THE TICKER

The Trump administration is escalating its trade war with China today even as it restarts talks toward an armistice.

Hopes remain low for negotiations that lower-level Trump officials kicked off Wednesday in Washington with a delegation from Beijing. And they are taking place against the backdrop of the Trump administration imposing 25 percent tariffs on an additional $16 billion in Chinese imports, duties that took effect today. China is responding in kind. 

More ominously, according to China watchers and lobbyists close to the process, neither side is showing much willingness to budge in the near term. Translation: The Trump administration looks likely to significantly ramp up the pain by slapping tariffs on $200 billion of Chinese imports expected to take effect late next month. 

Complicating matters, leaders in both governments are divided among themselves about how to proceed.

“We’re seeing various signals of disagreement among actors in China about how the Chinese side has been managed,” Richard Ellings, president of the National Bureau of Asian Research, tells me. “The regime bases its legitimacy on two legs: Economic success and nationalism. In this case, they work against each other.”

That is, Chinese President Xi Jinping has mirrored President Trump in taking a hard line, so he risks losing face if he offers concessions to end tariffs menacing the world’s second-largest economy. The regime is in the midst of a sweeping effort to prop up growth. “Chinese officials are pushing banks to lend more and allowing indebted local governments to spend money on big projects again,” the New York Times's Keith Bradsher reports from Shanghai. “They have moved to shore up the value of the country’s currency. They have also helped out the stock market, say financial analysts, as the government works to avert a stock market collapse like the one three years ago that shook the world... China is playing a difficult game. It must deal with its weakening economy without worsening its onerous debt problems. At the same time, it has to shore up the situation at home if it hopes to continue to retaliate against [Trump]’s trade war broadsides.”

The Trump team is even more evidently riven. From the Wall Street Journal’s Lingling Wei and Bob Davis last week: “The Treasury and [Larry] Kudlow’s National Economic Council have put together a pared-down list of requests to China that they think could be a basis for a deal. But the U.S. trade representative’s office, which is in charge of tariffs, wants to hold off on negotiations, arguing that additional levies would give the U.S. more bargaining power by October, said people briefed on the discussions.”

Trump himself and the trade hawks in his orbit believes the administration has the upper hand. “At home, Trump has watched the subdued reaction of financial markets to his trade maneuvers and hailed recent strong economic news and polls showing his approval rating holding up among Republicans,” Bloomberg’s Shawn Donnan, Jennifer Jacobs, and Mark Niquette report. “Meanwhile, in China the economy has shown signs of weakness in recent months -- a circumstance Trump has said gives the U.S. an advantage.”

Business groups in Washington are trying to close the gap between the two sides. The Chinese delegation met with some top business lobbyists on Tuesday before kicking off talks with Treasury officials, one person familiar with the talks tells me. If the visiting team hoped to recruit new American advocates in their standoff with the Trump administration, they were disappointed. “The business community shares the administration’s analysis of the very serious challenges that need to be addressed, though it doesn’t support the tactics,” the person says. “But the Chinese want to do the least possible to make this go away. And the business community joins the U.S. government in saying [to the Chinese], ‘You need to get back to a path of not just reform, but of opening along the lines of what we saw at the time of China’s [World Trade Organization] accession,' when it was clearly on the way to becoming a market economy.” 

As the Treasury Department works to refine its demands, business groups are circulating their own. The Business Roundtable shopped its proposal to over a dozen White House officials earlier this month, and “many were receptive,” according to one source. Another from the U.S. Chamber of Commerce would require the Chinese to drop restrictions on foreign ownership of Chinese companies; prohibit intellectual property theft; and eliminate subsidies for favored domestic industries (including those in the Made in China 2025 industrial plan), among other changes. The National Association of Manufacturers hit similar notes in its own version, which it released Wednesday.

Those are at once steep asks of the Chinese and the bare minimum they must meet to satisfy the administration, business groups, and an emergent bipartisan consensus of lawmakers. Hence the unlikelihood of a breakthrough agreement any time soon that averts a further escalation of trade hostilities between the two countries. “The U.S. is deeply concerned about things the Chinese can’t correct” because they are “so endemic” to the Chinese economy, Ellings says. “There really isn’t room for compromise here. That doesn’t mean the U.S. is wrong in insisting on these things, because the global trading system is not compatible with continued Chinese behavior like this. So something has to give.” 

