Daily Comment (November 30, 2017)

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EST] There was a lot of overnight news, but below are the stories we are following today:

Trade war with China?  The U.S. has formally declined China’s bid to be treated as a market economy within the World Trade Organization (WTO).  The move will likely heighten tensions between the two countries.  If China is named a market economy it would limit U.S. ability to impose duties on Chinese exports.  The Trump administration has consistently argued that China engages in unfair competition.  Yesterday, the Department of Commerce opened an investigation into Chinese steel, in which China has been accused of making its steel artificially cheap in order to push down global prices and price out competitors.  Although the U.S. has failed to place any trade restrictions on China, it appears to be signaling that it may do so down the road.  We will continue to monitor this situation.

Response to NK threat: Following North Korea’s recent missile launch, the U.S. has been urging the rest of the world to cut off ties with the rogue nation.  Yesterday, U.S. ambassador to the UN, Nikki Haley, threatened to disrupt Chinese oil shipments to North Korea if China continues to supply North Korea with oil.  It is unclear whether China will comply, but it does signify a dramatic shift in rhetoric.  China has been reluctant to cut off oil supply to North Korea due to the humanitarian crisis it might cause.  In addition, as mentioned in yesterday’s comment, cutting off oil to North Korea may not change the trajectory of its nuclear program.

Debate on tax bill: The tax bill is headed to the Senate floor for debate.  Although there seems to be support for the bill, recent revisions have led to speculation on whether it will pass.  Sen. Bob Corker’s (R-TN) insistence on a trigger component that would raise taxes if revenue requirements are not met has drawn the ire of some of his colleagues.  At this point, some Republicans are skeptical of the bill as there were many concessions made in order to satisfy various factions within the Republican Party.  Most notably, the desired 20% corporate tax rate is rumored to have increased to around 22%.  Assuming the Democrats keep a united front, the tax bill can only afford to lose two votes from Republicans to ensure passage.  The bill is expected to be put to vote by Friday at the latest.

Post-Brexit U.K.: Yesterday, the U.K. and the EU agreed on a Brexit “divorce bill” of about €50 bn, therefore setting up talks for a future trade arrangement with the EU.  In the wake of discussions, we expect the U.K. to begin to showcase itself as a viable place for investment and trade following its departure from the EU.  Yesterday, Mark Carney stated that the U.K. could abandon a rule imposed by the EU that placed a cap on bonuses for financial institutions.  Financial institutions have railed against the measure since its inception.

New Fed governor: Yesterday, President Trump nominated Marvin Goodfriend to the Fed’s Board of Governors; he will fill one of the four vacancies on the Board of Governors.  In the past, Goodfriend has advocated for more transparency and less independence of the Fed, in addition to his belief that Fed policy should be measured against a mathematical rule like the Taylor Rule.  Although Goodfriend has been labeled a hawk, he has warned that the Fed should be prepared to push interest rates back to zero; he has been known to favor negative rates over quantitative easing.  Goodfriend’s nomination will likely be viewed positively by Senate Republicans.

View the complete PDF