Yellen Raised China's Hopes for Tariff Cut; U.S. Politics Will Crush Them

China-U.S. Relations

Summary:

U.S. Treasury Secretary Janet Yellen's trip to China has raised hopes in Beijing that Trump-era tariffs on Chinese imports may be eased as she tries to smooth relations between the two nations, but strong anti-China sentiment in the U.S. may make that impossible.

Trade and political analysts in Washington say that even though cutting some of the "Section 301" tariffs would help U.S. companies and consumers, as well as Chinese exporters, doing so would expose Biden to a buzz-saw of Republican criticism at a dangerous time.

"The political calculus is pretty clear," said Harry Broadman, a former White House, World Bank and U.S. trade official who is now a managing director with Berkeley Research Group. "That would be red meat for the opposition."

Looking soft on China could cost Biden the 2024 presidential election, he said, adding that anti-China sentiment in the U.s. is four years, fueled by former President Donald Trump's China policies.

High Hopes in China

Yellen discussed trade irritants and other policy differences with China's top economic officials and Premier Li Qiang for a marathon 10 hours over two days last week -- meetings that she said put U.S.-China ties "on surer footing."

U.S. tariffs and high technology export controls to Beijing's new anti-espionage law that threatens the activities of U.S. companies in China were among the topics, the U.S. Treasury said. Yellen said nothing publicly to indicate that the U.S. was poised to ease tariffs, but commentators in China were hopeful, amid a U.S. Trade Representative review.

In a statement on Monday, China's Finance Ministry called for the U.S. to cancel punitive tariffs, roll back export curbs and end import bans from Xinjiang province.

"Yellen has a say in the next phase of the U.S.'s four-year tariff review," said Hong Hao, chief executive of Grow Investment Group in Hong Kong. "While U.S might continue its technological curbs on China, a reduction or exemption of non-core tariffs against China is possible."

China's state-run Global Times, normally a harsh U.S. critic, called Yellen a "professional and pragmatic" official who could influence the Biden administration to take such steps to improve the economic relationship.

Yellen last year advocated eliminating some duties on "non-strategic" goods as a way to ease some specific costs amid high inflation.

But U.S. political pressure to raise China tariffs is growing, said Chad Bown, a trade economist with the Peterson Institute of International Economics who has researched them extensively.

"There is no political appetite to reduce tariffs on China – Secretary Yellen will do well in this political climate if they manage to stay where they are," Bown said.

U.S. officials have been tight-lipped about any response to the Chinese call for action, noting that no new initiatives were under way. A U.S. Treasury spokesperson declined comment on tariffs.

A USTR spokesperson said the agency was continuing its review and was evaluating feedback received, nearly seven months after it closed public comments.

Collections of U.S. tariffs on Chinese goods peaked at $49 billion in fiscal 2022, bringing the total amount collected from U.S. importers over four years to $182.9 billion, according to U.S. customs data.

U.S. imports from China had nearly reached their 2018 peak in 2022, but are down 24% so far this year.

Endless 'groveling'

Hardliners who dominate China discussions within the U.S. Republican party took to social media memes to mock Yellen for appearing to bow to Chinese vice premier He Lifeng at the start of a meeting.

Firebrand Republican Senator Josh Hawley said in a tweet that such "embarrassing groveling to China is a historic mistake."

Republican presidential hopefuls have adopted confrontational rhetoric with respect to China, which they see as the nation's top geopolitical foe.

Florida Governor Ron DeSantis and former UN Ambassador Nikki Haley have laid out the most specific plans so far to confront China on trade, and advocate revoking China's permanent normal trade relations status, a legal designation granted by the U.S. that lowers trade barriers with specific nations.

Haley has said she would push Congress to revoke China's trade status until China curbs its alleged role in the fentanyl trade. China is a major producer of chemicals required to create fentanyl, which is frequently smuggled over the U.S.-Mexico border.

Former President Donald Trump, who leads the Republican field with DeSantis a distant second, told Reuters that he would give China 48 hours to remove what sources say is Chinese spy capability on the island of Cuba 90 miles off the U.S. coast. If China fails to comply, his administration would impose new tariffs.

Source: Reuters

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Devin

Higher Deficit and Unidentified Outflows Weigh on Reserves in Turkey_1

External developments remained challenging in May with another higher-than-expected current account deficit of US$7.9bn, widening the 12M rolling figure further to $60bn (translating into around 6.1% of GDP), the highest since late 2013. A quick glance at the May data points to a similar performance in the services balance with respect to the same month of 2022, although there was a relatively wide deficit in the goods balance driven by higher core trade and gold deficits despite the improving energy trade balance.

Higher Deficit and Unidentified Outflows Weigh on Reserves in Turkey_2

The capital account, on the other hand, witnessed net outflows of $-1.2bn. With the monthly current account deficit and outflows via net errors and omissions at $7.4bn, official reserves recorded another large decline at $16.6bn (not only the cumulative deficit in the first five months but also part of large unidentified outflows at $13.7bn in the same period).

In the breakdown, contributing to net monthly outflows, we saw asset acquisitions abroad by residents at a net $8.0bn, driven by growth in external deposits and trade credits extended by locals. For the non-residents, $6.8bn inflows were attributable to $0.7bn gross of foreign direct investment, $5.1bn of deposits placed by foreign investors to the Central Bank of Turkey, $1.6bn of trade credits and $0.7bn net borrowing by banks.

On the flip side, we see outflows via declining equity assets of non-residents at $0.6bn. Regarding the rollover rates, we saw a strong performance for banks at 142% on a 12M rolling basis (vs 86% in May alone), while the same ratio for banks stood at 85% (a healthy 130% in May).

Higher Deficit and Unidentified Outflows Weigh on Reserves in Turkey_3

Overall, the data once again confirm a growing need for a rebalancing in the economy. Going forward, we will likely see an improvement in the current account as evidenced by the normalisation in energy prices and continuing strength in tourism, while a recovery in global demand should also be supportive of the foreign trade balance.

Continued strength in domestic demand points to upside risks to imports, however recent currency weakness in the aftermath of elections and tightening in the policy mix has led to a slowdown, helping to control import growth.

On the capital account, total flows have remained weak in the absence of strong unidentified inflows, leading to pressure on international reserves so far this year. Going forward, a pivot to a more conventional policy stance will likely be critical for recovery in investor confidence and hence capital inflows.

Source: ING

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Damon

Economic

World markets leaned positively into another critical U.S. inflation report later on Wednesday, seeding a dollar slide to two-month lows that's revved-up yen and sterling gains.

The importance of the monthly U.S. consumer price report for Federal Reserve thinking and the entire U.S. rates complex is not hard to see. For now, futures are confident of at least one more quarter-point Fed hike this month but still see less than a 50-50 chance of another move by yearend.

And June's CPI readout should be a marker if the consensus forecast for almost a full percentage-point drop in the headline inflation rate to two-year lows of just 3.1% is borne out. Perhaps more important for the Fed, however, is how much the now higher "core" rate of inflation recedes - and that drop is expected to be by a more modest 0.3 point to 5.0%.

Still, encouraged by a screed of other positive disinflation signals this week, U.S. markets are relatively buoyant going into the release and still feel the end of the Fed rate rise campaign is nigh.

U.S. stocks, climbed for the second day in a row on Tuesday and S&P500 futures are positive ahead of today's open - with more signs of rotation in the outperformance of small cap stocks versus the mega cap tech sector, while banks advanced ahead of second-quarter earnings later this week.

Fed futures haven't shifted much, but Treasury bond yields continue to walk back from last week's peaks and volatility there has ebbed a bit - with one eye on a 10-year Treasury auction later in the session.

But the dollar's ongoing slide was most notable.

Alongside thoughts of 'peak Fed', speculation seems to be rising once again that the Bank of Japan will gradually wind-down its super-easy monetary policy stance over the coming months. The dollar/yen exchange rate, now almost 4% down from mid-year peaks, skidded to its lowest in almost a month.

Spurred by aggressive expectations of Bank of England interest hikes far above the Fed's, in order to rein in Britain's outlying inflation problem, the pound briefly hit its highest in 15 months on Wednesday before recoiling. UK bank stocks pushed higher on the rates view and a relatively clean bill of health from Wednesday's financial stability report from the BOE.

Other central banks also gave some cause for applause.

The Reserve Bank of New Zealand paused its long-running rate rise campaign early on Tuesday. And although the Bank of Canada is expected to raise rates another notch later in the day, the decision will be watched closely for hesitation there too.

Elsewhere, Asia bourses were mixed. Japan's Nikkei dialled back amid the sharp yen gains. Shanghai stocks fell, but Hong Kong added more than 1% on this month's optimistic noises about tech sector regulation and upbeat credit data. European indices were up smartly.

