A 6-year buying spree worth up to $1 trillion in US goods is what’s reportedly been offered by China as a way to correct, and eventually eliminate, its trade imbalance with the United States. Reported by both Bloomberg News and CNBC this morning, the news of this offer boosted the stock market with the S&P 500 making its way out of correction territory and the Dow jumping 200 points.
According to Bloomberg, the offer was “made during talks in Beijing earlier this month.” The Wall Street Journal also reported this week that Treasury Secretary Steve Mnuchin mentioned the idea that the US could ease up on tariffs as part of the negotiations. CNBC quoted a senior administration member as saying lifting tariffs is not part of the discussion right now.
Nothing was finalized in the talks in Beijing, however Chinese Vice-Premier Liu He will be in Washington at the end of this month for another round of talks.
The issue of Huawei Technologies Co. continues, however, with the United States reportedly launching a criminal investigation into potential theft of trade secrets from US companies. This was reported by The Wall Street Journal earlier this week. This might complicate trade talks as Huawei, a Chinese company, is the world’s largest manufacturer of telecommunications equipment.
US Markets holding steady
Equities seem to be taking all of this uncertainty in stride with all major indexes up nearly three percent on the week. Bonds have not fared as well as the 10-year Treasury note has reached a near term high of 2.75 percent (see chart below), the highest level this year.
The biggest driver in all of this is the potential progress in trade talks between China and the US. Adding to more stability is constant chatter among Fed officials that the economy is in a good place and there isn’t a real reason to raise rates at this time. New York Federal Reserve President John Williams called for “patience and good judgment” before raising rates.
Fannie and Freddie no longer government-backed?
There are reports that the Trump Administration is working on a proposal to release Fannie Mae and Freddie Mac from government control. Market Watch reported that Joseph Otting, the acting director of the Federal Housing Finance Agency, commented on the plans at an internal gathering. Once the news of that meeting broke, shares of Fannie Mae rose more than 31 percent with Freddie Mac going up by nearly 25 percent.
Shutdown drags on, delays economic data
We are nearly a full month into the government shutdown and have little sign of it ending anytime soon. The House of Representatives passed a bill to reopen the government, but that will likely not be fruitful because it does not allow funding for President Trump’s border wall.
Speaker of the House Nancy Pelosi has also asked that the President not give his State of the Union address as scheduled on Jan. 29, citing security concerns with the U.S. Secret Service and Homeland Security both going unfunded during the shutdown.
Because of the shutdown, a lot of government data about our economy is also being delayed. Normally we would have an update on the number of housing starts and building permits, but that will not happen until the government is fully up and running. Retail sales data, scheduled to be released on Wednesday, has also been delayed due to lack of funding for the US Commerce Department.
So far, none of this has had a noticeable impact on the stock market. However, as the shutdown continues and more data is delayed, there is potential for a lack of consumer confidence and a downturn economically.
What continues to have an impact on the economy is a strong labor market. The Labor Department’s report this week showed that fewer Americans are filing applications for jobless benefits.
While economists predicted claims to rise to 220,000, the claims actually fell to 213,000, a decrease of 3,000 from the previous week.
This data was compiled for the week ending Jan. 12. Keep in mind that the federal employees who are out of the job right now missed their first paycheck last Friday, Jan. 11. So this set of data does not necessarily include the 800,000 or so government employees who missed their paycheck.
Shutdown costs piling up
The sheer irony of the shutdown, according to Barron’s, is that the shutdown is likely going to be more expensive for taxpayers than the actual cost of building President Trump’s wall. Based on estimates from the shutdown in 2013, one reporter estimates the back pay for furloughed workers is around $1.5 billion.
This week, Trump signed a bill that guarantees back pay for all the government employees who have been furloughed. Not only that, this bill specifically states that they will get paid back as quickly as possible, even if it means paychecks go out off schedule.
Going beyond paychecks, Fortune.com estimates the shutdown has cost the overall economy $3.7 billion and could exceed $6 billion if the government doesn’t open before Jan. 25. President Trump is asking for $5 billion to fund his border wall.
Brexit complications continue
United Kingdom Prime Minister Theresa May narrowly survived a vote of no confidence, 325 votes to 306, on Wednesday. Coincidentally, the main groups who voted against her Brexit deal on Tuesday were the ones who rallied to keep May in power.
This did not really move the needle as far as the economy goes. However, it’s becoming increasingly apparent that the U.K. is on course for a second referendum vote, a.k.a a “People’s Vote,” on Brexit. The country originally voted two-and-a-half years ago in favor of Brexit. In that time, the government has been unable to come up with a plan that can be agreed upon by both sides.