Daily Comment (August 25, 2017)

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] South Korean war games: Pyongyang has repeated its threats of retaliation in response to the South Korean war games, contending that the drills act as a precursor to the imminent invasion of North Korea.  Pyongyang reportedly threatened that the U.K. would face a “miserable end” if it participates in military drills alongside the U.S. and South Korea.  The Kim regime has always disliked these annual exercises and belligerent comments are common when the drills are being conducted.  On Thursday, Reuters reported that the North Korean state media released photos of designs for a new intercontinental ballistic missile, which they believe will be able to strike anywhere in the U.S.  The increased belligerence of the North Korean regime will likely bolster the U.S. claim that the world should take more actions against the regime to deter its nuclear ambitions.

Cohn next?  In an interview with the Financial Times, Gary Cohn expressed dismay with President Trump’s response to the events in Charlottesville.  Cohn, who is Jewish, told the FT that he felt enormous pressure to resign after the president blamed “both sides” for the violence that erupted.  It was rumored that Cohn had briefly considered stepping down from his position as economic advisor following the president’s remarks, but decided against it due to speculation that he will replace Janet Yellen as chair of the Federal Reserve.  It is unclear how the president will react to this interview.  On the one hand, he tends to react poorly to public criticism; on the other hand, he seems to like Cohn and probably won’t oust him over the interview.  Regarding the Fed chair position, the interview could affect it either way.  If Trump wanted him out, he could move him to the Fed.  However, he could also use it as punishment.  We still favor Cohn for the Fed chair job but we view it as 60/40; in other words, odds favor Cohn but there is a chance that Yellen may remain as well.

Tax reform: President Trump is expected to release information about tax reform next week. Following the failure to repeal Obamacare, the focus has turned to tax reform as the president tries to get his legislative agenda back on track.  Thus far, the president has failed to deliver a detailed tax plan.  According to the FT, the president will begin campaigning on a simpler tax code in order to spur economic growth.  Axios reports that the president will let the GOP handle the details of the plan and have it come out of the House Ways and Means committee.  At this point, it is unclear how much Trump will look to cut taxes.

Jackson Hole: Today, Mario Draghi will speak about the developments from Jackson Hole; the topic of discussion is thought to be monetary policy’s impact on inflation.  Market participants are hoping Draghi will give clues as to whether or not the ECB will continue its bond buying program.  However, we expect the ECB president to remain coy.  The Federal Reserve and the ECB have been receiving pressure for their respective monetary policies.  In the U.S., the Federal Reserve’s hawkish approach is seen as undermining future GDP growth; in Europe, the ECB’s dovish policy has been accused of causing market bubbles.

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