Is US CPI robust enough for a full-steam Fed?


Before considering CPI today, get a grip on PPI yesterday. On PPI, forecasters ex-pected 0.2% for the Dec month (after 0.4% in Nov) but got a drop of 0.1% instead, plus ser-vices down 0.2%. It's the first drop since Aug 2016. Year-over-year, PPI rose 2.6% after 3.1% in Nov and against a consensus forecast of 3%. Core PPI rose 0.1%.

How can we expect a hefty CPI today that will keep the Fed stuck to the March hike? In practice, the PPI data is not really a big obstacle to the March hike, but expectations for a rip-roaring economy are being pared back hard. See the chart on the next page. Not having the usual salu-tary effect is the comment from outgoing NY Fed Dudley, who said "expansionary fiscal policy and loose financial conditions raise the risk of economic overheating, dubbing three interest-rate increases in 2018 as a good projection" (Bloomberg).

And while the trajectory of CPI looks robust enough—second chart—forecasts for today's data indicate we will get the same rate of change and perhaps a little deceleration, not the acceleration that is required for a full-steam-ahead Fed. Bloomberg forecasts headline inflation is expected to have eased to 2.1% and the core rate staying steady at 1.7 percent. To be fair, European inflation is not accelerating, either, but growth is, implying acceleration sometime this year.



We have two trade stories but both keep circling back to Trump's "America First" mantra. Yesterday Trump gave a nearly incoherent interview to the Wall Street Journal (denying DACA is the same thing as Dreamers, among other gaffes). On trade, he said he will be flexible on the March deadline to com-plete the Nafta review, considering Mexico has a presidential election on July 1. But he keeps insulting Mexico. About the wall, "They can pay for it indirectly through NAFTA... We make a good deal on NAFTA, and, say, I'm going to take a small percentage of that money and it's going toward the wall. Guess what? Mexico's paying."

At a guess, nobody has told Trump about China's latest trade data. China reported imports fell dra-matically to deliver an even bigger trade surplus of $54.7 billion when $37.0 billion was forecast. The drop in imports was big enough to scare AUD bulls, since 35% of Australian exports got to China. As for trade with the US, see the chart from ACLS.


And we guess nobody has told Trump that Canada filed a complaint against the US at the WTO, either. Canada charged the US on some 200 instances of US wrongdoing in applying anti-dumping and anti-subsidy duties, and not just against Canada but also potentially against China, India, Brazil and the EU, according to Reuters. The complaint is worded in such a way that other countries can join. The WSJ names China, South Korea, Japan and Germany.

Reuters reports "The 32-page complaint faulted technical details of the U.S. trade rule book, ranging from the treatment of export controls to the handling of split decisions at the six-member U.S. Interna-tional Trade Commission. Canadian Foreign Minister Chrystia Freeland said the legal action was in response to the ‘unfair and unwarranted' U.S. duties against Canada's softwood lumber producers and part of a "broader litigation" to defend forestry jobs."

Yikes. Talk about poking the bear. "Under WTO rules, the United States has 60 days to try to settle the complaint, or Canada, which sends 75 percent of its goods exports to the United States, could ask the WTO to adjudicate. The United States has been under fire for years about the way it calculates unfair pricing, or dumping. It has already lost a string of WTO disputes after its calculation methodology was ruled to be out of line with the WTO rule book."

We think that at bottom, what got Canada's goat (and it takes a lot to get Canada riled up) is the US proposal to get rid of Nafta's Chapter 19, which allows Canada and Mexico to appeal America's anti-dumping and anti-subsidy tariffs. Chapter 19 gives at least the appearance of a level playing field. Get-ting rid of it on the grounds it "compromises US sovereignty" is BS, pure and simple. The US is behav-ing badly under Trump's direction and Canada is bringing it to the world's attention. Bravo. Wouldn't it be fun if the US botches its 60-day rebuttal window and all the other countries join Canada? Talk about a global thumbs-down judgment on Trump. This would presumably get his back up and he will go around saying "America Frist" all over the place, again. Trump might withdraw from the WTO in a fit of pique.

