USA and Canada

[USA] [US:Growth] [US:Fiscal] [US:Monetary] [US:BOP] [US:Domestic Politics] [US:Geopol]





[Twitter: EMgist latest]

  • Strategy:   

    • SPX

      • Higher UST yield, deregulation support banks (12 Mar-18): In terms of strategy, we remain directionally biased for higher UST rates, which also anchor our bullish view on US banks relative to the S&P 500 (SPX INDEX). The US Senate is also expected to pass a financial deregulation bill this week that intends to loosen post-GFC Dodd-Frank rules. 

        • We are also fading the US steel and aluminum tariff announcement on 1-2 March as the prospect of more exemptions dilute its initial impact. We hold relative value shorts to Ak Steel Holding Corp (AKS US) and Cleveland Cliffs vs Japanese counterpart Jfe Holdings Inc (5411 JP). Over the weekend, Australia reportedly earned a tariff exemption and Japanese, Korean and EU ministers are also seeking a similar waiver. Trade rhetoric may cool after Tuesday's special congressional election in a Pennsylvania district that was hit hard by a shrinking US steel industry. On Wednesday, the European Parliament is expected to hear comments on tariffs from the European Commission.​

        • Trade idea (conditional) – Buy VIX on dips towards 13.2 (two-year average) or 13.4 100dma (last 14.6): The CBOE volatility index has nearly completed a round trip. Any further decline towards key levels presents opportunities to accumulate (at a 1:10 or 1:5 ratio to SPX longs) based on a view of structurally higher volatility and some fragility in the SPX while 10yr UST yields remain below 3.00%.

      • No Powell Put (5 Mar-18): For US equities, perhaps the most important takeaway from last week is confirmation that the 'Powell Put' is largely absent (or has a strike price that is very far from current valuations). This - coupled with the prospect of steel and aluminum tariffs - pose risks to the recent equity market rebound, which is the main reason we prefer relative value trades (long banks vs SPX). Our relative short NYSE FANG+ vs S&P 500 has hit our stop at -5% loss.​

      • RV long banks vs FANG+ (26 Feb-18): For US equities, subdued bond yields are likely to be supportive near-term. Within US equities, we are relative value-long banks vs FANG+ stocks and prefer SPX to Euro Stoxx. FANG+ stocks continued to outperform the SPX even as CFTC positioning stayed net short we are doubtful that tech's outperformance is sustainable - in agreement with the majority of participants in our latest poll.

    • UST

      • Short 10yr US Treasuries (target 3.05% by 21 March FOMC) (12 Mar-18): Inflation and economic trends are swinging towards four rate hikes this year, yet the market pricing remains at three. The recent slew of Fed speakers as well as equity market stability also point to the burden of proof increasingly resting on the 'three-hike' camp. The market is only currently pricing in a 26% probability for four hikes this year, which is just slightly above what was priced before the equity correction and despite recent US economic data 'coming to a boil' (see Coming To The Boil - US Overheating Watch #2 - Richard Iley, 9 Mar-18).

      • US Treasury 30-10yr steepener (5 Mar-18): Sustained inflation and economic momentum in the coming months - coupled with a data-dependent Fed that may be more tolerant of an inflation overshoot and whose dot plot could lag market-pricing for hikes - would be supportive for a re-steepening in the US Treasury curve. Treasury supply comes to fore again early next week when the 10yr and 30yr bonds are reopened (Mon/Tue) around the time inflation data are due (Tue). One main risk to this trade is the prospect of a global slowdown, including one possibly induced by intensified trade protectionism.

      • UST curve flattening (15 Nov-17): Market discussions revolve around whether they are a harbinger for monetary policy mistake and imminent recession - or simply a (more-benign) reflection of tighter monetary policy. Along with gradual Fed hikes, skepticism over the US economy to meet LT inflation targets, downsized expectations of fiscal/tax stimulus and short-dated supply (Treasury Department is set to issue relatively more short-term debt), the curve may flatten further into 2018. Curve steepening is challenged by long-term inflation expectations not much >2%, where both 10-year and five-year/five-year forward breakevens hover. As for whether UST curve flattening portends recession, over the last 30 years, flat curves have preceded recessions but lags have sometimes lasted years. During the 1990s, the 10-2yr curve remained for 5 years at <50bps before a recession (caused by the tech bubble). In the late 1980s and mid-2000s, the UST curve had inverted for 2 years before a recession.

