Daily Comment (November 19, 2019)

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

[Posted: 9:30 AM EST] Episode #3 of our Confluence of Ideas podcast is now available.

It’s rather quiet this morning with a modest risk-on tone to the markets.  Yesterday, on the other hand, was active.  Trump and Powell met.  The government might shut down due to a lack of funding legislation.  Hong Kong remains in turmoil.  Bolivia is in turmoil too.  Tory poll numbers improve.  Trade news and other times from northeast Asia.  Here are the details.

The president and the chair:  President Trump and Chair Powell met at the White House yesterdayMeetings between these two officials are not historically all that unusual but have, at times, led to strong pressure from the White House.  Both the president and the chair felt compelled to offer a public comment.  The president continues to press the Fed for easier policy.[1]  Chair Powell continues to protect the independence of the Federal Reserve.  Of all the Fed related items out yesterday, the most intriguing, in our opinion, comes from Boston FRB Rosengren.  He opposed the last rate cut; in fact, he has opposed all the most recent cuts.  However, this isn’t because he is an inflation hawk.  He is part of a small but growing faction of what we call “financial sensitives” who worry that rate cuts to lift price inflation are destabilizing the financial system.  This stance is probably never going to dominate Fed thinking because it would put the bank in an impossible position; it would be setting policy based on financial conditions.  Imagine a chair indicating rates were lifted because the P/E was too high.  However, what makes the financial sensitives interesting is that they would take financial conditions into account when setting policy and if conditions are easy, they would be hawkish.  In some respects, Rosengren, Brainard and Evans are perhaps the three FOMC members that would be the most difficult for markets to take.  As a matter of record, neither Rosengren or Evans will be voters next year.

Government shutdown?  With all the focus in Washington on impeachment, the need to fund the government is being lost in the noise.  However, the potential for a shutdown in the next two weeks is rising.

China-Hong Kong:  China’s parliamentary committee on law and labor issued a statement of “strong dissatisfaction” with Monday’s Hong Kong court decision overturning the city’s ban on protest masks.  To make matters worse, a committee spokesman noted that under Hong Kong’s mini-constitution, China’s parliament has the final say on whether a municipal law is legal.  By implying yet another trampling on Hong Kong’s autonomy, the statement is likely to further inflame the ongoing anti-China protests, which have already been weighing on the city’s economy and financial markets.  Meanwhile, politicians and professors helped negotiate the evacuation of hundreds of protestors who had been holed up at the Hong Kong Polytechnic University.  Under the deal, police said they wouldn’t immediately arrest anyone under 18, and would be lenient to any older protestors.  However, approximately 100 protestors who don’t trust those assurances are reportedly still in the facility, and it isn’t clear what the police will do to get them out.  We also note that Congress is getting increasingly active on condemning China.  If a bill that condemns China’s actions in Hong Kong passes Congress, the president will almost be forced to veto it or see the trade talks fail.

Bolivia:  Although Bolivia’s current (and self-proclaimed) interim President Jeanine Áñez said she would operate a caretaker government until the next elections, in fact, she has moved to unwind much of the nativist and populist policies of her predecessor, Evo Morales, currently enjoying exile in Mexico.  Bolivians have noticed and are starting to express their opposition.

Trade:   In the China/U.S. talks, the latter continues to spin optimism while the former remains skeptical that a deal will occur.  Meanwhile, reports indicate the White House has waited too long to apply auto tariffs on European or Japan.  Japan’s lower house has passed the slimmed down U.S./Japan trade agreement.

United States-South Korea:  Negotiations on the financial burden sharing for U.S. military forces in South Korea broke down today, just six weeks before the current agreement expires.  The U.S. side reportedly walked out of the talks after the South Koreans balked at quintupling their current annual contribution of almost $1 billion.  He who pays the piper gets to call the tune, but the Trump administration finds little motivation in controlling the U.S. security environment around the globe.  Rather, its motivation is in reducing the costs of global hegemony, even if that risks damaging relationships with allies like South Korea or Japan.

United States-North Korea:  State media in Pyongyang claims the Trump administration proposed resuming the U.S.-North Korea nuclear talks in December, ahead of the year-end deadline for new ideas set by Kim Jong Un.  However, the report didn’t say whether the North Koreans would accept the offer.

Iran:  The Islamic Revolutionary Guard Corps have threatened to crack down on the continuing protests against a hike in fuel prices.  The massive, violent protests suggest the renewed U.S. sanctions on Iran are creating social tensions as planned, though it isn’t clear whether the government will feel enough pressure to meet U.S. demands.

Eurozone Monetary Policy:  Almost 60% of German banks are now charging negative interest rates on at least some large corporate deposits, while more than 20% are doing the same for large retail deposits, based on new data.  The growing prevalence of negative rates in high-saving Germany is likely to generate stronger pushback against the ECB’s loose monetary policy, and help turn policymakers’ attention toward looser fiscal policy to stimulate economic growth.

Brexit and the elections:  PM Johnson reversed himself on corporate tax cuts, citing costs.  The Labor Party continues to strike a hard-left stance in its campaign for the December election, today releasing a hyper-intrusive, rigid plan for reining in business.  This may account for recent polling action showing a surge for the Tories.  Meanwhile the EU is warning Britain that a comprehensive trade deal by the end of next year is probably impossible, meaning that either a small deal is done, or hard Brexit occurs anyway.

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[1] This is nothing new.  We have nothing in the historical record of a president begging the central bank for higher rates.