Don’t expect it to give in the near term, says Josh Kallmer, executive vice president for policy at the Information Technology Industry Council. “The tenor of things has been so negative that the meetings this week are talks about talks,” he says, adding the best hope for this week’s negotiations is to set up Trump and Xi for fruitful negotiations when they meet in November at the Asia-Pacific Economic Cooperation forum and then a Group of 20 summit in Buenos Aires. “As of this week, things are in a sufficiently early stage that they’re getting back to the table to rediscover the art of the possible.”

Programming note: The Finance 202 will not be publishing starting tomorrow through Labor Day and will be back in your inbox on Sept. 4.

MARKET MOVERS

— Fed hints at another rate hike. The Wall Street Journal's Nick Timiraos: “Federal Reserve officials at their last meeting signaled they were likely to raise interest rates next month and discussed in greater detail their concerns over how prolonged trade disputes could disrupt economic growth. If the economy performs in line with current expectations, ‘it would likely soon be appropriate to take another step in’ raising rates, said the minutes of the Fed’s July 31-Aug. 1 meeting, which were released Wednesday . . . At the recent meeting, Fed officials discussed dropping language from their post-meeting statement that has for years described monetary policy as ‘accommodative’ — or rates low enough to stimulate economic activity . . . As the Fed gradually raises its benchmark rate, describing interest-rate policy as accommodative will ‘at some point fairly soon … no longer be appropriate,’ the minutes said.”

— Waiting for Powell's take. The Associated Press's Martin Crutsinger: “Is financial turmoil in Turkey and other emerging economies at risk of spreading? Will America’s trade war with China derail the U.S. economy? Does the Federal Reserve have the means to fight the next recession? And: Is Chairman Jerome Powell troubled by [Trump’s] public denunciation of the Fed’s interest rate hikes? When Powell gives the keynote address Friday at an annual conference of central bankers in Jackson Hole, Wyoming, the world will be seeking any clues to his stance on those questions — and how any of it might affect the Fed’s rate policy.

“If Powell sounds confident that the economy won’t be unduly hurt by the Trump administration’s tariffs on imports or by a currency crisis in developing markets, investors would likely conclude that the Fed will keep raising rates, albeit only gradually. But if Powell sounds a message of concern, it could be read as a sign that the Fed is considering slowing its hikes. A slower pace of rate increases would be intended to encourage continued borrowing and spending by companies and individuals to drive economic growth.”

— Goldman: Don't read too much into the yield curve. Bloomberg News's Liz McCormick: “Goldman Sachs economists are reiterating their plea to keep calm and carry on after a widely followed recession signal flashed brighter. The gap between 2- and 10-year Treasury yields shrank to as little as 21.8 basis points Wednesday, reaching the narrowest since August 2007 — a year that also marked the last time an inversion of the curve happened. The contraction has prompted traders and Federal Reserve officials to warn of the ominous risks to America’s growth outlook. . . . ‘The historical correlation between yield curve inversion and recession is impressive,’ wrote Goldman’s David Mericle and Daan Struyven, in a note. ‘But it can be misleading,’ they said, adding that they see the risk of a U.S. recession as only ‘moderate for now.’ ”

— Kudlow: Investors are ignoring Trump turmoil. CNBC's Jeff Cox: “Chief White House economic advisor Larry Kudlow said Wednesday that a thriving economy is allowing markets to continue to perform well amid the barrage of seemingly damaging political headlines. . . . Kudlow, in an exclusive interview Wednesday with CNBC.com, said a thriving economy is overcoming those issues. ‘The economy's everything when it comes to markets and confidence, and I think that markets frankly look through all these various political issues,’ he said. ‘There's no change in policy coming; that's what really matters. Keep your eye on the ball, and I think the markets have done a good job.’”

— Foreigners less eager to buy U.S. Treasurys. Reuters's Richard Leong: “Foreign investors are showing signs of fatigue in absorbing the supply of Treasuries that is growing due to the U.S. government’s ballooning budget gap, posing a risk that bond yields will eventually spike. . . . Signs of waning enthusiasm from this major group of Treasuries holders have yet to hurt the $15 trillion Treasuries market, analysts said. . . . ‘Incrementally, foreigners are buying fewer Treasuries, but domestic investors have stepped up and filled in for that group,’ said Ed Al-Hussainy, senior interest rate and currency analyst at Columbia Threadneedle Investments in Minneapolis. Recent safe-haven demand for Treasuries stemming from trade frictions between the United States and China and other nations, and political concerns about Turkey and Italy have kept a lid on bond yields, analysts said.”

