Aurelia Butler

Unlock the White House Watch newsletter for freeYour guide to what the 2024 US election means for Washington and the worldThe writer is a faculty member at Yale, formerly chair of Morgan Stanley Asia, and is the author of ‘Accidental Conflict: America, China, and the Clash of False Narratives’A tit-for-tat between China and the US on trade this month hints at what could well lie ahead if Donald Trump delivers on campaign promises to up the ante on Chinese tariffs when he returns to the White House. In a long overdue move, the US has just updated its export sanctions on China, focusing on high-bandwidth memory chips and semiconductor manufacturing equipment. Washington also added another 140 Chinese companies to the commerce department’s so-called “entity list”, effectively making it very difficult for those US companies to supply technology to them.As has been the case since 2018, China has been quick to counterpunch, in this case by banning or limiting US purchases of several critical minerals while tightening controls on graphite. China’s retaliatory action is a surgical strike with important strategic consequences for key US industries, ranging from semiconductors and satellites to infrared technology and fibre optic cables, to lithium batteries and solar cells. These actions are comparable to what Washington is seeking with its “small yard, high fence” strategy aimed at restricting access to critical US technologies. It is a reminder that retaliation is the high-octane fuel of conflict escalation. This is not well understood in US policy circles that seem to harbour the mistaken notion of a one-way dependency — that China is uniquely beholden to external demand and new technologies from the US. This leaves out the other half of the equation. The US is also heavily reliant on low-cost Chinese goods to make ends meet for income-constrained consumers; the US needs Chinese surplus saving to help fill its void of domestic saving; and US producers rely on China as America’s third-largest export market. This codependency means the US depends on China just as much China depends on America.Trump doesn’t buy this logic. During Trump 1.0, US tariffs on Chinese products were raised from 3 per cent in 2016 to 19 per cent by 2020. Trump held the mistaken view that there was a bilateral China fix for a multilateral trade deficit with 106 countries.That backfired. Over the subsequent years, the overall US merchandise trade deficit widened from $879bn 2018 to $1.06tn in 2023. Predictably, in response to tariffs, the Chinese share of the overall US trade deficit fell from 47 to 26 per cent over this same five-year period.  However, the Chinese portion was simply diverted to Mexico, Vietnam, Canada, Korea, Taiwan, India, Ireland and Germany. And it turns out more than 70 per cent of the trade diversion away from China went to higher-cost or comparable-cost nations, underscoring that trade diversion is the equivalent of a tax rise on US companies and consumers. Expect more of the same in a second Trump administration. And as US actions escalate, retaliation from China will probably broaden. For example, China’s latest actions on critical minerals open up the possibility of wide-ranging constraints on rare earths, which are of enormous strategic importance to the US.Then, of course, there is the ultimate financial weapon — Greater China’s $1tn in direct holdings of US Treasury securities (including $772bn by the PRC and $233bn by Hong Kong as of September 2024). Cavalier Americans typically dismiss this possibility, claiming China wouldn’t dare flirt with this nuclear option because it would hurt them more than us.Oh really? There are a couple of “bad dream” options to consider: China could go on a buyer’s strike during upcoming Treasury auctions, or, even more extreme, it could start to unload its outsize position as America’s second-largest foreign creditor. Either option would be devastating for America’s deficit-prone economy and would unleash havoc in the US bond market, with wrenching collateral damage in world financial markets. While it seems far-fetched, almost suicidal, for China to spark such a financial meltdown, it is equally reckless to dismiss the “tail risk” consequences of a trapped adversary. Much of the post-election policy discussion has focused on tariff initiatives likely to be forthcoming in Trump 2.0. Sino-American codependency urges us to think less about unilateral actions and more about the retaliatory responses to those actions. Trump’s nationalistic view of “America First” ignores how much a saving-short US economy depends on China for goods and financial capital. China has plenty of “Trump cards” to send a very different message.  More

