Trump officials this week stopped short of charging Beijing with devaluing its currency on purpose. But the yuan's drop is figuring into the trade team’s thinking as they weigh whether to more than double, from 10 percent to 25 percent, the tariffs they are considering on the next $200 billion of Chinese imports, The Wall Street Journal’s Bob Davis and Lingling Wei report. And President Trump has accused China explicitly of manipulating its currency, calling the country out on Twitter last month for moves he called illegal.
The truth of China’s intent is in the eye of the beholder. Currency analysts agree there is no evidence that Chinese policymakers are actively working to devalue the yuan. But the government isn’t taking steps to slow its decline, either.
Robin Brooks, chief economist at the Institute of International Finance, tells me he is “strongly of the view they’re letting this slide on purpose.”
“If they wanted to stabilize the move, they could easily do that,” Brooks said, pointing to China’s ability to tap its deep reserves of foreign currency. “This is by design. The speed of the move is clearly designed to catch U.S. policymakers' attention, to say, ‘We’re unhappy with the direction of trade policy in the U.S., and let’s see how you like these apples.’”
Not so, says Mark McCormick, head of currency strategy at TD Securities. “I don’t think Chinese policymakers want a big sell-off,” McCormick tells me. “They want to be considered more of a reserve currency and a source of stability. They're letting it become more volatile, which would be natural for a free-floating exchange rate.”
The uncertainty about China’s moves underscores the extent to which both sides remain a mystery to the other as their confrontation approaches a boiling point. For their part, the Chinese say they remain in the dark about what precisely the Trump administration is demanding of them. Sen Rob Portman (R-Ohio) indicated Thursday he believes them:
Talks between Washington and Beijing have stalled for weeks, though Treasury Secretary Steven Mnuchin said last week they are engaging in “some quiet conversations,” and they are working to restart more formal negotiations, Bloomberg reported this week.
In the meantime, the Trump administration may have floated intensifying the next round of proposed tariffs in order to pressure the Chinese on their currency, Goldman Sachs economists wrote in a research note this week. Indeed, the economists said they expect the Trump team's decision about how far to go next will turn on whether the Chinese currency's recent fall continues or reverses. “More generally, recent events continue to suggest the White House could be moving to settle less central trade matters in order to concentrate pressure on the US-China dispute,” they wrote.
|You are reading The Finance 202, our must-read tipsheet on where Wall Street meets Washington.|
|Not a regular subscriber?|
— Mexico: Progress, but toughest issues remain. Reuters's Daphne Psaledakis and David Lawder: "Negotiators for Mexico and the United States have reached agreement on about 20 topics during talks to revamp NAFTA, Mexico’s economy minister said on Thursday, although he conceded that some of the thorniest issues remained unresolved. Ildefonso Guajardo said after leaving a meeting with U.S. Trade Representative Robert Lighthizer that the group had yet to discuss issues such as the 'sunset clause,' a provision sought by the United States under which the agreement would have to be renegotiated every five years. But he was upbeat about the group’s progress."
— Ross backs additional tariffs. The Hill's Jordan Fabian: “Commerce Secretary Wilbur Ross on Thursday defended the Trump administration's latest threat to ramp up tariffs on China, saying it would not lead to disaster for the U.S. economy. 'It’s not something that’s going to be cataclysmic,' he said in an interview with Fox Business Network. . . . The Commerce secretary said Trump believes additional tariffs are needed because China has refused to 'modify their behavior' in response to an initial round of tariffs and other U.S. economic sanctions.”
China seeks "equal footing." Reuters's Christian Shepherd: "China is willing to resolve differences with the United States on an equal footing, the Chinese government’s top diplomat said on Friday after meeting U.S. Secretary of State Mike Pompeo, but added they did not address their trade war too specifically... 'As two members of the U.N. Security Council and the world’s largest two economies, we should of course maintain talks at all times,' [Chinese State Councillor] Wang [Yi] said."
