Daily Comment (April 13, 2018)

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] U.S. equities are rising this morning as earnings season begins.  As our numbers above indicate, earnings are expected to be robust and the releases this morning confirm that outlook.  Here is what we are watching:

Return to TPP?  All presidents learn on the job; there really isn’t any earlier position that prepares a person for the rigors of the presidency, although state governorships are probably the best training available.  Where one sees this clearly is in presidential debates when an incumbent is running for a second term.  The “newbies” are all talking about all the great things they will do, while the current president looks at them with eyes that suggest “you think it’s that easy?”  Both candidates wanted to kill TPP and TTIP.  It looked like a political no-brainer.  Americans had employment insecurity and the last thing they wanted was more foreign competition in the form of imports.  But, apparently neither candidate understood the real reason these trade deals were cobbled together.  If both trade deals were in place, the U.S. would have been the center of two enormous trade blocs.  Any nation outside the blocs would have been at a deep disadvantage.  It would have forced China and Russia, in particular, to enter the agreements essentially on America’s terms.  Instead, both candidates focused on the impact on U.S. jobs.  Some sectors of the U.S. job market would have likely been adversely affected by trade and thus both candidates promised to end the deals.  Now, President Trump is realizing that if an overarching goal of U.S. foreign policy is to manage and contain China, then TPP would be a really useful tool.  We would not be surprised to see the administration reverse course on TPP and, despite this morning’s comment to the contrary, the other 11 nations renegotiate parts of the agreement.

The Syrian War: The U.S. is putting together a significant assembly of military assets.  The U.K. and France have joined in.  Currently, there are four U.S. destroyers in the Mediterranean and two subs, with up to 400 Tomahawk cruise missiles available.  The U.S.S. Harry Truman will be in theater by late next week.  That adds an additional 300 Tomahawks and up to 90 aircraft.  B-2 bombers from Whiteman AFB in Knob Noster, MO are available.  There are over 100 aircraft at the U.S. facility in Qatar.  Britain is contributing 6 Typhoon fighter jets, two attack submarines and the H.M.S. Duncan, a destroyer.  France will also be contributing aircraft deployed from France.

This has the look of a broad and extensive military operation.  Syria is moving its military assets under the protection of Russian anti-aircraft and anti-missile systems.  President Trump has significant assets at his disposal.  Now we await what decisions are made.  In the run-up to a potential conflict, oil and gold prices have been rising.

Chinese data: As we note below, China’s credit growth, although up sequentially (mostly due to the New Year), is showing continued weakness on a yearly basis.  Total loan growth fell to 12.1% from 12.9% on a yearly basis.  China has a serious debt problem and Chairman Xi is trying to slow the growth of credit to arrest the problem.  However, slowing credit growth will certainly weaken the economy.  In the past, Chinese leaders have reversed course once it became apparent that growth was slowing.  Xi has amassed enough power to deal with slower growth; the real question is whether he will use that power.

View the complete PDF