Atlanta Fed GDP Forecast Plunges Below 2.0%

From its exuberant 5.4% expectation for Q1 GDP at the start of February, The Atlanta Fed’s guess has collapsed to just 1.9% as CPI and retail sales disappointments weigh on their outlook.

Via Atlanta Fed,

Latest forecast: 1.9 percent — March 14, 2018

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2018 is 1.9 percent on March 14, down from 2.5 percent on March 9. After yesterday’s Consumer Price Index release from the U.S. Bureau of Labor Statistics and this morning’s retail sales report from the U.S. Census Bureau, the nowcast of first-quarter real personal consumption expenditures growth fell from 2.2 percent to 1.4 percent.

GDPNOW is now well below consensus expectations…

Which is not entirely unexpected as we have seen this pattern of disappointment for the last 8 quarters…

And the weakness in recent US macro data suggests no rebound anytime soon…

And this is the declining economic growth picture that The Fed is jawboning 5 rate-hikes into?

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Here Comes The Main Event: Trade War With China, And What Is Section 301

The recently announced global steel and aluminum tariffs (with various exemptions) by the Trump administration were just a (Section 232) preview of the main event: Trump’s imminent trade war with China, which as Credit Suisse previews, will be unveiled any moment in the form of tariffs and restrictions on trade with China, reportedly in retaliation for Chinese IP violations.

First, a reminder on the all-important Section 301:

  • What is Section 301? Section 301 of the 1974 Trade Act allows the President to, among other things, “impose duties or other import restrictions on the products of [a] foreign country,” if the President determines that that country is violating a trade agreement or “engages in discriminatory or other acts or policies which are unjustifiable or unreasonable and which burden or restrict United States commerce.“ The U.S. relied heavily on the provision during the Reagan era (an administration in which the current USTR Robert Lighthizer served as Deputy USTR) into the early 1990s, but it has been used infrequently since the World Trade Organization was formed in 1995 and provided a forum for dispute resolution.

How will Section 301 figure in the upcoming US-Chinese trade war, and what are the key points:

  • Last August, President Trump instructed his U.S. Trade Representative Robert Lighthizer to initiate a Section 301 investigation into China’s forced technology transfer policies.
  • While the results of the 301 investigation are not due until August 2018, the President appears poised to act on the issue in the coming weeks.
  • The President is reported to be seriously considering a package of tariffs on Chinese imports (targeting between $30BN and $60BN worth).
  • Reports have stated that Administration officials have used China’s manufacturing roadmap, “Made in China 2025,” in deciding what goods to impose tariffs on. This will likely further concern Chinese leaders.
  • In addition, the Administration has discussed rescinding licenses for Chinese businesses and employing other such methods to restrict Chinese investment in the United States. The President’s recent decision to block a Singaporean company’s bid to takeover a U.S. company underscores his aversion to Chinese direct investment (the company had Chinese affiliations).
  • As part of the 301 action, the Administration has also reportedly discussed visa restrictions and a mandate that U.S. stock exchanges limit who can list in a U.S. market. It remains unclear whether the restrictions will go this far, but the President has, to date, been hawkish in his trade policy and there seem to be fewer and fewer moderating voices in the White House.
  • The 301 investigation and potential actions resulting from it seem to complement congressional efforts to restrict Chinese investment through legislation broadening the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS). We believe this legislation is on track to be signed into law in Q3 2018.

