Trump’s Nafta Rewrite Gets Signoffs; Senate to Vote in 2020

© Reuters.  Trump’s Nafta Rewrite Gets Signoffs; Senate to Vote in 2020 © Reuters. Trump’s Nafta Rewrite Gets Signoffs; Senate to Vote in 2020

(Bloomberg) — House Democrats embraced the U.S.-Mexico-Canada trade agreement after securing key revisions and announced plans to vote on the deal next week, putting President Donald Trump closer to a political win as he heads into the 2020 election.

Speaker Nancy Pelosi praised the changes her House Democats were able to negotiate, saying the revised deal is better for American workers. She said the new version of the accord, known as the USMCA, will be a model for other trade agreements going forward.

“This is the day we have been waiting for,” Pelosi told reporters. “It is infinitely better than what was initially proposed by the administration.”

Trump welcomed the finalized Nafta overhaul, which has been languishing for more than a year and could resolve some of the uncertainty weighing on the economy as he heads into his re-election campaign. But it is also a win for House Democrats who are eager to prove that they can do more than investigate and impeach Trump.

The timing on Tuesday was extraordinary, with Pelosi flanked by more than 30 of her colleagues announcing the long-awaited trade deal just minutes after chairmen of House committees investigating Trump unveiled the two articles of impeachment they plan to bring against the president. She said the back-to-back announcements were not a coincidence.

“We are at the end of the session and you have to make some decisions,” Pelosi said.

The timing will prove more difficult in the Republican-led Senate, according to Majority Leader Mitch McConnell. He told reporters Tuesday that the Senate won’t take up the USMCA until after it finishes with the impeachment trial next year.

“We will not be doing USMCA next week in the Senate,” McConnell said Tuesday.

On Oct. 12, 2011, the House and Senate passed trade agreements with Korea, Panama, and Colombia, according to Henry Connelly, a Pelosi spokesman.

“Senator McConnell has no excuse not to bring up the USMCA,” Connelly said in an emailed statement.

‘Will-It-Ever-Happen Moment’

The changes that Democrats demanded on provisions regarding the environment, pharmaceuticals, labor and overall enforcement were the subject of intense negotiations between U.S. Trade Representative Robert Lighthizer and House Democrats led by Ways and Means Chairman Richard Neal.

“Every once in a while you get to participate in a will-it-ever-happen moment,” Neal said Tuesday. ”This is a triumph for workers across America.”

Lighthizer called the agreement “historic” and said the accord “will be the model for American trade deals going forward.”

“After working with Republicans, Democrats, and many other stakeholders for the past two years we have created a deal that will benefit American workers, farmers, and ranchers for years to come,” Lighthizer said in a statement.

Pelosi told her Democratic members earlier Tuesday that expects a House vote next week, according to Representative Henry Cuellar, a Democrat from Texas. Neal also confirmed that timing.

“We are ready to rock and roll,” Cuellar said after a closed-door meeting of Democratic representatives in Washington. “We’re very confident. We have the numbers” to pass the deal.

Pelosi later told reporters she hopes to vote on the deal, known as the USMCA, “before the end of the session,” which would be before Congress recesses for the holidays Dec. 20.

Representatives from Canada, Mexico and the Trump administration met in Mexico City Tuesday to sign the amendments to the trade agreement. Mexican President Andres Manuel Lopez Obrador said the new version will be ratified by the legislatures of all three countries.

Revised Provisions

The revised trade agreement removes a loophole in Nafta that allowed any country to object to the formation of enforcement panels, and it updates rules governing how evidence can be presented at arbitration panels, according to a summary of the agreement.

The major sticking point in talks for months has been labor-rights enforcement. The deal creates a new labor-specific dispute panel system covering all goods and services, and labor violations can lead to “penalties on goods and services.”

Instead of U.S. labor inspectors in Mexico, which Mexican negotiators opposed, the deal creates an inter-agency committee to monitor labor rights in Mexico and allow labor attachés to monitor labor reforms.

