North Korea | Iran | Trump trade policy | KORUS | NAFTA 2.0 | China trade policy | Populist tide growing | Hurricane aid | Puerto Rico | Export programs | Net worth | Rail problems | Cotton AWP | Markets
— Kim Jong Un: ‘Deranged’ Trump will ‘pay dearly’ for threat. North Korean leader Kim Jong Un called President Donald Trump “deranged” and said he will “pay dearly’ for his threats,” a possible indication of more powerful weapons tests on the horizon. North Korea’s foreign minister reportedly said his country may test a hydrogen bomb in the Pacific Ocean to fulfill Kim’s vow to take the ‘highest-level’ action against the United States. The N.Y. Times said the remarks are “believed to be the first time a North Korean leader directly issued a statement to the world under his name.” Link for details.
Dimon: North Korea a ‘terrible threat’ but markets shouldn’t expect a bad outcome. The threat posed by North Korea is “terrible” but it would be a mistake for market participants to significantly alter their portfolios on concerns of a nuclear war, JPMorgan CEO Jamie Dimon said. “I think there’s a higher chance of something going wrong in the Korean Peninsula, it’s slightly higher than it was before,” he told CNBC-TV18 in an exclusive interview today. “But I don’t think it’s going to change my view of how we should go around the world and work with each other and grow our economies. It’s just this terrible threat hanging out there,” he said on the sidelines of an investor summit in New Delhi, India.
Meanwhile, South Koreans are brushing off the threat from their northern neighbor, worrying more about jobs and the economy, according to a new poll (link). At least three airlines have rerouted flights amid concerns over an accidental strike. The North Korean regime’s search for hard currency to evade sanctions has spread to Africa, where it is revitalizing wildlife trafficking.
— Defying Trump, Iran says will boost missile capabilities. Iran will strengthen its missile capabilities and will not seek any country’s permission, President Hassan Rouhani said today regarding demands from President Donald Trump. Rouhani was speaking at a military parade where an Iranian news agency said one of the weapons on display was a new ballistic missile with range of 1,200 miles, capable of carrying several warheads. In a speech broadcast on state television, Rouhani said: ‘We will increase our military power as a deterrent. We will strengthen our missile capabilities ... We will not seek permission from anyone to defend our country.”
— A more subdued Trump trade policy stance is linked with tax reform push. Trump administration officials are reportedly softening trade policy positions as a tax reform push approaches. CNBC‘s Kayla Tausche reported: “The White House is softening its stance on trade — if only temporarily — as it seeks to preserve Republican votes on tax reform, according to senior administration officials, congressional aides and outside advisors. A long-delayed investigation into Chinese steel dumping is on hold; the calls to withdraw from NAFTA have quieted; and the criticism of the existing free-trade deal with Korea has been snuffed as the Trump Administration actively works to preserve Republican votes for tax reform, the sole issue that unites the party ruling both ends of Pennsylvania Avenue.” Looking at the rosters for the House Ways & Means Committee and the Senate Finance Committee, “the vast majority are free-traders,” said one senior administration official, acknowledging particularly hawkish trade actions — like withdrawing from NAFTA or slapping tariffs on steel — wouldn’t sit well with that group.” Link for more details.
— More lawmakers urge Trump to stay in KORUS. A bipartisan group of House members are urging President Donald Trump to reconsider the threat to take the U.S. out of the South Korea-U.S. Free Trade Agreement (KORUS). “We are concerned that America’s reputation would be greatly diminished if we withdraw from this agreement,” the bipartisan group of lawmakers said. They note the importance of the Korean market for U.S. agriculture products like cheese, pork, potatoes and cherries and said there is still potential for greater U.S. market access. “No relationship is perfect, and we should commit to growing and improving our trade relationship with Korea just like any other,” they wrote. “We stand ready to work with you to ensure that Korea addresses its many failures in implementing the agreement.” The 19 sending the letter included Reps. Ron Kind (D-Wis.), Dave Reichert (R-Wash.), Charlie Dent (R-Pa.), and Rick Larsen (D-Wash.).
