Yellen Says Nothing Off Table In Response To China Overcapacity

Economic

Political

Summary:

Treasury secretary wants to ‘responsibly manage’ China ties.Yellen also defends Biden’s domestic manufacturing push.

Treasury Secretary Janet Yellen said the US wouldn’t take “anything off the table” in response to China’s manufacturing capacity, including the possibility of additional tariffs to stem what she has described as a flood of cheap goods into the US market.

“We’re concerned about the possibility of surges in Chinese exports to our markets in areas where they have a great deal of overcapacity,” Yellen said on CNN’s Fareed Zakaria GPS. “I’ve been very clear in my discussions with them that this is a concern not only to us, but also to other countries, to Europe, to Japan, and even to emerging markets. India, Mexico, Brazil,” she said.

Yellen visited China last week, where she rebuked the country for “unfair economic practices,” including alleged mistreatment of US and other foreign companies operating in China and distortion of global markets by subsidizing overproduction in certain sectors.

Asked if additional US tariffs could be in the cards, Yellen told CNN, “I wouldn’t take anything off the table as a potential response. But we really want to responsibly manage this relationship.”

Chinese leaders have been pouring money into manufacturing, focusing on new industries such as electric vehicles, batteries and renewable energy as China looks for new sources of growth for its slowing economy.

President Joe Biden’s administration has tightened US measures to deny China advanced technology and has signaled it’s exploring tariff increase on Chinese EVs. The EU has launched a probe into subsidies for electric vehicles manufactured in China.

Inflation Influence

Yellen defended the administration’s efforts to boost domestic manufacturing to steer away from a reliance on cheap Chinese goods, saying the effort will have only “a very modest influence on inflation.”

She said surging Chinese imports since China joined the World Trade Organization were to blame in part for industry that’s “hollowed out” in parts of the US. “We want to engage in trade that’s mutually beneficial,” Yellen said in the interview broadcast Sunday.

Yellen warned China during her trip against supporting Russia in its war on Ukraine. She said companies that provide material support for Russia’s war, including banks which facilitate transactions that channel military goods to Moscow, will be at risk for US sanctions.

Bloomberg reported that US officials have warned China is providing Russia with substantial quantities of parts to build drones and missiles to bolster its resources in the conflict. The US has also been cautioning allies that China has provided geospatial intelligence to boost the Kremlin’s efforts, according to people familiar with the matter.

Treasury’s sanctions office is investigating some companies, both US and foreign, for selling chips that have eventually ended up in Russia. China denies seeking to benefit from Russia’s war in Ukraine.

“I was clear at the highest levels in my meetings that the United States will not tolerate violations of our sanctions by Chinese banks or firms that are aiding Russia in its war against Ukraine,” Yellen said. “And that if that’s done, that there will be consequences.”

Source：Bloomberg

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Swissquote

Economic

Risk appetite is better this Monday morning than it was last Friday when the world was bracing for the Iranian retaliation on Israel. Iran fired more than 300 drones and missiles on Israel on Saturday night, but only a small number reached Israel, limiting damages. There were no fatalities, just an army base was slightly damaged.

Good news is Teran called the operation a success and declared that it won’t take further actions unless Israel responds. Oil traded slightly lower as the first reaction to the weekend news, while gold gapped higher at the open as last week’s rising tensions left a sour taste in investors’ mouth. Elsewhere, base metals including copper, iron and aluminum surged after the US and the UK decided to impose sanctions on Russian supplies. Spot aluminum jumped more than 5% while copper futures advanced to the highest levels since last summer. The dollar index consolidated on Monday after a 2% jump last week.

Too strong to cut

The US dollar strengthens on the back of a severe deterioration in Federal Reserve (Fed) rate cut expectations following strong jobs and inflation data, and the dollar outlook remains comfortably bullish.

The US 2-year yield hit 5% post-US CPI data, and the probability of a June Fed rate cut fell to around 22%. July cut expectations is around 50-50, and a September rate cut is given around 73% chance.

And you know the election narrative that the Fed may not opt for a rate cut approaching the November presidential election, which would delay the first cut to after the election. And some believe that the Fed’s next move won’t be a cut, but a rate hike to tame rising inflationary pressures. That’s a significant readjustment compared to the expectation of six rate cuts in January.

Diverging fortunes

While the US data continues to cement the strength of the US economy and the fact the US doesn’t need to cut rates – and should not be cutting rates with heating inflation – the rate cut expectations elsewhere remain pretty solid. Last week’s European Central Bank (ECB) meeting gave another hint that the bank will more likely than not cut its own rates in June. ECB Chief Christine Lagarde said that the ECB is data dependent and not Fed dependent and other members noted that it’s time to ‘diverge’ from the Fed, as the US consumers are relentless – and the US government is very supportive – with Biden looking to cancel $7.4bn in student debt to please young voters before the election.

