Chinese retaliation for Trump IP-related tariffs with soybeans, airplanes, cars, and chemicals
U.S. ADP employment report expected to show solid hiring
U.S. ISM non-manufacturing index expected to dip from Jan’s 12-1/2 year high
U.S. Feb factory orders expected to remain strong
Eurozone CPI expected to tick higher but remain far short of ECB’s goal
Italian government negotiations officially begin
Weekly EIA report
Markets wait for shoe to drop on Chinese retaliation for Trump IP-related tariffs — The Trump administration after yesterday’s close at about 5PM ET released the list of about 1,300 products worth $50 billion that will be targeted with 25% tariffs for Chinese IP violations. After the U.S. announcement, Chinese officials quickly promised equal-sized reciprocal tariffs on U.S. goods. The markets are now waiting for China to announce the list of U.S. products they will target with retaliatory tariffs, which are likely to be more important U.S. products such as soybeans and aircraft.
The U.S. list of Chinese products that will get a 25% tariff are focused on the higher-technology industries that China seeks to dominate in coming years such as aerospace, information and communication technology, robotics and machinery. We view the Trump administration’s decision to target high-technology products as a competitive decision to protect America’s position in those industries. We suspect that the Trump administration has little intention of bargaining away those tariffs. It seems to us that China would have to make some huge concessions in order to get the Trump administration to drop the latest tariffs.
The bad news is that if this round of tariffs doesn’t get the Chinese government to bend on trade to the Trump administration’s liking, then another round of Trump tariffs on Chinese products may soon be forthcoming. The markets may find out before long whether trade wars are as easy to win as Mr. Trump believes.
U.S. ADP employment report expected to show solid hiring — The consensus is for today’s Mar ADP employment report to show a solid increase of +210,000, which would be mildly stronger than the 12-month trend average of +193,000. The ADP report in the past three months has been very strong with a monthly average of +243,000 (Dec +250,000, Jan +244,000), Feb +235,000). The strong start for hiring in 2018 bodes well for the labor market.
U.S. ISM non-manufacturing index expected to dip from Jan’s 12-1/2 year high — The consensus is for today’s Mar ISM non-manufacturing index to show a -0.5 point decline to 59.0, adding to Feb’s -0.4 point decline to 59.5. However, today’s expected report of -0.5 to 59.0 would still leave the index is strong shape at only 0.9 points below the 12-1/2 year high of 59.9 posted in January. U.S. business confidence is seeing strength from the generally strong momentum of the U.S. economy combined with the Jan 1 tax cuts.
This past Monday’s ISM manufacturing index fell by -1.5 points to 59.3, which did not bode well for today’s non-manufacturing index. However, the manufacturing index remained in generally strong shape at only -1.5 points below the 14-year high of 60.8 posted in February.
U.S. Feb factory orders expected to remain strong — The consensus is for today’s Feb factory orders report to rebound higher by +1.7% m/m following Jan’s report of -1.4% and +0.4% ex transportation. Despite Jan’s -1.4% m/m decline, factory orders in general remained very strong in January with year-on-year gains of +6.6% y/y and +6.5% ex-transportation. The ISM manufacturing new orders sub-index has fallen for the last three months (Jan-March) by a total of -5.5 points but nevertheless remains at the high level of 61.9, illustrating continued manufacturing confidence about order flows.
Eurozone CPI expected to tick higher but remain far short of ECB’s goal — The consensus is for today’s Eurozone Mar CPI to rise to +1.4% y/y from Feb’s +1.2% y/y and for the Mar core CPI to rise to +1.1% y/y from Feb’s +1.0% y/y. The glacial upward pace of the Eurozone CPI will not put any added pressure on the ECB to talk about an exit from its monetary largesse since the headline and core CPIs are expected to remain well below the ECB’s inflation target of just under +2%.
Italian government negotiations officially begin — Italian President Mattarella will meet with smaller party leaders on Wednesday and the main party leaders on Thursday as talks begin on forming a government. Mr. Mattarella is not likely to be able to name a premier this week and a second round of talks is expected next week. The entire process of forming a government is expected to take weeks or months. If there is no solution, then Italian voters will have to return to the polls for a new vote. The markets are not showing much concern about the Italian political situation at this point. The Italian-German 10-year bond yield spread is currently near a 1-1/2 month at 129 bp.
Five Star leader Luigi Di Maio is insisting that he should be the prime minister since the Five Star party won the most votes of any single party. However, Five Star does not have a majority of seats in parliament and must find a governing partner. Forza Italia leader Berlusconi last week expressed some willingness for his center-right coalition, led by the League, to discuss a possible coalition government with Five Star. The markets would not be happy about a populist government formed by Five Star and the League, but would be partially appeased if the establishment Forza Italia party is included in the coalition and acts as an anchor to keep the coalition from adopting extreme policies.
Weekly EIA report — The market consensus for today’s weekly EIA report is for a +2 million bbl rise in U.S. crude oil inventories, a -1.5 million bbl decline in gasoline inventories, a -1.4 million bbl decline in distillate inventories, and a +0.2 point increase in the refinery utilization rate. The U.S. crude oil glut has evaporated with U.S. crude oil inventories now -1.2% below the 5-year seasonal average, which is the tightest level in 3-1/2 years. Gasoline inventories are +3.2% above average while distillate inventories are -3.9% below average. U.S. crude oil production in last week’s report rose by +0.2% w/w to a new record high of 10.433 million bpd.