    • USD:   

  • Macro:

    • 21 May-18: UST - Steepening on oil, Fed: Last week's bear-steepening sharply reversed the previous weeks' bull-flattening - with 10-2yr spread ending the week at 51bp. The nearly 2mth-high on Thursday (55bp) coincided with a brief spike in Brent oil prices above $80 as well as renewed Fed concerns over curve inversion.

      • ​UST price action likely did not come from stronger growth momentum. Despite a string of stronger-than-expected second-tier economic data - Empire manufacturing, IP and Philly Fed business outlook - US April retail sales came in more muted versus forecasts/prior (headline/core 0.3% mom). 

      • Instead, UST curve steepening likely mostly came from Fed signals over forward guidance and the yield curve:

        • Forward guidance - Questions over usefulness: Last week saw commentary from Fed speakers regarding the usefulness of the dot plot:

          • St. Louis Fed's Bullard said it's outlived its usefulness: "The whole idea that you’re naming the number of rate hikes way out into the future when you don’t know what the data are going to be is something we should get out of the business of doing".

          • Fed Williams said that the justification for forward guidance is waning as the Fed approaches the long-term neutral rate: "This forward guidance, at some point, will be past its shelf life".

        • Curve inversion warnings: Last week saw heightened concerns over the possibility of yield curve inversion. In addition to the usual suspects (Kaplan and Bullard), there was surprising candour from Atlanta Fed's Bostic, who had not previously cited UST moves as a deterrent to Fed policy: 

          • I have had extended conversations with my colleagues about a flattening yield curve ... we are aware of it. So it is my job to make sure that doesn’t happen" - Bostic on the possibility of US Treasury yield curve inversion

        • This week's FOMC Minutes (Wed) may add more color on the median view around forward guidance and curve inversion. We also monitor Chair Powell's comments at the Riksbank Conference (Fri) as well as any retraction from Bostic, who speaks twice this week (Mon and Fri).

      • For now, the Fed's 'symmetric' inflation target policy and concerns about curve inversion - coupled with chatter about de-emphasizing forward guidance - keeps front-end relatively anchored while potentially raising long-end term premium and therefore supporting mild curve steepening pressure near-term.

      • Over the past month, the NY Fed's term premium model became less-negative by 25bp (current: -30bp), roughly in line with ~20bp rise in UST 10s.

    • Week ahead - Inflation (12 Mar-18): While CPI (out Tue) captures the most attention, don't underestimate potential information value from PPI (Wed) and import prices (Thu) given tightening capacity, rising trade protectionism and continued fluctuations in the dollar. First, February US consumer inflation out Tuesday is unlikely to reverse expectations for a medium-term drift higher. January tends to see a seasonal pick-up, so it would not be a surprise to see a monthly deceleration - and this is expected by consensus (headline to 0.2% from 0.5% mom, core 0.2% from 0.3% mom). The annual figure, however, is forecast to be stable-to-mildly higher: headline 2.2% from 2.1% yoy and unchanged core 1.8%.

      • Statistical effects are unfriendly to CPI from March through June and this is well-telegraphed for some time. Nevertheless, the extent of consensus inflation forecast revisions in recent months is noteworthy: June 2018 headline CPI is now seen at 2.50% yoy (up +30bp from Nov-18).

      • Consensus forecasts for core PCE - the Fed's preferred inflation gauge - is being revised higher and now expected to rise +40bp by mid-year from 1.50% in Dec-17.

      • Monthly US CPI has been accelerating, which risks persistent upside momentum in coming months.

      • This week, the US Treasury will issue 3yr and 10yr bonds ($28bn and $21bn, Mon) as well as 30yr bonds ($13bn, Tue). Tbills will also be issued: 3/6mth (Mon) and 1mth (Tue). The monthly budget statement is expected on Monday, which could highlight the medium-term increase in auction supply. January TIC flows (Thu) will be an important indicator of foreign demand, which have been held back recently by high FX-hedging costs for JPY- and EUR-based investors and - in recent months - a less-positive bias on the dollar.

