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USDJPY closed around 108.50 in the late-U.S. session Thursday, slumped almost -0.30% on lingering concern about Trump’s impeachment saga and U.S.-China tentative trade deal coupled with dovish Fed talks; it made a session low of 108.25. But on early Friday, USDJPY as-well-as risk Tarde (Dow Fut) bounced back on renewed optimism by Kudlow about an imminent interim trade deal (Phase One) between the world’s two largest economies.
On late Thursday, after the U.S. market closing the WH NEC Kudlow popped up for his part of ongoing media-bytes on China trade deal and said: “We are getting close to a trade deal with China— mood music is pretty good, talks with China have been very constructive. The U.S. - China to the short strokes on a Phase One deal, which is in final stages, but not done yet, while the with the two sides are in daily contact”.
Kudlow said without elaborating much on existing Trump tariff rollbacks in phases, the main thorny issues for an interim trade deal: “We are coming down to the short strokes. We are in communication with them every single day right now. We’re getting close. The mood music is pretty good, and that has not always been so in these things”.
On the U.S.-EU auto trade war, Kudlow also clarified: “President Trump had not yet made a decision on whether to impose -- or delay new auto tariffs on imported cars and parts from the European Union. The president received a report from Lighthizer’s office (USTR) and he is considering it”.
On late Thursday, Kudlow again confirmed that he is working on a second term tax cut (2.0) package, intended for the middle-income families: “We are working on second-term tax cut package, geared to improve economic growth, help middle-income families”.
But the overall trade deal optimism was quite limited as there was another report that suggested some skepticism: U.S.-China trade deal negotiations hit another snag despite it was supposed to be signed next week as negotiations over the final text have reached a rough patch. And it’s not clear when a final text will be ready for Trump and Xi (U.S.-China) to sign. Trump is also reluctant to phase out his existing tariffs on Chinese imports.
On early Thursday, China's MOFCOM Feng reiterated that the cancellation of U.S. tariffs was a significant condition for a Phase One trade agreement-- any potential deal will have to include the dropping of some tariffs on each other's products. On Thursday, China’s MOFCOM spokesman Feng said in the weekly briefing:
“China is sticking firm to its demand that the US remove tariffs as talks on an interim trade deal continues. That is an important condition for reaching the deal. The significance of phase one deal should reflect the scale of the tariff rollback. The trade war between the two nations started with the imposition of tariffs and it should end with their removals. That is an important condition for reaching the deal. The significance of phase one deal should reflect the scale of the tariff rollback. China is willing to work together with the U.S., resolving each other’s core concerns properly on the basis of equality and mutual respect and creating conditions for the Phase One deal”.
As a goodwill gesture, China also officially lifted its ban on U.S. poultry meat imports. China lifted a ban on U.S. poultry that began in 2015 after the US Department of Agriculture made a similar decision to allow Chinese poultry into the U.S. The USTR Lighthizer said: “This is great news for both America’s farmers and China’s consumers. The government estimates American producers will be able to export more than US$1B worth of poultry to China annually”.
Earlier the White House trade adviser Navarro cautioned against believing China trade rumors. Navarro said in an interview late Wednesday regarding an earlier report of Chinese unwillingness to commit any specific volumes of U.S. farm product purchase: "Everybody stops listening to the rumors--We are going to get a great deal. We are on a glide path to a phase one agreement. All this rumor stuff, it is all just someone making a lot of money, moving the markets. Don’t chase these rumors they are not going to make you any money”.
Further on this never-ending U.S.-China trade war/truce confusing stories, on mid-Thursday, there was another report that suggested some deadlock over negotiations: “US-China are struggling to close Phase One deal as senior trade officials are still debating over IP provisions, agricultural purchases and tariff rollbacks. Trump admin officials are frustrated that China has not offered enough concessions to justify a reduction in U.S. tariffs on Chinese goods. China is absolutely delaying the truce with its approach, jeopardizing the chances that a final agreement could be reached in the coming days”.
