In the latest unexpected and ad hoc announcement on North American trade arrangements, the Globe and Mail reports that Trump’s Commerce Secretary pick, Wilbur Ross, has informed Canadian officials that he plans to reopen NAFTA talks within days of his inauguration, and that rules of origin and independent dispute tribunals will be central in negotiations of North American Free Trade Agreement. Ross has indicated new administration will send a formal letter notifying Canada and Mexico of plans to renegotiate Nafta within days of Trump’s inauguration.

According to the G&M, Trump “want to discuss country of origin rules and the independent dispute-settlement mechanism that are key features of the 1994 NAFTA pact, officials say.”

Country of origin rules, which govern how much content from outside NAFTA a product can contain and still qualify to be shipped duty-free, are specific to each product and spelled out in writing. They cover every kind of good and service, from suits to cars. The Trump administration is expected to take a harder line on exactly what can cross the border duty-free.

NAFTA’s tripartite dispute panels are also on Mr. Ross’s radar, officials say. The United States has long complained these independent panels are unaccountable and give too much power to Mexico and Canada.

However, in what is modest good news for Canada, a senior government official told The Globe and Mail the signals from Mr. Trump’s trade team indicate the trade focus will largely be aimed at Mexico, essentially cutting the United States’ southern neighbour out of many NAFTA benefits.

The clear indication we have gotten from that side of the operation is that they are targeting Mexico and not us,” the official said. “We are keeping an open line of communication with them so we know what things they are planning to do with Mexico and that have a major knock-on effect with us.”

 

Foreign Affairs Minister Chrystia Freeland has already contacted Mr. Ross, although the Trudeau government is relying heavily on former Progressive Conservative prime minister Brian Mulroney to act as an intermediary.

Still, it remains unclear just how much a renegotiation will have on Canada. Canada is the biggest trading partner of the United States, and Mr. Mulroney has strongly pressed the case about the importance of the Canadian economy to Mr. Ross and others, including the president-elect, a source said.

Mr. Trudeau sounded a positive note when asked at an event in Fredericton, N.B., on Tuesday about the threat of U.S. protectionist measures and a border tax on Canadian products.

 

“We are focused on having a constructive working relationship with the new administration and one in which we highlight the depth of integration and inter-connectedness between our two economies,” he told reporters. “Obviously, there are millions of Canadian jobs that depend on the U.S. market, but there are also millions of American jobs that depend on smooth integration and trade back and forth across the border of goods and services.”

Ross will have his confirmation hearing before the Senate Commerce, Science and Transportation Committee on Wednesday. He has been a vocal critic of free trade, and long advocated renegotiating NAFTA and other deals. He has called NAFTA the “poster child for unbalanced trade and investment” and accused Mexico of importing auto parts from China for vehicles it ships duty-free to the United States.

In an interview with Bell Media’s BNN in October, Mr. Ross said Canada would not have a “lot to fear” from a Trump presidency.  “You don’t hear him voice huge complaints about Canada, and there’s a good reason for that,” he said. “In the case of the trade between the U.S. and Canada, it is relatively much better-balanced than is the trade between the U.S. and Mexico.”

As for Mexico, keep an eye on the USDMXN which has been rising all session on the news.

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US retailer woes continued this morning, a trend the began well prior to the poor holiday spending season, when retail giant Target not only announced ahead of its Feb 28 Q4 earnigns result that comparable sales during the combined November/December period decreased 1.3%, but that “as a result of this softer-than-expected sales performance, the Company updated its fourth quarter and full-year 2016 guidance.”

Target now expects fourth quarter comparable sales in the range of (1.5) percent to (1.0) percent, compared with prior guidance of (1.0) percent to 1.0 percent. In fourth quarter 2016, Target expects both GAAP EPS from continuing operations and Adjusted EPS of $1.45 to $1.55, compared with prior guidance of $1.55 to $1.75.

For full-year 2016, Target now expects GAAP EPS from continuing operations of $4.57 to $4.67, compared with prior guidance of $4.67 to $4.87. The Company expects full-year 2016 Adjusted EPS of $5.00 to $5.10, compared with prior guidance of $5.10 to $5.30. The 43-cent difference between these ranges reflects $0.44 of early debt-retirement losses and a $0.01 benefit from the resolution of income tax matters.

“While we were pleased with Black Friday sales, December digital sales growth of more than 40 percent and continued strength in our Signature Categories, these results were offset by early season sales softness and disappointing traffic and sales trends in our stores,” said Brian Cornell, chairman and CEO of Target.

Target shares tumbled as much as 4.9% on the news, which has dragged Wal-Mart as much as 1.5% lower.

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In an interview airing this morning on Fox News, President-elect Donald Trump said Democrats shunning his inauguration this Friday should return their tickets. At least 54 House Democrats have pledged they will not attend the event, according to the latest whip list by The Hill. A growing number of Democrats have said they will break with tradition
and skip Trump’s presidential inauguration in three days. 

The number of boycotters has swelled following Trump’s recent feud with John Lewis, who said last week he does not view Trump as a “legitimate president,” and said he would not attend Trump’s inauguration, leading the president-elect to accuse him of being “all talk” and “no action” on Twitter. Democrats initially vowed they would not attend Trump’s swearing-in after last year’s bitter presidential campaign.

“As far as other people not going, that’s OK, because we need seats so badly,” Trump said during a Fox News interview scheduled to air Wednesday. “No, what happens to their tickets?” Trump asked host Ainsley Earhardt. “I hope they’re gonna give us their tickets. I hope they give me their tickets.”

