by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] It’s a “risk-on” morning.  Equities are up around the world.  It’s also the 70^th anniversary of NATO.[1]  Here is what we are watching this morning:

A trade deal with China: Reports suggest the U.S. and China are nearing an agreement on trade.[2]  The two sides are still hashing out enforcement issues and the path of implementation, but most of the longstanding differences have apparently been ironed out.  Meetings in Washington are scheduled for this week.[3]  Optimism about a trade agreement is boosting equities this morning.

Brexit: After a difficult cabinet meeting, PM May has reached out to opposition leader Corbyn to work out a Brexit deal.[4]  Up until now, May has tried to manage Brexit within the Tory Party but has apparently decided that continuing on that path will lead to a hard Brexit, which she wants to avoid.[5]  Corbyn has avoided a direct outreach because his ultimate goal is to become PM; rescuing May tends to undermine that objective.  However, if Corbyn can work with May and deliver a workable exit that doesn’t lead to a sudden economic shock, then he can claim the mantle of statesman and enhance his future chances.  Needless to say, hardline Tories are angry.[6]  The hardliners are perfectly fine with a hard Brexit, assuming that forecasts of an economic crisis are simply scare tactics.  May’s decision to work with Corbyn runs the risk of splitting the Tory Party and rendering the Conservatives to minority status for years.

So, May and Corbyn will work on a common plan.  If they come up with one, both leaders will present it to Parliament and a vote will be held.  If it passes, the U.K. will petition the EU for an extension of Article 50.[7]  If they don’t come up with a common plan, May will likely ask for an even longer extension.

The White House and the Fed: There is more reporting suggesting that President Trump is profoundly unhappy with Chair Powell, apparently viewing his appointment as one of the bigger mistakes of his presidency.[8]  According to reports, the president has indicated to Powell that he is “stuck” with the current chair.  He has also criticized Treasury Secretary Mnuchin for pushing Powell’s nomination, and reportedly preferred Kevin Warsh for the job.[9]  Warsh was not considered to be a strong choice for the role.[10]  At the same time, the president may have believed that Warsh would be more open to the White House’s position on rates.  We would not be surprised to see Warsh resurface for one of the two open governor positions on the FOMC, especially if Trump can get Moore through the nomination process.

Gold’s quiet supporters: Gold is apparently making a comeback among central bankers concerned about the long-term stability of the dollar.[11]  Given low interest rates around the world, the opportunity cost of holding gold has fallen.  What we find interesting about this action by central bankers is that they don’t view other currencies as an attractive alternative to the dollar.  At the same time, the gold market is rather small so there will be limits to the banks’ abilities to shift reserves to the yellow metal.

A couple of taxing ideas: The Center for American Progress[12] has published a report calling for a tax on monopoly power.[13]  Such a tax fits well within the MMT framework of taxing “bads” to achieve a different result.  Market power is coming under deeper scrutiny on fears that monopolies and oligopolies are causing unusually high profit margins.  By taxing market concentration, the incentive to merge and buy competitors will likely be diminished.  Of course, regulation tends to cut in the opposite direction; increased regulatory costs tend to encourage concentration as businesses attempt to spread the regulatory costs over more units.

A tax on unrealized capital gains has been floated by Sen. Ron Wyden.[14]  Along with equalizing the difference between income and capital gains taxes, the law attempts to tax gains before they are taken.  Although such a tax is possible, it would be quite complicated; for example, one would expect the cost basis on an asset to be adjusted each tax year.  In addition, unrealized capital losses would also need to be recognized.  And, the tax should also include residential real estate.  We doubt Wyden’s bill will get any traction but the fact that it has even been written suggests we are in a new, more populist, era.

Oil news: Three of the eight nations that were granted waivers on Iranian oil have indicated they are no longer importing crude oil from that nation.[15]  Falling Iranian supply is bullish for crude oil.

As we noted last week, Saudi Aramco issued bonds to buy a Saudi petrochemical firm.  As part of the bond issue, the Saudi state oil company released public financial numbers for the first time in four decades.  It was revealed in the report that the giant Ghawar oil field, for years the world’s largest, can only produce 3.8 mbpd, which is 2.0 mbpd less than generally estimated.  That means the Permian basin is now the world’s largest producing area at 4.1 mbpd.  The kingdom still indicates it can produce 12.0 mbpd, although that number may be called into question in light of this most recent news.  The bottom line here is that there may be less oil capacity available than we think which is bullish for oil prices.