The economic damage to the US economy would be vast. We must assume that the Treasury and Com-merce Secretaries would try to talk him out of it, not to mention the Defense Secretary. One wag said it's the president's job to sell aircraft and arms to foreign countries. They won't be buying under these circumstances. Trade is a relatively small portion of GDP in the US, less than 15% vs. 45% for some others (EU). But because of the size of the US, the export sector is still the biggest one in the world, about $1.6 trillion (as of 2014). Granted, the EU has $3.4 trillion in goods exports, but that's spread out over 28 countries. We wouldn't lose all the exports, of course, but even 10% would be $160 billion, and that's not chopped liver. How many lost jobs is that? And we are not even going to think about the capital investment inflow that won't come no matter how low the corporate tax rate, or the divestment of US financial and real assets. In a word, catastrophe.

But we are reluctant to buy into hysteria over the Trump trade war scenario because Trump himself does not know what he wants. He seeks only to make a name for himself and doesn't give a hoot about the "facts," i.e., economic benefit or harm. He might dimly suspect that a trade war will trash the dollar and that can't be good for his reputation, although at the moment he decides, he may be thinking about promoting exports so a weak dollar would be okay. Or he might be flattered into thinking that backing off on ending Nafta will reflect nicely on him as "presidential." What we get will all be in the moment.

As for China, Trump secretly knows he is not as smart as they are. Anyone truly self-confident about his braininess doesn't go around telling everyone he is smart, let alone a genius. So he is likely fearful of what China might do to retaliate if Trump picks a fight with them. But then again, he might get so angry at being played by China—giving up real stuff in return for imaginary and never-delivered bene-fits—that he comes down hard on them and damn the consequences. Anyone who thinks he knows what will develop over the next three weeks on trade is delusional. Trump himself doesn't know.

The market has a pessimistic bias, because Trump's sense of self-interest is not the same as the self-interest of the country. Just this week he has changed direction twice, on a "clean bill" for DACA and on FISA. He even tweeted a condemnation on his own FISA bill at the urging of a conspiracy theorist on the Fox propaganda machine and had to be roped back into supporting it. He lied yesterday about TV newscasters writing to him in praise of his TV show the day before with members of Congress. This adds to the 2000 lies the Washington Post has documented as of last Tuesday, counting from the inauguration.

Commentators are taking this recent behavior as validation of the charges in the Fury book that Trump is losing his marbles. He is erratic and actually pretty dumb, and nobody in the White House dares to correct or herd him.

The Trump damage to the reputation of the presidency and the US as a country because of his racism will take decades to repair, if it can be repaired at all. Whole generations of Latinos and Africans will perceive the US as hostile to brown and black people. Just try getting cooperation on fighting terrorism from people you just said live in a shithole country. China must be rolling on the floor. The Chinese are not immune to racism but are the first and only people willing to invest serious money in African ven-tures and infrastructure.

Looking forward, we suspect Trump will make a lot of noise in order to create a distraction from the special counsel investigation and now the racist remarks drawing in so much condemnation. A trade war would constitute a seriously big distraction.

Trump seems to think that collusion with Russians is the only subject and repeats endlessly, sometimes multiple times in the same rambling sentence, that he did not collude. Okay, maybe not. But the special counsel has moved on from collusion to many other topics. If Trump paid the slightest attention to the basis for the Manafort charges, he would know that. In fact, the special counsel, judging from the ex-pert prosecutors he has hired, is also looking into the cyber connection between the campaign and Rus-sians, plus illegal financial transactions including possibly money laundering (like the suspiciously priced sale of a Florida mansion). Then there is the smoking gun—firing FBI director Comey. That act alone is obstruction of justice, according to many legal scholars.

Bottom line, we are seeing showmanship—and bad showmanship at that—in opposition to classic American principles like the rule of law and the most basic of economic principles. The blowback against Trump's lies and racism is a whole lot more than the usual liberal bleeding heart stuff. The fi-nancial press is neglecting the shithole story and trying to stay focused on the same old, same old like equity earnings, whether bitcoin is a bubble, commodity prices, and so on. But Trump is increasingly the story. His words and action have now shredded American credibility in foreign affairs, national se-curity, trade and the sustainability of the US position as world financial and political leader. Nobody wants this guy to lead anyone anywhere. Again, Trump is a one-man dollar negative. The dollar may recover a bit as the usual ebb-and-flow of positioning and new data pushes and pulls, but the dollar is toast.



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