A growing number of Democrats have said they will break with tradition and skip Trump’s presidential inauguration in three days. At least 54 House Democrats have pledged they will not attend the event, according to The Hill’s whip list.

Trump on Wednesday mocked Lewis, meanwhile, for saying he had never boycotted an inauguration despite doing so during former President George W. Bush’s in 2001. “He conveniently doesn’t remember. How do you forget if you go to an inauguration? I can tell you when I was at inaugurations and you don’t forget something like that.”

Separately, in the same interview, Trump said that he dislikes tweeting and uses Twitter as a defense against media. “Look, I don’t like tweeting,” Trump insisted during the interview. “I have other things I could be doing.”

“But I get very dishonest media, very dishonest press. And it’s my only way that I can counteract. When people make misstatements about me, I’m able to say it and call it out.” Trump additionally promised he would reduce his Twitter activity once the press treats him more respectfully.

“Now if the press were honest, which it’s not, I would absolutely not use Twitter,” he told host Ainsley Earhardt on “Fox & Friends,” adding, “I wouldn’t have to.”

Trump has repeatedly used Twitter for savaging opponents ranging from lawmakers to foreign leaders and even celebrities. Critics have voiced concern, however, that the social media platform’s 140-character limit is too simplistic for complex policy issues.

Trump’s tweets, meanwhile, have become the news market moving catalyst du jour, driving not only stock price moves but the entire news cycles.

Yesterday Fox News reported that Trump will use his personal Twitter account instead of the official presidential account once he takes office, according to a report from NBC News’ Kelly O’Donnell. Trump explained his reasoning for keeping his personal account in an interview with The Sunday Times.

“@realDonaldTrump I think, I’ll keep it. … So I’ve got 46 million people right now — that’s a lot, that’s really a lot — but 46 million — including Facebook, Twitter and ya know, Instagram, so when you think that you’re 46 million there, I’d rather just let that build up and just keep it @realDonaldTrump, it’s working — and the tweeting, I thought I’d do less of it, but I’m covered so dishonestly by the press — so dishonestly — that I can put out Twitter — and it’s not 140, it’s now 280 — I can go bing bing bing … and they put it on and as soon as I tweet it out — this morning on television, Fox — ‘Donald Trump, we have breaking news,’”

Trump created his @realDonaldTrump account in 2009 and has sent more than 34,000 messages on Twitter. He has more than 20 million followers. Obama created the first official presidential Twitter account @POTUS in 2015, but it has only 13.5 million followers, and he sent only 342 tweets as president.

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While Deutsche Bank shareholders have certainly seen some recent relief following last year’s stock acrobatics which sent the the largest German lender crashing to all time lows last fall, the bank’s employees have far less to look forward to.

First, it was a report by the NY post, according to which Deutsche Bank may hold back on giving out bonuses to as many as 90% of bankers and traders, noting that only the top 10% of revenue generators may get a bonus for 2016, and even that would be paid out over the next five years, according to a source briefed on internal discussions.

The bank was rocked last year by concern about its capital adequacy, a 23% in its share price and rising litigation bills from Europe to the U.S. Chief Executive Officer John Cryan, 56, has eliminated jobs, suspended dividends and sold risky assets to shore up profitability and capital buffers. The bank on Tuesday reached a $7.2 billion final settlement with the U.S. Justice Department over its sales of mortgage securities before the financial crisis. It’s still seeking to end an investigation related to its Russian unit. While reports have suggested that the settlement could affect the bank’s ability to pay bonuses, it couldn’t be confirmed if the bank had used incentive compensation for the settlement.

The post added that this wouldn’t be the first time that John Cryan, Deutsche’s CEO, has cut bonuses since taking over in 2014: last year, the bank cut the bonus pool by 11 percent and delayed paying its employees until March.

Then earlier today, Bloomberg confirmed the news when it reported that Deutsche will tell senior employees as soon as this week that they probably won’t get a bonus for 2016 because of the lender’s performance last year.

“The decision to withhold bonuses for management board members and most top bankers across the firm was taken at the end of last year and isn’t directly related to the cost of settling legal disputes, said the person, who asked not to be identified discussing internal matters. There will be some retention bonuses paid to the highest performers, according to the person.”

The decision won’t affect junior Deutsche Bank employees, who have already been shifted into fixed salaries.  In the autumn, the bank had explored alternatives to cash bonuses including paying staff with shares in the non-core unit or Deutsche Bank stock.

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European shares decline led by a plunge in Pearson shares, S&P futures were modestly in the green as Asian and EM stocks gained. The dollar rebounded against most major currencies after retreating 1.3% on Tuesday to the lowest in a month following Trump’s “strong dollar” comments and halted a seven-day drop against the yen.

Asian traders said shares were helped by hopes that the concerns about a stronger dollar expressed by the U.S. President-elect at the weekend, would be beneficial to emerging markets where companies have borrowed heavily in dollars. Asia’s MSCI’s ex-Japan Asia-Pacific shares index rose 0.3%, just shy of a three-month high hit last Thursday. Energy and cyclical stocks were the chief gainers. Short-covering also helped, especially in China where stocks tumbled more than 4% last week as traders took some money off the table before Trump’s inauguration on Friday. European stock markets were fractionally in the red steady after a choppy start, banking shares under pressure as investors chewed over details of the impact of regulatory fines on Deutsche Bank.