Closing the southern border?  The White House has backed away from this threat[16] after aides apparently convinced the president that doing so would cause significant economic dislocation.[17]

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[1] https://www.politico.eu/article/nato-aims-for-more-birthday-less-bash-in-trumps-washington/?utm_source=POLITICO.EU&utm_campaign=a058ec28df-EMAIL_CAMPAIGN_2019_04_03_05_02&utm_medium=email&utm_term=0_10959edeb5-a058ec28df-190334489

[2] https://www.ft.com/content/d6ac5082-5582-11e9-91f9-b6515a54c5b1?emailId=5ca423abac7473000402ba1a&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22

[3] https://www.reuters.com/article/us-usa-trade-china/white-house-sees-headway-on-us-china-trade-ahead-of-new-talks-this-week-idUSKCN1RE1Y2

[4] https://www.nytimes.com/2019/04/02/world/europe/theresa-may-labour-brexit.html?emc=edit_fd_20190403&nl=&nlid=567726720190403&te=1

[5] https://www.ft.com/content/4bad9a24-556c-11e9-91f9-b6515a54c5b1?emailId=5ca423abac7473000402ba1a&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22

[6] https://www.ft.com/content/f42336c4-556b-11e9-91f9-b6515a54c5b1 and https://www.ft.com/content/ecadf298-5553-11e9-a3db-1fe89bedc16e

[7] https://www.ft.com/content/3924a7ac-5559-11e9-a3db-1fe89bedc16e

[8] https://finance.yahoo.com/news/trump-called-powell-march-stocks-215712662.html

[9] https://www.axios.com/newsletters/axios-am-cb573592-5eb5-4cb3-8836-1bf8a93fb9eb.html?chunk=1#story1

[10] https://www.washingtonpost.com/news/wonk/wp/2017/10/23/how-to-be-wrong-about-almost-everything-and-maybe-be-fed-chair-anyway-the-kevin-warsh-story/?utm_term=.b6ef489e917a

[11] https://finance.yahoo.com/news/gold-demand-support-central-banks-sour-on-dollardenominated-debt-151506427.html

[12] The Center for American Progress is a center-left think tank that models itself as a left-wing version of the Heritage Foundation.

[13] https://www.americanprogress.org/issues/economy/reports/2019/04/03/467613/toward-robust-competition-policy/

[14] https://www.wsj.com/articles/top-democrat-proposes-annual-tax-on-unrealized-capital-gains-11554217383?mod=newsviewer_click

[15] https://www.reuters.com/article/us-iran-sanctions-usa-waivers/three-importers-cut-iran-oil-shipments-to-zero-u-s-envoy-idUSKCN1RE298

[16] https://www.reuters.com/article/us-usa-immigration/white-house-softens-tone-after-threat-to-close-border-with-mexico-idUSKCN1RE1PE?feedType=RSS&feedName=topNews

[17] https://www.politico.com/story/2019/04/02/trump-aides-border-shutdown-disaster-1249828

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Markets are quiet after a strong rally yesterday.  Here is what we are watching this morning:

Turkey fallout: The stunning losses in local elections have put President Erdogan on notice—the economy is suffering and he needs to address the problem.  Addressing a weakening economy with rising inflation will be challenging.  The weak currency will help in the economy’s recovery but Turkey is probably looking at a year of falling real wages and stagnant growth.  The temptation to use temporary measures to lift growth will be high.[1]  Although the elections reflect economic turmoil, for the most part, it looks to us like the financial markets have mostly discounted the bad news; simply put, the elections are a lagging indicator.

Brexit: Parliament voted on four measures for Brexit and rejected all of them.[2]  It is becoming apparent that all of the ideas for leaving without disruption mean the U.K. will remain tied to the EU with less influence than it has now.  The customs union, which lost by a mere three votes, doesn’t really solve anything.  Such a union keeps the U.K. in the EU’s trade bloc on tariffs but not on product standards.  Thus, there would still be a border problem in Ireland.  Essentially, Britain is rapidly realizing that it must either (a) leave suddenly and completely, suffering an immediate economic shock in return for full independence, or (b) call the whole thing off.  There really isn’t any middle ground.

