This post is by Jeffrey Sparshott from Real Time Economics
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Good morning! Today we look at fallout from higher oil prices, some collateral damage from the U.S.-China trade spat, and Larry Kudlow’s transition from a cable-news commentator to the president’s top economic adviser.
Oil prices have been marching higher for nearly a year. Brent, the global benchmark, reached $73.78 on Thursday, its highest level since November 2014. It’s up 55% since June 2017.
That certainly means higher gasoline prices. Up until a few years ago, it also meant a brake on U.S. economic growth. Not anymore. U.S. consumers will still get pinched at the pump, but the U.S. is on its way to becoming the world’s biggest oil producer. Energy firms and the companies that supply them with machinery, steel tubing, transportation and other equipment services largely benefit from higher crude prices.
Investment from the mining industry is a tiny share of all the goods and services produced in the U.S. But much of the economy is on autopilot, so big swings at the margins—say, a jump or drop in oilfield investments—can have an outsize effect on the pace of overall economic growth.
Bonus for data geeks: The Baker Hughes rig count is out at 1 p.m. ET each Friday. The numbers are a decent proxy for investment.
WHAT TO WATCH TODAY
Canada’s consumer price index for March is due out at 8:30 a.m. ET.
Eurozone consumer confidence for April is due out at 10 a.m. ET.
The Chicago Fed’s Charles Evans speaks on economy and monetary policy at 9:40 a.m. ET and the San Francisco Fed’s John Williams speaks at 11:15 a.m. ET.
WHAT GOES UP
As oil prices have soared, hedge funds and other big investors have amassed a record number of bullish bets on crude, putting the market at risk of a swift fall if the outlook sours, Georgi Kantchev writes. Last week, hedge funds and other big money managers increased their net-long position—a bet on rising prices—in Brent to the highest level since records started in 2011. Bets on West Texas Intermediate, the U.S. oil price gauge, are also near a record. “Right now, speculators simply love oil. That’s dangerous,” said Tamas Varga, an analyst at brokerage PVM Oil Associates Ltd. “If the geopolitical tensions ease, you will see quite a sharp selloff. If OPEC doesn’t extend its cuts, all hell would break loose.”
TRADE WARS: ATTACK OF THE PHONES
ZTE has quietly been building its own American success story. The Chinese telecom giant last year alone almost doubled its U.S. market share to 11.2%, selling 19 million handsets and making the country its biggest market, Dan Strumpf and Newley Purnell report. Now, ZTE executives are grappling with a new roadblock that they say threatens the company’s very survival. The U.S. government moved this week to block sales of American products to ZTE, saying the company violated the terms of a deal last year settling allegations of sanctions-busting involving North Korea and Iran. The ban has forced the Chinese telecom titan to assess whether it must—or even can—replace key components such as semiconductors supplied by Qualcomm and the Android mobile operating system it uses, made by Alphabet’s Google.
CHINA STRIKES BACK
San Diego-based Qualcomm too has taken on an unwelcome role as punching bag in the U.S.-China trade dispute. China’s antitrust regulator raised questions Thursday about the company’s proposed $44 billion acquisition of NXP Semiconductor. Qualcomm has since refiled for approval but has set a deadline of July 25, after which it would walk away.
China’s move highlights the vulnerabilities of industries like chip makers as the trade rhetoric heats up, Dan Gallagher and Justin Lahart write. The White House has threatened tariffs on $150 billion in Chinese imports. China’s ability to evenly match the U.S. is limited, since it imports only about $130 billion in U.S. goods annually. But as the case with Qualcomm shows, China has other sources of leverage that it can bring to bear.
WHO WILL BEAR THE BRUNT OF TARIFFS?
U.S. tariffs on Chinese imports are set to fall disproportionately on a handful of American industries. The tariffs unveiled last month would impose 25% duties on more than 1,300 products across 872 categories. China isn’t a major source for most. But 38 categories of products had a significant amount of imports—of more than 30%—from China. Importers of aluminum alloy sheets, pump parts and radio and TV transmitters are especially exposed, Andrew Tangel and Theo Francis report. Manufacturers that import such products from China will have to find alternative suppliers or perhaps raise prices at a time when raw-material and labor costs are already rising.
A TOYOTA IN EVERY GARAGE
There’s a big reason why Japan doesn’t want to talk about a trade deal with the U.S.: Its auto exports are booming. Japanese auto makers exported nearly 10% more cars to the U.S. in the first three months of this year compared with the same period a year earlier, Sean McLain reports. The value of Japan’s car exports to the U.S. has nearly doubled in six years to more than $40 billion, driven by American hunger for sport-utility vehicles, whereas only a tiny number of American-made cars are sold in Japan. That will likely set up a clash between the two allies over how to proceed with trade talks.
STEP INTO THE SPOTLIGHT
Three weeks into the job as National Economic Council director, Lawrence Kudlow has embraced his role as a self-proclaimed “happy warrior” for President Donald Trump —delighting the president and surprising some White House staff with his unscripted style. But he has irked colleagues—most notably Nikki Haley, the U.S. ambassador to the United Nations—and unnerved economists with his unsparing put-down of the nonpartisan Congressional Budget Office. “Never believe the CBO,” he said.
The viewer who counts most likes what he sees, Peter Nicholas and Nick Timiraos write. Mr. Trump has told aides that he relishes having a telegenic new face out front touting the White House’s economic agenda.
FRANCLY, SWITZERLAND DOESN’T GIVE A DAMN
The euro briefly exceeded 1.20 Swiss francs Thursday and again early Friday, a level it hasn’t reached in over three years. That’s a milestone for Switzerland’s economy after it was battered, but not broken, by its strong currency, Brian Blackstone writes. Switzerland’s ability to survive, and even thrive, is a counterpoint to recent comments by policy makers around the world who seemed to signal a preference for weaker currencies to juice exports or inflation.
The Swiss lesson, analysts said, is that nimble labor markets, productivity and an emphasis on high-value exports that aren’t super sensitive to prices are just as important to a country’s competitiveness as the exchange rate. A strong currency raises purchasing power for households and businesses.
QUOTE OF THE DAY
“So overall, the near-term prospect for the global economy continues to be bright. At the same time, while the sun is shining…we are seeing more clouds accumulating on the horizon than we did back in October.” – Christine Lagarde, managing director of the International Monetary Fund
TWEET OF THE DAY
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WHAT ELSE WE’RE READING
Do economists think you need an advanced degree in economics to be a good economic policy maker? Quite a few do. The University of Chicago’s Initiative on Global Markets polls economists on a range of topics. In the latest installment, 38% say a kind of occupational licensing for senior government economic-policy posts isn’t a bad idea. “I don’t think government economic officials need to have a graduate degree—but it wouldn’t hurt,” said Harvard’s Eric Maskin. (The language of the question is a bit tortured: “Restricting eligibility for senior government economic-policy posts by requiring a graduate degree in economics would reduce the chances for good public policy outcomes.” The results: 33% disagree and 5% strongly disagree.)
What if China encourages a boycott of U.S. goods? The New York Times reports that some Chinese state media outlets have hinted at such a maneuver. Beijing has done it before, ably punishing Japanese, South Korean and Philippine products and companies over political disputes. The problem? “Due to the integration of the economies, whatever China does to the U.S. will end up hurting itself,” said Ernan Cui, a consumer analyst at the research firm Gavekal Dragonomics.