TOKYO (Reuters) -Japanese big manufacturers’ sentiment improved slightly in the three months to December, a quarterly survey showed on Friday, boding well for the central bank’s plans to gradually raise interest rates from near-zero levels.The data comes ahead of the Bank of Japan’s two-day policy meeting next week, when the board will debate whether to lift rates from the current 0.25%.The headline index measuring big manufacturers’ business confidence stood at +14 in December, up from +13 three months ago and marking the highest reading since March 2022, the BOJ’s “tankan” quarterly survey showed on Friday. It compared with a median market forecast for +12.”Companies seem to be weathering headwinds from China’s economic weakness. This is good news for the BOJ and shows things are on track for the economy and prices,” said Saisuke Sakai, chief economist at Mizuho (NYSE:MFG) Research & Technologies.”But the outlook is highly uncertain due partly to U.S. president-elect Donald Trump’s tariff policies, which could weigh on automakers’ profits ahead,” he said.An index gauging big manufacturers’ sentiment declined slightly to +33 from +34 in September, compared with a median market forecast for a reading of +32.Big manufacturers and non-manufacturers expect conditions to worsen in the three months ahead, the survey showed.Big companies expect to increase capital expenditure by 11.3% in the fiscal year ending in March, compared with a 10.6% gain projected in the previous survey in September. The increase was bigger than market forecasts for a 9.6% rise.The BOJ ended negative interest rates in March and raised its short-term policy rate to 0.25% in July on the view Japan was making steady progress towards sustainably achieving its 2% inflation target.BOJ Governor Kazuo Ueda has said the central bank will continue to raise rates if companies keep hiking prices and wages due to optimism over the outlook, and help keep inflation durably around its 2% target.The tankan’s sentiment diffusion indexes are derived by subtracting the number of respondents who say conditions are poor from those who say they are good. A positive reading means optimists outnumber pessimists. More

In recent interviews with potential candidates for leading these regulatory agencies, Trump advisers and officials from the newly established Department of Government Efficiency (DOGE) have inquired about the possibility of the president-elect abolishing the Federal Deposit Insurance Corp, the WSJ said, citing people familiar with the matter.Advisers have asked the nominees under consideration for the FDIC and the Office of the Comptroller of the Currency, if deposit insurance could then be absorbed into the Treasury Department, the report said. More

The new regulation, adopted over the banking industry’s vocal opposition, closes what the U.S. Consumer Financial Protection Bureau described as a 1960s “loophole” from the era when checks were still in widespread use and that banks had since turned into a profit center.Lael Brainard, President Joe Biden’s National Economic Council director, added in a statement that the new rule amounted to “real relief for families.””The CFPB’s new rule, which caps overdraft fees as low as $5, is expected to save many families as much as $225 a year,” she said.The American Bankers Association reacted negatively, saying the CFPB had exceeded its legal authorities in finalizing the rule and that the trade group was considering its options.Consumer Bankers Association President and CEO Lindsey Johnson said the “rule harms Americans who need it most – including the 26 million Americans who don’t have access to credit and thus stand to lose the most if overdraft services are restricted.”Under the rule adopted Thursday, banks with more than $10 billion in assets who lend depositors money to cover account overdrafts have three options, according to the CFPB.They may charge $5, a fee that covers no more than costs or losses or they may offer credit at a profit so long as this complies with laws governing credit cards and other lending.CFPB officials said in January that about 23 million households paid such fees, which generated $12.9 billion in 2019.Banks say they have sharply reduced or eliminated overdraft fees in recent years. However the ABA said in a statement on Thursday the rule could cause banks to cease offering overdraft loans altogether, depriving cash-strapped consumers of quick access to funds essential expenses.According to Americans for Financial Reform, a progressive advocacy organization, recent polling shows overwhelming bipartisan voter support for limits on overdraft charges.Unlike other banking regulators, the CFPB has persisted in rulemaking in the weeks before President-elect Donald Trump takes office, angering congressional Republicans. The agency has finalized rules on digital wallets and also proposed new regulations on data brokers.Other CFPB proposals awaiting finalization include rulemakings on medical debt and on fees for instantaneously declined charges.A Republican Congress may nullify the rules adopted late in Biden’s final year and trade groups have also shown little hesitation in bringing court challenges. But such efforts are not guaranteed success.In Senate testimony on Wednesday, Chopra told lawmakers he did not feel the agency should cease rulemaking activity.”I don’t think it makes sense for the CFPB to be a dead fish,” he said. More

