by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EST]

Welcome back!  Equities are under pressure due to Apple (APPL, 324.95) news.  The U.K. rejects the EU trade agreement proposals as it appears Britain is ramping up fiscal spending.  The Netherlands threatens the EU/Canada trade deal.  We’re seeing rising tensions over the U.S/China technology war.  Here are the details:

COVID-19:  Today’s big news on the virus came from Apple, which announced it would not meet its quarterly revenue targets due to production disruptions caused by the COVID-19.  Although the news of supply disruptions should not be a shocker, until this report, this expectation was merely generalized.  Now, it is real.  We expect other companies will start admitting similar problems in the wake of this announcement.  Companies are working on anti-viral drugs but are reporting snags in getting approvals for testing.  We are seeing the virus’s impact on global economic activity as trade has been weakening, Japan’s GDP slumped, and a combination of post-consumption tax blues and the loss of Chinese tourists.  Europe is missing Chinese tourism as well.

The latest data shows 73,345 confirmed cases with 1,874 fatalities.  Although the numbers are rising, the pace of the increase is showing signs of slowing.

Of course, we offer our usual caveats; we suspect the actual number of infections is much higher, but the lethality is much lower than the official data suggests.  Although nothing we have seen convinces us that our take on the disease is wrong (we expect one weak quarter from the event), we remain vigilant for the unexpected.  We do note that China’s equities have recovered their losses since the return from the New Year holiday, supported by fiscal and monetary stimulus from Beijing.

In other related news, the CPC has postponed the National People’s Congress meetings usually held in March due to COVID-19.  This is an important meeting and the fact that it is being postponed shows the degree of concern among CPC leadership.  President Moon called for “emergency steps” to prevent the COVID-19 virus from derailing the South Korean economy.  According to Finance Minister Hong Nam-ki, this month the government will offer emergency low-interest loans to a range of companies in the airline, shipping, travel and restaurant industries to cushion the blow

U.S./China tech:  The battle over Huawei (002502, CNY 2.85), in particular, and U.S. attempts to retard China’s technology development, in general, continues.  The U.S. has been pushing European nations to avoid using Huawei’s technology; Britain has already rejected U.S. overtures and Germany appears ready to follow the U.K. lead.  The U.S. has announced it is considering banning the export of U.S. microchip machine tools.  The world is rapidly heading toward a “one world, two systems” situation in technology.  Needless to say, such a world would operate at a lower level of efficiency.

Brexit:  The EU is offering a trade deal with the U.K. in exchange for a “level playing field” on rules and regulations.  Westminster is outright rejecting such an arrangement, which it should; there is no point to Brexit if the country leaves only to follow rules that it no longer has input in setting.  Meanwhile, PM Johnson appears to be ramping up a fiscal splurge.  If it occurs and the BOE turns more hawkish as a consequence, it should be bullish for the GBP.

EU:  There are two items of note.  The Netherlands, normally a supporter of free trade within the EU, may reject the recent free trade deal with Canada.  Under EU rules, all the members must approve a free trade arrangement, which explains why getting anything approved is really hard.  Under normal circumstances, we expect the smaller states or France to be leery of free trade deals, but if the Dutch are done with free trade then there is little hope that any new treaties are possible (take note, Brits!).  Why the trouble?  Agriculture.  Farmers in the Netherlands are afraid of the agricultural power of the central North American plains; however, as usual, the worries are couched in safety terms.[1]  Second, despite recent visits by Facebook (FB, 214.18) CEO Mark Zuckerberg, the EU is still giving the company the cold shoulder and pressing for more extensive regulation.

Russia-Turkey:  The Turkish government yesterday sent a delegation to Russia in an effort to forge a ceasefire agreement for northwestern Syria.  Nevertheless, Turkey continues to pour troops and equipment into the area and has threatened to attack Syrian forces there if they don’t stop targeting Turkish-backed rebels.  Such a Turkey-Syria conflict would raise a serious risk that Russia would be drawn in.

