Wednesday, March 22, 2017

Wednesday, March 22, Morning Global Market Roundup: Trump Tax Cut Doubts Hit Stocks, Lifts Yen Vs. Dollar

By Nigel Stephenson
March 22, 2017

Growing doubts U.S. President Donald Trump will be able to deliver on a promise of tax cuts that has powered stocks markets to record highs pushed shares lower on Wednesday and drove investors to seek safety in government debt, gold and the yen.

The dollar touched a four-month low against the Japanese currency, whose strength helped push Tokyo stocks to a three-week low, while the euro held close to its highest since early February at around $1.08.

Investors’ flight to safety pushed down U.S. Treasury yields and the gap between U.S. and German 10-year government borrowing costs hit its narrowest since November.

European shares opened lower after Asian shares suffered their biggest percentage daily fall since mid-December and, on Tuesday, the S&P 500 .SPX fell by more than 1 percent for the first time since Oct. 11.

Waning risk appetite also hit commodities: Brent crude oil LCOc1 fell 20 cents to $50.76 a barrel, while copper CMCU3 fell 0.5 percent to $5.747 a ton.

The main factor behind the sell-off in risky assets was doubt that Trump would be able to deliver on his agenda for economic growth, including tax cuts and relaxed regulation, any time soon.

Trump is trying to rally Republican lawmakers behind a plan to dismantle Obamacare, and investors worry that failure could spell trouble for the promised tax cuts and regulatory changes.

Societe Generale currency strategist Alvin Tan, in London, said an FBI investigation into possible ties between Trump's campaign and Russia was also adding to investor worries.

"All in all, that’s adding to a picture that the much hoped-for and hyped fiscal stimulus package may not be coming as soon as markets would like it to come, if at all," he said.

The pan-European STOXX 600 index fell 0.9 percent to a two-week low, led lower by banks .SX7P and miners .SXPP. Britain's FTSE 100 index .FTSE fell 0.9 percent

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS fell 1.4 percent at one point, its biggest intraday percentage fall since Dec. 15. In the previous session, the index hit its highest level since June 2015.

Japanese stocks .N225 fell 2 percent, Australian shares tumbled 1.6 percent and mainland Chinese shares closed down 0.5 percent. MSCI's main measure of emerging market equities .MSCIEF slid nearly 1 percent.

E-mini futures on the S&P500 ESc1 and Dow Jones Industrial Average 1YMc1 indicated Wall Street would open lower and the CBOE VIX index .VIX, known as the "fear gauge", of implied volatility on the S&P topped 13 percent for the first time since mid-January.

The dollar was flat against a basket of currencies .DXY but down 0.3 percent versus the yen JPY=, having hit a four-month low of 111.25 yen earlier in the day.

The euro EURO= dipped 0.2 percent to $1.0790, off a high of $1.0818 as European trading began. Sterling GBP=D3 fell 0.1 percent to $1.2463.

Treasury Yields

U.S. Treasury yields, which fell on Tuesday with Wall Street, dropped further. The 10-year benchmark yield US10YT=RJR dipped below 2.4 percent for the first time since March 1.

In early trade, the closely watched gap between U.S. and German 10-year yields touched its narrowest since November at around 195 basis points. German 10-year yields DE10YT=RR, the benchmark for euro zone borrowing costs, then fell further and were last down 4.8 basis points at 0.41 percent.

"Market participants are worried about the effects and feasibility of Donald Trump's growth program," DZ Bank strategist Birgit Figge said.

"Alongside this, speculation is persisting ... that the ECB may possibly scale back its ultra-expansionary policy stance to some extent at an earlier point in time than is currently being assumed."

Gold hit a three-week peak of $1,248.47 and last traded up 0.2 percent at $1,247 an ounce. It has rallied almost $50 from last Wednesday's low after a less hawkish policy statement than many investors had expected from the U.S. Federal Reserve.

Article Link To Reuters:

Oil Prices Slide On Bulging U.S. Crude Inventories

By Edmund Blair 
March 22, 2017

Oil prices slipped back toward three-month lows on Wednesday after data showed U.S. crude inventories rising faster than expected, piling pressure on OPEC to extend output cuts beyond June.

