As the US warns of further ratcheting of tariffs up to 25% (from the originally threatened 10%) on $200bn of Chinese imports (beyond the $34bn already imposed and a further $16bn that may come into effect later today) it’s worth reviewing the US policy on FX manipulation, consider its impact on the global economy, and - as many will be worse-off in this brinkmanship - identify any that stand to gain from these escalating tariff threats.
Last week the EU signed the world’s largest bilateral trade pact with Japan – reducing friction in the eastward flow of wine and cheese and the westward shipment of vehicles and parts – five years in the making. However, this week is another story and the EU faces the further undoing of such Trans-Atlantic trade relations as its diplomats stand-up or stand-down to Trump’s escalating trade demands. According to Donald Trump yesterday, “Tariffs are the greatest!” – unless of course they are levied against the US like the EU’s £3bn retaliatory tariffs on bourbon and bikes.
Along with the Beige Book release yesterday we have had a queue of Fed Presidents/Board Members giving 1, 2 or 3 speeches this week including: Atlanta’s Raphael Bostic, Chicago’s Charles Evans, Philadelphia’s Patrick Harker, New York’s William Dudley, San Francisco’s John Williams, as well as Vice Chairman Randal Quarles speaking and giving testimony to the Senate Banking Committee. Moreover, later today, Board Member Lael Brainard addresses regulatory reform, Cleveland’s Loretta Mester delivers her economic outlook and Quarles continues his testimony… with Evans wrapping up his outlook and the week. And all this whilst long-short term Treasury spreads (take your pick: 2/10-year, 2/30s, 5/30s, 10/30s …) reach their narrowest since 2007.
The economic calendar looks relatively light today (before China GDP, retail and industrial output tomorrow) meaning that traders and markets have been focusing on the weekend’s Western sorties in Syria and a number of other geopolitical pressures. The solemn worsening situation in Syria and its multi-faceted and far-reaching aftermath include: US’s further sanctioning (expected later today) on Russian companies tied to the production of chemical weapons; the discord within UK parliament on whether Theresa May’s prerogative to join US and France airstrikes goes against the spirit of the parliamentary process (including 15 years of convention) and undermines UN Security Council procedures; it hampers the likelihood of success for the forthcoming summit between North and South Korea and the potential meeting of Kim Jong Un and President Trump; puts pressure on Brent oil prices to remain around the current ~$70 range; it emphasises the urgency for the Organisation for the Prohibition of Chemical Weapons (OPCW) to be allowed to investigate the locations of suspected chemicals attacks; it opens further possibilities for Iran and Israel to deepen their conflict in the Syria region; and it still does little to support the people of Syria in the near-term (who are themselves split, with large protests over the airstrikes gathering in Damascus).
They say an apology can be worth a lot, but in Mark Zuckerberg's case it seems more than most; following his characteristically dry but apologetic testimony and questioning by the Senate his company’s net worth rose $25 billion (and his own share up almost $3bn). So eating ‘umble pie’ and not mincing words seems to have played off quite well, at least in the short term for ‘Mr Sugar-Mountain’. But although the Senate, in some of their questioning, have demonstrated a farcical amount of tech ignorance, clearly their chief concerns remain valid. Now, it seems momentum is building for a ratcheting-up in tech and platform regulation - both enforced by the law and autonomously to appease kvetching users.
With a trend of chemical weapons use in Syria that, if uncontended, could be deemed standard practice by other warring states; and a pivotal moment in the war against Islamic State - it certainly doesn’t seem to be the best of times for the Trump Administration to head down this familiar road that has previously resulted in impeachment. After all, the FBI and Deputy Attorney General Rod Rosenstein must have had significant credence for the nerve to raid the President’s Attorney. As one former FBI agent stated, “I’ve been an FBI special agent for 20 years and have only seen a handful of searches executed on attorneys. All of those attorneys went to prison.”
Monday’s stock market rally looks a little like a dead cat bounce (if that) with the S&P 500 rebounding off of its 200-day moving average (~2587) only to fall within striking distance again yesterday, touching 2596. Asian and European stocks furthering this decline today may mean that this floor gets tested again later this afternoon.
Beginning this week, the S&P 500 was flat ytd but the NASDAQ’s FANG+ Index of tech behemoths was up over 16%: mostly on the back of Netflix, Amazon, Twitter and Nvidia rocketing this year (+67%, +33%, +33% and +26% respectively). But with yesterday’s performance the S&P is now down -1.85% ytd and the FANG+ Index trimmed its 2018 gains to below 10% after falling over -5.6%: its largest hit on record.
Its Jerome Powell’s first policy meeting as Fed Chairman; and with the near certainty that rates will be raised to 1.5-1.75% everyone is really now only interested in what the man has to say about the effects of stimulus in an already tight labour market, inflation concerns, and any sign that the Fed is playing cautious in the early days of Powell at the helm. Currently implied probabilities show around 40% expect 3 quarter-point-rises this year with the remainder evenly split between expecting more or less than 3 hikes.
It’s US consumer price inflation day again, and it seems forecasts were dead on, with the Core CPI up 1.8% YoY. This made for a relatively muted market reaction with 10-year US Treasury yields first falling 3 basis points but then returning to 2.86%. At around the same time President Trump tweeted CIA Director Mike Pompeo is to become his new Secretary of State, finally unseating a discordant Rex Tillerson; the White House confirmed Gina Haspel as nominee to replace Pompeo as CIA Director; and the expectation is that a replacement for Gary Cohn may also be announced imminently. Earlier Trump forenamed CNBC’s Larry Kudlow as having ‘a very good chance’ at becoming the new director of the White House National Economic Council.