Odds and ends:  In defense of U.S. projection of power, Sen. Graham (R-SC) pushed back against a Trump administration proposal to withdraw U.S. troops from areas of Africa.  This stance shows how the establishment remains at odds with the populists over the U.S. hegemonic role.  As turmoil continues in Germany, there are growing calls for Chancellor Merkel to resign.  A sign of the times—Greek and Italian bond yields are falling as investors view them as alternatives to Bunds.  The Taliban says it has a peace deal with the U.S.  Car dealerships are encouraging beleaguered car buyers to purchase a vehicle before selling or trading the old one and voluntarily allow the current car to be repossessed.  Such stories usually start to emerge when credit stresses are rising.  Sen. Sanders (I-VT) and Rep. Ocasio-Cortez (D-NY) have introduced legislation that would ban fracking in the U.S. by 2025.  Although the bill has no chance of passage, it shows a striking blindness on the part of the populist left.  The cost of adjustment for this bill, designed to combat climate change and other environmental ills, would fall almost entirely on low income households who would face significantly higher gasoline costs as oil production falls and prices rise.

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[1] For the record, even with consuming “unsafe” food, Canadians manage to have a life expectancy of 82.3 years, just beating the Netherlands at 82.1

by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EST]

Happy Friday and St. Valentines Day!  It’s rather quiet in the financial markets, with bonds doing well and equities grinding higher.  We update news on COVID-19.  There is unrest in Colombia, and more legal action on Huawei (002502, CNY 2.61).  We have additional color on Johnson’s cabinet shakeup.  Judy Shelton is under fire.  Canada faces a rail strike.  Here are the details:

COVID-19:  The number of reported cases is up to 64,467 with 1,384 fatalities.  After yesterday’s jump due to changes in reporting methods, today’s increase is more in line with previous patterns.  Sentiment is slowly moving away from “what is this virus all about?” to “how much of a negative impact is it going to have?”  Here are a few of our observations.  First, traditional stimulus measures, such as cutting interest rates and taxes, have less effect.  Essentially, for China and parts of Southeast Asia this event is disrupting production.  Adding liquidity into limited supply is a recipe for inflation, at least in the short run.  What needs to happen is a reduction of fear and a resumption of production.  That outcome will only come with time.  It is important to note that Chinese officials are working at cross-purposes to some extent.  Although they want to boost growth, they are also continuing aggressive actions to quarantine suspected cases, thus hampering the movement of people necessary for economic recovery.  Second, the ripple effect from this event will probably be a function of the overall dependence on the Chinese economy.  For example, China is one of the few customers willing to buck Iranian sanctions.  The virus is reducing Iranian oil exports to China and thus putting additional pressure on the Iranian economy.

Colombia:  The ELN and dissident members of the FARC rebel group launched an effort to shut down the country, warning that they will kill anyone nationwide who ventures outside their home from 6:00 am on Friday until Monday.  We believe the threat is a show of force after the successful national strike earlier in the winter.  If this signals a new round of unrest in Latin America, regional stocks would come under renewed pressure.

Huawei:  New charges have been assigned to Huawei; the company has been accused of racketeering, conspiracy and conspiracy to steal trade secrets.  This action will certainly raise tensions between Washington and Beijing and reduces the likelihood of a Phase Two deal.  In fact, it may undermine the execution of the Phase One agreement.

Johnson:  PM Johnson’s cabinet shakeup was much more than a mere post-election restructuring.  The headline news was the resignation of Exchequer’s Javid.  He was ordered to fire his staff so Johnson could create a separate unit in the Exchequer.  Javid correctly realized that accepting this change would make him a mere figurehead and resigned.  Reports suggest that Johnson wants to boost spending in the areas of the country that flipped from Labour; Javid was less keen on increasing spending.  As always, there is some person willing to accept unattractive terms and Johnson did find someone.  Our overall take is that Johnson has opted for loyalty over other attributes.  For the markets, expectations of fiscal stimulus lifted the GBP.

