It’s Not That Bad as It May Seem
The economy is hesitating whether to grow or decline, and the United States prepare for a state of national emergency. However, it’s not that bad as it may seem: the markets are going higher and companies report great earnings.
US-China Dispute
Wall Street Journal reports that US Treasury Secretary Steven Mnuchin discussed lifting some or all import tariffs for Chinese goods in order to advance deal negotiations and proposed discussing the matter at the next meeting on January 30. Treasury spokesperson however, said that Mnuchin had made no such recommendations, but the market, it appears, starts believing that a compromise is possible no matter what.
All the more so as Bloomberg reported that China has offered in early January during talks in Beijing to reduce its trade deficit with the U.S. to zero by 2024, which amounts to $323 billion today and is continuously rising. To do so, China will have to cut its imports from other countries, and primarily crude oil and agricultural products. Analysts, however, have doubts as to the feasibility of such move and suspect that with the offer China is only trying to draw attention away from serious issues like the intellectual property rights, tech sector supervision and the burden built for American businesses that want to enter the Chinese market.
A State of Emergency in the United States
Trump ordered some government employees to resume working without pay hoping to limit the shutdown’s impact. The order targets plane inspectors, tax refund processors, food safety controllers and employees facilitating the sale of offshore oil drilling rights. Trump also plans to sign a law providing federal employees with back pay after the shutdown ends.
CNN reports the White House is working on a draft proclamation for Donald Trump to declare a national emergency along the southern border, which would allow appropriating over $7 billion from various funds (mainly military-related) to construct the wall. Trump’s advisers continue arguing the legal justification for the move, but should the document be signed, the parties will be able to negotiate the government funding.
UPDATE: On Friday, January 25, Donald Trump signed a bill to temporarily end the government shutdown until February 15; in his interview to WSJ on Sunday, he, however, said that another shutdown is “certainly an option”, if Congress fails to fund the border wall Trump has requested.
Mixed Economic Data
New industrial output and retail sales data in China were published on January 21 indicating a deceleration in economic growth slowdown.
In addition, China’s leaders confirmed their intention to lower taxes “on a larger scale” to support the slowing economy and primarily small businesses and the manufacturing industry.
The industrial output in the U.S. increased 0.3% in December (while growth of 0.2% was expected).
American consumers, however, are getting nervous. The University of Michigan Survey of Consumers revealed that the consumer sentiment index slumped to 90.7 (with 96.0 expected), the lowest point since Trump was elected. 2014 was the last time when consumer expectations were lower, which might affect future expenses.
At the same time, everyone is happy about the job market: initial jobless claims were at the 50-year low nominally and at a historic low if the total workforce figures are taken into account.
The United Kingdom that is having a hard time deciding how to better leave the European Union surprised with its economic data: unemployment remains at the lowest level for 43 years (4%), and wage growth is the strongest since 2008.
The International Monetary Fund has cut its 2019 and 2020 global growth projections for the second time in three months to 3.5% and 3.6%, respectively (from 3.7% forecast in October, primarily owing to difficulties faced by German carmakers in view of new fuel standards and Italy-related risks), while China posted the lowest growth since 1990 (+6.6%). But the above numbers are no news anymore. The figures may be unpleasant but quite expected; and therefore, the market decline was rather driven by the need of a correction after a strong rally of the last weeks.
The U.S. housing market continues to decline: home resales fell 6.4% in December (vs 1.5% expected; the weakest pace in over three years), but the industry has been facing troubles for a long time already and the news proved to be a non-event too.
Japanese exports fell 3.8% in December (vs 1.9% expected), the lowest figure in two years, which was largely driven by exports to China. The factory activity in Germany declined for the first time in 4 years, IHS Markit Index reported.
Mario Draghi noted at the ECB meeting that Eurozone’s economic outlook is weaker than expected at the previous meeting, and stimuli are still essential to save the economy from falling into a recession. However, the market took almost no notice of the negative news and data — investors seem to believe the slowdown is temporary, which will eventually force central banks to be wary of the tightening, and in this case things would work out well.
Earnings Season
Last week marked the start of the U.S. earnings season, with banks traditionally reporting first. Citigroup exceeded analysts’ expectations denoting that the U.S., as well as global, economy remains strong, and the slowdown in China had no effect on the bank’s performance. JPMorgan fell short of expectations for the first time in 15 consecutive quarters. Both banks noted that the ongoing government shutdown in the United States may have a negative effect on their guidance, and if extended to the end of Q1, the economic growth may fall to zero. Overall, positive earnings reports outnumber the less positive ones: Goldman Sachs, Bank of America, American Express, United Airlines, IBM, Procter & Gamble, United Technologies and many others had a great quarter. Less optimistic guidance was given by Wells Fargo, Morgan Stanley, Ford, Delta Airlines and Sherwin-Williams, Schlumberger, Eli Lilly, and Tiffany, but they went unnoticed by the market, just as weak economic data. Ignoring bad news has always been a very strong and positive signal.
Tesla to Cut Jobs
Musk wrote in a blog post that the company managed to generate net profits in the last quarter of 2018 but announced that 3,000 jobs (7%) will be cut as he expects tough times in making electric cars more affordable for the mass market. The company’s shares plunged 13% on the news.
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