      • US-China trade deficit is recycled into US Treasury holdings. No signs (as yet) of a PBOC 'buyer's strike'.

      • In other US economic data, Tuesday has NFIB small business optimism. Wednesday sees retail sales, which consensus expects to improve: headline +0.3% (prior -0.3%), ex-auto and gas +0.3% (prior -0.2%). A strong retail sales would add teeth to anecdotal evidence of a tax-related surge in consumer confidence. Thursday has Empire manufacturing and Philly Fed business outlook. US housing starts/building permits and UMich sentiment close the week on Friday. 

    • Week ahead - Powell testimony (5 Mar-18): ​The headline event this week is Fed Chair Jay Powell's two days of congressional testimony - beginning with the House Financial Services Committee (Tue), followed by the Senate's Banking Committee (Thu). Prepared text inspired by last Friday's Semi-Annual Monetary Policy Report (link) will be released 90 minutes before the House testimony, but much of the fireworks will take place during multi-hour Q&A sessions. Observers will be alert for signs of anything different from what has been communicated - including a presumed Fed policy of data-dependence and gradual tightening. Comments around financial stability after the recent equity market correction - and sharp rebound - may also be parsed. Strangely, on Day 1 of Powell's testimony, two former Fed chairs Yellen and Bernanke are scheduled for a 'conversation' at the Brookings Institution. If we were on the congressional panel deposing the new Fed Chair, here are some burning questions that we would ask - all of them sniffing for clues around the Fed's reaction function ahead of the March FOMC/SEPs:

      • What are you watching to prove that the US has escaped the era of low inflation and is firmly on the path towards the Fed's 2% goal? How many months of observations would you need to be able to conclude this?

      • The relationship between employment and wages - demonstrated by the Phillips Curve - is non-linear, maybe exponential. If the unemployment rate moves below 4% (current: 4.1%), wouldn't you expect wages to rise by a much larger degree?

      • Is the greater risk now - with a fiscal stimulus working its way - that the economy overheats? 

      • Are you concerned by how much volatility in equity valuations - and in the US Dollar - significantly drive the tightness or loose-ness of financial conditions?

      • ​Alas, however, as we've seen in past Humphrey Hawkins testimonies, congressmen are less likely to ask 'the tough questions' than they are to use the forum as an opportunity for political grandstanding. Ultimately, we do not expect the new Fed Chair to rock the boat. Rather, we think the bar for a fourth rate hike in 2018 from Powell's FOMC remains quite high - until either: More evidence gathers on wages and price pressure (likely a 1-3mth process) and/or markets increasingly price-in the possibility of four hikes (ie the financial market 'tail' wags the Fed 'dog'). ​

US: Growth

Updated 7 Nov-17

Twitter: [US GDP latest]

  • Growth - Resilient but soft patch in 2019 could be frontloaded to late 2018 (?) in no-tax cut scenario

    • Govt - Tax cut (still taking shape) is growth-accretive but estimates vary​: 

      • In a Bloomberg News survey (7 Nov-17), economists said the planned cut will likely boost U.S. economic growth by about one-quarter of a percentage point in 2018 and not reduce the chance of a recession.

      • The Tax Foundation, an independent, right-leaning group in Washington, says over the long run, the House bill would boost U.S. gross domestic product by 3.9 percent, add 975,000 full-time equivalent jobs and increase wages by 3.1 percent.​


US: Fiscal Policy

Updated 23 Jan-18

Twitter: [US fiscal latest] [US tax latest]

  • Fiscal policy - GOP tax bill pulled, twisted, diluted but passage by Q1 2018 still possible

    • US government shutdown (updated 23 Jan-18): 

      • Funding can kicked down to 8 Feb. By then, Schumer (D-NY) expects DACA progress, Thune (R) braces for another (5th) temporary stopgap bill, closer to debt ceiling deadline (between late Feb-early Apr).​

        • Overnight, Congress voted to end 3-day shutdown after Senate Dems accepted deal from GOP McConnell that would fund govt thru 8 Feb in exchange for promise that Congress quickly restore Dreamers protection. Trump just signed the agreement a few hours ago. Schumer says GOP now has 17 days to prevent dreamers deportation. GOP Sen Thune said unlikely Congress will be able to pass final spending bill in 3wks, likely require another (5th) stopgap bill, which brings expiry closer to debt ceiling deadline seen as moving target between late Feb to early Apr.​