— Job gains better than thought. Reuters: “The U.S. economy likely created 43,000 more jobs in the 12 months through March than previously estimated, the Labor Department said on Wednesday. The marginal increase, which the Labor Department said represented less than a 0.05 percent gain versus current estimates, is a preliminary estimate of the government’s annual ‘benchmark’ revision to nonfarm payrolls data.”

— The investors who never saw a downturn. AP's Stan Choe: “Meet the generation of investors who haven’t known a bear market. ... That’s nice for these 20- and 30-somethings, and their retirement accounts, but it raises the question: What will they do when the next downturn inevitably arrives? ... The fear is that inexperienced investors will panic at their first taste of a bear market and sell their stocks, which would lock in their losses. ... Many experts say today’s young investors are generally taking the right approach. For instance, many are invested in the stock market through specialized kinds of mutual funds in their 401(k) accounts called target-date retirement funds, which may keep them from making rash moves.”

Wonkblog
Conservatives face a conundrum: After calling for the Fed to increase interest rates, they have a president calling for lower ones.
Jeff Stein
Jon Faust, who served as a senior adviser to former Federal Reserve chiefs Janet Yellen and Ben Bernanke, has taken on a similar full-time role for Fed Chairman Jerome Powell, according to people familiar with the matter.
The Wall Street Journal
TRUMP TRACKER

TRADE FLY-AROUND:

— Mexico: Deal on NAFTA is close. Reuters's Sharay Angulo, Timothy Aeppel: “Agreement between Mexico and the United States on outstanding bilateral issues in renegotiating the North American Free Trade Agreement could be just a few hours away, Mexican officials said on Wednesday. ‘We hope that we’ll have a solution in the next couple of hours, or the next couple of days,’ Mexican Economy Minister Ildefonso Guajardo told reporters before entering U.S. Trade Representative Robert Lighthizer’s Washington offices for NAFTA talks. ... A representative for Lighthizer’s office said there was no deal yet and that ‘major issues’ remained outstanding on NAFTA, even as Mexican private-sector representatives were flying to Washington in anticipation of news of a breakthrough. ... Guajardo’s comments were echoed by Jesus Seade, designated chief negotiator of Mexican President-elect Andrés Manuel López Obrador, who said the two sides were making ‘good progress’ and that talks could conclude ‘in the coming hours.’”

Auto tariffs are in the way. Bloomberg: "Trump’s plans to punish carmakers who produce vehicles outside the U.S. and sell them to Americans are hindering his administration’s efforts to close the deal on a new Nafta this month. Among the sticking points emerging during this week’s discussions in Washington between the U.S. and Mexico toward a renewed North American Free Trade Agreement is a proposal by the administration to increase the tariffs on cars imported from Mexico that don’t meet stricter new content rules, according to five people familiar with the discussions."

Aluminum tariffs help revive Kentucky smelter. NYT's Alan Rappeport: Trump's "aluminum tariffs have rattled global businesses, set off retaliatory levies and started to eat into profits of some major American companies. But they have also provided a lifeline to other United States businesses, like Century Aluminum, the struggling smelter in Kentucky that is at the heart of Mr. Trump’s trade fight. After years of foreign competition that eroded Century’s market share, prompted layoffs and put its smelter here on the brink of perpetual collapse, the company is now riding high. Century is planning to invest over $150 million to more than double output at the plant, and add 275 jobs in the process... Despite the new signs of hope in Hawesville, the prospects for the American aluminum industry and the broader economic impact from Mr. Trump’s tariffs remain uncertain. Several large companies, including Campbell Soup, Daimler, General Motors and Mondelez have all cited tariff-related costs, including retaliatory duties and trade uncertainty, as a drag on profits."

— Trump mistaken on Chevrolet. Bloomberg's John Lippert: “In trying to portray Chevrolet as being dogged by Europe and China’s unfair trade practices, [Trump] demonstrated a need to brush up on the state of General Motors Co.’s all-American brand. During his latest Make America Great Again Rally on Tuesday, Trump lamented to the crowd how few Chevys there are on the streets of Berlin. In giving an explanation for why this is the case — Europe’s trade barriers — he left out any mention that GM abandoned the European market almost entirely last year, and withdrew the Chevy brand years earlier. Then came another gaffe on the price of the Chevy Camaro in China. Trump claimed the muscle cars cost as much as $119,000 there, citing ‘taxes and taxes and taxes.’ In fact, the company sells the vehicle for 399,900 yuan — about $58,000.”