Also, another report suggested that the U.S. Senate is preparing for a quick passage of legislation to show support for protesters in Hong Kong by placing the city’s special trading status under annual review.
Subsequently, USDJPY as-well-as Dow slid; USDJPY made the session low of 108.25; but recovered slightly in the closing U.S. market hours late Thursday after a report that suggested the much-awaited Phase One trade deal between U.S.-China may be imminent: “US Trade Sources confirm there was another deputy level trade talk via phone between the US and Chinese trade teams. The talks are progressing as the two sides try to get a Phase One trade deal on paper”.
Another report, quoting U.S. agricultural secretary said that the U.S., Chinese principal negotiators will hold a call on Friday to finalize the Phase One deal. There is urgency on the U.S. side as farmers have stuff lined up to sell and there is better than 50% chance the two sides get a deal signed.
Chinese trade sources said that there will be a primary level phone call between the U.S. and Chinese trade delegations on Friday to try and finish getting a Phase One deal with on paper. This call follows deputy level calls Thursday (which U.S. trade sources already confirmed).
Further, on the U.S-China trade deal, the U.S. Commerce Department is expected to extend a limited, temporary waiver for blacklisted Chinese telecom giant Huawei, notwithstanding any last-minute directives from the White House. The fate of broader export licenses providing relief for major U.S. chipmakers remains unclear. China also demanded that if the U.S. side wants to end the trade war as soon as possible, Washington should immediately issue licenses allowing U.S. companies to resume supplies to Huawei. And thus the U.S. is likely to extend the limited export waiver for Huawei.
There was also another good new(s) on the USMCA trade deal front, which was a victim of political rivalry between Trump’s RNC and Pelosi’s DNC in the U.S. Congress, where it needs to be approved. As per the report, the USMCA deal between DNC and the Trump admin is imminent as Pelosi & Co were talking to the USTR Lighthizer Thursday afternoon to proceed further, while the goal is a handshake deal by Nov. 21.
On Tuesday (12th Nov), USDJPY edged down as Trump sounded moderately hawkish on China in his election speech at NY economic club. Trump also blamed the Fed for hiking too much and to fast while cutting too little and too slow. But despite that Trump claimed that he is able to bring back the U.S. economy from the brink of a recession.
On Tuesday, all eyes were on Trump’s speeches at the NY Economic club on politics, policies and trade deal with China. But Trump offered little cues about the vital issue of existing tariffs rollbacks, which could pave the way for much-awaited U.S.-China Phase One trade deal, but threatened China for more ‘substantial’ tariffs if Phase One deal is not reached.
On Tuesday, Trump’s speeches were largely political as a part of an election campaign and he was evasive on vital questions about an economic slowdown because of his trade war agenda. Although Trump said (as usual) that a trade deal with China could happen soon but did not offer clarity on a rollback of his bellicose tariffs. Trump also claimed credit for economic growth, low unemployment, real wage growth and surging Dow at a lifetime high, while again attacked Fed’s monetary policy. Again, Trump claimed that a U.S. - China trade deal was close, but also threatened that if a trade deal with China is not reached, he would increase the tariffs already in place substantially.
Trump claimed on Tuesday that his admin has launched an unprecedented ‘economic boom never seen before and he never believed the U.S. was destined for a diminished future, stressing that he refuses to accept that Americans have to lower their expectations or give up on their dreams. Trump also pointed out that he ended the war on American workers and that he is not the president of the world, but of the United States of America.
Trump again trolled the U.S. Central Bank in his speech at the prestigious NY economic club and said the Fed was far too fast with rate hikes and now too slow with rate cuts, adding that despite the unfavorable monetary policy, the U.S. is doing better than any other country in the world/G7. He reiterated that the United States is actively competing with nations cutting interest rates, wondering ‘who has ever heard of negative rates?-- Gimme some of that’. Trump again blasted the Fed for putting the country at a competitive disadvantage compared to other countries, stressing that the US should be paying the lowest interest rates.