Poll: Business owners want more Chinese tariffs. Axios: "A majority of business owners, including small business owners, surveyed in a new poll support additional tariffs on China, Mexico, Europe and Canada, although most expect negative effects on the economy if there's a trade war, according to new UBS polling provided exclusively to Axios... One likely reason for the support for tariffs is that business owners tend to be more U.S. focused, Michael Crook, Head of Americas UHNW and Institutional Strategy at UBS, told Axios. This could lead to the perception that additional trade barriers for foreign imports would give them less competition. Business owners also tend to be more Republican-leaning, he added... Percentage support for tariffs among business owners: China (71%), Mexico (66%), Europe (64%) and Canada (60%)."
— HNA deal was no match for tightening China controls. NYT's David Barboza and Michael Forsythe: "Just over a year ago, two senior executives from the giant Chinese conglomerate HNA landed a meeting with Steven Mnuchin, the United States Treasury secretary, at his office. The executives, Adam Tan and Guang Yang, snapped a photo with Mr. Mnuchin, holding a model plane of the HNA-owned carrier, Hainan Airlines. Officially, they wanted to discuss the state of the American economy. But HNA had other urgent business: It was trying to buy the New York investment firm SkyBridge Capital... The meetings were part of a major campaign by HNA to win over Washington power brokers...
"But in late April, HNA scrapped its bid for SkyBridge Capital. Both companies realized that they wouldn’t get the green light from regulators. Chinese companies, once among the most prolific deal-makers in the world, are increasingly running into regulatory roadblocks, particularly in the United States. A slew of deals by Chinese buyers have been thwarted for national security reasons, including the acquisition of MoneyGram by Ant Financial, the electronic payments company controlled by the internet tycoon Jack Ma. Regulators will soon be more emboldened. Congress has just passed new rules on foreign takeovers of American companies, to strengthen the national security reviews and give more authority to Cfius. Mr. Trump is expected to sign them into law."
— Tariffs hurt European businesses. The New York Times's Jack Ewing: “Higher prices. Disrupted supply chains. Wavering exports. Those are some of the ways that some of Europe’s biggest companies have been affected by [Trump’s] trade war, offering a preview of how tensions in global commerce could begin to ripple through the European economy. As companies like BMW, Siemens and Volkswagen reported otherwise solid earnings this week, they warned that Mr. Trump’s aggressive stance on trade presented them with a host of new risks, which may already be acting as a drag on growth. The president’s tariffs have not just raised the costs of materials like steel, they have also diverted trade worldwide and warped the complex global supply systems that businesses rely on. Here in Europe, there are signs of strain, which, along with risks ranging from Britain’s withdrawal from the European Union to the excessive debt loads of Italy and Greece, are piling pressure on the region’s economy.”
— Kidney bean growers feel the pain. The Wall Street Journal's Jesse Newman: “After the U.S. slapped tariffs on European steel and aluminum in June, Europe hit back with a tax that, among other things, made American kidney beans 25% more expensive in Europe. Now, Cindy Brown is running out of room to store kidney beans. One-ton bags of them cover the floors in her cavernous warehouses. Smaller sacks are piled on wood-pallet shelves. Beans fill tall steel bins that dot the grounds. Chippewa Valley Bean Co. had been on track to ship to Europe 60% of its beans traded internationally this year, worth $25 million. Now, 'we’re just sitting on our hands,' said Ms. Brown, president of the family company. ... Businesses reliant on a single product are especially exposed. Focusing on a specialty crop — often planted by farmers to help insulate them from big-commodity boom and bust cycles — paid off for Chippewa Valley for years, offering higher profit margins. Now, specialization is magnifying the tariff pain, even though the Wisconsin business has grown into one of the world’s largest processors of dark red kidney beans, a sector the U.S. dominates.”