The agreement establishes benchmarks for Mexico’s implementation of its new labor law. If they the deadline is not met, that leads to “enforcement action,” according to the summary.

Democrats also managed to remove a provision that would have guaranteed 10 years of data protection for biologic drugs, which pharmaceutical companies lobbied to preserve in the deal.

“We now have a new and improved, renegotiated Nafta that prevents Big Pharma from raising prices,” said Representative Jan Schakowsky, an Illinois Democrat.

The Biotechnology Innovation Organization, a drug industry group, said removing protections for biologic drugs “surrendered one of the most important tools” that would help Trump keep his promise to “end foreign free-riding on American medical innovation.”

Pelosi said that she was not able to remove a provision granting legal liability protections for internet companies from the deal.

Republican Support

Trump tweeted his support for the revised agreement Tuesday before Pelosi’s announcement.

Republicans in the U.S. Congress have been relentlessly pressuring Democrats to put the trade agreement up for a vote. Some Republicans on Monday said they were concerned that the changes to the trade agreement, negotiated in close consultation with labor unions, would stray too far from the original deal.

Senate Finance Chairman Chuck Grassley, the Republican who will shepherd the deal through the Senate after House passage, said he isn’t worried that the revised deal would slow its passage.

”I don’t think it’s going to be big enough to stop us from getting it passed,” Grassley said about GOP concerns.

Louisiana Representative Steve Scalise, the Republican responsible for counting his party’s votes in the House, praised the deal and said Congress should continue working on other “outdated trade deals.”

“I predict an overwhelming vote for this agreement,” Scalise said in a statement. “Republican support for President Trump’s hard-negotiated trade deal will be strong.”

One of the most important endorsements for the deal came from the AFL-CIO, the largest labor federation in the U.S. Richard Trumka, the group’s president worked closely with Democrats on the negotiations.

“We demanded a trade deal that benefits workers and fought every single day to negotiate that deal; and now we have secured an agreement that working people can proudly support,” Trumka said in a statement. “Trade rules in America will now be fairer because of our hard work and perseverance. Working people have created a new standard for future trade negotiations.”

(Updates with Pelosi spokesman’s statement in the ninth paragraph.)

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Economy News

3 Things Under the Radar This Week

Investing.com – Here are three things that flew under the radar this week.

1. Views of the Economy Swing With Partisanship

While overshadowed by the strong U.S. jobs report Friday, the University of Michigan’s posted its highest level since May.

The preliminary measure of sentiment for December came in at 99.2, up from 97 and topping expectations for a dip to 96.8.

One thing definitely not worrying consumers is all the headlines about the impeachment hearings, with “virtually no consumer spontaneously mentioning impeachment in response to any question in early December,” Richard Curtin, surveys of consumers chief economist said.

But politics does come into play in the survey, so much so that party-affiliated respondents act as outliers.

“The average gap between Democrats and Republicans was 18.7 points in the Obama administration and 41.6 points since Trump took office,” Curtin said.

“While the implications of the economic expectations of Democrats and Republicans are clearly exaggerated, the Independents, who represent the largest group and are less susceptible to maintaining partisan views, hold very favorable expectations, indicating the continuation of the expansion based on consumer spending,” he added.

Weak Wages Stymie Experts

The Labor Department’s employment report was applauded enthusiastically by investors, who took the opportunity to add risk.

But while the monster rise of 266,000 in was pretty straightforward, one part of the report left economists with something of a mystery.

Why is wage growth so muted given the strong job market and overall economy?

rose 0.2% in November, according to the report, down from a 0.4% rise in October. The rise was lower than the 0.3% economists predicted, according to forecasts compiled by Investing.com.

Wage inflation ticked up to 3.1%.

“Wage growth continues to remain puzzlingly weak,” Justin Wolfers, economics professor at the University of Michigan, tweeted. “Over the past year, hourly earnings are up only 3.1%. That’s the sort of number that’s unlikely to worry the Fed much (even as it continues to be puzzled by such low wage and price growth at such a low inflation rate).”