Is Shelton in trouble?  Although President Trump initially selected conventional figures for Fed governor positions, in the past couple of years he has offered more radical candidates, all of whom have failed to get nominated.  The latest in this group is Judy Shelton, who in the past has argued for a gold standard, deliberate monetary policy to trigger a weaker dollar and reduced independence of the central bank.  Surprisingly, senators are pushing back much harder than we expected and it is possible that Shelton will join Herman Cain and Stephen Moore on the list of candidates that couldn’t get confirmed.  If she fails, we would view it as a win for the establishment.  However, we would not be surprised to see other governor candidates in the future suggest policies to reduce independence or intervene in exchange rates.  If the U.S. is going to reflate, such policies are probably necessary.  Nevertheless, Shelton’s positions do seem muddled.  On the one hand, she calls for a return to the gold standard and appears reluctant to deploy unconventional policies such as QE but has little problem with overtly engaging in currency depreciation.  Our suspicion is that she is really a political candidate who wants policies designed to keep her favored party in power.  In our reading of Fed history, this type of appointment would be a first for the Fed and perhaps such an appointment is a bridge too far for the Senate to cross.  So, we will see if these “misgivings” evolve into rejection.

Canada:  The country’s biggest railroad said it has shut down operations in eastern Canada because of widespread rail blockades set up by activists protesting the construction of a major natural gas pipeline.  Since the shutdown is likely to result in layoffs and significant disruption to Canada’s economy, we expect it to be a near-term headwind for Canadian stocks.

Odds and ends:  At yesterday’s T-bond auction, the newly issued 30-year sold at a 2.061% yield, a new record-low at auction.  Research from the White House staff suggests that foreign nations are suppressing drug prices, which essentially means that Americans are subsidizing the cost of new drug research that foreigners free ride on by setting lower prices.  We will be watching to see if the U.S. uses this research as a trade tool to apply export taxes on foreign nations who engage in such practices.  If it does, it should be bullish for U.S. drug makers as the ultimate goal will be to boost foreign drug prices.  France and Germany are trying to strongarm the EU competition regulator to allow for the creation of concentrated national champions.  One of the reasons U.S. equities have outperformed the world is that U.S. large cap firms are more concentrated due to lax anti-trust enforcement.  Market power has given these firms the ability to consistently generate higher profits.  If the EU gives France and Germany what it wants, similar structures may be created.  One element is that the EU is considering creating a single market for data in a bid to weaken the grip of U.S. tech firms on Europe.  At the same time, the U.S. appears to have misgivings about the dominance of American tech firms.  The DOJ held a conference on whether top digital platforms have become so dominant that they’re discouraging investment in new products.  Some venture capitalists at the meeting complained that it’s hard to develop a product in markets dominated by a tech giant.

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by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EST]

After a steady rise, equities are lower this morning following a jump in reported infections; we update news on COVID-19.  The nominating process for the remaining two vacant governor positions begins today.  PM Johnson shakes up his cabinet.  The CDU/CSU begins the process of selecting a new party leader.  We update the energy data; the IEA warns of weakening oil demand.  French unemployment falls (see foreign economic data below).  Here are the details:

COVID-19:  Due to new reporting standards, there was a massive jump in reported infections in China.  The new count is 60,407 with 1,370 fatalities.  Health authorities in Hubei province started counting clinically diagnosed cases as infections.  Previously, only a positive laboratory test would trigger a diagnosis.  There have been serious concerns about undercounting; testing kits were seen to be inaccurate, or worse, because they had a tendency to produce false negatives.  The new reporting does show a noticeable bump in the data.