MELTDOWN WATCH:

Trump is considering a Manafort pardon. CNBC: "Trump speaking in an online clip of an interview to air Thursday, didn't rule out the possibility of pardoning his former campaign chief and newly convicted felon, Paul Manafort... Speaking to 'Fox & Friends,' Trump was asked whether he was considering pardoning his former campaign chairman. 'I have great respect for what he's done in terms of what he's gone through,' Trump said. 'You know, he worked for Ronald Reagan for years, he worked for Bob Dole, he worked — I guess his firm worked for (Sen. John) McCain,' the president added. 'He worked for many, many people, many, many years.'" 

Rudy Giuliani, Trump's personal lawyer, says he discussed the political fallout of such a move with the president and that it is not under consideration, per the NYT. 

POCKET CHANGE

— Layoffs at JPMorgan. The Wall Street Journal's Emily Glazer: “JPMorgan Chase & Co. is in the process of laying off around 100 employees in its asset-management division as the bank makes staffing adjustments amid market shifts, according to people familiar with the matter. The layoffs, which amount to 1% to 2% of the division, are occurring throughout the business and in cities around the world, the people said. The bank already has laid off employees in its fixed income, administration and sales groups, with layoffs in its equity group also expected, the people said. The asset management layoffs were spurred by an internal review that identified potential staffing adjustments, one of the people said.”

— Retail resurgence: Target sales soar. The Post's Abha Bhattarai: “Shoppers are increasingly heading to Target for toys, electronics and home goods, which helped send the retailer’s sales growth to its highest level in 13 years... Second-quarter profits rose 19.1 percent to $799 million from $671 million a year earlier. Analysts and executives also attributed the retailer’s strong earnings to consumer confidence. Americans are feeling better about the economy as recent tax cuts translate into higher take-home pay. This has boosted sales for some of the country’s largest retailers, including Walmart, Home Depot and Nordstrom.”

On Leadership
"He is really the poster boy of a contemporary culture that celebrates impulsive authenticity and obsessive overwork," one business school professor said.
Jena McGregor
MONEY ON THE HILL

Heitkamp will oppose Kraninger for CFPB American Banker's  Neil Haggerty: "One day before the Senate Banking Committee is scheduled to vote on Kathy Kraninger's confirmation to run the Consumer Financial Protection Bureau, a moderate Democrat on the panel said she plans to oppose the nominee. Sen. Heidi Heitkamp, D-N.D., has compromised with Republicans on key issues, in particular her support for the recent regulatory relief law, and has supported other regulatory appointments by the Trump administration. But she said Kraninger has not demonstrated enough of a background in consumer protection issues."

As left-leaning groups urge Senate to reject her. The Hill's Sylvan Lane: "Dozens of liberal organizations, civil rights groups and labor unions asked senators on Wednesday to reject [Trump's] nominee to lead the consumer bureau over her connections to the administration’s controversial immigration policies. In a letter to the Senate Banking, Housing and Urban Affairs Committee, 57 groups urged senators to oppose [Kraninger’s] nomination... The panel is expected to advance her nomination to the full Senate on Thursday. The groups say Kraninger, an associate director at the White House Office of Budget and Management, is unfit to lead the financial regulator because of her ties to Trump's zero-tolerance immigration policy that led to the separation of thousands of migrant families at the U.S. border."

McConnell moves to confirm Trump noms, including Clarida. Roll Call's Niels Lesniewski: "Senate Majority Leader Mitch McConnell moved to thwart filibusters of more than a dozen of [Trump's] nominees Wednesday afternoon. The move sets up the potential for weeks of virtually continuous sessions of the Senate, although it is more likely that a bipartisan agreement will be reached at least ahead of the long Labor Day weekend. The list of 17 nominees is highlighted by Richard Clarida to the Federal Reserve and a slew of Trump nominees to fill federal judgeships in seats across the country.  If senators were to object to time agreements, the Senate could literally spend weeks doing little other than considering the nominations, a move that complicates much of the legislative agenda for the rest of the year, particularly when it comes to finishing consideration of government spending bills before the end of the fiscal year on September 30."

DAYBOOK

Today

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