US-Mexico Deal — Where Art Thou Canada?Soaring US Corporate Profits + Consumer Confidence, Desperate Measures In Argentina

Welcome to a regular snapshot-review of U.S. and international economic data that aims to 1) determine the direction of economic policy — such as the speed at which central banks decide to raise interest rates, 2) provide a window into the challenges and decisions facing businesses today, and 3) assess what the impact will be for consumers.

They might not be on the same page when it comes to who will foot the bill for you-know-who’s wall, but the United States and Mexico this week managed to strike a deal on revisions to the North America Free Trade Agreement (NAFTA), paving the way for a cooling of trade tensions between the two countries. The agreement covers issues such as intellectual property rights, free trade provisions for agricultural goods, and establishes a minimum wage requirement for autoworkers.

The eagerness of both sides to reach an accord quickly was likely spurred by the fact Mexico will have a left-wing government in place by December 1 — one that is expected to be more antagonistic towards Washington. U.S. authorities must wait 90 days after notifying Congress before signing a deal, so to have a new NAFTA deal in place before the new Mexican president is sworn in on December 1, the administration must send lawmakers the new agreement by September 1.

Canada had been part of initial talks to revise NAFTA, before moving to the sidelines so the U.S. and Mexico could hash out their differences. Now the latter two have reached a preliminary understanding, the unanswered question is if Canada will quickly sign on or if the need for additional concessions will make that impossible.

At time of writing, all indications point to both sides being nowhere close to ironing out their differences, and the political risks for both President Trump and Canada PM Justin Trudeau from giving up too much make it even more likely neither side will budge before today’s deadline.

And given Trump’s declared preference for bilateral trade deals over multilateral pacts — based on the belief that greater pressure can be brought to bear and better terms extracted from the other side — don’t be surprised if he forges ahead to get Congressional approval of the Mexico agreement while engaging with Canada on a separate deal.

According to news reports this week, President Trump plans to impose tariffs on $200 billion in Chinese imports once the public-comment period concludes on Sept. 6. If he does, China will respond with tariffs on $60 billion worth of U.S. imports. Expect to see those feed through to higher consumer prices in the second half of this year if neither side budges.

Meanwhile the president’s chilly relationship with the European Union shows no sign of thawing, with Trump rejecting an olive branch from the EU to end tariffs on car imports to the bloc if the U.S. is willing to do the same. Calling the offer “not good enough,” Trump declared:

“The European Union is almost as bad as China, just smaller.”

Concerns over the damaging impact a trade war will have economic activity and consumers remain, but data shows the U.S. economy and consumer sentiment remain strong.

The Bureau of Economic Analysis (BEA) reported this week that the economy expanded by 4.2% in Q2, fueled by increased spending from both government (federal, state, and local) and consumers, as well as more exports — although those were likely orders pulled forward to avoid the threat of higher tariffs. The report also showed corporate profits took an immense leap last quarter, rising by $72.4 billion compared with an increase of $26.7 billion in the first quarter.

In more positive news on the current situation in the economy, the Conference Board’s Consumer Confidence Index reached its highest level since October 2000, driven by consumers’ positive assessments of both the business environment and labor market conditions.

Strong economic data and increasingly confident U.S. consumers mean the Federal Reserve is unlikely to slow the pace of interest rate hikes it has embarked upon since December 2015. As Fed Chairman Jay Powell noted in a speech at the Kansas City Fed’s Economic Symposium last week, “if the strong growth in income and jobs continues, further gradual increases in the target range for the federal funds rate will likely be appropriate.”

In more good news for the central bank this week, the U.S. Senate voted to confirm Richard Clarida as vice chairman of the Federal Reserve board, providing much-needed relief to an institution that has been short-handed at the leadership level for some time. He fills the spot vacated by former Vice Chairman Stanley Fischer resigned in October 2017.

The Fed still has three vacancies on its seven-member board. Carnegie Mellon Professor Marvin Goodfriend and Kansas State Bank Commissioner Michelle Bowman await confirmation by the full Senate, while Trump has yet to put forward a nominee for the remaining open seat.

Congress passed the Community Reinvestment Act in 1977 to combat discrimination in banks’ lending practices and encourage the flow of credit to under-served communities around the country.

The Office of the Comptroller of the Currency, the regulator responsible for overseeing the nation’s banks and thrifts, wants to modernize how the law is implemented and this week issued a request for public comment. The OCC said it wants to “increase lending and investment where it is needed most, and reduce the burden associated with reporting and assessing CRA performance.”

Critics of the law have said it places too much emphasis on crediting banks for establishing physical branches in low income areas, while failing to recognize changes in the industry such as the explosion of digital banking. On the other hand, there are concerns among consumer advocates that the reform effort will water down the regulations and ease the requirement for banks to serve a broader customer base outside of major metropolitan areas.

And finally, President Trump might not be happy about the Fed’s determination to keep raising interest rates, but it is nothing on the scale of what Argentina is dealing with this week.

With its currency rapidly declining in value as investors exit risky emerging market investments for safer assets in the U.S. (attracted by the aforementioned Fed rate increases), Argentina’s central bank hiked interest rates to 60% — the highest in the world — and pledged to maintain them at that level until December.

Argentina has also asked the International Monetary Fund to speed up the release of funds from a $50 billion bailout package, and for its part the IMF voiced its confidence in Argentina’s ability to weather the storm. Its leadership will meet with government authorities next week.

Founder — SW4 Insights. Public policy junkie and Central Bank Watcher. Recovering journalist and former Senior Director at Hamilton Place Strategies

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