From the Federal Reserve’s point of view, and for many in the market, the absence of wage pressures is a boon and keeps the FOMC from hiking rates to combat inflation, which could stall growth and hit asset prices.

But at the same time, workers aren’t enjoying a commensurate rise in pay as the economy keeps chugging along.

“This is where the labor market diverges from 1990s boom, and helps explain why confidence in economy is high, but not as good as was during peak of 1990s boom,” Grant Thornton Chief Economist Diane Swonk tweeted.

“Both consumer sentiment and consumer confidence measures are strong, but well off the euphoric highs of the late 1990s,” Swonk added.

“The good news is that what the expansion has lacked in momentum, it has made up for in stamina,” she added. “We need that to fully regain the mojo lost in the 2000s”

3. Gold to Lose Some Luster Before Resuming Climb

has made the list of fashionable investments over the past year, outperforming the broader U.S. market at a time when stocks have recently notched record highs. But the yellow metal’s next move is likely to be to the downside before resuming a climb higher, ABN AMRO said in a note earlier this week.

Fixed on a diet of global central bank easing and low interest rates, the price of gold has jumped about 16% over the last 12 months, beating returns of about 15%. (Admittedly, the S&P 500 was in the midst of its big fourth-quarter 2018 swoon and wouldn’t bottom until Dec. 26, 2018.)

With expectations running high that global banks will continue to ease, denting the value of their respective currencies, demand for gold will remain intact and push gold prices even higher, but not before correcting.

“Even though the longer-term outlook looks solid, we expect substantial price weakness in the coming weeks and months,” said Georgette Boele, senior FX and precious-metals strategist at ABN AMRO.

The ABN AMRO strategist highlighted the metal’s 200-day moving average, $ 1,400 an ounce, as key level of support to watch.

Much of the rise in gold prices has been supported by central banks ramping up purchases of the yellow metal as they seek to hedge their euro and dollar holdings.

In 2018, central banks bought the most gold in 49 years and, in the first half of this year, their gold purchases have topped that of last year.

The need to hedge against currency debasement amid falling interest rates will likely continue to drive central bank demand.

CPM Group projects central banks will buy 20 million ounces on a net basis this year and anticipates a comparable increase in 2020.

The decline in global government bond yields, which lowers the opportunity cost of owning gold, will also support gold prices, ABN AMRO’s Boele suggested.

“The outstanding amount of negative-yielding government bonds will probably grow; while gold has no yield, it is at least not paying negative rates.”

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Economy News

ECB takes oversight of big investment banks fleeing Brexit

FRANKFURT (Reuters) – The European Central Bank will start supervising the subsidiaries of several global investment banking giants from next year as they move significant operations to the continent ahead of Brexit, the ECB said on Wednesday.

“Owing to Brexit, four banks were expected to significantly increase their business activities and were therefore placed under the ECB’s direct supervision: UBS Europe SE, J.P. Morgan AG, Morgan Stanley (NYSE:) Europe Holding SE and Goldman Sachs (NYSE:) Bank Europe SE,” the ECB said in a statement.

All in all, the bank will supervise 117 lenders from next year, down from 119, as several banks no longer meet its criteria for supervision.

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Economy News

South Korea November exports plunge as China-U.S. deal still in dark

By Choonsik Yoo and Joori Roh

SEOUL (Reuters) – South Korean exports in November fell for the 12th month in a row and far more than expected, denting hopes for the global manufacturing sector stabilizing as a much-awaited China-U.S. trade deal is still in darkness.

Exports declined 14.3% in November from a year earlier, trade ministry data showed on Sunday, far below a median 10.2% fall tipped in a Reuters poll and missing even the worst forecast in the survey of an 11.1% loss.

It was also the second-worst drop in overseas sales in nearly four years as global semiconductor prices failed to turn around while China, the country’s biggest export market, continued to cut down purchases from its smaller neighbor.

The surprisingly weak November data from a manufacturing powerhouse, which reports monthly trade data ahead of major exporting nations each month, underscores the global economy still far from a turning point.

