Overseas Headlines – April 5, 2018

April 5, 2018

Untied States:

U.S. Leaves Door Open to China Talks Amid Trade-War Fears

The Trump administration indicated it’s willing to negotiate with China on escalating frictions between the world’s two biggest economies, helping to ease fears among investors of a tit-for-tat trade conflict. U.S. Commerce Secretary Wilbur Ross said China’s response isn’t expected to disrupt the U.S. economy. In an interview on CNBC on Wednesday, he said China’s reaction “shouldn’t surprise anyone.” He said the U.S. isn’t entering “World War III” and left the door open for a negotiated solution. Earlier Wednesday, China said it would levy an additional 25 percent levy on about $50 billion of U.S. imports including soybeans, automobiles, chemicals and aircraft. The move matched the scale of proposed U.S. tariffs announced the previous day. The U.S. is allowing 60 days for public feedback and hasn’t specified when the tariffs would take effect, leaving a window open for talks. China’s retaliation isn’t justified under international trade rules or domestic law, said an official with the U.S. Trade Representative’s office. The appropriate response by China would be for the Asian nation to change its behavior on trade and intellectual property, said the official, who spoke to reporters on condition of anonymity. U.S. stocks opened sharply lower, but reversed course as investors speculated that the flurry of tariffs may not do much damage to the global economy.



Euro-Area Economy Cools Further in Sign Peak Growth Has Passed

Euro-area economic momentum slowed to the weakest level in more than a year, adding to warning signs that the region’s upswing has passed its peak. A composite Purchasing Managers’ Index dropped nearly two points in March, the most since 2012, when the 19-nation bloc was mired in recession. Growth in manufacturing cooled to an eight-month low last month, and sluggish orders in the region’s largest economy suggest there’s little additional strengthening in store. After the fastest growth in a decade last year, companies in the 19-nation euro area are running into constraints that threaten to moderate the expansion. While that complicates the European Central Bank’s job as it judges when to pare back stimulus, the region’s revival is far from over. “Some pull-back from the elevated level of the PMI at the start of the year was always highly likely,” said Chris Williamson, chief business economist at IHS Markit. He said the gauge still points toward an “impressive” quarterly rate of expansion of 0.6 percent, adding that the weaker data generally reflect fewer companies reporting improvements in business, rather than more firms pointing to deteriorating conditions.


U.K. Economy Battered by the ‘Beast From the East’ Snowstorm

Bad weather in March has taken a toll on the U.K. economy, but the ‘Beast from the East’ may not be enough to shake the Bank of England from its path toward another interest-rate increase. Reports this week showed snow and storms dragged growth in services to its weakest in almost two years, and saw the construction industry shrink for the first time in six months. While the pound fell after the services report, investors are still pricing in an around 85 percent chance of the BOE hiking rates in May. That’s little changed from last week. IHS Markit, which published the industry reports, said the weather, along with a drag from subdued consumer demand and “heightened economic uncertainty,” means overall economic growth probably slowed in the first quarter. It estimates expansion of 0.3 percent, down from 0.4 percent at the end of 2017. The BOE has already factored in the hit from the bad weather, and downgraded its own estimate for the quarter. According to Markit, that means the Monetary Policy Committee’s widely expected rate increase in May is still on the cards, an assessment shared by Scotiabank economist Alan Clarke. With the relatively poor readings attributed to the bad weather, “the weakness is likely to prove transitory and hence forgivable from the perspective of the MPC,” Clarke said. “Overall, I suspect the MPC looks through this.”



What Markets Can Expect Next From China

Trade tensions between the U.S. and China have escalated to the point where each side has slapped tariffs on imports. The logical question is: What now? Although I am hopeful a deal between the two countries will be reached by the end of May, I also expect China to announce policies that attempt to mitigate any economic downside resulting from the trade frictions. Those policies would include measures to boost domestic consumption and investment, as well as an acceleration of broader reforms already underway. The Chinese State Council announced some initial moves last week, reducing value-added tax rates to 16 percent from 17 percent starting May 1 for the manufacturing sector, and cutting them to 10 percent from 11 percent for the transportation, construction and telecommunications services industries. Plus, the government will set up a national financing guarantee fund with an initial investment of 60 billion yuan ($9.52 billion) to support small and micro companies, startups, and agriculture businesses. Consumption support will likely come in the form of individual tax cuts. The current threshold for personal income tax is 3,500 yuan, which could be raised as high as 5,000 yuan. Other measures that China could introduce this year to help consumption include increasing the minimum wage, allowing further income tax deductions for education and health care expenses, reducing electricity prices, cutting government fees and employee contributions to social security funds, and further lowering of corporate taxes for small- and medium-sized enterprises. In addition to measures to stimulate consumption, I expect China’s fiscal policy to remain “proactive,” with the central and western regions targeted for major infrastructure construction. Rural China, shantytown redevelopment, and affordable and rental housing will be targeted areas of investment. There are also two significant regional investment plans in the Xiong’an New Area, and the Guangdong-Hong Kong-Macao Greater Bay Area development plan. Finally, Chinese President Xi Jinping’s signature Belt and Road initiative will be used to boost regional infrastructure and trade.