- Markets are unsure whether Trump would accept a partial US/China trade deal
- U.S. Sep PPI expected steady
- 3-year T-note auction to yield near 1.41%
Markets are unsure whether Trump would accept a partial US/China trade deal — China’s chief trade negotiator, Vice Premier Liu, is coming to Washington for high-level talks beginning on Thursday with an offer for a trade deal that is narrow in scope and that does not include concessions on industrial policy or state subsidies, according to a Bloomberg report on Sunday. China is focused on getting President Trump to back off on tariffs and then schedule talks for next year on the larger industrial policy and state subsidy issues.
Bloomberg’s reporting added to previous media reports that the U.S. and China are discussing the possibility of an “interim” deal whereby Mr. Trump backs off on new tariffs in return for Chinese ag purchases and IP commitments. Mr. Trump has already announced that the tariff will be raised to 30% from 25% on $250 billion of Chinese goods effective next Tuesday (Oct 15) and that a new tariff of 15% will be placed on the remaining $160 billion of Chinese goods on Dec 15. The Trump administration on Sep 1 already slapped a 15% tariff on $110 billion of Chinese goods.
The chances for an interim US/Chinese trade deal are perhaps a bit higher after President Trump agreed to a similar type of deal with Japan. The U.S. and Japan on Monday signed a “first-stage” trade agreement involving ag products, a limited number of industrial products, and digital trade. Despite its agreement to that trade deal, Japan did not receive any iron-clad assurances that Japanese autos are safe from a penalty tariff from President Trump, making the US/Japan trade deal look lopsided in favor of the U.S.
Even though talk in the media is focused on an interim US/Chinese trade deal, there is no assurance that Mr. Trump would agree to such a deal. He has said several times in recent weeks that he is not interested in a “partial” deal. However, there is speculation that Mr. Trump might take what he can get in a partial deal now so he gets a win to counteract his current political difficulties.
If this week’s US/Chinese trade talks go badly, then Mr. Trump will undoubtedly go ahead with the Oct 15 and Dec 15 tariffs. There is also the chance that Mr. Trump might announce new tariffs or even expand the trade war by announcing restrictions on U.S. investment in Chinese stocks. White House advisor Kudlow on Monday relieved those fears a bit by saying that there are no current plans to force a delisting of Chinese stocks listed in the U.S.
U.S. stock index futures prices fell after Monday’s stock market close when the Trump administration blacklisted eight Chinese technology companies because of alleged human rights violations against Muslim minorities in China’s western province of Xinjiang. The blacklisting of more Chinese companies could hurt the climate at this week’s high-level trade talks.
U.S. Sep PPI expected steady — The consensus is for today’s Sep final-demand PPI report to be unchanged from Aug at +1.8% y/y and for the core PPI to be unchanged at +2.3% y/y.
The markets will be encouraged if today’s PPI report is in line with expectations at unchanged considering the recent rise in the core CPI and deflator measures. The CPI in August eased to +1.7% y/y from July’s 1.8%. However, the Aug core CPI rose to an 11-year high of +2.4% y/y and showed an alarming +3.4% increase on a 3-month annualized basis.
Meanwhile, the Aug PCE deflator was unchanged at only +1.4% y/y, but the core PCE deflator rose to an 8-month high of +1.8% y/y and was up +2.5% on a 3-month annualized basis.
The rise in the core inflation measures in August is partially behind the recent statements by multiple Fed officials that they do not currently support further rate cuts. With the core PCE deflator showing a +2.5% increase on a 3-month annualized basis and with the economy growing near +2.0%, the Fed has more reasons to stand pat than to cut rates another notch.
Nevertheless, the risks are skewed to the downside and the markets are discounting the odds at 86% for a rate cut at the next FOMC meeting on Oct 29-30 and at 100% for that rate cut by the December 10-11 meeting (relative to the current funds rate target midpoint of 1.875%). The markets are currently discounting an overall 81 bp rate cut by the end of 2020, which is equivalent to 3.2 more rate cuts.
3-year T-note auction to yield near 1.41% — The Treasury today will sell $38 billion of 3-year T-notes. The Treasury will then continue this week’s $78 billion coupon package by selling $24 billion of 10-year T-notes on Wednesday and $16 billion of 30-year T-bonds on Thursday. This week’s 10-year and 30-year auctions will be the second and final reopenings of the securities first sold in August.
The 3-year T-note yield on Monday closed +5.4 bp at 1.413%, which is only 9.5 bp above last week’s 3-year low of 1.318%.
The 12-auction averages for the 3-year are as follows: 2.50 bid cover ratio, $73 million in non-competitive bids from mostly retail investors, 3.1 bp tail to the low yield, 24.6 bp tail to the low yield, and 58% taken at the high yield. The 3-year is the second least popular security among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of only 46.9% of the last twelve 3-year auctions, well below the median of 59.6% for all recent Treasury coupon auctions.