“The optimism for the first-phase trade deal between the United States and China will take time before actually boosting exports, and today’s poor data means the turnaround in exports is taking longer than expected,” said Chun Kyu-yeon, economist at Hana Financial Investment.

Shipments to China fell 12.2% in November from a year earlier, while overseas sales of semiconductors, South Korea’s top export item, tumbled by 30.8% in value as prices plunged this year from a super-rally last year.

Imports fell 13.0% on-year in November, also missing an 11.9% contraction tipped in the survey. That brought the November trade balance to a $ 3.37 billion surplus, versus a $ 5.34 billion surplus a month earlier.

Sunday’s data left shipments for the first 11 months of this year 10.7% below a year earlier, putting the country on track for its worst annual exports performance since a 13.9% fall in 2009 during the height of a global financial crisis.

South Korea’s economy, the fourth-largest in Asia and heavily dependent on exports, has been hit especially hard by cooling global trade and a prolonged tariff war between China and the United States.

On Friday, the central bank trimmed its 2019 economic growth forecast for the fourth time this year to the lowest in a decade, and also lowered next year’s forecast.

The downgrades came even after the Bank of Korea cut rates twice this year, the most recent cut coming in October. Many analysts expect the central bank to ease policy further next year to support the stuttering economy.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

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Economy News

France will soften, not give up pension reform ahead of strikes

© Reuters. French PM Philippe attends news conference after weekly cabinet meeting in Paris © Reuters. French PM Philippe attends news conference after weekly cabinet meeting in Paris

By Sophie Louet and Sudip Kar-Gupta

PARIS (Reuters) – The French government is willing to compromise on its pension reform but will not abandon plans to rebuild a system that allows some workers to retire in their fifties, it said on Wednesday, a week before a planned transport workers’ strike.

President Emmanuel Macron was elected in May 2017 on a pledge to overhaul the generous social security system and has promised to introduce a points-based pensions system under which all workers will have the same rights.

But as his centrist government is working on a first draft of the pension reform, unions at state-owned rail and metro operators – where some workers can retire in their early fifties – plan a nationwide transport strike on Dec. 5.

“The government is determined to build a universal pension system … but we will take the time we need to get there,” Prime Minister Edouard Philippe told a news conference.

He said he favours a compromise between “an immediate and brutal transition” that would make the reforms applicable to people born after 1963, and a “grandfathering” clause that would impact only people entering the labour market from 2025.

France’s official retirement age is 62, but it has more than 40 different pension systems, with some allowing workers to retire in their mid- to late fifties or even their early fifties for Paris subway conductors.

Philippe said workers will be able to hang on to “acquired rights” but said the government is determined to end special pension regimes.

“The system of corporatist solidarity is no longer suitable for this day and age and has created injustices,” he said.

Leftist opposition parties and the more radical unions reject the pension reform plan, but the moderate CFDT union agrees with the principle of a points-based pension.

Next week’s transport strike will be a key test of the unions’ determination and of Macron’s ability to continue reforms in the second half of his five-year mandate. Civil servants and energy sector workers will join the protest.

In the first year of his term, Macron made labour law more flexible and in June 2018 his government ended the special benefits for new workers joining the SNCF state railway.

But the eruption late last year of often-violent “yellow vest” protests against the high cost of living crimped Macron’s reform drive and several planned measures have been shelved.

The government will reveal a draft of the pension reform around Dec. 9 or 10 and parliament will vote on it early 2020.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.

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Economy News

Saudi central bank governor reiterates banking sector is very liquid

© Reuters.  Saudi central bank governor reiterates banking sector is very liquid © Reuters. Saudi central bank governor reiterates banking sector is very liquid

RIYADH (Reuters) – Saudi Arabia’s banking sector has a high level of liquidity, its central bank governor said on Sunday, as banks in the Gulf state offer leverage to Saudi investors for shares in Saudi Aramco’s approaching initial public offering.

“The Saudi banking sector enjoys very high level of liquidity compared to Basel requirements,” Ahmed al-Kholifey told a conference.

In September, the governor had said he did not expect Saudi Aramco’s planned listing to affect liquidity in the banking sector, as all indicators were healthy.