“You’ve seen the banks ease, everything has taken a breather after the strong start in January for stocks,” Andy Sullivan, a portfolio manager with GL Asset Management in London told Reuters. “The last few days have been choppier and for the rally to be sustained, we need to see earnings growth start to come through.”

The Yen and gold retreated for the first time in eight days. Bonds edged lower before Thursday’s ECB meeting, where few surprises are expected. Oil reversed course after earlier gains, slipping below $52 a barrel.  Sterling, which soared more than 3 percent on Tuesday after Prime Minister Theresa May’s Brexit speech, fell back 0.7 percent.

“Everything is just a partial reversal of the price action yesterday,” said RBC Capital Markets currency strategist Adam Cole, arguing that the greenback’s weakness had been primarily driven by excessive positioning at the end of last year.

Ahead of today’s December CPI report in the US, strengthening inflation in the U.K. and eurozone will likely underpin confidence in a growth rebound, however concerns about the policies of Trump and looming elections in Germany and France are among issues clouding the outlook according to Bloomberg. That’s taken the edge off the so-called reflation trade, with strategists starting to rethink bets on returning inflation and a stronger dollar.

“We need to see what the next steps from central banks will be, what policy action will follow the inauguration,” said Peter Schaffrik, the head of European rates strategy at Royal Bank of Canada. “We’ve had a lot of news flow. Markets need to see some concrete action.”

Meanwhile, the MSCI index of global share prices reached its highest since mid-2015 on Friday and, driven by a bounce in expectations for U.S. inflation and growth since Trump’s election, is within sight of all-time highs. But worries about the new U.S. president’s attitude to trade and politics, with relations with China in focus, have begun to show up more in some asset prices since the start of the year. As a result, with doubts growing about the sustainability of the “Trump trade” – higher stocks and a stronger dollar – investors’ favorite safe havens for capital have been in demand.

The Stoxx Europe 600 Index fell 0.2 percent. Pearson Plc plunged 27 percent to the lowest since 2009 after cutting its profit forecast for this year. The MSCI Emerging Markets Index rose 0.3 percent, poised for the highest closing level since Nov. 8. Futures on the S&P 500 added 0.1%. The underlying gauge lost 0.3% on Tuesday. 

The Bloomberg Commodity Index halted a five-day rally, retreating 0.4 percent. West Texas Intermediate crude slumped 1.5 percent to $51.67 a barrel, the most in a week. Gold lost 0.3 percent, snapping a seven-day winning streak that was the longest since November.

In rates, yields on 10-year Treasuries climbed three basis points to 2.36 percent, after falling seven basis points on Tuesday. Gilts yields rose, with the 10-year benchmark trading one basis point higher at 1.32 percent.

Market Snapshot

• S&P 500 futures up 0.1% to 2265
• Stoxx 600 down 0.2% to 362
• FTSE 100 down less than 0.1% to 7219
• DAX down less than 0.1% to 11537
• German 10Yr yield up less than 1bp to 0.32%
• Italian 10Yr yield down less than 1bp to 1.91%
• Spanish 10Yr yield up less than 1bp to 1.39%
• S&P GSCI Index down 0.8% to 397.5
• MSCI Asia Pacific up 0.3% to 140
• Nikkei 225 up 0.4% to 18894
• Hang Seng up 1.1% to 23098
• Shanghai Composite up 0.1% to 3113
• S&P/ASX 200 down 0.4% to 5679
• US 10-yr yield up 2bps to 2.35%
• Dollar Index up 0.24% to 100.57
• WTI Crude futures down 1.5% to $51.70
• Brent Futures down 1.5% to $54.66
• Gold spot down 0.2% to $1,215
• Silver spot down 0.3% to $17.15

Global Headline News

• Trump’s Options for Weakening Dollar Extend Far Beyond Tweeting
• By Ripping NATO, Trump Makes Europe Nervous and Arms Trade Happy
• Bayer-Monsanto Pledge Investment, Jobs After Trump Meeting
• Davos Cocktail Circuit Hums With Trump Optimism After Day One
• Amazon Said to Walk Away From $1 Billion Souq.com Takeover Talks
• Fed’s Williams Sees Gradual Hikes to Keep Economy on Track
• Oil Extends Gains Above $52 as U.S. Crude Supplies Seen Falling

Looking at regional markets, Asia stocks were mostly higher as the region shrugged off the negative lead from Wall Street where the financial sector led stocks lower amid an unwinding of the Trump trade. ASX 200 (-0.4%) was today’s laggard after weakness in financials dampened the tone, considering the sector’s near 50% index weighting and with the Big 4 banks all firmly lower. Nikkei 225 (+0.4%) was initially negative as JPY strength dampened exporter sentiment, although the index then recovered alongside USD/JPY reclaiming the 113.00 handle while Toshiba shares (+2.9%) outperformed on reports the Co. is mulling spinning off its semiconductor business. In China, Hang Seng (+1.1%) and Shanghai Comp. (+0.1%) were higher after another substantial liquidity operation by the PBoC valued at CNY 460BN, while participants also digested the latest Chinese property prices which showed continued stellar advances, albeit at a slightly softer pace. Of course, the “national team” ias now officially intervening, making sure there is no selloff during Xi’s Davos visit. Finally, 10yr JGBs saw mild losses amid the improvement in risk appetite and following a paltry BoJ buying operation valued at JPY 710bIn in government bonds ranging from 5yr-25yr+ maturities.

