The big story today will likely be the new ECB

Outlook:

Analysts agree, the big story today will likely be the new ECB “strategic review,” the first since 2003. We get a major overhaul of the economic outlook at the next meeting, an interesting schedule. The strategic review will focus on the role of inflation in decision-making (rather than the data itself), among other things, including climate change (see below). We will also see the extent of the difference between Lagarde’s style and Draghi’s. It might be argued that Lagarde doesn’t have to operate in crisis mode, like Draghi. Most observers are not expecting much, but we are not so sure. It would be nice to know how much pressure the hawks are exercising behind the scenes. A somewhat hawkish tone, or announcement of fiscal generosity, would be euro-favorable.

The FT writes that the ECB left rates on hold this morning, as expected, with the press conference still to come. “The brightening prospects for the eurozone, despite the fact that growth is expected to have slowed from 1.8 per cent in 2018 to 1.2 per cent in 2019, have prompted investors to shift from anticipating a rate cut this year to positioning themselves for rates to rise next year. A key signal on the potential direction of ECB policy will be whether it shifts from saying the risks to its growth outlook are ‘tilted to the downside’ to describing them as ‘neutral’.” (Meanwhile, the German constitutional court will decide whether QE is legal—in March.)

We smell a change in the air…. Risk aversion that used to hang its hat on one factor, Trump, now has a whole rows of hooks. This time it’s the Chinese virus (and a reportedly inadequate response) but with other uncertainties, including the Australian wildfires. If other factors are coming to the fore, that means the Trump factor is retreating. The UK has already said it needs the European trade deal more than the US deal. The EU is hitting back at Trump and promising equal retaliation. This is in the context of the US not having won much, if anything, with China, which didn’t bother to send the top guy to the signing. Trump won’t like so see himself relegated to the back row of multiple problems. He wants to be the only star on the stage. He’s losing it.

And he knows it. In a desperate move to regain the spotlight, Trump called the WTO top official to visit him yesterday and discuss a total overhaul of WTO. Trump claims to have secured agreement for a “very dramatic” change in the WTO structure and operations. WTO chief Alvarado pooh-poohed the drama and noted reform is not going to be easy. This looks like a classic fight between Trump and the WTO, with Trump not acknowledging other points of view and making threats if he doesn’t get his way. Nobody disputes the WTO is fairly dysfunctional but Trumpians tactics are never going to fix it. 

What this means for the dollar is certainly not clear—probably nothing much, so far. But keep in mind that Trump’s dominance of the headlines and the narrative, especially the risk-off stuff—is fading. Analysts are going to pretend, as they have been doing all along, that politics don’t count, anyway. Not so. The implication is that with the biggest risk-off factor downgraded, risk-on has far to go, still.

Tidbit: EC Pres von der Leyen said yesterday the EU will be more assertive and take the lead on climate change and data protection. The EU budget will contain €1 trillion over the next decade to help switch to sustainable energy (the European Green Deal) and Europe will be the "world's first climate-neutral continent" by 2050. Trade partners and border countries will be “encouraged” to go along. As for data, we don’t understand the goal, but it involves using non-personal data to help with innovation. Those are the two biggies but in addition, she wants to strengthen "credible military capabilities." Well, we complained that it might be China taking global leadership, now that Trump has squashed American leadership under his ugly shoe. More power to von der Leyen.

Tidbit 2: The WSJ reports “District of Columbia Attorney General Karl Racine sued President Trump’s inaugural committee and his family business, alleging that the committee abused its nonprofit status by overpaying the Trump Organization’s Washington hotel for event space to enrich the company.” Trump has been involved in 4095 lawsuits on either side, according to USA today. We couldn’t find a count of what cases are still ongoing, but Bloomberg has a summary updated in December. The topics include bank fraud, insurance fraud, emoluments, hush money, rape and assault, defamation, campaign finance violations, etc. and that’s not counting employment and contractor suits. The man is a trainwreck.

Politics: The Dem House managers put on a decent show yesterday, repetitive though it was for those of us who watched the original hearings. The commentary from TV talking heads was more interesting. It appears the Plubs want to insist on Hunter Biden as a witness (with no relevance to the subject of the trial) in exchange for Bolton, but then wrap Bolton’s testimony in a cloak of national security. “Trading witnesses” is not something done in a normal trial. National security is a great fall-back for Trump but Bolton’s testimony is going to come out in the end—in his book, if nowhere else—making the Senate look like witless dupes if they don’t handle it better.

In addition, when the defense starts next week, it has almost nothing to say. It can’t say the defendant is innocent because the defendant admitted the crime on TV. It can try for “he did it but it’s not a crime,” but the law says it is a crime and more than one government lawyer says so. Or it can say “he did it and it’s a crime but it doesn’t deserve impeachment,” and that’s what the Senate has to decide.

Here’s a problem: the Senators are supposed to stay in their seats and not talk or use their phones, with only milk or water available. But several of them are dissing the process by hanging out in the back of the room, out of their seats, or missing from the room altogether, while the House managers are presenting their case. So far the judge, the Supreme Court Chief Justice, is not enforcing the Senate attendance rules. Maybe it’s not his job. But we don’t like it. There is no bigger component of a Senator’s job than attending an impeachment proceeding. It’s disrespectful of the laws the Senators were hired to uphold and took an oath to uphold.

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