Daily Comment (June 25, 2019)

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

[Posted: 9:30 AM EDT] It’s a slow news day so far this morning.  Lots of Fed speakers throughout the day.  Here is what we are watching today:

The Fed: There is a plethora of Fed speakers today (see below), including Chair Powell.  We did see the president continue to lambast the central bank.  We doubt we will get any new information from all these speakers; we note, for example, that Dallas FRB President Kaplan continues to hold his neutral position closely.  As we have noted before, the committee is divided along four lines—the pragmatists, the Phillips Curve hawks and doves (that’s two in our count) and the financial sensitives.  Neither group commands a large enough contingent to set a definitive policy path.  In the absence of consensus, the Fed seems to be letting the financial markets dictate policy, which likely means easing in the near future.

Iran: As promised, President Trump implemented additional sanctions on Iran, including direct sanctions on its supreme leader.  Iran’s response indicated that these additional sanctions end any hope for diplomacy.  SoS Pompeo has been visiting nations in the region; it appears the U.S. is preparing for tanker escorts.  However, the president has indicated that he doesn’t like the fact that the U.S. is paying for protection that the rest of the world enjoys.  Although understandable, this is the burden of hegemony; if the U.S. does end this role, the world becomes a much more dangerous place.  Markets continue to bid up safety assets, with gold and bitcoin moving higher in recent days.  There are also reports that Iran has been increasing its cyberattacks against the U.S.

Trade talks: Hopes for a breakthrough this weekend are steadily being dashed.  Although officials on both sides continue to talk, the U.S. appears ready to either make a deal or add tariffs if a truce isn’t declared.  The U.S. is close to sanctioning Chinese banks for their trade with North Korea and added additional tech company sanctions as well.  There is also talk of forcing tech firms to move their design operations out of China, which would further hamper China’s ability to develop technology.  The Trump administration is also indicating that sanctions on China over the Uygur internment camps are “ready to go”; if implemented, these will infuriate Beijing, which sees the issue as an internal matter.  In other China news, the country is boosting pork imports due to the African Swine Virus, but so far has avoided buying U.S. pork.  The PBOC may be preparing for a rate cut.  If China cuts rates, expect the White House to further criticize the Fed for not easing policy.

Brexit: Boris Johnson is dealing with the travails of being the frontrunner for PM, replacing Theresa May.  Although we still expect him to win next month, he is mercurial enough to snatch defeat from the jaws of victory.

EU battles:The EU continues to struggle to name a new commissioner.  Germany is accusing French President Macron of being “anti-German.”  German leaders continue to stump for their candidate, Manfred Weber.  If Germany loses the EU commissioner position, look for Berlin to insist on getting the ECB presidency, which would be bullish for the EUR.

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