Top Asia News

• China Home Prices Rose in Fewest Cities in 11 Months Amid Curbs
• Hong Kong Regulator Sues StanChart, UBS Over 2009 Timber IPO
• China Stock Volatility Wanes Amid Speculated State Intervention
• Optimism Reigns in India as CEOs, Consumers Look Beyond China
• Diageo Said to Weigh Raising Stake in India’s United Spirit
• China’s Xi Takes on Trump in Rebuttal Against Protectionism
• Top Four Most Expensive Cities Worldwide in Asia, London Fifth

European markets are trading mixed this morning with the EUROSTOXX 600 trading flat and FTSE 100 trading higher after traders and investors digest yesterday’s Brexit speech from PM May. In stock specific news Pearson hit limit down following a 27.5% nosedive after the Co. announced they are scrapping 2018 profit target and dividend. Also of note, HSBC today announced bankers generating 20% of HSBC’s London  revenue may move to Paris which will raise some eyebrows after the aforementioned PM speech yesterday. Price action across fixed income markets have been somewhat subdued with the bund 2-10yr curve flattening by around 1bps. Elsewhere, Italy have begun marketing for their Sep’33 EUR dominated bond.

Top European News

• May’s Brexit Hardball Raises Chances of All-or-Nothing EU Deal
• Pound Rescued by May Faces Choppy Waters as Political Risks Loom
• U.K. Employment Steady, Wages Pick Up in Resilient Labor Market
• UBS’s Orcel Says Market Hasn’t Discounted All Negatives Yet
• Trump’s Barbs Aimed at Merkel Seen Aiding Her Election Pitch
• Chip Gear-Maker ASML’s Quarterly Sales Forecast Beat Estimates
• Sweden’s Biggest FX Trader Warns Rate Hike Could Come Quicker
• Pearson Cuts Forecast on Textbook Slump; to Sell Penguin
• Burberry Gives Fresh Boost to Luxury as Sales Beat Estimates
• Maersk Is Most Likely to List Energy Units Separately, CEO Says
• German Jobless Mystery Explained as Refugees Hide in Statistics

In currencies, the Bloomberg Dollar Spot Index added 0.4 percent at 11 a.m. London time, after retreating 1.3 percent on Tuesday to the lowest in a month. The pound dropped 0.8 percent to $1.2311 after surging 3.1% on Tuesday. The euro slipped 0.3 percent to $1.0684 while the Russian ruble gained 0.3 percent. The yen weakened 0.7 percent to 113.35 per dollar, after soaring 3.9 percent over the previous seven days. FX markets have been range bound this morning, with the USD rebounding but showing no signs of resuming its uptrend, but current levels still look corrective as yet. The US 10yr looks to have found a near term base at 2.30%, and this looks to have placed a bid in USD/JPY in the mid 112.00’s, but stock market risk continues to unnerve the market, prompting ongoing caution just yet despite the overwhelming yield differentials with signal a buy. EUR/USD looks to be finding plenty of selling interest on spikes above 1.0700, but the pullbacks are extremely shallow as the ECB meeting ahead still carries modest risk on any mention of tapering. USD/CHF is still hovering above parity as a result, but recoveries here are lacking in any traction to suggest further consolidation (or another setback) in the near term. For GBP, it looks as though the post PM speech honeymoon is over, as talk of City job losses to the continent have taken the shine off GBP. The domestic jobs report showed another healthy earnings rise of 2.7%, while the unemployment rate stays at 4.8%.

In commodites, moves have been largely muted, but for the erratic moves seen on Oil prices, though price action all inside established ranges, to suggest traders looking for sizeable orders either way. Focus on the USD keeps Gold supported for now, with equity markets also showing vulnerability ahead of the presidential inauguration at the end of the week to add a safe have bid under the yellow metal. The Bloomberg Commodity Index halted a five-day rally, retreating 0.4 percent. West Texas Intermediate crude slumped 1.5 percent to $51.67 a barrel, the most in a week. Gold lost 0.3 percent, snapping a seven-day winning streak that was the longest since November. Iron ore futures slid 0.6 percent on the Dalian Commodities Exchange, also ending a seven-day stretch of gains. Zinc led industrial metals higher in London, climbing as much as 1.7 percent for the first daily advance this week. S&P Global raised 2017 price assumptions for zinc, copper and iron ore.

Looking at today’s calendar, in the US the headline release is the December inflation report where market expectations are currently sitting at +0.3% mom for the headline and +0.2% mom for the core. Industrial and manufacturing production prints for last month will also be released, followed shortly after by the NAHB housing market index reading for this month. Away from the data, the most notable Fedspeak today will likely be Fed Chair Yellen when she speaks at 3pm ET in a discussion at the Commonwealth Club where she is expected to give an economic assessment. The Fed’s Kaplan will also speak at 9am ET and the Fed’s Kashkari at 4pm GMT. Away from that we’ll also get comments from the ECB’s Nouy while the EU’s Tusk is due to speak at European Parliament. Finally the US corporate reporting calendar today is headlined by Goldman Sachs and Citigroup, who both report prior to or at the US open.

