Fed faces tougher task in deciding whether to cut U.S. rates

The Federal Reserve building is pictured in Washington, DC, U.S., August 22, 2018. REUTERS/Chris Wattie/

By Trevor Hunnicutt

NEW YORK (Reuters) – U.S. employers are hiring workers at a brisk pace, but that is only making the Federal Reserve’s job harder.

On Friday, the Labor Department said nonfarm employers added 224,000 jobs last month – the most in five months, and not the kind of labor market that would normally cause policymakers at the U.S. central bank to cut interest rates.

But the Fed opened up the possibility of cuts last month, citing muted inflation pressures and an economic outlook clouded by a U.S. trade war and slower global growth.

This complicates a debate Fed policymakers are having over whether the economy needs stimulus, setting up a possible standoff with markets at their July 30-31 meeting.

“They are in a bit of a bind,” said Karim Basta, chief economist at III Capital Management. “On the surface, the data, in my opinion, doesn’t really support an imminent cut, but markets are expecting it, and I do think there’s a risk at this stage that they disappoint.”

Markets are overwhelmingly betting the Fed’s next move will be its first rate cut since the financial crisis a decade ago, and President Donald Trump on Friday renewed demands for lower rates to strengthen the economy.

Fed Chairman Jerome Powell has repeatedly said the central bank makes decisions independently from both markets and the White House, but failing to deliver a cut could cause a stock and short-term bond selloff and reduce economic activity.

U.S. interest rates futures fell after the jobs report on Friday. Markets still see a rate cut this month as a near-certainty, though they largely priced out changes for an aggressive half-percentage-point cut.

“These are good numbers, but a rate cut in July is still all but inevitable,” said Luke Bartholomew, investment strategist for Aberdeen Standard Investments. “Employment growth remains a bright spot amid a fairly mixed bag of U.S. data and yet markets have come to expect a cut now so (they) will fall out of bed if they don’t get one.”

The U.S. has not resolved its trade dispute with China, but the two countries agreed last weekend to resume trade talks, putting off new tariffs.

There are still signs of a pullback in economic activity. Businesses’ spending on machines and other equipment is tepid, but employers keep hiring hotel maids, electricians, daycare providers and other workers. They are also paying them more. Average hourly earnings rose at a 3.1%-a-year pace. A May payroll gain of 72,000 now seems like a fluke rather than a sign of deterioration.

Those are not the prototypical conditions for a rate cut. Unemployment at 3.7% is near its lowest levels since 1969 and policymakers have traditionally seen job gains with low unemployment posing risks of inflation.

But economists have grown less confident in academic models that forecast an inverse relationship between unemployment and inflation. The core personal consumption expenditures index is running at 1.6% a year, short of the Fed’s 2% goal.

In its semi-annual report to Congress, the Fed on Friday repeated its pledge to “act as appropriate” to sustain the economic expansion, with possible interest rate cuts in the coming months, but notably said the jobs market had “continued to strengthen” so far this year, and described recent weak inflation as due to “transitory influences.”

Some policymakers think a rate cut could lift inflation expectations, reducing chances of more drastic rate cuts being needed later. With rates at 2.25%-2.50%, policymakers have less room to cut before they resort to unconventional measures.

A cut could also reduce the Fed’s firepower in the case of a more severe downturn and signal greater concern about the future and even that more stimulus is on the way.

(Reporting by Trevor Hunnicutt in New York; Additional reporting by April Joyner in New York and Howard Schneider in Washington; Editing by Jennifer Ablan and James Dalgleish)

Exclusive: U.S., China sketch outlines of deal to end trade war – sources

FILE PHOTO: U.S. Treasury Secretary Steven Mnuchin, second from left, U.S. Trade Representative Robert Lighthizer, third from left, and Chinese Vice Premier and lead trade negotiator Liu He, second from right, pose for a photo before the opening session of trade negotiations at the Diaoyutai State Guesthouse in Beijing, Thursday, Feb. 14, 2019. Mark Schiefelbein/Pool via REUTERS

By Jeff Mason

WASHINGTON (Reuters) – The United States and China have started to outline commitments in principle on the stickiest issues in their trade dispute, marking the most significant progress yet toward ending a seven-month trade war, according to sources familiar with the negotiations.

