Monday, February 13, 2017

Asian Shares At 1-1/2-Year High, Yen Sags After Trump-Abe Meet

By Hideyuki Sano
February 13, 2017

Asian stocks rallied to 1-1/2-year highs on Monday, helped by renewed hopes over U.S. President Donald Trump's tax reform plans, generally upbeat global economic data and a rebound in some commodities.

The U.S. dollar rose against the yen on relief that Trump set aside tough campaign rhetoric over security and jobs in a relaxed meeting with Japanese Prime Minister Shinzo Abe, with no mention of currency policy or any protectionist measures.

"The global economy seems fairly sound now, compared to last year, as China is supporting its economy through fiscal measures. The downside risk in the U.S. economy is small due to Trump's policies," Masayuki Kichikawa, chief macro strategist at Sumitomo Mitsui Asset Management.

MSCI's broadest index of Asia-Pacific shares outside Japan gained 0.3 percent, with resource-related stocks in Australia leading the gains. Markets in Taiwan and Singapore scaled their highest levels since mid-2015.

Japan's Nikkei rose 0.4 percent.

European shares are expected to follow suit, with spread-better seeing a 0.2 percent gain in Germany's DAX and Britain's FTSE at open.

Comments from Trump on Thursday that he plans to announce the most ambitious tax reform plan since the Reagan era in the next few weeks rekindled hopes for big tax cuts.

Economic data from major economies has been upbeat, including Friday's Chinese trade figures while U.S. corporate earnings have been also solid so far.

On top of this, the Trump administration has provided some relief to global financial markets in the last few days, especially as the U.S. president has avoided ratcheting up protectionist comments that have rattled investors over the past month.

In the weekend meeting with Abe, Trump held off from repeating harsh rhetoric that accused Japan of taking advantage of U.S. security aid, stealing American jobs and "playing money markets."

Those cordial discussions drove the dollar as much as 0.9 percent against the yen to 114.17 yen.

It last stood at 113.69 yen, extending its rebound from 111.59 yen touched last Tuesday, which was its lowest level in 10 weeks.

A senior Japanese government spokesman said Abe and Trump did not discuss currency issues and that the U.S. President did not request a bilateral trade deal.

The official told reporters that a U.S.-Japan economic dialogue will be led by Japanese Deputy Prime Minister Taro Aso and Vice President Mike Pence. It will address fiscal and monetary policies as well as infrastructure projects and trade.

"We can expect a realistic approach as the dialogue will be led by Pence and Aso. It is reassuring that an unpredictable Trump is not in it," said Yasunobu Katsuki, senior primary analyst at Mizuho Securities.

Trump's change of tack to agree to honor the "one China" policy during a phone call with China's leader Xi Jinping last week was also received positively in markets as a more realistic approach, helping to boost risk sentiment.

Trump's tax cut hopes offered broad support for the dollar, with the euro slipping 0.1 percent to $1.0631, edging near Friday's three-week low of $1.0608.

The common currency has been dogged by fears about a strong showing for French far-right leader Marine Le Pen ahead of a presidential election.

The offshore yuan also weakened 0.2 percent to the weakest level in almost a month.

In commodities, copper hit its highest levels since May 2015 after shipments were shut off from the world's two biggest copper mines - due to a strike in Chile and an export's ban by Indonesia.

It last traded at $6,157 per tonne, up 1.1 percent on the day.

Other metals were also buoyed, with LME zinc advancing 0.9 percent to within sight of its highest levels in more than nine years and lead edging up 1.7 percent towards its five-year high hit in November.

Oil prices dipped slightly after strong gains on Friday on reports that OPEC members delivered more than 90 percent of the output cuts they pledged in a landmark deal that took effect in January.

International benchmark Brent crude futures fell 0.1 percent to $56.65 per barrel.

Article Link To Reuters:

Oil Prices Slip Back; Traders Await OPEC Report

By Jenny W. Hsu
February 13, 2017

Crude futures slipped on Monday as investors booked profits ahead of a key data that would indicate the progress of an ongoing multi-country effort to cut back oil production.

“Traders will be keenly awaiting the release today of the Organization of the Petroleum Exporting Countries monthly report. If production cuts are coming through as suggested, we should see oil prices push higher,” said ANZ Research.

On the New York Mercantile Exchange, light, sweet crude futures for delivery in March CLH7, -0.24% traded at $53.77 a barrel, down $0.09 in the Globex electronic session. April Brent crude LCOJ7, -0.11% on London’s ICE Futures exchange fell $0.06 to $56.64 a barrel.

Oil prices rose nearly 2% over the weekend after the Paris-based International Energy Agency said global crude supply dropped nearly 1.5 million barrels a day in January, and 730,000 barrels a day less from same month last year, with both OPEC and non-OPEC countries producing less.

The nearly one million-barrel decline by OPEC, if confirmed later today by the cartel, would mean a 90% compliance to the production cut pact, IEA said, estimating the cartel’s last month production fell to 32.06 million barrels a day.

OPEC on Nov. 30 had agreed to cut production from January by 1.2 million barrels a day to end a persistent oil glut. Later in December, Russia and other producers outside the group committed to take 558,000 barrels a day out of the market. The combined cuts would wipe out around 2% of the world’s daily production.

“We estimate there could be over 400,000 barrels of inventory draws in 2017 if agreed cuts are complied with during first half of 2017, draining excess inventories back to normalized levels,” Bernstein Research said in a note.

However, burgeoning production from other non-cartel players could impede the rate of decline. Collective production from Brazil, Canada, and U.S. is expected to grow by 750,000 barrels a day in 2017 and the net change for non-OPEC producers next year is close to a growth of 400,000 barrel a day, the IEA said.

Analysts said that even though the pace of growth in U.S. production is currently not fast enough to offset the decline rate elsewhere, a rapid improvement in drilling technology and increased investment in innovation means production from the U.S. remains a threat that could derail OPEC’s plan to move the market into a deficit.

American oil drillers activated eight more oil rigs in the week ended February 10, bringing the total U.S. count to 591, the highest number since October 2015, oil-field service company Baker Hughes said on Friday.

Nymex reformulated gasoline blendstock for March RBH7, -0.70% — the benchmark gasoline contract — fell 60 points to $1.5836 a gallon, while March diesel traded at $1.6691, 32 points higher.

ICE gasoil for March changed hands at $503.25 a metric ton, down $0.25 from Friday’s settlement.

Article Link To MarketWatch:

Things Might Be OK If Trump Borrows From Abe

By Noah Smith
The Bloomberg View
February 13, 2017

I have occasionally been accused of metaphorically hugging Japanese Prime Minister Shinzo Abe, but so far I’ve never had the chance to do so in literal terms. Not so Donald Trump, who gave the Japanese leader a brotherly hug at a meeting at the White House on Friday. But I hope that in addition to hugging the man, Trump embraces Abe’s approach to governing. In the past four years, Abe has created a template for a responsible, positive modern nationalism.

When Abe was elected at the end of September 2012, many on the Japanese left and in the foreign press denounced him as a dangerous right-wing nationalist. His grandfather, Nobusuke Kishi, served in the militarist Japanese government during World War II. He has worked to loosen the country’s postwar restrictions on its military, and his appointees have included Nanjing Massacre denialists. For these reasons, the “Abe is Hitler” memes flew fast and furious in his administration’s early days.

But actually, Abe has governed as anything but the right-wing revanchist many feared. Though his policies have clearly been aimed at strengthening Japan and boosting national pride, those policies have been responsible, smart, far-sighted and even liberal. If Trump adopts Abe’s blueprint, the U.S. will be in better shape than the president’s many critics fear.