As a result, the gap between the Fed and the ECB rate cut expectations widened to the highest level this year following a dovish ECB stance and another set of strong jobs and inflation read in the US. And the chatter of a further euro depreciation to parity against the US dollar is being brought back on the table. At the current levels, the RSI indicator is very close to the oversold territory, meaning that the euro was sold too rapidly in a too short period of time and a correction could be needed. But most traders will be looking to sell the tops in the EURUSD on the back of the growing divergence between the soft ECB and the Fed – that simply can’t justify a rate cut this summer.

Earnings

The S&P 500 posted its worst weekly performance since late October 2023. Mixed bank earnings didn’t help improve mood on Friday. JPM tanked 6.5% as net interest income missed expectations and slipped from the previous quarter as investors chased higher returns. The latter is a real joy killer among investors who were expecting to hear how much more net interest income the bank could gain with a delayed rate cut from the Fed. Similarly, deposits that don’t pay interest at Wells Fargo slumped 18% in Q1.

This week, the earnings season gains momentum with the rest of the US big banks, Netflix and TSM due to announce their Q1 results. The expectation is a 3.8% annual growth in S&P500 companies’ earnings per share in the Q1, while profits for the Magnificent Seven are expected to have risen around 38%. Another strong quarter in terms of earnings could slow a potential selloff in the S&P500 – that sees the selling pressure rise on the back of rising hawkish voices. But a softer-than-expected earnings season will likely trigger profit taking.

Halving

Bitcoin slumped over the weekend as rising geopolitical tensions weighed on risk appetite. Bitcoin halving is expected to happen in the coming days. Lower supply is fundamentally supportive of an asset’s valuation, but we might not see a clear kneejerk reaction to Bitcoin halving as most of it is already priced in.

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Cohen

Cryptocurrency

The wave of crypto adoption by TradFi continues to pick pace globally, especially amid excitement surrounding Bitcoin halving. In a major breakthrough, Germany’s biggest federal bank Landesbank Baden-Württemberg (LBBW) also revealed plans to offer crypto custody services in partnership with crypto exchange Bitpanda.

Germany’s Top Bank and Bitpanda to Offer Crypto Custody

Landesbank Baden-Württemberg, Germany’s biggest federal bank, and the Bitpanda crypto exchange to provide cryptocurrency custody services in the second half of 2024, reported Bloomberg.

Germany’s top federal bank and the largest crypto exchange in the country coming together is a major development for crypto adoption ahead MiCA regulation. Austrian unicorn company Bitpanda received a crypto license from Germany’s financial regulator (BaFin) in November 2022 to become one of the few companies to get crypto custody and proprietary trading license.

LBBW and Bitpanda will offer crypto custody to institutional and corporate clients, according to a statement by the companies on April 15. LBBW is owned by some of Germany’s savings banks such as the state of Baden-Wuerttemberg and the city of Stuttgart. It has nearly €333 billion ($355 billion) in assets.

“The demand from our corporate customers for digital assets is increasing. We are convinced that crypto assets will establish themselves as a building block for further business models. With this cooperation, we are creating the technical and regulatory basis at an early stage to best support the individual crypto strategies of our corporate customers,” said Jürgen Harengel, managing director of corporate banking at LBBW.

Banks’ Active Participation in Crypto

German banks and asset managers’ interest in crypto assets are increasingly active ahead of EU’s MiCA regulations taking effect later this year.

In March, Germany stock exchange firm Deutsche Boerse launched a fully regulated crypto trading platform Deutsche Boerse Digital Exchange (DBDX). The aim is to offer a fully regulated and secure environment for institutional trading, settlement, and custody for this digital asset class.

Also, Germany has massive demand for Bitcoin and altcoins from retail and institutional investors. Electronic securities trading platform Xetra has been offering crypto ETP and ETN for companies such as 21Shares and WisdomTree.

A recent research by KPMG shows German investors are actively buying crypto assets as trust returns ahead rise in Bitcoin price.

Source：coingape

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Ukadike Micheal

Economic

Forex

Consumers displayed resilience in the face of rising inflation in March, defying expectations by maintaining a robust pace of spending, according to the latest report from the Commerce Department. Retail sales surged by 0.7% for the month, significantly surpassing the forecasted 0.3% increase, as indicated by Census Bureau data adjusted for seasonality but not for inflation.

Despite the 0.4% uptick in the consumer price index reported by the Labor Department the previous week, consumers managed to keep up with the pace of inflation, which ran at a 3.5% annual rate for the month. This ability to maintain purchasing power amidst inflationary pressures highlights the underlying strength of consumer sentiment and economic resilience.

Digging deeper into the retail sales data, it's evident that certain sectors experienced notable growth. Excluding auto-related receipts, retail sales jumped by an impressive 1.1%, well above the estimated 0.5% increase. This strong performance underscores the broad-based nature of consumer spending, with various categories contributing to the overall uptick.

