Trump’s Trade Disputes With G-7 a `Family Quarrel,’ Kudlow Says

In World Economy News 08/06/2018

Donald Trump’s top economic adviser, Larry Kudlow, called trade tensions shadowing the G-7 conference beginning Friday “a family quarrel” and said Trump will meet one-on-one with Canadian Prime Minister Justin Trudeau and French President Emmanuel Macron at the summit.

Trump is expected to attend the Group of Seven summit on Friday and Saturday with the leaders of the world’s largest economies before flying to Singapore for a historic meeting with North Korean leader Kim Jong Un on June 12.

Finance ministers from the six other nations participating in the summit issued a rare public rebuke during a preliminary meeting last week, saying they would retaliate against Trump’s decision to impose duties on steel and aluminum imports from the European Union, Canada, and Mexico.

The criticism has been particularly acute from the summit’s host, Canadian Prime Minister Justin Trudeau, who said Sunday the tariffs were “insulting” to the longstanding alliance between the U.S. and Canada.

“The idea that we are somehow a national security threat to the United States is, quite frankly, insulting and unacceptable,” Trudeau said in an interview with NBC News.

Kudlow rejected criticism of Trump and declined to describe the dispute as a “trade war.”

“Don’t blame Trump. Blame the nations that have broken away from” the world trade order, Kudlow told reporters at a White House briefing. He called Trump a “trade reformer.”

Further complicating the U.S. relationship with Canada is the ongoing effort to renegotiate the North American Free Trade Agreement, with both leaders saying they are willing to walk away from the pact if talks fail to produce a revised agreement to their liking. Trump has recently said he’d be interested in negotiating separate bilateral trade deals with Mexico and Canada instead of updating Nafta.

Some White House officials are discussing additional economic penalties in response to the $13 billion in retaliatory tariffs Trudeau has promised, the Washington Post reported Wednesday. Administration officials are also weighing whether to withhold Trump’s signature from the customary joint agreement issued at the end of the G-7 summit.

Kudlow denied another element of the Washington Post report: that Treasury Secretary Steven Mnuchin had advocated a softer approach toward Canada, including an exemption from the metals tariffs. The story was “patently false” and inaccurately depicted a meeting in which Mnuchin didn’t even speak, Kudlow said.

Source: Bloomberg

Fed On Track to Raise Rates Regardless of Emerging-Market Woes

In World Economy News 08/06/2018

Emerging markets struggling with higher U.S. interest rates are likely to get little sympathy from the Federal Reserve.

Currencies of such nations have been hammered in a spreading selloff amid worries that their economies won’t cope with higher U.S. borrowing costs. That’s prompted central bankers in India and Indonesia to raise interest rates and urge Fed caution, while officials in Brazil are bracing for challenging times too.

There are few signs such concerns will steer the Fed away from its course for at least two and possibly three more rate hikes this year, including a move at its policy meeting next week.

Chairman Jerome Powell explicitly pushed back against criticism early last month in Zurich, saying the role of U.S. monetary policy on foreign domestic financial conditions was “often exaggerated.” His colleague, Governor Lael Brainard, mentioned emerging markets in a May 31 speech, but spent far more time discussing the upside risks posed by fiscal stimulus.

“I don’t think they can change policy based on fear,” said Bricklin Dwyer, senior economist at BNP Paribas in New York. Emerging-market turmoil “is noise right now, justifiable noise. But does it shift the outlook for the U.S? The answer is, not yet.”

The U.S. economy is powering ahead, adding over a million jobs in the first five months of 2018. Inflation is at the central bank’s 2 percent target, and the Atlanta Fed’s gross domestic product tracking model suggests the economy grew a strong 4.5 percent in the second quarter.

‘Huge Tailwind’

Even if exports are tempered by foreign economic woes, trade fights, and a somewhat stronger dollar, some $1.5 trillion in fiscal stimulus and a $300 billion increase in federal spending are supporting domestic U.S. demand with “a huge tailwind,” said Torsten Slok, chief international economist at Deutsche Bank AG in New York.

