FIG Topics of Interest



Trump returned to Washington early on Wednesday morning. In an interview aired on Wednesday, Trump told Fox News that he was “very strongly clamping down on trade” with China.

Asked how strong, Trump said: “Well, I think very strongly. I mean you’ll see over the next couple of weeks. They understand what we are doing.”
Trump is due to unveil revisions to his initial tariff list targeting $50 billion of Chinese goods on Friday. People familiar with the revisions said that the list will be slightly smaller than the original, with some goods deleted and others added, particularly in the technology sector.

Another administration official said that a draft document showed that the new list would still be close to $50 billion, with about 1,300 product categories, but both the dollar amount and quantity of products were still subject to change.

Under the 1974 trade law that Trump invoked to pursue a tariff investigation into China’s intellectual property practices, he could delay the activation by 30 days. He can also delay the tariffs by another 180 days if the U.S. Trade Representative’s office finds that negotiations with China are yielding progress.

“The president’s trade team has recommended tariffs. If there are not tariffs, it will be because the president has decided that he’s not ready to implement tariffs,” a person familiar with the administration’s deliberations told Reuters.

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The Fed is expected to announce a quarter-point interest rate hike when it wraps up its June meeting Wednesday afternoon, but that rate hike is widely anticipated and there are a few other things that could stir up markets more.
"They don't need much of a change at all for the headline to say four instead of three," said Michael Schumacher, director of rates at Wells Fargo. "The headline will be screaming and say the Fed looks for more aggressive tightening, but in reality if you look at the numbers, it wouldn't be that much different."
The Fed releases its so-called dot plot, a chart with anonymous Fed officials' forecasts on interest rate expectations. The chart currently shows three rate hikes for this year, but it's a very close call based on the positioning of the dots, so any slight move could add an interest rate hike in December. That would be a clear message from the Fed that it is going to be more aggressive.
The Fed is likely to bump up its forecast for GDP growth from its current median forecast of 2.7 percent for 2018. Economists currently see second-quarter growth running well ahead of 3 percent. The Fed could leave its outlook for unemployment about where it is, at 3.8 percent for 2018, which is where it was in the month of May.

The Fed could also slightly move its forecast for inflation, which is currently seeing a slight tailwind. The Fed's current forecast expects PCE core inflation at 1.9 percent for this year, and while PCE has been under 2 percent, CPI is running above the Fed target of 2 percent.

A news wire story that Powell is thinking of holding press briefings after every meeting roused markets Tuesday and sent the dollar higher. Marc Chandler, head of foreign exchange strategy at Brown Brothers Harriman, says the market viewed that Dow Jones report as hawkish and as suggesting there is more scope for further rate hikes if Powell needs to meet the press more often.
"If we get a full-blown trade war with China and tariffs on cars, we're in a recession in 2019," says Grant Thornton chief economist Diane Swonk. "With inflation, that's a bad combination for the Fed."

Economists are also listening for any mention by Powell of emerging markets and whether he expects contagion there or a crisis in Europe, started by Italy.

Economists expect to see the Fed increase its fed funds target range by 25 basis points, to a range of 1.75 to 2 percent. But it could do so by pushing up the interest on excess reserves by 0.20 percent.

That's because the funds rate has risen to the top of its range and the Fed would like to keep it more in the middle. The interest on excess reserves, or IOER, is the interest that the Fed pays banks to keep cash at the central bank.

Specifically, the benchmark is at 1.7 percent, just 0.05 points away from the IOER. The interest rate on excess reserves has historically been a guide for the funds rate and is usually a bit above the Fed's benchmark. But Fed officials were recently concerned the funds rate is rising more quickly than expected, causing a tightening in money markets, according to the minutes from its last meeting.

A solution suggested at the meeting was that the Fed raise the rate paid on reserves by 0.2 percent, while it hikes the funds rate 0.25 percent. This could hold back the funds rate from getting too close to the target ceiling.

"We believe the 25bp hike in the target range will be implemented by increasing the IOER rate by 20bp, thereby encouraging the effective fed funds rate to trade closer to the middle of the 1.75-2.00% range," wrote J.P. Morgan chief U.S. economist Michael Feroli.

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Here is the full text of what the two men signed:

Joint Statement of President Donald J. Trump of the United States of America and Chairman Kim Jong Un of the Democratic People’s Republic of Korea at the Singapore Summit

President Donald J. Trump of the United States of America and Chairman Kim Jong Un of the State Affairs Commission of the Democratic People’s Republic of Korea (DPRK) held a first, historic summit in Singapore on June 12, 2018.

President Trump and Chairman Kim Jong Un conducted a comprehensive, in-depth, and sincere exchange of opinions on the issues related to the establishment of new U.S.-DPRK relations and the building of a lasting and robust peace regime on the Korean Peninsula. President Trump committed to provide security guarantees to the DPRK, and Chairman Kim Jong Un reaffirmed his firm and unwavering commitment to complete denuclearization of the Korean Peninsula.

Convinced that the establishment of new U.S.-DPRK relations will contribute to the peace and prosperity of the Korean Peninsula and of the world, and recognizing that mutual confidence building can promote the denuclearization of the Korean Peninsula, President Trump and Chairman Kim Jong Un state the following:

1. The United States and the DPRK commit to establish new U.S.-DPRK relations in accordance with the desire of the peoples of the two countries for peace and prosperity.

2. The United States and the DPRK will join their efforts to build a lasting and stable peace regime on the Korean Peninsula.

3. Reaffirming the April 27, 2018 Panmunjom Declaration, the DPRK commits to work toward complete denuclearization of the Korean Peninsula.

4. The United States and the DPRK commit to recovering POW/MIA remains, including the immediate repatriation of those already identified.

Having acknowledged that the U.S.-DPRK summit--the first in history--was an epochal event of great significance in overcoming decades of tensions and hostilities between the two countries and for the opening up of a new future, President Trump and Chairman Kim Jong Un commit to implement the stipulations in this joint statement fully and expeditiously. The United States and the DPRK commit to hold follow-up negotiations, led by the U.S. Secretary of State, Mike Pompeo, and a relevant high-level DPRK official, at the earliest possible date, to implement the outcomes of the U.S.-DPRK summit.

President Donald J. Trump of the United States of America and Chairman Kim Jong Un of the State Affairs Commission of the Democratic People’s Republic of Korea have committed to cooperate for the development of new U.S.-DPRK relations and for the promotion of peace, prosperity, and security of the Korean Peninsula and of the world.

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If a ship crossing a wide and placid harbor yaws so far that it almost hits the channel markers, its captain might want to have its rudder adjusted. That’s what the Federal Reserve is considering as the fed funds rate threatens to slip outside the central bank’s target range. The gap between the rate and the Fed’s upper bound has narrowed to a 7-1/2 year low, setting off alarm bells from Washington to Wall Street. It’s also prompted policy makers to discuss whether shifting tides in short-term markets mean they need to change the way they go about manipulating what is arguably the most important interest rate in the world.
1. What’s going on?
2. What is the fed funds rate?
3. How does that work?
4. What about now?
5. What’s the IOER?
6. Why is the fed-funds rate rising toward the top of the band?
7. Why does this matter?
8. What is the Fed doing about it?
9. Will it work?

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Canada - Import Tariffs

Although Canada eliminated tariffs on all industrial and most agricultural products imported from the United States under the terms of NAFTA, tariffs and tariff-rate quotas (TRQs) remain in place on dairy and poultry tariff lines. Canada announced the elimination of MFN tariffs on baby clothing and athletic equipment (valued at C$76 million annually) in its 2013 federal budget. Canada proposed to permanently eliminate tariffs on mobile offshore drilling units in its 2014 federal budget.
Import Policies
Agricultural Supply Management
Canada uses supply-management systems to regulate its dairy, chicken, turkey, and egg industries. The regime involves production quotas, producer marketing boards to regulate price and supply, and tariff-rate quotas (TRQs) for imports. Canada’s supply-management regime severely limits the ability of U.S. producers to increase exports to Canada above TRQ levels. Under the current system, U.S. imports above quota levels are subject to high tariffs (e.g., 245 percent for cheese, 298 percent for butter).

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Because Paul Gruenwald had a front row seat for the Asia crisis, Bloomberg News asked for his analysis of the current selloff in emerging markets, which has rattled Argentina and Turkey and prompted other leading economists such as Carmen Reinhart to forecast a rocky period ahead.The current emerging market tensions reflect the stronger dollar and higher U.S. rates, both of which reflect a relatively strong U.S. economy. Countries with some combination of high external financing requirements, high U.S. dollar-denominated debt and large foreign investor pools will be most affected. Under the assumption that markets are discriminating across these vulnerabilities, there shouldn’t be a crisis.
Do strong underlying fundamentals matter if the market turns?

If markets are discriminating then EM countries with strong fundamentals should be OK. But that doesn’t always happen. However, such episodes of generalized, non-discriminating risk reduction should be short-lived so countries with good fundamentals –- including ample reserve buffers (see, for example, Korea in 2008-09) should be able to weather the storm.

Are you concerned about debt? If so, can you detail where?

The debt levels become more of a concern if funding conditions become tight and debt needs to be rolled over and/or rates rise more quickly than expected, which leads to debt servicing issues and less spending on other goods and services. We would need a much quicker pace of policy normalization -- a Fed-behind-the-curve scenario -- to see this happen.

s there a risk to central bank independence?

I don’t think so. Central banks may need to use some combination of higher on-shore rates and reserve drawdowns to help battle any storms. This does not necessarily compromise their independence, unless they are being ordered to do so by the government.

What’s your biggest concern? Who is most vulnerable?

We really don’t have a list of countries, but we do have a list of characteristics. We would note that in Asia Pacific, India and Indonesia –- two victims of the 2013 Taper Tantrum -– are better placed this time around with lower current-account deficits, although they have seen some modest pressures and Bank Indonesia did raise rates.

How would you describe overall conditions today versus 1997?

I see markets as much more discriminating as regards EM. In the old days we would see a generalized EM selloff, sometimes with significant collateral damage hitting countries that were well-run but lumped together with all emerging markets, good and bad. With much more and more timely information now available, it is a good thing that markets are more discriminating

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The number of vacancies is pulling well ahead of the number the Bureau of Labor Statistics counts as unemployed. This year is the first time the level of the unemployed exceeded the jobs available since the BLS started tracking JOLTS numbers in 2000.

As of April, the total workers looking and eligible for jobs fell to 6.35 million, a decrease from 6.58 million the previous month. The number fell further in May to 6.06 million, though there is no comparable JOLTS data for that month.

Under normal circumstances, the mismatch would be creating a demand for higher wages. However, average hourly earnings rose just 2.7 percent annualized in May, up one-tenth of a point from April.

"Given these trends, the sluggish wage growth rate is even more perplexing," said Cathy Barrera, chief economist at Zip Recruiter, an online employment marketplace. "If employers want to fill these 6.7 million job openings, they are either going to have to raise wages or find more clever and creative ways to recruit workers off the sidelines."

Employers have been complaining for years about a skills mismatch, or the inability to find workers with the right training for the positions available. In the meantime, companies are adding other incentives to retain workers and pull new ones in.

The total "quits" rate has been nudging higher this year and was at 2.3 percent in April, the highest since 2005 and above the 2.1 percent rate a year ago and the 1.3 percent bottom set in 2010. Barrera said the rate should be higher.

"While more people are getting into jobs, folks aren't moving around much once they do," she said. "Unfortunately, the lack of mobility means that employers face little pressure to raise wages. They just aren't competing over jobholders."

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Trade tensions between the U.S. and China are unlikely to be resolved by the existing architecture that governs world trade, according to Stephen Olson, Hong Kong-based Research Fellow at the Hinrich Foundation Ltd.