* * *

US Event Calendar

• 7am: MBA Mortgage Applications, Jan. 13 (prior 5.8%)
• 8:30am: CPI MoM, Dec., est. 0.3% (prior 0.2%)
• 8:30am: Real Avg Weekly Earnings YoY, Dec., (prior 0.5%)
• 8:55am: Redbook weekly sales
• 9am: Fed’s Kaplan Speaks in Dallas
• 9:15am: Industrial Production MoM, Dec., est. 0.6% (prior -0.4%)
• 10am: NAHB Housing Market Index, Jan., est. 69 (prior 70)
• 11am: Fed’s Kashkari Speaks on Economy in Minneapolis
• 3pm: Fed’s Yellen Speaks in San Francisco
• 4pm: Total Net TIC Flows, Nov. (prior $18.8b)
• 4:30pm: API weekly oil inventories

DB’s Jim Reid concludes the overnight wrap

Given that Brexit discussions are all the rage again at the moment and that the Alps have become a regular holiday destination for me and the family, one wonders what the future holds for travelling to and from the continent. However it appears that perhaps Bronte may have given us residential status. Over the weekend I picked the family up from France after travelling through Europe on business in early January and after a 10 hour drive arrived at pet passport control in Calais only for the officers to refuse to let Bronte through immigration. It was a big shock but apparently her passport hadn’t been stamped properly when issued. She’s now been over the border several times and this hadn’t been picked up until now. After many frantic phone calls we eventually found a back street late night vet open a few miles drive away and they allowed us to get a fast tracked French passport for her after the requisite checks. So Bronte is now effectively a dual citizen without having to sing (or bark) “Le Marseillaise”.

While I didn’t hear any mention of animal migration rights in UK PM May’s hotly anticipated Brexit speech yesterday it was a fairly upbeat attempt at balancing a harder Brexit than the market would like with a commitment to being an open global player. It was a great speech in theory but a lot depends on the goodwill of EU member states for her to get her wishes of a comprehensive free trade agreement in goods and services with the continent. Even with such goodwill, it seems optimistic that this could get done within two years. So this may be a big challenge but there was enough flexibility and openness to the world in the speech and enough fear beforehand for it to be well received by markets. In fact GBPUSD (+3.05%) ended up eclipsing any of the huge daily gains made in 2008 and in fact had the best day since 1993 after closing last night at $1.241, although it has retraced about -0.60% this morning. A decent contributor to yesterday’s surge was the comments from President elect Trump to the WSJ on concerns over a strong dollar. 

Meanwhile, in addition to Trump’s comments, yesterday at the World Economic Forum in Davos, Anthony Scaramucci – who is a member of Trump’s transition team – added further weight to the argument by saying that “we have to be careful about a rising dollar”. The USD index finished last night down -0.86% and is now actually down -3.40% from the 2017 high mark already. Coming back to the Trump interview for a second, another comment from the President-elect which appeared to gain some traction was his one calling a so called border tax “too complicated”. The reaction in US equity markets following all this seemed to imply that there are growing doubts about what policies Trump might actually follow through on. With Treasuries continuing to unwind after the 10y yield fell 7.1bps yesterday to close at 2.326% and the lowest since November, it was financials that were most under pressure yesterday with the S&P 500 financials index tumbling -2.28% for its worst day since June last year. Amazingly that was despite another strong set of bank earnings yesterday with Morgan Stanley the latest to beat market expectations at the profit line after posting the biggest Q4 profit since the financial crisis. The S&P 500 and Dow both ended -0.30% while prior to this in Europe the Stoxx 600 had closed -0.15%. The FTSE 100 (-1.46%) was the standout underperformer though and clearly weighed down by that huge rally for Sterling.

This morning in Asia bourses have generally bounced back from a soft start. There’s been gains for the Hang Seng (+1.19%), Shanghai Comp (+0.45%) and the Nikkei (+0.60%), while the Kospi is little changed. Currencies in the region are generally stronger while rates markets are also fairly mixed. There’s also been some data out of China this morning with the December house price series. It showed that new home prices, excluding government subsidized housing, rose in 46 of the 70 main cities last month which compares to 55 in November, suggesting a cooling down in the market.

Staying with China, it was interesting to hear from China President Xi Jinping yesterday when he made his debut at the annual Davos shindig. While refraining from mentioning Trump by name, Xi said that “countries should view their own interest in the broader context and refrain from pursuing their own interests at the expense of others”. He also warned that “no one will emerge as a winner from a trade war” and referred to the Paris agreement as being a “hard-won achievement” and one that “all signatories should stick to”.

Moving on. The most notable data for us over the course of yesterday was the ECB’s bank lending survey. The survey reported that credit standards for loans to enterprises in the Euro area tightened in Q4 2016 for the first time in three years. While current conditions have tightened, the recent rally in European bank equities does indicate that a slowdown in lending may still be avoided and this was reflected in the survey with expectations of lending standards easing over Q1 2017. We published a Credit Bites report on this survey yesterday where you’ll find some more detail.

Away from that we also got the latest inflation numbers out of the UK. Headline consumer prices in December were reported as rising more than expected during the month (+0.5% mom vs. +0.3% expected) and helped to push the YoY rate up to +1.6% from +1.2%. The core also rose to +1.6% yoy from +1.4% and is now at the highest level since August 2014. Headline retail prices also rose a bit more than expected (+0.6% mom vs. +0.4% expected) although PPI output prices did miss (+0.1% mom vs. +0.4% expected). Meanwhile in Germany the January ZEW survey revealed that expectations rose 2.8pts during the month to 16.6 although that was slightly less than what the consensus estimate was pegged at (18.4 expected). In contrast, the current situation component surged to 77.3 (vs. 65.0 expected) from 63.5 and is at the highest level since 2011. Across the pond the NY Fed’s manufacturing survey weakened 1.1pts to 6.5 this month.

