The U.S. markets this week will focus on (1) Washington politics as President Trump's impeachment trial begins in the Senate with a vote today on the trial rules and with opening arguments on Wednesday, (2) Monday's positive trade news that the U.S. and France reached a truce on France's 3% digital tax that averts retaliatory U.S. tariffs on $2.4 billion of French goods, (3) March Brent crude oil prices, which rallied +0.54% on Monday on production disruptions in Libya and Iraq, (4) Q4 earnings with 41 of the S&P 500 companies reporting, and (5) the Treasury's sale of $14 billion of 10-year TIPS on Thursday.
This week's U.S. economic calendar is light with key reports including (1) Wednesday's Nov FHFA house price index (expected +0.3%) and Dec existing home sales (expected +1.5% m/m after Nov's -1.7%), (2) Thursday's Dec leading indicators report (expected -0.2% after Nov's unchanged), and (3) Friday's Jan Markit U.S. manufacturing and non-manufacturing PMIs (expected +0.1 and - 0.3, respectively).
In Europe, the focus will be on the US/French digital-tax truce, Thursday's ECB meeting, and UK Prime Minister Johnson's progress on getting his Brexit withdrawal bill through Parliament before the Jan 31 deadline.
The market is unanimously expecting the ECB to leave its policy unchanged, but the big news will be ECB President Lagarde's expected official announcement of the ECB's long-term review of its monetary policy, which is expected to be completed by year-end. The ECB is not expected to make any big changes but could switch its inflation target from "close to but below 2%" to a symmetrical 2% target such as that seen in other major countries such as the United States. A symmetrical 2% target would be a dovish shift that would allow, if not encourage, inflation to periodically run a little above 2%.
In Asia, the focus will be on the results of the BOJ meeting that will be announced tonight (ET time). The BOJ is expected to leave its extraordinarily easy monetary policy unchanged. The week-long Chinese Lunar New Year holiday begins this Friday.
Mnuchin says the administration may do a 2A and 2B in the second phase of the trade deal with China.
Big issue at Davos is where to invest money.
New virus out of China getting worse.
Occidental Petroleum Chief touting their direct air carbon capture.
The US calls for immediate resumption of Libyan oil production.
Investor confidence in Germany grows.
The UK's employment hits a record high.
Click here to download a pdf of this article, Missile.pdf
Today's slew of U.S. economic data is expected to be mixed. On the neutral-to-positive side, today's Dec housing starts report is expected to show a +1.1% increase of 1.380 million, adding to Nov's +3.2% to 1.365. Also, today's preliminary-Jan University of Michigan U.S. consumer sentiment index is expected to be unchanged at 99.3 following Dec's +2.5 point increase to 99.3.
On the negative side, today's Dec U.S. manufacturing production report to expected to show a -0.1% point decline, falling back a bit after Nov's surge of +1.1%. The overall Dec industrial production report is expected to show a decline of -0.2% after Nov's +1.1% surge.
Today's Nov JOLTS job openings report is expected to show a mild decline of -17,000 to 7.250 million after Oct's surge of +235,000 to 7.267 million.
US/Chinese trade tensions will likely fall to secondary status for the markets in the coming weeks after the phase-one trade deal was signed on Wednesday. US/Chinese trade tensions should ease as long as China steps up its purchases of U.S. products in line with its promises in the phase-one trade agreement.
There are also hopes that the phase-two trade talks, which may not begin in earnest for a number of weeks, will be a more laid-back affair than the phase-one talks since President Trump doesn't seem to be in a hurry and is not expecting a deal until after November's election. In addition, the issue of industrial subsidies, which is the main topic of discussion for the US/Chinese phase-two talks, is in the process of being dealt with on a multilateral WTO level, which should drain some of the intensity from the US/China bilateral talks.
The U.S., Europe, and Japan earlier this week reached an agreement on expanding the definition of industrial subsidies that should be prohibited by WTO rules. If they can now persuade the WTO as an organization to adopt the rules and persuade China to abide by the new rules, then the issue of industrial subsidies may be successfully addressed at the multilateral level rather than with heavy U.S. pressure on China at the bilateral level.
The U.S. and EU already have a substantial number of trade issues on the table and the situation is getting worse. There has been no resolution of the steel/aluminum situation after the U.S. in 2017 slapped tariffs on EU steel and aluminum and the EU responded with retaliatory tariffs.