— Trump softens tone on KORUS. President Donald Trump said Thursday the U.S. will try to “straighten out” the U.S.-South Korea Free Trade Agreement (KOURS) in what may be a shift from his earlier stance of wanting to pull out of the trade deal. “Because of the fact that our trade deal is so bad for the United States and so good for South Korea, I said we’ll focus on the military, but, actually, we’re going to try and straighten out the trade deal and make it fair for everybody,” Trump said alongside South Korean President Moon Jae-in as the two were ready to meet in New York.
— Global trade rebounding, risks remain: WTO. Global trade is rebounding strongly but risks remain, according to updated projections from the World Trade Organization (WTO). Commerce expected to grow by 3.6% in 2017, much stronger than last year’s 1.3% pace. The forecast is a large upward revision of WTO’s April estimate, when it foresaw growth of 2.4% and in a range of 1.8-3.6%, due to a high level of political and economic uncertainty. That range has now been refined to between 3.2% and 3.9% thanks to accelerating economic growth and rising import demand in China and the United States. “The improved outlook for trade is welcome news, but substantial risks that threaten the world economy remain in place and could easily undermine any trade recovery,” WTO Director-General Roberto Azevedo said in a statement.
— NAFTA 2.0 negotiators meet for third round of talks in Ottawa. Round three of North American Free Trade Agreement (NAFTA) modernization renegotiations will include sensitive topics like dispute settlement and rules of origin for automobiles as negotiators meet Sept. 23-27 in Ottawa. An agreement on digital trade is expected to be an early win for the negotiators. Administration officials had set the goal of offering all proposals by the end of the third round but trade talks have a way of altering expectations. Negotiators are trying to come up with a combined text for all the chapters but that is problematic because the U.S. reportedly has not offered all of its proposals.
Commerce Secretary Wilbur Ross is getting ahead of a more challenging third round of NAFTA negotiations with Mexico and Canada by pushing for tougher rules of origin, based on the Trump administration’s belief that auto imports in particular have too little U.S. content. U.S. Trade Representative Robert Lighthizer will submit new proposals in Ottawa starting Saturday covering rules of origin, labor standards in Mexico and dispute resolution. Ross, in an op-ed in the Washington Post, said a report by department analysts that will be released later this morning shows the U.S. content of cars and other production made in Mexico and Canada isn’t nearly as high as some supporters of current NAFTA provisions claim. “If we don’t fix the rules of origin, negotiations on the rest of the agreement will fail to meaningfully shift the trade imbalance,” Ross wrote. “Our nation’s ballooning trade deficit has gutted American manufacturing, killed jobs and sapped our wealth. That is going to change under President Trump, and rules of origin are just the beginning.” Link to op-ed.
U.S. negotiators view achieving several changes to NAFTA as necessary for meeting President Donald Trump’s goal of cutting the U.S. trade deficit. This includes: limiting Buy American procurement waivers, increasing U.S. content in rules of origin, raising Mexican wages, and changing investment rules.
On the issue of the environment, Mexico has said it will not support Canada’s proposal to require standards similar to its multi-lateral agreement with Europe.
On labor, Canadian negotiators reportedly have asked for removal of U.S. right-to-work laws. Under such laws, employees in unionized workplaces may not be compelled to join a union or to pay for any part of the cost of union representation.
The fourth NAFTA round reportedly will take place Oct. 11-15 in the Washington, D.C. area.
— Does China play fair? “Tensions over China’s industrial might now threaten the architecture of the global economy,” The Economist writes in its cover editorial (link):
- “America’s trade representative this week called China an ‘unprecedented’ threat that cannot be tamed by existing trade rules.”
- “At the heart of these tensions is one simple, overwhelming fact: firms around the world face ever more intense competition from their Chinese rivals.”
