Daily Comment (August 5, 2016)

by Bill O’Grady and Kaisa Stucke

[Posted: 9:30 AM EDT] The big news today is the employment report, which we will cover in detail below.  We do want to note that economic data from Germany and the U.K. were unusually weak and natural gas inventories recorded a rare August draw in stockpiles.

There has been some interesting news emerging from China over the past couple of days.  First, the CPC announced a delay to the National Financial Work Conference, saying it will be held “no earlier than late September.”  This conference, which occurs every five years and has, on occasion, produced important economic changes, is usually held before this date.  Speculation is that the leadership is divided and needs more time to create a consensus.

The other news of note is that the CPC announced a major overhaul to the Communist Youth League (CYL).  The CYL has been one of two paths to power in the CPC, the other being born into fortunate circumstances.  The latter, called “princelings,” are men who are the sons of prominent revolutionary leaders.  General Secretary Xi is a princeling; Premier Li is a CYL man.  It appears that Xi is consolidating power by taking control of the CYL and undermining this path to power, meaning that only princelings will be able to reach the pinnacles of the CPC in future years.  The fact that these two events have occurred so closely together probably means that Xi is concentrating power before he begins his second term next year.  Reducing the influence of the CYL will eliminate a competing power center, and it is likely that Xi is also trying to complete his takeover of economic policy, usually the mandate of the premier.

Finally, the WSJ is breaking news that OPEC may consider an output freeze at an emergency meeting in September.  Russia has noted it has not been contacted about any such meetings.  We suspect this is “oral intervention” by OPEC in response to recent price weakness. We cannot see how Iran would agree to an output freeze as it ramps up output.

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