Date: November 05, 2018
United States:
Trump-Xi Trade Deal Likely to Begin Rather Than End at G-20
President Donald Trump often seems to be caught between his ideological desire to rewrite America’s trade relationship with China and a businessman’s instinct to cut a deal. And with midterm elections looming and financial markets coming off a rough October, the deal-maker appears to have the upper hand. “We’ll make a deal with China, and I think it will be a very fair deal for everybody,” Trump told reporters on Friday after asking aides the day before to begin drafting ideas for an agreement to take to his planned meeting with Chinese President Xi Jinping at the Group of 20 summit in Argentina Nov. 30 to Dec. 1. The two sides are “getting much closer to doing something,” he said. Still, to satisfy Trump’s own inner ideologue — and the China hawks in his administration — that “something” is going to have to hang on substance. And that’s where things are likely to get complicated. Xi may fill out the picture on Monday when he is due to address a trade fair in Shanghai. Analysts familiar with White House discussions, however, say any deal struck at the G-20 is likely to take the form more of a temporary truce than anything that will bring a final peace in the trade wars. Such a ceasefire could, they said, see a commitment to forgo additional tariffs, and possibly even to remove some, while high-level officials negotiate a broader pact. Any of those things would in the current context be a significant achievement and be welcomed by markets. But they would also leave Beijing and Washington facing arduous negotiations ahead, as one senior administration official indicated on Friday.
Europe:
Italy’s Bonds Drop as Leaders Defiant Before Eurogroup Meeting
Italian bonds declined as euro-area finance ministers were set to discuss how to deal with a government that is showing few signs of capitulating on its budget plans. Short-dated bonds led the selloff and domestic stocks snapped a three-day rally before the gathering that takes place in Brussels Monday. Italy’s leaders have until Nov. 13 to submit revised spending plans after the European Commission took the unprecedented step of rejecting initial proposals to widen the deficit. Deputy Prime Minister Luigi Di Maio said in an interview with the Financial Times that the government’s plans would not change. The commission will propose disciplining Italy on Nov. 21, Politico reported Monday, citing three unidentified people involved in the talks in Rome and Brussels. It may base its recommendations on the country’s debt — which is equivalent to 130 percent of economic output — rather than next year’s target deficit that could help speed up proceedings, the report said. There were also signs of infighting between Italy’s coalition partners, with Giancarlo Giorgetti, a League member and key aide to leader Matteo Salvini, warning that the government could be at risk of collapse if the parties focus only on polling results. Support for the League rose to 34.7 percent in an Ipsos poll published in Corriere della Sera. European commissioner Valdis Dombrovskis said Italy’s budget plan needs substantial adjustments. “The Eurogroup meeting could see a display of unity from other finance ministers against Italy’s budget plans,” said Antoine Bouvet, an interest rates strategy at Mizuho International Plc. “The market might be anticipating a heated debate on the topic.” Italian two-year yields climbed five basis points to 0.91 percent, while those on 10-year bonds rose three basis points to 3.35 percent. The yield spread over their German peers widened three basis points to 292 basis points. The FTSE MIB Index of shares dropped 0.4 percent. Italian bond futures slipped, with a block trade of 500 10-year contracts adding to the pressure, according to traders in London. The move appeared to be flow-driven with no material news, though may reflect some positioning ahead of the Eurogroup meeting, the traders said.