First, Abe has shown that nationalism doesn’t mean keeping out immigrants -- it means viewing them as vital recruits whose contributions increase national strength. Since 2012, Japan has had a points-based immigration system similar to the one used by Canada, aiming to lure the world’s best and brightest. And under Abe, the government is taking even more steps to make it easy for skilled professionals to become permanent residents in Japan. The country’s universities are also allowing more foreign students. As a result of these and other initiatives, the total number of foreign workers in Japan -- including guest workers and permanent residents -- has gone up since Abe took power.

Trump has talked about implementing a points-based immigration system, so hopefully he will follow Abe’s lead. He should also focus on luring foreign students, as Japan has done, to save U.S. universities and the local economies that depend on them.

Abe has also worked hard to increase women’s participation in the economy. As a nationalist, the prime minister realizes that if women are able to work and raise families at the same time, the country gets stronger as a result. His “womenomics” program, much derided by the Japanese left and much of the foreign press, seems to be producing results. Japanese women are now more likely to hold jobs than their counterparts in the U.S. Abe has pushed for a major expansion of government-funded day care and increased parental leave -- two areas where the U.S. is a laggard. Under him the Japanese bureaucracy has introduced flex-time work schedules. Abe has also deployed powerful rhetoric to advocate women’s equality in the workplace, and has urged men to share more child-care duties.

It’s too soon to know the ultimate results of Abe’s push. But not only are Japanese women working more, they’re also having slightly more children. If the trend continues, it will help reduce the burden of the country’s aging population -- a problem the U.S. now shares with its Asian ally. If Trump, like Abe, were to push for paid parental leave and child-care subsidies, the U.S. might be able to repeat this success.

Finally, Abe’s tone and rhetoric have promoted a responsible, tolerant form of nationalism. After Abe’s election, many racist elements in Japan felt emboldened, perhaps hoping that the resurgence of nationalism would dovetail with their agenda. An anti-Korean group called Zaitokukai held marches denouncing Japan’s Korean residents, and online trolls unleashed a torrent of hate speech reminiscent of the so-called alt-right in the U.S. But instead of looking the other way, Abe denounced these groups and their divisive rhetoric. He formed a study group to consider stronger laws against hate speech. And under Abe, Japan’s police have stepped up monitoring of hate groups.

This is another area where Trump should borrow from Abe, and recognize that a strong nation is an inclusive nation. As in Japan, some U.S. hate groups have taken the rise of nationalism as a signal to step up hateful rhetoric and harassment of minorities. Trump should denounce and discourage these groups, and shouldn’t turn a blind eye to the threat of white supremacist terrorism.

Just as fears of Abe turned out to be overblown, fears of Trump’s nationalism may turn out to be exaggerated. That can happen if Trump sticks to Abe’s playbook, and pushes for a nationalism that is confident, pragmatic, inclusive and forward-looking. The more Trump looks like Abe, the less worried we should be.

Article Link To The Bloomberg View:

Senate Expected To Confirm Mnuchin As Treasury Secretary

By David Lawder
February 13, 2017

The U.S. Senate is expected to confirm former Goldman Sachs banker and Hollywood financier Steven Mnuchin as Treasury secretary on Monday, returning a Wall Street veteran to the top U.S. economic and financial job for the first time in eight years.

Mnuchin's appointment to Treasury signals the Trump administration's trust in bankers and other senior business executives after Democrat Barack Obama launched his presidency with career regulator Timothy Geithner running Treasury and a mandate to rein in Wall Street for its role in the 2007-2009 financial crisis.

Democrats, who boycotted Mnuchin's approval by the Senate Finance Committee, are expected to vote against Mnuchin. But no Republicans have declared opposition, setting the stage for a party-line 52-48 vote. The vote is set for around 7 p.m. EST.

Mnuchin's focus will shift from defending his foreclosure record in the aftermath of the financial crisis to tackling major issues such as tax reform, financial services deregulation and international economic diplomacy as major trading partners fret over President Donald Trump's "America First" strategy.

Mnuchin, 54, will need to build a team of officials quickly to handle a Group of 20 finance ministers meeting in March and make decisions on how far to roll back the Dodd-Frank Wall Street reform law enacted during the Obama administration with the aim of preventing a repeat of the financial crisis.

Treasury and White House representatives did not respond to requests for comment late on Sunday on a Bloomberg report that Trump would soon nominate David Malpass, a former economist at failed Wall Street bank Bear Stearns, as Treasury undersecretary for international affairs.

Malpass, a Trump campaign adviser who had been leading Treasury transition efforts, was seen as a leading candidate for the job, with experience from international economic posts in the Ronald Reagan and George H.W. Bush administrations.

His role at Bear Stearns could set off a new round of protests from Democrats over his forecasts in 2007 dismissing the hazards building in credit markets that fueled the U.S. housing collapse. Bear Stearns was the first major financial failure of the financial crisis in 2008.

Foreclosure Record Under Fire

Mnuchin, who left Goldman Sachs in 2002, has come under fire over his investor group's 2009 acquisition of another failed lender, IndyMac Bank, a deal in which the Federal Deposit Insurance Corp agreed to absorb most of the losses on IndyMac foreclosures. The bank, rebranded as OneWest, subsequently foreclosed on more than 36,000 homeowners, drawing charges from housing advocates that it was a "foreclosure machine."

Mnuchin grew OneWest into Southern California's largest lender and sold it for $3.4 billion in 2015. He has also helped finance Hollywood blockbusters such as "Avatar," "American Sniper" and this past weekend's box office champion, "The Lego Batman Movie," which took in $55.6 million.

In a last-ditch effort to derail Mnuchin's nomination, Democratic Senator Elizabeth Warren charged on Friday that Mnuchin "flat-out lied" to senators about OneWest's use of so-called robo-signings, a practice in which signings of court documents are automated without adequate review by bank officials.

But Mnuchin, who joined Trump's campaign as finance chairman in May 2016, has been well-received by Republicans because of his extensive finance experience.

"Objectively speaking, I don’t believe anyone can reasonably argue that Mr. Mnuchin is unqualified for the position," Republican Senate Finance Committee Chairman Orrin Hatch said at Mnuchin's confirmation hearing in January.

Article Link To Reuters:

Death Of A Businessman: How The Philippines Drugs War Was Slowed

By Karen Lema and Martin Petty
February 13, 2017

When Philippines President Rodrigo Duterte summoned his security chiefs to an urgent meeting one Sunday night last month, his mind was already made up.

His military and law enforcement heads had no idea what was coming: a suspension of the police force's leading role in his signature campaign, a merciless war on illegal drugs.

There was only one reason for the U-turn, three people who attended the Jan. 29 meeting told Reuters. Duterte was furious that drugs-squad cops had not only kidnapped and murdered a South Korean businessman, they had strangled him to death in the headquarters of the Philippines National Police itself.

"He was straight to the point - 'I am ordering you to disband your anti-drug units, all units'," said Defence Secretary Delfin Lorenzana, who was at the meeting in the presidential palace.

Duterte decided that the much smaller Philippine Drug Enforcement Agency (PDEA) would take over the drugs crackdown, with support from the military.

It was a stunning turnaround by Duterte, who had until then stood unswervingly behind his police force through months of allegations that its officers were guilty of extra-judicial killings and colluding with hit men in a campaign that has claimed the lives of more than 7,600 people, mostly drug pushers and users, in seven months.

The blunt-spoken president had repeatedly defied calls from United Nations, the United States and the European Union to rein in his war on drugs, calling them stupid and 'sons of bitches'. Duterte's aides were used to his mercurial style, but they were taken aback that the killing of one foreigner would be enough to stop him in his tracks.

One explanation is that relations with South Korea are of huge importance to the Philippines for development aid, tourism, overseas employment and military hardware.

But security officials said it was the audacity of the killing of Jee Ick-joo and the attempt to use the war on drugs as a cover for kidnap and ransom that triggered his decision.

"It's all about the Korean. That it happened at all, it's really that (which) pissed him off," Lorenzana told Reuters.