ORLANDO, Florida (Reuters) -One of the many curiosities of 2024 has been how global stocks have surged so strongly even as central banks have drained liquidity from the system. The question for markets is, if draining liquidity wasn’t much of a headwind this year, will its likely reversal next year turn into a tailwind?Global growth is forecast to moderate, partly due to the heightened uncertainty surrounding U.S. trade policy, and key economies like China, Europe and Canada are expected to loosen monetary policy significantly. Meanwhile, the Federal Reserve is trimming interest rates and could wind down its quantitative tightening (QT) program which has shrunk its balance sheet by $2 trillion since mid-2022. In short, the liquidity drain is likely to end. But if tracking the level of liquidity coursing through financial markets and the global banking system is hard, accurately assessing its impact on asset prices is a near-impossible endeavor. Liquidity has often been measured, albeit crudely, by the size of central bank balance sheets, with the assumption being that bigger balance sheets – and especially higher levels of bank reserves – mean stronger equity markets. For example, analysts at Citi run a model which suggests every $100 billion change in bank reserves held at the Fed equates to a roughly 1% move in the S&P 500. That would mean Wall Street should have taken a 2% hit this year, all else equal, as reserves fell by around $200 billion. On a global level, the 12-month change in bank reserves is around $600 billion, implying a much bigger fall in world stocks. Of course, the S&P 500 is up nearly 30% this year and the MSCI World index is up 20%.Or consider that the combined size of the ‘G4’ central bank balance sheets fell by $2.2 trillion in both 2022 and 2023, yet world stocks fell 20% in one year, then rose 20% the next. All this suggests liquidity is only one of many factors impacting markets. Economic growth, geopolitics, technology, earnings, regulation, investor psychology and a host of other factors can sway markets from day to day. Does this mean investors can mostly disregard changes in liquidity? Not necessarily.COLOSSALWhen trying to assess the status of market liquidity implied by central bank balance sheets, it’s useful to zoom in on bank reserves. If they get too low, as appeared to happen in the U.S. in 2019, money market rates can spike, credit crunch fears can flare up and investors may begin dumping risk assets. New York Fed models and recent commentary from Fed officials have both indicated that current U.S. bank reserves of around $3.2 trillion are “abundant”. However, they would like them to be merely “ample”, which is what the Fed’s ongoing balance sheet reduction is seeking to achieve.Policymakers will be pleased that – at least thus far – this reduction has not seriously impacted financial markets. It has been “like watching paint dry,” as U.S. Treasury Secretary Janet Yellen once quipped.But early 2025 could be choppy for markets, prompting the Fed to call a halt to QT. President-elect Donald Trump returns to the White House, the U.S. debt ceiling issue could rear its head again, and cash at the Fed’s overnight repurchase facility (RRP) could hit zero, signaling the disappearance of what some Fed officials have deemed a rough proxy for “excess” liquidity.Analysts at Goldman Sachs reckon the Fed will end QT in the second quarter, and others say it could come earlier. And why not? The balance sheets of the Fed, European Central Bank and Bank of England are all the smallest they’ve been as a share of their respective GDPs since early 2020, before the pandemic.David Zervos, chief market strategist at Jefferies, at a conference in Miami in February predicted that QT will stop with the Fed’s balance sheet at $7 trillion, right where it is today.”That’s a colossal balance sheet … a huge stimulus. It lifts earnings, lifts nominal GDP, lifts profits and lifts valuations,” Zervos said. Even if there is no mechanical link between central bank liquidity and markets, a “colossal” Fed balance sheet sends a signal that policymakers want to keep liquidity at stimulative levels and have the market’s back. The perception of liquidity rising – or not falling – could be enough to fuel risk appetite, potentially giving an already hot market an added tailwind next year. (The opinions expressed here are those of the author, a columnist for Reuters.)(By Jamie McGeeverEditing by Peter Graff) More

(Reuters) -Costco Wholesale beat first-quarter revenue and profit expectations on Thursday as its bulk and discounted offerings, appealing to budget-conscious American shoppers, drove early holiday-season sales growth for the membership-only retailer.The company’s shares, which are up 51% so far this year, rose nearly 1% in extended trading.The retail chain, which sells products in larger packs and has bulk offers on items such as bread and eggs for as low as $3, has seen picky consumers turn to its stores to shop for their holiday needs, including home furnishings and jewelry. “It seems like you saw more than just bulk food sales growing. So it looks like there was a little bit of an uptick in other goods, not necessarily big-ticket discretionary items… but you’re seeing some sales growth in some different aisles of the store,” said Brian Mulberry, client portfolio manager at Zacks Investment Management, which has a stake in Costco (NASDAQ:COST). The holiday shopping season is shorter in 2024 than previous years, with only 26 days between Thanksgiving and Christmas. The season saw retailers across the United States roll out discounts and promotions as early as October to beat competition and attract finicky customers.”Seasonal sell-through appears to be very strong… people are very basic buying this year, but good trends,” CFO Gary Millerchip said in a post-earnings call.Costco ran pre-Black Friday sales in early November, trying to dodge a hit to sales in the first quarter ended Nov. 24 this year, from the late Thanksgiving weekend, which extended into December.It has offered products at heavy discounts, such as an LG UltraGear Gaming Monitor for $179, $70 lower than its original price, and JBL headphones for a 30% discount, at $69.99.Bigger rival Walmart (NYSE:WMT), which has also been offering higher discounts and promotions, raised its annual sales and profit forecast in November for the third time this year, signaling strong consumer spending.Costco’s first-quarter revenue rose 7.5% to $62.15 billion, beating analysts’ estimate of $62.08 billion, according to data compiled by LSEG.Its profit came in at $4.04 per share in the reported quarter, handily topping an estimate of $3.79.The recent hike in its annual membership fee to $65 for Gold Star members and $130 for Executive members resulted in earnings from the fees rising 7.7% to $1.17 billion in the reported quarter. More