— U.S. will tax Canadian newsprint. The Associated Press: “The U.S. Commerce Department is going ahead with a tax on Canadian newsprint, a threat to the already-struggling American newspaper industry. The revised tariffs unveiled Thursday are mostly lower than those originally imposed earlier this year. But they would still hit the paper used by newspapers and other publications with an anti-dumping border tax as high as 16.88 percent. The tariffs are a response to a complaint from a hedge fund-owned paper producer in Washington state, which argues that its Canadian competitors are taking advantage of government subsidies to sell their product at unfairly low prices. Still, Commerce decided to spare two Canadian producers from the anti-dumping charges.”
- “Manafort’s bookkeeper testifies against him, alleging efforts to inflate income.” The Washington Post's Rachel Weiner, Justin Jouvenal and Devlin Barrett.
- “Trump fury over Mueller ‘conflicts’ dates to oval office meeting.” Bloomberg News's Shannon Pettypiece and Chris Strohm.
— Cohen's $10 million deal. WSJ's Michael Rothfeld, Rebecca Ballhaus and Joe Palazzolo: "A major donor to President Trump agreed to pay $10 million to the president’s then-personal attorney if he successfully helped obtain funding for a nuclear-power project, including a $5 billion loan from the U.S. government, according to people familiar with the matter. The donor, Franklin L. Haney, gave the contract to Trump attorney Michael Cohen in early April to assist his efforts to complete a pair of unfinished nuclear reactors in Alabama, known as the Bellefonte Nuclear Power Plant, these people said. Had he been paid the success fee, Mr. Cohen’s deal with Mr. Haney could have been among the most lucrative of the known consulting agreements he secured after Mr. Trump’s election by emphasizing his personal relationship with the president, according to people familiar with his pitches... Authorities are investigating whether Mr. Cohen engaged in unregistered lobbying in connection with his consulting work for corporate clients after Mr. Trump went to the White House."
— Strong growth likely drove July job gains. AP's Christopher Rugaber: "With a robust economy at their backs, optimistic employers likely added jobs at a solid pace in July. Economists forecast that employers added 191,000 jobs last month, down from 213,000 in June but easily enough to lower the unemployment rate over time. The jobless rate is projected to decline to 3.9 percent, near an 18-year low, from 4 percent."
Jobless claims rise. WSJ's Paul Kiernan and Sharon Nunn: “The number of U.S. workers filing new applications for unemployment benefits ticked slightly higher last week but continued to hover near the lowest levels since the late 1960s. Initial jobless claims, an indication of layoffs across the U.S., rose to a seasonally adjusted 218,000 in the week ended July 28 from 217,000 in the prior week, the Labor Department said Thursday. Economists surveyed by The Wall Street Journal had forecast 220,000 new applications for jobless benefits last week.”
— Trump's looming debt headache. CNBC's Jeff Cox: Swelling government debt levels are shaping up to be the biggest economic challenge for [Trump], a problem that could spill into the stock market. This week's Treasury Department announcement that it would have to increase the amount of bond auctions over the next three months was a low-key reminder that the government IOU is only getting bigger and will start influencing interest rates sooner rather than later. As more product comes to market, investors could be expected to demand higher yields to snap up all the supply. And those higher yields mean higher costs at a time when taxpayers already have shelled out nearly half a trillion dollars this year in debt service. Put it all together and it raises questions about how long the spurt in economic growth will continue, what will happen the next time the economy falls into recession and what impact it all will have on financial markets."
— Apple reaches $1 trillion. The Post's Thomas Heath: “Apple became the first $1 trillion company shortly before noon Thursday, briefly crossing the lofty mark in a closely watched ascent that made stock market history. 'Apple’s $1 trillion cap is equal to about 5 percent of the total gross domestic product of the United States in 2018,' said David Kass, professor of finance at the University of Maryland. 'That puts this company in perspective.' Apple crossed the threshold in Thursday trading following a strong third-quarter report that showed earnings beat expectations and also showed increased revenue from the technology giant’s services and software businesses. Apple briefly hit the $1 trillion mark before falling back below it amid fast-moving trade.”
