Daily Comment (April 1, 2019)

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