A deal between the Organization of the Petroleum Exporting Countries and some non-OPEC producers to reduce output by 1.8 million barrels per day (bpd) in the first half of 2017 has had little impact on bulging global stockpiles of oil.

Brent crude, the international benchmark, fell 35 cents to $50.61 per barrel, heading back to its lowest level since OPEC announced on Nov. 30 its plan for cuts. The deal with non-OPEC states was reached in December.

U.S. light crude was down 35 cents at $47.89 a barrel, also heading back toward a three-month low.

"The lower the price goes, the higher the pressure on OPEC to extend cuts," Commerzbank analyst Carsten Fritsch said.

Sources have said OPEC is inclined to extend but wants backing from non-OPEC producers, including Russia, even though such countries have yet to deliver fully on existing cuts.

On Tuesday, the American Petroleum Institute reported U.S. inventories climbed by 4.5 million barrels to 533.6 million last week, a bigger rise than the 2.8 million analysts forecast.

Investors now want to see whether Wednesday's figures from the Energy Information Administration, a unit of the Department of Energy (DoE), confirm the rise.

"A look below $50 (for Brent) is quite possible today if DoE data show a similar pattern, but it's impossible to say how far below $50," Commerzbank's Fritsch said.

U.S. shale oil producers have been adding rigs, pushing up the country's oil production to about 9.1 million bpd, from around 8.5 million bpd in late 2016.

"OPEC's market intervention has not yet resulted in significant visible inventory drawdowns, and the financial markets have lost patience," U.S. bank Jefferies said in a note.

The bank said OPEC-led cuts would start having an impact in the second half of 2017, but added that U.S. crude production was expected to grow by 360,000 bpd in 2017 and 1 million bpd in 2018.

U.S. bank Goldman Sachs warned its clients in a note this week that a U.S. shale-led production surge "could create a material oversupply in 2018-19".

Article Link To Reuters:

U.S. Oil And Gas Industry Reaps The Benefits Of International Trade

By John Kemp
March 22, 2017

Rising exports have thrown a lifeline to U.S. shale producers and refiners, giving them an additional outlet at a time when the domestic market has been at risk of becoming saturated.

The United States exported record quantities of natural gas, propane, gasoline, distillate fuel oil and light crude last year while continuing to import the heavy oils needed by its refineries (

Gas exports increased by almost 30 percent in 2016 and have more than tripled in the last decade, limiting the build up of unused gas and supporting prices in recent months despite the warmest winter on record.

Record propane exports eliminated a surplus and returned stocks to average levels despite low heating demand. ("Increasing exports contribute to large draw on propane inventories this winter", EIA, March 17)

Exports are also starting to reverse a surplus of domestically refined gasoline and distillate fuel oil despite lackluster demand for both at the start of 2017.

Most of the natural gas and other fuels have been sold to Latin America, where local producers and refineries have been unable to keep up with growing consumption.

As a result of the shale revolution, the United States has emerged as the dominant supplier in an increasingly integrated hemispheric fuel market owing to the efficiency and competitiveness of its Gulf Coast refineries. ("Latin America struggles to stem pricey fuel imports", Reuters, March 16)

Free trade in both crude and refined fuels, as well as in natural gas, has played a critical role in helping U.S. shale producers and refiners to weather the slump in oil and gas prices since 2014.


The United States has benefited from rising exports even in commodities such as crude where it remains a large net importer overall.

Crude exports averaged 520,000 barrels per day (bpd) in 2016, up from 465,000 bpd in 2015 and just 25,000 bpd in 2006.

Exports are still outnumbered more than 15:1 by imports, which averaged almost 7.9 million bpd in 2016, according to the U.S. Energy Information Administration.

But exports have enabled shale producers to avoid a refinery bottleneck and realize higher prices for their oil than would have been possible in the domestic market.

Most U.S. refineries are configured to run on a medium-sour blend of crude with an API gravity of around 31-33 degrees and an average sulfur content of about 1.5 percent.

Crude from the main shale plays is mostly lighter, with an API gravity of 40 degrees or more, and contains less than 1 percent sulfur.

