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  • China either capitulates today or US/China trade war steps up to the next level
  • 30-year T-note auction to yield near 2.90%
  • Fed is looking towards today’s PPI and tomorrow’s CPI reports for inflation guidance
  • U.S. trade deficit expected to expand mildly

China either capitulates today or US/China trade war steps up to the next level — The 2-day US/Chinese trade talks begin today in Washington with Vice Premier Liu leading the Chinese side.  However, China only has today to capitulate to U.S. demands or the Trump administration will presumably proceed with raising tariffs to 25% from 10% on $200 billion of Chinese goods effective tonight just after midnight (i.e., Friday morning at 12:01 AM ET).

Indeed, the Trump administration appears to have every intention of proceeding with that tariff hike early Friday morning since the U.S. Trade Representative’s Office yesterday took steps to publish today the notice of Friday’s tariff hike in the Federal Register.

It is not clear what China could offer to get President Trump to agree to delay the tariff hike short of a complete capitulation to nearly all U.S. demands.  In retrospect, China clearly miscalculated this past weekend when it sent to Trump officials a new draft of the trade agreement language deleting an earlier agreement to change legislation to effectuate the trade agreement.  Now that President Trump has drastically escalated the dispute, China would likely have to give back that legislation-change measure plus other major concessions in order to get President Trump to delay the tariff hike.  Yet Chinese President Xi is not likely to make any big concessions today for fear of looking weak to his domestic audience where he is already under fire for mismanaging US/Chinese relations.

If President Trump goes ahead with the tariff hike tonight just after midnight, then China yesterday said that it will retaliate “in kind.”  In previous rounds when China retaliated, then Mr. Trump took that as a pretext to move to his next level, which in this case is his threat for a 25% tariff on the remaining $325 billion of Chinese goods.

President Trump’s tariff announcement on the remaining $325 billion of Chinese goods could come as soon as tomorrow or next week if China retaliates, which they must.  The only way for China to avoid the next tariff round might be if China retaliates at such a minimal level that President Trump is willing to forgo the next level of tariffs for some period of weeks or months, or sets a deadline for that new tariff hike.

China in any case doesn’t have many good options for retaliation since it already has penalty tariffs on $110 billion of U.S. goods, representing nearly all of U.S. exports to China.  On the tariff front, China can only raise the level of the existing penalty tariffs.  China could also retract its recent promise to buy large amounts of U.S. farm products and LNG and reimpose the former tariffs on U.S. autos.  China can also crack down on high-profile U.S. companies that sell a high volume of products in China such as Apple, Procter & Gamble, Nike, Starbucks, McDonalds, etc. 

If the Trump administration goes ahead with Friday’s tariff hike, the markets will then be watching to see whether the US/Chinese trade talks continue or whether China will essentially walk away from the talks for a period of weeks or months for a cooling-off period as it did last year when President Trump nixed the trade deal that China made with Treasury Secretary Mnuchin.  If China essentially walks away from the talks tomorrow, then the markets will likely have to wait until autumn or even 2020 for a new round of serious talks.



30-year T-note auction to yield near 2.90% — The Treasury today will sell $19 billion of new 30-year bonds, thus concluding this week’s $84 billion refunding operation.  Today’s 30-year bond issue late yesterday afternoon was trading at 2.90% in when-issued trading.  The 12-auction averages for the 30-year are as follows:  2.29 bid cover ratio, $5 million in non-competitive bids, 4.6 bp tail to the median yield, 33.0 bp tail to the low yield, and 61% taken at the high yield.  The 30-year is slightly below average in popularity among foreign investors and central banks.  Indirect bidders, a proxy for foreign buyers, have taken an average of 61.1% of the last twelve 30-year T-bond auctions, which is slightly below the median of 61.6% for all recent Treasury coupon auctions.

Fed is looking towards today’s PPI and tomorrow’s CPI reports for inflation guidance — The markets will carefully watch today’s PPI report and tomorrow’s CPI report since the Fed is keying heavily on inflation for its policy direction.  Fed Chair Powell several weeks ago expressed substantial concern about below-target inflation but then at last week’s FOMC press conference said most of the weakness in inflation is due to “transitory” factors, thus leading the markets to conclude that the Fed is thoroughly confused about the current inflation situation.

In any case, the consensus is for today’s April headline PPI to rise slightly to +2.3% y/y from March’s +2.2% and for the core PPI to rise to +2.5% from March’s +2.4%.  The consensus is for tomorrow’s April headline CPI to rise to +2.1% y/y from March’s +1.9% and for the core CPI to rise to +2.1% from March’s +2.0%.  The PCE deflator in March was in much weaker shape at +1.5% y/y headline and +1.6% y/y core, well below the Fed’s +2.0% inflation target.

U.S. trade deficit expected to expand mildly — The consensus is for today’s March trade deficit to expand mildly to -$50.1 billion from Feb’s 8-month low of -$49.4 billion.  The trade deficit narrowed sharply in Jan-Feb from Dec’s 10-year high of -$59.9 billion mainly because of the combined +2.1% rise in exports in Jan-Feb versus the -2.4% drop in imports.  The U.S. trade deficit continues to be buffeted by tariffs and the threat of tariffs, which makes the underlying trends hard to decipher.  However, the fact remains that the trade deficit is fundamentally wide and is a long-term underlying bearish for the dollar.


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