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  • US/Chinese trade talks take a small step forward with another phone call this week
  • Short-term debt ceiling hike seems necessary
  • U.S. retail sales expected to stagnate
  • U.S. manufacturing production expected to improve 
  • U.S. NAHB index remains in generally strong shape

US/Chinese trade talks take a small step forward with another phone call this week -- Treasury Secretary Mnuchin on Monday said that he and USTR Lighthizer will have another telephone conference call on trade this week with their Chinese counterparts.  Mr. Mnuchin said that if this week's telephone call is productive, then he and Mr. Lighthizer may travel to Beijing for trade negotiations.  The flipside of that statement is that if the U.S. isn't satisfied with progress on this week's telephone call, then there won't be a near-term face-to-face meeting.  Mr. Mnuchin's comment highlighted the fact that the formal resumption of US/Chinese trade talks is still not 100% assured.

Each side appears to have a precondition for the formal resumption of trade talks.  On the U.S. side, White House economic advisor Kudlow on Monday said, "We expect China to be announcing shortly some large-scale purchases of farm goods and services."  That suggested that the U.S. may be refusing to engage in face-to-face talks until China actually steps up with some large ag purchases.

Meanwhile, China appears to be delaying the resumption of talks until it sees whether the U.S. will follow through on its promise to allow U.S. companies to start selling chips and other products to Huawei.  There was some positive movement on that issue on Monday after Reuters reported that U.S. firms see Huawei sale approvals starting in 2-4 weeks.  Huawei is still on the U.S. entity list and the Commerce Department must approve licenses for any product sales by U.S. companies to Huawei.

Short-term debt ceiling hike seems necessary -- Treasury Secretary Mnuchin on Monday said that Congress must increase the debt ceiling before they leave for their August recess or else they should "stick around" in Washington until they do pass an increase.  Mr. Mnuchin has sent letters to Congressional leaders saying that the Treasury could run out of cash by early September and start defaulting on its obligations.  

Mr. Mnuchin's warning about an early-September X-Date is consistent with the Bipartisan Policy Center's analysis last week that the Treasury's X-day could come as soon as early September in its pessimistic case, although its baseline case is that the X-date will be reached in early October.

The House is scheduled to adjourn next Friday (July 26) and the Senate is scheduled to adjourn the following Friday (Aug 2), with the recess then lasting until September 9.  That means that the Treasury could hit its X-Date before Congress returns from recess on September 9.

Congress had hoped to bundle the 2020 budget and the debt ceiling increase into a single legislative package.  However, it now appears that in order to be safe, the debt ceiling will have to be raised before the new fiscal year begins on October 1.  A 2020 budget deal is expected to be very difficult and a deal doesn't seem likely before Congress leaves for the August recess.  

The path of least resistance may therefore be for Congress by next week to pass a short-term debt ceiling hike lasting until October, which would then allow Congress to go back to its original plan of bundling the budget and a longer-term debt ceiling hike into a single package.  The markets fear they will be subject to a another bout of brinkmanship in September involving the very serious threat of a Treasury sovereign debt default.

U.S. retail sales expected to stagnate -- The consensus is for today's June retail sales report to show a slight increase of only +0.1% and +0.1% ex-autos after May's strong report of +0.5% for both the headline and ex-auto reports.  U.S. retail sales improved in the March-May period after showing weakness over the winter.  In the last three reporting months, retail sales showed increases of +1.8% m/m in March, +0.3% in April, and +0.5% in May.

The markets are a bit nervous about consumer spending in June after the sharp drop in June consumer confidence.  The Conference Board's U.S. consumer confidence index in June plunged by -9.8 points to a 1-3/4 year low of 121.5.  The University of Michigan's consumer sentiment index in June fell by -2.1 points to a 2-month low of 97.9.

U.S. manufacturing production expected to improve -- The market consensus is for today's June manufacturing production report to show a moderate increase of +0.3% after May's report of +0.2%.  The overall June industrial production report is expected to edge higher by +0.1% after May's report of +0.4%.

U.S. manufacturing production in May showed a +0.2% increase but the series has been weak in recent months with an overall -1.5% year-to-date decline.  The weakness in the U.S. manufacturing sector is tied mainly to the trade war, which has hurt U.S. business investment and U.S. exports.

The ISM manufacturing index has fallen for the last three reporting months (April-June) by a total of -3.6 points to June's 2-3/4 year low of 51.7, illustrating fading manufacturing confidence.  The ISM new orders index has been even weaker and it fell by -2.7 points to 50.0 in June, teetering on the edge of the boom-bust level.

U.S. NAHB index remains in generally strong shape -- The consensus is for today's July NAHB housing market index to be unchanged at 64 following June's small -2 point decline to 64.  The NAHB index fell to a 4-year low of 56 in December due to rising interest rates and the Q4 plunge in the stock market.  However, the NAHB index has since recovered sharply due to the sharp drop in mortgage rates and the recovery in the stock market to a record high. The 30-year mortgage rate is currently at 3.75%, which is only 2 bp above the late-June 2-3/4 year low of 3.73%.



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