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  • Trade talks appear stalled as President Trump expresses pessimism about a deal
  • U.S. ISM non-manufacturing index expected to remain solidly above 50
  • ADP expected to remain below par

Trade talks appear stalled as President Trump expresses pessimism about a deal 
— The markets on Tuesday were surprised to hear President Trump say, I don’t have a deadline” for a trade deal and, “I like the idea of waiting until after the election for a China deal.”

In addition, Commerce Secretary Wilbur Ross on Tuesday said that while the trade talks continue, there are no big meetings scheduled.  That suggests that a deal is unlikely before next Sunday (Dec 15), when Mr. Trump is due to impose a 15% tariff on the remaining $160 billion of Chinese goods. 

If there is no near-term trade deal and if talks have essentially stalled, then Mr. Trump will undoubtedly go ahead with the Dec 15 tariff.  Moreover, Mr. Trump’s modus operandi would be to ratchet up the pressure another notch by reviving his previous plan to raise the tariff to 30% from 25% on the first $250 billion of Chinese goods.  The next logical tariff steps would be to raise the current 15% tariff on the $110 billion of Chinese goods imposed on Sep 1 and raise the new 15% tariff on the last $160 billion of Chinese goods due to go into effect on Dec 15.

If there is no prospect for a trade deal in his first term, then Mr. Trump seems likely to impose across the board tariffs of at least 25% on all Chinese imports and perhaps even raise that tariff to 30% or even higher.  The markets on Tuesday were forced to consider that possibility.

By saying that he doesn’t care if a trade deal has to wait until after the election, Mr. Trump may have just been feigning indifference to convince China that he doesn’t want a deal badly enough to meet China’s demand for a rollback of current tariffs.  However, Mr. Trump’s comment may also have been just what it appeared, i.e., a fatalistic recognition that the talks have stalled and that a deal is unlikely unless he wins reelection next November.

Indeed, Axios on Monday reported that the trade talks are stalled “because of the Hong Kong legislation,” and that time is needed to allow “Xi’s domestic politics to calm.”  That situation is only going to get worse as Congress finalizes passage of another bill that will infuriate China that calls for sanctions on Chinese officials responsible for human rights violations against Uighurs and Kazakhs in the Xinjiang region.  

Moreover, US/Chinese relations might be about to get even worse based on reports that China is close to releasing its long-promised “unreliable entity” list targeting U.S. companies such as FedEx with sanctions.  President Trump would likely strike back for any Chinese sanctions on U.S. companies by adding more Chinese tech companies to the U.S. trade blacklist or by imposing another round of trade tariffs.  Meanwhile, China has another card to play of halting its export of rare-earth minerals to U.S. high-tech manufacturing companies.

Regardless of the deteriorating situation, both the U.S. and China need a phase-one trade deal for their own domestic political and economic reasons.  That means that the U.S. and China may yet reach a last-minute trade deal, or at least reach another truce that prompts Mr. Trump to defer the Dec 15 tariffs.  Still, US/Chinese relations are deteriorating by the day and the prospects do not appear to be favorable for a near-term trade deal.

U.S. ISM non-manufacturing index expected to remain solidly above 50 — Today’s Nov U.S. ISM non-manufacturing index is expected to show a -0.2 point decline to 54.5, giving back a little of October’s strong increase of +2.1 points to 54.7.  

The Oct index level of 54.7 is comfortably above the expansion-contraction level of 50.0, illustrating that most U.S. economic sectors other than manufacturing are in solid shape.  The ISM non-manufacturing index has remained consistently above 50.0 since 2009 when the Great Recession ended.

Today’s final-Nov Markit U.S. services PMI is expected to be unrevised at 51.6, leaving the index up by +1.0 point from October.

ADP expected to remain below par — The consensus is for today’s Nov ADP employment report to show an increase of  +140,000, improving from October’s report of +125,000.  Today’s expected report of +140,00 would still be significantly weaker than the 12-month trend average of +171,000.  

The markets are closely watching to see if hiring starts slipping, given that the U.S. manufacturing sector is in a recession and that GDP is in the process of slowing to next year’s expected pace of +1.8% from +2.3% in 2019 and +2.9% in 2018.  In addition, the U.S. economy has already generated 21.9 million new jobs since the Great Recession ended, meaning that U.S. businesses may be getting close to being fully staffed.

On the labor front, the market is mainly looking ahead to Friday’s Nov payroll report, which is expected to strengthen to +190,000 from Oct’s +128,000.  November’s payroll report is expected to be boosted by +46,000 returning GM strikers.  Meanwhile, October’s weak payroll report of +128,000 was due in part to the GM strike and the layoff of some census workers.

The consensus is for Friday’s Nov unemployment rate to be unchanged at +3.6%, which would be only +0.1 point above Sep’s 50-year low of +3.5%.  Job growth has been strong enough to keep the unemployment near 50-year lows, illustrating the continuing strength of the U.S. labor market.

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