The other trend that is becoming apparent is that May can either (a) stop Brexit by cobbling together a coalition of Remain-supporting MPs in Parliament at the cost of marginalizing the Tory Party, or (b) hold the Tories together but suffer a hard Brexit.  We think she leans toward the second option.  Our position has been that no government wants a hard break, and that is probably true, but a hard break may be considered a better option than eternal Labour Party dominance.

Bouteflika out: The president of Algeria, Abdelaziz Bouteflika, will leave office on April 28.[3]  It is unclear who will replace him.  Although there is no evidence that Algerian energy production has been affected, the chances of a disruption are rising.

Fed conference: The Fed will hold a monetary policy conference in Chicago June 4-5; ideas about policy, including inflation targeting, policy transparency and employment, will be on the agenda.[4]  As we discussed recently,[5] the Fed is investigating its inflation target, considering if it should be trying to target a level or average change in inflation.  The Chicago meeting will likely overshadow the August Jackson Hole meeting this year.

September fiscal cliff? The Treasury will hit a hard debt limit by September.  At that point, the debt ceiling will need to be raised.  Congress has already begun work on a deal but both houses are closely watching the White House, which is making noise about a wholesale rewrite of recent budget deals.  Although it isn’t uncommon for these arrangements to go down to the wire, the looming election year will play a role.[6]  Thus, we will continue to monitor this issue but would not be surprised to see a crisis develop in late Q3.

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[1] https://www.ft.com/content/6ca1d484-546d-11e9-91f9-b6515a54c5b1?emailId=5ca2d4f0341b100004e47892&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22

[2] https://www.nytimes.com/2019/04/01/world/europe/uk-parliament-soft-brexit-may.html?emc=edit_fd_20190402&nl=&nlid=567726720190402&te=1

[3] https://www.bbc.com/news/world-africa-47776725?utm_source=POLITICO.EU&utm_campaign=647364b043-EMAIL_CAMPAIGN_2019_04_02_04_47&utm_medium=email&utm_term=0_10959edeb5-647364b043-190334489

[4] https://www.reuters.com/article/us-usa-fed-conference/fed-sets-agenda-for-chicago-framework-conference-in-june-idUSKCN1RD351

[5] See Confluence Asset Allocation Weekly (3/8/2019).

[6] https://www.politico.com/story/2019/04/02/congress-spending-budget-shutdown-1244283

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] It’s the beginning of Q2 and April Fools’ Day.  Equities are up around the world.  Here is what we are watching this morning:

China better, but elsewhere struggles: China’s manufacturing PMI data came in better than forecast;[1] the Caixin number for March was 50.8, exceeding expectations around 50.0, and the official PMI reading was 50.5 compared to 49.2.  A lift in export orders accounted for much of the rise.  Although the improvement offered investors some relief in what has been a steady diet of weaker data, the fact that export orders drove the numbers raises fears they won’t be sustained.  In contrast, the Eurozone data was soft, with manufacturing PMI falling to 47.5 in March, the weakest level in almost six years.  Meanwhile, in Japan, the Tankan business survey fell to a two-year low.  The data from large companies was even worse, falling to a more than six-year low.

Weekend elections: There were three elections of note over the weekend.  In Turkey, the economic recession led to local government losses for Erdogan’s AKP, including the capital Ankara and Istanbul.[2]  Although these elections don’t threaten Erdogan’s power, the results show rising discontent in Turkey and thus it would behoove the leadership to boost the economy.  In Ukraine, a comedian, Vladimir Zelenskiy, won the first round of presidential elections, capturing about 30% of the vote.  The election sets the stage for a run-off between Zelenskiy and the incumbent president Poroshenko, which will be held in two to three weeks.[3]  And, in the second round of voting in Slovakia, Zuzana Caputova won handily, 58.4% to 41.6% over Maros Sefcovic.[4]  Slovakia has suffered through a series of high-profile assassinations of journalists; Caputova is seen as a reformer.[5]

Brexit: One could be forgiven for thinking Brexit has become something like the movie Groundhog Day, where the lead character keeps reliving the same day over and over again.  There are plans for a fourth vote on May’s ill-fated plan.[6]  Also on tap is another round of indicative votes.  So far, all Parliament has been able to do is express what it doesn’t want but hasn’t been able to determine what it does want.  The upcoming votes range from May’s plan, to a custom’s union, a hard exit and other points in between.[7]  So far, the GBP is taking all this in stride, which suggests the financial markets do not expect a hard exit.

