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Jan 3, 2019

Real Time Economics: The China Shock | Is The Fed Done?

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Real Time Economics
Good morning! Greg Ip here, looking at the implications for the world of a slowing Chinese economy, collapsing expectations of further Fed rate increases, and the shutdown's impact on tax refunds.

If China Sneezes, Does World Catch Cold?

Bad news keeps seeping out of China. In November, retail sales growth hit a 15 year-low and consumption tax revenue nose-dived. In December, factory activity contracted  for the first time in more than a year. Wednesday, Apple lowered projected revenue because of slumping Chinese sales. Weak Chinese growth didn’t used to matter much to the world because it imported far less than it exported. No longer: In 2017 China accounted for 10% of the world’s imports. A slowdown and bungled devaluation in 2015-16 hit commodity prices and helped hobble U.S. shale investment. A repeat could be in the works. President Trump has boasted that his tariffs, by undermining China’s economy and stock market, boost U.S. negotiating leverage. When the pain washes back to the U.S., that leverage is diluted.
Apple may have suffered from more than just overall weakness: Chinese consumers increasingly favor Chinese brands, Robert McMillan and Tripp Mickle note. Four of China's five most-watched movies last year were Chinese, and Apple was the No. 5 handset maker, down from No. 3 in 2015.

What to Watch Today

Democrats retake control of the House of Representatives; Nancy Pelosi is expected to be re-elected speaker. Among their first votes will be for a rule that automatically suspends the debt ceiling when a new budget is approved. Reluctance to raise the debt ceiling in standalone votes has previously led to nerve-racking threats of default.
Jobless claims, to be released at 8:30 a.m. ET, are seen rising to 219,000 last week from 216,000.
The Institute for Supply Management’s manufacturing activity index, reported at 10 a.m., is seen falling to 57.9 in December from 59.3 in November.

Top Stories

Flash Crashes Hit Currencies

The one to two-hour period when U.S. traders are heading home—but market hubs in Singapore and Hong Kong aren’t yet fully up and running—has become known to traders as the twilight hour, when normally stable currencies can suddenly go haywire, Saumya Vaishampayan and Mike Bird report. On Thursday, the yen surged by 3% against the U.S. dollar and 8% against the Turkish lira in minutes around 6:30 a.m. Hong Kong time, or 5.30 p.m. in New York.

The Market Thinks The Fed is Done

Futures contracts Wednesday showed a 91% probability interest rates will end this year at or below their current level of 2.25% to 2.5%. That’s a dramatic shift from early November when the probability of rates rising this year was 90%. That shift has come even as economic data remains robust, Daniel Krueger and Nick Timiraos note. Meanwhile, the gap between current yields on Treasury bills and what those yields are expected to be in six months turned negative for the first time since March, 2008. Fed researchers have found that “near-term forward spread” is a strong indicator of Fed easing, and recession.

Tariff Roulette

Having imposed sweeping tariffs on imported steel, the Commerce Department has granted about 75% of the 19,000 requests for exclusions from importers, Inti Pacheco and Bob Tita report. Importers can’t figure out the criteria for exclusion. Primrose Alloys Inc., which imports stainless-steel pipe, has had about half of its 474 exclusion requests denied. In some cases, President Bob Wren said, a competitor got to import nearly identical products without paying the tariff  his company did: “None of it makes any sense.”

Your Tax Refund is Not in the Mail

Millions of taxpayers won’t get their tax refunds on time if the federal government shutdown extends past mid-January. Only one in eight Internal Revenue Service employees is now at work, and tax filing season usually begins in mid to late January, Richard Rubin notes. People who tend to file early are taxpayers who count on large refunds to pay down debt, catch up on bills or make major purchases - disproportionately low-income households that benefit from the earned-income tax credit.

Brazil's Pro-Business Populist Gets to Work

A day after being sworn in as Brazilian president, Jair Bolsonaro went to work on the economy, ordering a cut in the prospective minimum-wage increase and reduction in government ministries. But the biggest challenge will be the giant deficits generated by pensions, said his new economy minister, Paulo Guedes. Previous presidents who sought to reduce pension spending met resistance from unions, legislators and the judiciary, Jeffrey Lewis reports.

New Signing Bonus: A College Degree

Companies such as Walt Disney Co., Discover Financial Services and Taco Bell are sending front-line employees back to college, a perk designed to retain and upgrade their work force amidst the tightest labor market in memory, Kelsey Gee reports. Companies often contract with colleges via a broker such as Guild Education, which can negotiate the price of tuition down to between $6,000 and $10,000, compared to the average $33,000 at a four-year institution.

What Else We're Reading

China’s population may have shrunk last year as the number of births dropped below the number of deaths, the Global Times reports, citing Chinese demographers. Births may have dropped more than two million last year, or by at least 15%, in 2018, even though China ended its one-child policy in 2016. Yi Fuxian, a research fellow at the University of Wisconsin-Madison, said newborns in 2018 were 10.31 million while deaths were 11.58 million.

Up Next - Friday

Payrolls, unemployment and wages for December will be reported Friday morning.
Nerd alert: The American Economic Association meets in Atlanta through Sunday. Thousands of Ph.D. students, professors and other assorted econonerds will swarm downtown Atlanta hotels in search of jobs or just a commenter on their dissertation. Find me (@Greg_Ip) and Eric Morath (@EricMorath) in the halls or on Twitter. Also, Fed chairman Jerome Powell will join a panel with his predecessors Janet Yellen and Ben Bernanke.

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