What to expect? here are some high-level thoughts from Credit Suisse:

  • The Chinese will likely respond in kind, beginning a succession of tit-for-tat trade policies between the two countries.
  • The United States has the option to take a multilateral approach and work with allied nations to initiate their own WTO dispute regarding Chinese technology transfer policies. However, at this point, the U.S. appears more likely to instead take unilateral retaliatory action without WTO authorization, which may run afoul of the U.S.’s WTO obligations.
  • If the U.S. acts unilaterally (as it appears it will), China will likely bring a challenge before the World Trade Organization (WTO).
  • The President appears committed to maintaining his “tough on China” stance. Even after losing top advisor Gary Cohn after the imposition of steel and aluminum tariffs, the President appears steadfast in his campaign against China’s trade practices and Chinese investment in the U.S, and we expect continued restrictive trade policies with respect to China.
  • The President’s actions may not receive the congressional backlash that his steel and aluminum tariffs did. Many U.S. corporations are frustrated with China’s policy requiring foreign companies to turn over source code and other proprietary technology in exchange for access to the Chinese market. However, if the President takes this as far as he currently seems to be planning to, punitive measures by China coupled with the chilling of foreign investment could be a major concern for U.S. corporations.

In terms of specifics, the US trade deficit last year hit an all time high of $375BN.

The Trump administration is planning imposing tariffs on up to $60bn of Chinese goods, or roughly 13% of goods import from China ($505BN), and 2.75% of total US goods import according to Danske Bank; the tariffs will target tech products, telecoms & clothing.

A snapshot of the key aspect of the US-China trade relationship:

  • the US exports soybeans, pharmaceuticals, vehicles and aircraft.
  • the US imports textiles,clothing, manufactures of metals,electronics and toys.

How to trade it?

As noted last week, when discussing which industries and companies would be impacted, we said that there are some obvious sectors such as industrials (cars, planes), agriculture, and technology. Below, courtesy of Strategas,  is a list of US companies which derive the largest percentage of their total revenue from China. As trade war looms, it would be prudent for investors to start thinking about potential risks to the companies they own if they have sufficient business in China.

 

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Why the Government Shouldn’t Break Up Google: New at Reason

Has Google’s market dominance been a net negative for consumers and innovation—and should government antitrust regulators intervene?

Every day, hundreds of millions of satisfied internet users enjoy a handful of free Google services that improve their lives without even really thinking about them. Yet a growing chorus of critics argues that Google is more of an innovation-killer than an innovation-fueler, and suggests it might be time for government antitrust authorities to step in.

Traditionally, arguments about antitrust and government intervention have focused on the potential costs imposed on consumers, notes Andrea O’Sullivan. But there’s little evidence Google is ill-serving its customers. So what’s the problem?

View this article.

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Stocks Slide, Breakevens Tumble After White House Confirms $100BN China Deficit Target

Could Dennis Gartman be right?

For the third day in a row, stocks have burst higher out of the gate, only to be met with a wave of selling which has promptly pushed the S&P to session lows.

While there has been no specific news catalyzing the move, traders are attributing the move to a sudden drop in 10Y breakevens – with 10Y real rates unchanged – as long-term inflation pressures are suddenly looking far less pressing…

… which in turn has pushed Breakevens back levels not seen in one month as real 10Y yields remain rangebound.

One potential factor spooking risk may be a Reuters headline, which confirms that the White House is seeking a $100 billion reduction in the trade deficit with China:

  • DJ WHITE HOUSE CONFIRMS IT IS SEEKING $100 BILLION REDUCTION IN U.S. TRADE DEFICIT WITH CHINA

This confirms reports from last week that the Trump administration is planning to cut the annual US trade deficit with China by USD100bn. For context, the US-China trade deficit reached a record USD375bn last year, which means the White House is targeting roughly 26.7% of trade.

Meanwhile, after the tariffs on US steel and aluminium imports as per Section 232, the technology sector is considered the next target as the US wants to tackle China’s use of intellectual property. Reports suggested such tariffs could come as early as this week with sources noting that anywhere between $30bn and $60bn in tariffs may be targeted. It appears that after generally ignoring trade war news, markets are becoming incrasingly sensitive to any trade developments in the aftermath of Tillerson’s departure.

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WTI Down, RBOB Up After Huge Gasoline Draw, Crude Build, Record Production

WTI/RBOB prices held gains from last night’s smaller-than-expected crude build from API, but prices action was mixed after DOE reported a bigger than expected crude build and bigger than expected gasoline draw (as production hit a new record high).

