THE TICKER

President Trump doesn’t have the stomach for his own trade war.

He tipped his hand Tuesday by softening his rhetoric toward China after Monday's stock market rout. And he underlined it in his Twitter tantrum over Harley-Davidson’s announcement that it will move some production abroad in response to new European tariffs.

The president signaled Tuesday he is abandoning plans to impose tough new investment restrictions on China that his administration had been arranging. Instead, he said he would work within his existing authority. "If Mr. Trump’s decision holds, it would represent a significant easing of threats the president has made against China and a possible olive branch to Beijing before the July 6 imposition of the first tariffs on Chinese goods under the Trump administration’s trade offensive," WSJ's Bob Davis writes. 

Trump's simultaneous attack on Harley-Davidson highlighted his unease with the mounting costs of his trade offensive.

The motorcycle maker said in a Monday regulatory filing that it will shift manufacturing overseas over the next year and a half to avoid levies by the European Union on its bikes in retaliation for Trump’s steel and aluminum tariffs — duties the company estimates will add $2,200 to the cost of the average hog it ships from the United States to the E.U. 

In response, Trump lashed out in tweets that were either confused or intentionally misleading. He accused the company of waving “the White Flag” and using the tariffs “as an excuse” to offshore jobs; threatened “a big tax” on Harley imports back to the United States; said the bikes “should never be built in another country-never!”; and predicted the move would be “the beginning of the end” and lead to the company being “taxed like never before!”

Harley-Davidson has extensive production overseas, in Australia, Brazil and India. A plant set to open in Thailand later this year — which Trump falsely asserted accounted for its decision to shutter a Kansas City operation that is in fact moving to York, Pa. — has been in the works since last year. The Thai operation will serve a growing Asian market, and the company says it has no plans to ship bikes built abroad back to the United States.

The bigger point, though, is the Harley-Davidson story represents the first wavelet preceding a likely tsunami of news about the possible economic consequences of an escalating trade war. And that was precisely the Europeans’ intent: They targeted the company to maximize the political pain for Trump specifically and the GOP more generally. The president has gone out of his way since the earliest days of his presidency to associate himself with the company's ruggedly iconic brand, hosting Harley-Davidson executives and workers on the White House lawn weeks after his inauguration and then touting the company in his first address to Congress. 

It isn’t clear yet how many American jobs Harley-Davidson will scrap with its move. But as my colleague Heather Long reported this week, the first layoffs from Trump’s trade offensive landed earlier this month when Mid-Continent Nail, the country’s largest nail manufacturer, fired 60 workers as rising steel costs have forced it to hike prices, crimping sales. The Tax Foundation projects the tariffs that Trump has already imposed will cost more than 48,000 jobs, with more than 200,000 additional jobs likely to evaporate if he follows through with $200 billion in extra duties on Chinese products. 

Some of those job losses will likely come from companies with similarly high Americana cache — and others will land heavily in Trump country. The European tariffs are also jacking up prices on Levi Strauss jeans, Jack Daniels whiskey, Tropicana orange juice and Skippy peanut butter. The Chinese are targeting agricultural products, including soybeans, corn, wheat and tobacco. 

And while the tit-for-tat tariffs that have characterized the trade conflict so far haven’t been sufficient to take a meaningful bite out of economic activity broadly, investors and economists are increasingly concerned the reprisals could spiral out of control. “A decline in confidence and supply chain disruptions could amplify the trade shock, leading to an outright recession,” Bank of America Merrill Lynch economist Michelle Meyer wrote in a Friday note. “We continue to believe that the probability of a full blown trade war is low but the risks are rising and it remains a key uncertainty to our outlook.”

Pro-trade Republicans are expressing mounting anxiety that the trade conflict will sap momentum from tax cuts they hoped would turboboost economic activity. Harley-Davidson’s experience offers a preview. The company estimated on its first quarter earnings call back in April that the higher material costs stemming from the metals tariffs were costing it $15 million to $20 million. That sum has likely risen by as much as $15 million since, Wedbush Securities analyst James Hardiman estimates. And Harley-Davidson says it will absorb as much as $45 million this year alone in costs from the new European tariffs rather than pass them on to consumers. Compare that potentially $80 million bill from Trump-launched trade hostilities to the roughly $70 million windfall that analysts say the company is likely to pocket from the slashed corporate tax rate the president signed into law last year. 

