Mexico Border Delays Weigh on U.S. Investment and Factories
More cargo from Mexico to the U.S. is being held up at the border, accompanied by increasing evidence that such delays are dimming prospects for American companies. Slower trade between the countries since federal border officers were recently redirected to deal with a surge in migrants has been socking businesses with additional shipping costs. The effects will likely cause a modest headwind for second-quarter nonresidential investment growth — which cooled at the start of the year — and already helped to push a U.S. factory gauge to a two-year low in April, according to Bank of America Corp. “The delays generate a meaningful direct cost for businesses,” economist Stephen Juneau said in an email Monday. The disruption may have a significant impact on the flow of goods, as more than 86 percent of Mexican imports enter the U.S. by land, and impose some $5.5 million in additional costs on U.S. businesses each month, he wrote in a report Friday. Trucking company Werner Enterprises Inc. said on an April 25 earnings call that it expects border crossing to be “slow for the foreseeable future.” “Freight is still crossing the border at a very slow rate by comparable standards,” said Derek Leathers, chief executive officer of the Omaha, Nebraska-based company. U.S. Customs and Border Protection said March 27 that trade processing would slow, with as many as 750 officers from crossings in the San Diego, Tucson, El Paso and Laredo regions being re-assigned. President Donald Trump the next day renewed threats to close the border. The Institute for Supply Management’s factory survey last week showed April conditions at the weakest since October 2016, though still expansionary. The production component also fell to a more than two-year low, which Juneau said was likely in part because of border delays. Mexico border issues “are a potential threat,” one unidentified respondent from a machinery company said in ISM’s survey, while a computer and electronic products company said “border crossing delays are slowing supplier deliveries.” A transportation-equipment company said it’s closely watching the Mexico border situation. Federal Reserve Bank of Dallas President Robert Kaplan has also cited the trade disruptions, citing average daily truck crossings at El Paso falling by half to 1,500. While it hasn’t had a material impact on Texas, it could, “and it’s something we’re watching,” he told CNBC Friday. “A lot of the commercial traffic, we’re hearing from businesses, is being impeded” he said. “This is affecting logistics and supply chains, not just in Texas and the Southwest, but also in the Midwest.”
EU Sees Italy’s Debt, Deficit Up Amid Muted Economic Recovery
Italy’s fiscal situation will worsen this year and next because a pickup in the economy won’t be strong enough to stop its debt and deficit rising, the European Commission warned. While economic “growth is likely to rebound moderately on the back of firming external demand and higher social transfers,” Italy remains “the only euro-area member state where the snowball effect is projected to provide a debt-increasing contribution,” the European Union executive said Tuesday in its spring economic forecasts. “The average interest rate paid on Italy’s debt exceeds its nominal GDP growth.” The EU’s estimate of 2.5 percent for Italy’s deficit to gross domestic product this year is higher than the government’s 2.4 percent target, raised last month from an original 2 percent. The forecasts assume that hikes in indirect taxes such as VAT planned for 2020 under current legislation won’t kick in, the report said. Based on the forecasts, Italy could be the only euro nation above the 3 percent deficit level in 2020. The Italian government has repeatedly vowed to find alternative measures to a VAT increase, that was legislated as a safeguard clause. “Possible activation of the VAT safeguard clause in 2020 and potential under-spending for the new measures would lead to a better fiscal outlook,” the Commission said in its report. The country’s structural deficit, which excludes one-time expenditures and the effects of the economic cycle and is a key figure for EU budget rules, is forecast to worsen by 0.2 percentage point in 2019 and a further 1.2 points next year, when the debt will exceed 135 percent of the economic output. Italy is set to run a “sizable” structural deficit combined with a rising debt level, “suggesting that further fiscal adjustment is needed,” the Commission said, without elaborating or mentioning a possible infringement procedure in coming months. Still, the EU’s Brussels-based executive arm stressed that after its clash with the populist administration in Rome over the 2019 budget law, Italy’s position on sovereign bond markets improved. “In March 2019, the spread between Italian and German 10-year sovereign bonds fell below 250 basis points and remained close to that level in April, significantly below the 320 basis points seen on several occasions in autumn,” during the difficult talks on the budget, the report said. “This suggests that market participants have become more sanguine about Italy’s budget issues — investor demand for Italian bonds has been strong lately.”
Malaysia Joins Asia Easing Cycle With Quarter-Point Rate Cut
Malaysia’s central bank cut its benchmark interest rate for the first time since July 2016, seeking to support the economy as global risks mount. Bank Negara Malaysia reduced the overnight policy rate by a quarter percentage point to 3 percent, as predicted by 14 of 23 economists surveyed by Bloomberg. The rest forecast no change. Policy makers in the Southeast Asian nation are bracing for slower growth as exports take a knock from weaker global demand and rising trade tensions. The central bank is forecasting expansion of 4.3 percent to 4.8 percent this year, lower than the government’s projection of 4.9 percent. “There are downside risks to growth from heightened uncertainties in the global and domestic environment, trade tensions and extended weakness in commodity-related sectors,” the central bank said in a statement. Asian central banks are shifting to more dovish policy stances after the U.S. Federal Reserve pumped the brakes on rate hikes and growth outlooks soured. Malaysia becomes the second Asian nation after India to lower interest rates this year. New Zealand and the Philippines may also ease this week. Given the tightening in financial conditions, the rate cut is “intended to preserve the degree of monetary accommodativeness,” the central bank said. “This is consistent with the monetary policy stance of supporting a steady growth path amid price stability.” The tone of the statement suggests the rate cut may be a one-off move rather than the start of an aggressive easing cycle, according to analysts at Mizuho Bank Ltd. and UBS AG. The policy move was “not because they thought growth was slowing dramatically” or that inflation was problematic, but that they saw “growing risks” in both of those areas, said Edward Teather, an economist at UBS in Singapore. He doesn’t see a “major” rate-cutting cycle for Malaysia. Inflation remains subdued, reaching 0.2 percent in March, and is expected to be “broadly stable compared to 2018,” according to the central bank. The outlook will depend on oil prices, it said. The ringgit was little changed at 4.1480 against the dollar as of 3:45 p.m. in Kuala Lumpur on Tuesday. It’s weakened 1.5 percent against the dollar in the past month, among the worst performers in Asia, as the U.S. currency gained and sentiment slumped. Outflows from bonds may worsen if FTSE Russell drops Malaysia from its global index in September.