U.S. refiners have mostly replaced imported light crude with domestic shale oil, resulting in a sharp drop in light crude imports especially from Africa (

Refiners have blended light domestic crude with more heavy sour crudes imported from Canada and the Middle East to maintain their target API gravity and sulfur content.

Surplus domestic crude, mostly light and sweet, that U.S. refineries cannot absorb even with blending is being exported in record volumes to refiners as far away as Asia (

Blending explains the apparent paradox that U.S. crude imports and exports have both been rising at the same time.


Trade is enabling U.S. refiners to make best use of their equipment and maximize their fuel production and sales to customers at home and overseas.

Strong refinery runs coupled with growing exports of shale oil have avoided a domestic crude bottleneck and boosted prices for shale producers, eliminating the big discounts seen for domestic oil before 2013.

Despite occasional complaints about the continued importation of Middle East crude, trade has provided critical export markets for U.S. refiners and kept refineries operating at record rates.

Exports have been even more important for gas producers, struggling with back to back warm winters in 2015/16 and 2016/17.

Exports likely avoided an even worse price crisis in the natural gas industry during the winter of 2016/17 that would likely have bankrupted many gas-focused shale drillers.

The United States is expected to become a net exporter in 2018 thanks to the rising number of liquefaction terminals. ("Liquefied natural gas exports expected to drive growth in U.S. natural gas trade", EIA, Feb. 22)

Growing exports, as much as cost cutting and improving efficiency, are driving the next stage in the American energy revolution.

Article Link To Reuters:

U.S. Farm Heartland Lobbies To Steer Trump Away From Mexico Trade War

By Jason Lange and Alexandra Alper
March 22, 2017

Farmers in the U.S. agricultural heartland that helped elect Donald Trump are now pushing his administration to avoid a trade dispute with Mexico, fearing retaliatory tariffs that could hit over $3 billion in U.S. exports.

The value of exports at risk is based on a Reuters analysis of a tariff list which Mexico used in a trucking dispute six years ago and which Mexican officials have said could serve as a model if President Trump sets new barriers to Mexican goods.

Pork producers contacted Trump's transition team soon after the Nov. 8 election to stress that tariff-free access to Mexico has made it their top export market by volume, said John Weber, president of the National Pork Producers Council.

The council has sent the administration multiple letters, including one signed in January by 133 agricultural organizations, and is arranging for several hog farmers to fly to Washington next month to talk to officials.

"We just keep pounding them on how critical trade is to us," said Weber, who fears Mexico could revive the list of mostly agricultural products it successfully used to push Washington into letting Mexican truckers on U.S. highways in 2011.

Pork products topped that list and, if revived, the tariffs would apply to over $800 million of annual pork exports, according to data compiled by IHS Markit's Global Trade Atlas. "We'll be the first to take the hit," Weber said.

The lobbying effort by U.S. businesses which rely on the Mexican market shows how Mexico can press its case in Washington despite having an economy 1/17 the size of America's and relying on the U.S. market for nearly 80 percent if its exports.

In Iowa, where pigs outnumber people seven to one, hog and grain farmer Jamie Schmidt voted for Trump in part on his promise to cut regulatory burdens for businesses.

Now he and others who farm the flat, rich land around Garner, Iowa, worry about trade. Schmidt gets about half of his income from hogs, earning $4-5 for each of the 425 pigs he sells per week, usually to a Tyson Foods (TSN.N) packing plant in nearby Perry, Iowa.

Tariffs from Mexico could depress U.S. wholesale prices and wipe out his profits, Schmidt said. "It would be devastating."

In The Crosshairs

In December, after fears of a trade dispute fueled a deep peso MXN= slump, Mexico started mapping out U.S. states that are most reliant on its market, replicating the strategy it used in the trucking dispute, said two senior Mexican officials.

Mexican officials also prepared briefs, seen by Reuters, on Mexico's own risks in a dispute, including losing much of its cost advantage in building cars, such as the Ford Fusion (F.N) made in Hermosillo, Mexico.

Reuters could not verify a complete list of products and states Mexico considered targeting this time around.

But the country's foreign minister said last month tariffs could target Iowa, which raises a third of U.S. hogs and exports about a quarter of its pork production, $100 million of which went to Mexico last year.