Both charts show the same data but the chart on the left uses a logarithmic scale, which shows the rate of change in the data; the chart on the right uses a linear scale and has been used by some media outlets to highlight the “hockey stick” nature of the increase.  Although the jump in the data is clearly noticeable, even using the more legitimate log scale, it should be treated as a one-off event.  In a sense, the new reporting should be treated as a data revision.  The good news is that the increase in the number of cases highlights that most of those infected are suffering a mild case of the disease.  So, today’s equity weakness is probably not a proper reaction to this news; on the other hand, the rally we have seen over the past several days was ignoring the likelihood of under-reporting so today’s drop could also be seen as a correction to previous overconfidence.

In related news, China continues to fire province-level officials over the handling of this crisis.  And, proving the universality of Rahm Emmanuel’s dictum that a political leader should never let a crisis go to waste, Chairman Xi has installed his close ally, Xia Baolong, as leader of the Hong Kong and Macau Affairs Office.  Xi is clearly working to extend his control over the restive Hong Kong.  The banking system is showing some signs of stress as the virus weakens the economy.  Global tourism is weakening as well.  China’s car sales plunged 22% in January.

PM Johnson’s shakeup:  The most notable firing is Sajid Javid, who was Chancellor of the Exchequer.  However, there were numerous other sackings.  The government is expected to announce replacements throughout the day.  It is still uncertain what these replacements will bring.  The GBP did move higher on the news.

The Fed nominating process:  At long last, Christopher Waller and Judy Shelton go before the Senate Banking Committee at 9:00 EST today.  To some extent, Waller may be the most fortunate candidate in recent memory; he is a conventional candidate and, most likely, Shelton will take a grilling.  She is a very unconventional candidate.  She has supported the gold standard and has expressed doubts about the very wisdom of having a central bank.  For GOP senators, this nomination may prove to be yet another loyalty test to the White House.  Our view?  We have been expecting doves to be nominated to the vacant seats and both these candidates will be reliable advocates for rate cuts.  It will make the composition of the Fed more dovish.  At the same time, as we move from an efficiency to an equality cycle, central bank independence will be undermined.  What we are concerned about with Shelton is that she may not be a dove or hawk in the traditional sense but may instead represent a “new bird.”  She may be a political bird who will support easier policy when a Republican controls the White House but call for tight policy when a Democrat is in the Oval Office.

Odds and ends:  As AKK leaves the leadership of the CDU/CSU, new candidates for the job are circling.  The vetting process is beginning with familiar names emerging for a second chance at the position.  And, here’s one to ponder—Greek 10-year bond yields have fallen below 1% to 0.98%.

Energy update:  Crude oil inventories rose 7.5 mb compared to a forecast rise to 3.2 mb.

In the details, U.S. crude oil production rose 0.1 mbpd to 13.0 mbpd.  Exports fell 0.4 mbpd, while imports rose 0.4 mbpd.  The rise in stockpiles was more than 2x what was forecast.  The rise in imports coupled with the decline in exports prompted the large rise.

This chart shows the annual seasonal pattern for crude oil inventories.  This week’s rise was consistent with seasonal patterns, and the gap between the normal pace of inventory accumulation and the actual has narrowed significantly.  The next two weeks are usually steady so continued accumulation will put the current year above normal.

Based on our oil inventory/price model, fair value is $59.72; using the euro/price model, fair value is $47.58.  The combined model, a broader analysis of the oil price, generates a fair value of $51.04.  We are seeing a steady decline in all of the fair value calculations as the dollar strengthens and oil inventories rise.  However, the combined model is within range of fair value so we may see some consolidation in the coming weeks.  The IEA, citing the impact of the COVID-19 virus, has cut its global oil demand forecast by 365 kbpd.