Closing the southern border?  The White House is threatening to close the southern border in response to an influx of migrants.[8]  It isn’t clear if the U.S. will carry out the threat but, if it does, it will disrupt trade between the U.S. and Mexico.  The goal of the Trump administration is for the Mexican government to stop Central American migrants from coming to the U.S. border.

The White House and the Fed: White House officials are calling for an immediate 50 bps cut in interest rates.[9]  One of the most dovish members of the FOMC, Minneapolis FRB President Kashkari, doesn’t go that far, suggesting a pause is the best policy.[10]  However, the steady pressure from the White House is having the effect of a policy easing, at least so far.  The risk is that if the economy were to pick up and inflation pressures rise, markets would view pressure from the administration less favorably.  But, for now, executive branch officials pressing for easier policy isn’t adversely affecting financial markets.

Secondary sanctions: The U.S. is considering sanctions on non-U.S. companies conducting business with Venezuela.  So far, the U.S. has not sanctioned companies that have ties to PDVSA,[11] the Venezuelan state oil company.  If the U.S. were to take this step, it would further reduce Venezuela’s sales from oil.

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[1] https://www.wsj.com/articles/china-factory-activity-rebounded-strongly-in-march-11554002297?mod=hp_lead_pos3

[2] https://www.reuters.com/article/us-turkey-election/erdogan-loses-hold-over-turkish-capital-istanbul-disputed-idUSKCN1RD130?utm_source=POLITICO.EU&utm_campaign=cd12771421-EMAIL_CAMPAIGN_2019_04_01_04_45&utm_medium=email&utm_term=0_10959edeb5-cd12771421-190334489  and https://www.washingtonpost.com/world/erdogan-faces-challenge-in-local-elections-as-turkeys-economy-struggles/2019/03/31/3794c56c-539b-11e9-a047-748657a0a9d1_story.html?utm_term=.4ce76201fd52&wpisrc=nl_todayworld&wpmm=1

[3] https://www.politico.eu/article/no-joke-comedian-vladimir-zelenskiy-to-win-first-round-in-ukraines-presidential-election-against-petro-poroshenko/?utm_source=POLITICO.EU&utm_campaign=cd12771421-EMAIL_CAMPAIGN_2019_04_01_04_45&utm_medium=email&utm_term=0_10959edeb5-cd12771421-190334489

[4] https://volby.sme.sk/prezidentske-volby/2019/vysledky?utm_source=POLITICO.EU&utm_campaign=cd12771421-EMAIL_CAMPAIGN_2019_04_01_04_45&utm_medium=email&utm_term=0_10959edeb5-cd12771421-190334489

[5] https://www.politico.eu/article/jan-kuciak-gorilla-slovakia-journalist-dead-darkest-day/?utm_source=POLITICO.EU&utm_campaign=cd12771421-EMAIL_CAMPAIGN_2019_04_01_04_45&utm_medium=email&utm_term=0_10959edeb5-cd12771421-190334489

[6] https://www.ft.com/content/c20c79ae-5384-11e9-a3db-1fe89bedc16e?emailId=5ca1834e1d4b6b000456c867&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22

[7] https://www.politico.eu/article/uks-brexit-options-explained/?utm_source=POLITICO.EU&utm_campaign=cd12771421-EMAIL_CAMPAIGN_2019_04_01_04_45&utm_medium=email&utm_term=0_10959edeb5-cd12771421-190334489

[8] https://www.nytimes.com/2019/03/31/us/politics/trump-mulvaney-border-close-mexico.html?emc=edit_fd_20190401&nl=&nlid=567726720190401&te=1

[9] https://www.reuters.com/article/us-usa-fed-trump/white-house-calls-for-fed-to-reverse-u-s-rate-hikes-idUSKCN1RA2MB

[10] https://www.wsj.com/articles/feds-kashkari-says-it-isnt-time-to-cut-rates-11554111001?mod=newsviewer_click

[11] https://www.reuters.com/article/us-venezuela-politics-bolton-exclusive/exclusive-trump-eyeing-stepped-up-venezuela-sanctions-for-foreign-companies-bolton-idUSKCN1RA2F0

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Good morning, all! Equity markets are higher on progress being made in U.S./China trade talks. The overnight news was a bit quiet, but here are the stories we are following today:

