New Trump Tactics Help Greenback and Rates

In the face of much cynicism and pessimism about the outlook for
the Trump Administration’s agenda, we have repeatedly pointed out the resilience
of the system of checks and balances.
  Many of the more extreme positions have been tempered,
either on their own accord, such as naming China a currency manipulator or
pulling out of NAFTA or KORUS, or the judiciary branch, such as on immigration
curbs, or the legislative branch itself, as in limiting the President’s ability
to rollback new sanctions on Russia (and Iran and North Korea).  
The most important shift
since last November’s election has taken place recently. 
After increasingly frustratrated with
Republican legislators, who despite their majority, have ideological
differences, that have stymied the Administration’s agenda, Trump has switched
gears.  He is seeking, at least in some areas, to work with a Democrats,
with the hope of peeling off enough Republicans to forge a majority.  This
worked to buy more time, insofar as the debt limit and spending authorization
were extended until mid-December to ensure smooth emergency aid funding after
the recent weather calamities. 
It looks like this new
course can be extended in a few issue-specific areas, including DACA, and
possibly health care and tax reform.
   It may be premature to reach any hard and fast
conclusions, but the point is that the dance between the fractious and small
Republican legislative majority, a maverick President, and strident Democrat
minority has changed tunes, and many investors do not appear prepared for this.
Given prices, market
positioning, and sense of market psychology, we think the market is
ill-prepared for any one of these scenarios: tax reform, the continuation of
the Fed’s gradual removal of accommodation through increasing the Fed funds
target range, and Yellen being reappointed
.  We suspect the first two are more dollar bullish
than the third, but the reappointment of Yellen, assuming she would accept,
would provide continuity at an important time for the administration.
 Many in the media have emphasized the importance of loyalty for the White
House, but in the Fed’s case, dependability may be almost as good.  She is
a known quantity, there is a nearly 40-year old tradition of two term for the
Fed chair, and her views on regulation are very much what one would expect from
one of the most important regulators. 
Tax reform is of keen
interest, and the squabbling between the Freedom Caucus and the Tuesday Group
warned that what happened to health care reform was going to sabotage tax
 A new
bipartisan group has emerged (Problem Solvers) that may break the logjam.
 Although details are not clear, a new time frame has been offered.
 In about two weeks (~September 25), a broad framework will be announced
and this will be followed up by release of core elements that will
operationalize the framework by mid-October by House Ways and Means Committee.
This would leave only 28
legislative days for the remainder of the 2017 session. 
 The debt ceiling can be maneuvered
around for a few months, but the spending authorization needs to be
renewed/extended from early December, or face the risk of a shutdown of parts
of the government.   Sequentially, the FY2018 budget needs to be in place
to allow the parliamentary ploy that allows tax reform to pass with a simple
majority.   There is a bit a chicken-egg story, as some legislators (Freedom
Caucus) are reluctant approve spending authorization without a better
understanding of the tax changes.  
The US August CPI is key
economic report left today after the strong Australian jobs report and the
disappointing Chinese data. 
 The story is well known.  Price pressures have softened
this year in the US at both the headline and core levels. This has become a
concern for several Fed officials, though most (according to recent FOMC
minutes) still think it is a result of temporary factors, but seem increasingly
open the possibility of a structure shift.  
Headline consumer prices in
the US have averaged a monthly increase of 0.1% this year after 0.2% last
headline has not increased by 0.2% since April.  The median estimate in
the Bloomberg survey is for a 0.3% rise in August.  After what seemed like
a soft PPI report yesterday, some fear a disappointing report.  While that
is possible, the finished consumer goods component of the PPI rose 0.6%, which
augers against a downside surprise today.  
The core rate has not risen
by more than 0.1% since February. 
 The median estimate looks for a 0.2% increase in August.
 However, due to the base effect (last August core CPI rose 0.3%), the
year-over-year rate could tick down to 1.6% from 1.7%.  That might give
the bond market a pause with the 10-year yield near 2.2% after slipping to
almost 2.0% on September 8.  
Tomorrow the US reports
retail sales. 
weekly report of chain store sales may help to offset some of the drag of
weaker auto sales.  US consumption remains firm after a soft Q1,
underpinned by job creation, small but positive real wage growth, and the
increased use of credit.  
Perceptions of the risk of a
December rate hike have risen in recent days.
  Bloomberg’s calculation has increased the odds from
almost 27% at the end of last week to almost 39% chance now.   By the
CME’s interpolation the odds have risen from 31% to 46%.  
The most impressive thing
about Australia’s jobs report is not that it created more than 40k full-time
is a volatile number and follows a loss of nearly 20k full-time positions in
July.  More striking was the fact that the participation rate rose to
65.3% from 65.1%, while the unemployment rate was unchanged at 5.6%   This
may have helped the Australian dollar shrug off the weaker growth impulses from
China reported a series of
August data that disappointed, and  strengthens the idea that the world’s
second largest economy may have seen its mini-growth spurt lose momentum in
sales slowed to 10.1% from 10.4%.  The median guesstimate had been for an
increase.  Industrial output slowed to 6.0% from 6.4%.  Here too the
median forecast had expected an acceleration.  Fixed investment slows more
than expected to 7.8% from 8.3%. This (non-rural) investment figure is the
lowest since before China joined the WTO in 2001.  
The Bank of England meets
today, but we do not see this as a major driver. No one expects a change in
policy, even after the firmer than expected CPI reading earlier this week.
  The scope for surprise seems
limited, but it could appear in the vote.  Most expected a 7-2 vote, so a
6-3 vote would likely spur a quick pop higher in sterling.  
 Sterling is the only major currency that is currently higher against the
dollar this week (@ $1.3220).  

There are some chunky
options that expire later today that could impact the price action.
  There are options with a
notional value of 1.1 bln euros that are struck at $1.19 that expire today.
 In the yen, options struck at JPY110.50 ($840 men) and JPY111.00 ($894)
will be cut today.  There are about A$1.8 bln options struck at $0.8010
that roll-off later today.  


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