TradeTheNews.com September-October
2018 Outlook: Deadlines
Tue, 11 Sep 2018 20:49 PM EST
The next few months will see the culmination of a number of geopolitical issues
that have been building a ‘wall of worry’ for the financial markets. A cluster
of hard and soft deadlines will hit from now through the end of the year that
will realign the global political and economic landscape for years to come.
From the impending US Congressional election, to the due date for a Brexit
deal, to looming ultimatums on trade deals, these deadline will mark binary
moments that could either give markets the footholds to keep climbing or cause
the first stumble toward the next recession. These key unresolved risks along
with the historical trend for the September-October period to be especially
volatile are a recipe for some unnerving gyrations during the next couple of
months. If progress is demonstrated on these time-sensitive issues, then equity
markets may continue to melt up on the strength of corporate earnings reports
amid stronger fiscal stimulus and what is still a highly accommodative interest
rate environment globally.
The D.C. Political Calendar
In the US, the growing intensity of the political divide between Democrats and
Trump’s Republican Party may hit a crescendo in the next few months. With
control of Congress the President has been able to shape an agenda of lower
taxes, increased military spending, and cutting regulation. But Trump’s chaotic
personality has maybe made these victories harder than they should have been
and has contributed to consistently low poll numbers for the President outside
of his core supporters. The installation of another conservative jurist on the
Supreme Court this fall may be his last victory in a while as all indications
are the Democrats should retake the House in the mid-term elections (November
6).
While a Democrat-controlled House may provide the President with a foil to
grouse about obstructionism, it will effectively stall any further legislative
planks in his agenda. Assuming a Democratic win, the new Congress will not be
taking up additional tax cuts or discussing funding for a border wall.
Democratic committee leaders will also seek more oversight of Executive
activities and may even be emboldened to start impeachment proceedings (even if
it’s a lost cause without a supermajority in the Senate).
The other political shoe that could drop in the next few months is the
conclusion of Robert Mueller’s investigation of election meddling by Russia.
With a handful of Trump associates already facing jail time it has yet to be
seen if Mueller or federal prosecutors will net any bigger fish. The timeframe
on when the investigation will close remains murky, but the pressure is growing
with Trump’s lawyers threatening to cry foul if Mueller makes any major
announcements in the two months leading up to the election, and the President
himself saying since June that “he may get involved” in the FBI probe.
It should be noted that as part of his electioneering the President is also
threatening another government shutdown if he does not get the border wall
funding he desires. Current funding expires at the end of September, so if the
Trump holds fast there could be a temporary disruption of some government
services. Democrats will pounce on this as material for political ads, while
the President will hope that it burnishes his reputation as a tough negotiator
who is ready to shutdown “the swamp.”
Countdown to Trade War
Trump’s best hope at improving chances for the GOP in November would be to
cobble together one or more significant trade deals. US trade negotiators
reached a handshake deal with Mexico, but are having a harder time integrating
Canada into the accord. Canada seeks a win-win-win agreement, but has said that
no NAFTA is better than a bad agreement. PM Trudeau has stated outright that
Canada wants to keep the dispute resolution mechanism (‘Chapter 19’) and that
his country will not give in to US demands that it abandon dairy supply
management (which results in high tariffs on US dairy products). Negotiators
have given the impression that they are making slow progress, and if they can
overcome these two points of contention it seems possible a deal could be
reached by the end of September.
Markets have not reacted much to the Trump Administration’s tough talk on
trade, largely on the belief that no one wants a trade war and that all sides
will come to terms in the months ahead. That conviction may be tested if the US
moves forward with $200 billion in additional tariffs on China that are now
cleared and ready to go at any moment. President Trump appears to be holding
the new tariffs in reserve as leverage to get some movement out of Beijing, and
he recently threatened that another $267 billion could be teed up rapidly,
which would effectively be putting duties on just about all Chinese imports.
All of this gamesmanship with tariffs does not appear to be benefitting anyone.
Even though US metals manufacturers made upbeat comments about the trade
restrictions, shares of US Steel have dropped 40% from the moment the metals
tariffs were officially announced.
China is definitely feeling the pinch: the China Securities Journal recently
forecast that export growth in the second half of 2018 may decline to 2% (after
reporting July exports rising 12.2% y/y), and the Shanghai Composite Index and
Hang Seng have tumbled into a bear market. Amid these circumstances, China has
shown patience and has thus far given signals that it does not intend to use
currency as a weapon in the trade war. Nor has there been any sign of either
side giving concessions, and by all reports there is currently minimal
high-level contact between Beijing and Washington.