PDEA Director General Isidro Lapena, who was also at the meeting, hadn't seen it coming either. He said in an interview that the president had lambasted the police force and told them that the "deactivation" and purge of its anti-drugs unit was now as important as the drugs war itself.

Police Director General Ronald dela Rosa told Reuters that Duterte had been "really mad" about the incident and, after the meeting, the president publicly denounced the police force as "corrupt to the core".

"So Obvious"

The president's legal counsel, Salvador Panelo, said the president, a former prosecutor, makes decisions strictly on the basis of the letter of the law. Activists' allegations of summary executions had no supporting evidence, he said, yet to Duterte, Jee's killing was irrefutable, audacious and embarrassing.

"The committing of that crime was so obvious," he said.

Worried that the incident would dent the Philippines' image in South Korea, Duterte sent Panelo to Seoul to apologize to acting president Hwang Kyo-ahn.

Seoul is Manila's biggest supplier of military hardware, donating or selling fighter jets, patrol boats, frigates and trucks.

About 1.4 million South Koreans visited the Philippines in the first 10 months of 2016 - a quarter of all tourists arrivals - lured by beaches, golf and the sex industry. Korean tourists spend an average $180-$200 daily, and their overall spending is triple that of U.S. visitors.

South Korea is the Philippines' fifth-largest source of development aid and in 2015 invested $520 million in areas like power, tourism and electronics manufacturing.

About 55,000 Filipinos work in South Korea and the Philippines attracts Koreans studying English, over 3,700 of them last year.

A South Korean diplomat in Manila said there were no threats or pressure on the Philippine government over the killing of the businessman, but Seoul wanted a guarantee of safety for its citizens and a secure investment climate.

Hoik Lee, president of the Korean Chamber of Commerce in the Philippines, said South Koreans felt increasingly unsafe in the country.

The chamber's membership has grown from 20 firms in 1995 to 500 companies now, including Samsung Electro-Mechanics, Hanjin and LG, but Lee estimated that the Korean community has shrunk by about a third to 100,000 people since 2013 despite the bright economic outlook in the Philippines.

"Police should protect us not kill us," Lee said. "That is why we are very upset and very shocked."

The number of Koreans murdered in the Philippines averages about 10 each year, accounting for a third of all Korean nationals killed overseas, according to Seoul’s foreign ministry.

However, South Koreans are perpetrators of crime as much as they are its victims in the Philippines, says the police Criminal Investigation and Detection Group, which has a Korean desk handling cases of kidnappings, murder, robbery, theft, extortion and fraud, mostly in Korean communities, where mafias operate.

Article Link To Reuters:

It’s No Flash In The Pan; Stay Long On Gold: UBS

February 13, 2017

A rally in gold prices has room to run on risk concerns from politics to interest rates, so hold on to those long positions, a UBS analyst said Monday.

"There's plenty of uncertainty out there," said the bank's commodity and Asia-Pacific commodity head, Dominic Schnider. Top among consideration is the pace of interest rate hikes from the Federal Reserve, he added.

"Inflation is going to accelerate faster than the Fed is going to hike rates; that's good for real assets. On top of it, we are looking for weak dollar on broad basis; that combination has a good tendency to boost prices," he told CNBC's "Squawk Box."

Gold prices took a beating after U.S. President Donald Trump's victory but have since rebounded 7 percent this year-to-date. Spot gold was trading around $1,230 an ounce on Monday morning in Asia.

The yellow metal has further upside to $1,300 an ounce, Schnider said.

Federal Reserve chairwoman Janet Yellen will testify on the U.S. economy and monetary policy before the House Financial Services Committee on Wednesday with the market closely watching for any signals of a rate hike. The Fed's next meeting is on March 14-15. The Fed has forecast as many as three interest rate hikes this year, though debate has grown on the pace.

UBS expects two rate hikes this year because it sees the Fed as cautious until policies proposed such as tax cuts and higher spending actually get legislative nods as currently proposed.

"The economy is expected to accelerate a bit this year versus last year but there's not going to be an awful lot of acceleration taking place. You can argue Trump is going to able to bring a huge fiscal stimulus and that's why growth is going to accelerate 4 percentage points. We think that is unlikely to happen; we have yet to see it's going to pass (the U.S.) Congress," said Schnider.

"There's a lot of uncertainty here. For the Fed, in the current environment, this means: 'yes guys, we are going to normalize rates but it's going to be slow moving. Give us a little bit of time, let us assess the situation.'"

Article Link To CNBC:

Fed Could Take The Wheel From Trump And Drive Markets This Week

By Patti Domm 
February 13, 2017

The Federal Reserve could rival the White House as a source of volatility in the week ahead.

Since he was elected, President Donald Trump has taken the driver's seat for markets, pushing the obsessive focus on the Fed aside, with his promises of big pro-growth fiscal policies impacting market expectations.

But the current back seat driver could grab the wheel for at least two days in the coming week, when Fed Chair Janet Yellen testifies before Senate and House committees on the economy and Fed policy.

"Certainly investors are paying close attention and given the fact the VIX is … at some crazy low number, it's possible we see a volatility pop," said Jack Ablin, CIO of BMO Private Bank. The VIX, the CBOE's volatility index, was at a low reading of 10 on Friday, indicating to some a high level of market complacency, as stocks leap to record highs.

"Just like last year, they [the Fed] started the year with a forecast where were going to have four rate hikes, and we got one. I think the same thing this year. Her rhetoric could be construed as hawkish but with very little action," said Ablin.

On Wall Street, traders are waiting to hear if Yellen signals that the Fed is on track to raise interest rates three times this year, as it forecasts, and the timing of when it might next move. Analysts also expect to hear pointed questions aimed at the Fed's own policies and what Yellen thinks about potential new tax policy, fiscal stimulus, banking deregulation and efforts to exert new supervision over the Fed itself.

Ablin expects Yellen to be circumspect, given the scrutiny of the Fed and unknowns about the shape and timing of Washington policy. "I actually think Trump and Yellen are on the same page. I think they want the same thing. 'Let the economy run hot and drag your feet raising rates.' I don't see a lot of controversy. The controversy could be around the independence of the Fed and [Sen.] Rand Paul wanting to audit the Fed," he said.

There are also a few important economic reports in the week ahead, with CPI inflation data and retail sales Wednesday. There are some major earnings including PepsiCo, Cisco, Kraft Heinz and AIG.

Trump, of course, will stay a top focus, as he has since before his first day in office. In the past week, he shook markets out of their doldrums by promising Thursday he would provide details on tax reform in the next two to three weeks. That launched a stock market rally that took major indexes to record highs, put a bid under the dollar and drove bond yields higher. It also turned the market focus back to the programs that helped propel stocks higher since the election — not the recent controversies around immigration, trade and his daughter's clothing line.

"I think we'll just wait for the tax stuff to come out and we'll wait for other stuff. I still think the market could go up in the meantime. I think the equity market is now the new Nielsen ratings for Trump," said Ablin. "That's his barometer … between tweets and remarks."

Trump meets with Canada's Prime Minister Justin Trudeau on Monday, after spending the weekend with Japan's Prime Minister Shinzo Abe. In the past week, Trump also made conciliatory comments to China's President Xi Jinping about the country's One China Policy regarding Taiwan. That reduced some market concern that Trump will steer the U.S. into a trade war with China.

Key stock indexes in the past week all closed at record highs. The Dow gained 1 percent for the week, ending at 20,269. The S&P 500 was up 0.8 percent at 2,316, and the Nasdaq was at 5,734, up 1.2 percent for the week. The 10-year Treasury yield was fairly active during the week, at 2.40 percent Friday after touching a low of around 2.32 percent Wednesday.

Gold futures for April, rallying most of the week, sold off in the final two U.S. sessions but ended up 1.2 percent at $1,235.90 per ounce. Oil bottomed hard mid-week on worries of oversupply but bounced back to end the week flat, with West Texas Intermediate futures for March at $53.86 per barrel.

