by Bill O’Grady, Kaisa Stucke, and Thomas Wash
[Posted: 9:30 AM EST] Yesterday’s market action was a good example of what we expect to see at least through the summer. As we have noted since the election, President Trump needs to manage two constituencies, the right-wing populists (RWP) and right-wing establishment (RWE). Although there is some overlap in policy, there isn’t all that much. The RWP want lots of high paying, low skilled jobs and support trade impediments, immigration restrictions, entitlement protection and regulations designed to support their primary goal. The RWE want continued low inflation, which requires deregulation, free trade, open borders and entitlement reforms. Trump really can’t govern without placating both wings. If he only focuses on the RWE, he risks losing the White House in 2020 to a left-wing populist. If he only focuses on the RWP, he will struggle to get any legislation through Congress.
When the president seems to focus on the RWP, equities tend to drift, interest rates fall, gold rises and the dollar weakens. When the president pays attention to the RWE, equities rally, interest rates rise, gold prices slip and the dollar strengthens. If we expect the president to vacillate between these two constituencies, it means that markets will remain choppy. At this point, we don’t really expect either side to “win out.” Instead, we expect more of the same going forward. However, markets do eventually adjust. At some point, the markets will establish a verdict on who this president mostly represents. We don’t know when this will occur but suspect it will be sometime this summer.
On Feb. 20, EU finance ministers must approve Greece’s fiscal plans in order to disburse €7.0 bn in aid. The IMF has been pressing the EU to write off some of Greece’s debt, indicating that continued austerity is becoming politically impossible to sustain. The IMF position seems to be that Greece needs even tougher reforms but will be rewarded with debt forgiveness. The EU (read: Germany) opposes any such debt forgiveness; in fact, German Finance Minister Schäuble said yesterday that if Greece can’t meet its obligations, it should consider Grexit. At the same time, the EU is less insistent on reforms. Essentially, EU leaders want to settle a Greek deal before elections are held in the Netherlands, Germany and France (and maybe Italy) this year. If a Greek bailout is still being discussed during elections, it may be impossible to agree to anything because supporting Greece is politically unpopular. We expect a deal to get done by the 20th but, if it isn’t, conditions in Europe could deteriorate and the EUR could weaken.
The IEA is reporting that OPEC has achieved its best compliance in cartel history, achieving 90% of its promised cuts. The Saudis, showing their seriousness, cut production more than promised. The 11 members of OPEC that received a quota cut production by 1.1 mbpd to 29.9 mbpd. This strong performance is lifting prices this morning, offsetting a massive increase in U.S. commercial crude oil stocks last week.
President Trump and General Secretary Xi spoke on the phone yesterday. Xi insisted that no direct talks would occur until the incoming U.S. president reaffirmed the “one-China” policy, which President Trump did. This does appear to be a retreat from the earlier controversy over the congratulatory phone call from Taiwan president Tsai Ing-wen shortly after the election.
Finally, the White House announced it is demoting the position of chairman of the Council of Economic Advisors (CEA); the council is a three-member committee that was formed by President Truman. Usually filled by academic economists, it is responsible for publishing the Economic Report to the President and Congress. The White House is required, by statute, to submit this report 10 days after submitting the fiscal budget. It is unclear why President Trump has decided not to fill this committee; it does require Congressional approval and he simply may not want another fight. It would be difficult to find a reputable academic economist that would support trade barriers and thus, he may not want the internal dissention, although he doesn’t seem to have a problem with internal conflict. It’s quite likely Trump believes that he has enough economic firepower with Peter Navarro, Gary Cohn and Wilber Ross. Still, it will be interesting to see who authors the Economic Report to the President this year.