- China is pushing to have Sep 1 tariff rolled back
- U.S. ISM non-manufacturing index expected to rebound mildly from Sep’s 3-year low
- U.S. JOLTS job openings expected to show a modest recovery after sharp 3-month decline
- U.S. trade deficit expected to narrow mildly
- Treasury kicks off refunding operation
China is pushing to have Sep 1 tariff rolled back — U.S. stock indexes on Monday rallied to new record highs on optimism about a US/Chinese phase one trade deal. China’s Ministry of Commerce over the weekend said that the two sides have reached a “consensus in principle.” U.S. Commerce Secretary Ross on Sunday then said the two sides are “very far along” on a phase one trade deal and that licenses would be coming “very shortly” for U.S. firms to sell components to China’s Huawei Technologies.
However, the trade deal isn’t finalized yet, as made clear by the fact that the Trump administration has not yet agreed to scrap the upcoming Dec 15 tariff of 15% on the last $160 billion of Chinese goods as part of a phase one trade deal. If China doesn’t get that concession, then it would receive very little in return for the promises it makes in the phase one trade agreement regarding ag purchases, currency stability, the opening of Chinese financial services to U.S. companies, and IP protection.
If the Dec 15 tariff isn’t scrapped, then the only concession that China would get from the U.S. would be the fact that President Trump already scrapped the Oct 15 hike in the tariff to 30% from 25% on the first $250 billion of Chinese goods. If China only prevents the Oct 15 tariff hike and still gets hit by the Dec 15 tariff, that would be a very lopsided and bad deal for President Xi to present to his domestic audience.
China is now reportedly pushing for more concessions from the U.S. in return for its phase-one promises, aside from scrapping the Dec 15 tariff. Specifically, Politico on Monday reported that China is making a full-court press to convince President Trump to scrap the 15% tariff on about $110 billion of Chinese goods that went into effect on Sep 1. The Financial Times then reported late Monday afternoon that the Trump administration is in fact discussing whether to scrap the Sep 1 tariff, according to “five people briefed on the discussions.”
President Trump seems eager to get a phase one deal signed and have the signing ceremony somewhere in the U.S. However, it remains unclear whether Mr. Trump wants a deal badly enough to scrap the Sep 1 tariff. If Mr. Trump agrees to scrap the Sep 1 and Dec 15 tariffs, he would still have in place the 25% tariff on $250 billion of Chinese goods as leverage to use in phase two of the trade negotiations. The markets would obviously be pleased if Mr. Trump were to agree to scrap the Sep 1 and Dec 15 tariffs, thus rolling back some existing tariffs for the first time.
U.S. ISM non-manufacturing index expected to rebound mildly from Sep’s 3-year low — The consensus is for today’s Oct ISM non-manufacturing index to show a +0.8 point increase to 53.4, thus recovering part of Sep’s sharp -3.8 point drop to a 3-year low of 52.6. Although the index in September fell to a 3-year low of 52.6, the index at least remained 2.6 points above the expansion-contraction level of 50.0, indicating that the U.S. non-manufacturing sectors of the U.S. economy continue to expand.
The expansionary status of the non-manufacturing index, however, contrasts with the ISM manufacturing index. The ISM manufacturing index has been below the 50.0 mark for the last three months (Aug-Oct) and improved just mildly by +0.5 to 48.3 in October from September’s 10-year low of 47.8. Markit’s final-Oct services PMI today is expected to be unrevised at 51.0 after the small +0.1 point rise to 51.0 seen in the preliminary-October report.
U.S. JOLTS job openings expected to show a modest recovery after sharp 3-month decline — The consensus is for today’s Sep JOLTS job openings report to show a small +12,000 upward rebound to 7.063 million. The series has fallen sharply in the past three reporting months (June-Aug) by a total of -333,000 to post a 1-1/2 year low of 7.051 million in August, providing a negative leading indicator for job hiring.
U.S. trade deficit expected to narrow mildly — The consensus is for today’s Sep U.S. trade deficit to narrow mildly to -$52.5 billion from Aug’s -$54.9 billion, which would be mildly narrower than the 12-month trend average of -$54.7 billion. The U.S. trade deficit continues to be distorted by the U.S. tariff war. U.S. exports and imports have been moving sideways for the past 1-1/2 years as two-way trade has been dampened by U.S. tariffs on imports and by retaliatory tariffs on U.S. exports by America’s trading partners. U.S. imports from China this year have dropped more sharply than U.S. exports to China, thus prompting a mild improvement in the US/Chinese 12-month cumulative trade deficit to -$390 billion in August from the record high of -$419 billion seen in Dec 2018.
Treasury kicks off refunding operation — The Treasury today kicks off its $84 billion quarterly refunding operation by selling $38 billion of 3-year T-notes. The Treasury will then sell $27 billion of new 10-year T-notes on Wednesday and $19 billion of new 30-year bonds on Thursday. This week’s auction sizes are unchanged from the Treasury’s last refunding operation in August. The 3-year T-note yield on Monday rose by +4 bp to 1.59%, where it was up by +27 bp from the early-Oct 3-year low of 1.32%.
The 12-auction averages for the 3-year T-note are as follows: 2.49 bid cover ratio, $68 million in non-competitive bids to mostly retail investors, 3.1 bp tail to the median yield, 28.2 bp tail to the low yield, and 61% taken at the high yield. The 3-year T-note is the least popular security among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of only 46.8% of the last twelve 3-year T-note auctions, which is well below the median of 59.7% for all recent Treasury coupon auctions.