Trump also pointed out that U.S. stock markets went wild the day after he was elected, stating the indexes rose between 45% and 60% since he came to the White House late 2016. Trump also clarified that he was elected to end the disastrous trade deals, high taxes and regulatory assault which have led to the shuttering of American plants and offshoring of American jobs. Trump also claimed that the failed political class has sold out American workers and he is working to change that, adding ‘We want businesses to stay in the U.S. and America must be the best place to do business and pursue a career’.
Trump also attacked the EU for its trade policies and said ‘the EU has terrible trade barriers against American exports, in many ways worse than China. Trump further alleged that ‘China ransacked our companies, stole our intellectual property and dumped its products on our market to close our factories’, which is why a ‘Reciprocal Trade Act is being prepared. Trade must be fair and reciprocal’.
Further on trade negotiations with China, Trump claimed that the two sides are close to signing the phase one deal, but the U.S. will only accept a deal if it is good for the country and the workers, but if a trade deal with China is not reached, he would ‘increase the tariffs already in place substantially’. But in the Q&A session, Trump noted that China has already begun big agriculture purchases.
Trump also clarified that as long as he's president, America will never be a socialist country. He also warned against the radical socialist agenda of some of the Democratic candidates running in party primaries as well as far-left politicians in Washington seeking to take over the entire economy, including the healthcare sector, by the government.
Trump said on Fed:
We have ended the war on American workers, we have stopped the assault on American industry, and we have launched an economic boom the likes of which we have never seen before.
I did this despite a near-record number of rate increases and quantitative tightening by the Federal Reserve since I won the election — eight increases in total — which were, in my opinion, far too fast an increase and far too slow a decrease. Because remember, we are actively competing with nations who openly cut interest rates so that now many are actually getting paid when they pay off their loan — known as negative interest. Whoever heard of such a thing? Give me some of that--Give me some of that money. I want some of that money. Our Federal Reserve doesn’t let us do it.
I don’t say that’s good for the world — I’m not President of the world; I’m President of our country — but we are competing against these other countries nonetheless, and the Federal Reserve doesn’t let us play at that game. It puts us at a competitive disadvantage to other countries.
Yet, in the face of this reality, our economic policies have ushered in an unprecedented tide of prosperity surging all throughout the nation. We’re paying interest. By other comparisons, we’re paying, actually, high interest. We should be paying, by far, the lowest interest, and yet we’re doing better than any nation, by far, on Earth. The extraordinary numbers tell the story.
Trump said his trade policies are one of the primary reasons behind the recovery of the U.S. economy from the prior 2016 slowdown. Apart from threatening higher tariffs from Dec 15 if no Phase One trade deal signed with China, Trump also accused China as ‘cheater and thief’ of U.S. IP and also blamed China for destroying U.S. businesses and factories at the expense of their state subsidy.
Trump also said that as China is ‘dying’ to get a deal, the U.S. will decide when to sign such a deal, but Trump also acknowledged that the Phase One trade deal is imminent: “A significant phase one trade deal with China could happen. It could happen soon. But we will only accept a deal if it’s good for the United States and our workers and our great companies because we’ve been hit very hard”.
“---central to this comeback is a series of bold initiatives to reform a broken system of international trade. We want thriving commerce with as many countries as possible, but trade must be fair, and to me, it must be my favorite word, “reciprocal.” It’s not reciprocal--We’re getting it to be much more reciprocal.
The American market is the most valuable and coveted market anywhere in the world. Those who want access must play by the rules, and they have to respect our game and our laws, and they have to treat our workers and businesses fairly — not the way they’ve been treating them over the last 25 years. America will not be taken advantage of anymore.
Many countries charge us extraordinarily high tariffs or create impossible trade barriers--Impossible. And I’ll be honest: European Union — very, very difficult. The barriers they have up are terrible—terrible--In many ways, worse than China.
We’re working on legislation known as the United States Reciprocal Trade Act, meaning quite simply: What’s good for them is good for us. If they want to charge us, we charge them. It’s a very simple thing.