President Trump then threatened a 25% tariff on European autos unless the EU gave concessions on several trade issues. President Trump and then-EU Commission President Junker in July 2018 reached a cease-fire agreement that staved off a U.S. tariff on European autos. However, the subsequent US/EU talks on reducing industrial tariffs have gone nowhere because the EU is refusing the U.S. demand to include agriculture in the talks. President Trump in late 2019 let his threat expire to slap tariffs on European autos, but he could renew that threat at any time.
In the meantime, other US/EU trade issues have arisen. The U.S. is planning to slap WTO-approved tariffs on the EU for the WTO's ruling that the EU is providing illegal subsidies to Airbus, while the EU is planning retaliatory tariffs on the US for what it claims are illegal U.S. subsidies to Boeing. Also, the U.S. has announced plans for tariffs on $2.4 billion of French products as retaliation for France's 3% sales tax on digital products that the U.S. says discriminates against U.S. tech companies.
China's data fuels bets on growth.
China embaces EV battery swap technology.
Spacex faces on last test flight before first astronaut flight.
THe US will issues 20-year bonds.
The Senate today is expected to pass the revised NAFTA/USMCA treaty before moving on to President Trump's impeachment trial. The Senate's approval today of the USMCA treaty will complete the Congressional approval process. The markets will be pleased with the final Congressional approval of the USMCA since that could spark a burst of new investment once businesses are certain about the new rules for North American trade.
The consensus is for today's Dec retail sales report to improve to +0.3% and +0.5%
ex-autos from Nov's +0.2% and +0.1% ex-autos. The U.S. economy continues to depend heavily on personal consumption as its main pillar of support.
Tonight's Chinese Q4 GDP report is expected to be unchanged from Q3's +6.0%, leaving
Chinese GDP growth at a 29-year low. Chinese GDP growth inQ4 likely stabilized as the U.S. and China headed towards the December trade deal announcement. The consensus is for China's GDP growth to ease from +6.1% in 2019 to +5.9% in 2020 and +5.8% in 2021.
Now that the phase-one agreement has been signed, the two main questions are (1) will China live up to its promises to buy a substantial amount of additional U.S. products and services, and (2) when will the phase-two talks begin and will they involve any new threats by President Trump to increase his bargaining position.
The breakdown of that total figure includes a promise by China to buy at least $40 billion annually of U.S. food, agricultural, and seafood products in 2020 and 2021, with an aspiration for an additional $5 billion per year of purchases. No breakdown by commodity type was announced since that breakdown is contained in a confidential annex. China is likely to have difficulty buying as much as $40 billion of U.S. ag products in 2020 and 2021 considering that the pre-tariff level in 2017 was only $24 billion and the record was $29 billion in 2013.
The phase-one agreement calls for China to purchase U.S. manufactured products of at least $120 billion in 2020 and $132 billion in 2021. U.S. manufactured products are defined in the agreement as including traditional manufactured products and instruments, pharma products, aircraft, vehicles, iron and steel, chemical products, and many other products.
The agreement calls for China to boost its purchases of U.S. energy products (LNG, crude oil, coal) by $52 billion with purchases of at least $30 billion in 2020 and $46 billion in 2021. China's purchases of U.S. services must total at least $100 billion in 2020 and $112 billion in 2021.
Looking ahead, President Trump said that the phase-two talks will begin "very shortly." However, China's Global Times, citing a source close to China's Ministry of Commerce, said that the U.S. and China will first focus on the implementation of the phase-one deal before moving on to the next phase of the talks. The report said that the phase-two talks will be closely connected to global WTO reforms that deal with industrial subsidies. That means that the US/Chinese talks will apparently run parallel to global, multilateral WTO talks on industrial subsidies, perhaps reducing the intensity of the bilateral US/China talks.
The US/Chinese economies in 2020 will therefore continue to labor under the U.S. 25% tariff on $250 billion of Chinese goods and the 7.5% tariff on $120 billion of Chinese goods (cut to 7.5% from 15% on Feb 15), along with retaliatory Chinese tariffs on upwards of $110 billion of U.S. goods.
US investors should beware of access to bad debt in China.
That smells offal.
Russia approves Putin's pick for the new PM.
Ulraine asks the FBI for help in probe.Click here to download a pdf of this article, Missile.pdf
The US/China phase-one trade deal is scheduled to be signed today at a ceremony at the White House. The markets are hopeful that the phase-one trade deal will hold as a ceasefire during 2020 despite what is likely to be a difficult round of phase-two trade talks.