The deals world was enlivened as Microsoft cleared major hurdles to its plan to buy videogame maker Activision Blizzard on Tuesday after a U.S. judge gave a thumbs-up to the $69 billion deal and a British regulator suggested it could reconsider its opposition. Activision shares surged 10% and Microsoft shares rose 64 cents to $332.47.

Events to watch for later on Wednesday:

* U.S. June consumer price report

* Bank of Canada policy decision

* Federal Reserve issues 'Beige Book' of economic conditions

* Richmond Federal Reserve President Thomas Barkin, Atlanta Fed President Raphael Bostic, Minneapolis Fed chief Neel Kashkari and Cleveland Fed boss Loretta Mester all speak

* U.S. President Joe Biden at NATO summit in Vilnius

* U.S. Treasury sells 10-year notes Dollar Swoons in Upbeat Inflation Vigil_1

Dollar Swoons in Upbeat Inflation Vigil_2

Dollar Swoons in Upbeat Inflation Vigil_3

Dollar Swoons in Upbeat Inflation Vigil_4

Dollar Swoons in Upbeat Inflation Vigil_5

Source: Yahoo

To stay updated on all economic events of today, please check out our Economic calendar

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Kevin Du

Cryptocurrency

Crypto market capitalisation rose by 0.5% on the day, approaching 1.2 trillion. The trend of capitalisation growth has been in place since the beginning of the week. Although the bulls' attempt to accelerate has failed to gain traction, the market is approaching these local highs again as of early Wednesday afternoon.

Bitcoin is up 0.6% at $30.8K and is approaching the upper boundary of its short-term range at $31.4K. Only a break above this level will indicate that the market is ready for further gains, with potential targets near $35.5K by the end of the month. Bitcoin is Gaining Momentum_1

Bitcoin's capitalisation is 50% of the total market and has been trending higher since the end of last year, coinciding with the turnaround in global equity indices. At the same time, it remains in a long-term downtrend, thanks to increasing competition from altcoins. However, increasing regulatory pressure poses a more significant threat to the latter.

The market is experiencing a period of "reaccumulation", which often occurs when halving is imminent, Glassnode notes. Previous such periods have resulted in several months of sideways trading. The Network Value to Transactions Ratio (NVT Ratio) indicator, based on 28 DMAs, suggests a "fair value" for Bitcoin of $35,900, above current prices for the first time since November 2022.

Spot trading volumes on centralised exchanges increased by 10.4% in June, while cryptocurrency futures trading volumes rose by 9.5%.

News background

According to K33 Research, employment in the cryptocurrency sector fell by 10% last year, from 210,000 to 190,000. The industry has around 10,000 companies with a total value of about $180 billion.

Bank of England Governor Andrew Bailey said that Bitcoin and other cryptocurrencies do not meet the standards of money. He said they are better classified as "highly speculative investments".

The UK's Financial Conduct Authority (FCA) has shut down 26 crypto ATMs in various cities nationwide for illegally offering cryptocurrencies. The regulator also warned consumers of these services that they could lose their money.

After the BRICS countries launch a gold-backed cryptocurrency in August, the US dollar will "die", and bitcoin will rise to $120,000 in 2024, warned Robert Kiyosaki. He once again urged people to buy gold, silver, and bitcoin.

Source: FxPro

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Devin

Central Bank

Central banks aren't ready to see the glass half full

There are plenty of indications that inflation pressure in developed markets is easing… if you're willing to believe in survey data and leading indicators. Germany's Zew saw another decline in July although, as a survey of investors' sentiment, we're never quite sure if it leads economic data or the other way around. More telling perhaps were the details of the National Federation of Independent Businesses (NFIB) index showing a slowdown in selling prices and compensation. Even the UK labour indicators showed easing supply constraints, although private sector wages are likely to give the Bank of England (BoE) sleepless nights. All is heading in the right direction then if you're willing the see the glass half full.

But that's not how central banks see it. Past forecast mistakes and too slow a pace of disinflation (we're not even sure we can yet talk of disinflation in the UK) mean they are likely to err on the side of remaining too hawkish for too long. The Bank of Canada (BoC) meeting today should deliver the second 25bp hike since it restarted its hiking cycle last month. Rightly or wrongly, it is seen as a bellwether for other central bank decisions later this month, and in early August in the case of the BoE. The Fed's decision is seen as more momentous for other central banks, given how a strong dollar could complicate their own fight against inflation. This makes today's U.S. CPI a very important data input into central banks' July decisions.

