April 16, 2018
U.S. Stock Futures Rally, Bonds Fall After Syria: Markets Wrap
U.S. stock futures rallied and bonds fell with crude oil as traders speculated there would be limited repercussions from the missile strikes in Syria. Haven assets including Treasuries and gold dropped with European debt, while the Stocks Europe 600 Index slipped as traders assessed the military action’s aftermath. The dollar held last week’s decline after futures data showed hedge funds are the most bearish on the currency in five years. WTI oil futures fell below $67 a barrel amid concern that shale production will rise further, and after there was no immediate reprisal to the missile attack. The ruble reversed earlier losses. “There was a significant fear of potential escalation; that hasn’t happened so far,” said Callum Henderson, a Eurasia Group managing director in Singapore. Even so, “it remains to be seen how long this market rally lasts on the back of this specific factor — whether or not, or when, Russia retaliates,” he said on Bloomberg Television. U.S. President Donald Trump declared “mission accomplished” via Twitter on Saturday, a day after the U.S., France and the U.K. launched military strikes in response to Syrian leader Bashar al-Assad’s suspected chemical attack on civilians. While geopolitical concerns linger, with new U.S. sanctions on Russia, the focus this week is back on earnings season in the U.S. and a slew of Federal Reserve officials who are due to speak, including the incoming head of the New York Fed, John Williams.
What to Expect From Retail Sales After the Trump Tax Cuts
Tax cuts have given a boost to Americans’ take-home pay this year. The question hanging over the U.S. economy is whether they are putting the extra cash toward savings and debt, or using it to go shopping. Retail-sales data due Monday from the Commerce Department will help provide an answer, and economists are betting that consumers finally opened up their wallets a little wider, thanks in part to the boost in paychecks as well as 2017 tax refunds from Uncle Sam. Sales probably rose 0.4 percent in March from the prior month, based on the median estimate of analysts. That would break a streak of three declines that was the longest such dip since 2015 and reflected the hangover from a debt-fueled, post-hurricane spending binge in the fourth quarter. “The economy continues to create jobs in significant numbers and tax cuts are putting more money in households’ pockets,” ING chief international economist James Knightley wrote in a note. “We suspect the cash flow story will win out for now, implying a positive outlook for consumer spending.” A rebound in retail sales would be a sign that President Donald Trump’s tax cuts are helping spur growth in an economy largely reliant on consumer spending. Trump and the Republican-led Congress also slashed corporate taxes, a move partly meant to spur wages, which have yet to move significantly higher. Americans had reined in spending in the previous three months, disappointing market watchers and likely culminating in a relatively soft first quarter for consumer spending. That’s kept estimates for economic growth in check, with analysts forecasting that gross domestic product expanded at a 2.2 percent annualized pace in the January-March period, down from 2.9 percent in the previous quarter.
U.K. Is Far From Full Employment, Former BOE Official Says
U.K. unemployment might have to drop as low as 3 percent, a rate not seen in at least half a century, before wage growth picks up any serious traction, according to research co-written by a former Bank of England policy maker. The number of people seeking more working hours has jumped since the global financial crisis, while weaker bargaining power means employees are “frightened” to ask for higher pay, wrote David Blanchflower, who was on the BOE’s interest-rate panel from 2006 to 2009, and University of Stirling economics professor David Bell. Unemployment is currently 4.3 percent, the lowest since at least 1975. But Blanchflower and Bell put the underemployment rate at 4.9 percent, and suggest a drop to 3 percent is necessary to boost wage growth back to pre-recession levels. They also flag low productivity as a reason for sluggish pay gains. “Underemployment is more important than unemployment in explaining the weakness of wage growth in the U.K.,” the authors wrote. “The U.K. is a long way from full-employment.” The lack of wage growth in Britain and other developed economies amid falling unemployment has baffled policy makers since the financial crisis. BOE officials have consistently been overly optimistic in forecasting a pay revival, prompting them to lower their estimate of the jobless rate needed to spur inflationary pressures to 4.25 percent. Blanchflower and Bell also contend that the U.K. Phillips curve — the inverse relationship between unemployment and inflation — appears to have flattened sharply. While that chimes with findings of the Federal Reserve and others, it puts them at odds with BOE research published Friday that suggested the curve has rather fallen because of a better-educated labor force.
IMF Says China’s Complex Fiscal System Needs ‘Crucial’ Overhaul
China’s sprawling local government financing system needs “crucial” reforms to increase consumption, build prosperity and encourage economic rebalancing, the International Monetary Fund said. Among the IMF’s recommendations is to fund local governments by imposing recurring property taxes and adding local surcharges to national individual income taxes. China’s fiscal system is the world’s most decentralized, with local bodies responsible for 85 percent of government spending, the fund said in a report, citing the breadth across 31 provincial level governments, 334 prefectures, 2,850 counties, 40,000 townships and 900,000 informal village jurisdictions. Including off-budget spending by local government financing vehicles brings the ratio up to 89 percent of all public expenditures.Such a complex network must be overhauled to better deliver services, increase social spending and reduce regional disparities, Philippe Wingender, an economist in the tax policy division of the fiscal affairs department, said in a paper released on Saturday. Revenue changes are needed to reduce risk from “excessive sub-national borrowing” and increase efficiency. “These reforms will allow China’s government to improve social safety nets and better protect citizens from adverse economic and health shocks,” Wingender wrote. “In turn, this would improve welfare and promote consumption and economic rebalancing.”A 2014 budget law aimed to improve budgeting and increase transparency and accountability in local government finances by requiring multi-year spending plans and setting conditions for managing annual deficits and surpluses. But it doesn’t address the misalignment of spending and taxing powers and the large imbalance across levels of government that’s prevailed since the last major fiscal reform in 1994, Wingender said.
China, Japan Hold First Economic Talks in 8 Years in Trade War Shadow
Japan and China held their first high-level economic dialogue in almost eight years on Monday against a backdrop of trade threats from the U.S. Neither side is publicly linking the talks in Tokyo between Chinese Foreign Minister Wang Yi and his Japanese counterpart Taro Kono to President Donald Trump’s protectionist policies. But the meeting is a timely reminder of how much they both rely on the American market, as well as how interdependent the two Asian nations have become. Japan asked China to ensure the fair and free transfers of technology and exchanges of intellectual property, Kono told reporters after the meeting with Wang. The U.S. is threatening tariffs on about $50 billion on imports from China to address what it called “unfair Chinese economic practices” in IP and forced technology transfers. Japan also made requests of China regarding steel overproduction, Kono said, However, he denied an earlier report from Kyodo News that China had asked for Japan’s help on U.S. steel tariffs, which have been imposed on both Japan and China. Even before he was elected, Trump had criticized both Chinese and Japanese trade and economic policy as unfair and damaging to the U.S. Recently, he has threatened tariffs on Chinese exports and limits on investment, and just last week took a shot at Japan, saying the nation “has hit us hard on trade for years!” That trade may be on the table for discussion when Japan’s Prime Minister Shinzo Abe meets with Trump later this week in Florida, but the rise of intra-Asian trade has weakened the power of U.S. attempts to coerce countries.