Daily Comment (March 4, 2019)

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Equities are moving higher this morning on hopes of a U.S./China trade deal.  China’s National Party Congress begins on Wednesday and the ECB meets on Thursday.  Here is what we are watching this morning:

Chinese trade: It appears the U.S. and China are nearing a trade agreement.  Reports suggest that in addition to lifting tariffs China is pledging to end some of its most onerous practices in terms of technology transfer.[1]  Some specific Chinese purchases of commodities also appear to be part of the mix.[2]  Although a deal isn’t done quite yet, it has been our position that both sides need a deal in the short term.  We have doubts the long-term issues will be resolved by this agreement, but it will relieve tensions and has already lifted equity markets.

In related Chinese news, the Xi government is planning a tax cut for manufacturers.[3]  We have seen China moving toward tax cuts instead of direct subsidies in recent months.  We are not exactly sure why this is the case, but it may be designed to appear less threatening to the West.

Trump and the markets: At CPAC, the president delivered broadsides against Chair Powell, and, interestingly, against the dollar’s strength.[4]  The push against Powell appears to be a scapegoating exercise; if the economy slumps, Powell will be assigned the blame.  We find the turn against the dollar much more interesting.  Last year, Treasury Secretary Mnuchin caused a stir at Davos when he argued for a weaker dollar.[5]  Although the president has, in the past, made comments about supporting dollar weakness, in this case, he rebuked his treasury secretary.[6]  We think at heart Trump is a reflationist, wanting to stimulate at all costs.  That would imply a weaker dollar as part of this policy.  So far, financial markets are not paying attention to the comment on the greenback; although the dollar did weaken overnight, it has recovered off the lows (taking precious metals lower as well).  We suspect financial markets want to see concrete action to weaken the dollar.  Intervention, which is rarely deployed, would be one way to accomplish this.

An interesting side note—today is Fed Independence Day!  On this day in 1951, President Truman reluctantly acquiesced to demands from the Federal Reserve to allow it to conduct monetary policy without the need to accommodate Treasury borrowing.  During the war years the Treasury would indicate what rate it wanted to pay for Treasuries and the Fed would buy up enough bonds to peg that rate.  Truman’s decision hasn’t always made presidents happy.  President Johnson was accused of assaulting William Martin,[7] the Fed chair at the time, and Nixon emasculated Arthur Burns by leaking lies about him.[8]  President Reagan ordered Paul Volcker not to raise rates in 1984.[9]  The relative peace that emerged due to Bob Rubin’s agreement with the White House during the Clinton administration has broken down under President Trump, but tension between presidents and Fed chairs is nothing new.

Huawei (002502, Shenzhen, CNY 4.26): Canada will proceed with extradition to the U.S. for Meng Wanzhou.[10]  We would expect China to ratchet up pressure on the Canadian government to prevent Meng from being sent to the U.S. to face charges.

Venezuela: Opposition leader Juan Guaido is returning to Venezuela amid signs that the opposition has become a bit more divided in his absence.[11]  Maduro may try to arrest Guaido on his return, although doing so would almost certainly trigger a harsh response from the U.S.  The president is a Jacksonian, thus dishonor always prompts a response.  The U.S. is considering emergency aid for the country if Maduro steps down.[12]

Brexit: Big votes loom next week.  On March 12, Parliament will vote again on PM May’s deal.  It will likely fail again given that it lost in historic fashion earlier this year.  The next day, Parliament will vote on whether it supports a hard Brexit.  That is unlikely as well.  On the 14th, a third vote supporting an extension of the deadline will be before legislators.  That will almost certainly pass (if the two earlier votes are rejected, it is the only logical conclusion).[13]  May has offered a spending increase targeted to areas that supported Brexit in what appears to be an open attempt to sway MPs.[14]  Overall, the odds of May’s Brexit deal are making a comeback as Brexiteers realize they either take her deal or face a long delay[15]; a sudden departure, the hard Brexit option, is pretty much dead.

Echoes of the Arab Spring?  We are seeing widespread protests in Sudan and Algeria.  In the former, years of misrule have led to rising protests; President Omar Hassan al-Bashir has reacted with increasingly harsh measures which have failed to end the unrest.[16]  Meanwhile, in Algeria, the ailing President Bouteflika has announced he will seek a fifth term.  Bouteflika is 82, paralyzed and in a wheelchair following a stroke in 2013.  He has not spoken in public for seven years.  In fact, he may not be in the country as he went to Switzerland earlier this year and has reportedly not returned.[17]  Despite harsh measures, the protests continue.  The government avoided participating in the first Arab Spring because it increased fiscal spending.  However, oil prices were near $100 per barrel in 2011 when the Arab Spring was in full swing.  With oil prices lower, the government can’t boost spending to placate the protestors.  Algeria is a major member of OPEC, producing around 1.3 mbpd and is an important natural gas exporter, mostly to Europe.  A crisis there could boost oil prices.

