Daily Comment (March 9, 2018)
by Bill O’Grady and Thomas Wash
[Posted: 9:30 AM EST] It’s employment data Friday! We detail the data below but the quick summary is “shocking.” Wage growth moderated and payrolls came in stronger than expected. In the household survey, the unemployment rate remained at 4.1% but that masked massive increases in employment and the labor force. Employment in the household survey jumped 785k, but the unemployment rate remained steady due to an even more impressive rise in the labor force of 806k. Thus, both the participation rate and the employment/population ratio rose sharply. The data does indicate that there is still ample slack in the labor market and thus should cool worries about inflation. Here are the other items we are watching:
Trump to Pyongyang: Just a few months ago, we were worried about war on the Korean Peninsula. Now, the president is going to meet with Kim Jong-un. This will be the first time in history that a sitting U.S. president will meet directly with the leader of North Korea. All of us are trying to sort out what this means but it is a clear high-wire act for both leaders. There is the potential for a game-changing agreement. One could imagine bringing peace to the Korean peninsula and pulling North Korea out of China’s orbit. Or, Kim could snooker Trump and get aid and sanctions relief while keeping his nukes. We can’t cover all the bases in a Daily Comment; the basis for negotiations is enough for a full Geopolitical Report. But, while there is great risk of failure, there is also probably a better chance of success than the pundit class recognizes. Kim Jong-un could be looking for something different than his father and grandfather. Although the Kim dynasty is all about staying in power, the current leader may be more interested in boosting growth. Anecdotal evidence suggests he is more tolerant of market activity compared to his predecessors, and the young leader may have concluded he has more to worry about from Beijing than Washington. On the other side, President Trump seems to love the dramatic and he approaches negotiations with virtually a blank slate. We will have more to say on this in the coming weeks, but a peace deal with North Korea would be historic and a boost to sentiment.
Tariffs and trade: As expected, the president announced his steel and aluminum tariffs. Although there were serious concerns about the direction, in reality, the president preserved flexibility and we expect a surge of negotiations to establish carve-outs and exemptions. That doesn’t mean this president isn’t leaning toward protectionism; he is, but his core principle is flexibility. Thus, he wants to create conditions for lots of negotiations, which, he believes, play to his strengths of extracting concessions from negotiating partners. If our assessment is correct, we will see more trade-related measures but it is uncertain whether there is a specific goal (a trade deficit target, for example). As we noted earlier, if the president wanted a clean trade restriction, he could have accepted the border adjustment tax. That doesn’t appear to be his aim.
Who’s next at the NEC? The betting sites are leaning toward Shahira Knight, a former lobbyist, as the leading candidate for Cohn’s former job. She is currently the NEC’s tax expert. Others in the mix are Larry Kudlow, Peter Navarro and Kevin Warsh. All three have issues. Kudlow has been very critical of the recent tariffs, Navarro is seen as too controversial and it isn’t clear that Warsh wants the job. Our worry about Knight is that she may not have enough gravitas to stand up to the president. But, according to reports, it’s her job if she wants it.