Apple shareholders' patience rewarded. Reuters's April Joyner: “Donna Fenn bought shares of Apple Inc. in the 1980s on the recommendation of a stockbroker a good friend of hers was dating. She’d heard of the company because its co-founder Steve Jobs had appeared on the cover of the magazine she worked for. At the end of 1985, not long after Fenn, now 59, made her investment, shares of Apple were trading at the equivalent of 39 cents each, adjusting for subsequent stock splits. Little could she imagine that the value of Apple shares bought then would climb more than 50,000 percent. On Thursday, the market capitalization of Apple hit $1 trillion as its shares rose 2.8 percent to a high of $207.05. Apple, whose initial public offering was in December 1980, is the first U.S. company to reach that milestone.”
Bloomberg Businessweek took a poke at its earlier incarnation over the milestone:
The New York Times put together a fun animation that illustrates just how big Apple has become. For example: It's worth nearly as much as most of the world’s airlines and aviation companies combined — and nearly as much as Bank of America, Citigroup, JPMorgan, and Wells Fargo combined.
— Fannie reports $4.5 billion second-quarter income. HousingWire's Alcynna Lloyd writes the haul "was primarily driven by an increase in credit-related income... This income is up slightly from the first quarter this year, when the company reported comprehensive income of $3.9 billion, and up even more from the second quarter of 2017, when it saw a comprehensive income of $3.1 billion."
— Brookstone files for bankruptcy. The Post's Abha Bhattarai: “Brookstone, the mall chain synonymous with massage chairs and other quirky novelties, said Thursday it had filed for bankruptcy and would be closing all 102 of its stores. The bankruptcy — the company’s second in four years — comes after years of declining traffic to U.S. shopping malls. Brookstone also operates 35 airport stores, which it is looking to sell. It was not immediately clear how many employees would be affected by the closures. The company is owned by Sanpower, a Chinese conglomerate that bought Brookstone for $173 million at a 2014 bankruptcy auction. The company, founded in 1965 as a mail-order business, got its start selling dental clamps, dovetail saws and other specialty tools.”
— Lawmakers unveil Russia sanctions. The Post's Karoun Demirjian: “A bipartisan group of senators has unveiled a comprehensive package of Russia sanctions and measures to counter cybercrime, the latest attempt to push congressional leaders to intensify punitive measures against would-be election hackers ahead of November."
— Senate Republicans criticize Fed over bank capital rule. American Banker's Neil Haggerty: "Echoing House colleagues who raised similar concerns earlier this week, five Republican senators on Thursday called on the Federal Reserve Board to rethink the central bank's capital surcharge for the biggest banks. The senators — including Pat Toomey, R-Pa., who some speculate could chair the Senate Banking Committee in 2019 — said the Fed should adjust the surcharge for Globally Systemically Important Banks in order to eliminate 'excessive' capital requirements. They said the surcharge could hinder the U.S. financial system’s competitiveness."
— Derivatives regulator hands $45 million to whistleblowers. Reuters's Pete Schroeder: "A top U.S. financial regulator announced on Thursday it had awarded whistleblowers over $45 million for helping the watchdog identify improper activity. The Commodity Futures Trading Commission said the high payouts, a dramatic increase from smaller awards granted in prior years, are evidence the regulator is increasingly receiving tips to help hunt down wrongdoing. James McDonald, director of the agency’s enforcement division, said it had been a 'transformative year' for its whistleblower program, and he expected more to come... The regulator did not identify how many whistleblowers received the award, or what activity the tips helped the regulators hunt down. Under the program, whistleblowers can receive between 10 and 30 percent of any monetary sanctions that emanate from their tips."
Ivanka Trump says family separation was “a low point for me”:
Ride in Elon Musk's Tesla Model 3, a giant phone on wheels:
Late-night hosts on Paul Manafort’s ostrich jacket: