FIG Topics of Interest



“The bad trade data will quite likely increase the pressure on China to achieve a deal, or at least a suspension of the U.S. tariff hikes,” said Louis Kuijs, chief Asia economist at Oxford Economics in Hong Kong. “At the same time, the U.S. side also seems to be under more pressure to de-escalate tension in terms of news on the economy and financial markets than a few months ago.”
China’s exports slumped in December as a rush of orders to beat expected tariffs showed signs of fading and as domestic buyers succumbed to a worsening economic outlook.

The worse than expected figures, with exports falling 4.4 percent in December from a year earlier, set a grim domestic backdrop for China’s negotiators as they seek a deal to end the stand-off with the Trump administration. The fall in exports was the worst result since 2016 in dollar terms while imports slumped 7.6 percent, also the worst reading since 2016 and hinting at softening demand at home.

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Analysts surveyed by Bloomberg over the past week see a median 25 percent chance of a slump in the next 12 months, up from 20 percent in the December survey. The Federal Reserve is now projected to keep interest rates steady in the first quarter, instead of raising them, before two increases total this year -- down from four moves in 2018.
The median projection for 2019 economic growth edged down to 2.5 percent following 2.9 percent in 2018 as the boost from fiscal stimulus fades. Growth is still expected to be buoyed by a strong jobs market, rising wages and some lingering effects of tax cuts. If the expansion that began in 2009 lasts until July, it would mark 10 years and become the country’s longest on record.

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The People’s Bank of China is expected to continue to cut the amount of cash that banks must hold as reserves further in 2019 while keeping interbank borrowing costs largely steady even amid tightening U.S. Federal Reserve policy, according to a survey.
As part of efforts to shore up the slowing economy, the central bank will cut the required reserve ratio by another 150 basis points, in addition to the 100 basis point cut announced last week, according to a survey of 18 bond traders and analysts conducted between Dec. 24 and Jan. 9.
The PBOC will also likely tweak the cost of interbank lending slightly lower for the first time since 2015, taking the rate on 7-day reverse repurchase agreements to 2.45 percent by the end of 2019 from the current 2.55 percent, according to the median estimate in the survey.

The rate will be cut by 5 basis points in the second quarter and another 5 basis points in the third quarter, participants said.
The easing measures altogether will drive gains in government bonds, with the 10-year sovereign yield dropping to as low as 2.8 percent this year, compared with about 3.1 percent now, the survey showed.

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“China will stick to the main theme of structural deleveraging, properly tackle local governments’ debt risks, and continue to clean up overcapacity, debts and zombie firms,” Yi said in the interview with state-run Xinhua News. Financial risks which were exposed have been tackled in an orderly manner, the overall leverage ratio remains stable and financial risks are generally contained, he said.
“We are going to accurately control overall liquidity,” Yi said in the interview. “While avoiding overly rapid liquidity contraction which would shake the real economy, we should as well stay away from the flood-like stimulus which would hamper structural deleveraging.”
The Chinese central bank will start lending money to banks under a new policy instrument in late January, the governor announced in an interview, promising that China will avoid both massive stimulus and a fast credit contraction.

The targeted Medium Term Lending Facility, which lends cash for up to three years, was announced in December and will encourage banks to lend to small and private companies which are facing credit shortages due to a government debt crackdown. China is trying to balance funneling more cash to the real economy without hampering its campaign to clean up excess debt and financial risk.

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Job openings are outnumbering unemployed workers across increasingly wide swaths of the United States, forcing businesses to rethink how they find workers, which could keep pressure on the Federal Reserve to raise interest rates despite a global economic slowdown.
The volume of openings first topped the number of jobless people in Midwestern states in early 2017. But in recent months that phenomenon has spread to other regions, particularly the South.
Economists say the most convincing signs of labor shortages would be a surge in wage growth. While average hourly earnings rose 3.2 percent in December that is tepid by historical standards.

It is possible that the imbalance between job openings and unemployed workers owes partly to the ease with which online job advertisements can be posted. Additionally, it may overstate labor market tightness because people not actively looking for work are not counted in the ranks of the unemployed.

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(Funny how Congress continues to get paid?)
A series of deadlines over the next seven weeks will increase pressure on the Government to cut a deal to end a shutdown that could soon become the longest in history. Hundreds of thousands of workers at nine Cabinet departments and other agencies will soon start to miss paychecks, and the longer the standoff continues, the more consequences Trump and Congress will face -- including shuttered courts, filth piling up in National Parks, and delayed tax refunds.
Jan. 11: Missed Paychecks
Jan. 12: Record Shutdown
Jan. 21: Davos Man
Jan. 29: State of the Union
Late January and February: Tax Returns
March 1: Debt Limit
All Year: Census


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“Given the many store closures across the U.S., the minimal changes in vacancy rates show how the retail sector has withstood the structural changes in the industry,” Barbara Denham, a senior economist at Reis, said. “Many feared that vacancy rates would soar and rents would plummet. This did not occur as the doomsday prognostications proved to be overblown.” 
Overall, U.S. retail vacancies remained flat at 10.2 percent during the latest quarter, Reis said. The vacancy rate at regional and super regional malls was 9 percent in the fourth quarter of 2018, based on a survey released Thursday by real estate research firm Reis of 77 metropolitan areas across the country. That’s down from 9.1 percent — a seven-year high — in the third quarter, but up from 8.3 percent at the end of 2017. That’s also above a 10-year average vacancy rate for these malls of 8.4 percent during the fourth quarter.

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To Apple investors:
Today we are revising our guidance for Apple’s fiscal 2019 first quarter, which ended on December 29. We now expect the following:

  • Revenue of approximately $84 billion
  • Gross margin of approximately 38 percent
  • Operating expenses of approximately $8.7 billion
  • Other income/(expense) of approximately $550 million
  • Tax rate of approximately 16.5 percent before discrete items

We expect the number of shares used in computing diluted EPS to be approximately 4.77 billion.
Based on these estimates, our revenue will be lower than our original guidance for the quarter, with other items remaining broadly in line with our guidance.

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"My prediction? More dysfunction than there should be, unfortunately," said Representative Peter King, a New York Republican.
The first test of the new dynamic in Washington may come as soon as Wednesday. Democratic and Republican leaders in the House and Senate will attend a meeting with Trump for a briefing on border security at the White House.
The 435-seat House will be controlled by at least 235 Democrats, including a number of progressive freshmen who may show little inclination to compromise. In the Senate, Republicans gained two seats to boost their majority to 53-47, and the only GOP senators who consistently took on the president, Jeff Flake of Arizona and Bob Corker of Tennessee, are retiring.
On policy matters, an early action item in the House and Senate will be legislation approving Trump’s trade agreement with Mexico and Canada. But Pelosi has dismissed the trade deal as a “work in progress” and says she wants to add environmental and labor protections. She also hasn’t indicated whether she would back the “fast track” up-or-down vote procedure Trump could need to easily clear the deal.

The trade agreement may also have trouble getting support in the Senate, although incoming Finance Chairman Chuck Grassley, an Iowa Republican, has praised it and promised to try to usher it through his panel.
McConnell told reporters after the November elections that Senate Republicans aren’t interested in a $900 billion infrastructure package Democrats are discussing, and said no proposal for roads and bridges should be considered without resolving how to finance it.

“You know what the sticking point is: How do you pay for it,” McConnell told reporters.
Leaders in both chambers must agree on raising the federal debt limit, which is now suspended but will go back into effect March 1. The Treasury Department likely can use so-called extraordinary measures to delay reaching the limit into mid-year, but eventually lawmakers must find a way to prevent a default on government obligations.
The two chambers almost certainly won’t agree on an annual budget blueprint like one that allowed the GOP Senate in 2017 to bypass a Democratic filibuster and enact a massive tax cut. Going forward, any tax changes would be subject to a 60-vote threshold, meaning they couldn’t be enacted without Democratic support.

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American farmers, already hit by low commodity prices and China’s punitive trade tariffs, are poised to endure further pain in 2019 now that a major Pacific trade deal has come into effect.
The Comprehensive and Progressive Agreement for Trans-Pacific Pacific Partnership, or CPTPP, was ratified by seven of its member countries on Sunday. Now that the massive free trade pact is a reality for Australia, Canada, Japan, Mexico, New Zealand, Singapore and Vietnam, the remaining four members — Brunei, Chile, Malaysia and Peru — are soon expected to follow suit.
The milestone agreement, a refurbished version of the Trans-Pacific Partnership, will slash tariffs among the 11 nations that cover 14 percent of global growth, making their exports cheaper in each other’s markets. Around 90 percent of planned tariff cuts will be immediately take place, HSBC said in a note on Sunday, adding that businesses will benefit from reduced administrative costs thanks to other benefits such as pre-arrival customs clearance.
“I’ve never seen such nervousness in the U.S. business community as I see now,” Steve Okun, senior advisor at McLarty Associates, an international trade consultancy, told CNBC last week, referring to developments such as the CPTPP. There is a sense that “the world is moving forward without us,” he said.

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