The lack of progress on US/China trade talks is also hampering negotiations
with North Korea. President Trump effectively stopped the countdown clock on
the ‘denuclearization’ of the Korean peninsula, canceling his Secretary of
State’s visit on the grounds that China is no longer helping the cause. The
implication is that North Korea will be put on the back burner until the
Sino-American trade dispute is resolved.
The US also continues to tangle with Europe and emerging market countries on tariffs,
with a large focus on the automobile and steel industries. The US and EU
announced a temporary ceasefire in late July with an agreement to discuss WTO
reforms and to work toward zero tariffs on non-auto industrial goods. The two
sides agreed to resist implementing any new tariffs while talks are ongoing.
Trade representatives from both sides will meet again at the end of September
with the goal of finalizing agreements on at least some areas of trade by
November.
Emerging markets are struggling with US trade pressures coupled with the strong
dollar, which have exacerbated already difficult local conditions in places
like Turkey and Argentina. Elections in Brazil (first round October 7, runoff
October 28) will be a chance to stabilize Latin America’s biggest economy,
maybe providing footing for the emerging markets. After years of the political
establishment being overrun by corruption, this election could be a seen as a
break with the past, though markets participants are not that keen on the
expected victory by one of the more left-leaning candidates.
World leaders will have several opportunities to hash out their differences (or
clash further) in the coming months. The UN General Assembly in New York,
scheduled for September 25, is often used by politicians as a platform for
policy speeches and a chance for bilateral meetings, and leaders will gather
again in Buenos Aires on November 30 and December 1 for the G20 summit.
Brexit Deadlines Loom
The clock is running out on Brexit talks, which appear to be moving along in
fits and starts, with some recent headlines indicating that EU and the UK have
eased some of their redlines in hopes of getting closer to a deal. The days
ahead will come down to whether the EU accepts the ‘Chequers’ proposal formulated
by UK PM May as a compromise. If Chequers can be used as a framework, then an
exit arrangement may still be reached by the legislative deadline that has
reportedly already been pushed out a month to mid-November. If all goes well,
an EU summit could be held in that timeframe to seal the deal.
Things get much more complicated, however, if the EU explicitly rejects the
Chequers proposal. The BOE’s chief economist Haldane recently noted the markets
are putting chances of a ‘no deal’ Brexit at about one-in-four, but that may
rise dramatically if the EU says ‘no’ to Chequers.
Should Chequers be spurned, pro-Brexit ministers are urging the PM to take a
harder tack, endorsing an agreement framed on the EU’s trade agreement with
Canada. The “Canada-plus” model envisions allowing nearly all goods to be
traded without tariffs, but, just as with the Chequers plan, this new idea does
not solve the most nettlesome issue in the talks: a resolution for the Irish
border that prevents the reintroduction of fixed customs checks at the border
that would undermine Ireland’s Good Friday Agreement. Unless UK and EU
negotiators find an answer to avoid a hard border in Northern Ireland soon,
they may not be able to get a withdrawal agreement in place by March.
In recent days the EU’s chief Brexit negotiator Barnier stated that he sees a
realistic possibility of reaching an agreement in the next 6-8 weeks. That
comes on the heels of reports that the EU was instructing Barnier to get a deal
done to avoid a ‘hard Brexit.’ An informal meeting of the EU 27 in Salzburg on
September 19 may be the first indicator that this timeframe is on track.
Current expectations are that the Salzburg meeting could report more Brexit
progress and confirm plans for a formal leaders’ summit on Brexit, likely on
November 13…if all goes well.
End of an Era
All of the short term deadlines of the next few months described above are
coming due in the context of the end of an era of extremely accommodative
monetary policy. The global economy is starting to hum again, but it is not
clear how long that will continue once the unprecedented central bank
accommodation is withdrawn.
Most major central banks have now made minor adjustments to edge away from
ultra-easy policy, but rates largely remain stuck near zero. The BOE is only
planning one more rate hike between now and 2020, the ECB is not expected to
start raising rates until September 2019, and the BOJ may not raise rates for
years.
Meanwhile, the Federal Reserve will extend its divergence from other global
central banks with another 25 basis point rate hike at the September 26 FOMC
meeting. That will take the key rate to over 2.00% for the first time since
2008, and bring it closer to the ‘neutral’ rate which is being estimated
somewhere in the 2.50-3.00% range. The September hike is locked in, but there
is still some dove/hawk debate over a fourth 2018 rate hike in December. The
Fed appears to be ignoring President Trump’s gripes about rates rising too
fast, and that may even stiffen the Fed’s resolve to move higher again in
December to demonstrate the central bank’s independence.