    • US debt ceiling (updated 23 Jan-18): 

      • Key dates (Bloomberg, 11 Jan-18): ​

        • 29 Jan: Financing estimates

          • The government will release its latest financing estimates for the current and upcoming quarters on Jan. 29. While this document won’t give a precise breakdown of issuance plans, it will reveal the total amount it expects to borrow quarter-by-quarter, and also the anticipated cash balance at the end of each period. This in turn could provide insight into Treasury thinking on the debt ceiling. The estimates released back on Oct. 30 showed net borrowing of $512 billion with a cash balance of $300 billion by the end of March, an indication that it thought the debt-ceiling would be resolvedsooner rather than later. ​

        • 31 Jan: Refunding statement

          • With the primary dealers surveyed and financing estimates announced, the Treasury on Jan. 31 will outline the particulars of its issuance program for the coming three-month period. On Nov. 1 it said that it anticipated gradual adjustments to the sizes of its auctions for coupon-bearing debt and two-year floating-rate notes at this upcoming release. Investors will have an eye out to see if Treasury holds firm to that commitment or delays supply increases because of debt-limit concerns.​

        • Jan-Apr 2018: Tax season liquidity

          • One wild card is the potential effect on cash balances of tax refunds. Filings can be made any time from Jan. 29 to April 17, but with those expecting refunds typically going earlier than those who owe money, February tends to end up as a deficit month for the government. If refund payments are higher than projected, there is a risk that the extraordinary measures being used by the government are exhausted sooner, which could pull forward the drop-dead date. The recent passage of new tax laws also throws an extra variable into the mix.​

        • 8 Feb: Latest continuing resolution ​(passed/signed 22 Jan-18) expires

        • Mid-to-late Feb: Smaller auctions

          • If the debt ceiling is still looking problematic in mid-to-late February, the Treasury may reduce the size of bill auctions to make room for the coupon-bearing sales​. That would also reduce the volume of late-March maturities that could be “potentially toxic” if Congress is struggling to resolve the ceiling issue as the drop-dead date nears. Bills maturing in late March and early April are seen as the securities most likely to show distortion if worries emerge.

        • 28 Feb: Mnuchin's deadline

          • Treasury Secretary Steven Mnuchin is said to have told Republican congressional leaders that he wants them to raise the government’s borrowing authority by the end of February. During the 2017 showdown, Mnuchin said he would prefer Congress deal with the debt ceiling before leaving for its August recess, and that Treasury believed the cap should be increased no later than the end of September. Congress ultimately settled on a short-term resolution in early September that put the matter off until the current episode.​

        • 9 Mar: BAML estimates that cash will only fall to “precariously low” levels (according to 5 Jan note)

          • Bloomberg (25 Jan-18): The BI U.S. rate strategy debt-ceiling model is forecasting the government to run out of cash and borrowing authority (via extraordinary measures) on March 22. However, the government could come extremely close earlier that month, having under $10 billion of spending authority on March 9. Given the uncertainty about the timing of some tax refunds, all of March has become a concern for delayed payments on Treasury bills and other obligations that pay coupons or mature.​ The government has over $550 billion of debt maturing in March, which will increase should the Treasury issue four-week Treasury bills that month. Interest payments of nearly $8 billion are also scheduled for March. 

        • Mar or Apr: Later deadline?

          • Not everyone is convinced that Mnuchin’s current deadline is the final line in the sand. A Congressional Budget Office analysis released on Nov. 30 projected that the U.S. Treasury could continue borrowing without having to lift the debt ceiling until late March or early April. Bank of America strategist Mark Cabana said in a Jan. 5 note that the new tax law and its impact on worsening the budget deficit will pull forward the potential drop-dead date -- but even he is estimating that cash will only fall to “precariously low” levels around March 9. ​

    • Tax cut: 

      • Reference:

        • The text of the House Tax Cuts and Jobs Act (link)​

        • Details and Analysis of the 2017 Tax Cuts and Jobs Act - Tax Foundation (3 Nov-17)

        • Estimated Revenue Effects Of H.R. 1, The “Tax Cuts And Jobs Act,” Scheduled For Markup By The Committee On Ways And Means On November 6, 2017 - Joint Committee on Taxation (2 Nov-17)



US: Monetary Policy

Twitter: [US Fed latest] [US CPI latest]

  • Views: 

    • Higher dot plot more likely in June than in March 2018 (5 Mar-18): We think that the bar is quite high for a data-dependent - albeit more confident - Fed to raise its median dot plot this month (this is more likely in June). There is little incentive for the Fed to raise the market's expectations without a few more months of observations. Whereas the downside of prematurely doing so - at the risk of changing guidance mid-year if data unexpectedly slow or even reverse - could impair the credibility of the new FOMC. Employment and inflation data this week and next would have to strengthen by such a large magnitude (for example, to <4% unemployment rate, >3% AHE, >2% core CPI) to provoke a sufficient number of FOMC members to raise their expectations.  

      • At this stage, we assume only a very small (10%) probability that the median dot will move higher on 21 March. We assume a higher probability (50%) that the median dots will move in June, 20% in September and 20% that it does not rise at all this year. 

      • For the median dot to move higher, we would need to see at least three 'consensus' FOMC members to join the three members currently in the four-hike camp. After Fed Chair Powell's congressional testimony last week, markets will monitor this week's slate of Fed speakers for any signs of greater confidence around Chair Powell's four tailwinds - namely: “[1] Continuing strength in labor market ... [2] Some data that will add some confidence to my view that CPI is moving up to target ... [3] Continued strength around globe ... [4] Fiscal policy become more stimulative."

      • We're also watching for additional clues about the committee's tolerance for  overshooting the 2% inflation target. This question over the symmetry of the inflation target is likely to be debated internally as inflation drifts higher. This is the dilemma implicit in Powell's statement: “We’re trying to balance risk of getting CPI up to 2% with risk of economy overheating." We expect those in favour of symmetry (in Kashkari's camp) to ultimately make their case, which would reinforce our view of a data-dependent Fed that requires more observations before signalling a change to rate trajectory.

      • The Fed speakers we are watching most closely this week are the four voters (Quarles, Dudley, Bostic and Brainard). The first three are likely 'median dots', while Brainard is believed to be in the 'two-hike' camp - so any comments that soften her views around labor market slack could be significant. The schedule of Fed speakers this week are as follows: Quarles (voter, neutral) on Monday; Dudley (voter, neutral, leaves mid-2018), Kaplan (hawk), Brainard (voter, dove) on Tuesday; Bostic (voter, neutral) on Wednesday; and Rosengren (hawk) and Evans (dove) on Friday. The Fed Beige Book (Wed) will provide granular anecdotal data on economic conditions in different regions.

      • Fed Funds Futures have nearly discounted three hikes in 2018. We think continued strength in labor markets and inflation trends in coming months makes it likely that the market tentatively prices-in four hikes (in early 2Q18) even before it is reflected in the Fed's dot plot (likely 13 June).

  • Commentary: 

    • Post-21 Mar-18 FOMC

      • Bloomberg (22 Mar-18): “The Powell Fed is proceeding with a similar sense of gradual deliberation, at least for now. The dot plot revealed policy makers shifting toward a faster pace of tightening in outlying years, consistent with Bloomberg Economics’ expectation for them to “backfill” rate hikes into 2019-2020.”

  • Fed: The dot plot median currently shows a Dec-17 hike and 3-4 hikes in 2018, much higher than than the market is projecting. The credibility of the Fed's latest dot plot depends on the inflation outlook (Phillips Curve relationship) and continued resilience in jobs/real economy. There are some signs that Fed members are watching the UST markets and whether continued curve flattening could deter the Fed from hiking at the currently projected pace.

    • People:​ Following Jerome Powell's nomination to be Fed chair, there are four vacancies on the seven-member Fed Board for President Trump to fill. Trump's appointees could significantly alter the Fed's reaction function in 2018.