- Why it matters: “China is not the first country to industrialize, but none has ever made the leap so rapidly and on such a monumental scale.”
- “Little more than a decade ago Chinese boom towns churned out [zippers], socks and cigarette lighters. Today the country is at the global frontier of new technology in everything from mobile payments to driverless cars.”
— Spotting some potential megatrends. David Brooks’ N.Y. Times column, The Coming War on Business, summarizes some topics that appear to be underway throughout the United States:
- “Trump is not a one-time phenomenon; the populist tide has been rising for years. His base sticks with him through scandal because it’s not just about him; it’s a movement defined against the so-called ruling class.”
- “Congressional Republicans get all tangled on health care and other issues because they don’t understand their voters. ... Trump may not be the culmination, but merely a way station toward an even purer populism.”
- “Trump is nominally pro-business. The next populism will probably take his ethnic nationalism and add an anti-corporate, anti-tech layer.”
- “As the tech behemoths intrude more deeply into daily life and our very minds, they will become a defining issue in American politics.”
And it’s not just happening in the United States... Beijing is also battling tech giants. The largely unchecked rise of Alibaba and Tencent is coming to an end as the Chinese government is placing them under greater scrutiny amid fears that tech groups are becoming as powerful, and important to the economy, as state-owned enterprises, according to a Financial Times account.
— House to prepare for next hurricane supplemental: Ryan. House Speaker Paul Ryan (R-Wis.) said he and lawmakers from both parties are preparing to move another disaster aid package in October. Ryan said he isn’t ruling out more than one multibillion-dollar relief package to augment the $15.25 billion initial relief measure already passed this month.
— Devastation in Puerto Rico. The situation in Puerto Rico is “devastating,” according to initial reports from the Environmental Protection Agency (EPA). The agency is going to send staff there once travel is possible with a first priority being facilities “where there are known hazardous substances” to make sure those areas are safe for surrounding residents. Trump declared a major disaster Thursday, freeing up additional federal resources to respond to the storm that knocked out power to the entire island of Puerto Rico. “Ships with additional supplies en route to PR & making ALL efforts to reach our most vulnerable citizens,” Resident Commissioner Jenniffer Gonzalez tweeted.
— Farm export programs’ funding would double under bipartisan bill. A bipartisan Senate bill would double funding over five years for two USDA export promotion programs. The bill would help farmers get their products to foreign shores by strengthening the Market Access Program (MAP) and the Foreign Market Development (FMD) Program, supporters said. The Cultivating Revitalization by Expanding American Agricultural Trade and Exports (CREAATE) Act was introduced by Sens. Joe Donnelly (D-Ind.), Angus King (I-Maine), Joni Ernst (R-Iowa), and Susan Collins (R-Maine).
MAP allows several agriculture exporters to apply for either generic or brand-specific promotion funds to support exporting efforts. The program helps them share the costs of overseas marketing and promotional activities that help build commercial export markets for U.S. agricultural products.
FMD is more of a long-term program that expands and maintains export markets for U.S. agricultural products. The focus of FMD is on generic promotion of U.S. commodities, rather than consumer promotion of branded products. According to the USDA, the program-funded projects generally address long-term opportunities to reduce foreign import constraints.
Impacts. Joe Steinkamp, director of the American Soybean Association, has seen the MAP and FMD spur trade activity that supports 240,000 full-time jobs for soybean farmers and returns nearly $30 for every dollar invested, he said. “Doubling funding for the important work they support will only further the mission of creating and expanding export markets for U.S. soybeans in a time when farmers need robust and reliable markets for the crops they produce,” he said.
Background. Statutory funding for MAP is now authorized at $200 million per year and $34.5 million per year for FMD. The CREAATE Act would phase in additional funding, bringing the MAP figure in fiscal 2023 to $400 million and the FMD amount for that year to $69 million. The Senate bill follows the House version, HR 2321, introduced with bipartisan support on May 3 by Reps. Dan Newhouse (R-Wash.) and Chellie Pingree (D-Maine).