--There are certain countries that the average tariff is over 100 percent. And we charge them nothing. And then they call it “fair trade.” That’s not fair trade; that’s stupid trade.
Nowhere has the change in U.S. strategy been more vital or dramatic than in our dealings with respect to China. Before my election, Washington politicians stood by and did nothing while China ransacked our companies, stole our intellectual property, subsidized their industries at the expense of ours, and dumped their products in a deliberate strategy to close American factories all across our land.
In particular, since China’s entrance into the World Trade Organization in 2001, no one has manipulated numbers better or taken advantage of the United States more. And I won’t use this word, “cheated.” I will not say the word, “cheated.” But nobody has cheated better than China, but I will not say that. We’ll say that off the record, okay? And there are only about 600 cameras back there. In fact, that is a big group up there. Good. I hope you use it because it’s true. And they understand it’s true.
And I don’t blame China, by the way. I blame our leaders because we should’ve been doing what they were doing. They did it to use. We didn’t do it to them. We were defenseless. We had no leadership. This was for a long time. This is long beyond the Obama administration.
So I don’t blame them. I said this to President Xi. I was making a big speech in China. I had 5,000 people in front of me and I was talking about how bad China was. And I said, “This is not going over well.” I was in Beijing — this massive hall. And I looked down at President Xi. He was sitting right where Larry is. He was not as imposing a figure as Larry Kudlow, but he was quite imposing. And I said — I said, “You know, I think he’s getting very angry.”
And I then I realized, “Hmm, how do we save this? This is going to be a disastrous afternoon.” And I said, “But I don’t blame China. I blame our leaders.” And then I realized, that’s true-- I blame our leaders for allowing it to happen. I’ve told that to you and many people many times.
But the theft of American jobs and American wealth is over. They understand that. My administration has taken the toughest-ever action to confront China’s trade abuses. We are taking in billions and billions of dollars in tariffs that China is paying for. We’re not paying. China is paying because they’re devaluing their currency to such an extent and they’re pouring tremendous amounts of cash into their system.
They’re having their worst year in more than 57 years, more than half a century. Their supply chains are cracking very badly, and they are dying to make a deal. We’re the ones that are deciding whether or not we want to make a deal. We’re close.
A significant phase one trade deal with China could happen. It could happen soon. But we will only accept a deal if it’s good for the United States and our workers and our great companies because we’ve been hit very hard. We’d have deficits for many years — go back many years — $500 billion a year. Not the million. Five hundred billion dollars a year is a lot--Five hundred billion dollars a year in trade deficits with China. And we have it with many other countries, just not nearly as large. China probably makes up almost 60 percent of our deficits.
Trump also defended his trade war policies despite its affecting business decision/capex (uncertainty) and causing an economic slowdown. Trump said under his admin, the U.S. is no longer a piggy bank:
--- They haven’t been hurt. You know, they were totally down. Now they are a little bit down because of a little bit, perhaps, the uncertainty of trade wars. But there is no uncertainty. We’re the bank that everyone wants to take from. We’re the source that everybody needs and everybody wants all over the world. The real cost-- would be if we did nothing. The cost of doing nothing was killing us, as a country — our national debt and so many other things. But it was killing us.
One of the things I was able to do with China: As an example — we’ve taken in — I mean, we’ll soon be up to $100 billion in tariffs. And you haven’t seen inflation and you haven’t seen, in many cases, price increases.
Our farmers — because I have a very good relationship with our farmers — our great American farmers — I call them “patriots” — they were hurt very badly by China because China targeted them because they were my vote. The whole middle of the country — it’s a beautiful thing to see, I will say. But they targeted them.
And I said to Sonny Perdue, our Secretary of Agriculture, “Sonny, how much is it?” And he said, “The year before last, it was $12 billion, and this year it’s $16 billion in orders.” I said, “That’s okay, Sonny. We’re going to give them $28 billion. We’re going to take it right out of the tariffs. And, hopefully, the farmers will say, “Thank you very much, China.”