Before we look at the day ahead, there was also some interesting Fedspeak to mention yesterday. NY Fed President Dudley probably didn’t help the Dollar sell-off by saying that “the risk that the Fed will snuff out the expansion anytime soon seems quite low because inflation is simply not a problem”. He also said that “the economy is not growing much above its sustainable long-term pace”. Meanwhile the usually dovish Fed Governor Lael Brainard sounded a bit more hawkish by saying that “if fiscal policy changes lead to a more rapid elimination of slack, policy adjustment would, all else being equal, likely be more rapid than otherwise”.

Looking at today’s calendar, this morning in Europe we’re kicking off in Germany where the final CPI revisions for December will be made. We then turn to the UK where the November and December employment stats will be released, before we then get the final December inflation data revisions for the Euro area. This afternoon in the US the headline release is likely to also be the December inflation report where market expectations are currently sitting at +0.3% mom for the headline and +0.2% mom for the core. Industrial and manufacturing production prints for last month will also be released, followed shortly after by the NAHB housing market index reading for this month. Away from the data, the most notable Fedspeak today will likely be Fed Chair Yellen when she speaks at 8pm GMT in a discussion at the Commonwealth Club where she is expected to give an economic assessment. The Fed’s Kaplan will also speak at 2pm GMT and the Fed’s Kashkari at 4pm GMT. Away from that we’ll also get comments from the ECB’s Nouy while the EU’s Tusk is due to speak at European Parliament. Finally the US corporate reporting calendar today is headlined by Goldman Sachs and Citigroup, who both report prior to or at the US open.

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British education group, and the world’s largest education company, Pearson PLC lost a quarter of its market cap in an instant this morning after it issued a dire warning about the state of the textbook business, cut profit forecast, and warned of an “unprecedented” decline in its North American business. It also put its stake in the iconic Penguin Random House book business for sale in a bid to raise cash, not long after selling the Financial Times to the Nikkei.

In an unscheduled update ahead of its full-year results in March, the former owner of the Financial Times said it was revising down its prior operating profit goal for 2017 and rebasing its dividend this year after a sharp slump in an arm of its American business. Pearson said its North American courseware market was “much weaker than expected”, with net revenues falling 30 per cent in the fourth quarter, taking the overall yearly decline to 18 per cent. Operating profit in 2017 will be 570 million pounds to 630 million pounds, the London-based company said in a statement, below the average analyst estimate compiled by Bloomberg of 702.9 million pounds. The world’s largest education company withdrew its profit goal for 2018 after sales of materials for U.S. higher education dropped 30 percent in the fourth quarter.

“Whereas we had previously anticipated a broadly stable North American higher education courseware market in 2017, we now assume that many of these downward pressures will continue”, the company said. Furthermore, while Pearson said it expected 2016 operating profit in line with guidance, it scrapped its 2018 profit goal.

Chief executive John Fallon said Pearson was taking “more radical action to accelerate our shift to digital models, and to keep reshaping our business”.

“The education sector is going through an unprecedented period of change and volatility. We have already taken significant steps on restructuring, reducing our cost base by £375m last year”, said Mr Fallon.

The stunned market reacted quickly, and the company lost about a quarter of its market cap in minutes at the start of Wednesday trading. The shares were then halted on volatility after continuing their decline as analysts peppered executives with questions about their business and the industry on a conference call that extended past an hour. The company’s enrollment projections were too aggressive, Chief Financial Officer Coram Williams said on a conference call. Pearson sank to 585.5 pence in early trading in London, cutting the company’s market value to 4.81 billion pounds ($5.9 billion)

Pearson’s sudden capitulation contrasts with months of optimistic statements CEO John Fallon about the challenges Pearson faces in the U.S., where college enrollments and its testing business are down, and textbook sales unexpectedly declined, Bloomberg reports.

“It’s a difficult time for Pearson,” Fallon said on the call. The company is seeking to build a more sustainable and growing digital business, he said. “We’ll manage our balance sheet so we can sustain the company through this challenging transition.”

Despite record amount of student loans in the US, fewer older students are enrolling, community college admissions also are dropping, and more students are renting textbooks.

The company will also issue an exit notice over its 47% stake in publisher Random House to JV Bertelsmann, Europe’s largest media group by sales, “with a view to selling our stake or recapitalising the business and extracting a dividend”. The Penguin stake may raise as much as 1.2 billion pounds, according to Ian Whittaker, an analyst at Liberum Capital. Pearson will use it to strengthen its balance sheet and return excess capital to shareholders, the company said.

The dividend, which amounted to 52 pence a share for 2016, will be cut beginning this year to reflect the lower earnings guidance. The current dividend equals 6.4 percent of Pearson’s share price, the highest yield among companies in the U.K.’s benchmark FTSE-100 Index.

As Bloomberg adds, analysts have been questioning the health of Pearson’s education business since last year. Neil Campling, an analyst at Northern Trust Securities, called the announcement “the warning we’ve been expecting,” in a note on Wednesday. “The higher education business declined further and faster than the company expected in 2016 although in light of the plethora of negative data points we have highlighted throughout the year we are not surprised,” Campling wrote. “The North American higher-education courseware market essentially collapsed in the critical fourth-quarter back-to-school season.”

Pearson combined Penguin with Bertelsmann’s Random House in 2013, leaving the British company owning just under half of the venture, which publishes books from writers including John Grisham, Ken Follett and George R. R. Martin. In 2015, it generated revenue of 3.7 billion euros ($3.95 billion) and operating earnings before interest, taxes, depreciation and amortization of 557 million euros.