Markets have taken higher US rates in stride and that may continue as the Fed
works its way back to the ‘neutral’ rate. As this process continues, there
seems to be little discomfort with the flattening yield curve, perhaps in part
because Japanese and German bonds are holding down the long end of the curve.
The theory goes that the 2-10 year curve may not be as good a signal for
recession as in the past because of extraordinary global rate accommodation
over the last decade. However, it is possible that a yield curve inversion
could still trigger a stock market reversal, becoming a self-fulfilling
prophecy as traders who are trained to watch for the inversion react
to it.
It appears that US economic outperformance and the strong dollar will be the
dominant themes in the global economy for the rest of the year. America’s
economic strength has allowed the Fed to get far ahead of other central banks
in policy normalization, and now the market perspective may be shifting toward
predictions of how high rates will go. Fed Chairman Powell has signaled that,
with inflation looking very stable, once rates get to ‘neutral’ the Fed will be
more cautious about taking rates higher from that point, even if the economy
remains very strong. Barring any new shocks developing from missing one of the
geopolitical ‘deadlines’ described earlier, that should give comfort to the
markets that the next recession is not due any time soon.
Calendar
SEPTEMBER
3: UK Manufacturing PMI; US ISM Manufacturing PMI
4: UK Construction PMI
5: UK Services PMI; US ISM Non-Manufacturing PMI
6: China Trade Balance
7: US Payrolls & Unemployment
9: China CPI
10: UK Q2 GDP; UK Manufacturing Production
11: UK Goods Trade Balance
12: UK Claimant Count & Unemployment; US PPI
13: BOE Policy Statement; ECB Policy Statement & Press Conference; US
CPI; China Industrial Production
14: US Retail Sales; Preliminary Univ. of Michigan Consumer Sentiment
17: EU Final CPI; Empire State Manufacturing Index
18: UK CPI & PPI; German ZEW Economic Sentiment; BOJ Policy Statement
19: US Housing Starts & Building Permits; EU 27 meeting in Salzburg
20: UK Retail Sales; Philadelphia Fed Manufacturing Index; US Existing Home
Sales
21:
24: Various EU Flash Manufacturing & Services PMIs; German Ifo Business
Climate
25: US Conference Board Consumer Confidence; UN General Assembly in NYC
26: FOMC Policy Statement & Press Conference
27: German CPI; US Final Q2 GDP; US Durable Goods Orders
28: German Retail Sales; UK Current Account; UK Final Q2 GDP; EU Flash CPI; US
Personal Income & Spending; Chicago PMI
29: China Manufacturing & Non-Manufacturing PMIs
OCTOBER
1: UK Manufacturing PMI; US ISM Manufacturing PMI
2: UK Construction PMI
3: UK Services PMI; US ISM Non-Manufacturing PMI
4:
5: US Payrolls & Unemployment
7: Brazil election (1st round)
8: China Trade Balance
9:
10: UK Q3 GDP; UK Trade Balance; US PPI
11: UK Manufacturing Production; ECB Minutes; US CPI
12: Preliminary Univ. of Michigan Consumer Sentiment
15: US Retail Sales; Empire Manufacturing; China Q3 GDP; China CPI; China
Industrial Production
16: UK CPI & PPI; German ZEW Economic Sentiment
17: UK Claimant Count & Unemployment; EU Final CPI; US Housing Starts &
Building Permits; FOMC Minutes
18: UK Retail Sales; Philadelphia Fed Manufacturing Index
19: US Existing Home Sales
22:
23:
24: Various EU Manufacturing & Services PMIs
25: German Ifo Business Climate; ECB Policy Statement & Press Conference;
US Durable Goods Orders; UN General Assembly in NYC
26: US Advance Q3 GDP
28: Brazil election (2nd round)
29: German Retail Sales; US Personal Income & Spending
30: German Preliminary CPI; EU Flash Q3 GDP; US Conference Board Consumer
Confidence; BOJ Policy Statement & Outlook Report
31: EU Flash CPI; Chicago PMI; China Manufacturing & Non-Manufacturing PMIs
NOVEMBER
1: UK Manufacturing PMI; BOE Policy Decision & Inflation Report; US
ISM Manufacturing PMI
2: UK Construction PMI; US Payrolls & Unemployment
6: US Midterm Election
