Daily Comment (July 18, 2018)

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Equity markets are quiet this morning; the biggest market moves are in currencies and commodities.  The dollar is up this morning in the aftermath of the Powell testimony, which is dragging commodities and emerging markets lower.  Here is what we are watching:

Google fined: Google (GOOG, 1198. 80) was hit with the largest fine ever levied by the EU, at €4.3 bn.  EU regulators accused the company of anti-competitive behavior in the distribution of its operating system.  This action is important on a macro level because government regulation may be the only threat to the market dominance of the major tech firms.  We do expect the company to appeal the decision but we would not expect the EU to reverse this verdict.

The Powell testimony: Although the testimony generally went according to script, there were two takeaways from the discussion that we see as important.  First, Powell continues to stress that the economy is robust and that economic strength justifies tighter policy.  Focusing on economic strength should inoculate the Fed from criticism from the White House.  Of course, any modest weakness might trigger a strong push from the White House for rate cuts.  Second, Powell signaled that the quarterly cycle of rate hikes will be ending at some point.  Powell appears uncomfortable with the notion of forward guidance and wants to inject some degree of uncertainty into monetary policy.  We agree with this position.  The move to holding press conferences after every meeting next year will give the Fed more flexibility to raise rates faster if necessary.  At the same time, it can introduce the potential for pauses in tightening as well.  We note that the implied three-month LIBOR rate from the two-year deferred Eurodollar futures did not change after the testimony; it still signals a terminal fed funds rate of 3% in two years.

May survives (again): U.K. PM Theresa May is becoming the Houdini of politics; this morning, she survived a vote[1] against the hard Brexit wing of the Tories by the pro-EU wing of her party.  The hard Brexit group appeared to be pushing May into a complete exit position which is opposed by a large group of her party.  The pro-EU faction forced a vote that could have brought down the government.  But, in the end, a group of Labour MPs[2] voted with the pro-EU Tories and so May lives on another day.

Putin:A Russian aircraft carrying President Putin violated Estonian airspace[3] yesterday, passing through the NATO nation without clearance.  This is a clear provocation after the recent events in Helsinki.

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[1] https://www.ft.com/content/30f3900e-89c4-11e8-b18d-0181731a0340?emailId=5b4ecafa59397d0004ab9281&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22

[2] https://www.ft.com/content/e8b1c98e-89df-11e8-bf9e-8771d5404543?emailId=5b4ecafa59397d0004ab9281&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22

[3] https://www.nytimes.com/2018/07/17/world/europe/putin-summit-plane-estonia.html?emc=edit_mbe_20180718&nl=morning-briefing-europe&nlid=567726720180718&te=1