Daily Comment (March 13, 2017)

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

[Posted: 9:30 AM EDT] BREAKING NEWS: The Atlanta FRB announced that Raphael Bostic has been named as the new president, replacing the retiring Dennis Lockhart.  Bostic will take over the bank on June 5.  He was a housing official in the Obama administration and his academic work is mostly on the housing market.  He is currently a professor at USC.  He also spent time as an economist at the Federal Reserve in Washington.  He did his undergraduate studies at Harvard and has a Ph.D. from Stanford.  The Atlanta FRB will be a voting member of the FOMC in 2018.

There is a lot of impending news this week.  Here is what’s on tap:

The FOMC: The Fed meets Tuesday and Wednesday and is virtually certain to raise rates by 25 bps to a range of 75 bps to 100 bps.  With that outcome well telegraphed, the focus will move to the progression of future rates.  Therefore, the dots chart will take on unusually high significance when it’s released on Wednesday.  It is quite possible that the text of the release will read much more hawkish than the press conference; Yellen is more dovish than the committee and if the projection is three more hikes this year, and maybe three to four next year (all 25 bps), she will probably try to suggest that such an outcome isn’t necessarily her position.  If we get a negative financial market reaction (higher interest rates, weaker equities), we will be watching to see if the Fed is subjected to Twitter criticism from the Oval Office.

President Trump and Chancellor Merkel meet: The two leaders meet on Tuesday as the latter comes to the U.S. for a visit with the new president.  The Trump administration has been highly critical of the German government’s positions on immigration and trade.  The NYT reports that Merkel is bringing executives from several large German firms that have operations in the U.S. to show how German companies are major American employers.  Merkel has a generally good record of handling strongmen; she parries President Putin well and managed Italian President Berlusconi when he led Italy.

Dutch elections: Elections will be held in the Netherlands.  Geert Wilders will likely win the most seats but won’t be able to form a government.  Building a government without the most popular party will tend to undermine its mandate.  We will be watching to see if the polls underestimate the popularity of populists as we saw in the U.K. and U.S. elections.  An interesting side note developed over the weekend when the Dutch government banned a Turkish diplomat from visiting the country to rally support for an upcoming referendum on the Turkish constitution that would give the president (currently Recep Erdogan) sweeping powers.  President Erdogan called the Dutch “Nazis” for not allowing his representative to rally support.  Dutch officials were concerned about unrest just before their elections as civil disorder would likely lift support for Wilders, which is something the current government wants to avoid.  Both Erdogan and Wilders are trying to use the incident to boost their respective electoral chances.

The BOE and BOJ meet: These two central banks hold meetings on Thursday.  The BOE is facing increasing pressure to raise rates as the U.K. economy outperforms.  The BOJ has been toying with allowing a modest rise in the 10-year JGB, which is pegged to zero by the Japanese central bank.  We don’t expect much movement from either bank.

Article 50: U.K. PM May is working to dispense with two amendments from the House of Lords, one that would unilaterally guarantee the rights of EU citizens working in the U.K. and the other granting a meaningful vote on the final agreement.  If she can garner enough support for a “clean” bill in the House of Commons, Article 50 could be activated as soon as tomorrow.  That would begin the 24-month process for the U.K. to exit the EU.

G-20 Summit: The G-20 will hold a leaders’ summit in July in Hamburg.  On Friday, foreign ministers will meet in Bonn as a pre-meeting.  Although the leaders’ meeting will gain more press, actual work is done at the pre-meetings so the leaders can mostly sign off on things.  Russia is expected to use the forum to expand its influence.  The weekend media had several “where’s Rex” reports, suggesting U.S. Secretary of State Tillerson has been mostly sidelined.  If that is the case (and we have doubts), the U.S. could find itself at a disadvantage at the July gathering.

In other news, there are reports that Chairman Xi may visit Mar-a-Lago next month on April 6 and 7.  According to reports, there are no golf outings planned.  The U.S. wants China to rein in North Korea; China wants to keep trade open.  This could be a very important meeting for the global economy and for stability in the Far East.  The weekend FT reported a “civil war” in the administration between the economic nationalists (Bannon and Navarro) and the establishment (Cohn and Mnuchin).  The president seems to support internal strife among his staff but all indications still signal that the nationalists are dominant.  Finally, the CBO is expected to score the new GOP replacement for the ACA.  Given the high number of critical comments about the office, it looks likely that it won’t get a favorable score (which means that it will either increase the deficit or the number of uninsured Americans).  The level of opposition in the Senate to the Ryan replacement is very high and thus we may see an ACA repeal but there is no obvious replacement.

View the complete PDF