FIG Topics of Interest



Now the Fed has to weigh again the balance between continuing to please markets and responding to continued domestic economic strength. On the one hand, it will wish to be cautious about reinforcing too much the notion of a full return to a “Fed put” that excessively decouples asset prices from fundamentals. On the other hand, it needs to refrain from again appearing to signal that it is not sufficiently sensitive to the risks to domestic economic activity of spillovers from weakness in the rest of the world and spillbacks from excessively volatile markets.

The best way to achieve this would be for the Fed to hint at greater policy flexibility than it signaled in December. Specifically, my expectation is that the central bank will use the statement and, especially, the press conference that follows the meeting to:

  • Indicate that the next revision of the blue dots and economic projections will again likely be down;
  • Point out that the balance of overall global economic risk has shifted more to the downside;
  • Reiterate its inclination for patience when it comes to future interest rate hikes;
  • Signal progress on the ongoing technical work on balance-sheet policy;
  • Keep open the possibility of altering both its journey and destination -- that is the pace of balance-sheet reduction over time, and the final equilibrium number.

With better technicals now helping markets, though not as much as in 2017, this approach should maintain a sense of a responsive policy underpinning for now, thereby limiting the scope for self-inflicted wounds. However, it won’t sustainably remove the longer-term policy dilemma facing systemically important central banks. For that, the Fed -- and even more so the European Central Bank -- needs the help of politicians to open up the way for more pro-growth policies on the part of other economic-policy-making agencies.

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“We’re talking, we’re talking,” said Schumer of New York after emerging from McConnell’s office.
Senate Majority Leader Mitch McConnell, who until now has publicly sat on the sidelines during the 35-day government shutdown, opened negotiations with Minority Leader Chuck Schumer Thursday after the chamber blocked two rival spending bills to reopen the government.

House Democrats postponed plans to unveil a proposal on Friday for securing the border without erecting new barriers. Homeland Security Committee Chairman Bennie Thompson of Mississippi said he expects it to call for more than $5.7 billion in spending on technology, personnel and other aspects of security.
Overcoming a veto would require two-thirds majorities in the House and Senate, and votes so far have shown support well below that amount.

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Is the shutdown freeze starting to thaw?
2 competing bills will be voted on in the Senate.  Both are expected to fail.

The first bill is President Trump's proposal for $5.7 billion in wall funding in return for a 3-year extension of protection for DACA dreamers.  However, there isn't likely to be even close to enough Democratic support to get to 60 votes on that bill since the legislation also makes it more difficult for new dreamers to apply for DACA protection and imposes significant new restrictions on asylum.

The second bill is a clean continuing resolution (CR) to temporarily fund the government through February 8 without wall funding. That same bill has already been passed by the House.  Senate Democrats will vote in favor of that bill, but the bill is not likely to get enough Republican cross-over support to get to 60 votes.

Keep Hope Alive!
There were reports late Wednesday that House Democrats may be ready to offer to raise the level of funding for border security to as much as  $5.7 billion from the current level of $1.6 billion, although the building of a wall would still be prohibited.  Mr. Trump is not likely to accept that offer.  However, the movement on both sides is at least a step in the right direction towards what will inevitably have to be a compromise.

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Mitch McConnell, the Republican Senate majority leader, reversed his previous position on Tuesday to allow the votes. He had said earlier that he would only let the chamber consider shutdown-related legislation that was backed by President Donald Trump and congressional Democrats. Mr McConnell called on senators to support a proposal put forward on Saturday by Mr Trump, which would allocate $5.7bn for border wall spending, and make a series of changes to the existing immigration system.
However, Mr McConnell also agreed to allow a short-term spending bill, backed by Democrats, to go up for a vote. That legislation would reopen the government until February 8 — giving Congress and the White House a two-week breather to find a solution to the crisis.

The short-term spending bill would keep funding at current levels and offer temporary relief to the roughly 800,000 federal workers whose agencies are affected by the shutdown and who have spent the past month either furloughed or working without pay. The same bill passed in the US House of Representatives this month.

To pass the Senate, either bill would require 60 votes, a tall order in a chamber where Republicans hold a slim 53-47 majority, and few senators have shown signs of breaking rank.


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“The party is facing long-term and complex tests in terms of maintaining long-term rule, reform and opening-up, a market-driven economy, and within the external environment,” Xi said, according to Xinhua. “The party is facing sharp and serious dangers of a slackness in spirit, lack of ability, distance from the people, and being passive and corrupt. This is an overall judgment based on the actual situation.”
President Xi Jinping stressed the need to maintain political stability in an unusual meeting of China’s top leaders -- a fresh sign the ruling party is growing concerned about the social implications of the slowing economy.