The headline retail sales figure was bolstered by an increase in gas prices, with sales at service stations surging by 2.1% for the month. Additionally, the robust growth in online sales, up by 2.7%, reflects the ongoing shift towards e-commerce as a preferred shopping channel. Miscellaneous retailers also saw a substantial increase of 2.1%, further highlighting the diversity within the retail sector.

Market reaction to the upbeat retail sales data was positive, with stock market futures and Treasury yields both experiencing sharp increases. Despite concerns over escalating tensions in the Middle East following Iran's aerial strikes on Israel over the weekend, investors remained optimistic about the outlook for the Wall Street open. This optimism underscores the market's confidence in the resilience of consumer spending as a driver of economic growth.

However, amidst the positive market sentiment, lingering concerns persist regarding the trajectory of monetary policy. Federal Reserve officials have expressed caution about potential interest rate cuts in the face of ongoing inflation pressures, leading investors to adjust their expectations for policy easing in the near term. This uncertainty surrounding monetary policy adds a layer of complexity to the market environment, influencing investor sentiment and market dynamics.

The strong retail sales data for March reflects the robustness of consumer spending, which continues to serve as a crucial driver of economic growth. Despite challenges posed by inflation and monetary policy uncertainties, consumer confidence remains resilient, supporting the overall stability of the U.S. economy.

Source: U.S. Census Bureau

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Warren Takunda

Economic

Stocks

U.S. stock futures ticked higher Monday even as investors dealt with a multitude of issues, including Iran’s missile and drone strike on Israel and a spike in equity market volatility that sent the Dow Jones Industrial average to its worst week of the year last week.

Futures tied to the Dow Jones Industrial Average rose 108 points, or 0.3%. S&P 500 and Nasdaq-100 futures added 0.5% each.

Gold futures pulled back slightly to trade at $2,367.90 an ounce. Bullion hit a record level last week and is up 15% this year as investors seek safety from sticky inflation and geopolitical tensions.

The Dow on Friday lost 476 points and the S&P 500 posted its worst day since January on lingering inflation concerns and a poor start to the first-quarter earnings reporting season. The losses caused the Dow to shed 2.4% last week for its worst week since March 2023 and its second down week in a row. The S&P 500 slid 1.5% for its worst week since October 2023. The Nasdaq Composite Index posted its third negative week in a row.

Iran launched drones and missiles on Israel on Saturday night, marking the first direct attack on Israel from Iranian territory. While the majority of the threats were intercepted, concerns of retaliation remain.

Oil prices, which have risen in the last few weeks prior to the attack on the rising Middle East tensions, were slightly lower Sunday.

“This remains a dangerous situation, but risks to oil and markets may be a bit less than feared Friday on the eve of the attack,” Krishna Guha, Evercore ISI senior managing director and head of the Global Policy and Central Bank Strategy Team, wrote in a Sunday note.

Guha added that the a key question remaining is how Israel Prime Minister Benjamin Netanyahu will respond to the attack. The Biden administration has made it clear it does not want Israel to retaliate, noted Guha.

“Provided that Netanyahu looks like he is willing to follow U.S. advice, there may be some element of a relief rally in markets Monday. However, our colleagues in the energy team do not expect a big retracement in the price of oil,” said Guha.

On the earnings front, investors will be watching for Goldman Sachs and M&T Bank results Monday morning. More economic data is also scheduled for release. Retail sales data is scheduled for Monday, as well as business inventories data for February and manufacturing numbers for March.

Treasury yields were jumping for most of last week amid a third-straight hotter-than-expected CPI reading. However, rates eased on Friday as investors bought Treasuries as a safe haven from the geopolitical tensions. Prices move inversely to yields.

While JPMorgan Chase bested analysts’ profit estimates in its first-quarter report Friday, investors sent the shares 6% lower on concern about what it may generate from lending in the year ahead. CEO Jamie Dimon also raised concerns about the “unsettling” global landscape and “persistent inflationary pressures.”

Source: CNBC

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Ukadike Micheal

Economic

Forex

Manufacturing activity in New York State continued to contract in April 2024, as evidenced by the latest findings from the Empire State Manufacturing Survey. Despite a modest improvement in the headline general business conditions index, which rose by seven points, it remained entrenched below zero at -14.3, indicating persistent weakness in overall business conditions. This protracted downturn is a concerning trend for the manufacturing sector, with implications for the broader economy.

The survey highlighted ongoing declines in key indicators such as new orders and shipments. The new orders index, barely changing at -16.2, and the shipments index, falling by eight points to -14.4, point to a sustained decrease in demand for manufactured goods. This downturn in demand is likely influenced by various factors, including global economic conditions, supply chain disruptions, and geopolitical uncertainties.

