Head-spinning Week Ahead; We’re Focusing on the Fed
Author: Greg Valliere
February 25, 2019
THIS ENORMOUSLY SIGNIFICANT WEEK has already begun with a bang, with markets celebrating President Trump’s decision to extend the March 1 deadline for a China deal. Trump’s trade hawks say privately that several issues aren’t resolved yet — including how to enforce a deal — but if The Boss wants a late March celebration with President Xi at Mar-a-Lago, he’ll get one. And that prospect is very bullish for investors.PROGRESS WITH CHINA isn’t the only major story in this head-spinning week. Here are likely highlights:
Jerome Powell’s testimony on Tuesday and Wednesday: The Fed Chairman will offer assurances that the economy is solid — no recession in sight — but analysts will focus on his views on inflation, in the wake of extraordinary comments last Friday by New York Fed Chairman John Williams. He disclosed that the central bankers are increasingly concerned that inflation has not risen to the Fed’s target of roughly 2%.
Williams said an internal study of the persistent inflation undershoot will culminate with a policy conference in June. Some Fed officials are concerned that they are not accurately factoring in changes in labor compensation and the workforce; they are considering whether there should be a policy “makeup” after periods when inflation fails to meet targets.
This new thinking on stubbornly low inflation could produce some very interesting Q&A for Powell this week, and should reinforce a perception that the Fed will stay dovish for months and months to come.
Donald Trump’s Summit with Kim Jong-un: Denuclearization by North Korea is a long-shot, but a pathway toward it is possible, along with a U.S. timetable to reduce sanctions. Trump’s hawkish foreign policy advisers worry that he may be too eager to deal, but we think he won’t come home empty-handed. It’s possible there will be a declaration ending the de facto state of war between the two countries, along with the establishment of “liaison offices” in the two countries, the first step toward diplomatic relations.
The spin coming out of this summit will be important for Trump, who makes no secret of his desire to win the Nobel Peace Prize. He needs some progress that could lead to eventual denuclearization, and he just might get it.
Michael Cohen Testifies: CNN will cover this gavel-to-gavel on Wednesday, Fox not so much. Amid all the political threats to Trump, the greatest may be from Cohen and probes in the Southern District of New York. Robert Mueller probably is a couple of weeks away from issuing his final report; Democrats are itching to impeach, but based on what we know now, we still don’t see 67 votes to oust Trump in the Senate.
THE BOTTOM LINE FOR MARKETS: We sense a new theme developing — monetary and fiscal policy may turn stimulative again, just what the economy needs after this winter’s soft patch. The Fed is sounding more dovish, and here comes a fresh spending binge as Congress wiggles out of strict budget caps later this year. Worrying about deficits is terribly passe.
THERE’S NO SHORTAGE OF CONCERNS — Brexit, possible auto tariffs, Venezuela, Mueller, etc. But moderate — and sustainable — GDP growth of 2-1/2% or even better is looking likely by spring and summer, and this week’s developments could bolster that optimism.
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