Financial Review

The Last Flight

…Stocks slip on news of possible escalation of trade war with China. NAFTA hits a deadline. The EU grows weary. No pay raise for federal workers due to “serious economic conditions”. Consumer spending and inflation rise. McCain’s last flight out of Arizona.

Financial Review by Sinclair Noe for 08-30-2018

DOW – 137 = 25,986
SPX – 12 = 2901
NAS – 21 = 8088
RUT – 2 = 1732
10 Y – .02 = 2.86%
OIL + .54 = 70.05
GOLD – 6.70 = 1200. 60

Stocks moved lower as trade concerns once again took center stage. According to a report from Bloomberg, Trump wants to move ahead with a plan to impose tariffs on $200 billion in Chinese imports as soon as a public-comment period concludes next week. Companies and members of the public have until Sept. 6 to submit comments on the proposed duties, which cover everything from selfie sticks to semiconductors. Trump plans to impose the tariffs once that deadline passes. According to the people familiar with the matter, Trump hasn’t made his final decision, and it’s possible the administration may enact the duties in installments. The U.S. has so far imposed levies of $50 billion in Chinese goods, with Beijing retaliating in kind. It is also possible Trump could announce the tariffs next week but say they will take effect at a later date. The administration waited about three weeks after announcing in mid-June that it was imposing tariffs on $34 billion of Chinese goods before they were implemented. The next stage of tariffs on $16 billion of goods took hold in August. China has threatened to retaliate by slapping duties on $60 billion of U.S. goods.

 

After U.S. assaults on Europe over issues from trade to climate change, Angela Merkel and Emmanuel Macron are signaling they’ve finally had enough. Within 24 hours of one another this week, the German and French leaders made what would have once been remarkable interventions, calling on Europe to establish greater autonomy from the U.S. The common message was it is time to reassert the continent’s sovereignty. Both are pushing the EU to take on more global responsibility for defense while weighing a plan to create a separate financial system to ensure European autonomy. The calls for a stronger Europe, on trade as well as on security and defense issues, grow partially out of the frayed trans-Atlantic relationship and also out of concerns over the future of the EU, given rising nationalism in member states and given Brexit. True financial independence for the EU would imply a currency that could supplant the dollar’s essential global role and a financial framework that could compete with Wall Street, goals that would take many years to attain, if at all. And defense capabilities allowing Europe to safeguard itself look like a tall order for a continent where only five of 29 NATO allies meet the alliance’s target to spend 2 percent of economic output on defense.

 

A key trigger for moves to establish greater independence was Trump’s decision announced in May to pull the U.S. out of the Iran nuclear accord, forcing European companies including Daimler and Total to pull out to avoid U.S. sanctions. French Finance Minister Bruno Le Maire and German Foreign Minister Heiko Maas suggested that EU countries set up payment systems independent of the U.S. to sidestep the new regulations. The European push comes at a pivotal moment for the bloc: Autocratic leaders in eastern Europe are testing the bounds of the EU’s rules; the U.K. is on the cusp of leaving the union; and a clash with Italy over spending and migrants is looming as the next major flash point.

 

Meanwhile, talks between Canada and the United States over renegotiating the NAFTA trade agreement are going to the wire as Washington pushes for a deal by Friday – which is a self-imposed deadline; the idea being that Trump can deliver in time to have congressional approval before the midterms so that he can declare a win. And it would allow Mexico to push through a deal before Enrique Peña Nieto, Mexico’s president, leaves office at the end of November. Canada actually has some leverage. Trump actually doesn’t have the authority to negotiate two bilateral deals.  Congress gave him the authority to negotiate a deal that would include Canada and Mexico. Also, Canada is the U.S.’s single biggest foreign export partner. For 35 U.S. states, Canada is their single biggest foreign export market. Millions of U.S. jobs depend upon three-way trade between Canada, Mexico and the United States. The automotive industry, in particular, is deeply integrated. If Canada fails to keep its place in the free trade bloc, the US might respond with punitive tariffs on Canadian-made cars, mused Trump this week, breathing life into a scenario dubbed “Carmageddon” by Canada’s auto industry for the catastrophic job losses it could provoke. The new deal with Mexico looks a lot like the deal formerly known as NAFTA. Trump said he wanted a “sunset clause”, but now he has agreed the new deal will last for at least 16 years. In a way, this is reassuring: Trump turns out to be a bendable politician like the rest, rather than a uniquely destructive force. The whole farce is like a Brexit morality tale: populist politicians tell the people their problems are caused by unfair trade relations with their next-door neighbors, and then have to spend the next few years trying to replicate those very same trade deals.