And we spread — distributed, two years, $28 billion around to China — around from China, into our farmers and farms and ranchers and all of the people that were targeted. So, I would say, in a rough manner, “by China.” I would say in a very rough manner. And now China is coming back. And as you know, they’re already starting big buys — very big buys-- And the farmers are very happy.
The incredible thing with the farmers is they don’t want a subsidy, they don’t want a handout. But in this case, I thought it was something that I wanted to do, and I was able to do it — $28 billion. And after that, we had tremendous amounts of the billions leftover that we could use. Actually, we could use it for tax reductions. We could distribute it to people.
And again, if we don’t make a deal with China — look, I had a deal. We had a deal. This gentleman can tell you, we were so close to a deal. The hardpoints were negotiated: opening up China, intellectual property, all sorts of tremendous penalties.
And then, one day, we get a call — seven months ago, we get a call, they’d like to see us. And we saw them, and they explained why they can’t do three or four things that were already agreed to. And I said, “Okay. Hey, look, I’m in the real estate business in New York. I’ve heard that before.” (Laughter)--Sadly. It wasn’t like, “Oh, gee, I’m so shocked.” But I was a little surprised. You know, it’s China. They’re not supposed to do that. But they did. And I’ll tell you what: I’ll bet you they wished they didn’t do it.
Then I put on 25 percent tariffs on everything coming in — on the first $250 billion of product. It’s going to 35 percent very soon. And I tell this to Larry, I tell it to everybody: If we don’t make a deal, we’re going to substantially raise those tariffs. They’re going to be raised very substantially.
And that’s going to be true for other countries that mistreat us too because we’ve been mistreated by so many countries. It’s hard to believe. There are a few that haven’t mistreated us. And, you know, I can’t blame them, if you can get away with it. This is why I blame our past leaders. I don’t know how it’s gotten this way. So, we’ll have a trade deficit of — over the last, you know, a long period of time, close to $800 billion. Whoever heard of this? Eight hundred billion dollars of trade deficit. It’s supposed to be the other way around.
So, we’re changing it rapidly. It takes a while. You have a statutory constraint-- You have — in some cases, you take it to one phase, and then you have to, by law, wait six months before you can go to phase two, and phase three, and phase four. But we’ve made a tremendous amount of progress. And we are respected on — on many fronts.
We rebuilt our military--- which is very important. You know, we can all talk about trade, we can all talk about judges, and we can all talk about everything we’re doing. But if we don’t have a military in this world today — you saw what we did with al-Baghdadi last week. And we have the greatest military force on Earth. It was depleted when I took over. We have to spend money on the military, otherwise — you know, it’s wonderful to have budgets, but if we don’t rebuild our military — and we have rebuilt it: $700 billion; $716 billion, the second year; and $738 billion this year. And our military will be at a level that nobody can even come close to competing with.
And that’s where we have to be. We had a military that was so depleted, so bad. The planes were so old; many of them didn’t fly. I could tell you stories about ammunition. They didn’t have ammunition. We had a real problem. Well, we have to do that; otherwise, everything we talk about doesn’t matter because we have some very big, very powerful players.
You look at what’s happened in Europe. I mean, what’s going on in Europe is very sad when you look at what’s taken place in Europe. So, they have to be able to straighten out their own problems. But-- we’ve rebuilt our military.
Our manufacturing is coming back to a very, very strong pitch. It’s a little bit down from where it was last year. But last year, we’re doing record numbers. It’s coming back very, very powerfully. And our country is really strong. And I think one of the things that we can all talk about is the $10,000 per consumer, per person. But per consumer--When you look at that, I think, really, we’re going to go forward because our consumer is so strong, and never been strong like this. So we’re in great shape for the future. Thank you---
Meanwhile, after Trump, the White House CEA/NEC Kudlow clarified that there is no timeline on the China trade deal. Kudlow said he would rather not put a timeline on the China trade deal, failing to provide further details on the much-awaited tentative trade deal between the U.S. and China and also refused to put words in president's mouth, and only reiterated what he said earlier in his NY Economic Club speech:
"I can’t go into negotiating details--a lot of progress made on a number of issues, including financial services, currency stability, commodities, and agriculture. But we're close to reaching a Phase One deal. It could happen soon--no side in the talks would agree to any tariff adjustments before the deal is struck, but levy reduction may be a part of the Phase One deal”.
