- US/Chinese trade talks resume with hopes for near-term agreement
- U.S. unemployment claims expected to remain generally favorable
- U.S. Q1 GDP headed for weakness after today’s expected downward revision in Q4 GDP
- 7-year T-note auction
- PM May willing to trade her job for a Brexit deal; no Plan B option gets a majority vote
US/Chinese trade talks resume with hopes for near-term agreement — The US/Chinese trade talks resume today as USTR Lighthizer and Treasury Secretary Mnuchin meet with their counterparts in China through Friday. Chinese Vice Premier Liu will then travel to Washington next week to complete this round of talks.
The markets are hoping that U.S. and Chinese officials in this round of talks will be able to finalize a trade agreement. The U.S. was previously pressuring China for a Trump-Xi summit to negotiate final issues but China has reportedly rejected that plan due to fears that President Trump might make aggressive last-minute demands and threaten to walk away from the summit as he did with his recent summit with Kim Jong Un. If there is a Trump-Xi summit within the next month or two, it will likely be a signing summit that takes place after a deal has already been finalized.
President Trump has said that he expects the U.S. stock market to rally sharply if there is a US/Chinese trade deal. While the U.S. stock market would certainly be relieved by an agreement, the reaction of the stock market would depend on the terms of any agreement. The stock market would likely rally sharply if there is a comprehensive US/Chinese trade agreement that drops all the penalty tariffs that were imposed last year and doesn’t leave any loose ends.
By contrast, the stock market would be less impressed by the more likely outcome that a US/Chinese trade agreement leaves in place all, or some, of last year’s U.S. tariffs on Chinese goods. The least positive outcome would be if there is an agreement but the U.S. and China leave in place all their tariffs with only a vague plan to reduce those tariffs as agreement milestones are reached. The market’s main concern will be the chances for a new trade flare-up even after an agreement.
U.S. unemployment claims expected to remain generally favorable — Today’s U.S. unemployment claims report is expected to show that layoffs continue to be in generally favorable shape. Initial unemployment claims are only +21,000 above the 49-year low of 200,000 posted in January. Meanwhile, continuing claims are a bit elevated at +120,000 above the 45-year low of 1.630 million posted in October 2018.
The consensus is for today’s initial unemployment claims report to show a slight decline of -1,000 to 220,000 following last week’s -9,000 decline to 221,000. The consensus is for continuing claims to show an increase of +28,000 to 1.778 million after last week’s -27,000 decline to 1.750 million.
U.S. Q1 GDP headed for weakness after today’s expected downward revision in Q4 GDP — The consensus is for today’s Q4 GDP to be revised lower to +2.3% (q/q annualized) from +2.6%. The downward revision is expected to stem in part from an expected downward revision in Q4 personal consumption to +2.6% from +2.8%. While GDP growth was strong at about +2.9% in 2018, the question is where growth is going in 2019. The consensus is for GDP growth to ease to +2.4% in 2019 and +1.9% in 2020 due to the fading effects of the 2018 tax-cut stimulus, trade tensions, and weak Chinese and Eurozone economic growth.
The more immediate problem is the extent to which growth slowed in Q1, particularly given the all the talk about recession stemming from the inverted yield curve. The consensus is for Q1 GDP growth to slow to +1.5% from Q4’s +2.6%. The Atlanta Fed’s GDPNow forecast agrees with that +1.5% consensus and is forecasting that the weakness will stem mainly from an increase of only +0.9% in consumer spending.
7-year T-note auction — The Treasury today will sell $32 billion of 7-year T-notes, concluding this week’s $131 billion T-note package. The 7-year T-note yield on Wednesday fell to a new 16-month low and closed the day at 2.26%. The 12-auction averages for the 7-year are as follows: 2.52 bid cover ratio, $17 million in non-competitive bids, 4.4 bp tail to the median yield, 34.8 bp tail to the low yield, and 35% taken at the high yield. The 7-year T-note is of average in popularity among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 61.3% of the last twelve 7-year T-note auctions, which exactly equals the median of 61.3% for all recent Treasury coupon auctions.
PM May willing to trade her job for a Brexit deal; no Plan B option gets a majority vote — Prime Minister May on Wednesday made a desperate push for her Brexit plan by offering to resign as Prime Minister if the Conservative Party would vote in favor of her Brexit plan. A few additional hardline Brexiteers on Wednesday said they would in fact support Ms. May’s plan. However, the Northern Ireland DUP Party continues to say that it will not support the plan, likely dooming the plan. Ms. May plans to hold a third vote on her Brexit plan on Thursday or Friday if there is a chance of success and if she can finesse Speaker Bercow’s prohibition of a third vote on a substantially similar bill.
Meanwhile, Parliament had free rein on Wednesday to vote on Brexit Plan B options. None of the options gained a majority vote, but the proposal that did the best was a motion that a final Brexit deal should be put to a public referendum. The second best outcome was for the UK to remain in a customs union with the EU. The Plan B votes on Wednesday showed that there is more support for a softer Brexit and public approval of a final Brexit deal than there is for Ms. May’s Brexit separation agreement.
The near-term outcome still seems likely to be a UK request for a long Brexit extension before the new April 12 deadline.