— Net worth of U.S. households, nonprofits up $1.7 trillion in second quarter: Fed. The net worth of households and nonprofits grew by $1.7 trillion in the second quarter as the stock market rallied and house prices rose, according to data from the Federal Reserve. The net worth of households and nonprofits rose by 1.7%, to $96.2 trillion, as the value of equities rose by $1.1 trillion and the value of real estate rose by about $600 billion. Meanwhile, businesses continue to accumulate debt, as nonfinancial borrowing grew at a 5.3% rate. Household debt grew at a 3.7% rate, driven by student and auto loans. Mortgage debt excluding charge-offs rose 2.8%. State and local government debt, meanwhile, contracted by one percent.
— Rail service disruptions are still a problem for CSX. The latest issue is a snag at a CSX yard in Ohio that is causing automobile shipments to be rerouted. CSX lowered its profit guidance earlier this month, due in part to the impact of the operational misfires. The company will be the subject of a hearing of the Surface Transportation Board in Washington on October 11.
— Cotton AWP falls; upland cotton import quota #22 established. The Adjusted World Price (AWP) for cotton is at 60.91 cents per pound, effective today (Sept. 22), down from the prior week and the lowest since it was 59.65 cents per pound for the week of August 25. USDA also announced it would establish special import quota #22 for upland cotton September 28 to allow the import of 58,780 bales of upland cotton and will apply to upland cotton purchased not later than December 26 and entered into the U.S. no later than March 26.
— Other items of note:
- USDA, House agriculture staff injured in car accident. A USDA employee and two staff members on the House Agriculture Committee were injured Thursday in a car accident south of El Campo, Texas. House Ag Chairman Mike Conaway (R-Texas) and USDA Secretary Sonny Perdue were in a separate vehicle and were not involved in the wreck, USDA said in a statement. USDA later released a statement saying all three staffers had been discharged from the hospital. Link to article.
- Des Moines Register: It’s been 11 years, but EPA still can’t measure livestock air emissions. After 11 years, the U.S. Environmental Protection Agency has failed to come up with the tools needed to measure whether large animal-feeding operations are exceeding federal air pollution standards, according to an EPA inspector general’s report released this week. Link to article.
- General Mills, the U.S.-based maker of multi-colored kids’ cereal Trix, will bring back the original, artificially-colored version after customers complained. “Classic Trix,” which is colored artificially, will sit on store shelves alongside the new, natural-flavor version, the company said.
- A report says imported products wrongly labeled “organic” are reaching supermarkets because of poor enforcement at U.S. ports. Link to Washington Post article.
- USDA’s 2016 organic production survey shows big growth for the industry. U.S. organic farmland passed 5 million acres for the first time last year, a 15 percent increase over the number of certified acres reported in 2014 and up 23 percent since the department started reporting in 2008. Link to report.
— Markets. Stock futures were lower this morning after North Korea’s Kim Jong Un threatened to test a hydrogen bomb and revived geopolitical tensions. The yen jumped in comparison to the dollar, while Japan’s Nikkei and South Korea’s Kospi fell moderately on the day. On Thursday, the Dow fell for the first time in 10 days. The S&P and Nasdaq also closed lower. Asian stocks closed slightly lower into the weekend following the increase in tensions with North Korea. The 10-year Treasury yield was at 2.257% and gold was just under $1,300 an ounce.
Soybean futures rose to a six-week high in Chicago as U.S. export sales accelerated and dry weather hampered plantings in Brazil. But Soybeans are down 2.5% this year.
OPEC members plan to wait a bit longer to see if any further action is needed to clear out the global oil glut. The main focus of today’s meeting of OPEC officials in Vienna is expected to be compliance and supply cut extensions. Crude oil prices are slightly lower after a strong week.
