The top financial stories underway: an outbreak of good news around the world has pushed up interest rates, countered in paart by paralysis in advance of the Fed meeting on the 30th, and concern for rapidly shifting US politics.
There were no meaningful new economic reports this week, all steady as she goes, no rising risks and no acceleration.
“Good news?” No, I have not been drinking. (Not yet.) First, Brexit is moving off dead center after two years stuck and dreading. Either Mr. Johnson’s deal will soon make it through Parliament, or an election and new Parliament — either way, movement is good. Beware twisted reporting by Europhile journalists. Example: whatever success Mr. Johnson may have or not, he is not the cartoon version of Mr. Trump pushed by Remainers.
Bond and currency markets are handy for providing hard evidence. Brightening Brexit this week has reduced fear and lifted the yield on Britain’s 10-year “gilts” from the recurrent low at 0.41% to 0.71%, and the pound’s exchange rate from $1.20 to $1.29.
A negotiated exit has lifted markets on the continent as well: the bellwether German 10-year reached its most-frightened low in mid-September at minus-0.71%, today up to minus-0.379%. Another positive development in the EU: Christine Lagarde will take over from Mario Draghi next month. She is so able and respected that she may break the fiscal log jam and persuade Germany to spend and borrow, if not a fiscal union of the EU.
If rates rise over there, they push up on ours.
Had enough good news? More: the non-deal with China is far better than another spasm of tariffs. If worried enough, we find optimism in strange places. The greatest force pushing down US rates in 2019 has been the risk of trade contagion. Any event which reduces that risk, and rates float upward.
Not so much good news as non-news: ordinarily, episodes of shooting push money to bonds for safety. Our ceasefire deal with Turkey reads as follows: “You can shoot anyone you want to and we’ll go away as fast as we can.” But markets do not care — there is nothing of financial note in Syria or Turkey, nor any immediate contagion to things like oil. The long run may be different, but that’s why we call it the long run.
All of the overseas good news is a relief for the Fed. Above all else these things have pushed the Fed to page four and invisibility, the Fed’s preferred state. If global rates rise, then far less pressure on the Fed to adjust ours down to theirs. Economic risk to the U.S. from the trade war has stumped everyone, so far limited to minor damage from manufacturing and farms (which does not feel minor to those people). The Fed has less reason to cut some more, to “take out insurance.”
The meeting on the 30th will produce volatility in credit markets, true up-down. If they cut, will that be the last one, exposing all of those who have bet on lower? Cut or no cut, will they speculate on how long they will stay wherever they are? The Fed’s village idiot, Mr. Bullard of St. Louis has already speculated on hikes next year to reverse this year’s cuts, even though he remains steadfast as the most determined dove in favor of deeper cuts now. Mr. Bullard’s conundrum, absurd as it seems is real in markets and at the Fed. What benefitteth a rate cut if we say simultaneously that we intend to reverse it?
Perhaps the Fed will be rescued by more overseas news driving it off the front page. Hunch: the Fed will stay on the easy side in words and actions, not remotely considering take-away hikes. There is more going on than trade war: the rejection of traditional Fed theory about inflation (Phillips Curve and productivity) is a big deal, preventing a repeat of the 2018 hike-mistake.
Then politics. The faint of heart or the angry or partisan had best turn eyes away. From the relentless anti-partisan standpoint in this space, a review of recent change, effect on markets, and good news from an unremarked quarter….
Impeachment gets the ink, as it should, and we may be sentenced to a Senate trial, likely acquittal but re-handicapped by the hour. But there is a bigger political shift
underway. It is one thing to fear one’s base (in either party) and unwillingly support the base’s favorite. But it is a big and different thing to fear the collateral damage from running alongside the base’s favorite. It is tough but possible to swim across the Mississippi, but not while carrying an anvil. The Trump risk now: political pros think about “down ticket” risk. No matter what fate for him in a re-election campaign, what of Congress and legislatures? It has been easy to stay in denial, but the election is racing closer.
If Mr. Trump is to go, if at all likely more so by Nixon’s route than Senate trial. Then a mad race among many able Republicans for the nomination, base control loosened.
Which would have explosive and beneficial effect on the Democrats. Their progressive base has been as controlling as the Tea Party. The debates among the crowd of candidates have been dominated by left-side proposals with no future in any Congress. These far-left policies are election winners only on the theory than anyone can beat Trump — sell out to the base to get nominated and walk into the White House.
That theory is likely mistaken, but certainly blown to smithereens if Mr. Trump is not there, and the Republican candidate is a capable politician. In that event the Democrats will have to redeploy as fast as the Republicans.
It may be foolish to hope, but in 2020 both parties may understand that the one running closest to its base will lose. Which could open a glorious, useful debate about public policies attractive to the center.
And to markets! We might have a real discussion of our fiscal affairs. How to reduce the cost of health care, neither by status quo nor socialized medicine. Make obvious trades: secure borders and tightened rules in exchange for citizenship tracks. Dream on: both candidates might embrace national respect, care, and compromise while still disagreeing.
Everyone in markets and business is watching politics now more than ever. We can’t avoid it! The randomness of the White House does that, no matter which base or center we may occupy. As the odds of a Trump exit have risen in the last weeks, no matter how unquantifiable, the marketplace intake of breath and caution is unmistakable.
The year-long downtrend is hanging on by its fingernails. Rates are not likely to spike the way they did last year, but we’ll need a steady diet of bad news to go lower, and maybe to stay put:
The Atlanta Fed Tracker is still just fine:
The ECRI, using completely different methodology gets to the same stability: