by Bill O’Grady, Kaisa Stucke, and Thomas Wash
[Posted: 9:30 AM EDT] U.S. equity markets continue to meander; hopes for fiscal support continue to buoy equities but there are growing worries that the administration will fail to deliver. Geopolitical issues are a concern as well. Sean Spicer, the administration’s press secretary, seemed to add barrel bombs to Syria’s prohibited weapons. Although this decision is clearly defensible, the persistent use of these bombs would almost certainly suggest that more U.S. strikes are in the offing. We doubt the president has made this change in policy but we will be watching. Anytime ordinance is in the air unexpected things can happen. If any further U.S. action leads to a Russian casualty, escalation is likely. In another part of the world, the Chinese media is reporting that the People’s Liberation Army has sent 150k troops to its border with North Korea. There are unconfirmed reports that these troops are training to handle a refugee situation. Given that Chairman Xi and President Trump have recently met, this buildup may be a signal that China is expecting some sort of military action against the Hermit Kingdom that, most likely, would lead to a flood of refugees heading into China.
Meanwhile, SOS Tillerson is on his way to Moscow after meeting with the G-7. The group suggested that more sanctions against Syria are being considered. We expect Tillerson to receive a rather chilly reception in Russia.
In Fed news, Chair Yellen suggested in a talk yesterday that the economy has exited crisis mode and her policy now is to protect the gains made. This suggests less support for the economy but doesn’t necessarily suggest tightening policy. Our most recent focus has been on inadvertent tightening; a rising dollar, increasing credit spreads, rising financial stress, etc. None of these appear to be a problem now. There are rumors that the administration may be close to nominating a FOMC governor, one to essentially replace the recently departed Daniel Tarullo. However, no names have emerged so there may be a surprise coming. The NY Post is speculating that NY Fed President Dudley may have leaked non-public information to analysts, similar to behavior that led to the recent resignation of Jeffrey Lacker from his post as president of the Richmond FRB. If Dudley were forced out, it would remove a major dove from the board.