The problem for rates markets is that, much like the leading/lagging indicators dichotomy, there are two ways to look at today's report. With base effects and energy pulling the headline annual number back very close to 3% (if consensus is to be trusted), investors are likely to be showered with headlines of the 'inflation is back to its lowest level since early 2021' kind. The reality is more nuanced. A 0.3% monthly rate on both the headline and core readings is consistent with 3.6% annual inflation. Progress, but celebration is premature when the source of inflation is now moving to much less mean-reverting components, and last month's job report suggests wages are not letting up either.

Higher for longer vs panic hikes

There are two ways to deal with stubbornly high inflation and an economy that, so far at least, doesn't seem that bothered by the amount of policy tightening delivered in this cycle. One is the Fed's. In short, signalling that the peak is near but that rate cuts are still a long way away. This isn't an easy message to deliver, but the Fed has had some success. The curve still prices 125bp of easing in 2024, and the Fed's 'dot plot' signals 100bp. If the strategy is to signal 'higher for longer' rates, this may well be the next target for the Fed.

Contrast that with the BoE's 50bp hike last month. It's an open question whether this hike will be repeated in August. Next week's inflation print, especially the services component, is widely seen as the final piece of the jigsaw. A repeat would speak to a different strategy to the Fed's, whereby rates are raised to however high is necessary in order not to lose credibility. With policy rates already at 5%, confidence that rates will eventually drag on the economy is growing. To us, this points to differing curve dynamics, where the U.S. short-end curve may well re-steepen to reflect steady policy rates for a longer period of time, while the UK curve should invert further.

Today's events and market view

Ahead of a busy Northern American calendar, this morning's list of European events is rather thin. Spain's CPI reading will be a final release, and BoE Governor Andrew Bailey's speech should be focused on financial stability, and so less likely to comment on recent data.

Bond supply today will come from the UK, U.S., and Germany selling 10Y debt, and Portugal selling bonds with 2029 and 2035 maturity.

The main dish on today's economic menu will be the U.S. CPI report where the core and headline readings are still expected to grow at a 0.3% monthly pace, which annualises to 3.6%. The annual headline figure converging to 3% for the first time since March 2021 may be what headlines focus on, however.

The Bank of Canada's (BoC) decision to restart its hiking cycle in June after a five-month hiatus is largely expected to be followed by another 25bp hike. Any indicator on the pace of future hikes will likely be parsed by investors in other currencies, seeing the BoC as a bellwether for other developed market central banks.

Source: ING

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Samantha Luan

Forex

USD: Benign CPI could unlock a leg lower lower in the dollar

Another European morning follows another Asian session where USD/JPY has led the dollar lower. The Japanese yen has now appreciated 3.6% against the dollar over the last week, closely followed by NOK (+3.4%), SEK (+2.7%) and CHF (+2.4%). We discussed some of the push-pull factors driving the dollar in yesterday's update, but the outperformance of these underdog currencies clearly points to some position adjustment at work. The broad-based nature of the rally in these currencies suggests investors may be anticipating a more benign U.S. price environment like the one we saw in November last year when the U.S. started to print core inflation at 0.3% month-on-month after a string of 0.6% releases.

That nicely brings us to today's main event, which is the June CPI release at 14:30CET. Expectations are for a more benign 0.3% MoM core reading - the lowest since last November - and base effects bringing the headline CPI down to just 3.1% YoY - the lowest since March 2021. Assuming no nasty upside surprises here, this may be enough to firm up a view that a 25bp Fed hike may well be the last in the cycle. If so, DXY could make a run at the year's lows near 100.80.

A quick word on the yen. Developments in USD/JPY - especially the sell-off in early Asia - seem to be led by selling in the JGB bond market. Here, 30-year JGB yields are rising - spreads between 30-year U.S. and Japanese government bonds have narrowed 12bp over the last week - and the Nikkei equity index is underperforming. This has all the hallmarks of position adjustment before the 28 July Bank of Japan (BoJ) policy meeting, where expectations are growing that the BoJ could switch to targeting the five-year part of the JGB yield curve - another small step to policy normalisation. In short, then, this USD/JPY move looks driven by the private not public sector (i.e. no intervention) and something like 138.25 looks like a near-term target for USD/JPY assuming today's U.S. CPI data does not surprise on the upside.

EUR: Going along for the ride

Yesterday's price action was a little strange. EUR/USD opened bid in Europe, but spent the rest of the session edging lower even though the U.S. NFIB pricing intentions survey did dip as we expected. EUR/USD opens Europe bid again today and as above, the U.S. CPI print is going to be the main story. This may be one of the next chances that EUR/USD has of breaking above 1.1100 this month.

