The Global Markets Weekly – 9/8/17

Posted September 10, 2017 by rvillareal

Weekend Risks, Some Good News Out of DC

Most attention this weekend will be on another round of severe weather in the southeast U.S., plus prominent geopolitical risks on the Korean peninsula. Last week’s massive data breach at a big-three credit bureau may make U.S. consumers think a bit about privacy concerns after nearly 150 million may have been impacted. A big shift is unlikely given freewheeling tendencies, but it could add to a coming negative shock in confidence data.

We did get some good news out of Washington. Surprise unity discovered in Congress after hurricane Harvey has changed the political dynamic a bit. With Texas suffering from the aftermaths of Harvey and Florida bracing for Irma (important Republican states), now was not the time to appear incompetent by shutting the government down to build a border wall, or defaulting on the debt. The White House asked for nearly $8B in initial hurricane relief, the first down payment on a total bill that might reach $100B for Harvey, about twice what was allocated for Sandy in 2011 but close to 2005’s Katrina related spending.  Despite Republican opposition, Trump cut a surprise deal Wednesday with Democratic leadership to avoid a near-term confrontation on spending and the debt. It sets up a three-month extension for both until December 15.

Looking ahead, the need for a fiscal 2018 budget is still especially important his year, as a budget resolution or blueprint is needed to avoid the sequester, which would cut spending authority by over $100B next year. Since the sequester is allocated equally among defense and nondefense spending, the process is very unpopular with both Democrats and Republicans. But the threat of a sequester has gotten them to prioritize spending and make some meaningful compromises over the past few years. Fiscal 2018 will be no exception as the can is kicked down the road a little longer, with another fiscal band aid to postpone big cuts.

A budget resolution is also needed for tax reform if the resulting tax legislation is to be passed with 51 votes rather than the super-majority of 60 in the Senate. Unfortunately, tax reform remains the most challenging item for Congress, and little progress has been made this year. Legislators will likely decide that tax cuts are easier to legislate than tax reform, as the latter creates winners and losers. As we pointed out in April, tax reform need not be revenue neutral in the fiscal 2018 budget.  In fact, the House version (which has not yet passed the House) includes $1.2 trillion in revenue changes over the next 10 years, allowing room for sizeable tax cuts, which would eventually be paid for with outlay reductions.  The Senate has yet to seriously start work on a plan.

We have more detail and deadlines in this week’s Focus.

• S.: Pre-FOMC blackout period begins so events are limited to economic data including accelerating August consumer prices (Thu) and retail sales (Fri), plus activity data including August industrial production and surveys including September U of M Consumer Sentiment (Fri) which will likely see negative Harvey gasoline price impacts in coming months.
• Eurozone: After last week’s steady ECB decision where euro strength made an expected appearance in Draghi’s commentary, July industrial output may show further y/y acceleration (Wed). German output was softer than expected in last week’s release, same with Spain.
• UK: Markets rightly have the Bank of England (Thu) on the sidelines for now.
• China: Key mid-month August activity indicators including retail sales, industrial output, and urban investment are due Thursday, along with lending figures set for release sometime during the week.

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