The Fed is tasked with achieving stable prices and full employment. At 3.8 percent in May, unemployment is already well below estimates of full employment and recent forecasts show officials expect a modest overshoot of their 2 percent inflation target.

Meanwhile, the Fed’s benchmark lending rate is still low enough to stimulate growth, according to some measures, leaving officials with little choice but to keep raising it to a level that is more neutral in its impact on supply and demand.

Carry Costs

It has also gone out of its way to communicate the plan for gradual rate increases and a shrinking balance sheet to avoid repeating the 2013 taper tantrum, when then-Fed Chairman Ben Bernanke surprised investors by suggesting the central bank might slow bond purchases.

Delaying policy tightening could also carry costs for emerging markets if it led to higher inflation that forced the Fed to act more aggressively, said Nathan Sheets, chief economist for PGIM Fixed Income.

“The Fed’s got to move,” said Sheets, a former U.S. Treasury undersecretary for international affairs. Officials are probably asking themselves, “over time, are we going to serve the global economy well by not responding to inflation?”

There have been occasions in the past when the Fed has paused in response to international developments. In 1998, for example, then-Chairman Alan Greenspan led the committee to cut rates three times to offset effects of spreading financial turmoil.

Greenspan warned during that period that “it is just not credible” that the U.S. remain “an oasis of prosperity.”

Greenspan ‘Wrong’

“He was wrong,” said Joe Gagnon, a senior fellow at the Peterson Institute for International Economics in Washington and a former Fed economist. “He eased 75 basis points and the economy, if anything, accelerated and the tech economy really took off.”

The bubble in technology stocks eventually burst at high cost to the U.S. economy.

In 2016, Fed officials set aside plans to raise rates four times over the year in reaction to financial-market turmoil triggered by concern over slowing Chinese growth. They hiked just once, but could also point to U.S. inflation that was running too low as a reason for their caution.

The Fed’s preferred gauge of price pressures averaged just 1.2 percent that year, while it hit 2 percent on a 12-month basis in both March and April 2018.

Fed officials do have an eye on Europe and emerging markets, “but at the end of the day, look at the employment report” in May, when the U.S. economy added 223,000 jobs, said Deutsche Bank’s Slok. “If anything, we should be worried about overheating, not a recession.”

Source: Bloomberg

U.S. Jobless Claims Fell Last Week

In World Economy News 08/06/2018

The number of Americans claiming new unemployment benefits fell last week, signaling continued health in the labor market.

Initial jobless claims, a proxy for layoffs across the U.S., dropped by 1,000 to a seasonally adjusted 222,000 in the week ended June 2, the Labor Department said Thursday. Economists surveyed by The Wall Street Journal expected 220,000 new claims last week.

Data can be volatile from week to week, especially around the holidays when seasonal adjustments are sometimes difficult; last Monday was Memorial Day. The four-week moving average of claims, a more-stable measure, increased to 225,500 last week.

Unemployment-benefit applications have remained low for years, a sign that relatively few Americans are being laid off and seeking assistance in a buoyant U.S. job market.

The unemployment rate fell to 3.8% in May, the lowest since April 2000, the Labor Department reported last week. U.S. nonfarm employers added 223,000 jobs last month, extending the longest continuous job expansion on record to 92 months.

Thursday’s report showed the number of claims workers made for longer than a week increased by 21,000 to 1,741,000 in the week ended May 26. That figure, known as continuing claims, is reported with a one-week lag.

Source: Dow Jones

China’s Willing to Boost Imports If U.S. Meets Half-Way on Trade

In World Economy News 08/06/2018

China reiterated that it is willing to expand imports from the U.S. if the world’s two largest economies “meet half-way” in trade negotiations.

The two countries had “deep and detailed” talks on agricultural and energy products last week, while those details are subject to confirmation, Gao Feng, a spokesman for the Ministry of Commerce, said at a regular briefing Thursday in Beijing. Gao said that China doesn’t want to escalate trade tensions with the U.S., and that boosting imports is an established strategy.

The comments come after reports that China has offered to boost purchases of U.S. goods by about $25 billion this year ahead of a mid-June deadline for imposing tariffs on Chinese imports. U.S. Commerce Secretary Wilbur Ross was in Beijing earlier this month for the third round of high-level negotiations, which focused on China agreeing to buy more U.S. energy and farming produce. Gao didn’t comment on any specific Chinese offer during the talks.

China said after that round that all commitments made so far will be withdrawn if President Donald Trump carries out his threat to impose tariffs.

The Trump administration has made reducing the deficit in goods trade with China and other nations one of its most important policy goals. While it has imposed tariffs on steel and aluminum imports from across the world, riling up allies in Europe, Asia and Canada, it has yet to enact any of the China-specific levies it has threatened.

The proposed additional 25 percent tariffs on $50 billion of Chinese imports, if they materialize after June 15 as scheduled, would be Trump’s first actual trade actions specifically targeted at the world’s biggest trading nation.

The Mofcom comments can be “interpreted as an effort” to avert American tariffs due in about 8 days, according to Dariusz Kowalczyk, senior emerging-market strategist at Credit Agricole SA in Hong Kong. “We believe a breakthrough would be needed for that and the two sides will probably reach one in coming days, but time is ticking.”

Source: Bloomberg

Amid trade war fears, euro zone growth slowed on lower exports

In World Economy News 08/06/2018

The euro zone began the year with slower economic growth as fears of a trade war with the United States appeared to take their toll, official data showed on Thursday.

The economic slowdown in the 19-country bloc in the first quarter of the year was caused by lower trade and coincided with U.S. President Donald Trump’s threats in March of high duties on steel and aluminium imports from global partners, including the EU – threats turned into actual tariffs last week.

The euro zone’s output expanded by 0.4 percent on the quarter in the first three months of the year, a marked deceleration from 0.7 percent growth in the previous quarter, data released by EU statistics office Eurostat showed, confirming earlier estimates.

On the year, growth slowed to 2.5 percent from 2.8 percent in the previous quarter.

Germany, the bloc’s largest economy and main exporter, saw its output expansion halved to 0.3 percent on the quarter in the January-March period.

Reduced trade contributed to the slower pace of the expansion, which was propped up by increased consumption and investments.

Euro zone exports fell by 0.4 percent quarter-on-quarter and imports dropped by 0.1 percent, in a sign of slower global trade.

In the previous quarter, euro zone exports grew 2.2 percent and imports rose by 1.5 percent.

The drop in exports contributed to a loss of 0.2 percentage points to the euro zone output, data show.

The trade losses were offset by growing consumer spending and an increase in investments.

Household consumption rose by 0.5 percent in the currency bloc, from 0.2 percent in the previous quarter, in a sign that the bloc’s economy could be relying more on domestic spending.

“However, this is less encouraging than it first seems,” Capital Economics, a research firm, said in a note, adding the rise of consumer spending was likely mostly due to higher consumption of heating and fuel in colder-than-usual winter months, rather than being a structural shift in consumers’ habits.

Gross fixed capital formation, a measure for investments, also grew by 0.5 percent in the first quarter, but much less than in the previous quarter when it rose by 1.3 percent.

The United States also grew less, slowing to 0.5 percent in the first quarter from 0.7 percent.

Source: Reuters (Reporting by Francesco Guarascio; Editing by Janet Lawrence)

ECB Pushes Foot-Dragging Banks to Pick a New Lending Benchmark

In World Economy News 08/06/2018

The European Central Bank is urging lenders to prepare for the end of key interbank lending benchmarks and accused them of being complacent until regulators stepped up the pressure.

Banks have narrowed down their options for a new system that’s protected from the kind of rigging that discredited benchmarks such as Libor and Euribor. At stake for investors, central bankers and consumers is trust in the data that’s used to value financial assets and make the ECB’s monetary policy work in practice.

“Banks have been too complacent for a long time, so I’m very happy to see how engaged they are,” said Cornelia Holthausen, an ECB official who sits in on the meetings where bankers talk about how to replace the existing overnight lending rate, called Eonia. “Sometimes you need some pressure.”

Eonia will probably be retired at the end of 2019 and banks are likely to pick a replacement and a fall-back option this year, said Holthausen. That could include a rate known as Ester that the ECB is working on, but the central bank doesn’t have “a strong view” that it should be chosen over another, she said.

Benchmarks like Euribor and Libor were open to manipulation because they relied on estimates made by banks of their borrowing costs. The ECB’s Ester rate would be much harder to rig because it is based on transactions weighted according to volume, Holthausen said. “So you have to have a big transaction in order to have an influence on the rate and that’s expensive.”

Ester won’t be ready until the second half of next year, which is a little close to the 2020 deadline, Holthausen said. Plus, picking a new rate is only part of the battle, given the complexity of amending related contracts, she said. “This issue is manageable, but market participants still claim they need months to do that, and time is scarce.”

Source: Bloomberg

AfD urges German government to prevent euro zone becoming liability union

In World Economy News 07/06/2018

Germany’s largest opposition party has filed a motion urging the government to prevent the euro zone from becoming a union in which liabilities are shared out, three weeks before a European Union summit at which reform plans are due to be discussed.

The eurosceptic Alternative for Germany (AfD) took aim at some elements of the banking union and some of French President Emmanuel Macron’s euro zone reform proposals. German Chancellor Angela Merkel and Macron are due to present a joint plan for overhauling Europe at the meeting on June 28-29.

The AfD’s motion could strike a chord with some of Merkel’s conservatives, many of whom are sceptical about any steps that would push liability for other countries’ debts on to taxpayers in Germany, Europe’s largest economy.

In a weekend interview Merkel backed Macron’s idea of turning the euro zone’s ESM rescue fund into a European Monetary Fund (EMF) with powers to give members hit by sovereign debt troubles short-term credit lines.

The AfD, which was set up in 2013 to protest against bailouts but has since morphed into an anti-immigrant party, said the ESM should instead be wound down to stop losses from bank insolvencies being passed on to European, and particularly German, taxpayers.

AfD lawmaker Bruno Hollnagel, who focuses on euro zone issues and is a member of the parliamentary financial committee, told Reuters an EMF would be a way to transfer funds around the bloc and undermine national parliaments’ financial sovereignty.

“The EMF would basically be a bank in which the finance ministers decide on policy, the bank can decide how much money it has and the bank can decide to whom it gives money and on what conditions without it being subject to a banking supervisor,” Hollnagel said.

CONCERNS

One of the proposals to be discussed at the summit is a common backstop for failing banks. The AfD said introducing such a scheme would be “irresponsible” and that if banks knew they could get funds from the ESM or EMF if necessary, they would be tempted to take inappropriate risks.

Concerns about reform proposals were also voiced last month by a group of 154 prominent German economists, who dismissed Macron’s plans for the euro zone as risky and said the single currency bloc must not become a union sharing liabilities.

In the motion, the AfD said the ECB should be stripped of its task of banking supervision, with Hollnagel saying its role as a lender meant it was not independent enough to supervise.

One element still missing from the banking union is a European Deposit Insurance Scheme (EDIS) for the entire euro zone, which would bolster the confidence of savers and protect deposits of up to 100,000 euros in any euro zone bank. France wants Germany to commit to a clear timeline on EDIS.

The AfD, which entered parliament in September with around 13 percent of votes, said deposit guarantees should remain at the national level to reduce or prevent risks and to stop risks being transferred from the national to the European level.

Many conservatives are also sceptical about increased risk-sharing among euro zone members, with one saying in April that conservative lawmakers were “far, far away” from backing EDIS.

On Macron’s idea for a euro zone budget, Hollnagel said Germany would ultimately be left footing the bill, adding: “It’s about opening a new channel for transfers — they want to have another new source of money.”

Source: Reuters (Reporting by Michelle Martin)