- Chinese tariff cut is helpful but US/China trade tensions continue with ongoing tariffs and questions about China’s purchase capabilities
- Russia balks at OPEC+ production cut
- Payroll report expected to show a respectable increase before any coronavirus effects hit
Chinese tariff cut is helpful but US/China trade tensions continue with ongoing tariffs and questions about China’s purchase capabilities — The markets were only mildly impressed by China’s announcement on Thursday of a cut in its tariffs by half on $75 billion of U.S. good as an apparent part of its obligations in the phase-one trade deal. That tariff cut will go into effect on Feb 14, which is the day that the phase-one trade deal goes into effect and the same day that the U.S. will cut its tariffs in half to 7.5% on $120 billion of Chinese goods.
China’s tariff cut was a step in the right direction but did not represent any new progress in US/Chinese trade relations. Indeed, US/China trade tensions will continue since the markets remain skeptical about whether China will be able to meet its hefty purchase requirements under the phase-one trade deal, especially now that the Chinese economy has taken a heavy hit from the coronavirus. It remains unclear whether President Trump would accept any delay of China’s product-purchase requirements of $200 billion of extra U.S. goods during 2020-21.
Chinese companies have already started reneging on commodity purchases due to the coronavirus, which makes clear that China is likely to have trouble meeting this year’s trade-deal purchase requirements. China National Offshore Oil Corp, the nation’s largest LNG buyer, declared force majeure on some LNG cargos on Thursday, although the seller, Total SA, rejected the force majeure claim. Also, Chinese copper smelter Guangxi Nanguo used force majeure to try to reject the delivery of raw materials.
The US/China phase-one trade deal has what amounts to a force majeure provision that China is expected to use to try to at least delay its purchase requirements in the trade agreement.
While the tariff cuts by the U.S. and China on Feb 14 are helpful, the fact remains that heavy penalty tariffs will remain in place even after Feb 14 and will continue to bog down U.S. and Chinese exports and cause supply chain disruptions. The U.S. will keep in place tariffs on $370 billion of Chinese goods and China will keep in place tariffs on $110 billion of U.S. goods except for exemptions to allow China to meet its requirements for purchasing U.S. goods.
There is virtually no chance of those tariffs being removed until after November’s election when either a re-elected President Trump negotiates a phase-two trade deal or a newly-elected Democratic president perhaps removes the tariffs.
Russia balks at OPEC+ production cut — After three long days of talks, the OPEC+ technical committee on Thursday recommended a new production cut of 600,000 bpd in response to the plunge in oil demand from the Chinese coronavirus That production cut would help offset OPEC’s forecast for an oil supply surplus of about 600,000 bpd in Q1 and 1 million bpd in Q2. Bloomberg News has reported that China’s crude oil demand has already plunged by 20%.
Crude oil prices on Thursday saw only limited support from the technical committee’s recommendation for a production cut because OPEC+ was unable to schedule an emergency meeting to approve that production cut. Russian Energy Minister Novak said Russia needs more time to assess the impact of the virus outbreak.
Russia is holding out on an emergency production cut and instead seems to be hoping that the group might be able to get away with only rolling over its current 1.7 million bpd production cut into Q2. OPEC+ has a regularly scheduled meeting in March to decide on its production levels in Q2.
Payroll report expected to show a respectable increase before any coronavirus effects hit — The consensus is for today’s payroll report to show an increase of +160,000, up from Dec’s weak report of +145,000 but below the 3-month average of +184,000 and the 12-month average of +176,000. Wednesday’s Jan ADP report of +291,000 was much stronger than market expectations of +158,000 and supported expectations for a firm payroll report today.
U.S. hiring in January should remain relatively firm since business confidence improved with the US/China trade deal that was announced in mid-December. The coronavirus did not emerge as a big problem until mid-January. That means that any slowdown in hiring due to the virus is not likely to show up until February since the hiring process takes a matter of weeks before resulting in an actual hire that is reported in the payroll report.
The consensus is for today’s Jan unemployment rate to be unchanged from the 50-year low of 3.5% seen in Nov-Dec. The Fed is forecasting that the unemployment rate has bottomed out and will move sideways this year and then move slightly higher to 3.6% by the end of 2021 and to 3.7% by the end of 2022. The Fed expects the labor market to remain tight in the coming years with the unemployment rate remaining below its estimate of a long-term natural unemployment rate of 4.1%.
The tight labor market in theory should be putting stronger upward pressure on wages. However, wage growth remains stagnant with only moderate rises. The consensus is for today’s Jan average hourly earnings report to edge higher to +3.0% y/y from December’s 1-1/2 year low of +2.9%. December’s wage gain of +2.9% was well below last February’s 10-year high of +3.4% y/y.