Social media bias: On Thursday, Facebook (FB, $165.55) was accused of violating the Fair Housing Act by the Department of Housing and Urban Development.  Allegedly, Facebook targeted real estate advertisements to people based on their race and color; Twitter (TWTR, $32.87) and Google (GOOGL, $1,172.27) are also being reviewed by HUD for similar violations.[1]  The Trump administration has frequently criticized social media companies for being biased.  Accordingly, we view this conflict as an escalation in tensions between the administration and the tech giants.  Earlier this week, Facebook stated it would ban content from groups that are associated with “white nationalism” and Twitter announced it was considering labeling tweets from the president and other politicians if they violate its rules.[2],[3]  Although we can’t say for certain that all these actions are related, the timing does seem to match up.  Conservatives have long harangued social media platforms for promoting views that the platforms support while censoring views they don’t.  If the contentious relationship between social media companies and this administration continues to escalate we would expect the president to become more vocal about breaking up some of these firms.

Guaido ineligible?  The Maduro regime stepped up its war against the opposition by declaring Juan Guaido ineligible to take office for 15 years.  The announcement came from state comptroller Elvis Amoroso, who claimed there were “inconsistencies” found in Guaido’s personal finances.  We view the ruling as a way for the Maduro regime to undermine Guaido’s popularity in Venezuela and to delegitimize his claim as the leader of the country.  Following a controversial election that saw Maduro win in a landslide, Juan Guaido was recognized by the U.S., Canada and several South American countries as Venezuela’s interim president.  Since then, Guaido and his supporters have been trying to wrest power away from the Maduro regime.  The move to delegitimize Guaido likely signals that Maduro believes he can wait out the opposition in order to maintain power, in much the same way Bashar Assad was able to do in Syria.  If this is his plan, we do not expect the stalemate between Maduro and his opposition to end anytime in the near future.

Brexit Day deal: Today, U.K. Prime Minister Theresa May will attempt, for a third time, to pass her Brexit deal through parliament.  PM May has done everything possible to get this deal through parliament, even agreeing to resign following its passage, but it appears she still does not have enough support.  The EU has shown little patience with the U.K. and has stated that if the deal fails to pass today then the U.K. will have until April 12 to secure another deal or risk leaving the EU with no deal.  It is unlikely the EU would choose a no-deal Brexit if the sides were close to an agreement, but it seems the EU is getting a bit fed up.   

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[1] https://www.washingtonpost.com/business/2019/03/28/hud-charges-facebook-with-housing-discrimination/?utm_term=.4dadfb701b95

[2] https://www.axios.com/facebook-ban-white-nationalist-separatist-content-hate-speech-1b899bde-93ee-41e5-8acf-d1622331a560.html

[3] https://thehill.com/policy/technology/436218-twitter-considering-labeling-trump-tweets-that-violate-rules

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Happy Opening Day!  Even as cool temperatures linger in much of the country, major league baseball opens in the U.S. today, one of the official signs of summer.  Here’s something to make you feel older: for the first time in the 21^st century, there are no players on team rosters that have major league playing time in the 20^th century.[1]  Equities are modestly higher in a quiet news environment.  There have been a number of Fed speakers in the past few days.  The message remains consistent—the central bank is on pause, but not moving to ease.  Here is what we are watching this morning:

Brexit: If ever there was a day that showed there is no consensus on a path forward, it was yesterday.  All the indicative votes failed to reach a majority.[2]  PM May offered to resign if her plan was accepted.  Although that did sway some hardline Brexit supporters, the Northern Irish DUP rejected the offer.[3]  This outcome probably means we will get a long extension of Article 50 and a new PM to guide the effort.  The GBP is down a bit today but a long extension probably means the exchange rate will remain mired at roughly current levels.

Turkey: As we noted yesterday, in the run-up to elections Turkey has sent overnight interest rates to astounding levels, in excess of 1,000%, to punish currency shorts.  Turkey has been struggling for the past year with rising inflation and recession.  We would expect rates to fall after this weekend’s local elections.[4]  While Erdogan is clearly safe in his position, this election has evolved into a referendum of sorts on the regime, so he is trying all kinds of actions to lift sentiment.  Although conditions in Turkey remain difficult, we note that the exchange rate has fallen significantly, supporting a strong improvement in the current account.  In other words, conditions are not good, but most of the bad news is already discounted.

Chinese trade: USTR Lighthizer is back in Beijing for talks; Chinese officials are expected in Washington next week.  There are reports of progress[5] but nothing concrete ever emerges.  This looks like a “stall” game.  China is probably hoping that it can extend negotiations into early next year and expect election issues to dominate, allowing China to avoid making excessive concessions.[6]  From a financial markets perspective, discussions won’t end suddenly, leading to tariffs and a drop in equity values.

A side note on China: Former colleagues of mine at Doane, an agricultural research service, inform me that the African Swine Fever[7] (ASF) is becoming a serious problem.  The disease, so far, has affected Europe, Asia and South America.  It poses no risk to humans but it is nearly 100% fatal to pigs.  Thus, once a herd is affected, it essentially wipes out the group.  The USDA and Customs continue to work hard to prevent the disease from entering the U.S.[8]  ASF can be spread by pork products, so strict enforcement is vital.  This event will almost certainly lead to higher pork prices in the U.S. as summer grilling season approaches; we would also expect China to “offer” to buy lots of U.S. pork as their supplies dwindle due to the epidemic in China.

Another side note on China: Taiwan’s President Tsai Ing-wen said today that the U.S. is open to the island’s request for new arms sales.[9]  If the Trump administration does increase arms sales to Taipei, it will increase tensions with Beijing.

India joins another club: India has successfully shot down a satellite with a ground-based missile, becoming the fourth nation in the world to show it has this capacity.[10]  Although there is speculation that this news is part of a pre-election plan to boost Modi’s reelection, the fact that India could “blind” its primary adversary, Pakistan, in a conflict raises the potential for escalation in a crisis.

Energy update: Crude oil inventories rose 2.8 mb last week compared to the forecast decline of 3.0 mb.

In the details, refining activity fell 2.3%, which was a surprise.  Estimated U.S. production was unchanged at 12.1 mbpd.  Crude oil imports and exports both fell 0.4 mbpd.

This is the seasonal pattern chart for commercial crude oil inventories.  We would expect to see a steady increase in inventory levels that will peak in early May; the pattern coincides with refinery maintenance.  Even with the build this week, the market is well behind normal which is supportive for prices.

Based on oil inventories alone, fair value for crude oil is $59.87.  Based on the EUR, fair value is $53.30.  Using both independent variables, a more complete way of looking at the data, fair value is $54.86.  We are seeing the two fair value levels widen, with oil stocks very supportive, while the dollar isn’t all that supportive for prices.

In other oil news, President Trump tweeted for lower oil prices this morning, sending markets lower.  OPEC has consistently ignored the president on his calls for greater output.  Saudi Aramco is coming to market with a $10 bn bond to partially fund its purchase of a Saudi petrochemical company.[11]

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[1]https://www.apnews.com/c171fd38f1d0498390b4e7f0e5b092ee?utm_source=newsletter&utm_medium=email&utm_campaign=newsletter_axiosam&stream=top

[2] https://ig.ft.com/brexit-indicative-votes/?emailId=5c9c3e08c597400004352bc8&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22

[3] https://www.ft.com/content/27ac0b14-50d1-11e9-9c76-bf4a0ce37d49?emailId=5c9c3e08c597400004352bc8&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22 and https://www.ft.com/content/c80604c4-50b4-11e9-9c76-bf4a0ce37d49?emailId=5c9c3e08c597400004352bc8&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22

[4] https://www.politico.eu/article/tayyip-erdogan-turkey-election-the-invincible-faces-tough-election-test/?utm_source=POLITICO.EU&utm_campaign=6ce3f2f806-EMAIL_CAMPAIGN_2019_03_28_05_45&utm_medium=email&utm_term=0_10959edeb5-6ce3f2f806-190334489

[5] https://www.reuters.com/article/us-usa-china-trade-exclusive/exclusive-china-makes-unprecedented-proposals-on-tech-trade-talks-progress-u-s-officials-idUSKCN1R905P

[6] https://www.ft.com/content/3c84214a-507f-11e9-b401-8d9ef1626294?emailId=5c9c3e08c597400004352bc8&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22

[7] http://www.oie.int/en/animal-health-in-the-world/animal-diseases/african-swine-fever/

[8] https://www.agdaily.com/news/illegal-chinese-pork-products-seized/

[9] https://www.reuters.com/article/us-taiwan-usa/taiwan-president-seeking-tanks-and-fighters-says-us-responding-positively-idUSKCN1R82OA

[10] https://www.washingtonpost.com/world/asia_pacific/india-shoots-down-satellite-announces-itself-to-be-a-space-power/2019/03/27/a1e73426-5068-11e9-af35-1fb9615010d7_story.html?utm_term=.1f898d630442&wpisrc=nl_todayworld&wpmm=1

[11] https://www.wsj.com/articles/aramco-plans-10-billion-bond-next-week-opening-books-for-first-time-11553761555?utm_source=newsletter&utm_medium=email&utm_campaign=newsletter_axiosmarkets&stream=business

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Equities are modestly lower in a quiet news environment.  The big story remains in the long end of the yield curve as the 10-year T-note yield falls below 2.40%.  Here is what we are watching this morning:

Why are bonds rallying?  We suspect there are two factors sending yields lower.  First, expectations toward monetary policy have flipped.  The market expects the next move by the FOMC will be to lower rates.  Stephen Moore, the president’s most recent nominee for Fed governor, is calling for an immediate rate cut of 50 bps.  Although none of his future colleagues are supporting him (so far), assuming he is confirmed, he will be a consistent voice in favor of rate cuts.  It should be noted there is an international element to this trend.  ECB President Draghi indicated today that his bank is prepared to support the Eurozone economy by delaying policy tightening.[1]  Second, there are growing fears that the economy is not only slowing but may be stumbling.  With inflation low and economic data weak, there is an incentive for safety assets.  To some extent, the rally in bonds is starting to look like a momentum trade, which probably means it’s getting overdone.  Reversing the rally will require improved economic data.

Brexit: The “indicative voting” process begins today and will likely continue into tomorrow.[2]  Sixteen different proposals are being considered.  None are binding on the government; however, if any get overwhelming support (which isn’t likely) then PM May would be forced to either support the proposal or resign.  Champions of Brexit are coming to the realization that May’s plan may be the best they can get, so there has been some talk of simply accepting the May plan.[3]  Overall, we doubt anything definitive comes out of this process; if we are correct, the odds of a long delay are increasing.

Bouteflika out?  The current president of Algeria appears to be losing support of the military.  The army chief of staff, Gen. Ahmed Salah, is now openly calling for the president to be removed.[4]  Bouteflika has suffered a series of strokes and is, by most accounts, incapacitated.  So, if the military has decided that he is finished then it probably means the end is near.  A peaceful transfer of power in Algeria is important; the country is a member of OPEC and a significant supplier of natural gas to Europe.

An update: Earlier this month, we reported that a shadowy dissident group had broken into North Korea’s embassy in Madrid as President Trump and Chairman Kim Jong-un were meeting in Hanoi.  Apparently, the leader of the “operation,” a Mexican national living in the U.S., Adrian Hong Chang, fled to Portugal after the raid and flew back to the U.S.  An American, Sam Ruy, was also involved.  Spanish officials have issued international arrest warrants for both men.  According to reports, the group has offered materials seized in the raid to the FBI.  U.S. security officials have declined to comment.[5]

Turkey and the lira shorts: In the run-up to elections, Turkey has sent overnight interest rates to nosebleed levels, around 300%, to punish currency shorts.  To short a currency, a trader essentially borrows in the currency he is shorting.  The high interest rates are making shorting really expensive, reducing the attractiveness of such activity.  Obviously, it will be impossible to continue such high interest rates indefinitely.  At some point, those overnight rates will begin to affect other areas of the Turkish yield curve.  But, in the short run, the move will stabilize the lira, which has been under pressure recently.[6]

The return of the exurbs:The WSJ reports that housing development away from urban centers has been showing signs of life, adding to evidence that the housing market is continuing to recover.[7]  The article suggests that even younger buyers, who up until now have opted for urban rental property, are following the path of their parents and grandparents and moving out of the cities for cheaper housing after starting families.

