- U.S. shutdown focus turns to new House proposal after Senate sputters
- Next week’s Liu-Lighthizer meeting will be “determinative”
- ECB’s Draghi expresses caution about Eurozone economy
U.S. shutdown focus turns to new House proposal after Senate sputters — The Senate on Thursday failed to advance any bills to end the U.S. government shutdown, causing attention to turn to a plan by House Democrats that could be released Friday that involves $5.7 billion in border security, although no funding for a wall. President Trump is not likely to accept such a plan, unless the plan is designed to allow some of the money to be loosely defined as wall/fence/slat/barrier funding.
President Trump did show a little movement late Thursday by saying said that a CR would need to include at least a “down-payment” or a “prorated” down-payment on a wall, which hinted at something less than $5.7 billion.
There was some political movement in the Senate on Thursday as six Republican Senators crossed over to support the Democrats’ continuing resolution to reopen the government until Feb 8. The Republican cross-over was a larger than the usual two or three moderate Republican Senators who sometimes vote with Democrats (i.e., Maine’s Collins, Alaska’s Murkowski, Colorado’s Gardner). The three additional Senators voting in favor of the CR were Tennessee’s Alexander, Georgia’s Isakson, and Utah’s Romney. Only one Democratic Senator (West Virginia’s Manchin) crossed over to support President Trump’s spending bill with $5.7 billion of wall funding.
However, the Senate votes of 52-44 for the Democratic CR and 50-47 for Mr. Trump’s bill were not even close to the 60 votes that would be needed for cloture to advance the bills. The vote counts were even farther away from the 67 votes that would be necessary to override a presidential veto. Thursday’s vote made it clear that Senate Republicans will not be willing to override a Presidential veto unless the political shutdown pain gets much worse, perhaps weeks or months down the line. Late Thursday, there was news that McConnell-Schumer are trying to come up with some type of 3-week CR.
The whole political dilemma of course could be short-circuited if President Trump were to declare a border emergency and then agree to reopen the government. CNN reported late Thursday that the White House has already drafted a border emergency declaration and has identified more than $7 billion of funding that could be diverted to building a wall. The CNN report could have been an intentional leak by the White House to step up the political pressure on Democrats to compromise or it could mean that Mr. Trump might actually be close to going through with declaring the emergency to end the shutdown crisis.
Next week’s Liu-Lighthizer meeting will be “determinative” — White House economic advisor Kudlow on Thursday said that next week’s Liu-Lighthizer talks will be “determinative,” illustrating the high stakes for the talks next Wednesday/Thursday (Jan 30-31). By nearly all accounts, the two sides are close to an agreement for China to boost its buying of U.S. goods to reduce the US/Chinese trade deficit but are stuck on the difficult structural issues such as IP protection, forced technology transfers, more opening of markets, and state subsidies.
The Chinese strategy may be to placate the Trump administration with an agreement for a big increase in goods purchases and try to make enough promises on structural issues to get Mr. Trump to at least agree to an extension of the March 1 deadline. Mr. Trump has said that if there is no trade agreement by March 1, then he will raise the tariff to 25% from 10% on $200 billion of Chinese goods.
There seems to be little chance for a comprehensive agreement before the March 1 deadline considering that Commerce Secretary Ross on Thursday said, “We’re miles and miles from getting a resolution” of US/Chinese trade tensions. The best that the markets can probably hope for by March 1 is a partial US/Chinese trade agreement that removes some tariffs and extends the deadline for Mr. Trump to raise tariffs another notch, giving negotiators more time to work through the thorny structural issues. The U.S. stock market would likely see at least a modest rally on that outcome.
However, there is also a significant chance in our view that Mr. Trump will decide that he needs to turn the heat up another notch to get China to deal seriously on structural issues. If that is the case, then next week’s Liu-Lighthizer meeting is likely to go poorly and the odds increase that U.S. tariffs will go up to 25% after March 1, which would cause major negative fallout for the global stock markets.
ECB’s Draghi expresses caution about Eurozone economy as PMIs fall to 4-5 year lows — ECB President Draghi on Thursday acknowledged the recent weakness in the Eurozone economy but said that the ECB does not see a recession as a “likely event.” The ECB on Thursday switched its outlook from neutral to negative and said that the risks to growth “have moved to the downside.” The negative outlook was reinforced by Thursday’s news that the Markit Eurozone manufacturing PMI fell by -0.9 points to a 4-year low of 50.5 (weaker than expectations of unchanged at 51.4) and the Eurozone services PMI fell by -0.4 points to a 5-year low of 50.8 (weaker than expectations of +0.3 to 51.5).
The ECB at Thursday’s meeting left unchanged its key interest rates as well as its guidance that rates are expected to remain “at their present levels at least through summer of 2019” and that the ECB’s balance sheet reinvestment policy will remain in place for “an extended period” past the first interest rate hike. The ECB on Thursday disappointed the markets a bit by saying that there was only a limited discussion at the meeting of new TLTRO loans for banks, although the market is still expecting the ECB at its next meeting on March 7 to announce new TLTRO loans beginning in June.