One side issue here. Tomorrow sees eurozone finance ministers meet in the Eurogroup format. On the agenda is fiscal policy for 2024, which given the inflation problem, might be more minded to bring forward fiscal consolidation and a return of the Stability and Growth Pact budget constraints. Tighter fiscal policy could see ECB tightening expectations priced lower and perhaps see the euro underperform a little - albeit in a potentially soft dollar environment.

Also, today look out for a speech from ECB Chief Economist Philip Lane at 15:45 CET. Let's see whether he supports market pricing of two more 25bp ECB hikes later this year.

We favour a little more EUR/USD upside today - but that's very much dependent on the U.S. CPI data.

GBP: 1.30 will be tough for cable

Sterling and UK interest rate markets did eventually respond to the higher wage data yesterday. Today, the Bank of England has just released its Financial Policy Summary and Record. Headlines suggest large banks have passed stress tests while smaller lenders and shadow banks remain a concern though UK households with high debt will remain below their peak of 2007. At first glance, there seems nothing here to urgently constrain the BoE's monetary tightening plans.

U.S. CPI will determine whether GBP/USD dramatically trades through 1.3000 - there is an outside risk to 1.33 should we see a November 22-style move in the dollar. But it is probably better to stay cautious here and after a good rally so far this month, 1.30 could be difficult to break. EUR/GBP has broken to a new low - but again 0.8500 might provide some psychological support.

CAD: We expect a BoC hike today

The Bank of Canada surprised markets with a hike in June, and our base case is that policymakers will follow up with another 25bp increase today. As discussed in our preview, the data flow since the June meeting has not pointed unequivocally in the direction of more tightening, but the latest jobs report continued to point to a tight jobs market and we see a higher chance that the BoC will favour two back-to-back hikes after a five-month pause.

The consensus has been split lately but has leaned more in favour of a hike in the past few days. Markets price in around 17bp ahead of today’s announcement. There is undoubtedly some upside potential for CAD today in our baseline scenario, especially because the BoC may see the advantage in attaching a dovish statement to a hike, so closing the door to further tightening if needed. USD/CAD could be eyeing the 1.3120 late-June lows, and we like the loonie even more against other procyclical currencies like the Australian dollar or the Swedish krona.

Source: ING

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Alex

Central Bank

Australia's top central banker said on Wednesday he is confident higher interest rates are working to cool inflation but it is possible they will have to rise further, suggesting a decision on whether to resume hiking in August may be a close one.

Reserve Bank of Australia Governor Philip Lowe also announced changes to how the central bank formulates and announces interest rate decisions, including fewer but longer meetings, after a review recommended sweeping changes to the decades-old institution.

The RBA held rates steady last week, having raised interest rates by a whopping 400 basis points since May of last year to an 11-year high of 4.1%, saying it wanted time to assess the impact from past hikes.

"The Board is very conscious that monetary policy operates with a lag and that the full effects of the tightening to date have not yet been felt," Lowe said in a speech to economists in Brisbane.

"We're confident that what we're doing is working. The question mark is how much more do we need to do? And we have got a completely open mind on that question."

Lowe noted that the board would have an updated set of economic forecasts next month as well as a revised assessment of the balance of risks, which would help to inform the August decision.

Markets took the comments from Lowe as slightly dovish, with three-year bond futures rising 8 ticks to a session high of 95.97. Investors are divided on whether the RBA will raise rates in August, with futures showing about a 57% chance of no move.

"Whether or not this (further tightening) is required will depend on how the economy and inflation evolve," Lowe said.

Sea Changes at Rba

Lowe, who is set to find out this month whether his term will be extended for another seven years, laid out some of the changes the board has decided upon in response to the review.

From 2024, the RBA will meet eight times a year, compared with 11 times currently, while the meetings will last longer, Lowe said.

The governor will hold a news conference after each meeting, and quarterly statements on monetary policy, which include the bank's economic forecasts, will be released at the same time as the policy decision.

The board will also decide on some other recommendations from the review, including the publication of an unattributed vote count, at a later date.

Treasurer Jim Chalmers said on Wednesday the cabinet would meet soon to decide the next RBA governor, and local media reported that the decision could come as soon as this week.

Lowe has been under a cloud since repeatedly saying in 2021 that interest rates would not rise until 2024, only to reverse course and hike in mid-2022 when inflation unexpectedly surged.