 

Random House, the world’s largest book publisher. The German company is open to increasing its stake in the venture “provided the terms are fair,” CEO Thomas Rabe said in a statement. “Strategically this would not only strengthen one of our most important content businesses, it would also once further strengthen our presence in the United States, our second largest market,” Rabe said.

Pearson gets almost all its profit from education after already selling the Financial Times and its half of the Economist Group. The company announced a reorganization last year as it seeks to address sluggish demand in its main business.

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Submitted by Nathan Keeble via The Mises Institute,

Finland has announced that it is conducting a social policy “experiment” which deserves closer examination. Through 2017 and 2018, Finland will provide a guaranteed basic income of 560 euros to 2,000 randomly selected welfare recipients. This benefit will be subtracted from other, currently existing welfare benefits that participants may be receiving, and, crucially, the payments will continue regardless of any other income that is earned. If a participant of this program finds a job, the government will continue to pay them the 560 euros in addition to any other income.

The Finnish government hopes — and many believe — that this program will help to alleviate poverty as well as make inroads in reducing the country’s current 8.1 percent unemployment rate. This test trial is supposed to prove it, potentially opening the door for a full implementation of a universal basic income (UBI).

Why People Support a Universal Basic Income

The universal basic income is being considered as a partial or complete replacement to the current means-tested system of welfare. Under the current system, welfare recipients’ benefits taper off and eventually stop, completely, based upon how much income individuals independently earn. Naturally, this creates a disincentive to rejoin the labor force, because people fear a reduction in total income as welfare benefits are removed or if they believe the added income from a job isn’t worth the labor. Demonstrated very simply, if someone is currently receiving a total income of $1,100 through a means-tested welfare program, many will be less likely to seek a job which will result in similar income levels, as most prefer leisure to labor.

Supposedly, the UBI’s main innovation is that it manages to largely avoid this long standing failure. Since everyone would receive the established basic income regardless of other income earned, proponents believe that people would still have strong income based incentives to work. Some have gone even further, suggesting that the program will be a positive for employment because the financial cushion provided by a UBI will help people in the transition from unemployment to employment. For instance, a struggling entrepreneur or artist could, in part, rely on it while building support.

For these reasons, the UBI has gained support from the entire political spectrum, including libertarian-leaning think tanks like the Niskanen Center.

Where UBI Proponents Go Wrong

A universal basic income is not the god-sent welfare policy that it initially seems to be. It does not create incentive to work. It won’t help solve unemployment, and it will not alleviate poverty. The truth is that a UBI will exaggerate all of these factors in comparison to what would exist in a more unhampered market. There is even reason to think that it would be worse in the long run than traditional, means-tested welfare systems.

First, UBI does not eliminate the disincentives to work that are inherent in welfare programs; it simply moves them around. This program must be financed after all, and any welfare system, including the UBI, is necessarily a wealth redistribution scheme. Wealth must be forced from those who have it to those who do not. This means that at some point on the income ladder, people must go from being net receivers of benefits to being net payers of benefits.

The progressive taxation that is necessary to finance a UBI means that the more a person earns, the higher percentage of their wealth will be taken from them. The work disincentives are therefore still very much present in the tax system. They’ve simply been transferred onto different, higher income groups of people.

UBI Diminishes the Power of Consumers in Directing the Marketplace

The universal basic income shares another problem with traditional welfare systems. Far from promoting the unemployed from searching for work the market rewards, it actually subsidizes non-productive activities. The struggling entrepreneurs and artists mentioned earlier are struggling for a reason. For whatever reason, the market has deemed the goods they are providing to be insufficiently valuable. Their work simply isn’t productive according to those who would potentially consume the goods or services in question. In a functioning marketplace, producers of goods the consumers don't want would quickly have to abandon such endeavors and focus their efforts into productive areas of the economy. The universal basic income, however, allows them to continue their less-valued endeavors with the money of those who have actually produced value, which gets to the ultimate problem of all government welfare programs.

In the marketplace, wealth is earned by generating value. When someone buys a good, they’ve earned the money they are spending by having produced something else. This is not so with welfare programs like a universal basic income. Money is forcibly taken from those who have produced enough to earn it, and given to those who haven’t. This allows for people who aren’t producing wealth to continue to consume scarce goods. Eventually, all government welfare leads to the consumption of wealth, or, at the very least, a reduction in the amount of wealth that would have been accumulated otherwise. When entrepreneurs have less need to respond to the needs and desires of their customers, consumers will find themselves with fewer choices and with lower-quality choices.This means that overall welfare makes everyone poorer than they would have been in a free market.

How Finland Really Can Reduce Poverty

If Finland (or anywhere else) wishes to help alleviate poverty and unemployment, the best steps to take are in the directions of reducing the cost of living and creating conditions favorable to plentiful employment.

Charles Hugh Smith recently outlined the basics:

This may seem obvious, but the conditions required for work to be abundant and the cost of living to be low are not so obvious. For work to be abundant:

• It must be easy to start a business.
• It must be easy to operate the new business.
• It must be easy to make a profit so the business can survive the first few years and,
• It must be easy to hire employees.

All these factors require an environment of low-cost compliance with regulations, low tax rates, low costs of transactions, reasonable transport costs, reasonable cost of money (but not near-zero), reasonable availability of capital for small enterprises, local and national governments that actively seek to smooth the path of new enterprises and existing enterprises seeking to expand, and a transparent marketplace that isn't dominated by politically dominant cartels and subservient-to-cartels government agencies.