“Xi is seeing more and more red flashes on his monitor as things on many fronts go wrong,” said Ether Yin, partner at Beijing based consultancy Trivium China. “He wanted to draw the whole system’s attention to that.”
“That’s a cocktail that could be explosive as people realize the CCP is no longer delivering the goods on the social contract,” said Dennis Wilder, a professor at Georgetown University and former senior director for Asia on the National Security Council. “The slowdown of the economy to rates not experienced in the reform area is uncharted territory for this generation of leaders of the Communist Party.”

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It’s a grim week in global growth when the brighter take is that Italy’s more in stagnation than recession. Elsewhere, the tone is almost universally downbeat, with an OECD gauge affirming a deep sluggishness in the world’s major economies. Outside of sour trade data, China also saw its first car sales dip three decades, adding to a slowdown that has the government cutting taxes to nudge consumption. Germany barely dodged a recession at the end of 2018, and Mario Draghi sees the weakness across Europe even as he doesn’t want to apply the R-word. Economic policy uncertainty is at a record high globally, and the likes of Brexit and the U.S. government shutdown are adding dark clouds on the horizon. On a hopeful note, here’s a case for a pleasant surprise in the Philippines economy. And here’s a Bloomberg Economics analysis to help you read the tea leaves on global growth.
Esther George won the week for monetary policy doves, as the famously hawkish regional Fed chief called for patience on raising interest rates. That marked just the latest sign that 2019 will be a year of caution at central banks, outlined in our quarterly decision guide. China’s quietly cutting borrowing costs while holding rates. The Bank of Japan probably will cut its inflation forecast on cheaper oil, and here’s a guide to its language on the yen. Brexit chaos could delay action at the Bank of England, and markets already were coming around to a more dovish view there. Turkey, Indonesia and South Africa all kept rates on hold. 

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Housing Starts and Building Permit data postponed by Government Shutdown
Philly Fed Business Outlook (exp 9.5 v. 9.1% prior) 0730 hrs cst
Initial Jobless Claims (exp 220k v. 216k prior) 0730 hrs cst
Continuing Claims (exp 1734k v. 1722k prior) 0730 hrs cst
Fed Gov Quarles speaks at an Insurance Industry Forum 0945 hrs cst
4-week bill auction ($40b)
8-week bill auction ($30b)


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“They have every justification if they wish to not proceed in lockstep with their earlier increases but rather take a pause, and wait and see. It would not necessarily signal an end to rate increases, it would simply be a pause to evaluate.”
The Federal Reserve has plenty of reasons to pause its interest-rate increases in March to take stock of the economy, according to former Federal Reserve Bank of Atlanta President Dennis Lockhart.
“Monetary policy is about the real economy, not the financial economy. So the FOMC will do what it thinks is best for Main Street,” he said. “From time to time that may seem out of alignment with what markets are signaling. That’s very much the case today.”

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“It was like hitting the brakes when you’re going over the speed limit,” Redfin Chief Economist Daryl Fairweather said of the slowdown. “You can’t have prices growing faster than wages year after year.”
Home sales in the U.S. slumped in December, while prices inched up slightly, marking the smallest annual increase since the end of the last housing crash in 2012, according to data from brokerage Redfin.

The median home price rose to $289,800 in December, a gain of 1.2 percent, the slowest monthly pace since March 2012. Sales dropped by almost 11 percent, the biggest decline for any month since 2016, Redfin said. Previously hot metropolitan areas are cooling fast. Prices dropped 7.3 percent in San Jose, California.

The property market, which was surging for years as buyers fought for a limited supply of homes, is softening as inventories start to increase and buyers take more time. The jump in mortgage rates last year added to housing’s underlying affordability problem, putting an end to the era of rampant bidding wars.

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“It’s still our view that we’re not headed for recession in any of the major economies,” Goldman’s Peter Oppenheimer told CNBC’s Annette Weisbach at the Goldman Sachs Global Strategy Conference in Frankfurt.
“At the end of last year, there was a particularly sharp downgrade in expectations for the U.S. and while there has been a big tightening of policy and financial conditions in the U.S. … We don’t see a recession, but we do see a pretty sharp slowdown,” he said, adding that markets had “got too far into pricing a deeper downturn than we expect.” 
Oppenheimer’s comments come after general pessimism among market participants in the U.S. over where the market is heading amid rising interest rates from the U.S. Federal Reserve and geopolitical tensions, especially between the U.S. and China. 
A survey of 500 U.S. institutional investors by Natixis in December showed that the majority felt that the longest bull market in history will come to an end in 2019. Forty-one percent of those surveyed said they would be reducing allocations to U.S. equities. 
The growth outlook for 2019 is also beset with trade concerns, a slowdown in China, Brexit and political uncertainty in Europe making forecasts for the global economy tricky.

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