Debt ceiling: The U.S. officially hit the debt ceiling on Saturday;[18] the Treasury will begin instituting measures to keep the government running going forward.  The real crunch won’t hit until early Q4.

And, finally:Another issue that may have scuttled the U.S./North Korea talks is the fact that North Korea was engaging in widespread cyberattacks as the two leaders met.[19]

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[2] https://www.wsj.com/articles/u-s-china-close-in-on-trade-deal-11551641540 and https://www.nytimes.com/2019/03/03/business/us-china-trade-deal-trump.html?action=click&module=Top%20Stories&pgtype=Homepage

[3] https://www.bloomberg.com/news/articles/2019-03-04/china-is-said-to-plan-90-billion-cut-in-vat-for-manufacturers

[4] https://www.bloomberg.com/news/articles/2019-03-03/trump-using-fed-strong-dollar-complaints-to-stir-voter-base?srnd=premium

[5] https://www.cnbc.com/2018/01/24/dollar-tanks-the-most-in-10-months-after-mnuchin-says-weak-dollar-is-good.html

[6] http://fortune.com/2018/01/25/donald-trump-steven-mnuchin-us-dollar-davos/

[7] https://www.npr.org/sections/money/2019/03/01/699546781/episode-898-happy-fed-independence-day

[8] Mallaby, Sebastian. (2016). The Man Who Knew: The Life and Times of Alan Greenspan. New York, NY: Penguin Books.

[9] https://www.washingtonpost.com/business/2018/10/24/we-have-serious-problem-paul-volcker-is-worried-about-something-worse-than-inflation/?utm_term=.a86bb7f90d80

[10] https://www.washingtonpost.com/world/canada-to-proceed-with-extradition-case-against-huaweis-meng-wanzhou/2019/03/01/ab59a970-3c55-11e9-b786-d6abcbcd212a_story.html?utm_term=.aa25948af6ad&wpisrc=nl_todayworld&wpmm=1

[11] https://www.reuters.com/article/us-venezuela-politics/venezuelas-guaido-says-he-will-return-home-monday-after-latin-american-tour-idUSKCN1QK0LP and https://www.nytimes.com/2019/03/03/world/americas/juan-guaido-venezuela.html?emc=edit_mbe_20190304&nl=morning-briefing-europe&nlid=567726720190304&te=1

[12] https://www.ft.com/content/fa61453e-3d2f-11e9-8c2f-30761f19a974?emailId=5c7ca1c07c8e5e0004c3ebf0&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22

[13] https://www.ft.com/content/7d973c06-39c5-11e9-b72b-2c7f526ca5d0 and https://www.washingtonpost.com/business/economy/trump-trade-official-says-a-us-china-deal-wont-fix-all-of-beijings-anti-trade-policies/2019/02/27/aeb569b0-3a11-11e9-aaae-69364b2ed137_story.html?utm_term=.102b4b94f888

[14] https://www.thesun.co.uk/news/8552886/theresa-may-brexit-labour-voters-opinion/?editorialView=yes&utm_source=POLITICO.EU&utm_campaign=e59e0376eb-EMAIL_CAMPAIGN_2019_03_04_05_27&utm_medium=email&utm_term=0_10959edeb5-e59e0376eb-190334489

[15] https://www.reuters.com/article/us-britain-eu-ireland-extension/irish-pm-sees-brexit-extension-to-june-as-very-likely-sunday-independent-idUSKCN1QK09J?feedType=RSS&feedName=worldNews

[16] https://www.washingtonpost.com/world/africa/omar-al-bashir-has-ruled-sudan-for-30-years-his-latest-crackdown-could-be-his-last/2019/03/02/61b290a8-3ae2-11e9-b10b-f05a22e75865_story.html?noredirect=on&utm_term=.21ee1c0bfcd8&wpisrc=nl_todayworld&wpmm=1

[17] https://www.nytimes.com/2019/03/01/world/africa/algeria-protests-bouteflika.html?wpisrc=nl_todayworld&wpmm=1

[18] https://www.wsj.com/articles/congress-faces-fall-deadline-to-address-debt-ceiling-11551467259

[19] https://www.nytimes.com/2019/03/03/technology/north-korea-hackers-trump.html?utm_source=newsletter&utm_medium=email&utm_campaign=newsletter_axiosam&stream=top