The cut in the 15% tariff on about $120 billion of Chinese goods to 7.5% is still due to go into effect 30 days from today's signing date, as agreed to in the phase-one trade deal, according to Bloomberg. The 25% tariff on the original $250 billion of Chinese goods will
remain in effect after today's trade deal, as planned. China under the phase-one trade deal has agreed to provide exemptions on its tariffs as necessary to meet its purchase requirements for U.S. goods.
The markets are waiting to see the fine print of the 86-page phase-one trade agreement, which will be released today as part of the signing process. The markets are waiting to see exactly what China agreed to regarding the purchase of American products.
However, that information may still not be released to the public because it is contained in a confidential annex. The markets have many questions as to the quantity and enforceability of Chinese promises to buy U.S. goods. The markets also have questions about whether those promises are structured, so they do not violate WTO rules.
Senate Majority Leader McConnell on Tuesday said that the Senate is on track to pass the USMCA on Thursday before President Trump's impeachment trial begins next week. The approval of USMCA by the remaining Senate committees is expected to take place today.
On impeachment, the House today is expected to vote on the resolutions needed to formally transmit the articles of impeachment to the Senate and name the House managers who will prosecute the case in the Senate.
The consensus is for today's Dec final-demand PPI to rise to +1.3% y/y from Nov's +1.1%,
but for the Dec core PPI to be unchanged at +1.3% y/y. The rise in the headline PPI is expected to be driven by December's +11% rally in crude oil prices that was sparked by the unexpected move by OPEC+ to cut its production by 1.7 million bpd inQ1-2020, up
from the 2019 production cut of 1.2 million bpd.
The Nov core PCE deflator (the Fed's preferred inflation measure) remained low at +1.6% y/y in November, illustrating that there is no current pressure on the Fed to raise interest rates based on the inflation outlook. In fact, the Fed wants inflation to go above 2.0% since it says its 2.0% inflation target is symmetrical, meaning that inflation should periodically trade above the 2% target.
Goldman Sachs on tax policy
Iran's Rouhani makes veiled threats to the US.
Democratic debate takeaways.
Germany's second economic miracle is ending.
Libyan General snubs Putin.
The law of unintended consequences.Click here to download a pdf of this article, Missile.pdf
Click here to download a pdf of this article, Missile.pdf
January 15, 2020
MBA Mortgage Applications 13.5% prior 0600 hrs cst
PPI Final Demand m/m expected 0.2% v. 0.0% prior 0730 hrs cst
PPI x-food and energy m/m expected 0.2% v. -0.2% prior 0730 hrs cst
PPI Final Demand y/y expected 1.3% v. 1.1% prior 0730 hrs cst
PPI x-food and energy y/y expected 1.3% v. 1.3% prior 0730 hrs cst
Empire Manufacturing expected 3.6 v. 3.5 prior 0730 hrs cst
Philly Fed President Harker (voter) speaks in NY 1000 hrs cst
SF Fed President Daly (alternate voter) speaks in California 1000 hrs cst
Dallas Fed President Kaplan (Voter) speaks to the Economic Club in New York 1100 hrs cst
The US Fed releases the Beige Book 1300 hrs cst
The consensus is for today's Dec CPI to rise to +2.4% y/y from Nov's +2.1%, but for the Dec
core CPI to be unchanged from Nov's +2.3% y/y. The rise in the headline CPI is expected to be driven by the +10.7% rally seen in crude oil prices in December that was sparked by the unexpected move by OPEC+ to cut its production by 1.7 million bpd in Q1-2020, up from the 2019 production cut of 1.2 million bpd. However, the core CPI today is expected to be unchanged at +2.3% y/y, illustrating little change in the outlook for core inflation.
Market expectations for inflation have risen in the past several months and the 10-year breakeven inflation expectations rate is currently at 1.78%. The current breakeven rate of 1.78% is up sharply from Oct's 3-1/4 year low of 1.47% but is still well below the Fed's +2.0% inflation target. Moreover, the Nov core PCE deflator (the Fed's preferred inflation measure) remained low at +1.6% y/y in November, illustrating that there is no pressure on the Fed at present to raise interest rates based on the inflation outlook.
China posts a strong December exports number.
EU triggers the dispute mechanism in the Iran nuclear deal.
How the dispute mechanism works.
Iran is closer to regime collapse.
Germany has contracted to construct at least four new multi-role ships.