As for the Fed, the markets have been at odds with the Fed's forecast and its own expectations. Wall Street is skeptical the Fed can hike three times this year, and targets more like two rate hikes.

"[Yellen's] always a market moving event, but I feel like basically there's no upside, there's no reason for her to come out and use this as an opportunity to launch the Fed's pace, or trajectory for the Fed's balance sheet. It's too early," said George Goncalves, head of rates strategy at Nomura.

Fed officials, since their last meeting, have been talking about the day when they will stop holding onto the $4.5 trillion in Treasury and mortgage securities in their portfolio, and allow them to roll down. The Fed now replaces them, and if it were to cut back that would be the first step in the Fed reducing its balance sheet. It is not seen as something the Fed would do until possibly next year, but it has gotten the market's attention since the Fed signaled it was discussing it several months ago.

There also has been a debate within the bond market over whether the Fed could signal that it could raise rates at its March meeting, seen as unlikely by most Fed watchers. Expectations for March were further dampened when the Fed gave no indication in its Feb. 1 statement that it was ready to move, and the weak wage growth in the January jobs report lessened expectations for inflation — and Fed rate hikes.

Goncalves said Yellen would not want to be boxed in by pointing to any time frame for a hike, thought the markets expect a June move. "If the outlook is so rosy and so robust and they're feeling they are behind the curve, they could ramp up three hikes in the second half of the year. March is not going to be an insurance hike to start the process for 2017. You just don't do that to get the ball rolling. You do it when you have more confidence in the outlook … It's all about confidence. Not confidence around [Trump], just confidence about what's going to be delivered on the government side," he said.

The Trump tax plan will also remain top of mind for markets, and there now is a wait-and-see on what he will propose — a similar plan to the House Republicans, which includes a border adjustment tax, or something else.

The controversial border-adjustment tax would be a key way to pay for the corporate tax cut, which under Speaker Paul Ryan's plan would take the corporate rate to 20 percent from 35 percent. It basically taxes imports at a 20 percent rate but there would be no tax on exports.

"There's just uneasiness in the senate over this. This is going to be a roller coaster ride," said Daniel Clifton, head of policy research at Strategas. The House plan proposes a one-time repatriation of the $2 trillion in corporate cash stashed overseas, full expensing of capital equipment and a limit on deductibility of interest. But without the border adjusted tax, or destination tax, the plan would not carry a tax rate as low as 20 percent. Many S&P companies already have tax rates in the low 20s percent.

Congress is lining up on both sides of the border-adjustment tax, and so are companies, with industrial companies like GE and Caterpillar in favor of it and retailers, like Target and Wal-Mart against it.

"It's like 'Hunger Games' for tax lobbyists now," said Clifton. "If you're negatively impacted by the border tax, you're pushing the net interest deductibility." Limiting interest deductibility would be a negative for financial firms.

Clifton said the market may not get what it's looking for in Trump's tax plan. "This is: They promise something big, but it's not meaty," Clifton said.

What to Watch:


Earnings: Teva Pharmaceutical, Noble Energy, Restaurant Brands International, Vornado Realty, First Data, HCP, Flowers Foods


Earnings: AIG, Credit Suisse, Dr. Pepper Snapple, T-Mobile US, Discovery Communications, TransUnion, Devon Energy, Express Scripts, Lending Club, Generac, Molson Coors Brewing

6:00 a.m. NFIB survey

8:30 a.m. PPI

8:50 a.m. Richmond Fed President Jeffrey Lacker on economy

10:00 a.m. Fed Chair Janet Yellen before Senate Banking Committee

1:00 p.m. Dallas Fed President Rob Kaplan

1:15 p.m. Atlanta Fed President Dennis Lockhart on crisis, recession, recovery


Earnings: PepsiCo, Applied Materials, Cisco, Kraft Heinz, Groupon, Marriott, Marathon Oil, CBS, Och-Ziff, Chemours, NetApp, Avis Budget, Kinross Gold

8:30 a.m. Retail sales

8:30 a.m. CPI

8:30 a.m. Empire State manufacturing

9:15 a.m. Industrial production

10:00 a.m. Fed Chair Yellen testifies before House Financial Services Committee on economy

10:00 a.m. Business inventories

10:00 a.m. NAHB survey

12:45 p.m. Philadelphia Fed President Patrick Harker on economy

4:00 p.m. TIC data


Earnings: TransCanada, Wendy's, Time Inc, Avon, Alexion, GNC, Dean Foods, Cabela's, MGM Growth, PG&E, Con Ed, WebMD, Encana

8:30 a.m. Jobless claims

8:30 a.m. Housing starts

8:30 a.m. Building permits

8:30 a.m. Philadelphia Fed survey


Earnings: Campbell Soup, Fluor, Bloomin' Brands, Deere, JM Smucker, Moody's, VF Corp, Allianz

Article Link To CNBC:

Battle Looms As Trump Regime Looks To Gut Dodd-Frank

By John Aidan Byrne
The New York Post
February 13, 2017

The Trump administration is digging in for a financial cold war — to gut the 2010 post-financial crisis Dodd-Frank consumer laws introduced to protect Americans from another Great Depression.

And the controversial Trump campaign faces angry critics who oppose this new world order in American banking — with measures that could flood the US economy with more capital.

Critics took their campaign to the streets of New York last week, encircling Goldman Sachs’ headquarters and chanting, “Keep Dodd-Frank!”

“Look, Dodd-Frank could definitely do with some reform,” Richard Roberts, a former commissioner at the Securities and Exchange Commission appointed by President George H.W. Bush, told The Post. “It was hastily prepared,” added Roberts, previously chief of staff to Sen. Richard Shelby, before the senior Republican lawmaker from Alabama switched from the Democratic side. “It is way too voluminous, and it does raise some real questions.”

Consumer advocates dismiss talk of any changes to the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010.

“Trump rolled out an executive order to cut Dodd-Frank, and to get rid of regulation that would protect against a financial crisis like the last time,” said Jonathan Westin, executive director of New York Communities for Change, a group critical of Goldman Sachs’ outsized role in the Oval Office.

Added Westin: “They [the administration] are talking about getting rid of [Dodd-Frank’s] Consumer Financial Protection Agency, which is one of the main agencies that went after Wells Fargo when it was creating fake bank accounts.”

Trumps’ campaign to upend Dodd-Frank, a 22,000-page document, could see the abolition of the ban on proprietary trading at Wall Street banks and on predatory lending. It also targets the “fiduciary rule” that, if it goes into effect, would require brokers to put their clients’ interest first — but also impede investor choice, analysts say.

In Congress, Republicans have already pressed to ease requirements on small- and medium-sized banks, and to curb the appetite for regulators to introduce new rules.

More broadly, Trump wants a top-down review of Dodd-Frank, a move that could ultimately open the spigots to less restrictive lending rules, and ease banks’ capital requirements.

Rebecca Walser, chief executive of Walser Wealth Management, sees what’s happening. She says Dodd-Frank has disproportionately handicapped most of her small business clients, since capital for expansion is choked off by these requirements.

“One client in Tampa who runs a services company with as many as 20 employees has had strong double-digit growth in the last six years — revenues of $3 million, up from $900,000 — and yet he can’t get his $150,000 line of credit bumped up by his local bank during this same period,” Walser said, noting the massive industry consolidation among loan-constrained community banks and the law’s heavy compliance costs.

The number of small community banks declined 14 percent between 2010 and 2014.

Walser added, “Dodd-Frank in particular has hurt smaller businesses, the engine of jobs growth in the American economy.”

Walser said a return to the industry’s “Wild West days” of mad speculation should be avoided. But not, she says, with the same full-blown response of Dodd-Frank.