Trump feels personally betrayed by the company’s decision to move its production abroad, The Washington Post’s David Lynch and Phil Rucker report. But Wedbush’s Hardiman says Harley-Davidson is facing “a very painful couple of years” if it moves ahead with shifting operations. “This is going to be a major cost impact,” he said, and one the company won’t be able to reverse once it’s made. “If these tariffs are in place for a year, and Harley has taken on the cost and time and effort to get more production up and running in other parts of the world, I don't think those jobs will ever come back.”

Indeed, “management just wishes this wasn’t happening,” William Blair analyst Sharon Zackfia says. On top of the added costs and the turmoil, the headlines about offshoring and static with Trump amount to a major branding headache. “It’s going to be important for the company to define what they’re doing for their customers and remind them the U.S. motorcycles are made here by union workers.”

Harley-Davison executives have this much going for them: They at least know what they’re facing. Trump, demonstrably aggrieved by their decision, will have untold more to digest in the days ahead as he tries to prove his claim that trade wars are easy to win. 

MARKET MOVERS

— CBO predicts sharp rise in interest payments. The Wall Street Journal's David Harrison: “Rising interest rates will put increasing pressure on government finances and push interest payments to record levels in the coming decades, the Congressional Budget Office said Tuesday. In its annual long-term budget report, CBO said an improving economy and rising levels of federal debt would push debt payments from 1.6% of the gross domestic product in 2018 to 3.1% in 2028 and 6.3% in 2048, which would be the highest level ever. At that point, interest payments would equal spending on Social Security. . . . The agency projects that yields on the 10-year Treasury note would rise from under 3% today to 3.7% in 2028 and 4.8% in 2048. While that is still relatively low by historical standards, continued federal deficits during that time would push up the overall interest payments owed by the government.”

— Consumer confidence is down. Reuters: “U.S. consumer confidence ebbed in June, with households a bit pessimistic about their short-term income prospects, potentially signaling a slowdown in economic activity later this year. The Conference Board said its consumer confidence index fell to a reading of 126.4 this month from an upwardly revised 128.8 in May. The index was previously reported at 128.0 in May. 'While expectations remain high by historical standards, the modest curtailment in optimism suggests that consumers do not foresee the economy gaining much momentum in the months ahead,' said Lynn Franco, the Conference Board’s director of economic indicators.”

— Home prices increase. Bloomberg News's Sho Chandra: “Home prices in 20 U.S. cities continued to advance at a solid, albeit a touch slower, pace in April, reflecting lingering inventory shortages, according to S&P CoreLogic Case-Shiller data released Tuesday. . . . The report indicates a respite in the steady acceleration in property values since the end of 2014. Seattle, San Francisco and Las Vegas led the gain among cities posting a year-over-year advance in April. Price gains in this recovery have been supported by healthy demand amid a strong labor market and improving consumer finances. At the same time, there’s a persistent shortage of available and affordable listings, and borrowing costs have risen this year.”

— Investment headwinds rise. Bloomberg News's Sid Verma: “Tighter liquidity conditions and worries about global growth have sent a Goldman Sachs Group Inc. barometer of risk appetite to its weakest since July. The U.S. Financial Conditions Index, which tracks changes in interest rates, credit spreads, equity prices and the greenback, reflects a more-challenging investing environment, which may weigh on economic output. Trade tensions and interest-rate risks have slashed more than 2 percent off the S&P 500 since June 12 and pushed U.S. investment-grade spreads to an 18-month high.”

Small caps show the strain. Bloomberg News's Luke Kawa: “A shelter from the storm is starting to sprout leaks. Bearish sentiment is growing on the Russell 2000 Index of small-cap stocks, a group that had seemed relatively immune to the trade-tariff saber-rattling that’s recently cast a pall over the outlook for global commerce. This index, composed of U.S. companies that generate the bulk of their revenue domestically, has underperformed global equities for three consecutive sessions after hitting a record high relative to the MSCI World Index last week.”

