Daily Comment (January 26, 2018)

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EST] Happy Friday!  President Trump just ended his speech in Davos and GDP came in soft.  Here is what we are watching this morning:

Trump’s speech in Davos: The speech can best be described as “selling America” as a place to invest.  As we discussed yesterday, if protectionist threats encourage foreign firms to invest in the U.S. to avoid trade impediments, it’s supportive for the U.S. economy.  We would expect some increase in inflation from sourcing production in the U.S. instead of overseas but it would probably not be excessive.  The postwar U.S. “contract” with the world was to be the global importer of last resort and the supplier of the reserve currency.  These policies have led to the development of the “rust belt” and harmed lower skilled labor.  President Trump is trying to adjust that policy by forcing foreign firms to build in the U.S. to gain access to the American consumer.  It isn’t known what effect that will have on the rest of the world.  Our expectation is that it won’t be as favorable.

The administration and the dollar: Comments from Treasury Secretary Mnuchin sent the dollar lower on Wednesday.  Yesterday, President Trump appeared to contradict his Treasury secretary by calling for a strong dollar.  Mnuchin protested that he has made similar comments before and nothing has happened (which is true).[1]  So, did we see a change in policy, as we speculated earlier in the week?  Who knows?  If the administration wants a narrower trade deficit, jawboning the dollar lower is one way to support this outcome.  After Trump’s comments yesterday, the dollar rallied but it has resumed its downtrend this morning.  Our position is that the dollar is overvalued on a longer term basis and is simply correcting from that valuation issue, but the confusion on policy is clearly boosting currency market volatility.

The TPP: President Trump indicated yesterday that he might be willing to revisit TPP if it was a “better deal.”  We suspect much of this is pandering to the globalists and Davos.  Negotiating a multilateral trade deal is difficult, and then to suggest that the U.S. could renegotiate the current agreement is very unlikely.  The media is reading much into this; we would not.

NAFTA: Negotiations continue on the agreement but there appears to be some movement on developing a new deal.  According to reports, Canadian negotiators offered some new frameworks on trade and U.S. negotiators were moderately positive.  Maintaining NAFTA would be supportive not only to U.S. financial markets but would likely boost Mexican and Canadian equity markets as well.

Mueller: The NYT reported that the president was prepared to fire Special Council Mueller in June but his White House counsel opposed the action and threatened to resign if he moved to do so.  To some extent, this isn’t a major surprise.  On the other hand, we find it interesting that this news is emerging now.  We suspect members of the White House legal team are trying to shape the narrative regarding how it makes them look personally.  As always, we mostly focus on how such events affect markets.  Clearly, it isn’t bearish for equities and it hasn’t been bullish for Treasuries, either.  But, this turmoil may be affecting the dollar and is probably supportive for gold.

Saudi Arabia: The FT[2] is reporting that the November corruption arrests are going to allow the crown to take direct control of the Middle East Broadcasting Center, the largest in the region.  While ostensibly this is a corruption crackdown, there is an element of asset grab by the king and the crown prince.  As we noted earlier this month, the Ritz-Carlton (MAR, 145.50) in Riyadh has reopened but the report suggests that some princes and other dignitaries are still detained in the facility, as the leader of the broadcasting firm, Waleed bin Ibrahim al-Ibrahim, was calling from the hotel.  So far, there has been little negative repercussions for the crown prince’s crackdown; instead, he is gaining support from ordinary Saudis who are unhappy with the privileges the royal family princes have enjoyed and, at the same time, the crown appears to be gathering important assets in return for releasing those arrested.

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[1] It is actually rather surprising this sort of thing hasn’t happened sooner.  New cabinet members, especially those without government experience at a high level, are accustomed to speaking frankly without much ramification.  Once a person becomes a cabinet member, their comments suddenly take on much more importance.  Usually, in the first year of the first term of a new president, so-called “gaffes” of truth are common but they become less common over time as the new cabinet members learn that what they say makes things (like markets) move.

[2] https://www.ft.com/content/a50075d2-0069-11e8-9650-9c0ad2d7c5b5?segmentId=a7371401-027d-d8bf-8a7f-2a746e767d56