Date: August 9, 2019
Trump Still Has Plenty of Ways to Escalate His China Trade War
“The trade war’s August escalation has spooked markets — and central banks — around the world. The bad news, though, is that while President Donald Trump has fired two large weapons in the past week by green-lighting his biggest swathe of tariffs yet and formally branding China a currency manipulator, his arsenal is far from exhausted. The loudest shot Trump could take may be the one that he increasingly appears focused on: weaponizing the dollar, the world’s reserve currency. In a series of tweets on Thursday he called for the Federal Reserve to cut rates and weaken the dollar to benefit American exporters, effectively shrugging off a long-standing G-20 compact the U.S. signed again just weeks ago for the world’s major economies not to engage in competitive currency devaluations. Inside the White House, hawks have been pushing for a direct intervention in currency markets by the Treasury by pointing to a slowdown in U.S. manufacturing, which many economists have blamed on tariffs imposed by Trump and uncertainty surrounding his trade war with China. Just how effective either a Fed cut or an intervention would be is unclear. The relevant Treasury fund has $92 billion in it. Even if the Fed were to join in, as it has in past interventions, and match that amount — a $180 billion injection into a $5 trillion per day global foreign-exchange market might have a limited effect. It might also unnerve markets and have longer-term economic consequences. But while the president and markets are focused on a possible currency intervention, that’s far from the last weapon he has available, according to current and former U.S. officials, advisers to the administration and analysts.”
First U.K. Contraction Since Wake of Crisis Raises Brexit Stakes
“Britain succumbed to its first economic contraction since the aftermath of the financial crisis, raising the stakes for Boris Johnson’s government as it seeks an imminent exit from the European Union. The unexpected 0.2% decline in gross domestic product during the second quarter — the worst performance since 2012 — provides a foretaste of the potential damage to growth that most economists are warning of if Brexit happens without any transition. The pound fell after the report, sliding to $1.2117 as of 10:17 a.m. in London. The drop in output means the U.K. is in danger of falling into a technical recession with one more quarterly decline. It also highlights the predicament of the Bank of England, whose central forecasts see the need for gradual interest rate increases. Governor Mark Carney says the reaction to a no-deal Brexit, which would push down the pound and drive up inflation while further denting growth, could go in either direction. “Underlying momentum remains lukewarm, choked by a combination of slower global growth and Brexit uncertainty,” said Alpesh Paleja, lead economist at the Confederation of British Industry. “As a result, business sentiment is dire.” The abrupt drop came as many firms ran down inventories built up ahead of the original March 29 deadline to leave the European Union. Stock levels fell by 4.4 billion pounds ($5.3 billion), knocking 2.15 percentage points off GDP. The economy was also hit by auto factories bringing forward summer maintenance shutdowns to April to avoid the threat of supply disruptions around the original Brexit deadline. Manufacturing, which enjoyed a bumper first quarter, shrank 2.3% in the following three months, the most since 2009. The GDP figures are the first since Johnson became premier last month, vowing to take Britain out of the EU by Oct. 31, with or without a deal to cushion the blow. In a series of television interviews after the release, new Chancellor of the Exchequer Sajid Javid sought to play down the numbers, saying they “were not a surprise in any way,” and that he doesn’t expect a recession “at all.” “What we saw in the first quarter was perhaps sort of higher results than otherwise because businesses were stockpiling for the Brexit that was to be, and now they’re using those stockpiles, so we’re seeing volatility in the figures,” he said.”
Yuan Drama Leaves China, U.S. Further Apart Than Ever on Trade
“It was all about the yuan this week in China. U.S. President Donald Trump’s abrupt threat to raise tariffs on more Chinese goods prompted Beijing to halt imports of agricultural goods and let its currency weaken below the closely watched level of 7 per dollar. In response, Washington formally labelled China a currency manipulator. Experts including former U.S. Treasury Secretary Larry Summers say that’s a tough accusation to justify. While China does have a history of keeping the yuan weak to boost exports, in recent years it’s actually worked to prop up the currency. In fact, the Treasury chose to label it a manipulator just as it stopped intervening and let the market guide the exchange rate lower. Moreover, the designation was largely symbolic. The drama around the yuan has made the central bank’s daily fixing unmissable for China watchers. The rate is published every trading day at 9:15 a.m., after which the currency is allowed to move 2% in either direction. On Thursday, the PBOC set it at the weakest level since 2008, though it has sought to limit the yuan’s plunge by keeping the fixing stronger than expectations. Chinese officials and domestic media took pains to stress that the yuan’s moves have been normal and Beijing wouldn’t use the currency as a weapon in the trade war. The central bank also told foreign firms that there wouldn’t be a massive depreciation. But traders weren’t easily convinced after being burned before. So what now for trade talks? Chinese state media released an onslaught of criticism this week, accusing the U.S. of reneging on its promises and digging in for a protracted conflict unless Washington changes its tune. Trump doesn’t look ready to budge either, as his administration rushes to get the new tariffs ready. Still, his economic adviser Larry Kudlow struck a note of optimism, saying negotiators still expect talks in Washington next month to happen. For now, it looks like the two sides are further apart than ever. Neither leader believes the other is serious about making a deal: China sees Trump as posturing ahead of the 2020 election, while U.S. officials think Chinese leader Xi Jinping wants to wait him out for a better deal.”
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