Kudlow also told the NY economic club audience he had just come from a meeting of the top Trump administration trade officials and was more optimistic: “It’s not done yet, but there has been very good progress and the talks have been very constructive. But President Trump and Chinese President Xi would not need to meet in person to clinch a deal”. Kudlow also joked that the White House had hoped to stick to that general timetable and his preference was for the deal to be signed in his office on the second floor of the White House: “I don’t like to travel”.
Kudlow also clarified that the U.S. doesn't need negative rates as the economy is booming. Kudlow added it was a miracle the economy was doing so well after severe monetary tightening last year, but he expects a much stronger quarter coming into 2020, mainly due to strong job numbers and strong wages. Kudlow also noted the yield curve was normalizing, a good sign (as per his opinion).
In addition, Kudlow also said he was consulting with lawmakers from both sides of the aisle on tax cuts 2.0, a new policy to reduce the middle-class income tax rate to 15%. After Kudlow’s comments about Trump tax cut 2.0, Dow as-well-as USDJPY crawls back to almost unchanged.
On Wednesday, USDJPY edged down -0.17% on lingering suspense about Phase One U.S.-China trade deal despite Powell's optimism about the U.S. economy and Powell’s dovish testimony. Overall, Powell is open for more rate cut (as insurance against Trump trade war uncertainty), but not ready to hike in the foreseeable future.
Powell said in his testimony that the U.S. economy would experience a ‘sustained expansion with the effects of the latest rate cut yet to be felt. The baseline outlook remains favorable’. Powell said the current monetary policy stance remained appropriate as long as data are consistent with the outlook, although Fed remains open for any rate action (cut) in an unusual situation.
On late Wednesday, Dow as-well-as USD slips after a report that US-China trade talks have hit a snag over China’s farm purchases issues as China is not willing to committing specific U.S. farms purchases, while also resisting U.S. requests for tech-transfer curbs and any enforcement mechanism. There is also significant disagreement over the removal of existing additional Trump tariffs (on Chinese goods) since the start of the trade war in 2018.
The report said:
“Trade talks between the U.S. and China have hit a snag over farm purchases, creating another obstacle as Beijing and Washington try to lock down the limited trade deal President Trump outlined last month. Trump has said China has agreed to buy up to $50B in U.S. soybeans, pork and other agricultural products annually. But China is leery of putting a numerical commitment in the text of a potential agreement. China does not want to put a specific dollar figure in the details of the agreement.
Beijing wants to avoid cutting a deal that looks one-sided, while it also wants to have a way out should trade tensions escalated again and both sides are also at odds over when and by how much the U.S. would agree to lift tariffs on Chinese imports. China has also resisted US demands for strong enforcement mechanisms for the deal and curbs on the forced transfer of technology for companies seeking to do business in China”.
At a glance: US-China trade war timeline- All the key dates since July 2018
The U.S. imposed 25% additional tariffs on around $34B of imports from China, including cars, hard disks, and aircraft parts.
China retaliates by imposing a similar (tit-for-tat) 25% tariff on 545 goods originating from the U.S. worth $34B, including agricultural products, automobiles, and aquatic products.
Trump (U.S.) imposed 25% additional tariffs on another $16B of Chinese goods, including iron and steel products, electrical machinery, railway products, instruments, and apparatus.
China responded by applying 25% tariffs on $16 billion of U.S. goods, including Harley-Davidson motorcycles, bourbon, and orange juice.
The U.S. imposed an additional 10% tariff on $200B of Chinese imports.
China retaliated by applying additional tariffs of 10% on $60 billion of U.S. goods.
