- President Trump could make market-moving comments in his speech today
- Prospects improve for a smooth Brexit after Farage partially stands down
- Markets look ahead to Powell testimony on Wednesday and Thursday
President Trump could make market-moving comments in his speech today — President Trump today is scheduled to deliver a luncheon address at the Economic Club of New York that is focused on trade and economic policy. Mr. Trump today will reportedly deliver a speech and also take pre-approved questions from moderators. His comments could easily move the markets regarding anything he says about the US/Chinese trade talks or Fed policy.
Mr. Trump today could also mention tax-cut initiatives for next year during the presidential campaign season, although such tax cuts are not likely to get far with Democrats now in charge of the House. The only way that the Republicans in late 2017 were able to cut the minimum corporate tax rate to 21% from 35% and cut individual tax rates was by controlling the presidency and both houses of Congress, as well as avoiding a Democratic filibuster in the Senate by using the reconciliation process.
The markets today will mainly be listening for any comments by Mr. Trump on the likelihood of a phase one trade deal. Mr. Trump has recently pushed back on media reports that a tariff rollback is being considered, saying as recently as Saturday that reports of a tariff rollback are “incorrect.”
However, China seems to strongly believe that a tariff rollback is on the table. It remains unclear whether China will agree to a phase-one trade deal if all they get is a deferral of the Dec 15 tariff of 15% on the last $160 billion of Chinese goods. The Chinese economy is not likely to improve unless China gets some of the existing tariffs removed or reduced, i.e., the Sep 1 tariff on $110 billion of Chinese goods and last year’s 25% tariff on $250 billion of Chinese goods.
The markets would obviously be very pleased if Mr. Trump today unexpectedly used his speech to announce that a phase-one trade deal has been reached and that a date and location has been set for a signing summit.
Prospects improve for a smooth Brexit after Farage partially stands down — Market optimism for a smooth Brexit improved after Nigel Farage, leader of the Brexit Party, partially stood down on Monday by saying that the Brexit Party in the upcoming Dec 12 general election will not run candidates in the 317 districts that Conservatives won in the last election. Mr. Farage had previously threatened to run candidates in 600 of the Parliamentary districts, which could have badly split the pro-Brexit vote and produced many fewer Conservative Party seats.
Despite that partial stand-down, the Brexit Party will still make it harder for Prime Minister Johnson to win a solid majority in Parliament because Brexit Party candidates in opposition districts will split the pro-Brexit vote and prevent the Conservatives from winning back as many seats at they hope from Labour and Liberal Democratic districts. Mr. Johnson’s whole purpose in calling the Dec 12 general election was to try to win a wide Conservative majority in Parliament to ease the passage of his Brexit withdrawal plan.
Mr. Johnson apparently convinced Mr. Farage to partially stand down by reiterating his promise that he won’t extend the transition period beyond December 2020 even if there isn’t a trade agreement. If Mr. Johnson can push his Brexit withdrawal plan through Parliament before the deadline of January 31, 2020, then there will be a smooth transition period through December 2020 to allow time for a UK/EU trade agreement to be negotiated.
However, there is only limited hope that a trade agreement can be negotiated that quickly, which means that the UK could again face the threat of a no-deal Brexit in December 2020 if Mr. Johnson refuses to ask for the allowed 1-2 year extension of the transition period. Without a trade deal or a transition extension, the UK on December 31, 2020, would be left with a no-deal Brexit with a hard UK/EU customs border and a sharp rise in tariffs to WTO levels.
The odds that the Conservative Party will win a majority of the votes in Parliament at the Dec 12 election rose to 63% (4/7) on Monday from about 50% before Mr. Farage’s stand down, according to oddschecker.com.
Sterling on Monday rallied sharply by +0.63% to $1.2855 on the Farage news and the reduced chance of a no-deal Brexit. However, sterling remains 1.2% below the late-October 6-month high of $1.3013 as Brexit uncertainty prevails ahead of the Dec 12 election. The positive Farage news on Monday was unable to counteract Monday’s negative global stock market trend and the UK FTSE 100 index on Monday closed -0.42% lower.
Markets look ahead to Powell testimony on Wednesday and Thursday — Fed Chair Powell on Wednesday and Thursday will testify before Congressional committees in the semi-annual review of monetary policy. The markets are expecting Mr. Powell to simply reiterate his views expressed at his press conference after the FOMC meeting two weeks ago on Oct 29-30. Mr. Powell in his press conference said that Fed policy was in a good place after that meeting’s rate cut and that a “material reassessment” of the outlook would be necessary to justify any further rate cuts.
Market expectations for Fed rate cuts have fallen substantially in the two weeks since the FOMC meeting, both because of the Fed’s guidance that no more rate cuts are expected and because the markets have become more optimistic about a US/China trade deal.
The markets are now discounting only another 25 bp of rate cuts through the end of 2020, which is 8 bp less (i.e., about 1/3 of a rate cut) than the 33 bp of rate cuts seen right after the Sep 29-30 FOMC meeting. The market is discounting a negligible 5% chance of a rate cut at the next FOMC meeting on Dec 10-11.
