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Three months after the Fed “modestly” downgraded its outlook on the US economy from “modest to moderate” growth to “slight to modest pace”, and two months after Fed appeared to give its outlook a modest uptick saying that at the national level, economic activity expanded “modestly” from October through mid-November, in the just released January Beige Book, the Fed kept its economic assessment broadly unchanged, saying “economic activity generally continued to expand modestly in the final six weeks of 2019″ with the Dallas and Richmond Districts noting above-average growth, while Philadelphia, St. Louis, and Kansas City reported sub-par growth.

In welcome news for the economy, the primary driver behind US GDP, consumer spending grew at a modest to moderate pace, with a number of Districts noting some pickup from the prior reporting period. On balance, holiday sales were said to be solid – although Target may beg to differ – with several Districts noting the growing importance of online shopping.

Some more big picture details:

• Vehicle sales generally expanded moderately, though a handful of Districts reported flat sales.
• Tourism was mixed, with growth reported in the eastern seaboard Districts but activity little changed in the Midwest and West.
• Of note, manufacturing activity was essentially flat in most Districts, as in the previous report, while business in non-financial services was mixed but, on balance, growing modestly.
• Transportation activity was also mixed across Districts, with a majority reporting flat to weaker activity.
• Banks mostly  characterized loan volume as steady to expanding moderately.
• Home sales trends varied widely across Districts but were flat overall, while residential rental markets strengthened.
• Some Districts pointed to low inventories as restraining home sales. New residential construction expanded modestly.
• Commercial real estate activity varied substantially across Districts. Agricultural conditions were little changed, as was activity in the energy sector.
• In many Districts, tariffs and trade uncertainty continued to weigh on some businesses.
• Expectations for the near-term outlook remained modestly favorable across the nation.

Still, even though the Fed said there was no material change from December, an analysis by IFR observed that the latest Beige Book depicted economic activity that was “more modest and less moderate” based on a word count analysis. In this way, Reuters analysts said that they viewed the latest Beige Book “as a deterioration from the last version on November 27, 2019.”

Focusing on the labor market, the Beige Book found employment “steady to rising modestly in most Districts, while labor markets remained tight throughout the nation.” More notably, “most Districts cited widespread labor shortages as a factor constraining job growth, and, in a few cases, business expansion”, yet once again few businesses were willing to boost wages to attract workers.

It’s gotten so bad that according to Kansas Fed contacts there were “shortages for hourly retail and food services positions, mechanics, truck drivers, skilled construction, software developers, pharmacists and nurse practitioners“, the Chicago Fed said that “manufacturers facing slow demand again reported cutting hours rather than laying off workers because they were worried the tight labor market would make it too difficult to hire when demand recovered” while the St. Louis Fed pointed out that “firms continue to raise benefits, lower hiring standards, automate positions, and increase existing employees’ responsibilities due to chronic worker shortages.“

And to think, all this could be avoided if they only hiked wages…

A few Districts noted brisk demand for professional, technical, and managerial workers. A number of Districts reported job cuts or reduced hiring among manufacturers, and there were scattered reports of job cuts in the transportation and energy sectors.

As usual, wage growth was characterized as modest or moderate in most Districts—similar to the prior reporting period—and there were scattered reports of wage increases from year-end hikes in minimum wages, but not too much as otherwise the Fed may be forced to hike rates and crash the market admitting that inflation is starting to emerge. A few Districts also noted the use of benefits, incentives, training programs, and automation to reduce vacancies.

And speaking of inflation, the Fed said that prices continued to rise at a modest pace during the reporting period, as did input costs. A number of Districts reported that retail selling prices rose at a slightly faster, but still subdued, pace. A few Districts indicated that some businesses were passing along tariff costs to consumers—mostly in retail but also in construction.

Furthermore, some Districts noted that restaurants were being pressured by rising food prices. which is in addition to nearly half of US restaurants feeling the heat from rising wages as we reported previously. Meanwhile, deflation was also present amid “scattered reports of declining prices in some manufacturing industries, as well as in the energy sector.” Those Districts reporting on price expectations indicated that prices were expected to continue to rise in the months ahead.

Quantifying the modest improvement in the economy, respondents’ concerns about both the trade war and the economy appeared to wane, with “Tariff” mentions dropping from 30 to just 20, the lowest since June, while mentions of “slow”-ness eased further, and dropped from 51 to 38, also the lowest since June, and generally expected in light of the modest improvement in the broader outlook.