“There needs to be a happy medium,” she said.

Article Link To The New York Post:

These Countries Could Be Trump's Next Trade War Targets

U.S. has trade deficits with most Asian trade partners; Vietnam surplus with U.S. represents 15% of the economy.

By David Tweed
February 13, 2017

India, Indonesia, Malaysia and Vietnam have largely escaped U.S. President Donald Trump’s glare on trade, but he may yet come looking. The U.S. runs trade deficits with all of them, in some cases quite big ones.

Trump’s exit from the 12-nation Trans-Pacific Partnership, his attacks on the trade policies of Japan, China and South Korea, and a Republican push for tax reforms that would impose a levy on U.S. imports from all countries are contributing to concerns that a protectionist era will hurt growth.

Countries that the U.S. runs trade deficits with may be particularly vulnerable to attack. Peter Navarro, the head of Trump’s National Trade Council, and Commerce Secretary-nominee Wilbur Ross last year wrote a paper where they pinpointed America’s trade gaps as a cause for what they described as its “slow growth plunge.”

“Almost every country in Asia exports somewhere between an awful lot and a lot to the United States,” said Deborah Elms, executive director of the Asian Trade Centre, a Singapore-based consultancy. “Trade deficits are a problem. At any moment there could be an angry Donald Trump in your face or a Twitter coming your way. Have other countries woken up to this problem? Perhaps not.”

Here is a look at the U.S.’s trading arrangements with its main partners in Asia, arranged according to the size of their trade surplus:


-- Trade governed by: World Trade Organization rules
-- China was Trump’s main target on the campaign trail. Though he’s threatened everything from punitive tariffs to branding the country a currency manipulator, the president is yet to take any action against what is the U.S.’s third-biggest export market. Perhaps he’s mindful of President Xi Jinping’s warning that a trade war would hurt both sides.


-- Trade governed by: WTO rules
-- Prime Minister Shinzo Abe is Asia’s most proactive leader at attempting to ward off Trump’s threats, traveling twice to the U.S. to meet him since his election win. He met Trump in Washington on Feb. 10, where they agreed to begin new talks on trade and investment. Abe then joined the president in Florida for a game of golf.
-- Trump has taken umbrage about the lack of access for U.S. autos in Japan. Abe says the U.S. firms aren’t trying hard enough.


-- Trade governed by: WTO Rules and a Trade and Investment Framework Agreement.
-- Hanoi had been counting on the passage of the TPP to formalize trade ties with the U.S.
-- The trade surplus represents about 15 percent of Vietnam’s economy, driven by exports of knitwear, furniture and bedding. Exports to the U.S. more than doubled since 2010 as many Chinese factories shifted to Vietnam in search of lower wages.

South Korea

-- Trade governed by: Korea-U.S. Free Trade Agreement, or Korus, since 2012
-- Trump called the agreement a “jobs killer” and James Kim, chairman of the American Chamber of Commerce in Korea, says Seoul circumvents the deal with non-tariff barriers.
-- More than 80 percent of the trade gap with Korea for 2016 was in the auto sector, according to the American Automotive Policy Council.
-- South Korea’s Trade Minister Joo Hyung-hwan said last week he’ll seek to explain the benefits of Korus to the Trump administration.


-- Trade governed by: WTO rules, plus a Trade Policy Forum from 2005. Trade has flourished since then, rising to $65 billion in 2015 from $29 billion.
-- India runs a substantial surplus, helped by exports of information-technology services, textiles and precious stones.
-- Despite this, ties between Trump and Prime Minister Narendra Modi have been warm. Modi was the fifth world leader Trump called after his inauguration, and trade issues didn’t come up, according to a readout of their conversation by the White House.


-- Trade governed by: WTO rules
-- FTA negotiations started in June 2005 but were suspended in 2009 as Malaysia protested U.S. support for Israel during the Gaza War. Malaysia then joined the TPP talks.
-- Malaysia is focusing on trade with the 10-member Association of Southeast Asian Nations, Trade Minister Mustapa Mohamed said this month.


-- Trade governed by: WTO rules, TIFA since 2002
-- FTA talks started in 2004 and were suspended in 2006 ahead of a military coup in Thailand.
-- The U.S. trade deficit with Thailand is driven by electrical machinery and rubber.


-- Trade governed by: WTO rules, TIFA since 1996
-- Indonesia’s trade surplus comes from exports of knitwear, rubber and shoes. The U.S. exports aircraft, soybeans and machinery.
-- The countries last met in April 2016 to discuss trade issues, including ways to improve Indonesia’s intellectual property protection, and proposals for cooperation on issues like unregulated fishing.


-- Trade governed by: WTO Rules, TIFA since 1989
-- The Philippines may be vulnerable to a proposed “border tax” because its export mix is heavily reliant on electronic and capital goods, which can be easily replaced by U.S.-based producers, according to Credit Suisse Group AG.
-- President Rodrigo Duterte has prioritized trips around Asia to take advantage of trade and investment opportunities in the region, including with China.


-- Trade governed by: FTA since 2004.
-- Singapore can attribute its trade deficit with the U.S. to its status as a financial hub, with big banks, consultancies, law firms and accountants selling services in the city-state.
-- Singapore Airlines Ltd. plans a $13.8 billion order of wide-body airplanes from Boeing Co., which would represent about a quarter of the value of 2015’s total two-way trade.
-- Prime Minister Lee Hsien Loong was an avid TPP supporter, saying last year that ratifying it was a “litmus test” of U.S. credibility in Asia.

Hong Kong

--Hong Kong’s immediate focus is a trade pact with Asean, with talks starting last year.
-- Another financial hub, it has the largest deficit with the U.S. in Asia. Sales of services by majority U.S.-owned affiliates were $33.8 billion in 2013, according to the U.S. Trade Representative office.

Article Link To Bloomberg:

Toshiba Prepares To Unveil Nuclear Hole, Other Perils Threaten

By Makiko Yamazaki and Taro Fuse
February 13, 2017

Toshiba Corp (6502.T) will on Tuesday detail a writedown of close to $6 billion after bruising cost overruns at its U.S. nuclear arm, turning investor attention to the Japanese group's efforts to fix that and other balance sheet headaches.

The TVs-to-construction conglomerate warned of a potential multi-billion dollar nuclear writedown in December, a year after a $1.3 billion accounting scandal.

Sources familiar with the matter say the final charge, to be detailed alongside quarterly earnings, will be as high as 700 billion yen ($6.2 billion), a sum which alone would wipe out the company's shareholder equity.

Toshiba, which has seen its market value almost halve since the prospect of a writedown emerged in December, is also expected to outline the prospects for its nuclear arm and update investors on efforts to raise capital, including through the sale of a stake in its flagship memory chips business.

"The question for Toshiba is how is it going to move forward," said Masahiko Ishino, analyst at Tokai Tokyo Research Center.

He added Toshiba would need to show how it could stay competitive in the cash-generating but capital-intensive memory chip industry, given its battered balance sheet.

Toshiba has offered a 19.9 percent of its prize chips business to investment funds and rivals including Bain Capital, SK Hynix (000660.KS) and Micron Technology (MU.O).

Pillar Of Business

On Thursday, a source said that Toshiba had received bids of between 200 billion yen to 400 billion yen for the flash memory stake, a range that could cover the 300 billion yen the company wants to raise. It prefers multiple investors.

Toshiba is a pillar of Japan's business establishment. Born in the tumult of Japan's emergence from centuries of isolation, it made Japan's first light bulb and was a pioneer in laptop computers. Toshiba's 190,000 workers, employed at some 500 units, likely will make it too big to fail.

But as with other established Japanese firms that have dodged financial collapse, such as liquid crystal display inventor Sharp Corp (6753.T), Toshiba could face protracted pain.

Financial sources last week pointed to problem businesses within Toshiba beyond nuclear, including Landis+Gyr AG.