Bloomberg Intelligence’s Valle notes that maintenance season for refiners will deplete gasoline inventories over the coming weeks as the plants open space for summer components. Despite an improving outlook for demand, crack spreads haven’t meaningfully recovered after falling more than $1.20 a barrel over the past month, though they may recoup some of their losses in coming weeks. Demand is up 3% in 2018 vs. the five-year average.

“The oil market is more fragile than it seems,” said Norbert Ruecker, head of commodity research at Julius Baer Group Ltd. in Zurich. “Demand growth is strong, but supply is catching up.”

API

  • Crude +1.156mm (+2.5mm exp)

  • Cushing -155k (unch exp)

  • Gasoline -1.262mm

  • Distillates -4.258mm – biggest draw since Oct 2017

DOE

  • Crude +5.022mm (+2.25mm exp)

  • Cushing +338k (unch exp) – first build since Dec 2017

  • Gasoline -6.27mm – biggest draw since Sept 2017

  • Distillates -4.36mm – biggest draw since Oct 2017

Some stunning numbers here with a much bigger than expected crude build as products saw a huge draw (and Cushing stocks actually increased for the first time this year)…

Blomberg does have one major concern. Javier Blas issues a “statistical warning”The EIA is again running a huge adjustment factor to hammer down its supply, demand, and stocks balance sheet into place. The adjustment was last week positive to the tune of 605,000 b/d (the only second time in 10 years the adjustment factor is positive by more than 600,000 b/d). The previous week, the adjustment was -570,000 b/d.

Once again, all eyes are on US Crude production – especially following OPEC’s comments this morning (via Bloomberg):

OPEC for the first time is forecasting that new oil supplies from its rivals will exceed growth in demand this year as the U.S. industry thrives.

The Organization of Petroleum Exporting Countries raised its expectation for supply growth from the U.S. and other producers for a fourth consecutive month, according to its monthly market report. The outlook suggests efforts by the group and Russia to clear a global glut by cutting supply are backfiring, as new production emerges, particularly in the U.S.

And expectations were for a 20K uptick in Lower 48 production but aggregate US oil production rose 12k b/d to a new record high..

 

The kneejerk reaction to the DOE sent WTI/RBOB and Energy stocks higher BUT once the large crude build and production were noted, prices began to sink quickly…

 

“The oil market is looking increasingly oversupplied,” said Tamas Varga, an analyst at PVM Oil Associates Ltd. in London. “Risk is currently skewed to the downside.”

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Democrats Furious Over Hillary Clinton’s Latest Comments

Nobody’s talking about it, but President Trump appears to have kicked his habit of rehashing the 2016 election. The same, however, cannot be said for Hillary Clinton, and some Democrats have just about heard enough.

Last night we reported that Clinton’s own former campaign manager Patti Solis Doyle slammed Hillary over her bizarre recent comments. This morning, the Hill reports that some of Clinton’s former aides, surrogates and ideological peers are echoing this, and saying the former presidential contender should maybe tone down the carping about the 2016 election. Many, are in fact angry, and believe it’s harmful to the party.

And for anybody who isn’t Hillary Clinton, apparently, it’s fairly obvious why somebody might want this. During a conference in India this weekend, Clinton boasted that states that backed her in the election were more “economically advanced” than states that backed Trump. That remark echoed another Clinton gem – her famous “basket of deplorables” comparison – which helped galvanize popular opinion against the former first lady by exposing her for the out-of-touch elitist she is.

Hillary

But that wasn’t all: Clinton also claimed that women who voted for Trump mostly did so because that’s what their husbands (or sons or bosses) wanted, which doesn’t sound very feminist to us.

Even Clinton’s closest allies admitted that these comments were “cringeworthy,” and they worried Clinton’s continuing commentary could hurt red-state Democrats during the mid-terms in November 2018.

“She put herself in a position where [Democrats] from states that Trump won will have to distance themselves from her even more,” said one former senior Clinton aide. “That’s a lot of states.”

Another surrogate who spoke with the Hill questioned Clinton’s rationale for making these remarks, and for months now, many party insiders have privately grumbled that her remarks have been counterproductive.

Though one former Obama aide argued that, if Clinton can’t or won’t be silenced, it’d be best if she got all of these responsibility-deflecting comments out of her system.

One former senior Obama White House aide added, “If these statements are a form of catharsis, it would be in the Democratic Party’s best interest for her to get these out of her system soon.”

“We need leaders like her to look forward to 2020 and how to unify the party, not continue to re-litigate the past.”

Even a spokesman for the Republican National Committee admitted that, though they’ve been trying *not* to focus on Clinton – her latest gaffe was too funny to ignore.

“At the RNC, we try not to continue to focus on Hillary Clinton. We really do try very hard,” Reed said. “But this one is impossible to ignore.”

Clinton also claimed during her diatribe that Trump voters “don’t like black people getting rights,” and “don’t like women getting jobs.”

“Putting aside how absurd and wrong she is, rhetoric like this is the reason Sen. [Jon] Tester was forced to release an ad today, 8 months before Election Day, attempting to highlight areas of agreement with President Trump,” the RNC spokesman said. “The Democrat brand is isolated, elitist, and as out-of-touch as it ever has been.”

And as long as Democratic candidates are chained to this perception, they will continue to lose elections. They might even lose to Trump in 2020.

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Business Inventories Jump As Sales Slump Most In 18 Months

Business Inventories rose 0.6% MoM in January (es expected, so unlikely to impact Q1 GDP expectations) but Business Sales slumped 0.2% MoM – the biggest drop since July 2016.

Motor Vehicles saw a 1.7% surge in inventories in January (and 0.9% drop in sales).

On a YoY basis, Business Sales growth is slowing dramatically (after the storm-driven spike)…

 

All of which has pushed the inventories-to-sales indicator higher for the first time in 7 months…

 

The ‘Field of Dreams’ economy is alive and well it seems.

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The Growing Insurrection Against Trump’s War on Immigration

Trump’s war on immigration, it seems, is encountering a mounting insurrection. That’s to be expected given the scope of his administration’s actions against peaceable immigrants.

The Department of Homeland Security Trump nosespokesman James Schwab quit this week declaring that he does not want to participate in the administration’s campaign of lies.

The whole thing started last month when the president berated the mayor of Oakland, California, Libby Schaaf, for thwarting a four-day Immigration and Customs Enforcement (ICE) sweep by issuing a public warning that the raid was coming.

Trump called Schaaf a “disgrace” and claimed that had it not been for her missive, ICE would have caught a majority of the 1,000 people it was looking for rather than a mere 232. Furthermore, he alleged, that most of these folks were criminals and Schaaf’s actions had endangered public safety. Attorney General Jeff Sessions piled on as well. “How dare you? How dare you needlessly endanger the lives of our law enforcement officers to promote a radical open borders agenda?,” he thundered.

As it turns out, Schwab too is no fan of mayor Schaaf’s actions, even openly calling them “misguided.” However, he believes that the administration’s claims were totally false and didn’t want any part in spreading them. “I didn’t feel like fabricating the truth to defend ourselves against [the mayor’s] actions was the way to go about it,” Schwab commented. “We were never going to pick up that many people,” he maintained. Nor were 100 percent of unauthorized aliens “dangerous criminals” as the administration touted, he said.

In fact, as ICE later fessed up, only five of the 864 who managed to escape the dragnet had been convicted of serious crimes. Of the 232 people arrested, 115, or just under half, had “prior felony convictions for serious and violent offenses” or past convictions for “significant or multiple misdemeanors.” The other half had no criminal history at all.

Yet ICE insisted that all of them were fair game because they were “in violation of immigration law.”

This statement goes to the heart of the restrictionist case for a harsh enforcement regime, namely, that undocumented immigrants are law-breakers who deserve to have the book thrown at them. If individuals are allowed to simply pick and choose which laws they want to obey and which they want to ignore, the thinking goes, the country will collapse into mayhem and chaos. So it doesn’t matter if the rule of law is good or bad, it needs to be enforced.

The trouble with this argument is that it fails to consider the law-and-order consequences of trying to enforce inhumane and irrational laws.

When laws are just and sensible they are for the most part self-enforcing because the vast majority of people obey them automatically. Indeed, most people don’t go around killing, stealing, pillaging and raping. So authorities have to go after only an infinitesimally small subset of violators, which in functioning polities is a manageable task.

However, when laws are arbitrary and unjust, they lack an automatic majority buy-in and two things happen: Either people become indifferent to these laws and don’t care if they are enforced (even when they don’t actively oppose them they can’t muster too much enthusiasm for them)—or they actually profit from subverting them.

Consider alcohol bans: Non-drinkers may or may not mind laws against drinking, but they would have to be real moral zealots to turn in fellow citizens who happen to enjoy a dry martini. Most people just aren’t such dicks. So, contrary to, say, murder or theft, crimes that have actual victims, authorities cannot rely on spontaneous compliance or cooperation to enforce such bans. They have to resort to an ever more elaborate enforcement apparatus to launch witch hunts. Their use of force inevitably becomes disproportionate and therefore itself lawless.

And as law enforcement becomes draconian it spawns resistance.

That’s the stage we are approaching under Trump on immigration. Indeed, he is cueing up a moral showdown not unlike the one that America saw in the run up to Civil War when the Fugitive Slave Act was passed, as I have noted previously. Just as this act requiring Northern states to return fleeing slaves to their Southern masters generated a massive abolitionist backlash, Trump’s anti-immigrant jihad is provoking widespread resistance.

Indeed, the Oakland mayor is not the only one now openly flouting and subverting Trump’s draconian immigration designs. That’s what the entire sanctuary movement is all about. Schaaf’s actions are no doubt calculated to promote her political interests—just as Trump’s are calculated to promote his. But the difference is that as Trump escalates his use of state violence against peaceful individuals, the moral high ground is increasingly on the side of Schaaf-style “resistance.”

Even before Trump took office, Obama’s immigration crackdowns were triggering an incipient sanctuary movement with four states and 300 municipalities declaring themselves sanctuary jurisdictions. Since Trump, these entities have proliferated even more. Indeed, health centers, college campuses, and even transit lines such as BART (Bay Area Rapid Transit) have declared that they will not assist with federal immigration enforcement actions. Sanctuary churches offering shelter to undocumented aliens facing deportation have doubled from 400 to 800 under Trump.

Imagine how different their response would have been if the feds were trying to apprehend actual terrorists or serial killers. Or what the public reaction would have been at such non-cooperation. That’s why Trump and Sessions are straining so mightily to convince everyone that illegal immigrants are bad hombres and criminals.

But the very fact that they have to try to convince people demonstrates the weakness of their case. The fact of the matter is that the very act of enforcing a bad rule of law undermines it. Ultimately, it loses. The question only is how long that takes and how many innocent lives are ruined in the interim.

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Post Tillerson: Is The Iran Nuclear Deal (& Its Oil Production) At Risk?

Authored by Nick Cunningham via OilPrice.com,

President Donald Trump sacked Secretary of State Rex Tillerson via Twitter on Tuesday, replacing him with current CIA Director Mike Pompeo. The move has some grim implications for the U.S.’ approach towards Iran in the months ahead.