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[1] https://www.cnbc.com/2019/03/27/ecb-president-mario-draghi.html

[2] https://www.ft.com/content/03c149f2-4f01-11e9-9c76-bf4a0ce37d49?emailId=5c9b0c3905985700040ff276&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22

[3] https://www.ft.com/content/097b854c-4fb5-11e9-9c76-bf4a0ce37d49?emailId=5c9b0c3905985700040ff276&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22

[4] https://www.nytimes.com/2019/03/26/world/africa/algeria-army-president-bouteflika.html?emc=edit_fd_20190327&nl=&nlid=567726720190327&te=1

[5] https://www.nytimes.com/2019/03/26/world/europe/spain-north-korea-embassy-attack.html?utm_source=POLITICO.EU&utm_campaign=ee67c38c08-EMAIL_CAMPAIGN_2019_03_27_05_51&utm_medium=email&utm_term=0_10959edeb5-ee67c38c08-190334489

[6] https://finance.yahoo.com/news/turkish-lira-swap-rates-erupt-095606557.html

[7] https://www.wsj.com/articles/a-decade-after-the-housing-bust-the-exurbs-are-back-11553610771?utm_source=newsletter&utm_medium=email&utm_campaign=newsletter_axiosam&stream=top

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Equities are higher in a quiet news environment.  Here is what we are watching this morning:

Brexit: MPs voted 329/302 to take control of the House of Commons timetable, essentially removing the prime minister from running the process.[1]  Although this is no huge shock, it isn’t obvious whether the MPs will have any better ideas.  Parliament will begin holding a series of “indicative votes”[2] tomorrow to test out various ideas, which include combinations of May’s plan plus joining the customs union to a hard exit or another referendum.  PM May remains defiant, suggesting she may not implement whatever Parliament decides.  She can certainly threaten, but if she defies the will of Parliament she will almost certainly trigger a vote of no-confidence and an ouster.  New elections cannot be ruled out.  As it sits now, it looks to us like the most probable outcome is a long extension of the deadline.  That’s about the only thing that likely has a majority of support.  Such an outcome is modestly supportive for the GBP.

Bond bull market: Fears of recession and the lack of inflation have pushed the 10-year T-note yield below 2.50%.  We are starting to see other effects from this rally in bond prices.  First, the amount of global bonds with a negative yield hit $10 trillion, up from $6 trillion late last year.[3]  The German 10-year Bund fell back into negative territory.  Second, the BOJ is now talking about further monetary stimulus.[4]   It is hard to see how taking rates below zero would stimulate growth; about the only factor that might boost the economy is a weaker yen, but that would get Japan in trouble with the Trump administration.  Third, Fed policymakers are resurrecting the “operation twist” idea, where the Fed buys more short paper to steepen the yield curve.[5]  Monetary policy is a spent force at this point, with the only remaining stimulative tool being fiscal spending.

Bolton v. Pompeo:Although both are considered Iran hawks, there is a split between them on implementing Iranian oil sanctions.[6]  Pompeo wants to extend oil waivers to at least some of the eight nations that were initially granted waivers.  In fact, China and India, which are currently receiving waivers, would probably continue to buy Iranian oil regardless of U.S. actions.  On the other hand, not extending waivers would almost certainly weaken the terms for Iran on the oil it sells to India and China.  Pompeo wants to extend waivers, while Bolton wants to end them.  The other consideration is the price of oil; the Trump administration has made it clear it wants low oil prices and ending waivers would likely lift prices, at least initially.  Saudi Arabia, in defiance of the U.S., continues to support $70 Brent prices.[7]  Thus, if the waivers are ended, we would not expect OPEC to immediately step in to cover any shortages.  However, history also shows that cartel discipline tends to weaken as prices rise.

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[1] https://www.ft.com/content/cdfb086e-4f03-11e9-9c76-bf4a0ce37d49?emailId=5c99a9761d433300045767bb&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22

[2] https://www.ft.com/content/03c149f2-4f01-11e9-9c76-bf4a0ce37d49?emailId=5c99a9761d433300045767bb&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22

[3] https://www.ft.com/content/b131da2e-4f02-11e9-b401-8d9ef1626294?shareType=nongift

[4] https://www.reuters.com/article/us-japan-economy-boj/global-strain-stirs-boj-debate-of-more-easing-in-march-idUSKCN1R701O

[5] https://www.reuters.com/article/us-usa-fed-rosengren/fed-should-consider-holding-more-short-term-bonds-rosengren-idUSKCN1R7021

[6] https://www.bourseandbazaar.com/news-1/2019/3/26/trump-team-split-over-iran-oil-waivers-as-next-deadline-nears

[7] https://www.reuters.com/article/us-saudi-oil-prices-analysis/more-shale-who-cares-saudi-arabia-pushes-for-at-least-70-oil-idUSKCN1R31IP