Toshiba agreed to buy that unlisted meter maker for $2.3 billion in 2011 to tap smart grid demand that at the time was expected to grow six-fold to around $70 billion in 10 years. At the end of September, the goodwill value of Landis+Gyr was 143.2 billion yen ($1.3 billion).

Other stumbling blocks for Toshiba include a $7.4 billion commitment four years ago to buy U.S. liquefied natural gas believing that would help sell power plant turbines.

Accounting Scandal

A fall in Asian gas prices, now at about half the level they were, has cast doubt on that strategy.

Toshiba, on a stock exchange watchlist barring it from issuing new shares, must also contend with fallout from the 2015 accounting scandal.

Mitsubishi UFJ Trust and Banking Corp (8306.T) last month said it will seek 1 billion yen in damages, while sources say Sumitomo Mitsui Trust Bank Ltd and Mizuho Trust & Banking Co are preparing similar suits.[nL4N1FK07I}

With its latest financial crisis unresolved, investors appear most nervous about Toshiba's short-term prospects.

The cost of insuring against a credit default has soared over the past two months. Five-year insurance, or credit default swaps, was quoted at 315/355 basis points TOSB5YJPAC=MG on Friday, compared with 75 basis points in mid-December.

That quote, below late December highs, suggests it would cost $315,000-$355,000 per year for five years to insure $10 million in bonds. The CDS curve <0> is inverted, suggesting short-term cover is most expensive.

($1 = 113.1900 yen)

Article Link To Reuters:

The Stock Market’s Trump Rally Has Just Begun

Deutsche’s Chadha expects S&P 500 to hit 2,600 by year-end.

By Sue Chang
February 13, 2017

The juggernaut of optimism unleashed by President Donald Trump’s presidency will continue to steamroll its way through the market, paving the way for stocks to carve out new highs and keep hungry bears at bay.

Wall Street is fairly upbeat on the positive impact of lower taxes and regulatory reforms promised by Trump, even if details remain murky. But despite the lack of clarity, enthusiasm for the president’s agenda has not waned with at least one prominent strategist suggesting that the so-called Trump rally is only beginning.

Binky Chadha, chief strategist at Deutsche Bank, predicted that stocks have much further to go on the back of proposed tax revisions with the S&P 500 poised to hit 2,600 by the end of the year.

He argues that the surge in stock prices after Nov. 8 is typical of the market’s behavior following a tight race, playing down the commonly held notion that expectations of pro-business policies had fueled much of the market’s gains in the wake of the U.S. presidential election.

“The case for U.S. equities is strong,” Chadha wrote in a report. “A V-shaped recovery in gross domestic product and earnings growth, unfolding for a year now, has further to go.”

Other strategists were similarly ebullient.

The benefit of corporate tax cuts is expected to boost S&P 500’s earnings per share by $8, according to Dubravko Lakos-Bujas, head of U.S. equity strategy at J.P. Morgan Chase & Co.

On Thursday, Trump hinted during a meeting with airline industry executives that a big announcement on taxes could come in the next few weeks.

The White House has yet to outline the specific changes but Lakos-Bujas put forth the following assumptions:

Under this scenario, companies with large U.S. exposure, higher margins and low debt stand to gain the most whereas firms with high level of reliance on foreign-sourced parts and resources will suffer.

David Kostin, chief U.S. strategist at Goldman Sachs, projected adjusted earnings per share among S&P 500 companies will rise 5% to $123 this year. Firms with sizable overseas income such as Microsoft Corp. MSFT, -0.09% General Electric Co.GE, +0.44% and Apple Inc. AAPL, -0.23% will likely get a boost from a proposed tax holiday on repatriated funds, he said.

But for all the buoyant outlooks, voices of caution persist.

Jeffrey Saut, chief investment strategist at Raymond James, a bull among bulls, believes the current rally is near exhaustion and stocks won’t be able to push higher without a near-term correction. His colleague Andrew Adams earlier this week also warned of a possible selloff if Trump’s policies don’t make it out of the gate or get held up.

Apart from politics, earnings will remain a main driver in the market next week with 54 S&P 500 companies slated to announce quarterly results, including American International Group Inc. AIG, +0.44% PepsiCo Inc. PEP, +0.12% Kraft Heinz Co.KHC, +0.47% CBS Corp. CBS, +0.03% and Cisco Systems Inc. CSCO, +0.03%

To date, 67% of S&P 500 companies have turned in better-than-expected earnings per share and 52% of companies have reported sales above mean estimate, according to FactSet.

All three benchmarks set new records for a second session in a row on Friday with the S&P 500 SPX, +0.36% up 8.23 points, or 0.4%, to close at 2,316.10. The Dow Jones Industrial Average DJIA, +0.48% added 96.97 points, or 0.5%, to end at 20,269.37 and the Nasdaq Composite COMP, +0.33% climbed 18.95 points, or 0.3%, to 5,734.13.

Article Link To MarketWatch:

Verizon Reintroduces Unlimited Data Plan As Competition Rises

By Catherine Ngai and Anjali Athavaley
February 13, 2017

Verizon Communications Inc will introduce an unlimited data plan on Monday, its first in more than five years, in its latest effort to lure customers as competition rises between network carriers.

The introductory plan, announced on Sunday, will give unlimited data to customers on smartphones and tablets on its 4G LTE network. It comes days after competitor Sprint Corp introduced a new unlimited data plan of its own.

The unlimited option appears to be a change in direction for Verizon after one of the company's top executives said last month it was not looking at unlimited products when asked by analysts whether Verizon needed to be more aggressive in the market.

"We constantly look at... what's out there. Unlimited is one of the things that some of our competition has at this point in time. That's not something we feel the need to do," Matthew Ellis, Verizon's chief financial officer, told analysts during an earnings call on Jan. 24.

"But as I say, we continually monitor the market and we will see where we head in the future," he added.

Verizon's unlimited plan is $80 per month for unlimited data, talk and text for the first line with paper-free billing and autopay, and $45 per line for four lines. The company stopped offering unlimited data plans for most customers in 2011.

Article Link To Reuters:

America’s Biggest Creditors Dump Treasuries In Warning To Trump

Japanese investors cull U.S. government debt by most since ’13; Currency-hedged returns were worst on record last quarter.

By Brian Chappatta
February 13, 2017

In the age of Trump, America’s biggest foreign creditors are suddenly having second thoughts about financing the U.S. government.

In Japan, the largest holder of Treasuries, investors culled their stakes in December by the most in almost four years, the Ministry of Finance’s most recent figures show. What’s striking is the selling has persisted at a time when going abroad has rarely been so attractive. And it’s not just the Japanese. Across the world, foreigners are pulling back from U.S. debt like never before.

From Tokyo to Beijing and London, the consensus is clear: few overseas investors want to step into the $13.9 trillion U.S. Treasury market right now. Whether it’s the prospect of bigger deficits and more inflation under President Donald Trump or higher interest rates from the Federal Reserve, the world’s safest debt market seems less of a sure thing -- particularly after the upswing in yields since November. And then there is Trump’s penchant for saber rattling, which has made staying home that much easier.

“It may be more difficult than usual for Japanese to invest in Treasuries and the dollar this year because of political uncertainty,” said Kenta Inoue, chief strategist for overseas bond investments at Mitsubishi UFJ Morgan Stanley Securities in Tokyo. “Treasury yields may rise rapidly again in the near future, which will continue to discourage them from buying aggressively.”

Nobody is saying that foreigners will abandon Treasuries altogether. After all, they still hold $5.94 trillion, or roughly 43 percent of the U.S. government debt market. (Though that’s down from 56 percent in 2008.) A significant drawdown can harm major holders like Japan and China as much as it does the U.S.

And, of course, homegrown demand has of late been able to absorb the pickup in overseas selling. Since reaching 2.64 percent in mid-December, yields on benchmark 10-year notes have come back and are essentially flat this year. They ended at 2.41 percent on Friday.

