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Real Time Economics: The U.S. Trade Deficit Is About to Break Another Record
Real Time Economics
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China and the U.S. are in the final stage of completing a trade deal. Beijing is offering to lower tariffs and remove some restrictions on American farm, chemical, auto and other products and Washington is considering removing sanctions levied against Chinese products since last year. A formal agreement could be reached at a summit between President Trump and Chinese President Xi Jinping, probably around March 27, Lingling Wei and Bob Davis report.
China is pledging to help level the playing field, including speeding up the timetable for removing foreign-ownership limitations on car ventures and reducing tariffs on imported vehicles. Beijing would also step up purchases of U.S. goods. The two sides continue to negotiate over issues involving Chinese industrial policy the U.S. argues gives Chinese domestic firms an advantage.
President Trump set his sights on reducing mammoth U.S. trade deficits. This week, the Census Bureau will likely report the U.S. last year registered the largest trade deficit in its history. What gives? Over the past year, macroeconomic factors have overwhelmed any attempts to target specific trade deficits. Most powerfully, the combination of tax cuts and increased federal spending provided immense fiscal stimulus, Josh Zumbrun writes. That boosted consumption and indirectly led to a stronger dollar.
What to Watch Today
U.S. construction spending for December is expected to rise 0.1% from the prior month. (10 a.m. ET)
The Reserve Bank of Australia releases a policy statement at 10:30 p.m. ET.
President Xi Jinping, battling a persistent downturn in China’s economy, is trying to gird his rule by demanding absolute loyalty from the Communist Party in an effort to stifle simmering dissent. Mr. Xi has summoned senior officials from across China to warn them about “major risks” to the world’s No. 2 economy. His administration issued a slew of new party directives demanding “unity and concerted action.” Last week, state media publicized that the rest of the party leadership submitted self-evaluations for Mr. Xi’s review, a recently revived ritual designed to portray him as the ultimate authority. While Mr. Xi remains undisputedly in charge, party watchers say his maneuvers point to disquiet within the government and political elite, Chun Han Wong reports.
Investors Aren't Betting On Inflation...
Bets on a pickup in inflation are falling out of favor. Inflation ended last year below the Federal Reserve’s 2% target for a seventh straight year. Add in a cooling economy and the Fed has suggested it will pause its rate-increase campaign, helping the S&P 500 notch its best two-month start to the year in decades. But many bond investors have taken a more pessimistic view, questioning whether muted price increases are another sign that prospects for the economy and earnings are dimming, Akane Otani reports.
A widely tracked measure of investors’ expectations for average annual inflation over the next decade, known as the 10-year break-even rate, has remained below the Fed’s 2% target in 2019. The takeaway: Investors aren’t convinced that the economy is about to heat up.
...Consumers Aren't Expecting Inflation
Investors aren't the only ones with a subdued outlook on inflation. Long-term expectations matched their lowest level on record in the latest University of Michigan consumer-sentiment survey.
Diminishing Marginal Returns
Shale companies’ strategy to supercharge oil and gas production by drilling thousands of new wells more closely together is turning out to be a bust. What’s more, the approach is hurting the performance of older existing wells, threatening the U.S. oil boom and forcing the maturing industry to rethink its future. The problems mean some of the more optimistic projections for production may have to be lowered. In the Permian Basin, drilling issues threaten more than 1.5 million barrels a day of projected growth, according to a 2018 study by energy consulting firm Wood Mackenzie. That’s more than the daily output of Libya, Christopher M. Matthews, Rebecca Elliott and Bradley Olson report.
Bad Year for the Swiss Central Bank
One byproduct of massive balance sheets has been large, consistent profits for central banks like the Federal Reserve. Not so in Switzerland, where annual results have been much more volatile. The bank posted a 2018 loss of 14.9 billion francs ($14.9 billion). The SNB lost CHF12.4 billion on its foreign equity holdings, and CHF11.3 billion on exchange rates. That was partly offset by interest income and negative interest rates. Since the SNB installed a negative deposit rate at the end of 2014 and cut it to minus 0.75% in January 2015, Swiss banks have paid a total of 6.8 billion francs to store funds with the SNB. –Brian Blackstone
What Else We're Reading
Who's paying for President Trump's tariff war? "We find
that the full incidence of the tariff falls on domestic consumers, with
a reduction in U.S. real income of $1.4 billion per month by the end of
2018. We also see similar patterns for foreign countries who have
retaliated against the U.S., which indicates that the trade war also
reduced real income for other countries," Mary Amiti, Stephen Redding
and David Weinstein write in a Center for Economic Policy Research discussion paper.
Reality check on the Green New Deal:
"The transition to a carbon-neutral economy is bound to make us worse
off before it makes us better off, and the most
vulnerable segments of society will be hit especially hard. Unless we
acknowledge and address this reality, support for greening the economy
will remain shallow and eventually wane," the European University
Institute's Jean Pisani-Ferry writes at Project Syndicate.
Up Next: Tuesday
The Boston Fed’s Eric Rosengren speaks on the economy at 7:30 a.m. ET and the Minneapolis Fed’s Neel Kashkari testifies before the Minnesota Senate Finance Committee at 9:30 a.m. ET.
IHS Markit's U.S. services index for February is out at 9:45 a.m. ET.
The Institute for Supply Management's nonmanufacturing index for February is expected to inch up to 57.0 from 56.7. (10 a.m. ET)
U.S. new-home sales for December are expected to drop to an annual pace of 595,000 from 657,000 a month earlier. (10 a.m. ET)
The Bank of England’s Mark Carney testifies before the
House of Lords at 10:35 a.m. ET.
Treasury releases its monthly budget statement at 2 p.m. ET.