The US and EU enter the squared circle on trade.
Brexit deal contingent on fishing rights.
Click here to download a pdf of this article, Missile.pdf
The U.S. markets this week will focus on (1) the unveiling and signing of the US/China phase-one trade agreement on Wednesday and any developments regarding phase-two trade talks, (2) Washington events as President Trump's impeachment trial in the Senate could begin by late this week or early next week, (3) any new US/Iran military tensions, (4) US/EU trade tensions as the EU's new trade chief Phil Hogan visits Washington this week for talks with USTR Lighthizer, and (5) the beginning of Q4 earnings season with reports from 19 of the S&P 500 companies including the major Wall Street banks.
China is the most serious threat to the US.
New EU trade negotiator Hogan will visit the US this week.
Protests rage on over plane disaster in Iran.
The EU welcomes the Libyan cease fire.
US coal fired plants shut down at the second fastest pace on record.
Rhodium prices have surged 32% this year.
In Europe, the markets will closely watch the US/EU trade talks this week for any sign of progress that would avert President Trump's lingering threat to slap tariffs on European autos. Mr. Hogan will be in Washington on Tuesday through Thursday.
Also, talks between Treasury Secretary Mnuchin and French Finance Minister Le Maire will continue this week on France's digital tax.
The Mnuchin/Le Maire talks are coming down to the wire as they try to avert the U.S. tariffs that were announced on $2.4 billion of French products as retaliation for the French 3% sales tax on digital products.
This is a busy week on the U.S. economic calendar. Key reports include (1) Tuesday's Dec CPI (expected +2.4% y/y vs Nov's +2.1%; core expected unchanged at +2.3% y/y), (2) Thursday's Dec retail sales report (expected +0.3% and +0.5% ex-autos after Nov's +0.2% and +0.1% ex-autos), and (3) Friday's Dec manufacturing production report (expected +0.1% after Nov's +1.1%).Click here to download a pdf of this article, Missile.pdf
The consensus is for today's Dec payroll report to show an increase of +160,000 after the distortions seen in Oct (+156,000) and Nov (+266,000) caused by the GM strike. Today's expected report of +160,000 would be below the 12-month trend average of +184,000 but a weaker report wouldn't be surprising following Nov's very strong report of +266,000.
China's Ministry of Commerce officially announced that top Chinese officials will be traveling to Washington next week to sign the phase-one US/China trade deal.
The Chinese delegation will be led by Vice Premier Liu and will also include PBOC Governor Yi and Commerce Minister Zhong. The signing ceremony will also include business executives from both the U.S. and China.
The markets have yet to see the 86-page phase-one trade agreement, which will not be made public until the signing ceremony. The markets are waiting to see exactly what China agreed to as far as buying U.S. products. The U.S. claims that China agreed to boost its annual purchases of U.S. ag products to $40 billion in 2020 and 2021, and President Trump has been referring to $50 billion.
President Trump on Wednesday said that phase-two trade talks will begin "right away" but that an agreement might have to wait until after the election because he believes that the U.S. could get a "better deal" in his second term.
Bloomberg on Wednesday quoted an unnamed Senate Republican aide as saying that a vote to approve the USMCA is unlikely in the Senate next week because the Senate Foreign Relations Committee will not consider the bill until Thursday. The progress of the USMCA in the Senate slowed substantially after Senate Majority Leader McConnell gave several more Senate committees the opportunity to review the bill before it is referred to the full Senate for a vote.
There is the possibility that the Senate could approve the USMCA in the week of Jan 20-24. However, that will only be possible if House Speaker Pelosi continues to delay the transmission of the articles of impeachment to the Senate.
Missiles leave a tell tale sign.
Iraqi PM tell the US to decide the mechanism for troop withdrawal.
The US Army plans to expand Asian cyber efforts.
Macron continues to advance pension reform.
The not so Strait of Hormuz.Click here to download a pdf of this article, Missile.pdf
The markets will be watching to see if President Trump thinks Iran's retaliation is significant enough to draw a new U.S. military attack on Iran. The markets can deal with some minor tit-for-tat military action between the U.S. and Iran, but the risk is that it spirals into an all-out war. There is little doubt that the U.S. military would like to neutralize Iran's nuclear sites now that Iran has said that its nuclear activities are no longer limited by the nuclear agreement.