Lasting Consequences

Nevertheless, any consistent drop-off in foreign demand could have lasting consequences on America’s ability to finance itself cheaply, particularly in light of Trump’s ambitious plans to boost infrastructure spending, cut taxes and put “America First.” The president has singled out Japan and China, the two biggest overseas creditors, as well as Germany, for devaluing their currencies to gain an unfair advantage in trade.

In December, Japanese investors reduced their investments in U.S. debt by 2.39 trillion yen ($21.3 billion) after a smaller pullback in November. While only a fraction of Japan’s $1.1 trillion of holdings, they were first the back-to-back declines since the start of 2014. China, which owns just over $1 trillion of Treasuries, has been selling since May. Its holdings are at a seven-year low.

For now, risk-averse bond buyers like Daiwa SB Investments’s Shinji Kunibe are cutting back on Treasuries, despite some clear advantages.

Like many institutional money managers that invest abroad, Kunibe, Daiwa SB’s head of fixed-income management, likes to hedge away the risk of the dollar’s ups and downs. And right now, it makes sense. After accounting for hedging costs, 10-year Treasuries yield about 0.9 percent, roughly 10 times the return offered by Japanese government bonds. Going back to the 1980s, Treasuries have rarely enjoyed such a big edge over JGBs.

However, he sees U.S. yields rising further as Trump pursues expansionary fiscal policies and takes a protectionist stance on trade.

“Yields are going to be in an uptrend,” he said.

Big Losses

And investors like Kunibe can ill-afford more losses. Last quarter, Japanese investors who hedged all their dollar exposure in Treasuries suffered a 4.7 percent loss -- the biggest in at least three decades, data from Bank of America showed. The same thing happened in Europe, where record currency-hedged losses also stung euro-based buyers.

“It was a deer in the headlights moment,” said Zoltan Pozsar, a research analyst at Credit Suisse.

Combined with the unpredictability of Trump’s tweet storms, interest-rate increases in the U.S. could further sap overseas demand. Mark Dowding, who helps oversees about $50 billion as co-head of investment-grade debt at BlueBay Asset Management in London, says the firm has already moved to insulate itself from further losses due to higher rates.

What’s more, central bankers in Japan and Europe are still experimenting with monetary policies that may benefit bond investors locally.

Right now, it’s just “much easier to stay home than go abroad,” said Shyam Rajan, Bank of America’s head of U.S. rates strategy.

Article Link To Bloomberg:

Yellen Unlikely To Rule Out March Hike In Capitol Hill Testimony

Fed chair to testify before Senate, House committees this week; Testimony to feature uncertainty over Trump fiscal policy.

By Christopher Condon
February 13, 2017

Federal Reserve Chair Janet Yellen probably won’t drop a heavy hint on the timing of the next interest-rate increase when she speaks to Congress this week, but expect her to defend post-crisis banking rules the Trump administration has sworn to undo.

Yellen’s semi-annual testimony to lawmakers in Washington on Tuesday and Wednesday will be her first such performance since Donald Trump became president, a shift in power that may expose the U.S. central bank to deep changes favored by some in his Republican party, which remains in control of both houses of Congress. The hearings could also serve to shed light on where the Senate Banking Committee’s new chair, Idaho Republican Michael Crapo, stands on proposed changes to the central bank’s authority and structure.

On monetary policy, Yellen is expected to keep the Fed’s options open ahead of its next policy meeting. While few investors anticipate a move when officials gather in mid-March, several Fed policy makers have argued a rate increase should not be ruled out.

“We think Yellen will leave the possibility of a March rate hike on the table and won’t back down from the three hikes this year” penciled in by Fed officials when they last submitted economic forecasts in December, Roberto Perli, a partner at Cornerstone Macro LLC in Washington, wrote in a note to clients.

The policy-setting Federal Open Market Committee raised rates by a quarter percentage point in December. It next meets March 14-15.

With a year left in her current term as Fed chair, Yellen is seeking to guide rates carefully upward in synch with a slowly improving economy while wrestling with the uncertainty posed by the Trump administration’s still undetailed plans to boost economic growth. Trump said Feb. 9 he would announce a “phenomenal” tax plan in coming weeks.

Yellen is scheduled to testify before the Senate Banking Committee at 10 a.m. Tuesday, and before the House Financial Services Committee at 10 a.m. Wednesday. She is expected to deliver a prepared statement and answer questions from lawmakers.

In her most recent public remarks, Yellen said Jan. 19 the U.S. economy had made “considerable progress” toward the Fed’s objectives of 2 percent inflation and full employment, but was not at risk of overheating. She said the Fed would continue to adjust rates “gradually.”

Since then, January’s employment report showed the jobless rate had ticked up to 4.8 percent and wages rose only modestly, supplying no evidence of mounting inflation pressures. Excluding food and energy, prices rose 1.7 percent in the 12 months through December, according to the Fed’s preferred gauge of inflation.

Fiscal policy, however, looms as a wild card that has already driven up investor expectations for growth and inflation. On the campaign trail, Trump promised tax cuts, higher spending on defense and infrastructure and regulatory reform. The Fed chair will almost surely be asked how she intends to respond.

Hard Spot

“It’s a difficult situation for the Fed to be in,” said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto. “There’s not much Yellen can do because she’s got to wait and see what’s in the fiscal plan and if it gets a favorable response in Congress.”

There are also political risks. If pressed on how the Fed will react to expansionary fiscal policy, Perli said, she may have little choice but to point out, as she has in the past, that fiscal stimulus that arrives when the economy is near full employment will probably require higher interest rates.

“There’s a risk that she would sound like she was somehow being obstructionist, that the FOMC was standing in the way of economic growth that could be achieved through fiscal expansion,” said William Nelson, a former senior Fed staffer and now chief economist at The Clearing House, a banking trade group in New York and Washington.

For that reason, Nelson said he expects Yellen to emphasize that any response to fiscal policy will be aimed at hitting the Fed’s statutory targets, which are set by Congress.

What else to watch for:

1. Balance sheet plans -- Several FOMC members have called publicly for a discussion on when, how and the extent the central bank should reduce the size of its $4.5 trillion balance sheet. Yellen’s remarks could reveal whether that discussion began at the January FOMC meeting, and possibly hint at where she stands on the main questions.

2. Dodd-Frank defense -- The principle regulatory response to the financial crisis of 2008-09 is on the chopping block now that Republicans control both houses of Congress and the White House. Yellen may be prompted by Democrats to offer a vigorous defense of the 2010 law that imposed a raft of new obligations on banks aimed at making the financial system safer, but many of them seen as unnecessarily harsh by bankers who have the ear of the party in power.

3. Senator Michael Crapo -- The new chairman of the Senate Banking Committee, a Republican from Idaho, is expected to play a central role in determining the legislative agenda of his party with respect to financial regulation and potential changes to rules governing the central bank. He could reveal some of his thinking on those issues through his opening statement or his questions for Yellen.

4. Yellen’s future -- Many Fed watchers expect Trump to appoint a replacement next February when Yellen’s four-year term as chair expires, but the administration hasn’t confirmed that or commented since the election on Yellen’s future. She has declined to say whether she wants a second term or whether she would stay if asked. Nor has she ruled out remaining on the Fed Board if Trump names a new chair, an unusual move but one allowed since her 14-year term as a governor doesn’t expire until 2024.

Article Link To Bloomberg:

Imagining A Successful Trump Presidency

By Fred Hiatt
The Washington Post
February 13, 2017

Imagine a successful Trump presidency.

That is the assignment I gave myself this week as I met with research fellows at the Hoover Institution, a free-market think tank located here on Stanford University’s campus, and with Stanford professors. Set aside the initial stumbles and Washington angst, and imagine how Donald Trump might build on his unexpected electoral victory.