Furthermore, the unfilled orders index remained steady at -10.1, indicating a continued reduction in backlogs of work. However, there was a slight uptick in the inventories index, which rose by sixteen points to 3.4. This uptick suggests that manufacturers may have increased their inventories slightly, perhaps in anticipation of future demand or as a response to supply chain challenges.

In addition to these indicators, the survey also provided insights into labor market conditions and pricing dynamics. Labor market indicators remained weak, with the index for the number of employees recorded at -5.1, indicating a decline in employment levels. The average workweek index was largely unchanged at -10.6, suggesting reduced hours worked. These trends reflect the challenging environment faced by workers in the manufacturing sector.

On the pricing front, the prices paid index increased by five points to 33.7, signaling a slight acceleration in input price inflation. This uptick in input costs may pose challenges for manufacturers, potentially squeezing profit margins unless they can pass on these higher costs to customers. However, the prices received index held steady at 16.9, indicating that selling price increases remained unchanged. This dynamic suggests that manufacturers may be facing constraints in their ability to raise prices amid subdued demand conditions.

Looking ahead, the survey revealed subdued optimism about future business conditions. The index for future business conditions dipped by five points to 16.7, with only 37 percent of respondents expecting conditions to improve in the next six months. This lack of confidence in the future outlook reflects the prevailing uncertainty and challenges facing the manufacturing sector.

Overall, the Empire State Manufacturing Survey paints a picture of ongoing contraction and challenges for manufacturers in New York State. The persistent weakness in business conditions, coupled with subdued optimism and ongoing labor market challenges, underscores the need for policymakers and industry stakeholders to address key issues such as supply chain resilience, workforce development, and fostering innovation to support the long-term health and resilience of the manufacturing sector.

Source: Federal Reserve Bank of New York

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Alex

Economic

Beijing officials last month set a target of around five per cent growth for the year – a goal they admitted would "not be easy" and which analysts said was ambitious given the headwinds the country is confronting.

But there are some bright spots – figures last month showed industrial production soared even as consumption remained sluggish, reflecting the uneven recovery China has charted since emerging from growth-strangling zero-COVID policies in early 2023.

And analysts said they expected China to post around 4.6 per cent growth in the year's first quarter Tuesday (Apr 16), down from 5.2 per cent in the final three months of last year.

Analysts polled by Bloomberg expect it to come in at 4.8 per cent.

Woes in the property market remain a millstone for the economy, analysts said, as home prices continued to fall and top developers including Country Garden and Vanke sent out distress signals over their profits and challenges paying off debt.

"Persistent property sector weakness and subdued household consumption, resulting from negative wealth effects from the property correction and somewhat sluggish income growth" will hamper growth, Brian Coulton, Fitch Ratings' Chief Economist told AFP.

Policymakers have announced a series of targeted measures as well as the issuance of billions of dollars in sovereign bonds in order to boost infrastructure spending and spur consumption.

But analysts say much more needs to be done in the form of a "bazooka" stimulus.

"VERY BEARISH"

Ratings agency Fitch this month downgraded China's sovereign credit outlook to negative, warning of "increasing risks to China's public finance outlook" as the country contends with more "uncertain economic prospects".

Analysts say state pledges of support for the property sector are yet to sway the market or consumers.

"Home buyers remain very bearish," Gene Ma, head of China research at the Institute of International Finance, told AFP.

Sluggish consumption is another bugbear.

Last month, retail sales – the main indicator of household consumption – increased 5.5 per cent year-on-year, down from the previous month despite covering a holiday period that typically sees a spike in spending.

"A lack of domestic consumer demand will remain a drag" on growth despite an improvement on the industrial production front, Heron Lim, an analyst for the Moody's rating agency, told AFP.

Fears that China could slip back into deflation was also a major drag.

Consumer prices fell for several months from August, before rising 0.7 per cent in February.

But the consumer price index edged up by only 0.1 per cent on-year last month, renewing deflationary fears.

While deflation suggests goods were cheaper, it poses a threat to the broader economy as consumers tend to postpone purchases, hoping for further price reductions.

A lack of demand can then force companies to cut production, freeze hiring or lay off workers, while potentially also having to discount existing stocks – dampening profitability even as costs remain the same.

"Inflation is a fever of an economy, while deflation is a cancer," Ma said. "A prolonged deflation will hurt consumption and investment demands."

Manufacturing was one bright spot in the first quarter, the analysts said, pointing to the strong official data in March.

"Our proprietary indicators suggest more robust manufacturing activity than construction activity," James Seddon of Goldman Sachs told AFP.

"Relatively positive industrial production and export news mean that growth will come in steady this quarter," Lim at Moody's told AFP.

Still, he warned that more government support would be needed to prop up growth in the medium term, as there were "few policy support measures targeted at supporting domestic consumption directly".