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Good morning. In today’s issue, a crucial week in trade looms, the meaning of the latest GDP report, Sprint and T-Mobile test Trump’s antitrust policy, and the dollar’s long decline reverses.
TEMPTING TRADE WAR ON TWO FRONTS
This week brings crucial decision points on two fronts in the looming trade war. Just after midnight Tuesday exemptions from U.S. tariffs on aluminum and steel expire. President Donald Trump will have to renew those exemptions or let the tariffs take effect. European Union officials appear intent on retaliating if the tariffs are levied. Later in the week Mr. Trump’s economic team, led by Treasury Secretary Steven Mnuchin, arrives in Beijing to negotiate a resolution of U.S. complaints about subsidies, forced technology transfer, limitations on foreign investment.
U.S. TO CHINA: GIVE US YOUR BEST SHOT
Over the weekend U.S. officials hinted close allies such as the European Union, Canada and Mexico will continue to escape the steel and aluminum tariffs for now (though U.S. companies are racing to shore up supplies just in case, Bob Tita reports). But the prognosis for China is grim. Rather than issue specific demands, U.S. officials are simply asking China to submit its offers, write Bob Davis and Lingling Wei. Without clear American goals, who knows if Chinese concessions, such as on auto tariffs, will suffice? Also, the U.S. team is divided, between hardliners Peter Navarro and Robert Lighthizer on one hand and free traders Larry Kudlow and Mr. Mnuchin on the other. Meanwhile former Treasury Secretary Hank Paulson, who long ago was Mr. Mnuchin’s boss at Goldman Sachs, is now quietly counseling him; he’ll be in China this week on a pre-planned trip.
WHAT TO WATCH TODAY
At 8:30 a.m. The Commerce Department reports personal income and consumption for March. The data should show that the early-year consumer slowdown has ended: economists expect consumption to have risen 0.4% from February.
Also at 8:30: core prices using the Fed’s preferred gauge, the personal consumption expenditures price index, probably rose 0.2% in March from February, and 1.9% from a year earlier, tantalizingly close to the Fed’s 2% target which it hasn’t hit since 2012.
At 9:45 the Chicago-area purchasing managers index will be released; economists think it rose to a robust 58.3 in April from 57.4 in March.
At 10 a.m. pending home sales will be released. Economists expect a 0.8% increase in March from February.
Sometime Monday the Trump administration should announce whether exemptions from aluminum and steel tariffs are renewed rather than expiring at midnight.
THE BUCK STARTS HERE
One of the market’s biggest puzzles is a puzzle no more. Last year, despite strong U.S. growth and rising interest rates, the dollar, oddly, fell. In April, though, it has been one of the world’s best performing currencies, writes Ira Iosebashvili, as growth in Europe abruptly slowed. A stronger dollar is ordinarily a boon for countries that export in U.S. dollars. But that positive has been offset as emerging companies borrowed heavily in dollars; repaying gets harder as the greenback rises. Indeed, emerging markets hit turbulence in 2014 and 2015 when the dollar shot up.
AN ANTITRUST TEST FOR TRUMP
So what is the Trump Administration’s antitrust policy – laissez-faire, or skeptical, as the Justice Department’s so-far underwhelming court fight to stop AT&T from buying Time Warner implies? If a “horizontal” deal between a distributor (AT&T) and a content supplier (Time Warner) is a threat to competition, wouldn’t that be even more so of the horizontal merger announced Sunday between Sprint Corp. and T-Mobile U.S. Inc.? In 2011 the Obama Administration stopped the two from merging to prevent the four big national wireless providers from becoming three. Sprint and T-Mobile could argue 5G networks will blur the lines between wireless, cable and technology firms, much as AT&T says Netflix, Amazon and Google’s YouTube now compete with broadcast and cable for content.
BEHIND THE GDP SLOWDOWN
Economic growth slowed to 2.3%, annualized in the first quarter from 2.9% in the fourth, the Commerce Department reported Friday. But that doesn’t say much about underlying growth or whether the tax cut is working. A lot of the slowdown was the reversal of a post-hurricane surge in car buying and home repairs in the fourth quarter. Equipment investment kept growing in part because the tax law allows immediate write off of such investment retroactive to September 27. Still, we don’t know yet if businesses simply changed the timing of purchases they would have made anyway. And the real test of the tax cut is whether it delivers 3% growth over a decade, not just a few years.
CHINA’S SELF-INFLICTED DEMOGRAPHIC DISASTER
The biggest economic threat facing China is collapsing fertility, and it’s self-inflicted. Even after ending the one-child policy China still has a bureaucracy of 500,000 to enforce penalties for too many children, according to our report. Cai and her husband borrowed $7,000 to pay the fine a few years ago for their second child; she sold her clothing shop to pay the $12,000 fine they now face for having a third.
IN HEAVEN AND HELL, THE CRYPTO BANKERS ARE SWISS
Switzerland is hoping to become a global capital for cryptocurrencies centered in the cities of Zug and Zurich, Brian Blackstone writes . Switzerland has some built-in advantages including its banking prowess, low taxes, elite universities and the Swiss brand itself. But there are drawbacks too, particularly of compromising the years, and billions of dollars, spent shedding its a reputation as a shady-money haven.
IS THERE A SALES CLERK ANYWHERE HERE?
If you’ve struggled to find human help in a store lately, there’s a reason: major retailers have been slashing headcount even faster than they close stores, Suzanne Kapner reports. J.C. Penney employs 112 people per store now, down from 145 a decade ago. Workers are now stretched so thin one union stipulated in its latest contract that members can drop all other responsibilities to help care for customers first. Some, including Kroger and Dick’s Sporting Goods, are now reversing course.
TWEET OF THE DAY
WHAT ELSE WE’RE READING
Some countries will get continued relief from steel and aluminum tariffs when current exemptions expire Tuesday, Commerce Secretary Wilbur Ross told Bloomberg Saturday. He indicated on Friday that nations have been asked to accept import quotas in return for tariff-free access of the metals into the U.S.
How much are “free” digital products worth to you? Quite a lot, according to surveys of what consumers would have to get to give up various online services by Erik Brynjolfsson, Felix Eggers and Avinash Gannamaneni. Consumers would have to be paid $17,530 per year to give up Internet search, $8,414 for email, $3,648 for maps, $322 for social media and $155 for messaging. The fact they pay nothing suggests they reap substantial “consumer surplus” from these services that does not show up in measured gross domestic product. Of course, consumers may get even more surplus from more mundane non-digital products. How much would you have to be paid to give up indoor plumbing?
People seek two things from government: results and respect, Cambridge University’s David Runciman writes in an excerpt from his book, How Democracy Ends, in the weekend Wall Street Journal. China’s threat to democracy is limited by the inability of its pragmatic authoritarianism to deliver individuals respect, but its appeal is nonetheless growing as leaders from Moscow to Washington struggle to show “consistent, practical results for the majority.”
UP NEXT THIS WEEK: FOMC
The Federal Open Market Committee begins a two-day meeting Tuesday and announces its decision Wednesday at 2 p.m. It’s expected to hold rates steady, though pressure to raise them faster later on may be growing.