I was taken aback by the first response.

“Well, it’s sad,” a conservative expert on politics replied when I asked the question. “Because he could have done something groundbreaking.”

Could have?
Past tense? Already?

Yes, this person replied. Trump took office with a unique opportunity to triangulate between the two parties. With Republicans he could have enacted tax reform and rolled back regulations. With Democrats he could have pushed through a giant infrastructure bill, dividing the Democratic coalition (trade unions from teachers unions, Midwesterners from coastal elites). Presto: a new working coalition.

But Trump’s first three weeks were so disastrous and toxic to the opposition that he has made it impossible for Democrats to cooperate. “With all the noise about crowd size, the complaints about the march, the executive order, the attacks on judges — how can [Senate Minority Leader Charles] Schumer cooperate now?” he said. “He can’t.”

Undoubtedly the “resistance” has emerged far more quickly than anyone predicted. But surely, I thought, three weeks is a bit soon to say last rites over a 208-week presidency.

Unexpectedly, perhaps, a Never-Trump national security expert here, Kori Schake, agreed.

“I actually think there’s a strong optimistic case to be made,” she told me.

Government is so averse to risk, Schake argued, that many policies and processes have become “silted up.” Buying weapons takes too long and costs too much. Innovators stay away.

Trump complains about allies freeloading more rudely than did his predecessors, Schake noted, but the complaint isn’t new; maybe he can get somewhere. Similarly, he’s hardly the first president to promise in a campaign to help those left behind by trade; maybe he will be the one to do something about it.

“There’s a lot of stuff that needs fixing,” Schake said. “He’s going to break a lot of china, but there are opportunities to do things better.”

In practice, experts here such as Richard Epstein hope that means fewer regulations and lower taxes, which they say could spur investment — providing that the positive effects are not swamped by Trump-initiated trade wars or Trumpian interference in market decisions, such as telling companies where and how much to invest.

Overseas, the administration might seek stability via understandings with Russia and China. China could promise fairer access to its market for U.S. firms, less theft of intellectual property, maybe even more direct investment and job creation in the United States.

What would Trump give in return? Certainly an end to the annoying-to-China U.S. habit of talking about human rights and democracy. Smaller countries in the Pacific worry that he might give up a lot more.

“I think we are at risk of the president making a large number of high-octane bad deals,” Schake said. But setting “rules of the road for big-power behavior” has been a positive in past years and could be so again, she said.

Similarly, Russia might promise to withdraw gradually from eastern Ukraine, in return for a reduction of sanctions and America’s recognition that Ukraine would never be in NATO or America’s sphere of influence. Whether Russian President Vladimir Putin would honor such a promise is another question.

In any case, you can see something like a best-case scenario taking place. I should make clear: I don’t mean best-case in the sense of good policy. Personally I would not favor reducing regulations that, for example, protect stream beds in coal country. I don’t think it’s responsible to postpone entitlement reform, as Trump vows to do. Nor do I think that a values-free foreign policy is likely to be sustainable in the long term.

But you could imagine all of this translating into a reasonable short-term value proposition to voters three years from now: economic growth without too much inflation (for the moment), global stability, lower taxes.

The question is whether the administration has the discipline and finesse to pull off these difficult balancing acts. Was the lost opportunity of the first 20 days based on a strategic decision to double down on us-vs.-them, or on whim and resentment? And if the latter, will it become a learning opportunity?

“It will all come down to whether people feel like things are getting better for them,” said Stanford political scientist Morris P. Fiorina. “He could blunder into a successful presidency. It could also be a disaster.”

Article Link To The Washington Post:

‘Are We Safe Yet?’ The Answer’s Not So Simple.

By Robert J. Samuelson 
The Washington Post
February 13, 2017

Comes now Timothy Geithner, treasury secretary from 2009 to 2013, to tell you that much of what you “know” about Dodd-Frank — Congress’s response to the 2008-2009 financial crisis — is wrong. It’s a timely review because the Trump administration is promising to overhaul the law. The title of Geithner’s essay, carried in the current issue of Foreign Affairs, is simple: “Are We Safe Yet?” The answer is not so simple.

Start with good news. Like many others, Geithner — a critical player in containing the breakdown — doubts the United States faces “a major [financial] crisis anytime soon.” To justify this, he offers both statistics and common sense.

Since 2008, U.S. banks have raised roughly $500 billion in new shareholder capital, bringing the total to $1.7 trillion. The added capital provides a larger cushion against losses (and, of course, the new shareholders enjoy any profits). This bolsters confidence that the system can survive unexpected setbacks.

In addition to more capital, banks also have a more stable base of funds used for lending. According to Geithner, deposits now represent 86 percent of U.S. banks’ liabilities, up from 72 percent in 2008. Deposits tend to be stable, because most are insured by the government (up to $250,000 by the Federal Deposit Insurance Corp.) During the crisis, the flight of uninsured short-term funds (so-called repurchase agreements and commercial paper) threatened the entire financial system. Now this danger is reduced.

The result is a strengthened banking system. “Today, the major U.S. banks could probably sustain losses greater than those experienced in the Great Depression and still have enough capital to operate,” Geithner writes.

Psychology reinforces these changes. It has shifted toward caution. “The memory of the global financial crisis still looms large,” Geithner observes. “In a way, this should be reassuring. A world worried about the approaching abyss is safer than a more sanguine one, such as in 2006.” Loans may be harder to get; but they’re also more likely to be repaid.

Still, Geithner serves up much bad news. His essay is organized around four unhappy propositions.

Proposition No. 1: A financial crisis “is certain at some point” — we just don’t know when and how bad. Conditions change. Memories fade. Government regulators aren’t superhuman. They can’t “protect against every conceivable bad event.” They also face a dilemma: If regulations are too tough, they will cause “some financial transactions to shift away from banks and toward less regulated institutions.”

Proposition No. 2: A true crisis is “not self-correcting.”
Most declines in markets (for stocks, bonds, loans) are self-limiting. Prices drop to levels that buyers think are a bargain. Not so with a panic. Selling pressures reflect fears that tomorrow’s prices will be lower than today’s. The resulting “fire-sale prices . . . make large parts of the financial system appear to be insolvent.” Someone or something must intervene to stop the spiral.

Proposition No. 3: In a panic, only the federal government can mobilize the needed financial resources “to preserve the functioning of the credit system necessary for economic recovery.”
In the 2008-2009 crisis, the government provided trillions of dollars of aid through money creation by the Federal Reserve and by Treasury borrowing. Absent this torrent of emergency credit, it’s not clear what would have happened.

Proposition No. 4: Despite this, Dodd-Frank has crippled government’s ability to defuse future financial crises. It has restricted government’s “ability to act as a lender of last resort.” The Fed’s power to lend to individual institutions is curtailed, making it harder to nip future crises in the bud. The Fed can’t act until many institutions are in trouble. Consequently, we are “even less prepared to deal with a crisis” than in 2007.

This, of course, is madness. But it is madness with a political logic. The lesson that much of the public took from the financial crisis is that banks, and Wall Street in general, were “bailed out” and that this rescue was a bad thing. So Dodd-Frank became a vehicle for making sure this never happened again by weakening the Fed and other arms of government to deal with financial crises.

The real Dodd-Frank scandal is that this misinterpretation of events, widely embraced by both parties, has been allowed to stand. In many bailouts, banks’ shareholders suffered huge losses or were wiped out; similarly, top managers lost their jobs. The point was not to protect them but to prevent a collapse of the financial system.

If the Trump administration doesn’t repudiate the conventional wisdom and change the law accordingly, it risks creating a future, self-inflicted wound. Suppose it is 2028, and the Fed is coping poorly with a huge financial crisis. Someone asks, “What were our leaders thinking when they revoked so many of its powers?” And the answer will be: They weren’t.

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