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by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EST]

It’s a rather quiet Wednesday as global equity markets continue their steady rise.  We have an update on the COVID-19 virus (it now has an official name), along with some disquieting data from JOLTS and headlines about consumer debt.  The EU fires back at the U.K.  The NZD rallies.  Here are the details:

COVID-19:  The Wuhan virus now has an official name; this was done by the WHO to reduce the stigma applied to China.  However, changing the name doesn’t change the general perception.  Documented infections are now 45,171 with fatalities at 1,115.  There are worries that the diagnostic process is missing a lot of cases.  Beijing continues to take aggressive actions to contain the virus, seizing hotels, hospitals and autos to manage the situation.  CPC leadership is following a time-worn tactic of blaming local officials for the crisis; this practice was common during the emperor periods.  At the same time, General Secretary Xi is expressing concern about the economic damage from the virus, cautioning against an overreaction.  Leaders walk a fine line in these situations.  President Ford’s aggressive reaction to the swine flu in the mid-1970s turned out to be an overreaction as the vaccine proved more dangerous than the illness itself.  At the same time, if COVID-19 turns out to be the “big one,” warning of overreaction will look incredibly foolish.  There is growing worry about supply disruptions; commodities have obviously been adversely affected but drug makers are also worried.  Still, overall, financial markets are continuing to look through this issue.  In a world with accommodative policy, it is hard to contain risk assets.

JOLTS:  The Bureau of Labor Statistics releases a dataset that covers job openings, hires, quits and labor flows.  Although the report gets less attention than the payroll and household surveys, it does offer some granular information about the labor market.  The number that has caught everyone’s attention is a sharp drop in job openings.  However, as we show in the chart below, the decline probably had more to do with January than weakness.

The blue line on the chart shows the non-seasonally adjusted report.  The decline in January is remarkable as job openings fell by nearly 600k.  However, when we seasonally adjust the data, the decline is significant, around 250k, but much less than the headline data would suggest.  The number bears watching; if it continues to decline it would suggest an early warning that the labor market is starting to soften.  We would not be surprised to see a recovery in the coming months as the drop appears to be exacerbated by seasonal factors.

Another chart violation:  The NY FRB publishes data on consumer lending and there are headlines this morning talking about how household debt is at a new record level.  Well, that is true, but the pace of debt accumulation appears rather manageable.

From 1999 into 2008, annual growth rates averaged between 10% to 20%.  Last year’s growth rate was 4.4%.  On a per capita basis, the average person is carrying $51,740 of debt; although that number has been rising, it is below the $53,040 peak set in Q3 2008.  In other words, on a per capita basis, the growth rate is a mere 3.1%.  Overall, households remain cautious about debt and lenders are being careful, too.

By far, the most mortgage originations are for the highest credit score.  Note that before the Financial Crisis, low credit scores acquired nearly twice as many mortgages as they do now.

EU/U.K.:  Yesterday we noted that the U.K. indicated it wants “permanent equivalence” for its financial services industry; today, the EU signaled this isn’t going to happen.  Instead, access will always be temporary and subject to removal with 30 days’ notice.  If a deal cannot be worked out, London’s financial services industry will be in big trouble.

German trouble:  We have been documenting the turmoil within the CDU/CSU and the rising threat to Chancellor Merkel’s tenure.  Foreign policy experts are starting to see the void developing as a leaderless Germany essentially becomes a leaderless Europe.

Odds and ends:  The Reserve Bank of New Zealand indicated it was leaving policy rates at 1.0% and did not intend to cut further.  The NZD rallied on the news.  The USTR has issued a report critical of the WTO’s appellate mechanism.  The U.S. wants the WTO to become less of an adjudicator and more of a facilitator of talks.  This is more about advancing national sovereignty over supranational power.  The FTC is expanding its anti-trust investigation of big tech.  The U.S. is accusing Huawei (002502, CNY 2.72) of having the ability to access telecom networks in a bid to discourage allies from using the company’s equipment for 5G.  President Trump is planning a trip to Africa.  In order to bolster a coalition against Iran, the U.S. is expected to recruit the help of Sudan and Morocco.

