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  • Critical high-level US/Chinese trade talks begin today
  • U.S. government shutdown on Friday night now seems unlikely
  • Today's Brexit votes are not expected to shake up PM May's strategy
  • U.S. Dec retail sales expected to be weak
  • U.S. PPI expected to ease slightly


Critical high-level US/Chinese trade talks begin today -- Two days of high-level trade talks begin today between Lighthizer/Mnuchin and Chinese Vice Premier Liu.  Chinese President Xi will meet with the U.S. trade delegation on Friday, according to the South China Post, which is a potentially favorable sign of his support for the talks.

The outcome of this week's talks will likely determine whether President Trump raises U.S. tariffs on Chinese goods after March 1 or instead decides to extend the deadline.  Mr. Trump on Tuesday said, "If we're close to a deal where we think we can make a real deal and it's going to get done, I could see myself letting that slide a little while."  However, Mr. Trump also said that he is generally "not inclined" to delay tariffs.  Mr. Trump could go ahead with the tariff hike if this week's meetings show disappointing progress and he believes the tariff hike is necessary to break loose Chinese concessions on the difficult structural issues.

We suspect that there is a good chance that President Trump will extend the March 1 deadline.  The reality is that time is running out for a US/Chinese trade agreement during Mr. Trump's first term.  If Mr. Trump raises tariffs on March 1, China may walk away from the talks as they did last May and talks may not resume until later in the year after a cooling-off period.  At that point, China might be more inclined to simply stall through 2020 as they wait to see if Mr. Trump wins reelection in November 2020.  By contrast, if Mr. Trump takes the best US/Chinese trade deal he can get now, then he will provide a boost for the global economy and for the global stock markets going into next year's campaign season.

Separately, the markets are braced for the possibility that the Commerce Department today or tomorrow (i.e., before Sunday's deadline) will release its recommendations on whether the U.S. should impose a tariff of up to 25% on imported autos on national security grounds.  The President will then have 90 days to make a final decision.  The global stock markets will likely sell off sharply if President Trump ultimately goes ahead with auto tariffs on the EU, Japan and other countries since autos are a significant macroeconomic sector and since U.S. auto tariffs (and retaliatory tariffs) would hurt earnings for most global auto companies


U.S. government shutdown on Friday night now seems unlikely -- The House by Thursday night is expected to approve the border security deal and spending bills, giving the Senate all day Friday to approve the bills before the U.S. government shuts down at midnight Friday.  President Trump seems inclined to grudgingly sign the bills to avoid being blamed for another U.S. government shutdown.  Mr. Trump on Wednesday said, "I don't want a shutdown.  A shutdown would be a terrible thing."  If Mr. Trump signs the bills, then the markets will not need to worry about another government shutdown until at least October 1.

Today's Brexit votes are not expected to shake up PM May's strategy -- Parliament today will hold a series of votes on Brexit but the votes are not expected to shift Prime Minister May's near-term strategy.  Parliament today is being asked to approve the same bill that Parliament approved last month, which was Ms. May's Brexit separation agreement plus a provision that the Irish backstop should be replaced with "alternative measures."  Ms. May used that vote to ask the EU to soften the Irish backstop.  The UK and EU have negotiating teams working on the issue but the EU has so far flatly refused to reopen the Brexit separation agreement or soften the Irish backstop. 

The more important Brexit votes will come on Feb 27 when Ms. May will allow votes on various Brexit options.  The Cooper-Boles amendment is expected to be deferred from today until February 27.  The Cooper-Boles amendment seeks to prevent a no-deal Brexit by calling for an extension of the March 29 Brexit deadline if Parliament does not approve a Brexit agreement by March 13.  That amendment was defeated last month but has since picked up support.

The betting odds for a no-deal Brexit by April 1 are currently at 7/4 (37% probability), up from 25% a few weeks ago, according to  The markets generally believe that a no-deal Brexit will be avoided, likely by an extension of the March 29 agreement, rather than by a last-minute Parliamentary agreement to a Brexit separation bill.  However, there is still an outside chance that the UK and EU might blindly stumble into a no-deal Brexit, which would be a disaster for the UK economy.

U.S. Dec retail sales expected to be weak -- The consensus is for today's Dec retail sales report to be weak at +0.1% m/m and unchanged ex-autos, falling back from Nov's report of +0.2% and +0.2% ex-autos.  Today's Dec retail sales report was delayed due to the U.S. government shutdown, meaning today's data will be somewhat stale.  Still, the markets will get a reading on the strength of the holiday shopping season and the early impact of the U.S. government shutdown that began on Dec 22.  U.S. consumer confidence was weak in December and January due to the tail end of the Q4 stock market correction and the Dec/Jan U.S. government shutdown.  The Conference Board's index fell by -9.8 points in Dec and -6.4 points in Jan.  The University of Michigan's index rose by +0.8 in Dec but then fell by -7.1 points in January.

U.S. PPI expected to ease slightly -- The consensus is for today's Jan final-demand PPI to ease to +2.1% y/y from Dec's +2.5% and the core PPI to ease to +2.5% from Dec's +2.7%.  Yesterday's Jan CPI report of +1.6% y/y (headline) and +2.2% (core) was a bit stronger than expectations of +1.5% and +2.1% respectively.  The Jan core CPI was strong at +2.6% on a 3-month annualized basis, which suggests that inflation may be more of a problem in 2019 than earlier thought, which would force the Fed into a more hawkish stance. 




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