 

As we head into Labor Day weekend, no pay raise for federal workers. Trump said he would freeze the pay of federal workers next year, saying the nation can’t afford the scheduled 2.1% raises. In a notice to Congress Thursday, Trump cited “serious economic conditions” in cutting pay to civilian workers. Trump said, “We must maintain efforts to put our nation on a fiscally sustainable course, and federal agency budgets cannot sustain such increases.” It would be the first pay freeze for civilian federal workers since 2011 to 2013, when President Barack Obama instituted a three-year pay freeze as the nation recovered from the recession.   But Trump’s pay freeze comes even as he touts a booming economy. Hours before announcing the pay freeze, Trump tweeted: “The news from the Financial Markets is even better than anticipated,” and “More good news is coming!”

 

Under federal law, federal employees get cost-of-living raises every new year – in addition to specific increases in high-cost cities called “locality pay” – unless the president determines those raises would be “inappropriate.” Among the factors the president can consider: economic growth, unemployment, various measures of inflation and the budget deficit. The federal budget deficit has grown 16 percent this fiscal year, the result of a combination of Trump-supported tax cuts and military spending, as well as increases in mandatory spending programs like Social Security, Medicare and Medicaid. The national debt – the accumulation of those budget deficits – has increased nearly $1.6 trillion over the past year, to $21.4 trillion.

 

Consumer spending rose sharply in July for the fifth month in a row, getting the economy off to a good start at the beginning of the third quarter. The government said consumer spending climbed 0.4% in July. Inflation is also moving higher. The 12-month increase in the PCE index, the Federal Reserve’s preferred inflation gauge, rose to 2.3% from 2.2%. That’s the highest level since April 2012. Stripping out food and energy, the core rate rose to 2%.

 

Amazon stock hit $2,000 per share for the first time today. Shares rose as much as 1.4 percent to $2,025.57 but ultimately shied away from the record high to close at $2,002.38. If, or when, Amazon shares hit $2050 the company will have a market cap of $1 trillion.

 

Apple is set to reveal its latest lineup of products on Sept. 12. The company’s annual September event serves as the introduction of new iPhone models and upgraded gadgets before inventory hits the shelves, but this year’s unveiling is rumored to be impressive even by Apple’s standards. Reports have suggested a new line of iPhones, a new MacBook Air and updated Mac Mini, upgrades to the iPad and a new Apple Watch.

 

Senator John McCain was remembered in Phoenix today as a “true American hero”. In a deeply personal eulogy, former vice-president Joe Biden called McCain, who died on Saturday after a battle with brain cancer, a “brother – with a lot of family fights”. At North Phoenix Baptist church, an estimated 3,500 mourners, including family, friends, 24 Senate colleagues, Arizona athletes and other dignitaries celebrated McCain’s life. The program was choreographed to send a wider message. Biden is a Democrat whose friendship endured an election that pitted them against one another. Tony Espinoza, a prominent Arizonan Latino leader, recalled McCain’s love of “Mexican culture”. Larry Fitzgerald, a wide receiver for the Arizona Cardinals NFL team, described his perhaps unlikely friendship with McCain. More than one speaker urged politicians in the pews and elsewhere to follow McCain’s legacy by rejecting tribalism and forging friendships across the aisle. Amid personal memories, there were references to current political divisions – and to the presidency of Trump, which deeply troubled the senator.

 

Earlier, as a motorcade made the eight-mile journey from the state capitol to the church, Vietnam veterans in wheelchairs joined children holding American flags along the route, waving goodbye. At one point, Cindy McCain, the senator’s wife of 38 years, rolled down a window and waved back. McCain’s funeral will be held at the Washington National Cathedral on Saturday. Speakers will include presidents George W Bush and Barack Obama. On Sunday, the senator will be buried in a private ceremony at the US Naval Academy in Annapolis, Maryland. Shortly before 1 PM, an Air Force passenger plane carrying the casket of the six-term senator and two-time presidential candidate departed Sky Harbor Airport. Sen. John McCain has left Arizona for the last time as he makes his final flight to Washington, D.C.

 

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