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Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.

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Economy News

Fed holds off on permanent lending tool as policymakers mull details

By Matt Scuffham and Jonnelle Marte

NEW YORK (Reuters) – The Federal Reserve will hold off deciding whether to introduce a permanent lending facility aimed at staving off the money market ructions seen earlier this fall even as a growing number of policymakers warm to the idea, several sources told Reuters.

Concerns ranging from how to fine tune such a facility to whether the temporary solution the Fed installed several weeks ago is sufficient for the long term are feeding a debate over the matter.

Around two-thirds of the Federal Open Market Committee – the central bank’s policy-making arm – is broadly supportive of establishing a so-called standing repurchase agreement – or repo – facility, according to three of the sources. That is consistent with the “many” committee members who saw such a fixture as a “useful backstop” to address market shocks, the latest FOMC minutes from its meeting in October released on Wednesday showed.

Specific questions around what interest rate it should charge, who would be able to use it and what could be used as collateral still need to be resolved. A decision is unlikely to be made until at least the first quarter of 2020, the sources said.

Fed Chairman Jerome Powell, whose perspective looms large in the debate, has so far given little public indication of whether he sees the need for a standing facility to be introduced.

Following a liquidity crunch in mid-September, the Fed committed to inject cash into the banking system each day until at least January, as well as purchasing Treasury bills, to ensure there are “ample” reserves in the banking system.

The repo market underpins the U.S. financial system, helping ensure banks have the liquidity to meet their daily operational needs and maintain sufficient reserves. If the market dries up, it can disrupt financial markets leaving banks unable to raise enough cash to fund trades and meet regulatory requirements.

While support for the idea is growing, the FOMC’s meeting minutes showed a number of participants thought more work was needed to assess pricing, participation and acceptable collateral. Some policymakers are concerned the facility could become stigmatized if the rate is set too high while a rate set too low could result in inappropriately large and frequent repo operations, the minutes showed.

The sources also said some policymakers believe the facility should be restricted to primary dealers, or the top 24 Wall Street firms that do business directly with the Fed, while others say all banks under Fed supervision should be able to participate, the sources said.

Big U.S. banks have clung to a large share of excess reserves, partly to meet liquidity requirements enacted in response to the global financial crisis a decade ago. Some economists say that left repo markets susceptible to freezing.

Supporters of a standing repo facility say it would encourage banks to hold Treasuries in the knowledge they can quickly convert them into cash at a minimal discount. That would boost liquidity in overnight lending markets, preventing sharp rises in interest rates when liquidity dries up and eliminating the need for temporary interventions by the Fed, they say.

Most Fed policymakers were against a standing repo prior to September’s liquidity crunch, arguing that the difficulties of implementing the facility outweighed its benefits and questioned whether it was needed. However, opinion among policymakers has shifted over the past couple of months with most officials recognizing the merits of the facility, the sources said.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.

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Economy News

Trump hails ‘cash’ to farmers, U.S. aid in China trade war

© Reuters. A farmer plows a field in the San Pasqual Valley near Escondido, California © Reuters. A farmer plows a field in the San Pasqual Valley near Escondido, California

WASHINGTON (Reuters) – U.S. President Donald Trump on Sunday welcomed a “cash” payout to American farmers before the Thanksgiving Day holiday that he attributed to China tariffs, but that money actually is part of a U.S. government aid package.

“Our great Farmers will recieve (sic) another major round of ‘cash,’ compliments of China Tariffs, prior to Thanksgiving,” he wrote on Twitter.

“The smaller farms and farmers will be big beneficiaries. In the meantime, and as you may have noticed, China is starting to buy big again. Japan deal DONE. Enjoy!”

The U.S. Department of Agriculture said on Friday it will begin making a second round of 2019 trade aid payments to U.S. farmers next week.

The payments are the second part of a three-tranche $ 16 billion aid package announced in May to compensate farmers for the U.S.-China trade war. China imposed tariffs on key U.S. agriculture exports including soybeans and pork last year after Trump’s administration levied duties on Chinese goods.

