Daily Comment (June 23, 2017)

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

[Posted: 9:30 AM EDT] News flow overnight was rather slow.  This is typical of summer.  The Senate is working on its version of health care and, no surprise, is dealing with the same problems the House faced—to make the bill palatable to moderates, it fails to garner votes from the hard right.  Senate Majority Leader McConnell can only lose two GOP senators to pass the bill and most counts suggest he has four ‘no’ votes.  Of course, negotiations continue and there is a chance something might get done.  However, we are not convinced that McConnell is all that driven to execute a deal and would much rather move on to tax reform.  If this is the case, he will be less likely to use his political capital to pass health care legislation in order to conserve it for tax changes.  If the Senate health care bill fails to pass, it might actually be bullish for equities because it would raise hopes of tax changes this year.

The Gulf Cooperation Council (GCC), the representative body for the Arab Peninsula nations, has given Qatar its list of demands.  They include closing Al Jazzera, reducing ties to Iran and closing a Turkish military base in the country.  The other GCC nations want reparations for unspecified damages inflicted by Qatar over the years.  We assume these would include security and social spending costs that came from Qatar’s support of the Muslim Brotherhood.  Qatar has indicated it won’t negotiate while under a blockade; the GCC has given Qatar 10 days to comply, although no consequences have been signaled if Qatar doesn’t acquiesce.  We would not expect Qatar to comply.  Turkey is increasing support and we would expect Iran to do so as well.  The Trump administration appears divided, with the president offering support for Saudi Arabia’s hardline position while Secretary of State Tillerson has pushed the parties to end the tensions.  Although this issue hasn’t had any real market effects, we are watching for signs of escalation which would be bullish for oil prices.

St. Louis FRB President Bullard made comments yesterday suggesting that the path of interest rate hikes is probably not justified, although he fully supports reducing the balance sheet.  Bullard has become something of a renegade on the FOMC, arguing that monetary policy operates in a “paradigm” that keeps rates within a certain range and these rates should stay within that range until the paradigm changes.  We believe that monetary policy is at a crossroads of sorts; the FOMC essentially uses the Phillips Curve to formulate policy and it doesn’t necessarily have a good measure of economic slack, a key component of Phillips Curve analysis.  Bullard, Kashkari and Evans are questioning the path of rate hikes, which would suggest they believe more slack exists.  Currently, Evans and Kashkari are voting members of the committee; next year, none of these three will vote, which may give a more hawkish bias to the FOMC.  Of course, by next year, we may have five new governors so the path of policy could change significantly.  If Cohn and other establishment figures within the Trump administration are influential in filling current and future vacancies, monetary policy could tighten faster next year.

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