“The US is trying to pick the right key to China door”, Trump’s economic adviser, Larry Kudlow said on Tuesday before the two countries meet at the negotiating table in Washington. In an interview with Politico, he stated that he supports the efforts of the Minister of Finance Mnuchin to seek a tradeoff with the Chinese leadership and that the two sides cannot sit idly by in the face of significant divisions.
Essentially, Kudlow did not say anything, it was for more part a shaking of the air, on duty phrases. However, from his words we can draw enough information about the position of the White House in relation to international trade or even look at Trump’s position from a different angle. So, for example, Kudlow said during the interview that free trade and open markets are the key to solving problems. Given that he is an adviser to Trump, one can fully believe that he voiced not only his position but partly of Trump and the entire administration of the White House. In this light, Trump’s “protectionist manners” are smart calls for US partners to review mutual trade and make it even more open, but not a desire for isolation.
After a crackdown on ZTE, the rival for US telecoms sector, Trump moved on to ease rhetoric against China, saying that ZTE would not lose access to the US market and called for a review of the sanctions against the company, due to its trade with North Korea and Iran. The US withdrawal from the telecommunications front, which is key to China’s long-term development, was key in the negotiations, which showed that the White House is aware of all potential damage of the «tit-for-tat« tariff fight and is therefore ready to yield first. But as the US ambassador to China said, on many trade issues, the Sino-US talks are still far from over.
Trump wants to achieve a more competitive position of the US agriculture and automotive sector in trade with China, and progress in this direction will potentially mean the abolition of tariffs introduced on the basis of Section 301 of the US 1974 trade act. With the expansion of oil production and refining in the US and China’s growing demand for energy, it is likely that the countries will agree in this direction.
The dollar won back part of the losses from last week on Wednesday, amid a departure from the pessimistic scenarios in trade negotiations with China, as well as positive readings of economic indicators, particularly retail sales and business inventories. Consumer activity rose in April, showed data on retail sales, an increase of 0.3% in April compared with the previous month, coinciding with the forecasts. Business inventories did not change in March, although it was assumed that they would grow by 0.1%. Decrease in inventories is usually a good signal for the economy, as the pace of sales begins to exceed production rates (i.e. there is a growing demand for manufactured goods) that for rational firms means a signal to increase output. Retail sales without including a volatile component – cars and gas, climbed 0.3% in April, which was slightly below expectations.
Yield to maturity on 10-year treasury notes has renewed its maximum, increasing to 3.089%, its maximum value in almost seven years, thanks to a jump in oil prices to $79, the highest since early October 2014. Here, prices met with resistance and went into decline, which continues today. There is a preliminary test of the resistance zone at $ 80 per barrel, but long positions are still too early to wait for a second test, since strong drivers have already been put into the market, and a deeper correction from the psychological point of view is necessary before resuming growth. An additional blow to the price was received from a strong dollar, as its strengthening will cause a decrease in crude, which is denominated in it. The EIA data is expected to confirm yesterday’s API estimate for commercial reserves, which arguably increased by 4.854 barrels against the forecast of -1.850M barrels, which will allow prices to go even lower. This is likely to put pressure on the yield of US bonds.
Focus on buying is reasonable for Brent reaching a $75 per barrel.
As for the dollar, clear prospects for growth have not yet been sufficiently traced. The dollar index shows sluggish dynamics, fluctuating in a narrow range of 93.40-93.00. Decrease in intraday volatility indicates a neutral fundamental picture (that is, there is no catalyst for falling or rising), but the reports, which are due today, can help the US dollar to make downtick today. This is data on industrial production, housing starts, capacity utilization. The second half of the week is unremarkable, in terms of economic data that can move the dollar. So far, it remains solid near 93, but the risks are skewed downside.