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by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EST]

Global equity markets continue to grind higher.  We have an update on the Wuhan virus.  Chair Powell goes to Capitol Hill today and tomorrow.  The New Hampshire primary is underway.  News on Brexit.  The conflict in Syria continues.  The Philippines ends a long-standing security arrangement with the U.S., creating a gap in the first island chain.  CO₂ emisions are slowing.  Here are the details:

Wuhan virus:  The number of infections is now above 43k and fatalities are over 1k.  China tried to go back to work yesterday but turnout was rather low as quarantines and fears of the virus kept workers away from the factory and office.  It appears the recovery will be slow and we would expect to see supply problems begin to develop soon.  There is evidence to suggest the pace of infections is slowing (but men appear to be worse off from the disease).

However, as we have warned, this data should be taken with some degree of caution as actual infection rates are probably understated.  In related news, Chairman Xi made a tour, the first time he has been seen in a while.  We note that Xi has added Chen Yixin to the team overseeing the government’s response to the Wuhan virus.  Chen is the secretary general of the party’s law enforcement and is considered a protégé of Xi.  Adding such a high-profile person to the team suggests that (a) Xi is taking the event seriously, and (b) if a crackdown against unrest and social criticism is necessary, Chen would be a good candidate to lead it.  The first tranche of PBOC liquidity was offered yesterday.  Crude oil prices are getting a bounce this morning but problems within OPEC continue to pressure prices.  Finally, an example of the power of rumors has emerged in Hong Kong; there has been a run on toilet paper.  This run has occurred as other items, such as surgical masks and anti-bacterial soaps, have become scarce.  Once a hoarding mindset develops, the behavior can shift from the reasonable to unreasonable.  It reminds us of the famous toilet paper shortage of 1973, thought to be triggered by a joke in Johnny Carson’s monologue.  Why do we mention this event?  Because, under strain, humans can become remarkably irrational and investors should take care that although we think the odds favor the Wuhan virus being a one- to two-quarter event, that doesn’t mean odd things won’t happen.

The Fed to Capitol Hill:  Chair Powell will go to the House today and Senate tomorrow for his semi-annual testimony.  Expect him to be peppered with questions about the Wuhan virus and the state of the repo market.  Powell has been in office long enough now that we don’t expect him to make any market-moving statements; in general, the Fed is likely to hold policy steady for now, with a bias to easing further.

Brexit:  Negotiators for the Johnson government are moving to protect financial services, pushing for “permanent equivalence” for that industry in the EU.  Officials admitted that the “smart border” concept of using technology to create a seamless border won’t be ready until 2025.  In the meantime, actual paperwork will tend to slow trade.  In other U.K. news, yesterday the government approved a massive railroad upgrade project that will improve high-speed transport throughout the country and cost upward of £100 billion through 2040.  The “HS2” project, which will be the biggest infrastructure program in Europe, could be bullish for a range of British stocks in the manufacturing and construction industries.

Turkey-Russia-Syria:  Turkey has now lost at least 13 soldiers over the last week as it ramps up its support for the last group of rebels fighting the Syrian government in Idlib province.  Even though Turkey has asked Russia to help convince the Syrian government to back off, the Putin government has offered minimal help, which in turn has strained the Turkey-Russia relationship.

United States-Philippines:  The government of President Duterte said it has terminated the U.S.-Philippine Visiting Forces Agreement, under which the two countries held joint military operations.  The move will likely cause even more tension between the U.S. and the Philippines, strengthening China’s position in the South China Sea.

Climate change:  The International Energy Agency said global carbon dioxide emissions from the energy sector stopped growing in 2019, largely because of a plunge in coal burning and a shift toward renewables, natural gas and nuclear power for electricity generation in the developed countries.  The U.S. had the biggest drop in emissions (3%) as ultralow natural gas prices continued to prompt a massive shift away from coal generation.  If electricity generation continues to shift toward gas, whether on account of cost or regulation, it could raise hopes for better gas pricing down the road.

