Daily Comment (October 6, 2017)

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Happy employment data day!  We cover the release in detail below but the quick view is the report is mixed; payrolls actually declined but the unemployment rate did, too.  The data was affected by weather events.  The dollar rose on the news and Treasury yields rose as well, while equities eased modestly.  Here is what we are watching this morning:

PM May is in trouble: The FT is reporting that up to 30 Tory MPs are pushing for PM May to resign.  They are being led by Grant Shapps, a former party chairman.  The broader party leadership is trying to suppress the rebellion, worried that the leadership challenge could lead to a no-confidence vote and new elections.  If elections are held, it is quite possible that Labour could win.  The GBP continues to slide on fears that political turmoil will stall potential rate hikes and the possibility of a Corbyn government.

Madrid continues to tighten its grip on Catalonia: Spain’s constitutional court has suggested Catalonia can’t declare independence and the head of the province’s police force has appeared in court under investigation for sedition.  Some large businesses in Catalonia have indicated they would quit the province if independence is declared.  In the end, independence usually requires applying one’s claims through force.  Catalonia doesn’t have the military resources to separate.  When a region finds itself in this situation, it usually petitions other nations to support its goal.  For example, the emerging U.S. benefited greatly from French support during the American Revolution.  The South may have been able to successfully secede if the British had come to its aid.  We don’t see any outside power willing to go to war with the rest of Spain to bolster Catalonian independence.  The bigger problem is that Madrid will now have a restive province that will sullenly defy Spain at every turn.  Madrid should have used the Canadian model; allow the vote to go on but shower Catalonia with “goodies” to sway the average voter that staying in Spain was a better deal.  PM Rajoy is winning the battle but setting up for a long-term war that should have been avoided.  This problem is weighing on the EUR.

Decertifying Iran: It appears the White House is planning to decertify the nuclear deal with Iran, forcing Congress to deal with the issue.  However, it also appears that the president won’t recommend new sanctions.  This will allow the White House to express its displeasure with the Obama-era agreement without triggering a crisis.  The president may not be able to avoid it.  Once Congress gets control of the policy, there is no guarantee they won’t push new sanctions to his desk, forcing him to either break the current deal or defy his own party.  In addition, it is highly unlikely that Europe or Russia will cooperate on new sanctions, meaning the U.S. will be implementing the action unilaterally.  About the only way the U.S. can make unilateral sanctions stick is if the American financial system is involved.  Of course, if the nuclear deal ends, we would expect Iran to rapidly move to acquire a nuclear weapon which increases the potential of further destabilization in the Middle East.  The White House is trying to weave a middle path—it wants to express its displeasure with Iran, which is a way to gain “points” politically without causing a crisis.  It’s a risky move because we doubt the president wants to go to war in the Middle East.

Quarles confirmed: The FOMC gained a new governor (finally!) as Randal Quarles was confirmed yesterday.  He will take over Dan Tarullo’s role as guiding bank regulation.  Quarles is expected to be much more bank friendly, especially compared to Tarullo.  As a voter, he will probably be moderate to hawkish.

View the complete PDF