Monday Musings: December 9, 2019

Dec 09, 2019


Public Trust Credit Team

The U.S. economy remains relatively healthy, assisted by a strong November jobs report

According to the November jobs report released last week, the U.S. added 266,000 jobs to the economy, significantly higher than the 187,000 polled by Dow Jones. Additionally, the U.S. Department of Labor provided an upward revision of 13,000 and 28,000 jobs for September and October, respectively. The unemployment rate ticked down to 3.5% in November from October’s 3.6%, reaching a 50-year low and registering the twenty-first consecutive month with an unemployment rate below 4%. The strong jobs report is a bright spot in what has been a challenging year for the U.S. economy, as concerns about a possible recession earlier in the year prompted the Fed to cut its benchmark interest rate three times. The Fed has signaled that it does not plan on cutting rates further unless there is a material change in economic conditions. Considering the underlying health of the economy and current jobs report, we do not expect any changes from the central bank’s strategy as Fed policymakers gather this week for their final Federal Open Market Committee meeting of 2019.

Trade pressure ramps up as deadline looms and key international organization is crippled

As the main international body for trade policy, the World Trade Organization (WTO) faces a significant setback at the hands of the Trump administration. The appellate body that hears trade disputes between nations and makes rulings has seen its seven-member body cut to three members as the U.S. has stonewalled any new nominations over the past two years. Two of the remaining members’ terms end tomorrow, December 10, leaving the body with only one member and thereby making it unable to conduct its primary function. This is the culmination of an offensive led by the U.S. to essentially render the WTO powerless when facing a trade war between the U.S. and its trading partners. Without the appellate body of the WTO, no international power can rule for or against the various U.S. tariffs that have been implemented or announced or on any retaliatory tariffs against the country. 
On the U.S./China front, December 15, marks the deadline for the phase four tariffs that will broadly affect consumer electronic goods made in China. A Citi Global Markets survey from November found that 75% of market participants expected the tariffs to be delayed. Beijing mentioned it expects key tariff concessions from the U.S. in order to agree on any form of deal. With only six days left before the deadline, however, market participants still wonder what will/could make the Trump administration agree on a delay or some rollback of the announced tariffs.

Actions to mitigate repurchase agreement (repo) dislocations may be music to big banks' ears

The latest publication of the Global Systemically Important Banks’ (G-SIB) scores from three weeks ago showed that some of the largest banks’ balance sheets are very close to triggering counterproductive surcharges. In order to avoid these penalties, many G-SIBs opted not to participate in the short-term funding market via repo. Last week, Jamie Dimon, the CEO of JP Morgan, increased his calls for regulatory relief in order to alleviate funding market stress. With the Fed’s liquidity facilities oversubscribed and the threat of a re-occurrence of the fiasco related to Treasury auction settlements concurrent with quarterly tax payments next week (December 16), it seems that Dimon’s argument may be supported by market reality (or the reality that the large banks would like the regulators to see). Relief may come in the form of a standing repo facility, reduced liquidity coverage ratios, or some other alternative. In the meantime, it is likely to be a topic of substantial concern among money market participants and will remain a particular focus in the coming days.
All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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