Daily Comment (November 2, 2018)

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Happy Employment Friday!  We cover the data in detail below, but the snapshot is that the data was very strong.  Payrolls and wages rose well above forecast.  Global equities are higher this morning on optimism that the U.S. and China can come to a trade agreement.[1]  Here is what we are following this morning:

A China trade deal?  President Trump raised hopes of a thaw in U.S./Chinese trade relations after noting he had a “long conversation” with Chairman Xi.  Trump indicated he plans to meet with the Chinese leader at the G-20 summit later this month.  This positive tone was one of the bullish catalysts that lifted equities.  However, it is always difficult to determine how much substance any of these announcements have.  We note that Trump and EU Commission President Juncker met this summer to great fanfare on trade; so far, nothing has been resolved.  On the other hand, a Bloomberg report this morning indicating the president has asked his cabinet to draft a possible trade deal with China might mean that the upcoming meeting could be real.[2]  Our position is that the Trump administration is changing U.S. policy toward China, treating the latter as a long-term strategic threat.  If our position is correct, any trade agreement made later this month will likely be superficial.  But, in the short run, it’s having the desired effect.  Not only have equity prices jumped, but soybean prices have rallied strongly and the CNY has appreciated.  The positive talk has offered markets some relief, which is helpful in the short run.

Oil waivers: As we head toward Iran sanctions coming into effect, the U.S. has granted waivers to eight nations.[3]  Although American policy is designed to hurt Iran and force new talks on its nuclear program and regional power projection, the U.S. fears a big jump in oil prices will hurt global growth.  The waivers should ease some of these concerns.  In addition, the U.S. is working to clear some political bottlenecks in the Middle East.  For example, disputes between the Kurds in northern Iraq and the Iraqi government have reduced oil flows out of Iraq.  The U.S. is working to bring the parties to an agreement to lift supply.  The Trump administration is also working with Saudi Arabia and Kuwait to lift output in the so-called “neutral zone,” a disputed region claimed by both nations.  If both issues are resolved, it could boost global output by up to 1.3 mbpd.[4]  It would be quite optimistic to expect all these barrels to return to market but any additional supply, combined with waivers, will likely keep oil prices mostly stable in the near term.

Brexit update: There has been a surge of optimism on Brexit mostly coming from London, but there are reports that the EU is softening its position on the Northern Ireland frontier, which would avoid a hard border.[5]  If this were to occur, the odds would increase for a workable Brexit strategy that would have minimum disruption.  It’s still not clear if May can gather enough Tory votes to pass a Brexit plan as she envisions it.  We believe it would get enough moderate Labour votes to pass Parliament, which would mean a deal was made but May’s position as PM could be threatened.  Although Tory backbenchers would want her ousted, given the narrow coalition that is holding the government in place, any action to remove May could lead to a no-confidence vote and elections.  And, given current conditions, new elections would almost certainly lead to a Labour government.  Any Brexit deal would be very bullish for the GBP.

A Friday oddity: Yesterday, at 8 am Eastern European Standard Time, the Finnish government released taxable income data on every Finnish citizen.  Dubbed “National Jealousy Day,”[6] the data dump lets every Finnish citizen see “who makes what.”  Although the government has released the data for years, now it can put it out electronically which makes searching much easier.  This transparency appears unique to any Western nation but the Finns seem to take it in stride. 

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[1] https://www.reuters.com/article/us-global-markets/asian-shares-rise-as-trump-xi-lift-hopes-on-resolving-trade-row-idUSKCN1N7033

[2] https://www.bloomberg.com/news/articles/2018-11-02/trump-said-to-ask-cabinet-to-draft-possible-trade-deal-with-xi-jnzjeqx4?srnd=premium

[3] https://www.bloomberg.com/news/articles/2018-11-02/u-s-said-to-give-eight-nations-oil-waivers-under-iran-sanctions?srnd=markets-vp

[4] https://www.wsj.com/articles/u-s-redoubles-efforts-to-resolve-oil-field-disputes-to-boost-global-supply-1541112738

[5] https://www.ft.com/content/ee75a230-dde7-11e8-9f04-38d397e6661c?emailId=5bdbdd938c7cba0004e3a767&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22

[6] https://www.nytimes.com/2018/11/01/world/europe/finland-national-jealousy-day.html?emc=edit_mbe_20181102&nl=morning-briefing-europe&nlid=567726720181102&te=1