Finally, here are some of the most notable Beige Book anecdotes from the various regional Feds, as picked by Bloomberg:

• Boston: A fish producer said that tariffs had stabilized but the resulting costs were difficult to pass on to supermarkets
• New York: Businesses in most sectors reported that wage growth has been modest and little changed, though contacts in finance reported flat wages overall
• Philadelphia: Proposed tariffs on European wine prompted an area merchant to stock up with over 35,000 cases to beat the February sanction and minimize price hikes
• Cleveland: One large department store contact said that Black Friday turnout lifted November sales to ‘abnormally strong’ levels
• Richmond: A couple of firms in D.C. noted that political uncertainties, including a potential government shutdown, hampered demand for IT consulting and teleservices
• Atlanta: Logistics firms noted substantial increases in e-commerce activity over the reporting period as compared with year-earlier levels
• Chicago: Contacts continued to report shortages of GM replacement parts following the UAW strike
• St. Louis: Firms continue to raise benefits, lower hiring standards, automate positions, and increase existing employees’ responsibilities due to chronic worker shortages
• Minneapolis: Poor snow conditions across much of Montana meant slower activity early in the ski season
• Kansas City: Contacts noted shortages for hourly retail and food services positions, mechanics, truck drivers, skilled construction, software developers, pharmacists and nurse practitioners
• Dallas: Agricultural producers expressed concern over dry conditions damping crop production next year
• San Francisco: A financier from Southern California mentioned slower demand for high-end properties, noting that their development was constrained by tighter financing options and longer processing times

The bottom line: the Beige Book was another goldilocks slamdunk, where labor shortages continue to get worse by the day yet where no employer has even considered hiking pay keeping wage growth at bay, which is sufficient to justify the Fed’s decision to stay “patient” on future interest-rate hikes (or cuts) amid a healthy, but modest economic expansion, one where the only thing that matters is the S&P500.

After a roughly two-year trade war fraught with delays and periods of intense acrimony between the world’s two largest economies, President Trump and Vice Premier Liu He have signed the ‘Phase 1’ trade deal.

Now, Washington’s initial insistence that a ‘partial’ trade agreement was out of the question – and that Beijing must be ready for an all-or-nothing deal – seems almost comical in retrospect.

But as investors digest the newly released text of the deal, the BBC has published a quick guide outlining the winners and losers from the deal.

* * *

Winner: Donald Trump

Some critics say there is little substance, but the signing offers an opportunity for US President Donald Trump to put the trade war behind him and claim an achievement heading into the 2020 presidential election.

That may be a relief: Polls show that most Americans agree with the president that China trades unfairly, but they generally support free trade and oppose tariffs. Indeed, Republicans lost several congressional seats in 2018 – a change economists have linked to the trade war.

Winner: President Xi Jinping

China appears set to emerge from the signing having agreed to terms it offered early in the process, including loosening market access to US financial and car firms. In many cases, companies from other countries are already benefiting from the changes.

While President Xi can claim he did not simply bow to America’s demands, that doesn’t mean the Chinese are celebrating. The Federal Reserve estimates that China’s economy has taken a 0.25% hit, as US demand for its goods fell by about a third.

Loser: American companies and consumers

The new deal halves tariff rates on $120bn worth of goods, but most of the higher duties – which affect another $360bn of Chinese goods and more than $100bn worth of US exports – remain in place. And that’s bad news for the American public.

Economists have found that the costs – more than $40bn so far – are being borne entirely by US companies and consumers. And that figure does not even try to measure lost business due to retaliation.

Overall, the Congressional Budget Office estimates that tariff-related uncertainty and costs have shaved 0.3% off of US economic growth, while reducing household income by an average of $580 since 2018.

The CBO’s estimates take into account all new tariffs imposed since January 2018 – not just those involving China – but analysts say a more limited look would yield similar findings.

Loser: Farmers and manufacturers

The new deal commits China to boost purchases in manufacturing, services, agriculture and energy from 2017 levels by $200bn over two years.

Mr Trump has said that could include as $50bn worth of agricultural goods a year.

But other officials have put the figure lower and analysts are sceptical. So far, the primary effect on business has been pain.

Farmers, who have been targeted by China’s tariffs, have seen bankruptcies soar, prompting a $28bn federal bailout.

Among manufacturers, the Federal Reserve has found employment losses, stemming from the higher import costs and China’s retaliation.

Over the long-term, American firms may reroute supply chains away from China to avoid the tariffs – but that’s an expensive prospect.