Australia’s Property Slump Casts Doubt on Household Spending
Australia’s falling house prices are raising doubts about the resilience of household spending. There are signs of weakness emerging, with data Friday showing retail sales growth tumbled sharply in the third quarter. Australians were happy to fund higher spending by putting away less savings as the value of their homes increased. But when prices drop, as they have nationwide for 13 months, building a buffer traditionally becomes the priority over shopping. For Governor Philip Lowe, uncertainty about consumption has been one of his more regular warnings on the economy. It’s also a key reason why the Reserve Bank of Australia’s board is set to keep the cash rate unchanged at a record-low 1.5 percent Tuesday for a 25th meeting. Record household debt and stagnant incomes mean there’s little scope to absorb higher borrowing costs. “There will be a need for more deleveraging,” Joachim Fels, global economic adviser at Pacific Investment Management Co., said in an interview in Hong Kong following a visit Down Under. “If house prices continue to fall, which looks quite likely, you will probably see consumer spending slowing as well. Whether that is enough to push Australia into a recession is a different question. We are not forecasting a recession in Australia but a slowdown looks quite likely,” said Fels. Underscoring the price weakness, nationwide auction clearance rates have held below 50 percent for the past five weeks, compared with as high as 72 percent at the start of the year. In the weekend just gone, preliminary results came in at 47.4 percent, according to CoreLogic data released Monday. Data Friday showed retail sales rose just 0.2 percent last quarter, from 1 percent in the previous three months, while a report two days earlier showed inflation still subdued. The RBA releases its quarterly updated forecasts Friday. One risk to the outlook cited in the previous Statement on Monetary Policy was spending, with the central bank noting that housing accounts for about 55 percent of total household assets. “Lower housing prices could lead to lower consumption growth than is currently forecast,” it said in August. “Although the earlier gains in national housing wealth may not have encouraged much additional consumption, it is possible that the consumption decisions of highly indebted and/or credit-constrained households could be more sensitive to declines in housing prices.”
Asia:
Asia’s Most Aggressive Rate Hikers Have More Work Ahead
The three Asian central banks leading the region’s tightening cycle have used a spell of relative calm to take a breather on raising interest rates — but it’s not likely to last. With the Federal Reserve set to move again, possibly in December, and more signs of escalation in the U.S.-China trade war, policy makers in India, Indonesia and the Philippines are likely to be on high alert again soon. “We are expecting that this is going to be a temporary halt,” said Reza Siregar, head of Asean and India research at the Institute of International Finance. For Indonesia, India and the Philippines — who fought for months to defend their currencies and head off an exodus of investors — the end of the tightening cycle is “not a done deal,” he said. Donald Trump already appears willing to double down on his trade war, with the U.S. said to be preparing to announce tariffs on all remaining Chinese imports by early December if talks with Beijing fail to appease the president. America’s midterm elections on Nov. 6 add another element of uncertainty that could roil emerging markets. Then there’s the existing challenge of China’s slowing growth and concerns about oil prices. The three Asian central banks leading the region’s tightening cycle have used a spell of relative calm to take a breather on raising interest rates — but it’s not likely to last. With the Federal Reserve set to move again, possibly in December, and more signs of escalation in the U.S.-China trade war, policy makers in India, Indonesia and the Philippines are likely to be on high alert again soon. “We are expecting that this is going to be a temporary halt,” said Reza Siregar, head of Asean and India research at the Institute of International Finance. For Indonesia, India and the Philippines — who fought for months to defend their currencies and head off an exodus of investors — the end of the tightening cycle is “not a done deal,” he said. Donald Trump already appears willing to double down on his trade war, with the U.S. said to be preparing to announce tariffs on all remaining Chinese imports by early December if talks with Beijing fail to appease the president. America’s midterm elections on Nov. 6 add another element of uncertainty that could roil emerging markets. Then there’s the existing challenge of China’s slowing growth and concerns about oil prices. India and Indonesia were among the hardest hit economies from the sell-off that rattled emerging markets this year. The rout has seen India’s rupee fall about 13 percent against the dollar while and Indonesia’s rupiah is down more than 10 percent. While subdued inflation may have reduced underlying pressure on Indonesian policy makers to hike interest rates — consumer prices climbed 3.16 percent in October after rising at their slowest pace in more than two years in September — the central bank has vowed to continue efforts to stabilize the rupiah. Most economists surveyed by Bloomberg see Bank Indonesia hiking rates into next year as policy makers keep their focus on the currency. India’s central bank surprised markets by staying on hold in early October after a significant tightening in financial conditions after back-to-back rate increases in June and August. It flagged risks to growth due to higher oil prices and weaker global growth, both of which could prove to be a drag on domestic expansion in coming quarters.