Daily Comment (December 13, 2016)

by Bill O’Grady, Kaisa Stucke, and Thomas Wash

[Posted: 9:30 AM EST] The FOMC begins its meeting today.  Tomorrow we expect to see a 25 bps rate hike and little, if any, change to the structure of the dots plot.  These expectations are based on the idea that, like all of us, the FOMC doesn’t know exactly what changes will be made to fiscal and monetary policy, and so moving policy expectations based on what policymakers think might happen is fraught with risk.  Thus, we look for mostly a status quo event tomorrow.

We have been avoiding commentary on President-elect Trump’s selections for his administration.  This is because the individual selections are not as important as the pattern and we needed to see more appointments to get a feel for how this new government is going to be structured.  This morning, Exxon (XOM, 90.98) CEO Rex Tillerson was named as the incoming president’s selection for Secretary of State, with former Texas Governor Rick Perry for Energy Secretary.  Here are a few thoughts on what we have seen so far.

Oil and natural gas production will be favored: The new Secretary of Energy was the governor of a major oil-producing state, and the head of the Environmental Protection Agency is the attorney general of Oklahoma, another major oil-producing state.  Now, the Secretary of State is coming from the oil industry.  Oil drilling and exploration looks to be favored in the Trump government.

Lots of brass: Military figures are prominent in the Trump administration.  As noted in yesterday’s 2017 Geopolitical Outlook, the plethora of generals probably indicates a return to the Powell Doctrine, which, in a nutshell, means fewer military adventures and if conflicts do occur they will be well defined and delivered with overwhelming force.  Simply put, we strongly disagree with some commentators who argue that the presence of military figures means more wars.  These appointees know firsthand the human costs of warfare and won’t take it lightly.

The populists, so far, are behind: We have been characterizing the internal conflict for the heart and soul of Donald Trump as a war between Speaker Ryan and Senior Counselor Bannon.  So far, Steve Bannon holds the only senior position going to someone outside the political and economic establishment.  However, that doesn’t mean the populists are finished.  We believe that to be successful Trump will need to address issues that both constituents want.  Part of the financial market’s positive sentiment seems to be coming from the idea that populist policies, such as restrictions on trade and immigration, won’t be significant.  It’s probably too soon to take that position but, given the imbalance of selections, it isn’t unreasonable to believe the populists have lost.  That may be true but, again, it’s likely too soon to determine.

We look for a quiet trade today in front of the FOMC meeting; the statement will be released at 1:00 EST tomorrow with a press conference soon after.

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