The United States and China are trying to negotiate a phase one trade pact to end the tensions, but it is unclear when it might be finalized.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.

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Global Economy on Thin Ice With Frail Trio From China to Germany

© Reuters.  Global Economy on Thin Ice With Frail Trio From China to Germany © Reuters. Global Economy on Thin Ice With Frail Trio From China to Germany

(Bloomberg) — Explore what’s moving the global economy in the new season of the Stephanomics podcast. Subscribe via Apple Podcast, Spotify (NYSE:) or Pocket Cast.

The vulnerability of global growth to trade conflicts and dependence on U.S. momentum were exposed as Asia’s biggest economies faltered and Germany barely dodged a recession.

A triple whammy of dreary data on Thursday began with sharp slowing in Japanese growth to a fraction of forecasts, before China reported the smallest increase in fixed-asset investment in at least two decades. In Europe, Germany posted surprise growth — but only after a deeper contraction than previously estimated.

The frailty signaled by the reports underscore the world’s need for a China-U.S. trade deal that could remove the uncertainty depressing factory output. It also highlights the risk that the U.S., where consumer strength has supported growth, might become the sole crutch of global momentum.

“We are in a manufacturing recession,” Saker Nusseibeh, chief executive officer of Hermes Fund Managers, said on Bloomberg TV. “Even in the U.S., there’s contraction in manufacturing. The difference is that the consumer in the States has been carrying the day in a far stronger quantum than the consumer in Germany.”

Weak global demand weighed on Japan, where annualized growth dropped to just 0.2% in the third quarter, compared with a 0.9% median forecast. Izumi Devalier, head of economics at Bank of America Merrill Lynch (NYSE:), reckoned forthcoming data might get even worse.

“We do think that fourth-quarter GDP numbers will be quite weak,” she told Bloomberg Television. “We wouldn’t be surprised at all if we had a sizable contraction.”

China had a similar theme, with both industrial output and retail sales missing estimates. Fixed-asset investment grew just 5.2% in the first 10 months of the year, the least since records began in 1998.

For now, the government and central bank in China have refrained from pumping major stimulus into the economy, preferring to make smaller adjustments to try and boost growth without a massive expansion in debt. The weakness revealed on Thursday raises the prospect that such restraint may not hold.

“We are very close to the Chinese government’s bottom line,” said Larry Hu, an economist at Macquarie Securities in Hong Kong. “When the downward trend will turn around depends entirely on when the government will step up their stimulus efforts.”

While Germany, Europe’s biggest economy, defied expectations of a recession with surprise growth in the third quarter, the pace was only 0.1% and investment in machinery and equipment fell. The contraction in the prior period was revised to 0.2%, larger than originally reported.

Growth in the euro zone as a whole was just 0.2% in the quarter. Nusseibeh described the region’s momentum as “incredibly weak.”

That leaves the U.S. as the bright spot in the global economy. Household sentiment there improved for a third month in November, according to a University of Michigan index. The labor market remains robust, with employers adding 128,000 new jobs in October.

In tune with that resilience, Federal Reserve Chairman Jerome Powell on Wednesday stuck to his view that interest rates are probably on hold after three straight reductions. Manufacturing and business investment are under pressure though, just as elsewhere, showing how prospects of a trade deal remain crucial to providing confidence.

The latest talks are currently centering on a U.S. demand that China detail how it plans to reach as much as $ 50 billion in agricultural imports annually, according to people familiar with the matter. Chinese negotiators are resisting a proposal for monthly, quarterly and annual targets for purchases, and also insist that the two sides must agree to rollback tariffs in phases if a deal is reached, the people said.

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Economy News

China Factories Are Exporting Lower Prices Around the World

(Bloomberg) — Explore what’s moving the global economy in the new season of the Stephanomics podcast. Subscribe via Apple Podcast, Spotify or Pocket Cast.

Chinese factories are again threatening to drag down prices around the world as the cost of their goods decline by the most since 2016.