TRUMP TRACKER

TRADE FLY-AROUND:

— Corker renews anti-tariff push. Politico's Burgess Everett: “Sen. Bob Corker is making a new push to allow Congress to block . . . Trump's tariffs on U.S. allies, though his fellow Republicans may stop it in its tracks once again. The Tennessee senator is offering an amendment to the Senate's farm bill this week that would allow Congress to approve or disapprove of tariffs levied against countries on national security justifications. Corker wrote the bill with Sen. Pat Toomey (R-Pa.). . . . 'There's going to be more and more pain accruing. July 1, there's another round of tariffs on us. July 6, there's another round of tariffs on us. And we're already seeing the impact on the economy,' Corker said Tuesday as the Senate took up the bipartisan farm bill. 'This is a farm bill; if you look at the impact on the ag community of these tariffs, it is severe. So I don't know of a more appropriate piece of legislation to put this on.'”

— Canada preps countermeasures. Bloomberg News's Natalie Wong and Josh Wingrove: “The Canadian government is preparing new measures to prevent a potential flood of steel imports from global producers seeking to avoid U.S. tariffs . . . The Canadian dollar weakened and shares in Stelco Holdings Inc. soared. The measures are said to be a combination of quotas and tariffs aimed at certain countries including China . . . The Canadian measures are expected to include new quotas on certain steel imports to prevent dumping, with tariffs applied above that threshold . . . The announcement could come as early as next week.”

— U.S. warns foreign countries about Iranian oil imports. The Washington Post's Carol Morello: “U.S. officials are warning allies that they should prepare to cut oil imports from Iran to zero by November and that Washington will grant no waivers from secondary sanctions against foreign companies that continue to do business with Tehran, a State Department official said Tuesday. 'We’re going to isolate streams of Iranian funding and highlight the totality of Iran’s malign behavior across the region,' said the senior official . . . The official spoke to reporters by telephone in the middle of a worldwide road trip he and other officials are making to urge governments to start decreasing their imports from Iran in the wake of . . . Trump’s withdrawal from the Iran nuclear deal last month.”

And Rouhani says the United States wants an “economic war.” The Associated Press's Jon Gambrell: “Angry protesters in Iran’s capital held a third day of demonstrations on Tuesday over the country’s anemic economy as President Hassan Rouhani told the nation that it faces an 'economic war' with the United States following America’s pullout from the nuclear deal. . . . Rage persists over the plunging of the Iranian rial to 90,000 to the dollar — double the government rate of 42,000 rials to $1 — as people watch their savings dwindle and shopkeepers hold onto some goods, uncertain of their true value. . . . 'We are fighting against the United States, it wants to make an economic war,' the president said. 'The U.S. cannot defeat our nation; our enemies are not able to force us to their knees.'”

— Chevron and ExxonMobil bosses worry about trade. Reuters's Ernest Scheyder: “The leaders of two of the world’s largest energy companies said on Tuesday they worry a trade conflict between the United States and other nations could destabilize the global economy. . . . 'The risk of trade wars starts to weigh on people’s perception of economic growth in the future,' Chevron Chief Executive Mike Wirth said at the World Gas Conference in Washington. 'These things run the risk of becoming a bit of drag on growth.' . . . Darren Woods, Exxon’s CEO, said his company is trying to keep a 'level headed voice' around the tariffs."

MELTDOWN WATCH:

— Judge says Manafort case can continue. The Post's Rachel Weiner: "A federal judge in Virginia concluded Tuesday that special counsels are given too much latitude and that the current one is prosecuting Paul Manafort only so he will offer evidence against . . . Trump. But those thoughts do little for the ex-lobbyist, because U.S. District Judge T.S. Ellis III ultimately ruled that Robert S. Mueller III’s prosecution of Manafort on bank and tax fraud charges can go forward. 'Although this case will continue, those involved should be sensitive to the danger unleashed when political disagreements are transformed into partisan prosecutions,' the judge wrote. If there are no further delays, the July 25 trial in U.S. District Court in Alexandria will be the first case brought by Mueller’s team to come before a jury.”

— Judge denies Trump Organization's request for deadline extension. Bloomberg News's David Voreacos: “The Trump Organization has until July 5 to complete its review of the last of the 4 million files seized by the FBI from Michael Cohen . . . Trump’s former lawyer and personal fixer. U.S. District Judge Kimba Wood denied the organization’s request to give it until July 11 to finish the review. The organization had sought the extension, saying it had received 22,000 documents on June 20, and additional audio files and documents two days later.”