The world’s two largest economies have slapped tit-for-tat tariffs on hundreds of billions of dollars of goods, slowing global economic growth, skewing supply chains and disrupting manufacturing.

As officials hold high-level talks on Thursday and Friday in Washington, they remain far apart on demands made by U.S. President Donald Trump’s administration for structural changes to China’s economy.

But the broad outline of what could make up a deal is beginning to emerge from the talks, the sources said, as the two sides push for an agreement by March 1. That marks the end of a 90-day truce that Trump and Chinese President Xi Jinping agreed to when they met in Argentina late last year.

Negotiators are drawing up six memorandums of understanding on structural issues: forced technology transfer and cyber theft, intellectual property rights, services, currency, agriculture, and non-tariff barriers to trade, according to two sources familiar with the progress of the talks.

At meetings between U.S. and Chinese officials last week in Beijing the two sides traded texts and worked on outlining obligations on paper, according to one of the sources.

The process has become a real trade negotiation, the source said, so much so that at the end of the week the participants considered staying in Beijing to keep working. Instead they agreed to take a few days off and reconvene in Washington.

The sources requested anonymity to speak candidly about the talks.

Chinese Commerce Ministry spokesman Gao Feng on Thursday declined to comment on the MOUs.

U.S. equity index futures initially rallied on the news of progress in the talks, with the S&P 500’s e-mini futures contract gaining about 0.4 percent over the following hour during Asian trading. The dollar strengthened and U.S. Treasury security yields rose.

U.S. stocks later retreated in Thursday’s Wall Street session following a batch of weaker-than-expected economic data, though the dollar and bond yields remained modestly higher.

GETTING COMMITMENTS IN WRITING

The MOUs cover the most complex issues affecting the trading relationship between the two countries and are meant, from the U.S. perspective, to end the practices that led Trump to start levying duties on Chinese imports in the first place.

One source cautioned that the talks could still end in failure. But the work on the MOUs was a significant step in getting China to sign up both to broad principles and to specific commitments on key issues, he said.

Several Chinese government sources told Reuters that the two countries have basically reached a consensus on alleviating the trade imbalances, but there were still some differences on each other’s “core demands” that they were seeking to narrow.

“It can be said that we are now in the sprint phase, and both negotiating teams are working towards the goal of reaching an agreement within the deadline, but some problems are still quite complicated to resolve,” said one Chinese official familiar with the situation.

The United States has accused Beijing of forcing U.S. companies doing business in China to share their technology with local partners and hand over intellectual property secrets. China denies it engages in such practices.

Trump administration officials also object to non-tariff barriers in China, including industrial subsidies, regulations, business licensing procedures, product standards reviews and other practices that they say keep U.S. goods out of China or give an unfair advantage to domestic firms.

U.S. Treasury Secretary Steven Mnuchin has pushed for China to open its financial services markets to more foreign firms, including major credit card companies Visa and MasterCard, which have waited years for China to make good on promises to allow them to operate there.

On currency, U.S. officials including Mnuchin have warned China against devaluing its yuan to gain a competitive advantage after the Chinese currency weakened significantly against the dollar last year, partly counteracting Trump’s tariffs.

The two sides were discussing an enforcement mechanism for the deal, the source said. Reuters reported last month that the United States was pushing for regular reviews of China’s progress on pledged trade reforms and could reinstate tariffs if it deems Beijing has violated the agreement.

The parties also were looking at a 10-item list of ways that China could reduce its trade surplus with the United States, including by buying agricultural produce, energy and goods such as semiconductors, according to two other sources familiar with the talks.

CLOCK IS TICKING

Time is running short ahead of the March 1 deadline to resolve the dispute or see U.S. tariffs on $200 billion worth of Chinese goods rise from 10 percent to 25 percent. Trump said on Tuesday he thought China had an incentive to move swiftly.

“I think they’re trying to move fast so that doesn’t happen,” he told reporters in the Oval Office, while not ruling out the possibility of extending the deadline.