This matters because the number one cause of the high cost of living is artificial scarcity created and maintained by monopolies, cartels, and the government that serves their interests. Artificial scarcity imposed by cartels and a servile state is the primary cause of soaring costs in a variety of sectors.

In Scandinavia, as in most countries, its is becoming increasingly difficult to open and sustain businesses. In Scandinavia especially, labor unions exercise immense power over private business, pushing up costs and raising barriers to entrepreneurship and creating new businesses.

As has always been the case, it is necessary to create wealth before it is possible to redistribute it, and policies that encourage movement toward less productive types of work will fail to produce the wealth that government planners would like to spread around.

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Bloomberg's Anne Swardson, Zoe Schneeweiss, and Andre Tartar perfectly summed up the state of play right now during their discussion of the World Economic Forum's annual get-together: "Never before has the gap between Davos Man and the real world yawned so widely."

As the world's top executives, financiers, academics, and politicians make their way to Switzerland, Trump – who won't have an official representative there – has expressed strong feelings about some of the countries sending delegations, including his own.

 

Source: Bloomberg

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Submitted by Alice Salles via TheAntiMedia.org,

The U.S. government’s efforts against illicit drugs have finally run their course. With over one trillion dollars wasted over the past several decades and nothing to show but failure, taxpayers are beginning to ask a simple yet pertinent question: Is it time to end the bottomless funding of this utterly ineffective anti-drug crusade?

With a $29 billion budget for the 2017 fiscal year, the Department of Justice (DOJ) has secured vast resources to the Drug Enforcement Administration (DEA). With a sizeable budget — $2.8 billion in 2015 — the agency tasked with the chore of enforcing “the controlled substances laws and regulations … and [bringing] to the criminal and civil justice system … organizations and principal members of organizations involved in the growing, manufacture, or distribution of controlled substances appearing in or destined for illicit traffic in the United States” has continued to be the number one drug warrior within the federal government. But the DOJ’s Criminal Division, which is tasked with overseeing multiple offices, also houses the Organized Crime and Gang Section (OCGS), an agency that specializes in “developing and implementing strategies to disrupt and dismantle” gangs and organized crime, including drug trafficking. The 2017 budget for the Criminal Division alone is $198.7 million, which represents a “9.3 percent increase over 2016.”

Over the years, these agencies have time and again been tasked with capturing drug lords and low-level sellers, attempting to put an end to the flow of illicit substances into the country. But despite the copious amounts of resources used in this task alone — whether it’s through the DEA, the OCGS, or even the Federal Bureau of Investigation (FBI) — illicit substance use (and abuse) has only grown across the country.

According to data released by the federal government, for example, “[a]vailability of methamphetamine remains high as evidenced by its accounting for the largest percentage of drugs identified from law enforcement seizures and its declining wholesale price.” And yet, President Barack Obama requested an increase in funding for agencies such as the DEA, FBI, and OCGS.

More Money, More Drug Problems?

Despite these agencies’ failures, the supply of other substances, like heroin, has also increased.

With overdose rates doubling in most states between 2010 and 2012 and a staggering 28,000 Americans dying of opioid overdoses in 2014, it’s hard to understand the logic behind increasing the budget for an agency or group of agencies working unsuccessfully around the clock to put a stop to the drug trafficking business. Are these agencies helping to stop the flow of illicit drugs by enforcing current laws, or are they making the problem even greater by forcing users to rely on the black market?

In the real world, where employees of businesses or non-public organizations have to demonstrate proficiency in their trade to remain employed, these institutions are unable to keep their doors open if they are not delivering results.

When it comes to the federal government, however, results have nothing to do with budgeting. Why? Because the federal government doesn’t produce wealth. Instead, it taxes residents.

The federal government’s funding comes from the money earned through the ingenuity, hard work, and entrepreneurial spirit of common people. But as we see almost regularly on the news, people tend to spend money unwisely when they haven’t earned it. The same happens inside institutions where employees and leadership all rely on the bottomless pit that is taxpayer ‘revenue.’

When it comes to the enforcement of laws regarding consumer goods — especially those seen as immoral or damaging to the individual’s health — these agencies tend to ignore reality.

Individuals are free to act on their desires and needs, basing their decisions on information they have at hand, but also on past experiences. As free agents, humans have the natural right to pursue their own lifestyles, which includes the use of illicit substances. The very core of principles used to guide the creation of the U.S. constitution clearly shows this. And for most of the country’s young history, drug use was not controlled by governments or law enforcement. Some of the founding fathers even grew their own hemp — a variety of the cannabis plant.

At some point, even the consumption of alcohol in America was outlawed. The result? The creation of some of the most legendary, law-breaking cartels the world has ever seen. But what else happened due to alcohol prohibition? More alcohol abuse (which the federal government attempted to battle by imposing an ill-fated policy of poisoning huge supplies of alcohol).

Like alcohol, drug abuse has turned into a problem because consumers have to rely on the black market for their products. Without access to clear information on these substances, consumers suffer tremendously. And without free competition, which would flourish without governments constantly hampering these efforts, consumers would be free to only pursue their habits by relying on the safest, most trusted sources.

If the goal is to put an end to the illicit drug trade, the federal government is embracing the very opposite of what they ought to, allowing their attempts to restrict drugs to empower black market entities taking advantage of anti-drug laws. Increasing the budget of law enforcement agencies and adding to the ever-growing burden on the U.S. taxpayer is not going to do anything to fix it.

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