POCKET CHANGE

— GE to spin off health-care business. The New York Times's Steve Lohr and Michael J. de la Merced: “When John L. Flannery took over as the chief executive of General Electric last August, he declared that he would not be nostalgic about the industrial giant’s storied past when reshaping the company for the future. He wasn’t kidding. General Electric said on Tuesday that it planned to spin off its health care business and sell its multibillion-dollar stake in Baker Hughes, a major producer of oil field equipment, as Mr. Flannery turns the embattled industrial titan into a much smaller company. The company said it would retain just three major operations: jet engines, electric power generators and wind turbines. Those businesses accounted for 60 percent of the company’s $122 billion in revenue last year.”

— Uber gets a court victory in London. NYT's Adam Satariano: “Uber won an appeal on Tuesday to regain its taxi license in London after agreeing to stricter government oversight, a crucial victory for efforts by its new chief executive to revamp the company’s grow-at-all-costs culture. The closely watched case could serve as a template for other cities looking to extract concessions from Uber, the ride-hailing service that has upended the taxi industry worldwide, often by ignoring the concerns of regulators. But the company suffered a major setback with that approach last fall, when the transport authorities in London — its most lucrative European market — withdrew its license. It has been able to continue to operate through the appeals process.”

— Blockhouse Capital Management is shutting down. Bloomberg News's Saijel Kishan and Jan-Henrik Foerster: “In the latest round of hedge fund closures, Jack Franke and Eric Lee, who once worked for billionaire Stan Druckenmiller, are liquidating their firm after about two years in business, according to people with knowledge of the matter. Their Blockhouse Capital Management oversaw about $541 million including borrowed money as of the end of last year, a regulatory filing shows.”

Billionaire hedge fund manager William Ackman, whose investment assets have shrunk by more than half in the last three years, has made a second round of staff cuts and laid off three investor relations team members, two sources familiar with the matter said on Tuesday.
Reuters
Business
Bamboo Airways, a start-up airline owned by a Vietnamese resort developer, wants to start offering flights next year.
Aaron Gregg
MONEY ON THE HILL

House to tackle taxes again. WSJ's Richard Rubin: "The House will vote this fall on up to four tax bills, including one to extend tax cuts scheduled to lapse after 2025, said Rep. Kevin Brady (R., Texas), chairman of the House Ways and Means Committee. Republicans will discuss their ideas in July and release an outline in early August, Mr. Brady said at a Washington Post event on a Tuesday. The plan is to schedule the votes before the midterm elections, according to Mr, Brady. The bills follow last year’s revamp of the tax system and may address issues barely touched then, including retirement-savings policy, Mr. Brady said."

Mulhauser launches firm. Scott Mulhauser, former deputy chief of staff to Vice President Biden and chief of staff at the U.S. Embassy in Beijing, is hanging out a shingle. His new strategic advisory and communications firm, Aperture Strategies, launches today. 

THE REGULATORS

— A court ruling could make the situation at CFPB even more confusing. American Banker's Kate Berry: "With leadership of the Consumer Financial Protection Bureau already facing plenty of uncertainty, a looming court decision could further upend the calculus of who runs the agency. The U.S. Court of Appeals for the D.C. Circuit has been deliberating since April on whether Mick Mulvaney can continue as acting CFPB director. The three-judge panel appeared skeptical of the claim by Leandra English, the chief of staff under former CFPB Director Richard Cordray, that she is the rightful acting director. But the judges also raised questions about Mulvaney's dual role running the bureau and the Office of Management and Budget. Lawyers say while a victory is unlikely for English, they are still preparing for a possible outcome where Mulvaney is disqualified as acting director as well.”

— Three charged in insider trading case. Reuters: “A credit ratings analyst for Standard & Poor’s and two other defendants were criminally charged by U.S. prosecutors on Tuesday with insider trading related to Sherwin-Williams Co’s $9.3 billion purchase of Valspar Corp. Authorities said the analyst, Sebastian Pinto-Thomaz, 33, tipped his friends Abell Oujaddou and Jeremy Millul in early March 2016 about the impending transaction between the two paint makers, after learning about it through his job.”

CHART TOPPER

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THE FUNNIES

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