- Congress has a busy schedule through Friday with impeachment, spending bills, and USMCA
- Sterling drops sharply as PM Johnson sets up no-deal Brexit threat for Dec 2020
- BOJ on Thursday expected to leave policy on hold
Congress has a busy schedule through Friday with impeachment, spending bills, and USMCA — Congress will be very busy ahead of Friday’s recess for the holiday. The House today is expected to vote to impeach President Trump, setting up a trial in the Senate in January. The markets have not been showing much reaction to the impeachment process since Mr. Trump is virtually assured of being acquitted by Republicans in the Senate unless some grave new evidence or testimony emerges.
On the spending front, the House yesterday approved the bipartisan spending bills necessary to fund the government for the remainder of the 2020 fiscal year (through Sep 2020). The Senate could approve the spending bills as soon as Thursday. White House advisor Kellyanne Conway on Tuesday said that President Trump “is poised to sign” the spending bills. Washington must approve the spending bills by Friday’s expiration of the current continuing resolution, or there will be a U.S. government shutdown starting on Saturday. The odds of a Saturday shutdown seem to be near zero.
On the trade front, the House Ways and Means Committee on Tuesday approved the USMCA agreement, forwarding the bill to the full House. The House is expected to vote to approve the USMCA on Thursday. The Senate is then expected to take up and approve the USMCA after President Trump’s trial in January. The Senate is expected to pass the USMCA even though there is grumbling among some Republicans about some of the provisions required by House Democrats as their price for passing the bill.
The markets will be pleased if Congress in early 2020 can deliver the final approval of the USMCA since that would remove a large amount of uncertainty about US-Mexico-Canada trade relations. The markets would finally escape from Mr. Trump’s threat to unilaterally withdraw from the current NAFTA agreement if Congress refuses to pass his revised treaty, which would be a disaster for major U.S. industries such as autos and agriculture.
Sterling drops sharply as PM Johnson sets up no-deal Brexit threat for Dec 2020 — GBP/USD on Tuesday fell sharply by -1.51% and gave back all of the rally seen after Conservatives won by a landslide in last Thursday’s UK general election.
Prime Minister Johnson on Tuesday changed his Brexit withdrawal bill to prevent an extension of the transition period past the current date of Dec 31, 2020. His previous bill had a provision for an extension of one or two years as a concession to get his bill over the finish line in the old Parliament. With his large majority in the new Parliament, however, Mr. Johnson reverted to his hardline Brexit stance and tried to guarantee that the UK will be leaving the EU transition period with or without a trade deal on December 31, 2020. That made hardline Brexiters happy and will put heavy pressure on both the UK and EU to quickly negotiate a trade agreement.
Mr. Johnson is expected to present his revised Brexit withdrawal bill to Parliament on Friday. Parliament is expected to approve his bill before the January 31, 2020 deadline, thus ushering in a smooth transition period until December 31, 2020.
Mr. Johnson’s move cooled the market’s hopes for a smooth Brexit process that arose after last Thursday’s big victory by the Conservative Party. However, Mr. Johnson’s hardline Brexit maneuver on Tuesday wasn’t particularly surprising as a means to pile the pressure on the EU to negotiate a trade deal quickly and to try to reassure his voters that he is serious about getting Brexit over with.
Yet anything that Parliament approves, Parliament can later retract, meaning that Mr. Johnson can still extend the transition period into 2021 or 2022 if he wishes. Mr. Johnson in September made his famous quote that he would rather be “dead in a ditch” than preside over a delay in the October 31, 2019, Brexit deadline. However, that is exactly what he did in October when he extended the deadline until January 31. 2020.
The bad news for the markets is that they will be subject to Mr. Johnson’s brinkmanship all next year as he loudly cajoles the EU into giving him a good trade deal. However, the EU has different ideas as they seek to force Mr. Johnson into some serious concessions regarding a level playing field (i.e., a similar UK regulatory and tax regime) if Mr. Johnson wants anything close to a free-trade agreement. EU officials yesterday expressed serious doubt about meeting an end-2020 deadline for a UK/EU trade agreement and said the EU must make sure they are ready for a no-deal Brexit at the end of 2020.
BOJ on Thursday expected to leave policy on hold — The market is unanimously expecting the BOJ to leave its policy on hold at its 2-day meeting that ends on Thursday. The BOJ is currently targeting its short-term policy rate at -0.10% and its 10-year JGB yield at zero with a range of +/- 0.20%. The BOJ has a nominal QE target of 80 trillion yen but the BOJ is calibrating the size of its actual QE purchases to make sure its 10-year JGB yield target is met.
The BOJ is expected to maintain its extraordinarily easy monetary policy at least through 2020 as it addresses near-term problems such as typhoon damage, the Oct 1 sales tax hike to 10% from 8%, and the weak export market. However, the pressure on the BOJ was reduced by the government’s recent $120 billion stimulus program, which will give the economy a shot in the arm. The markets are expecting Japan’s Q4 GDP to drop sharply by -2.6% (q/q annualized) due to the Oct 1 sales tax hike, but then rebound by +0.8% in Q1.
