Tags: nafta | deal | canada | uk | trump | brexit

Clock Ticks on 'Deal or No Deal' for Not-NAFTA and Brexit Both

Clock Ticks on 'Deal or No Deal' for Not-NAFTA and Brexit Both

U.S. President Donald Trump (R) extends his hand to Prime Minister Justin Trudeau of Canada during a meeting in the Oval Office at the White House on February 13, 2017 in Washington, D.C. (Kevin Dietsch-Pool/Getty Images)

Thursday, 30 August 2018 08:08 AM Current | Bio | Archive

NAFTA Trilateral or Not

Prime Minister Justin Trudeau of Canada is starting to get a little confusing. The Prime Minister has declared that no NAFTA deal is better than a bad NAFTA deal, which seems to be making a catch-race of the U.K. Prime Minister Theresa May’s "no deal is better than a bad deal."

The not-NAFTA deal that is being discussed is not quite right for Canada. Milk (dairy products) is apparently a problem as is the French language. President Donald Trump said that the United States had given Canada until Friday to agree, which is not quite accurate. The political calendar is dictating the Friday deadline.

However, if the U.S. and Canada cannot agree an acceptable deal by Friday, then the outlook for "not NAFTA" looks distinctly less promising. Congress is less likely to pass a "bilateral" not-NAFTA deal than a "trilateral" not-NAFTA deal. 

Inflation Data from the U.S. and the EU

Today, the Bureau of Economic Analysis (BEA) will give us at 8:30 a.m. EDT the monthly personal income and outlays data that will include, of course, the associated personal consumer expenditure (PCE) deflator, which is allegedly the Federal Reserve’s favored indicator of inflation.

It is certainly true that the PCE deflator is more closely related to market-driven prices than is the consumer price index or CPI.

The PCE deflator will not show (yet) the full effects of Trump’s tariffs on consumers and it’s worth reiterating that the tariffs will take time to work through to the consumer. It was several months in the case of the washing machines tariffs or taxes.

But they will "work through, yes they do" and the PCE deflator will rise as a result and inflation will eat at living standards as a result these tariffs.

The question is whether the labor market and other income sources are allowing the U.S. consumer to meet these tariffs or tax increases head-on, which is where the income data becomes important. Income data is especially important as things like average hourly earnings are increasingly useless guides to compensation with the rise of self-employment and alternative income sources. 

Besides that, from the Eurozone we got Spanish inflation that came in at 2.1 percent, down 0.1 percent while German inflation remained unchanged at 2.0 percent.

Maybe it’s good to recall that in 2003 the ECB Governing Council clarified that in the pursuit of price stability it aims to maintain inflation rates below, but close to, 2 percent over the medium term. That does not appear to be troubling ECB President Draghi just at the moment.

Brexit Deal or No Deal

The U.K. government has been warning the European Union (EU) that it was a U.K. deal or "no" deal in the efforts to separate the European Union (EU) from the U.K. single market. Talks begin again there tomorrow.

The issue for the U.K. government is that the limit for compromise is, if not reached, very close. Parliament still has to agree to the final deal or choose no deal.

Interestingly, while speaking in Berlin yesterday, the EU’s chief Brexit negotiator, Michel Barnier said: “We are prepared to offer a partnership with Britain such as has never been with any other third country.”

So far, the British pound is still holding on to the sharp gains that brought it above $1.30 per pound sterling after it got that significant boost from Michel Barnier when EU’s chief Brexit negotiator signaled to possibility of a potential breakthrough in the U.K.’s divorce talks.

However, the realities of Parliamentary arithmetic may be better understood by other government leaders "in" the EU who also have parliamentary problems of their own. 

Emerging Markets in Asia

August was dominated by the Turkey-led emerging market sell-off.

It should not come as a surprise that global investors have turned attention to Asia, which has proved to be relatively stable notwithstanding there are risks, especially in the junk-bond market that needs closer attention.

The amount of debt coming due in U.S. dollars from Asian issuers, excluding financial firms, will rise over the next three years to a record $24.2 billion in 2021.

Now, in the U.S. we are on the path of rising interest rates because the Fed will “normalize” further, and because of that we can expect that Asia’s riskier companies will offer higher yields to lock in (!) fresh funding.

The main risk factors across Asia for global investors are:

  • Heavy debt piles in China, Korea, Taiwan, Hong Kong and Singapore, and
  • Account deficits in Indonesia, India and the Philippines.

Yes, investors should do their homework…

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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If the U.S. and Canada cannot agree an acceptable deal by Friday, then the outlook for "not NAFTA" looks distinctly less promising.
nafta, deal, canada, uk, trump, brexit
Thursday, 30 August 2018 08:08 AM
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