Daily Comment (November 1, 2019)

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

[Posted: 9:30 AM EDT] The second episode of the Confluence of Ideas podcast is available!

Happy employment Friday and All-Saints Day!  We cover the data in detail below, but the quick take is that we have a strong report.  Payrolls rose 128k compared to a forecast of 85k.  The unemployment rate ticks higher to 3.6%.  In other news, China’s data surprises to the upside.  The Fourth Plenum ends.  The problems of hegemony.  Christine Lagarde’s tenure at the ECB begins today.  Here are the details: 

China data:  Earlier this week, the government’s PMI series were weak, with manufacturing remaining under the 50-expansion line.  In addition to the government data, Caixin, a media company in China, also provides a survey of manufacturing which tends to include more small companies.  In a marked divergence from the government’s report,  , the highest level in two years.  It is not unusual for the two series to disagree but, in the past, the government data tended to be higher than the Caixin report.  Thus, the Caixin report was generally held to be more reliable.  It isn’t clear what this report is signaling; the strength does diverge from the broader array of data coming out of China.  It may be that large firms have been more adversely affected by the trade war compared to smaller firms, which may be more sensitive to the domestic economy.  Regardless of the reason, we did see a lift in global equities off this report which offers some hope for global growth.

The Fourth Plenum:  The CPC meeting ended yesterday with little news.  The lack of information isn’t a surprise; usually, whatever was decided is revealed in the weeks after the meeting.  It does appear Hong Kong was on the list of items for discussion.  The leadership has indicated it intends to “perfect” the selection of leaders for the former colony.  That likely means less democracy.

The headaches of hegemony:  As the U.S. removes itself from the Middle East, Iran and Russia are vying for regional dominance.  However, both nations are getting a taste of just how much “fun” it is to try to bring order to a disorderly region.  Iran has steadily increased its dominance of Iraq.  This makes sense.  Throughout history, Persian empires had to capture what is present-day Iraq to project power.  Recent unrest in Iraq is proving to be a real pain for Tehran. The Iranian leadership sent one of its most respected (and feared) operatives, Qassem Soleimani, the head of the Islamic Revolutionary Guard Corps, to Iraq to try to save its hand-picked prime minister, Abdel Abdul MahdiThe ploy apparently failed as Mahdi has resigned after he lost support of Iraqi powerbrokers.  Iraq’s president, Barham Salih, has indicated he will draft a new election law and hold new elections.  Meanwhile, protests in Lebanon are threatening Hezbollah’s influence in Beirut.  The civil turmoil has risen to the level where Iran’s supreme leader, Ayatollah Khamenei, has expressed alarm about the situation.  Meanwhile, Russia will have to deal with the rising possibility that Syria and Turkey could stumble into a war.  Turkish forces have reportedly captured 18 Syrian soldiers.  Complicating matters further, this time for China, unrest is rising in Pakistan as well.

United Kingdom-Brexit:  In a radio interview with Brexit Party leader Farage, President Trump claimed “certain aspects” of Prime Minister Johnson’s new Brexit agreement with the EU would prevent a future U.K.-U.S. trade deal.  It’s widely understood that the U.K. would suffer from limited leverage in any trade negotiations with the United States, but Trump’s statement seemed to go beyond that.  Farage is reportedly a friend of President Trump, so it could be that Trump is trying to tip the scale in favor of Farage in Britain’s December election.  Or, Trump could be calculating that Farage could draw pro-Brexit voters mostly from the Labour Party, clearing the way for a decisive win by Johnson and his Conservative Party.

Meanwhile, bringing his campaign for the December election to full gear, Labour Party leader Corbyn finally started to lay out details on how he would handle Brexit if elected.  First, he vowed he would “get Brexit sorted out within six months.”  More to the point, he also laid out three key actions he would take to do that: 1) Request another withdrawal deal extension, 2) renegotiate the latest withdrawal deal, and 3) hold a second Brexit referendum.

United States-Mexico-Canada:  House Speaker Pelosi yesterday said congressional Democrats and Trump administration officials are close to an agreement in which she would allow a vote on the updated NAFTA treaty in return for adjusting the treaty to toughen its labor and environmental standards.  That should provide modest support for U.S., Mexican and Canadian stocks.

United States-India:  The WTO said India broke global trade rules by providing some $7 billion in export subsidies to its pharmaceutical, textile, steel and information technology companies.  If India fails to end the subsidies within six months, the ruling would allow the United States to impose punitive tariffs.  The ruling should be negative for Indian stocks in at least the short term.

A new leader for Islamic State:  IS has a new leader.  The group acknowledged the death of al-Baghdadi and the “nation’s” spokesman, Abu Hassan al-Mahajir, and announced a new leader, Abu Ibrahim al-Hashemi al-Qurayshi.  At this point, no one seems to have any idea who this person is, or even if he really exists.  It is likely that this name is a nom de guerre, so analysis will need to go behind the new name to find out who has adopted it.

Odds and ends:  The Trump administration is backing away from plans to freeze auto emissions targets, creating a middle ground between Obama-era plans and a complete reversal.  South Africa is seeing financial turmoil, with the SAR falling 3% over the past two days.  Moody’s is expected to issue a review today.  Japan has issued a warning over China’s growing military power.  The U.S. has added sanctions on four products that could be used to aid Iran’s military.  Sixteen nations are meeting in Bangkok at the China-led Regional Comprehensive Economic Partnership (RCEP) meetings.  The RCEP was China’s response to TPP.  The Basel Committee is starting to look at crypto assets and banking.

View the complete PDF