The US/Iran tensions have so far not been severe enough to constitute a material change. March WTI crude oil prices have rallied by about $3.50 or 6% since the U.S. military's targeted killing of Iranian General Soleimani last Thursday night. The rally in crude oil prices has not yet been large enough to put a significant dent in the global economy. In addition, the global stock markets have so far shown only a minor downside correction on the US/Iran tensions. Still, if the US/Iran military action worsens, then there is the possibility for a dip in the global economy.
Since the U.S. attack on Iranian General Soleimani last Thursday night, the markets have boosted expectations for the Fed's easing in 2020 by 5.5 bp. Specifically, the Dec 2020 federal funds futures contract is now indicating market expectations for a total of 29 bp of easing by the end of this year, which is equivalent to 1.2 rate cuts.
Iran's supreme leader says the missile attack was a slap in the face for the US.
From a conventional military perspective, Iran would get absolutely hammered.
Kuwait's defense Minister received a letter saying all US forces will leave in 3 days.
Texas Governor Abbott announced reconnaissance of the state's computer network has surged.
The 10-year T-note market goes into today's Treasury auction with support from safe-haven demand after Iran last night launched a rocket attack on US-Iraq airbase. March 10-year T-note prices last night rallied by +19 ticks.
The Senate Finance Committee on Tuesday quickly approved the USMCA bill with a vote of 25-3. However, Senate Majority Leader McConnell has now decided to give seven other Senate committees the chance to review the bill, which will substantially slow its progress. A GOP staffer quoted by Bloomberg said that the earliest the bill could now be approved by the full Senate would be late next week. Finance Committee Chairman Grassley says he expects the bill to be passed by the end of January.
Click here to download a pdf of this article, Missile.pdf
Bloomberg on Monday reported that top Chinese trade officials will be in Washington on Jan 13-15 to sign the US/Chinese phase-one trade deal on January 15. However, the Bloomberg report was not confirmed by the Chinese government, meaning the Jan 15 signing date is still not assured.
Bloomberg said that Chinese officials had previously expected to be in Washington this week to sign the deal, but that they delayed the trip after President Trump last week tweeted that he would sign the US/China phase-one trade deal on January 15 at a ceremony at the White House with high-level Chinese officials.
The markets remain on guard for any Iranian retaliation for the U.S. military's targeted killing last week of Iranian General Soleimani, who was the second most powerful official in Iran. Iran presumably does not want to get into a full-fledged war with the U.S. or give the U.S. a pretext for bombing its key nuclear, refining and military facilities.
Expect Iran may to bide its time and wait for the current crisis to die down, finally taking retaliatory action through proxies or terrorist cells that cannot be easily traced back to Tehran.
The House Finance Committee today will mark up the USMCA bill, which shouldn't take long because the bill cannot be amended under the fast-track trade rules. White House trade advisor Navarro said on Sunday that he expects the full Senate to approve the USMCA bill by this Friday. Senate Majority Leader McConnell may want to get the USMCA completed soon since there is no way to know how long President Trump's impeachment trial might be delayed.
The consensus is for today's Dec ISM non-manufacturing index to show a +0.6-point increase to 54.5, partially recovering from Nov's -0.8 point dip to 53.9. The Nov index level of 53.9 was -6.9 points below the 14-year high of 60.8 posted back in Sep 2018, but the index remains comfortably above the expansion-contraction level of 50.0.
Today's Nov factory orders report is expected to show a decline of -0.8% following Oct's report of +0.3% and +0.2% ex-transportation. Factory orders ex-transportation were down by -1.2% y/y in October for the fifth consecutive year-on-year decline. There are hopes that the US/China phase-one trade deal might spark some optimism in the global manufacturing sector, but last Friday's Dec U.S. ISM manufacturing index showed an unexpected -0.9-point decline to a new 10-year low of 47.2, remaining below the expansion-contraction level of 50.0 for the fifth consecutive month.
Will oil become a weapon in Iran's escalation? (Yes if they want to shoot themselves in the foot).
China has been tight lipped as they are a large importer of Iranian oil.
What about on a cyber level? (Maybe).
Despite working with Iran, Russia does not call them an ally. (No surprise given the duplicitous nature of Russia).
Euro area inflation was higher but the core rate remained at 1.3%.
Speaking of shooting themselves in the foot, French Unions have put up blockades around refineries, as they continue to batle the government over pension reform.
Mnuchin and LeMaire continue to seek a compromise on the digital tax the EU is trying to implement.
French wines are squeezed by US tariffs.
South Korea is becoming frantic over improving ties with North Korea
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