Lower-level officials held a round of talks in Washington on Tuesday and Wednesday. They will be joined on Thursday by the top-level negotiators, led by U.S. Trade Representative Robert Lighthizer and Chinese Vice Premier Liu He.

One senior Chinese government official familiar with the talks said that extending the deadline was an option, though both sides were trying to reach an agreement before March 1 and any extension would not be too long.

It is possible the talks won’t resolve all the differences, and it will be up to the two heads of state to make a final decision, the official said.

(Reporting by Jeff Mason in Washington; Additional reporting by Michael Martina, Jing Xu, Muyu Xu and Martin Pollard in BEIJING and David Lawder in WASHINGTON; Editing by Simon Webb, Sonya Hepinstall and James Dalgleish)

China has ‘good faith’ to fix trade issues as talks with U.S. resume

FILE PHOTO: Shipping containers are seen at a port in Shanghai, China July 10, 2018. REUTERS/Aly Song/File Photo

By Michael Martina

BEIJING (Reuters) – China has the “good faith” to work with the United States to resolve trade frictions, the Foreign Ministry said on Monday as officials of the world’s two largest economies resumed talks in a bid to end their trade dispute.

U.S. officials are meeting their counterparts in Beijing this week for the first face-to-face talks since U.S. President Donald Trump and Chinese President Xi Jinping agreed in December to a 90-day truce in a trade war that has roiled global markets.

Trump said on Sunday that trade talks with China were going very well and that weakness in the Chinese economy gave Beijing a reason to work towards a deal.

On Monday, U.S. Commerce Secretary Wilbur Ross told NBC the talks were being held with appropriate-level staff and would help determine how the administration moves forward.

Ross also said he saw “a very good chance that we will get a reasonable settlement that China can live with, that we can live with and that addresses all of the key issues”. He added that it would be easiest to tackle immediate trade but harder to resolve enforcement issues and structural reforms such as intellectual property rights and market access.

The two sides agreed to hold “positive and constructive” dialogue to resolve economic and trade disputes in accordance with the consensus reached by their respective leaders, Foreign Ministry spokesman Lu Kang told a regular news briefing.

“From the beginning, we have believed that China-U.S. trade friction is not a positive situation for either country or the world economy. China has the good faith, on the basis of mutual respect and equality, to resolve the bilateral trade frictions.”

Trump imposed import tariffs on hundreds of billions of dollars of Chinese goods last year and has threatened more to pressure Beijing to change its practices on issues ranging from industrial subsidies to intellectual property to hacking. China has retaliated with tariffs of its own.

“As for whether the Chinese economy is good or not, I have already explained this. China’s development has ample tenacity and huge potential,” Lu said. “We have firm confidence in the strong long-term fundamentals of the Chinese economy.”

Lu also said Vice President Wang Qishan would attend the annual World Economic Forum in Davos, Switzerland in late January, but added that he had not yet heard of any arrangements for a meeting with Trump there.

By Monday evening, few details had emerged of the trade talks, which were scheduled to run through Tuesday.

Although the talks were held at a vice-ministerial level, Chinese Vice Premier Liu He, who has led trade negotiations with the United States and is a top economic adviser to Xi, made an unexpected appearance at the meetings on Monday, according to a person familiar with the discussions.

The U.S. delegation, led by Deputy U.S. Trade Representative Jeffrey Gerrish, includes undersecretaries from the U.S. departments of agriculture, commerce, energy and treasury, as well as senior officials from the White House.

Tu Xinquan, a Chinese trade expert at Beijing’s University of International Business and Economics, told Reuters before talks began that the meetings would likely focus on technical issues and leave major disagreements to more senior officials.

“China’s economy is significantly slowing down, and the U.S. stock market is declining quickly. I think the two sides need some kind of agreement for now,” Tu said.

Data last week showed manufacturing has slowed in both China and the United States, though the U.S. Labor Department on Friday reported a surge in new jobs in December along with higher wages.

Officials have given scant details on concessions that China might be willing to make to meet U.S. demands, some of which would require structural reforms unpalatable for Chinese leaders.

