Daily Comment (October 2, 2017)

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] It was a violent weekend.  Here is what we are watching:

The mess in Catalonia: Catalonia did hold an independence referendum over the weekend in the midst of a strong central government crackdown.  Latest media reports suggest over 760 people were injured in clashes with central government riot police.  The vote overwhelmingly supported independence (over 90%) but that was mostly the result of anti-independence groups telling their supporters not to vote.  We are seeing a weaker EUR this morning, due in part to the chaos caused by this vote.  It gets even more complicated; PM Rajoy leads a conservative minority government that governs with occasional support from the liberal and center-left parties.  The opposition will be less likely to cooperate with Rajoy in the aftermath of his heavy-handed response.  So, it is quite possible the government will fall because of this event and Spain could be looking at new elections.

A massacre in Las Vegas: In a shooting somewhat reminiscent of the University of Texas massacre in 1966,[1] Stephen Paddock, a local resident, began shooting randomly from the 32nd floor of a local casino/hotel into a crowded music festival.  At the time of this writing, 50 people have died and over 400 are injured.  Although this event probably won’t have a major market impact, it is a horrific event and our thoughts and prayers go out to the victims.

“Save your energy, Rex”: The Sunday NYT reported[2] that the U.S. was in direct communication with North Korea, raising hopes that negotiations were actually making progress.  There have been reports for months that the U.S. was engaged in backchannel talks with North Korean officials; for the Secretary of State to openly reveal that such talks were underway was a hopeful sign.  However, in a series of tweets, President Trump essentially undercut any discussions.  How could any North Korean negotiator take Tillerson’s promises with any degree of certainty? We do note that there is a North Korean holiday coming on October 10th and there are expectations that the Kim regime will use the event to launch another missile test.  Trump’s comments raise the likelihood that a conflict occurs.  We still believe the odds remain low (>15%), but they are increasing.

Fed talk: President Trump is turning his attention to the three (and soon to be four) open Fed governor positions. Current Governors Jerome Powell and Kevin Warsh are said to be the leading candidates for Fed Chair.  Powell is a moderate on policy.  Warsh’s public statements have been hawkish but he isn’t an economist and our read is that he is more of a political operator than an independent voice on policy.  Thus, if the president wants a dove, Warsh can do that.  There are reports that Warsh may favor increased political oversight of the Fed; although central bank independence is accepted wisdom, in reality, independence is a function of anti-inflation policy.  For years, central banks were expected to accommodate fiscal policy and all central banks serve at the pleasure of some political master.  But, if we start to see a retreat from independence, the chances of reflation rise.

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[1] https://en.wikipedia.org/wiki/University_of_Texas_tower_shooting

[2] https://www.nytimes.com/2017/09/30/world/asia/us-north-korea-tillerson.html