Daily Comment (July 26, 2019)

by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EDT]

Happy Friday!  As slow as the news is trickling in today, it’s clear that we’re deep into the dog days of summer.  Nevertheless, we have seen a few interesting tidbits, like an initial estimate showing moderate economic growth and falling inflation here in the United States.  Overseas, it looks like we’re in for another weekend of mass political protests in Hong Kong.  Here’s what we are watching most closely:

U.S. economic performance: In the first of three regular estimates, U.S. gross domestic product (GDP) grew at an annualized rate of 2.1% in the second quarter, beating expectations but still marking a slowdown from the unrevised 3.1% rate in the first quarter (see additional details below).  Compared with the same period one year earlier, GDP was up 2.3%.  That means growth over the last year was slightly better than the average annual increase of 2.1% over the last two decades.  As usual, most of the growth over the last year came from increased personal consumption spending.  Finally, in a broad measure of inflation, the second quarter GDP price index rose at a rate of 2.4%, rebounding from its dip to 0.9% in the first quarter, which is still generally moderate.  We don’t think these figures will change expectations for the Federal Reserve’s policy meeting next week.  If anything, slowing growth coupled with moderate inflation should bolster expectations for a cut in the benchmark fed funds rate.

U.S. fiscal policy: The House of Representatives late yesterday approved the White House Democratic compromise bill to lift the federal government’s debt limit and establish high-level budget parameters through July 2021.  If the bill now passes the Senate as expected, it would remove the risk of a debt default or new government shutdown until after the 2020 presidential elections.  Separately, the White House announced additional aid to U.S. farmers hurt by the administration’s trade skirmishes.  The new program will provide up to $16 billion for crop farmers based on the estimated impact of foreign tariffs across their county.

U.S. trade negotiations: Evidence of easing trade tensions continue to roll in, though at a fairly low level.  The Chinese government has allowed several domestic firms to buy U.S. cotton, corn, sorghum, and pork without being subject to its 25% retaliatory import tariff.  Separately, the Japanese government announced that Economy Minister Toshimitsu Motegi will meet U.S. Trade Representative Lighthizer in Washington on August 1 to discuss a bilateral trade deal.  We still don’t expect any major trade deal with China in the near term, but both sides have an incentive to show at least minimal progress to keep the negotiations from derailing.

Hong Kong: Demonstrations against China’s influence in Hong Kong will continue this weekend, with protest leaders targeting the city’s airport in hopes of raising global awareness of their concerns.  Separately, activists are also planning a protest against the police department’s lack of action when organized crime gangs known as “triads” attacked and beat dozens of anti-China protestors last weekend.  As we’ve mentioned before, it looks like the city government, or perhaps Beijing’s liaison office, may have enlisted the triads to help control the weekslong protests.  That’s reminiscent of how government officials in Russia and other rogue nations work hand-in-hand with criminals to achieve their goals (especially in cyberspace).  If that’s really happening in Hong Kong, it would seem to reflect a new level of desperation for the government and a new low in its relationship with Hong Kong’s citizens.

North Korea: New imagery analysis from private sector researchers indicates that North Korea has continued to produce long-range missiles and nuclear weapons even as leader Kim Jong-un is negotiating a denuclearization deal with President Trump.  In addition, analysts at the Defense Intelligence Agency say the North Koreans have probably produced about a dozen new nuclear bombs since Kim and Trump first met in Singapore last year.  Separately, North Korean state media has explicitly tied yesterday’s short-range missile launches to its anger over upcoming U.S.-South Korean military exercises.  We suspect President Trump will continue to look past such developments for now, but if North Korean provocations continue, they could eventually force Trump to break off the talks.

Spain: Socialist Party leader Pedro Sánchez failed to win parliamentary support for his proposed government for the second time in the last three days.  It’s looking increasingly like Sánchez would have to form a coalition government with the far-left Podemos Party and get support that way.  If he can’t do that, new elections are likely to be called for November.

Russia: The Russian central bank today cut its benchmark short-term interest rate to 7.25% from 7.50%.  Echoing the concerns driving many central banks to loosen policy, policymakers primarily based their decision on reduced inflation pressure and weakening growth prospects.

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