Sec. of State Rex Tillerson has been panned as “at or near the bottom of the list of secretaries of state, not just in the post-Second World War world but in the record of US secretaries of state,” according to Paul Musgrave, a scholar of US foreign policy at the University of Massachusetts Amherst. Other foreign policy scholars came to the same conclusion. Tillerson presided over a dismantling of the U.S. diplomatic corps – upwards of 60 percent of the agency’s top career diplomats resigned – and will exit Foggy Bottom without any notable accomplishments.

But, the dismal tenure for Tillerson could be followed by an even darker period in which the U.S. steps up confrontation on multiple fronts around the world. For all his faults, Tillerson, at least by comparison, was viewed as a relative moderate. He will be replaced by the current CIA Director Mike Pompeo, a notorious hawk who has politicized the CIA to great degree.

And one of Pompeo’s top targets could be Iran. Pompeo has previously called for tearing up the 2015 Iran nuclear deal. “Pompeo has done nothing but talk about how we need to take the gloves off,” Stephen M. Walt, a professor of international relations at Harvard’s Kennedy School, told the New York Times. Indeed, the NYT notes that just days after Trump was elected, Pompeo wrote in Twitter, “I look forward to rolling back this disastrous deal with the world’s largest state sponsor of terrorism.”

Pompeo has repeatedly signaled support for a harder line, whereas Tillerson appeared to be one of the few figures holding the administration back from taking aggressive action on Iran and North Korea.

As such, heightened confrontation or outright conflict with Iran appears more likely.

The President has to periodically recertify that Iran is complying with the terms of the deal, waiving U.S. sanctions for several months. Trump has done this several times, begrudgingly, in part due to Tillerson’s persuasion. With Tillerson out and Pompeo in, all signs pointing to the U.S. trying to rip up the agreement when the next recertification deadline arrives in May.

In fact, Trump explicitly said on Tuesday that one of the reasons for Tillerson’s removal was because of their disagreement over the Iran deal. “If you look at the Iran deal I think it’s terrible and I guess he thought it was OK … We weren’t really thinking the same,” Trump said in a statement outside the White House on March 13.

So, what does all of this mean for the oil markets?

A recent study from Columbia University’s Center on Global Energy Policy looked at some potential scenarios. The report estimated that Iran could lose around 400,000 to 500,000 bpd in the first year after U.S. sanctions targeting Iranian oil purchases returned. That number would rise to about 600,000 bpd if the U.S. managed to bring China, India or Turkey on board, the report says.

However, the Trump administration will have difficulty lining up support from key allies and other international partners, and not just because it is burning bridges at a torrid pace (see: steel tariffs, Paris Climate Agreement). By all accounts, there is little evidence that Iran is breaking the terms of the deal, and by walking away, the U.S. looks like the one breaching the contract, not the other way around.

Even as the U.S. appears more likely to walk away from the Iran deal, there are still a lot of uncertainties that remain. There are multiple sanctions upon which the Trump administration has to make decisions. The international reaction will also present new challenges. It is unclear how Iran might respond. As it relates to oil, the Columbia University report notes that what constitutes “crude oil” is somewhat subjective, so it remains to be seen how Iranian oil exports are affected by specific U.S. actions.

The upshot is that firing Rex Tillerson and replacing him with an Iran hawk does not bode well for the longevity of the Iran nuclear deal. That presents new threats to Iran’s oil supply, with a potential outage of half a million barrels per day possible if the U.S. decides to go down the road of confrontation.

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“This Hostile Action Is Unacceptable”: Russian Embassy Responds To UK Expulsions

In the first of what will be many tit-for-tat retaliations now that the “cooperation” game-theoretical regime between Russia and the UK has broken down, moments ago the Russian embassy responded to the UK’s expulsion of 23 diplomats.

In a statement it said:

“On 14 of March Russian Ambassador Alexander Yakovenko was summoned to the Foreign and Commonwealth Office where he was informed that 23 diplomats were declared personae non gratae.”

We consider this hostile action as totally unacceptable, unjus