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  • US/Chinese trade talks remain on thin ice as President Trump says he could still impose new tariffs
  • Beige Book will be watched for the extent of U.S. economic weakness
  • U.S. housing starts expected to remain generally strong
 

US/Chinese trade talks remain on thin ice as President Trump says he could still impose new tariffs -- The U.S. stock market fell on Tuesday after President Trump noted that he could still impose a new round of tariffs on China.  He said, "We have a long way to as far as tariffs where China is concerned, if we want.  We have another $325 billion we can put tariffs on, if we want.  So we're talking to China about a deal, but I wish they didn't break the deal we had."

Mr. Trump's comments reminded the markets that the US/Chinese trade talks have yet to resume officially and may lead nowhere in the end except another round of tariffs and recriminations.  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, although he did not say which day.  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 U.S. and China are currently dancing around each other on the issues of ag purchases and Huawei.  The U.S. seems unwilling to restart talks until China confirms large new purchases of U.S. ag products.  Meanwhile, China seems to be holding ag purchases in abeyance until it sees whether the Trump administration follows through on its promise to allow U.S. companies to resume selling chips and other products to Huawei.  

China may also be holding ag purchases in abeyance until farther down the line when it sees whether there is really any chance of a final trade agreement.  Ag purchases are the only lever that China really has to try to get the U.S. off its back since Mr. Trump needs rural political support going into next year's presidential campaign.  China will not want to play that card prematurely.

 

Beige Book will be watched for the extent of U.S. economic weakness -- The Fed today will release its Beige Book survey of the regional U.S. economy ahead of the FOMC meeting in two weeks on July 30-31.  The last Beige Book released on June 5 found mixed economic conditions and no signs of any big drop-off in the economy or an impending recession.

The June 5 Beige Book said, "Economic activity expanded at a modest pace overall from April through mid-May, a slight improvement over the previous period.  Almost all districts reported some growth, and a few saw moderate gains in activity. Manufacturing reports were generally positive, but some Districts noted signs of slowing activity and a more uncertain outlook among contacts."

Fed Chair Powell yesterday at a speech in Europe reiterated his dovish remarks from last week, saying that the Fed is "carefully monitoring" the downside risks to the U.S. economy and "will act as appropriate to sustain the expansion."  He said the Fed's baseline scenario is for growth to "remain solid" but that, "Uncertainties about this outlook have increased, however, particularly regarding trade developments and global growth."

The market continues to discount a 100% chance of a 25 bp rate cut at the FOMC in two weeks on July 30-31.  The market is discounting a total of -63 bp of Fed rate cuts in 2019 (i.e., 2.6 cuts) and one more -26 bp rate cut in 2020.

We believe that the Fed will go ahead with a 25 bp rate cut at its July 30-31 meeting as a reversal of its December 2018 rate hike that in retrospect was one step too far.  However, we believe the Fed will be stingier than the market expects with further rate cuts later this year since the U.S. economy continues to perform relatively well despite slow growth in Europe and China.  The market consensus is for U.S. GDP growth of about +1.8% through the remainder of this year, which is in line with the Fed's estimate of U.S. potential GDP.

 

U.S. housing starts expected to remain generally strong -- The consensus is for today's June housing starts report to show a small -0.7% decline to 1.260 million, adding to May's -0.9% decline to 1.269 million.  Today's June building permits report is expected to show a slight +0.1% rise to 1.300 million after May's +0.7% increase to 1.299 million.

U.S. housing starts remain in generally strong shape near the middle of the range seen over the past two years and only 5% below the 12-year high of 1.334 million units posted in January 2018.  Housing starts have improved this year mainly due to solid consumer confidence and this year's sharp drop in mortgage rates.  The current 30-year mortgage rate of 3.75% is only 2 bp above the late-June 2-3/4 year low of 3.73%.

Meanwhile, U.S. homebuilder confidence remains in generally strong shape.  Yesterday's NAHB housing index rose by +1 point to 65, which was only 9 points below the 20-year high of 74 posted in December 2017. 

U.S. homebuilder stock prices have done very well this year due to the sharp drop in mortgage rates and continued strong home sales.  The SPDR S&P Homebuilders ETF on Tuesday rallied to a new 1-1/2 month high of 42.91 where it was only 10% below the record high of 47.20 posted in January 2018.  The homebuilders ETF is up 31.7% year-to-date, which is a much better performance than the comparable +19.8% year-to-date gain in the S&P 500 index.

 

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