China’s President Xi and his U.S. counterpart Trump agree to a ceasefire to the trade war at the G20 summit in Argentina- suspending a proposed tariff from 10 to 25% on $200 billion of Chinese goods that were due to come into force wef 1st Jan’19.
China also responded by suspending tariffs on US-made cars and auto parts for three months from January 1 and also resumes its purchase of U.S. soybeans (as a part of trade war ceasefire verbal/handshake agreement).
After trade negotiations broke down, Trump (U.S.) increased additional tariffs on $200B worth of Chinese imports from the existing 10% to 25% (mostly industrial items).
China also responded by announcing that it will increase tariffs on $60B worth of U.S. imports from 1st June’19.
The US Department of Commerce announced the addition of Huawei to its ‘entity list’, which effectively bans U.S. companies from selling to the Chinese telecommunications giant without special government approval.
China also announced that it will establish its own ‘unreliable entities’ list.
China increased tariffs on $60 billion worth of U.S. products.
President Xi and Trump agree on a trade war truce at the G20 summit in Japan, delaying the imposition of new U.S. tariffs of up to 25% on $300 billion worth of Chinese goods (mostly consumer items).
Trump also suggested some of the restrictions placed on U.S. companies selling products to Huawei will be lifted (temporary Huawei relief).
The U.S. President Trump announced plans to impose a 10% tariff on $300B of Chinese goods from 1st Sep’19.
The U.S. officially designated China as a ‘currency manipulator’ after the Chinese Yuan weakened to below 7 to the USD.
Trump announced that planned tariffs on many of the $300B of Chinese goods threatened to start in September 2019 have either been delayed or removed. And tariffs of 10% on $155B of consumer products including phones, laptop computers, and video game consoles will be delayed until 15th Dec’19.
China announced tariffs of 5% and 10% on $75B of U.S. goods from September 1 and December 15 and also confirmed it will reinstate tariffs on U.S. cars and car parts from December 15 (2019).
The U.S. tariffs on more than $125 billion worth of Chinese imports begin as expected.
As a goodwill gesture, China announced that it will offer exemptions to 16 types of U.S. imports from additional tariffs, which include products such as pesticides, animal feeds, lubricants, and cancer drugs.
The U.S. President Trump agreed to delay new tariffs on $250B worth of Chinese goods from October 1 to October 15 as a goodwill gesture to avoid the 70th anniversary of the People’s Republic of China.
China announced it will exclude imports of U.S. soybeans, pork, and other farm goods from additional trade war tariffs (as the country was undergoing an acute food/protein crisis as a result of African swine-flu).
The US announced that it will delay a planned tariff increase of 25% to 30% on $250 billion of Chinese imports planned for 15th October following trade talks with Chinese Vice Premier and Chief trade negotiator Liu He for a possible Phase One deal.
Now the vital question is whether the Phase One trade deal with partial tariff rollbacks already on around $250-375B of goods by each other (U.S.-China) will happen in Nov/Dec’19 or Feb’19 (at the sideline of Vietnam summit).
Although Trump is clearly in the election campaign mood in the NY economic club, he made it almost clear that he will stick to his ‘America First’ (nationalistic) and anti-China policies, which primarily helped him winning the 2016 election. Trump basically portrayed China as the main reason behind the past U.S. economic slowdown (before his administration) and also blamed past U.S. Presidents as ‘silent spectators of Chinese economic rampage’ on the U.S.
Trump also made it clear that at the end of the day, despite an economic/manufacturing slowdown for his bellicose trade war policies against China, he needs higher revenue to rebuild America and also pay a subsidy (ahead of 2020 election) to U.S. patriotic farmers’, suffering from his trade war policies. In brief, Trump needs higher revenue to balance surging U.S. fiscal deficit (at least to some extent to fund fiscal stimuli like the tax cut, military/defense spending, and border wall).
