Merkel arrives in Washington with the tough job of cajoling President Trump on steel-aluminum tariffs and Iran nuclear deal
Q1 U.S. GDP expected to ease to +2.0%
Q1 employment cost index expected to show strength
Merkel arrives in Washington with the tough job of cajoling President Trump on steel-aluminum tariffs and Iran nuclear deal — German Chancellor Merkel visits Washington today for talks with President Trump. Ms. Merkel has two main missions: (1) try to prevent Mr. Trump from exiting the Iran nuclear deal, and (2) convince Mr. Trump to permanently exempt Europe from his steel-aluminum tariffs.
Ms. Merkel faces a very difficult task in trying to convince President Trump to remain in the Iran nuclear agreement. Earlier this week, President Trump reiterated his disdain for the Iran nuclear agreement by calling it “insane†and “ridiculous.†Following his talks with Mr. Trump, French President Macron said on Wednesday that, “I believe [Trump] will get rid of this deal for domestic reasons.†Mr. Trump did not seem swayed by Mr. Macron’s argument for maintaining the Iran nuclear agreement as a foundation and then negotiating side agreements to make the nuclear curbs permanent, curtail Iran’s missile development program, and contain Iran’s regional hostilities.
There are only two weeks left until President Trump’s self-imposed deadline of May 12 for deciding whether to exit the Iran nuclear deal. Oil prices have already rallied on the risk that Mr. Trump will exit the deal and oil prices will undoubtedly rally further if Mr. Trump goes ahead with that threat.
If Mr. Trump does in fact abrogate U.S. involvement in the Iran nuclear agreement, the big question will then become whether he immediately imposes new sanctions on Iran. Mr. Trump could delay the sanctions as he waits for buy-in from Congress and perhaps even from the Europeans. In that case, the impact on oil prices would be muted since there might still be a chance to revive the agreement and since there would be no new sanctions as yet to curb Iran’s oil exports.
However, if Mr. Trump goes ahead with new sanctions right away, then oil prices are likely to rally sharply since Iran’s oil exports would quickly drop. The extent to which Iran’s oil exports are curbed depends on the extent of U.S. sanctions and whether European nations reimpose their own sanctions. There is little likelihood that Russia and China would impose new sanctions and they might even act to counteract the blow of new U.S. sanctions.
If the U.S. does exit the agreement and reimposes sanctions, Iran might maintain its compliance with the agreement in the hope that it can prevent Europe from reimposing sanctions and gain European help for bringing the U.S. back into the agreement down the road. However, Iran might also react to a U.S. exit by renouncing the agreement as well and then reviving its nuclear fuel enrichment program. That would likely lead to war talk. Mr. Trump this week already warned, “If Iran threatens us in any way, they will pay a price like few countries have ever paid.â€
Regarding tariffs, Europe is braced for U.S. tariffs on imported European steel and aluminum possibly taking effect as soon as next week. President Trump granted a temporary exemption to Europe from U.S. steel and aluminum tariffs only until next Tuesday, May 1. If that exemption is not extended or made permanent, then U.S. tariffs on European steel and aluminum imports could go into effect next week.
If the U.S. steel-aluminum tariffs on Europe do in fact go into effect next week, then Europe will likely activate its threat to slap retaliatory tariffs on 2.8 billion euros ($3.5 billion) worth of U.S. imports. Europe has already announced the list of U.S. products that will be subject to the retaliatory tariff. That list includes (1) about 1 billion euros worth of U.S. consumer products such as clothes, cosmetics, motorcycles, and boats, (2) about 950 million euros worth of agricultural products such as orange juice, corn, bourbon whiskey and other ag products, and (3) about 850 million of industrial products including steel products.
Meanwhile on the U.S.-Chinese trade war front, President Trump is sending his top advisors to China late next week to sound out the possibility of a negotiated solution. The delegation includes Treasury Secretary Mnuchin, USTR Lighthizer, and Economic Advisor Kudlow. There have been no serious negotiations as yet on how to avoid the U.S. tariffs on $50 billion of Chinese imports that are currently in the 60-day public comment period. If those tariffs go into effect, then China will retaliate with tariffs on $50 billion of U.S. goods and President Trump has then threatened to slap tariffs on another $100 billion of Chinese imports.
Q1 U.S. GDP expected to ease to +2.0% — The market consensus is for today’s Q1 U.S. GDP to ease to +2.0% (q/q annualized) from 2.9% in Q4. The weaker GDP report is expected to stem in large part from expectations for Q1 personal consumption to weaken to +1.1% from Q4’s very strong pace of +4.0%. The markets will not be too worried about a weak Q1 GDP report since it may again be dampened by the residual seasonal weakness that has plagued first-quarter GDP reports in recent years. During 2012-2017, GDP averaged only +1.6% in Q1 versus the average of +2.4% in the other three quarters of the year. In any case, the market is expecting U.S. GDP to remain strong during the remainder of the year with growth of +2.8% in Q2, +2.7% in Q3, and +2.7% in Q4. On a calendar year basis, the consensus is for strong GDP growth of +2.8% in 2018 and +2.5% in 2019.
Q1 employment cost index expected to show strength — The consensus is for today’s Q1 ECI to show an increase of +0.7% q/q and +2.4% y/y versus Q4’s +0.6% q/q and +2.6% y/y. A strong report today would be bullish for the economy since it would indicator stronger consumer income, but would be hawkish for Fed policy.