Daily Comment (February 27, 2017)

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

[Posted: 9:30 AM EST] Over the weekend, parts of President Trump’s budget plan were released to the public. According to the New York Times, the president plans to increase defense spending and scale back non-defense spending, most notably the EPA and the State Department. The increase in defense spending should have a positive effect on equities as it should have a spill-over effect in other areas. Typically, military spending has led to increased manufacturing and investment in infrastructure as well as research and development; this will likely have a multiplier effect that trickles down to the rest of the economy. Increases in military spending have also been correlated with higher employment as more contract workers and factory workers are hired. On Sunday, Steve Mnuchin stated in an interview with Bloomberg that the current budget plan will not seek to cut entitlements “for now.” President Trump will elaborate on his budget proposal during his speech to the Joint Committee on Taxation in Congress on Tuesday. He is expected to run through a few obstacles to getting his budget plan passed, namely, the Republicans’ deficit concerns, Democrats’ almost devout opposition to the president and skepticism of the proposed border adjustment tax on both sides of the aisle.

Today, Wilbur Ross is expected to be confirmed as Commerce Secretary by the Senate. This confirmation would be a major boost to Steve Bannon’s populist camp. Ross is known for his skepticism of multilateral agreements and also shares Bannon’s affinity for bilateral agreements. He has been a vocal critic of China and has stated that his first priority once taking office will be to renegotiate NAFTA. In order to make his job easier, the Trump administration has already looked into ways to bypass the WTO dispute system. Ross’s appointment is likely to complicate relationships with some U.S. trading partners as it is unclear whether he will change the trade environment laid out by current cabinet members. Recently, Trump’s cabinet members have lessened some of their protectionist rhetoric in order to foster more hospitable trade negotiations. Currently, we are unsure if Ross is likely to continue along this path. Mexico’s Economy Minister Ildefonso Guajardo has threatened to leave the negotiating table if the U.S. puts a 20% tariff on cars.

In Europe, Theresa May has stated that she will decline a demand from Scotland for a second independence referendum. First Minister of Scotland Nicola Sturgeon was likely to demand a referendum the day Article 50 is triggered. Last year, Scottish citizens voted for the United Kingdom to remain in the EU. Although many believe that Scotland would still probably vote to remain in the UK if a referendum were to take place, May’s refusal to hold a referendum is likely to spark anti-UK sentiment. The pound fell 0.6% as a result of this controversy.

France’s 10-year bond yield fell to a one-month low as recent polls show Emmanuel Macron’s lead is expanding. Marine Le Pen is still expected to make it out of the first round of voting but markets suggest that she will have a hard time winning in the second round.  Last week, Marine Le Pen took a hit in the polls as her staff were investigated for misappropriation of government funds. Although we agree that Le Pen will likely lose the upcoming election, we believe that an upset is possible due to the rise of populism throughout Europe.

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