In a fresh challenge to the ability of global central banks to revive inflation, China’s slowest growth in almost three decades and cheaper energy costs have left manufacturing prices declining since July.

While cheaper goods may be a boon to foreign consumers as Christmas nears, the overall effect is a potential spiral of falling prices worldwide as companies everywhere are forced to compete with Chinese rivals to protect profits. That would add further tension to the U.S.-China trade war.

“Inflation is increasingly driven by global factors, and in particular, by waves of disinflation emanating from China,” according to Stephen Jen and Joana Freire at Eurizon SLJ Capital. “This is related to China exporting its overhang of capacity” which has been exposed by weak domestic demand, trade tensions with the U.S., and lack of economic stimulus.

They expect the recent worsening of the producer price index to weigh on inflation rates in the U.S. and Europe, similar to what happened in 2014-16. Producer prices in Germany, Japan, South Korea and the U.S. are already negative.

Data released on Saturday underscored the problem, with Chinese producer prices dropping for a fourth month in October. Input costs and energy prices have fallen since June, reducing costs for producers. However, those savings haven’t boost companies’ margins as demand isn’t strong and there’s plenty of excess capacity, so manufacturers have also cut asking prices.

What Bloomberg’s Economists Say

“Deepening factory deflation highlights sluggish demand, and depresses profits for industrial firms — limiting capacity to hire workers and invest in facilities.”

Weakening commodity prices are still the main cause for the deflation, and this is weighing on prices of related downstream industries, such as chemical materials and chemical fabrics.

David Qu, Economist

See here for the full note

A key problem is that while prices deflate, loans don’t, making it harder still for China’s indebted industrial sector to make ends meet. Chinese private companies are already defaulting on their bonds at twice the rate this year compared with 2018, and the government is worried about the health of the banking sector.

“The U.S.-China trade war is paralyzing global capex spending and delivering a massive deflationary shock,” according to Chua Hak Bin at Maybank Kim Eng Research Pte. in Singapore.

U.S. tariffs are diverting China’s excess capacity and supply to third countries, and more companies and nations are likely to feel the deflationary pressures, according to Chua.

The deflation risk reflects China’s heftier role in the world economy and how for many industries it is a price setter. It made up 12% of total global trade in 2018, the largest single country. Chinese price shocks accounted for about 6% of average inflation globally, according to a 2016 analysis by Bundesbank economists.

Similar to what happened in 2014-2016, a flow of cheaper goods from China will make it harder for central banks elsewhere to generate sustained inflation. Consumer prices in Japan, Germany and the U.S. are already below their inflation targets of around 2% a year, and further declines in the price of imports and manufactures will only make it harder to reach those goals.

China is the biggest source of imports for the U.S. and Japan, and the second-biggest for Germany, after the Netherlands.

The effect of the slide in the price of exported Chinese goods is already appearing in the data of some of those trading partners, with the prices of Chinese machinery, metals, cloth, and chemicals imported by Japan all dropping, and the price of U.S. imports also in decline. Germany and South Korea don’t provide a breakdown on the price of imports from China.

In addition to falling PPI, discounts by Chinese companies to compensate for tariffs may be having an effect on the price of goods sent to the U.S., and some of the decline in export prices is likely due to the yuan weakening against the dollar, making Chinese goods cheaper for companies in many countries.

Still, China’s producer deflation is nowhere near as bad as the low of -5.9% seen in 2015, and much of the current drop is due to cheaper energy and commodity prices, according to Michael Shaoul of Marketfield Asset Management. If energy prices stay stable, China’s factory prices may become neutral, he said.

Economists expect producer prices to bottom out in the fourth quarter before recovering slightly.

As for consumer prices in China, the overall measure is actually rising as soaring pork prices push up foods costs. That’s caused global bacon prices to increase and is pushing up the cost of other meats.

“China’s PPI deflation is a result of both weak commodity prices and weak domestic demand,” according to Chi Lo, Greater China economist at BNP Paribas (PA:) Asset Management. “The China factor is disinflationary at this point but not deflationary.”

(Updates with comment from Bloomberg economist.)

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