China trade: Short visit, long distance

China trade: Short visit, long distance

The U.S. officials' two-day visit left much work to be done; U.S. employment in April was good not great; Europe got a reprieve from the conflict between its trading partners; there's so much crude being produced in Midland, Texas that it can't leave the area.

"Trade, by its very nature, is not a case of winner takes all "
Official news outlet China Daily.

China - U.S.: Short visit, long distance. The two-day meeting between the U.S. Treasury Secretary Steven Mnuchin and Chinese Vice-Premier Liu He ended without a jointly-issued trade agreement, But afterward, China’s official press agency characterized[1] the discussions as “candid, efficient and constructive”, reaching agreements on “some issues” and agreeing to set up “a work mechanism to keep close communication”.

During the discussions, Beijing’s China Daily commented that “acceptable agreements can be reached if both sides have realistic expectations of their give and take.”[2] The press statement at the end of the meetings noted that “considerable differences still exist on some issues”, which leaves the parties much to discuss during the “close communication” which will ensue  

U.S. jobs: Plus vs. minus Friday’s report on April’s employment was mixed. On the positive side, the unemployment rate, at 3.9%, hasn’t been that low since September 2000, and manufacturing payrolls beat expectations by [rising 24k] can’t tell what this means.

But non-farm and private-sector payrolls fell well short of expectations despite gains of 164k and 168k respectively. The underemployment rate fell only -0.2% to 7.8%, now twice the overall unemployment rate. Also on the disappointing side:  average hourly earnings rose 0.1% since March and 2.6% year-over-year, showing little effect of the labor shortages that are now bottlenecking the manufacturing and residential construction sectors, among others.

Only time will tell if this report, along with next month’s results, will sway the Fed’s views on inflation, and therefore their actions on rates, for the balance of the year. If financial markets are to be believed, a 25-basis-point rate hike is an all but foregone conclusion at the FOMC’s June 13th meeting; now, the question has become whether there will be one additional hike before year-end, or two. To date, markets are leaning slightly toward two more hikes, for a total of four for 2018.  

European trade: Caught in the middle Within hours of its expiration date, the European Union (EU), along with Canada and Mexico, got another 30-day reprieve on U.S. steel and aluminum tariffs. The delay did little to mollify EU officials, who are seeking a permanent exemption from the trade measures. The rationale for the tariffs was “national security”, which is how the White House was able to put the measures in place without Congressional review.  Europe, both Western and Eastern, has been allied with the U.S. pretty much since the end of the Cold War. Hence the irritation behind the European Commission’s statement that the tariffs “cannot be justified on the grounds of national security”.

Texas crude: Liquid logjam The rapid rise of crude-oil prices worldwide has been a boon to producers, but has also created a challenge in the Texas oil patch. A shortage of pipeline and railcar capacity, preventing oil produced, consolidated and priced in Midland, Texas from getting to Cushing Oklahoma, where the benchmark West Texas Intermediate crude oil price is set.  The problem is visible in the price differentials between Midland and Cushing. As of 2:00 PM on Friday, May 4, Midland crude was priced at $57.30, $12.50 per barrel below WTI Cushing’s $69.80. That price differential is one clear indication that there’s plenty of oil waiting to meet the global demand not satisfied by OPEC’s self-imposed production cutbacks.



[1] Source: Xinhua, “China, U.S. reach agreements on some economic and trade issues” May 4, 2018.

[2] Source: China Daily, “Sincerity is the best way to make talks worthwhile”, May 4 2018.



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