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by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EST]

Happy Monday!  Global equity markets are flat to down as the world continues to deal with the Wuhan virus.  China officially returns from the New Year’s holiday, but it looks like a slow restart, and China’s inflation rises.  There is political turmoil in Europe.  Here are the details:

Wuhan virus:  Global confirmed infections are 40,649 with 910 fatalities, exceeding SARS.   Reports suggest there is growing anger at Beijing for the handling of the crisis.  Chairman Xi has finally started to make public appearances amid the rising criticism.  Officially, the New Year’s holiday ended today, but reports suggest that business recovery is very slow.  We had the first confirmed fatality of a U.S. citizen over the weekend.  The PBOC has instructed banks to lower rates and facilitate payment extensions; analysts worry this action will weaken the resolve of the banks to deal with bad debt once the crisis passes.

CPI rose 5.4% in January, well above forecast.  Although prices do tend to rise in January, hoarding activity played some role in boosting prices.  Food prices, which rose 20.6%, were a major factor in lifting overall CPI.

PPI was unchanged; we believe the Wuhan virus has not affected producer prices yet and thus we will be watching to see the impact in coming months.

Global equity markets are mostly looking through the current crisis, focusing on expectations of further policy easing.  It is possible that financial markets have gotten a bit ahead of themselves and thus we may be in for a few weeks of consolidation until we get clear evidence that the virus has been contained.

European politics:  There were two major items of note.  First, Saturday’s election in Ireland generated an inconclusive result.  The two centrist parties, the Fine Gael and Fianna Fail, took 20.9% and 22.2% of the vote, respectively.  The winner was Sinn Fein, at 24.5%.  The centrist parties cannot form a majority government without Sinn Fein, but both have historically avoided letting Sinn Fein into government, in part due to its ties to the IRA.  Sinn Fein did well among younger voters who have no memory of its ties to the IRA; the leftist party conducted an anti-austerity campaign that focused on stagnant wages and high housing costs.  The most likely outcome is another round of elections.  If a minority government is formed, we doubt it will last long.

The second item is that Annegret Kramp-Karrenbauer (AKK) has stepped down from leadership of the CDU/CSU in the wake of the Thuringia situation.  Last week, in this German state, the CDU teamed up with the AfD to install a Free Democrat as state premier (who, in the wake of this event, has resigned).  Teaming up with a far-right party has dark historical connotations and clearly upset the CDU/CSU leadership.  AKK’s resignation throws Chancellor Merkel’s succession open again, raising the possibility that her replacement will force her to resign.  The leading candidates include Friedrich Merz, a former leader of the CDU parliament members, Jens Spahn, the current health minister, and Armin Laschet, current prime minister of the state of North Rhine-Westphalia.  The breakdown also reveals the fracturing of German politics and opens the possibility of much more radical outcomes, which would have serious ramifications for the future of the EU.

United States-Japan-South Korea:  The U.S. military has dramatically shifted its schedule of joint drills with Japan and South Korea.  To reward Japan’s participation in the Trump administration’s new “Indo-Pacific Strategy” for containing China, joint drills with Japan have been scaled up.  In contrast, joint drills with South Korea have been downgraded for a second straight year to avoid antagonizing North Korea.

Odds and ends:  One reason the Phillips Curve relationship appears to be broken is due to the difficulty in determining labor supply.  The labor force has continued to grow despite data that would suggest the number of available workers should be exhausted.  Why is this happening?   The labor market is drawing a steady supply of workers who were previously out of the labor force directly back into the labor force.  This pattern should encourage the Fed to keep policy rates steady to continue to foster this development.

In early negotiations, it looks like the EU is offering open access to U.K. financial firms in return for continued access to British fishing waters; in other words, finance for fish.  Thirty-year mortgage rates hit an all-time low.  Global trade growth rose by a modest 1%, the fourth worst over 40 years of data.  The U.S./China trade conflict is the most likely culprit.  Although we don’t expect action in an election year, at some point, we do expect the administration to take direct steps to weaken the dollar.  We note that companies are starting to complain about the strong greenback.

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