      • Board of Governors: Always votes, no matter the rotation

        • Chair Jerome Powell: Neutral

        • Vice Chair of Board of Governors (vacant, formerly Fischer)

        • Vice Chair of Supervision Randal Quarles: Neutral

        • Lael Brainard: Dove

        • Governor (vacancy)

        • Governor (vacancy)

        • Governor (vacancy)

      • Voting Regional FRB Presidents:

        • William Dudley, Vice Chair of FOMC (New York, retires mid-2018): Moderate dove

        • Thomas Barkin (Richmond, temporary): Hawk

        • Loretta Mester (Cleveland)​: Hawk

        • ​Raphael Bostic (Atlanta): Neutral

        • John Williams (San Francisco): Moderate hawk, 2018 voter

      • Alternative voters: Votes in the absence of a voting member

        • Esther George (Kansas City): Hawk

        • Eric Rosengren (Boston): Moderate hawk

        • Charles Evans (Chicago): Moderate dove

      • Non-Voters:

        • Patrick Harker (Philadelphia): Moderate hawk

        • Robert Kaplan (Dallas): Neutral

        • Neel Kashkari (Minneapolis): Dove

        • James Bullard (St. Louis): Dove

          • Further curve flattening “would in my view be a vote of no confidence in markets that we have the story right about what is going to happen to inflation going forward​" - Bloomberg (15 Nov-17)

  • Money markets:

    • Latest:​

      • 14 Mar-18: Money market rates (Libor, Tbill yields) rising:​ Higher short-term borrowing costs have implications for investors and banks, which find themselves paying up to borrow through the commercial-paper market as they compete to lure cash

        • Impetus: ​

          • More Tbills issuance: Net issuance is slated to exceed $400 billion, with the bulk coming in bills. The Treasury increased the size of the four-week bill sale to $65 billion, from as low as $15 billion earlier in the year, and bidding has had some difficulty in keeping pace. The bid-to-cover ratio at Tuesday’s auction was just 2.58, the second-lowest at the tenor since 2009, while borrowers demanded a yield of 1.65 percent, the most since 2008​

          • Tax overhaul reduces companies' incentive to keep cash abroad, curtailing demand for unsecured USD funding -- Libor and commercial paper -- and driving rates higher

          • More CP supply drives rates higher: Once-dwindling commercial-paper market is reviving, with the amount outstanding on the rise

          • Higher collateral rates: Tbill supply boosted the amount of collateral available in secured-funding market, pushing those rates higher. Steeper rates on repurchase agreements make it more expensive for dealers to finance debt holdings

        • Libor-OIS has widened, doubling this year to 47bp, in sign that banks face steeper funding costs

        • For banks, increasing appeal of Tbills is making them pay up to compete, by offering better returns on commercial paper they use for short-term borrowing



Twitter: [US Trade latest] [Nafta latest]

  • Trade

    • Protectionism:​

      • Views:​

        • 21 May-18: US-China trade talks - Bumpy road to a stalemate: It was a volatile week for US-China relations replete with mixed signals and drew in Korea and tech national champions. Last week saw Trump tweets about getting ZTE 'back into business' as well as an allegation that Beijing is 'influencing' Pyongyang's threat to halt peace talks. White House economic adviser Kudlow suggested that China offered to reduce the trade deficit by $200bn - a figure that was contested by Beijing.

          • In the end, the joint statement referred to China 'significantly' increasing its purchase of US goods and services with no mention of the $200bn-target. The two sides agreed to put tariffs 'on hold', while discuss how China would import more energy and agriculture. Reference to ZTE or 'Made in China 2025' were excluded in the joint statement.

          • Xinhua reported Liu He as saying that the 'two sides agreed not to launch a trade war and to stop slapping tariffs against each other, which are the most remarkable fruits of the consultations'.

          • We think US pressure on China is likely to remain - likely re-intensify in a few months - given no US political party wants to be seen as soft on Beijing. Future disagreement on specific products and amounts are likely to re-intensify Chinese antagonism towards the US midterm elections. See also Christopher Balding's latest: US China Trade Non-Deal Deal (20 May-18).

          • We also wonder if the EU will raise the stakes in its pursuit of permanent steel and aluminum tariff exemptions and in defense of its firms from Iran-related sanctions - while simultaneously uniting with the US in applying pressure on China. Note that Germany's Chancellor Merkel meets China's Xi Jinping in Beijing (Thu).