Thus Trump may not withdraw all of his additional tariffs on China or other countries/trading blocs completely. Trump will keep at least 10-15% additional tariffs on Chinese goods for an easy source of revenue (from U.S. consumers), which is being neutralized by China through its currency (Yuan) devaluation (from 6.25 pre-trade war levels to 6.90-7.20 post-trade war levels ~10-15% tariffs) and certain other cost-cutting measures. The same tariff stance may be applicable with all other general imports into the U.S. by other exporters including the EU. In other words, Trump is taxing U.S. consumers through Chinese tariffs on one hand and at the same time giving some relief (through tax cuts) by the other hand.
Now, the question of whether China will accept this Goldilocks Trump tariffs, almost neutral for Chinse manufacturers/exports and also for the U.S. consumers (after Yuan devaluation). Apart from some adverse impact of currency devaluation on the macro-economy (despite helping Chinese exports), there is some domestic political compulsion for China’s President Xi and other senior CPC members because it will show weakness against Trump’s tariff pressure tactics and will also vindicate China’s consistent stance that all types of additional tariffs should be removed for any meaningful trade deal.
But China also knows that Trump will not remove all the additional tariffs since the 2018 trade war at one go and thus is insisting phased removal of the existing tariffs along with complete removal of all the proposed tariffs. So far, Trump has not denied the Chinese proposal entirely and the two sides are now basically negotiating about the scope of Phase One deal and partial removal of existing tariffs.
Trump may be waiting for the trajectory of his impeachment drama in the U.S. Congress and its impact on his election prospect. If there is further approval/election rating downgrade because of this impeachment ‘witch-hunt’, Trump may allow some partial tariff (existing apart from proposed) rollbacks to pave the way for a tentative Phase One trade deal with China to turn intense fake media/public attention from his impeachment politics to economics. Thus Trump is now very ‘busy’ these days in his speeches/remarks showcasing achievement for the U.S. economy under his admin compared to his predecessors.
But it seems that Trump is not in a great hurry now for the Phase One trade deal with China after the cancellation of the APEC summit. And China is also reluctant to sign any deal with Trump in a hurry, without the removal of any existing tariffs. Thus, we may see another high-level U.S.-China trade talks in Dec/Jan for a probable tentative trade deal in Feb, when both Trump and Xi may meet in Vietnam (neutral location) for a regional summit sideline to execute the Phase One deal.
In the meantime, Trump may double down on China by terming the nation as ‘Cheater, IP thief’ etc. as a part of his well thought election campaign strategy (rhetoric) and also to create some trade war uncertainty (Dow is now at around record high) to ‘force’ Fed at least another insurance cut in Dec/Jan. Trump clearly said that since 2017 (under his admin), Fed hiked 8-times (+2.00% cumulative), which is too fast, while Fed cuts (in 2019) are too slow. Trump wants at least a 1% cumulative cut by 2019 or Jan’20; i.e. rollback of 2018 hikes of +1.00% before his re-election bid in 2020.
Going ahead, Trump may also insist on another 1.00% rate cut by the Fed in 2020 for ZRIP. A combination of U.S.-China trade deal and Fed’s monetary stimulus (rate cuts/lower borrowing costs) will be positive for Trump’s election prospect in 2020. But the 2020 election will be also a major risk for Trump and the risk trade amid lingering impeachment drama and probability of Warren as the DNC Presidential candidate against Trump. Thus the entire financial market including USD is now truly a victim of Trump politics, his whims & fancies rather than economics.
On early Friday, USDJPY edged up almost +0.25% and made a high of around 108.69 on renewed Phase One trade deal optimism between U.S.-China coupled with another report that the U.S. is likely to extend the limited export waiver for Huawei.
Technically, whatever may be the narrative, USDJPY now has to sustain over 108.20 for a further bounce back to 108.80/109.00*-109.35/109.50* and further rally to 110.00/110.85*-111.15/111.75 in the near term (under bullish case scenario).
On the flip side, sustaining below 107.90, USDJPY may fall to 107.55/107.35*-106.95/106.45/105.90 and further to 105.25/104.45*-104.00/103.60 in the near term (under bear case scenario).
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