Winners: Taiwan/Vietnam/Mexico

Globally, economists estimate that the trade war will shave more than 0.5% off of growth. But some countries have benefited from the fight, which redirected an estimated $165bn in trade.
Analysts at Nomura identified Vietnam as the country that would gain the most, while the UN found that Taiwan, Mexico and Vietnam saw US orders ramp up last year.

The Fed found that the increased American imports boosted Mexico’s economic growth by just over 0.2%.

Some of those arrangements are likely to stick, even with a deal.

Loser: Washington China critics

The US has said that China has agreed to new protections for intellectual property, including lowering the threshold for criminal prosecution and increasing penalties. Critically, the two sides say they have agreed to a way to resolve such disputes.

Those were among the issues that ostensibly triggered the trade war.

But analysts say it’s not clear if the new commitments are any different from promises that China has made before. And the new deal does not address some of America’s chief complaints about China’s trade practices – such as the subsidies it provides to certain industries.

The White House has said it will tackle additional issues in a second, “phase two” deal but analysts say they don’t expect anything concrete anytime soon. The administration has also discussed how to address the subsidies with Japan and Europe.

Source: BBC

* * *

Now that the full text has been released, the takeaway is pretty clear: Beijing is benefiting from the deal.

Trade deal summary: China will buy pigs it desperately needs, soybeans it needs to feed the pigs, and whatever oil it can’t buy from Iran due to US sanctions.

China also promises to buy more if it can, but won’t

— zerohedge (@zerohedge) January 15, 2020

China also “grants” US funds permission to invest in trillions of local non-performing loans.

In exchange, China will make public FX information it already publishes, and if the US feels China is violating the deal, it can be ended with one Trump Tweet https://t.co/ksrCiB0kxZ

— zerohedge (@zerohedge) January 15, 2020

Since details of the deal were embargoed until President Trump actually signed the pact, most investors have only just begun to read into it, and many are finding that the deal isn’t as meaty as they expected, said UBS floor manager Art Cashin. That’s caused stocks to move off their highs of the session.

But now that the deal is done and dusted, where will the market look next for the bullish headlines it needs to sustain the rally? That remains to be seen.

As the U.S. and China prepare to sign a Phase 1 trade deal on Wednesday, Reuters is reporting that the Trump administration is nearing publication of a rule that would expand its ability to block shipments of foreign-made goods to Huawei and other blacklisted Chinese companies.

Under the current rule, the U.S. Commerce Department has placed Huawei on a trade blacklist due to national security threats. This allowed the Trump administration to limit sales of U.S. technology goods to the company but didn’t block goods from foreign supply chains, which angered China hawks within the administration.

Two sources told Reuters there’s a push already underway in the administration to regulate more sales to Huawei that includes a wide variety of low-tech items made in foreign factories with little U.S. technology.

The sources said the Commerce Department has been discussing whether it should increase the De minimis Rule, which dictates how much U.S. content in a foreign-made product gives the U.S. government authority to regulate an export.

The current rule can block the sale of products to Huawei if there are more than 25% of U.S. components in the good. The new rule will lower the threshold to 10% and significantly expand the list of foreign goods that the Trump administration can block.

If the new rule is adopted by the Commerce Department, it would further complicate the relations between the U.S. and China, despite the optically pleasing Phase 1 trade deal that is expected to be signed on Wednesday

Via SchiffGold.com,

On Jan. 13, Peter Schiff appeared on RT Boom Bust with Bubba Horwitz to talk about the yuan, the dollar, the stock market and the US economy. Peter said the dollar is eventually going to collapse and it’s going to be a rude awakening for Americans.

The Chinese yuan has been gaining strength against the dollar in recent weeks, in part because of optimism that there will eventually be a resolution to the trade war. But the Chinese currency is still over 17% lower than it was when the US imposed its first tariffs. Does this mean the markets are cautiously positioning for a deal, or is there still skepticism about the phase 1 deal? Peter focused on the bigger picture.

Well look, a phase one might happen because a phase one is insignificant. The real deal is supposedly phase two. That’s the one that’s not going to happen. So, if anybody thinks we’re going to have a substantive deal, they’re wrong. But the reality is, I think the Chinese yuan is undervalued relative to the dollar and I expect it to rise rather dramatically over time.”

Peter said this is not good news for the US.