TOKYO (Reuters) -The Bank of Japan is leaning toward keeping interest rates steady next week as policymakers prefer to spend more time scrutinising overseas risks and clues on next year’s wage outlook, said five sources familiar with its thinking.Any such decision will heighten the chance of an interest rate hike at the central bank’s subsequent meeting in January or March, when there will be more information on the extent to which wage hikes will broaden next year.There is no consensus within the central bank on the final decision, with some in the board still believing Japan has met the conditions for raising rates in December, the sources said. The decision will depend on the conviction each board member holds on the likelihood of Japan achieving sustained, wage-driven price rises.There is also a slim chance the board may favour acting if upcoming events, such as the U.S. Federal Reserve’s rate-setting meeting that concludes hours before that of the BOJ, trigger a renewed yen plunge that heightens inflationary pressure.But overall, many BOJ policymakers appear in no rush to pull the trigger with little risk of inflation overshooting despite Japan’s still near-zero borrowing costs, they said.”Japan isn’t in a situation where imminent rate hikes are needed,” one of the sources said. “With inflation benign, it can afford to spend time scrutinising various data,” another source said, a view echoed by two more sources.The BOJ will hold its final policy meeting for the year on Dec. 18-19, when the nine-member board will deliberate whether to raise short-term interest rates from the current 0.25%.Just over a half of economists polled by Reuters last month expect the BOJ to raise rates in December. About 90% forecast the BOJ to have hiked rates to 0.5% by end-March.By contrast, markets are currently pricing in less than a 30% probability of a rate increase in December.TRUMP RISK LOOMSThe central bank has been guarded on the timing of the next rate hike, causing market expectations of a move to fluctuate between December and January.There is growing conviction within the BOJ that conditions for another hike are falling into place with the economy growing moderately, wages rising steadily and inflation exceeding its 2% target for well over two years, the sources said.In a sign of its confidence over the economic outlook, the central bank is likely to maintain its view that consumption is “increasing moderately as a trend,” they said.But there is no sense of urgency to hike as inflationary pressure from raw material imports has subsided due to the yen’s recent rebound. That contrasts with when the BOJ hiked rates to 0.25% in July, when the currency’s rapid fall pushed up import prices and heightened the risk of an inflation overshoot.While rising wages are prodding more firms to hike services prices, such moves have not heightened enough to cause an alarming wage-inflation spiral, the sources said.Acting in December, rather than January, could give markets the impression the BOJ is in a rush to push up rates to levels deemed neutral to the economy – something it wants to avoid.The government, which still considers Japan as remaining in economic stagnation, also prefers the BOJ to move cautiously.”It’s desirable for the BOJ to hold off on raising rates until the economy recovers a bit more,” a senior government official told Reuters, when asked about the December meeting.Unless a renewed, rapid yen fall heightens inflationary pressure, many BOJ policymakers likely prefer awaiting information on whether firms will keep offering bumper pay hikes in next year’s wage negotiations with unions, the sources said.Holding until the Jan. 23-24 meeting would allow the BOJ to scrutinise remarks from corporate executives on next year’s wage outlook, and its quarterly regional report that includes information on how smaller firms are setting prices and wages.Another incentive to hold fire is uncertainty over U.S. president-elect Donald Trump’s economic policies, which Governor Kazuo Ueda highlighted as a risk in a recent media interview.”The biggest risk for Japan’s economy comes from overseas,” as sluggish global demand could hurt corporate profits and dampen their appetite to hike pay, a third source said.The BOJ’s decision next week will come hours after that of the Fed, which is widely seen cutting rates.If the Fed surprises by holding rates and triggers a dollar surge, that could pressure the BOJ to hike rates to slow any sharp yen selloff, the sources said.The BOJ ended negative interest rates in March and raised its short-term policy target to 0.25% in July. It has signaled readiness to hike again if wages and prices move as projected, and heighten conviction Japan will durably hit 2% inflation. More