Even if a trade agreement is reached soon, analysts say it would be no panacea for China’s economy, which is expected to continue decelerating in the coming months.

China’s stridently nationalist Global Times tabloid said in an editorial late on Sunday that statements from both sides that they hoped to reach a deal were cause for optimism, but that Beijing would not cave in to U.S. demands.

“If China was going to raise the white flag, it would have done it already,” the paper said.

(Reporting by Michael Martina; additional reporting by Susan Heavey in Washington; Writing by Ryan Woo; Editing by Kim Coghill/Mark Heinrich)

Frost thaws in U.S.-China ties ahead of G20 meeting

FILE PHOTO: U.S. and Chinese flags are placed for a joint news conference by U.S. Secretary of State Mike Pompeo and Chinese Foreign Minister Wang Yi at the Great Hall of the People in Beijing, China June 14, 2018. REUTERS/Jason Lee/File Photo

By David Brunnstrom and John Geddie

WASHINGTON/SINGAPORE (Reuters) – The United States and China will hold a delayed top-level security dialogue on Friday, the latest sign of a thaw in relations, as China’s vice president said Beijing was willing to talk with Washington to resolve their bitter trade dispute.

The resumption of high-level dialogue, marked by a phone call last week between Presidents Donald Trump and Xi Jinping, comes ahead of an expected meeting between the two at the G20 summit in Argentina starting in late November.

It follows months of recriminations spanning trade, U.S. accusations of Chinese political interference, the disputed South China Sea and self-ruled Taiwan.

China and the United States have both described last week’s telephone call between Xi and Trump as positive. Trump predicted he’d be able to make a deal with China on trade.

In a concrete sign of the unfreezing, the U.S. State Department said Secretary of State Mike Pompeo, Defense Secretary Jim Mattis, Chinese politburo member Yang Jiechi and Defense Minister Wei Fenghe will take part in diplomatic and security talks later this week in Washington.

China said last month the two sides had initially agreed “in principle” to hold the second round of diplomatic security talks in October but they were postponed at Washington’s request amid rising tensions over trade, Taiwan and the South China Sea.

Mattis had been due to hold talks with Wei in Beijing in October, but those plans were upended after Washington imposed sanctions on China’s People’s Liberation Army for buying weapons from Russia.

Mattis did meet Wei in Singapore on Oct. 18 and told him that the world’s two largest economies needed to deepen high-level ties to reduce the risk of conflict.

Speaking in Singapore on Tuesday, Chinese Vice President Wang Qishan, who is close to Xi, reiterated China’s readiness to hold discussions and work with the United States to resolve trade disputes as the world’s two largest economies stand to lose from confrontation.

“Both China and the U.S. would love to see greater trade and economic cooperation,” Wang told the Bloomberg New Economy Forum in Singapore.

“The Chinese side is ready to have discussions with the U.S. on issues of mutual concern and work for a solution on trade acceptable to both sides,” he said.

“The world today faces many major problems that require close co-operation between China and the United States,” Wang said.

Wang echoed comments made by Xi on Monday at a major import fair in Shanghai that Beijing will embrace greater openness.

Trump has railed against China over intellectual property theft, entry barriers to U.S. business and a gaping trade deficit, which U.S. data showed reached a record $40.2 billion in September.

The trade war, which has seen both sides impose tariffs on billions of dollars worth of the other’s imports, is beginning to hurt China’s economy and has battered Chinese shares and the yuan currency.

It has also brought purchases of U.S. soybeans by China to a virtual standstill. Soybeans are the largest U.S. agricultural export to China.

Jim Sutter, CEO of the U.S. Soybean Export Council, told Reuters on the sidelines of the Shanghai import fair that both countries understood the need to maintain their relationship.

“I think both sides are optimistic … more optimistic after the call last week that took place, that some kind of a solution can be reached,” he said.

(Reporting by David Brunnstrom and John Geddie; Additional reporting by Tom Daly and Michael Martina in Shanghai; Writing by Ben Blanchard; Editing by Tony Munroe and Neil Fullick)