It’s going to make imports more expensive for Americans, so it’s going to reduce our standard of living. And I do think ultimately, it’s going to push up interest rates as well, as the Chinese and a lot of other creditors are no longer lending money to Americans, and so we have to draw from our own savings pool, which is extremely shallow. It means the Federal Reserve is going to be printing a lot more money as it monetizes the debt that the Chinese and other nations no longer want to buy, and this is further going to lower the American standard of living.”

Horwitz said it’s hard to get a read on the yuan because it doesn’t trade freely. It’s always pinned by the Chinese government. He said he thinks the Chinese will keep their currency low as long as they can to offset tariffs and keep Americans buying their goods. He said he doesn’t agree with Peter at all that the yuan will explode to the upside.

Peter said, be that as it may, the Chinese have made a mistake undervaluing their currency and they’ll eventually figure that out.

They did that deliberately because they wanted to maintain exports to the United States. But I think that was a key mistake. I mean, it helped America because we got to live beyond our means. But I don’t think it did anything for the Chinese economy. It helped undermine it. Because they accumulated a huge pool of US dollars and they ended up doing things with that – created malinvestments and other distortions. I think the best thing that can happen to China is simply to allow their currency to appreciate, to reduce their exports to the United States because we can’t afford to pay for those products, to let their own nation consume that production so that their own people can benefit from their hard work. But unfortunately, Americans are going to have a rude awakening when all of a sudden we have to live within our means. And our means have been dramatically diminished over the years. We haven’t been investing. We haven’t been saving. We’ve been relying on an overvalued currency to import what the rest of the world produces. And we haven’t saved very much. We’ve just been borrowing to consume and all this is going to come back to bite us.”

The stock markets continue to go up, despite a lot of bad economic data. Horwitz said stocks will continue to go up until they don’t, but at some point, the markets will melt down. Cheap monetary policy has created an environment where investors really have no place else to go. Horwitz said there is no way to time the crash, but people will have time to get out if they don’t panic when it starts selling off.

Peter said he doesn’t think people will have time to get out.

I think with this — this is a bubble. It’s going to pop. I agree. there’s no way to know how much air they’ll successfully blow into it. The minute it drops, everybody says the correction is over, you gotta buy the dip. So, I think most people are going to watch all their paper profits vanish … It’s not just going to be that people are going to lose dollars when the stock market bubble pops, but the dollar bubble is even bigger. And when that pops, even the dollars you haven’t lost are going to lose most of their value.  So, I think Americans are going to be wiped out in the US stock market and the bond market. I mean, people are going to be surprised at how much of their wealth they lose playing it safe in the bond market. Because you’re not playing safe. You’re playing with dynamite there. There are no US dollar-denominated assets that can be considered safe right now. It is a giant casino. And yeah, you know, people think the economy is good because they managed to blow more air into the stock market bubble and the bond market bubble, but the economy is in worse shape now than it’s ever been. It’s in far worse shape than it was before Trump took office, mainly because he continued to pursue the failed policies of Obama, who pursued the failed policies of Bush.”

The show opened with a discussion of Boeing and the impact lower aircraft sales could have on the US economy. Horwitz said this is what happens when a company gets in bed with the government and gets a plane out too fast. He said he thinks it will hurt US GDP going forward.

The host noted that Boeing has already lost $62 billion off its market cap and asked Peter if the company can recover?

Well, I’m sure over the long term, there will be a recovery. But in the short run, certainly, this will weigh on our exports, which also could weigh on the dollar. You know, I’ve been thinking the US dollar was headed lower anyway, but if we end up with bigger trade deficits in part because we have fewer exports of aircraft, that is going to be another factor of many that I think will be weighing down the dollar and the US economy.”

The full text of the 94-page US-China “Phase One” Trade deal is below, and here, courtesy of Bloomberg, are some of the top highlights:

Agriculture details:

• China Purchases to Include Oilseeds, Meat, Cereals, Cotton
• China to Buy Add’l $19.5B U.S. Agriculture Products in 2021
• China to Buy Add’l $12.5B U.S. Agriculture Products in 2020
• China to Approve Pending Applications for U.S. Bond Raters

As Bloomberg notes, China is committing to buying about $32 billion in additional U.S. farm products over the next two years, that’s coming on top of levels seen in 2017 (pre-trade war). Specifically, China committed to importing at least $12.5 billion more agricultural goods this year than in 2017, rising to $19.5 billion next year.It’s unclear just how this will happen without China’s destroying existing supply chains. China will also “strive” to purchase an additional $5 billion a year in farm products.