        • 14 May-18: US-China trade - Take two: With Beijing and Washington far apart towards a negotiated agreement - as China increasingly plays offence and the list of demands from/on both sides grow - markets will monitor any news arising from Chinese Vice Premier Liu He's visit to Washington (expected Tue). While on one hand, the continuation of meetings suggest both sides are open to an agreement, the gulf of difference remains wide.

          • Liu He's challenge is to balance appearing conciliatory (e.g. showing goodwill in trade negotiations and policy action) without appearing to capitulate. To a global audience, China wants to show it is able to ratchet tensions lower. Inside China, the conduct of negotiations could be watched closely by hard line economic nationalists and market reformists alike. Finally, to the Trump administration, a negotiated settlement must be packaged in such a way that Trump can declare victory without having overridden China's interests.

          • Chinese 'carrots' and low-hanging fruit: The main areas for near-term agreement include those where Beijing can offer 'carrots': 1/ The trade deficit: With token MOUs to purchase more US-made products (e.g. oil). 2/ Beijing can signal approval of cross-border transactions (e.g. Qualcomm-NXP). 3/ Commitment to open select markets to foreign competition. Current negotiations can be convenient catalysts to accelerate market reforms already in the pipeline. However, even market liberalization can be a policy lever (Beijing can still control the participation of US firms). 

          • Sensitive sectors more difficult to address: However, in the broader topic of industrial and technological advancement, we think negotiations may drag past the summer. China's long-term shift away from traditional growth drivers (heavy industries with excess capacity) to higher value-added, information-intensive sectors is likely to remain an area of conflict with the US/other economies that have long-held a competitive advantage.

          • How anti-China rhetoric could benefit the GOP: Also, in our view, it may be more politically advantageous for Trump to continue to antagonize China during the midterm election campaign season - until striking a 'good' deal just before the midterm elections. For this strategy to succeed, we offer some preconditions - the American public must ... :

            • 1/ Continue to have faith in Trump's deal-making. Trump's credibility could be shattered if his tactics do not produce desired results elsewhere (e.g. Nafta, North Korea, Iran).

            • 2/ Be ready to stomach the potential economic and financial volatility/negative consequences of the current strategy. If Chinese retaliation lead to GOP/Trump disunity over the current strategy, then it will be more difficult to arrive at a deal.

            • 3/ Feel better-off after the deal. Given that compromises may be required on both sides, the packaging of any deal will be important. When all is said and done, Trump must appear to have acted strong on China and scored tangible benefits. If Americans think they are worse off, then the GOP/Trump are unlikely to reap the rewards of a pre-election bounce.

          • US business have their say: This week, over three days (Tue-Thu), the Trump administration holds a public hearing on the proposed tariffs on $50bn of Chinese goods. Initially set for Tuesday (only), it was extended over three days to accommodate ~130 companies/industry groups who want to testify (including US Steel, Best Buy, HP). 

        • 5 Mar-18: We don't expect blanket steel tariffs: On tariffs, ultimately, we think sober heads will prevail and instead see a high probability (75%) that the Trump administration moves towards targeted measures rather than a blanket steel tariff. The lack of specific details on the tariff announcement (e.g. whether blanket or targeted, any country/product exemptions, implementation period or even when the order will be signed next week) suggests this Trump's declaration is amenable to lobbying efforts in coming days from US businesses and steel importers (incl. car and machinery makers) and diplomats from 'collateral damage' countries that export more steel to the US than China. Moreover, the administration's sensitivity to stock market fluctuations may add pressure to reduce the scope for any tariffs. Finally, if a primary intention is to 'sound tough on trade' - or to specifically antagonize China - the Trump administration may have already achieved this through initial media-grabbing headlines without having to follow-through in neither substance nor implementation.​


US: Domestic politics

Updated 7 Nov-17

Twitter: [US Trump latest] [US GOP latest]


US: Geopolitics

Updated 7 Nov-17



Updated 7 Nov-17

[Twitter: EMgist latest]

  • Summary: 

    • Macro: ​

    • Strategy: 

      • CAD - Strategic short​


USA and Canada

[USA] [US:Growth] [US:Fiscal] [US:Monetary] [US:BOP] [US:Domestic Politics] [US:Geopol]





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US - UST 12mth Tbill - Bberg 18-03-14