- US/China trade deal is now being held back by ag purchase and tariff rollback snags
- Trump auto tariff decision expected soon
- Washington moves toward deferring government shutdown threat until December
- U.S. retail sales need to show the expected October recovery
- U.S. manufacturing production expected to show a worsening U.S. manufacturing recession
US/China trade deal is now being held back by ag purchase and tariff rollback snags — Bloomberg on Thursday added to WSJ’s reporting on Wednesday that the US/Chinese trade talks have run into a snag because China is reluctant to put numerical targets for ag purchases into the text of a trade deal. Bloomberg said that Chinese negotiators are balking at an American demand for monthly, quarterly and annual targets for ag purchases. President Trump says that China has agreed to ramp up its U.S. ag purchases to $50 billion from the $20 billion level seen in 2017, the last full year before the tariff war began.
Aside from the ag-purchase snag, China’s Ministry of Commerce spokesman on Thursday said, “To remove existing additional tariffs is an important condition for reaching a deal.” The Chinese demand for at least a partial tariff roll-back as a condition for a phase-one trade deal continues to a major point of contention in the trade talks since President Trump has said that he has not agreed to any tariff rollback. There was at least a little positive trade news on Thursday when China said that it lifted a ban on U.S. poultry effective immediately.
Trump auto tariff decision expected soon — The markets are waiting for an imminent decision by President Trump on whether he will impose the threatened tariff on autos imported into the U.S. The markets were encouraged by reports earlier this week by Politico and Bloomberg that Mr. Trump has decided to delay a decision on those auto tariffs for another 6 months. Bloomberg reported Tuesday that the Trump administration is pleased that European automakers such as Volkswagen and Daimler have agreed to shift global production to American suppliers as a means to stave off the tariff.
Europe has promised to slap retaliatory tariffs on $39 billion of U.S. goods if Mr. Trump imposes a tariff on European autos. Global stocks would likely fall sharply if Mr. Trump unexpectedly proceeds with a tariff on European autos since the European manufacturing sector is already in a recession and since the U.S. economy would take another hit from retaliatory tariffs.
Washington moves toward deferring government shutdown threat until December — Washington is moving towards deferring the threat of a U.S. government shutdown until December. Congressional leaders and the White House are reportedly near agreement on a new continuing resolution (CR) that will last until December 20. Without a new CR, there will be a U.S. government shutdown beginning next Friday after the current CR expires on Nov 21.
U.S. retail sales need to show the expected October recovery — The market consensus is for today’s Oct retail sales report to show an increase of +0.2% and +0.4% ex autos, recovering somewhat after Sep’s poor report of -0.3% and -0.1% ex autos.
Retail sales were very strong during the April-August period and reached a 1-year high of +4.4% on a year-on-year basis in August. However, retail sales then slid in September by -0.3% m/m and the year-on-year rate eased slightly to +4.1% y/y. The markets are hoping that the weakness in September retail sales was just a one-time glitch and that spending resumed in October. The good news is that consumer confidence remains in generally solid shape since the labor market remains strong and the stock market has hit record highs.
The markets need a solid retail sales report today to prove that U.S. consumers will continue to single-handedly support the U.S. economy. Personal spending contributed a hefty 3.03 percentage points to the Q2 GDP report of +2.0% and 1.93 points to the Q3 GDP report of +1.9%. By contrast, investment subtracted -0.25 points from Q2 GDP and -0.22 points from Q3 GDP. Net exports subtracted -0.68 points from Q2 GDP and -0.08 points from Q3 GDP. The Atlanta Fed GDPNow’s forecast is that U.S. GDP in Q3 will slip to a meager +1.0%.
U.S. manufacturing production expected to show a worsening U.S. manufacturing recession — The market consensus is for today’s Oct manufacturing production report to show a sharp -0.6% decline, adding to Sep’s -0.5% decline. The broader Oct industrial production report, which includes the utility and mining sectors, is expected to show a smaller decline of -0.4% m/m, matching Sep ‘s decline of -0.4%.
The U.S. manufacturing sector is currently in a recession with manufacturing production having fallen on a year-on-year basis for the last three reporting months of July through September. Manufacturing production in September fell to a 3-year low of -0.9% on a year-on-year basis. The ISM report also supports the view of a manufacturing recession since the ISM manufacturing index in October was at 48.3 and has been below the expansion-contraction level of 50.0 for the last three months (Aug-Oct).
Meanwhile, the global manufacturing sector is in bad shape due in large part to the trade war. The European manufacturing sector is in a deeper recession than the U.S. manufacturing sector. In September, industrial production fell by -1.7% y/y in the Eurozone and by -4.3% y/y in Germany. Markit’s manufacturing PMI has been below the expansion-contraction level of 50 since the beginning of this year for both Germany and the Eurozone as a whole.
China’s manufacturing sector is also weakening. China’s manufacturing national PMI has been below 50.0 since May and the latest report for October was at 49.3. China’s ISM new export orders sub-index in October fell by -1.2 points to 47.0 and has been below 50 since mid-2018, illustrating the weakness in exports due in large part to U.S. tariffs.