The major talking point today is Jerome Powell’s first testimony to the House Financial Services Committee as Fed Chair… (Unless you’re in London, then it’s probably the few inches of snow that we’ve not seen here in years. This so called “Russian snow storm” still isn’t the -20 degrees centigrade blizzard with record breaking snowfall that it was in Moscow.)
The longer end of the US curve is composed ahead of tonight’s release of Fed minutes: with 10-years yields, around 2.88%, back to where they ended last week, after the spike to 2.94% when January’s inflation data came in slightly above forecast. The shorter-end yields continue to rise, however: with 2-year yields touching 2.28% - almost double the yield they offered 12 months ago and moving further into 9.5 year highs (contrastingly over a 12 month period 30-years yields have risen 10bp from 3.04% to 3.14%).
The ‘eagerly’ awaited US inflation and retail sales data came out earlier today. An upside shock in these could have further uneased the both bond and equity markets, still teetering in the ‘fear zone’ with the VIX remaining above the 20 level. Whilst a tempered or only slightly stronger-than-expected reading would be enough to convince markets that the Federal Reserve would move ahead with tightening monetary policy at a faster pace than 2017, but without encouraging an inflation scare. US Treasuries ahead of the data release held steady with the 10-years trading around yields of 2.82% and the 30-years around 3.11% both ~7bp off their recent highs.
An investment bank, an online retailer and a conglomerate walk into a bar and ask for a cocktail called a ‘healthcare policy’ that is simple, transparent and reasonably priced. The bartender says, ‘Sorry we’ve only ever served ‘em complicated, murky and expensive’... So the three punters walked out and mixed one up themselves.
This pretty much sums up yesterday’s announcement that JPMorgan, Amazon and Berkshire Hathaway (the three unhappy punters) plan to set up a non-profit healthcare company
With the US Government 3-day shutdown resolved earlier this week, at least until the 8th of February, we revisited various facets of the Tax Cuts and Jobs Act of 2017 (TCJA) now a month on from its signing into law. Preliminary estimates from the Congressional Budget Office (CBO) forecast it to add a further $1 trillion to national debt over 10 years (even after macroeconomic feedback effects). This is in addition to the $10tn increase from the baseline forecast and existing $20tn in national debt. How many government shutdowns we shall see in the next decade as US national debt potentially grows to ~$31tn is anyone’s guess.
A year ago the world woke up to the certain prospect of Trump as the 45th President of the United States. Since then, as the Independent put it, he has made “2,470 tweets and 0 major legislative achievements”. He has also made 13 trips to foreign countries and at least 34 trips to his favoured destination: the golf course.
President Trump has this week been on his latest trip, sweet-talking his way through Asia and has turned from recent meetings and negotiations with Japan and South Korea to focus now on China. Yesterday in Beijing the Trumps met Chinese President Xi Jinping and today they meet Premier Li Keqiang. Tomorrow they go on to Vietnam and then to the Philippines: all in one week (the trip 11 days in total).
Brexit’s running for the most fruitless trade talks seems to have a contender in the Tratado de Libre Comercio de América del Norte - or more commonly known, to those of us not in the Spanish speaking world, as the North American Free Trade Agreement (NAFTA). The good news for Mexico (and for the US and Canada) is that at least NAFTA negotiations can be extended - as they were yesterday, to the first quarter of 2018. On news of this, the Mexican peso has rallied almost 2% from its weak point a couple of days ago.
Wall Street stocks rose, the dollar (DXY Index) touched a two week low earlier today and US Treasury 10-year yields shaved a couple of basis points following the release of the Federal Reserve’s September meeting minutes. These further confirmed expectations that interest rates could still be increased once more this year despite the notable dovish tone.
Although “staff continued to project that inflation would edge higher in the next couple of years and that it would reach the Committee’s longer-run objective in 2019”… “The risks to the projection for inflation were also seen as balanced.”
Today the US dollar seems to have halted the decline it had endured for the past few days. Treasury yields struggled to find their equilibrium yesterday, ending the day mostly flat, and are a touch lower today ahead of the forthcoming Fed meeting minutes. We should be able to see a little more detail on the discussions around unwinding the balance sheet and perhaps some important insights into the Fed’s view on the recent low core inflation figures. In any case, enjoy the finer points from what could be Yellen’s penultimate “full” Fed meeting (November and January meetings omit Economic Projections and Chair press conference).
Today the dollar continued its rally along with US equity indices whilst 10-year Treasury yields rose 5 basis points. The DXY Index is now up more than 1.4% so far this week; at 93.4 at time of writing, it is now back to where it was this time last month. Some of this may be due to profit taking from the recent rally in the euro (which is still up around 12% versus the US dollar year to date). The rest of the dollar rally and sell-off in Treasuries stems from hawkish comments from Fed Chair Yellen (and New York Fed President William Dudley) as well as market optimism over the anticipated tax proposal from President Trump later today.
For all the talk of multiple storms brewing in politics and financial markets it’s distressing to see and anticipate the devastation of actual storms barraging the Atlantic coast of the Americas. With Texas still in the aftermath of Hurricane Harvey, the first major hurricane to make landfall in the US since Hurricane Wilma in 2005, Hurricane Irma now thrashes through the Caribbean towards Florida with expected Hurricane Jose following shortly behind. Notwithstanding the human tragedy from such events, it’s also very hard to conceive of the economic destruction of such cataclysms.