Daily Comment (February 24, 2017)

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

[Posted: 9:30 AM EST] During a panel discussion at the CPAC convention, White House Chief Strategist Steve Bannon and White House Chief of Staff Reince Priebus sought to quell rumors of a possible rift between the two. The discussion was mild-tempered, with both stating that they respect each other and are focused on helping President Trump fulfill the promises he made on the campaign trail. Even though Priebus kept the conversation light by restating the conservative platform, Bannon, on the other hand, caused a bit of a stir by claiming that he plans to “deconstruct the administrative state” and promote “economic nationalism.” We interpret these comments as essentially wanting to create an economy that looks inward for growth as opposed to outward, as well as taking the U.S. out of all multinational institutions. As we have noted before, Bannon’s goals are populist in nature and directly contradict the traditional conservative pillars such as economic self-reliance and multi-lateral free trade agreements. Although the two were able to get along on stage, we firmly believe they have fundamentally different worldviews and will continue to butt heads until one of them eventually wins out. As we see it, Priebus has the edge as the president seems to be more focused on deregulation and lowering taxes than he is on challenging current trade agreements.

In other news, it seems that President Trump’s cabinet members have decided to walk back some of his more controversial promises. Treasury Secretary Steve Mnuchin stated that he is not ready to label China a currency manipulator, but instead will regularly review foreign exchange markets to determine who is cheating. President Trump had campaigned on labeling China a currency manipulator when he took office. Meanwhile, Rex Tillerson and John Kelley sought to ease tensions with Mexico by stating that the U.S. will not seek mass deportations and the recent immigration policy change is not a “military operation,” which President Trump had described it as during a meeting with manufacturing CEOs. The opposing stances within the Trump administration are likely not a result of dissent but rather a way to set the groundwork for future negotiations. This is not the first time the Trump administration has tried to smooth over relationships with other countries. Two weeks ago, President Trump told Chinese President Xi Jinping that he would honor the “one China” policy; prior to taking office, President Trump had challenged the policy by taking a phone call from the Taiwanese president. The change in tone is likely a positive sign for equity markets as it appears that Trump will seek a more conciliatory tone when negotiating with foreign leaders. Trump’s brash style had led many foreign leaders to become more defiant so as not to appear weak to their constituents. Yesterday, Mexico’s Foreign Affairs Secretary Luis Videgaray threatened to not accept the measures of the immigration ban if the U.S. continues to make decisions without consulting them first. The change in tone should lead to a better negotiating environment going forward.

In Europe, negotiations between the United Kingdom and the Eurozone have become more complicated as Brussels stated it will seek €60 billion from the UK if it leaves the Eurozone. Although the bill has been referred to as an “exit charge,” it is likely also a result of the UK’s other commitments to the EU such as pension obligations and past pledges to the bloc’s budget and projects. Brussels also stated it will not start trade talks until it is given assurance on what will happen to EU citizens currently living in the UK. This signals that the EU may be taking a harder negotiating stance following the trigger of Article 50 of the Lisbon Treaty.

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