Daily Comment (February 1, 2019)

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] It’s employment day!  We cover the data in detail below but here is a quick rundown.  The payroll data came in much stronger than expected, but there was a large downward revision to December.  The unemployment rate ticked higher, but that was likely due to the government shutdown.  Overall, the data show (a) the economy is still doing well, and (b) there is still slack in the labor force.  Here is what we are watching this morning:

BREAKING NEWS: As expected, the U.S. will withdraw from the Intermediate-Range Nuclear Forces Treaty.[1]  The U.S. has accused Russia of violating the treaty; this is the reason for the withdrawal.  This treaty has been in place since 1987.

China: Although the trade talks ended with something of a whimper, more meetings are expected to follow and the president’s upbeat assessment of the talks makes it look like a deal of some kind is coming.  In particular, Chairman Xi and President Trump will meet in February, perhaps to hammer out and announce the final deal.[2]  We will likely see a partial deal by March 1 with more talks to follow.  To some extent, both leaders benefit by extending the clock.  Once the elections pass, we expect U.S. and Chinese relations to become more hostile, but neither leader is relishing the economic dislocation that comes from breaking the relationship now.  Consequently, we expect some sort of deal soon and maybe talks that stretch into next year.  The key figure to watch is Lighthizer.  If the trade negotiator figures out he is being played and won’t be allowed to construct the deal he really wants with China, then he will likely leave the government.  As long as he stays, we suspect he thinks that an agreement to fundamentally change the trade and investment relationship with China is still possible.

Brexit: This is what we know: neither side wants a hard Brexit.  The majority in the British Parliament want a different deal than what PM May negotiated.  The EU is not likely to change the agreement.  Thus, we are heading into a binary outcome where either (a) Britain accepts May’s plan, or (b) we get a hard Brexit.[3]  May seems to believe the best way to get outcome (a) is to run the clock down until the end of March and see Parliament acquiesce to her plan.[4]  We also suspect that May agreed to go back to the EU to try to change the deal knowing full well there is little likelihood of that outcome, although, perhaps, the odds aren’t zero.[5]  May might hope to get some cosmetic changes so that she can frame another vote as a “new deal.”  Meanwhile, new twists have developed.  Spain wants Gibraltar to be treated as a colony of the U.K. rather than territory.[6]  Reopening negotiations with a body that requires a unanimous vote can bring unexpected complications.

Venezuela: John Bolton hinted on Twitter that the U.S. might support safe passage for Maduro and other regime officials.

I wish Nicolas Maduro and his top advisors a long, quiet retirement, living on a nice beach somewhere far from Venezuela. They should take advantage of President Guaido’s amnesty and move on. The sooner the better.

Other than that, not much has change on the Venezuelan front.

Fed Governors: Although the administration has not formally withdrawn Marvin Goodfriend from consideration, in reality, there is little chance he will get approved and there is an even smaller likelihood that the president would want a hawk for the position.  In something of a surprise, there were reports that Herman Cain, once a GOP presidential candidate, was being considered for the post.  It should be noted that Cain does have relevant experience—he was on the board of the K.C. FRB, spending some time as chairman.  The K.C. FRB has become the most consistent hawkish member of the FOMC, so Cain’s consideration does appear at odds with the president’s desire for doves.  It would appear the establishment wing of the administration is still trying to slip centrists and hawks past the president and onto the FOMC.

An Iran sanctions workaround?  The EU has created a Special Purpose Vehicle that would allow companies in the EU to get around U.S. sanctions on Iran.[7]  The new vehicle, called the “Instrument in Support of Trade Exchanges,” or INSTEX, is designed to avoid using dollars and may simply use barter for the trade of humanitarian goods.  We doubt it finds much use; without using a currency, a seller of EU agricultural goods would need to accept Iranian oil, for example.  It isn’t obvious if that cargo could be insured due to U.S. sanctions.  Most likely, this body will represent a signal that the EU can operate independently of U.S. policy but, in reality, it can’t.  We expect the administration to be harshly critical of this action and no major EU company to participate for fear of running afoul of U.S. sanctions.[8]

Another reason for Iran to be unpopular with Americans: Tehran has banned public dog walking or riding in cars with dogs.[9]

View the complete PDF

[1] https://en.wikipedia.org/wiki/Intermediate-Range_Nuclear_Forces_Treaty

[2] https://www.wsj.com/articles/china-trade-negotiators-proposing-trump-xi-meeting-in-china-next-month-11548940089 and https://www.ft.com/content/8cddb4d4-2565-11e9-8ce6-5db4543da632?emailId=5c53d7385117e90004fae6fc&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22

[3] https://www.nytimes.com/2019/01/31/business/brexit-european-union.html?emc=edit_mbe_20190201&nl=morning-briefing-europe&nlid=567726720190201&te=1

[4] https://www.ft.com/content/484b050c-2578-11e9-8ce6-5db4543da632?emailId=5c53d7385117e90004fae6fc&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22

[5] https://www.youtube.com/watch?v=zMRrNY0pxfM

[6] https://www.ft.com/content/ab72fb3a-2578-11e9-b329-c7e6ceb5ffdf?emailId=5c53d7385117e90004fae6fc&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22

[7] https://www.politico.eu/article/trump-iran-europe-sanction-powers-set-up-firm-to-thwart/?utm_source=POLITICO.EU&utm_campaign=1f45bc1d0f-EMAIL_CAMPAIGN_2019_02_01_05_45&utm_medium=email&utm_term=0_10959edeb5-1f45bc1d0f-190334489

[8] https://www.nytimes.com/2019/01/31/world/europe/europe-trade-iran-nuclear-deal.html?emc=edit_mbe_20190201&nl=morning-briefing-europe&nlid=567726720190201&te=1

[9] https://www.bbc.com/news/blogs-news-from-elsewhere-47041611