The world’s two biggest economies need to agree on a new framework that will allow both of their economic systems to co-exist, something the World Trade Organization doesn’t have the capacity to resolve, said Olson, who was a former U.S. government trade negotiator.
Are we in a trade war?

“As of today, we are not in a trade war, but I think the danger is certainly escalating.
The application of the steel and aluminum tariffs to the European Union and Canada and Mexico is certainly a very significant escalation and we are certain that those trading partners will retaliate. At that point, the question becomes will the U.S. administration retaliate against that retaliation.”

What kind of scenarios are you expecting?

“I would have to say that the current administration is arguably the most unpredictable administration in modern American history, so anyone who makes prognostications does so at their own risk. I would, however, point to a couple of scenarios. There is some speculation that at the end of the day this might actually be a negotiating tactic and in fact Secretary Ross made the comment to the effect that the reason the tariffs had to go into effect on Canada and Mexico was because there was insufficient progress in renegotiating NAFTA. So it remains to be seen, but that may actually be the end game here.”

Should trade balances be viewed as a score card?

“This is one of the most concerning aspects of Secretary Ross’s weekend visit to Beijing. The primary objective seemed to be to somehow negotiate down the size of the U.S. trade deficit with China. Doing so, unless the U.S. addresses its imbalance between savings and investment, will in all probability simply transfer that trade deficit from China to other countries and it would also get us dangerously close to the territory of managed trade. Trade negotiations should be about removing restrictions to cross-border access, it should not be about arbitrarily divvying up slices of market share.”

Can trade be viewed in a binary way?

“As the size and sophistication of China’s economy grows, its state directed model of capitalism is increasingly coming into conflict with the traditional Western model of free markets, free trade and a hands-off government approach to the market place, and what we are seeing now is that the rules of global trade are not really capable to help these two competing economic systems to get along.”

What kind of model is needed?

“Given the experience we had with the Doha round, I am not terribly optimistic that this is something that can be addressed within the context of the WTO. It might be more realistic for the U.S. and China to try to work out some kind of a modus operandi, some kind of framework that would let these two countries to continue their trade and investment partnership, because after all this has been a trade and investment relationship that has been very mutually beneficial. Now is the time really for the U.S. and China to figure out how can these two systems co-exist with each other, because it is clear both are here to stay.”

Would it be better to let sleeping dogs lie?

“Because of the size of China’s economy and its growing technological sophistication, I think these friction points are just going to increase in frequency, so I don’t think we can let sleeping dogs lie, this is an issue that has to be addressed.”

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The EU said it would take immediate steps to retaliate, while Mexico vowed to impose duties on everything from U.S. flat steel to cheese. Canada’s government announced it will impose tariffs on as much as C$16.6 billion ($12.8 billion) of U.S. steel, aluminum and other products from July 1.
House Speaker Paul Ryan attacked the decision in a statement, saying "today’s action targets America’s allies when we should be working with them to address the unfair trading practices of countries like China."

Canadian Prime Minister Justin Trudeau said the tariffs are an affront to the “long-standing security partnership” and to the Canadian and American soldiers who have fought and died alongside one another.

“We have to believe that at some point common sense will prevail, but we see no sign of that in this action today by the U.S. administration,” Trudeau said at a press conference.

European Commission President Jean-Claude Juncker, speaking in Brussels, characterized it as “a bad day for world trade,” adding “it’s totally unacceptable that a country is imposing unilateral measures when it comes to world trade.”

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Companies announced plans to cut 31,517 jobs in May, a 13 percent decrease from April, a private survey reported Thursday.

The 207,977 planned job cuts announced in 2018 is more than 6.2 percent higher than the same period of 2017.

"On average, job cuts are at their lowest in May and June. Companies typically make their
staffing moves at the beginning of the year or in the fourth quarter," CEO John Challenger said in a statement.

May's results held closer to April, which bucked the trend of increasing job cut announcements. Planned cuts hit a high in March, when the most job cut announcements were made in a single month in nearly two years.

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