Energy details:

• China to Buy Add’l $33.9B U.S. Energy Products in 2021
• China to Buy More U.S. Nuclear Power Equipment in Trade Deal
• China Energy Purchases to Include LNG, Oil, Products, Coal
• China to Buy Add’l $18.5B U.S. Energy Products in 2020

Chinese Purchases

• During the two-year period from January 1, 2020 through December 31, 2021, China shall ensure that purchases and imports into China from the U.S. of the manufactured goods, agricultural goods, energy products, and services identified in Annex 6.1 exceed the corresponding 2017 baseline amount by no less than $200 billion.

Intellectual Property

• The U.S. recognizes the importance of intellectual property protection. China recognizes the importance of establishing and implementing a comprehensive legal system of intellectual property protection and enforcement as it transforms from a major intellectual property consumer to a major intellectual property producer. China believes that enhancing intellectual property protection and enforcement is in the interest of building an innovative country, growing innovation-driven enterprises, and promoting high quality economic growth.

Tech Transfer

• The Parties affirm the importance of ensuring that the transfer of technology occurs on voluntary, market-based terms and recognize that forced technology transfer is a significant concern. The Parties further recognize the importance of undertaking steps to address these issues, in light of the profound impact of technology and technological change on the world economy.

Currency, Competitive Devaluation And Enforcement Mechanism

The text contains agreements not to engage in competitive devaluation, to respect one another’s monetary policy and to maintain transparency. Much of that, though, could probably have been inferred from what the U.S. Treasury said the other day in the FX report that saw it remove the tag of currency manipulator from China.

The big questions revolve around the enforcement mechanism. The FX section says points of contention can be referred to a new dispute resolution arrangement that’s being established by the agreement, and if that doesn’t work, the IMF can be called in.

• 1. Issues related to exchange rate policy or transparency shall be referred by either the U.S. Secretary of the Treasury or the Governor of the People’s Bank of China to the Bilateral Evaluation and Dispute Resolution Arrangement established in Chapter 7 (Bilateral Evaluation and Dispute Resolution).
• 2. If there is failure to arrive at a mutually satisfactory resolution under the Bilateral Evaluation and Dispute Resolution Arrangement, the U.S. Secretary of the Treasury or the Governor of the People’s Bank of China may also request that the IMF, consistent with its mandate: (a) undertake rigorous surveillance of the macroeconomic and exchange rate policies and data transparency and reporting policies of the requested Party; or (b) initiate formal consultations and provide input, as appropriate.”

The dispute arrangement itself is outlined in chapter 7, where some of the key sections appear to be as follows:

• If the Parties do not reach consensus on a response, the Complaining Party may resort to taking action based on facts provided during the consultations, including by suspending an obligation under this Agreement or by adopting a remedial measure in a proportionate way that it considers appropriate with the purpose of preventing the escalation of the situation and maintaining the normal bilateral trade relationship.
• If the Party Complained Against considers that the action of the Complaining Party was taken in bad faith, the remedy is to withdraw from this Agreement by providing written notice of withdrawal to the Complaining Party.

Financial Services

• China shall allow U.S. financial services suppliers to apply for asset management company licenses that would permit them to acquire non-performing loans directly from Chinese banks, beginning with provincial licenses. When additional national licenses are granted, China shall treat U.S. financial services suppliers on a non-discriminatory basis with Chinese suppliers, including with respect to the granting of such licenses.
• No later than April 1, 2020, China shall remove the foreign equity cap in the life, pension, and health insurance sectors and allow wholly U.S.-owned insurance companies to participate in these sectors. China affirms that there are no restrictions on the ability of U.S.-owned insurance companies established in China to wholly own insurance asset management companies in China.
• “No later than April 1, 2020, China shall eliminate foreign equity limits and allow wholly U.S.-owned services suppliers to participate in the securities, fund management, and futures sectors.
• China affirms that a wholly U.S.-owned credit rating services supplier has been allowed to rate domestic bonds sold to domestic and international investors, including for the interbank market. China commits that it shall continue to allow U.S. service suppliers, including wholly U.S.-owned credit rating services suppliers, to rate all types of domestic bonds sold to domestic and international investors. Within three months after the date of entry into force of this Agreement, China shall review and approve any pending license applications of U.S. service suppliers to provide credit rating services.
• Each Party shall allow a supplier of credit rating services of the other Party to acquire a majority ownership stake in the supplier’s existing joint venture.”

Full deal text below (pdf link)