- Trump says US/China trade deal might happen “sooner than you think”
- U.S. tariff threat on Japanese autos continues despite trade agreementÂ
- Labour continues to reject Johnson’s call for a general election
- U.S. GDP expected to fade slightly after today’s expected Q2 report of an unrevised +2.0%Â
- 7-year T-note auction to yield near 1.67%
Trump says US/China trade deal might happen “sooner than you think” — The stock market rallied on Wednesday after President Trump said that there is a “good chance” for a US/Chinese trade deal and that it could happen “sooner than you think.” It was not clear whether those were just general observations or whether they were based on positive developments in the negotiations that the markets don’t know about.
In any case, there was another positive development on the trade front on Wednesday after China’s state-run Xinhua news agency reported that China is preparing to buy as much as 100,000 MT of U.S. pork. Any Chinese purchases of U.S. ag products ahead of the high-level US/Chinese trade talks in the Oct 7 week would be very helpful for the negotiations.
The markets are trying to figure out whether the House impeachment inquiry is good or bad for a US/Chinese trade deal. The general thinking in the market seems to be that the impeachment inquiry might make a US/Chinese trade deal more likely if President Trump needs a win with a US/Chinese trade deal to boost the stock market and counteract the market’s concern about the political turmoil.
U.S. tariff threat on Japanese autos continues despite trade agreement — President Trump and Japanese Prime Minister Abe on Wednesday signed what they called the “first stage” of a US/Japan trade agreement. Negotiations will continue on a more complete agreement. Wednesday’s agreement reduced Japanese tariffs on some $7.2 billion of U.S. products, with a focus mainly on farm products. Japan was willing to generally cut tariffs to the levels that were contained in the Trans-Pacific Partnership agreement that President Trump rejected when he first took office. Wednesday’s agreement also covered $40 billion in digital trade.
Despite signing the accord, Japan did not receive any iron-clad assurances from the Trump administration that the tariff threat on Japanese autos is completely off the table. USTR Lighthizer said that Mr. Trump does not intend to slap tariffs on Japanese autos at the current time. However, there is no written promise by the U.S. regarding auto tariffs in Wednesday’s trade agreement. That means that the markets down the road may again hear Mr. Trump threaten tariffs on Japanese autos if he thinks Japan is dragging its feet in the ongoing trade negotiations or if Japan backslides on Wednesday’s agreement.
Labour continues to reject Johnson’s call for a general election — Prime Minister Johnson, fresh off his repudiation by the UK Supreme Court on Tuesday, spent much of the day on Wednesday trying to force a general election. Mr. Johnson is now the unelected head of a minority government since he ejected 21 Conservative Party members from the party for failing to vote with the government. His only chance for regaining a majority is to go to the voters and take his chances that the Conservatives will win.
However, Mr. Johnson doesn’t currently have enough votes in Parliament to force an election. Labour leader Corbyn continues to insist that he will agree to an election only after the threat of a no-deal Brexit has passed. In other words, Mr. Corbyn will only agree to a new election after Mr. Johnson secures a Brexit deadline extension from the EU.
The betting markets are assigning the probability of a no-deal Brexit by the end of 2019 at only 20%. The more likely outcome is that Parliament will force Mr. Johnson into obtaining an extension of the Brexit deadline into 2020 and then there will be a general election. The likelihood seems very low that Mr. Johnson will be able to get enough Brexit concessions out of the EU to produce a Brexit withdrawal agreement that could pass Parliament before the current Brexit deadline of October 31. If Parliament could pass a Brexit withdrawal agreement, then the UK would enjoy a smooth transition period while a UK/EU trade deal is negotiated.
U.S. GDP expected to fade slightly after today’s expected Q2 report of an unrevised +2.0% — The consensus is for today’s Q2 GDP report to be unrevised from the last estimate of +2.0%. GDP growth in Q2 was heavily dependent on strong consumer spending, which contributed a hefty +3.1 percentage points to the report. By contrast, business investment subtracted -0.20 points from Q2 GDP, net exports subtracted -0.72 points, and inventories subtracted -0.91 points. Government spending contributed +0.77 points to Q2 GDP, but government spending cannot be counted upon to continue boosting GDP.
Looking ahead, the consensus is for U.S. GDP to fade slightly to +1.9% in Q3 and then to +1.7% in Q4 and Q1-2020, before stabilizing near 1.8% during the remainder of 2020. On a calendar year basis, the consensus is for U.S. GDP in 2019 to ease to +2.3% from 2018’s strong rate of +2.9%, and then ease further to +1.7% in 2020. The U.S. economy is slowing due to (1) the fading effects of the 2018 tax cut, (2) slower growth in China and Europe, and (3) weak U.S. business investment tied to trade uncertainty.
7-year T-note auction to yield near 1.67% — The Treasury today will sell $32 billion of 7-year T-notes, concluding this week’s $131 billion T-note package. The benchmark 7-year T-note yield on Wednesday closed at 1.67%, which is 29 bp above the early-Sep 3-year low of 1.38%.
The 12-auction averages for the 7-year are as follows: 2.43 bid cover ratio, $20 million in non-competitive bids from mainly retail investors, 4.6 bp tail to the median yield, 28.4 bp tail to the low yield, 39% taken at the high yield, and 59.4% taken by indirect bidders, a proxy for foreign investors and central banks (slightly below the median of 59.6% for all recent coupons).
