Big guns come out in the US-Chinese trade battle
German bund yields fall faster than T-note yields but EURUSD remains strong
U.S. unemployment claims expected to remain favorable
U.S. trade deficit expected to post a new 9-1/4 year high
Big guns come out in the US-Chinese trade battle — A U.S.-Chinese trade battle is now in full swing with both sides bringing out their big guns this week and with real pain already being felt in stock and ag prices. The Trump administration late Tuesday announced its list of 1,300 products worth about $50 billion that will be subject to a 25% tariff in retaliation for Chinese intellectual property violations. China was clearly prepared for that announcement since China within a matter of hours presented its own retaliatory list of 106 U.S. products worth an equal $50 billion that will be subject to a 25% tariff. The Chinese list included such key sectors as soybeans and aircraft.
There is still time to avert the tariffs since China said it will not impose its tariffs until the U.S. imposes its tariffs. The U.S. process involves a 60-day public comment period and the U.S. Trade Representative then has up to 6 months to make a final decision. Written public comments can be submitted until May 11 and a hearing on the tariffs will be held in Washington on May 15. That means that there is window of at least two months during which the U.S. and China could negotiate and try to reach an agreement to avert the tariffs.
After President Trump’s recent announcement of the tariffs on $50 billion of Chinese imports, Treasury Secretary Mnuchin on March 25 was partially successful in soothing the markets by saying that he was “cautiously optimistic” about a negotiated solution and that talks were in progress. However, it remains to be seen how serious those talks will be, particularly after the U.S. refused to engage with China’s request for talks on the steel-aluminum tariffs. Those steel-aluminum tariffs have already gone into effect for China, as have China’s retaliatory tariffs on U.S. pork, fruit, nuts, ethanol and other products. Negotiations weren’t even attempted for the steel-aluminum tariffs on China.
The Trump administration on this tariff round is going after the heart of China’s industrial development plan by targeting the high-tech industries in which China plans to expand with its “Made in China 2025” plan. The Trump tariff plan may be less about trying to modify China’s trade behavior and more about protecting American high-tech industries from Chinese encroachment in coming years. If that is the case, then the Trump administration may have little intention of giving up the tariffs unless China makes some huge concessions. Meanwhile, China views its economic development plan of almost existential importance since it must placate the public with strong economic development in order to prop up its single-party communist rule.
If there is no agreement on the current round of tariffs, then President Trump may keep launching successive tariff rounds until he gets his desired outcome of a fundamental shift in Chinese trade and development behavior. The markets will therefore remain vulnerable to persistent uncertainty about tariffs and the impact of tariffs on the U.S. and Chinese economies.
German bund yields fall faster than T-note yields but EURUSD remains strong — Since the 10-year T-note yield peaked at a 4-1/4 year high of 2.95% on Feb 21, the T-note yield has fallen by a net -16 bp to the current level of 2.79%. Over that same time-frame, the 10-year German bund yield has fallen by a larger -22 bp, i.e., from 0.72% to 0.50%. That has pushed the German-U.S. 10-year yield spread downward by -6 bp to -229 bp from -223 on Feb 21.
The German bund yield has fallen more sharply than U.S. T-note yields over the past six weeks because an ECB tightening of monetary policy is still a long way off, versus expectations for another Fed rate +25 bp hike in June. Meanwhile on the FX front, EUR/USD has remained generally strong despite the -6 bp decline in Germany’s 10-year yield differential against the U.S.
The dollar continues to see underlying weakness due to (1) trade tensions, (2) political uncertainty and foreign capital flight, and (3) concerns about the twin U.S. budget and current account deficits. By contrast, the euro is seeing strength as the European economy is finally regaining its balance after a decade of problems and as the markets look ahead to the end of the ECB’s QE program by late 2018 and a likely ECB rate hike by mid-2019.
U.S. unemployment claims expected to remain favorable — U.S. unemployment claims remain in very favorable shape with U.S. layoffs near 45-year lows. The initial claims series last week fell by -12,000 to a new 45-1/4 year low of 215,000. Meanwhile, the continuing claims series is only +35,000 above the 44-1/2 year low of 1.836 million posted in the March 9 week. The consensus is for today’s initial claims report to show a +10,000 rise to 225,000 following last week’s -12,000 decline to 215,000. Meanwhile, the consensus is for today’s continuing claims report to show a -28,000 decline to 1.843 million, reversing most of last week’s +35,000 rise to 1.871 million.
U.S. trade deficit expected to post a new 9-1/4 year high — The consensus is for today’s Feb U.S. trade deficit to widen slightly to -$56.8 billion from Jan’s 9-1/4 year high of -$56.6 billion, thus posting a new 9-1/4 year high. The U.S. trade deficit in January was far wider than the 12-month trend average of -$48.0 billion.
The wider deficit seen in Nov-Jan was due mainly to a +5.2% surge in imports to a new record high of $257.510 billion. Meanwhile, exports have also been strong and reached a record high of $203.606 billion in December, but exports then fell by -1.3% in Jan to $200.910 billion. Import growth in January was very strong at +7.4% y/y, which was stronger than the export growth rate of +5.1%, thereby producing the wider trade deficit.