- US/Chinese trade talks are reportedly struggling on toughest issues
- Political pressure is growing for an end to the U.S. government shutdown
- Betting odds rise slightly for no-deal Brexit
US/Chinese trade talks are reportedly struggling on toughest issues— The Financial Times on Wednesday reported that the Trump administration refused to allow two top Chinese officials to visit the U.S. this week in preparation for next week’s (Jan 30-31) key meeting among Chinese Vice Premier Liu (Chinese President Xi’s top economic advisor), USTR Lighthizer, and Treasury Secretary Mnuchin. White House economic advisor Kudlow quickly denied the FT report.
FT said the White House refused to receive the two Chinese officials, key advisors to Mr. Liu, unless they brought along a written proposal for how China would meet U.S. demands on forced technology transfers and state subsidies. China is dragging its feet on those issues, according to the FT article, which means that the odds are higher that next week’s key Liu-Lighthizer meeting could result in the effective collapse of the talks if there isn’t significant progress on the technology and subsidy issues.
Tuesday’s report that the White House refused to meet the two Chinese officials, if true, suggests that US/Chinese tensions remain very high and that the two sides are still far apart on an overall trade deal. The two sides are reportedly making good progress on a plan for China to ramp up purchases of U.S. goods in order to eventually phase out the U.S. trade deficit with China. However, the White House seems unlikely to agree on a deal involving only Chinese purchases of U.S. goods and instead demand a comprehensive deal that includes the difficult issues on IP protection, technology transfers, and state subsidies.
The market seems to have only limited hope for a comprehensive US/Chinese trade deal before the March 1 deadline due to the complexity and extent of the outstanding issues. However, the market does appear to be hoping that there will be enough progress towards an agreement that President Trump will at least agree to delay his March 1 deadline for raising the U.S. tariff to 25% from 10% on $200 billion of Chinese goods.
The sharp stock market rally seen so far in January has been due in part to President Trump’s claims that good progress is being made in the US/Chinese trade talks. However, if the talks are actually going poorly and Mr. Trump does in fact raise the tariffs to 25% after March 1, then the U.S. stock market is likely to fall sharply as the market worries about even larger negative effects for the Chinese and U.S. economies, and by extension for the world economy.
Political pressure is growing for an end to the U.S. government shutdown — Congress is getting restless for an end to the government shutdown, which enters its 33rd day today and where some 800,000 government employees will miss their second paycheck this Friday. In the House, there are some Democrats that are pressuring Speaker Pelosi to at least promise President Trump a vote on the wall if he agrees to reopen the government.
In the Senate, Majority Leader McConnell and Minority Leader Schumer on Tuesday reached a deal for two votes on Thursday, both of which would need 60 votes for cloture. The first vote would be on President Trump’s proposal for $5.7 billion in wall funding in return for a 3-year extension of protection for DACA dreamers. However, there isn’t likely to be even close to enough Democratic support to get to 60 votes on that bill since the legislation also makes it more difficult for new dreamers to apply for DACA protection and imposes significant restrictions on asylum. In addition, the Supreme Court on Tuesday refused to take up the current DACA rulings, meaning that DACA dreamers are likely to be protected by current court rulings at least through the end of this year.
The second bill is more interesting since it is a clean CR through February 8 without wall funding, the same bill that the House has already passed. If enough Republicans were to vote on that bill, then the bill would land on President Trump’s desk. Mr. Trump in all likelihood would veto the bill. However, if he were to sign the bill, then the government would reopen through February 8, allowing government workers to at least get their back pay and get some work backlogs taken care of before the next shutdown. Yet that CR would probably not get enough support to pass in the first place if McConnell/Trump lobby their caucus hard to reject the bill. Nevertheless, the fact remains that members of Congress are getting antsy and are starting to put more pressure on leaders to find some kind of deal.
Betting odds rise slightly for no-deal Brexit — Prime Minister May continues to try to bolster support for her Brexit Plan B, which Parliament will vote upon this coming Tuesday (Jan 29). Parliament will also vote on a variety of other measures including a bill that would take control of Brexit away from Ms. May so there isn’t a no-deal Brexit on March 29. Ms. May is also trying to get the EU to relent on its Brexit backstop to make the deal more palatable to the UK Parliament, although the EU seems highly unlikely to soften its backstop demands.
Sterling continues to trade on a relatively strong note near last week’s 2-1/4 month high because the market seems to believe the chances are low that the UK will crash out of the EU on March 29 without a separation agreement and transition period where the UK stays in the common market. The betting odds of the UK leaving the EU by April 1 without a Brexit deal rose slightly to 3/1 (33%) on Tuesday from 5/2 (29%) over the previous several days, according to www.oddschecker.com.
The most likely outcome at this point seems to be that Parliament will be unable to agree on a Brexit separation agreement before March 29 (that the EU will accept) but that there will be an extension of the Brexit deadline by anywhere from 3 to 12 months depending on what the EU allows.