Daily Comment (March 6, 2019)

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] It’s another very quiet news morning.  Equity futures continue to struggle.  Here is what we are watching this morning:

BREAKING: The ECB is reportedly cutting its inflation forecasts through 2021.  The reductions are said to be enough to allow the ECB to extend easy policy into the next decade.  The EUR fell on the news.

Slower global growth: International agencies tend to confirm what we already know; the OECD[1] today cut its world growth forecast to 3.3% this year, a drop of 0.2%, and reduced the 2020 forecast to 3.4%, a decline of 0.1%.  The agency cited Brexit, trade tensions and weaker European growth for the downgrade.  Falling world growth has been a factor in the FOMC’s pause.  Although the Fed officially shuns its global role, tied to the dollar’s reserve status, the committee is concerned that weaker global growth is affecting the U.S. economy.

Market confirmation: Bloomberg[2] is reporting that the president is pressuring trade negotiators to cut a deal with China to boost equity markets.  The president’s fixation with market performance has been well documented.[3]  The problem for the president?  Financial markets have already discounted a deal with China so the odds of a lift on official news of an agreement will be modest, at best, and could actually suffer from “buy rumor, sell fact” market action.  As we noted yesterday, trade negotiations are shifting from China to Europe, so new worries may emerge on that front.  Simply put, trade impediments are not capital friendly.

Italy and China: To the chagrin of the U.S. and EU,[4] Italy has formally endorsed China’s “one belt, one road” project.[5] In doing so, it becomes the first G-7 nation to endorse the program.  Italy’s economy has stagnated this century after joining the Eurozone, so it is likely looking for some sort of foreign investment boost.  We view China’s program as a form of imperialism; China has reached a stage of development where it has built more productive capacity than it can consume.  To deal with this problem, which left unattended leads to deflation and potentially a depression (the U.S. Great Depression occurred, in part, due to this issue), China is trying a myriad of tactics, including moving up the value chain (China 2025) and lifting exports.  The belt and road project is designed to use China’s capacity to build projects abroad and create dependent governments that will absorb China’s imports.  Imperialism was the way European nations dealt with this issue in the 19th and 20th centuries.  The other way to address the issue, mass mobilization war, hasn’t been tried yet (thankfully).

Brexit: U.K. negotiators are in Brussels trying to adjust the Irish backstop.[6]  Although we don’t see the EU making major changes to the current proposal,[7] we could see some assurances from Brussels that the backstop won’t be permanent and may allow the U.K. to negotiate its own trade pacts.  With the odds of a hard Brexit diminishing, votes next week will either lead to a grudging acceptance of May’s proposal or a delay.

North Korea:In the aftermath of the Hanoi summit, it appears North Korea is back in the missile business.  Pyongyang has started to rebuild its Sohae Satellite Launching station, which it had been dismantling before the summit.[8]  The missile issue is important because North Korea had stopped testing missiles and the Trump administration seemed to be moving along a path that might have offered Pyongyang aid if it gave up its ability to strike the U.S. mainland.  Returning to rocket building is likely an attempt to push the U.S. back into negotiations.[9]  However, we note that President Trump’s initial stance toward North Korea was openly hostile so if he feels like he was “played” by Kim Jong-un then he may very well return to that position.

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[1] https://www.wsj.com/articles/u-s-china-trade-deal-expected-to-give-limited-boost-to-growth-11551867256

[2] https://www.bloomberg.com/news/articles/2019-03-06/trump-is-said-to-push-for-china-deal-with-market-gains-in-mind

[3] https://www.nytimes.com/interactive/2019/01/21/business/trump-stock-market.html

[4] https://www.ft.com/content/4ba18efa-377b-11e9-b72b-2c7f526ca5d0?emailId=5c7f2fea2d8a680004667b0d&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22

[5] https://www.ft.com/content/17f91d24-3f60-11e9-b896-fe36ec32aece?emailId=5c7f2fea2d8a680004667b0d&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22 ; for background: https://www.ft.com/reports/china-belt-and-road-initiative?emailId=5c7f2fea2d8a680004667b0d&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22

[6] https://www.nytimes.com/2019/03/05/world/europe/brexit-irish-backstop-uk-brussels.html?emc=edit_mbe_20190306&nl=morning-briefing-europe&nlid=567726720190306&te=1

[7] https://www.reuters.com/article/us-britain-eu-weekend/eu-sees-no-brexit-breakthrough-before-the-weekend-sources-idUSKCN1QN10Y?feedType=RSS&feedName=worldNews

[8] https://www.38north.org/2019/03/sohae030519/

[9] https://www.washingtonpost.com/world/north-korea-rebuilds-rocket-engine-test-site-in-ominous-signal-about-attitude-to-talks/2019/03/05/de9c7e54-3faf-11e9-a44b-42f4df262a4c_story.html?utm_term=.ee7ab7aa113a&wpisrc=nl_todayworld&wpmm=1