The minister also said tariffs could aim at Wisconsin, the center of U.S. cheese production, and has singled out Texas for its "notable" trade surplus with Mexico. All three states voted for Trump in the 2016 election, with the president taking Iowa and Wisconsin by slim margins.

Trump has accused Mexico of destroying U.S. jobs and has vowed to leave the 1994 North American Free Trade Agreement with Canada and Mexico if he cannot renegotiate better terms with Mexico. United States went from running a small trade surplus with Mexico in the early 1990s to a $63 billion deficit in 2016.

Besides pork, cheese was also a top target in the trucking dispute in which Mexico retaliated with tariffs against rules that banned its trucks from U.S. roads. Some $200 million in current annual exports of cheese would be targeted if the tariff list were revived, according to the IHS database, which the U.S. government uses to measure the impact of trade disputes. The full tariff list would apply to $3.25 billion in current U.S. exports.

John Holevoet, the director of government affairs at Wisconsin's Dairy Business Association, said he has attended multiple meetings with Wisconsin federal lawmakers this year where risks of Mexican trade were discussed.

Weber of the pork producers group said he believed the Trump administration "gets it" when it comes to the vulnerability of U.S. farm exports. Republican Congressman Steve King, who represents Iowa's agriculture-focused fourth district, also pointed out that Iowa's role as the first state to hold presidential primaries helps keep farm interests in Washington's view.

But King told Reuters he was worried the White House is still not taking trade risks seriously enough.

A possible 20 percent tax on Mexican imports, which White House spokesman Sean Spicer has said could also pay for Trump's proposed border wall, would cause a trade war, he said.

King said he has been in contact with the White House on the matter but has yet to secure a one-on-one meeting with the president. "I'm making sure that here in Washington they know what this means."

Article Link To Reuters:

Trump, Koch Brothers At Odds Over 'Trumpcare' Vote

By James Oliphant, Emily Stephenson and Caren Bohan 
March 22, 2017

Republicans considering whether or not to back U.S. President Donald Trump's healthcare reforms in a crucial House of Representatives vote this week face a painful choice.

If they vote against, they could face the wrath of a vengeful and combative president. If they vote for it, they risk retribution from the billionaire brothers Charles and David Koch and other powerful right-wing players whose money can be pivotal in re-election races.

As Trump faces the most formidable, high-stakes negotiation of his presidency, the fierce battle in the U.S. Congress over his plan to replace Obamacare is a test of whether Republicans will trust him with their political futures at the risk of alienating deep-pocketed conservative advocacy groups.

As Trump and leaders in the House round up support for the bill ahead of a planned Thursday vote, some groups are threatening to retaliate against those who do support it, including the Club for Growth, the Heritage Foundation's political arm, and Americans for Prosperity, which is part of the expansive political pressure network established by the Koch brothers.

All three groups are “keying” the vote, which means it will be a factor in determining whether the groups deem a lawmaker to be sufficiently conservative. That opens up the possibility that some Republicans who vote in favor of the bill could face a primary challenge in next year’s congressional elections and may not be able to count on help from the Kochs and others.

Trump himself warned House Republicans in a meeting on Tuesday that their seats will be at risk next year if they do not support his healthcare bill, which would modify but not eliminate Obamacare, formally known as the Affordable Care Act, Democratic former President Barack Obama's signature healthcare legislation passed in 2010.

“He warned us that there are consequences if we don’t come together for us as a party and also for individuals,” Representative Richard Hudson of North Carolina said after the meeting. “He wasn’t threatening in any way. He was just giving us a pretty clear warning.”

Trump also told Representative Mark Meadows of North Carolina, an outspoken critic of the bill, that he was "coming after" him, according to people in the meeting. Meadows later said the president was joking.

'Outsider' Joins Establishment

Some Conservatives believe the bill does not go far enough in dismantling Obamacare and have not been satisfied by the White House’s attempts to mollify them. NBC News reported on Tuesday that 26 House Republicans oppose the bill, which would leave House Speaker Paul Ryan short of the 216 votes he needs. No Democrat is expected to support the bill.

The conflict has created an odd dynamic: Trump, who ran as an “outsider” candidate siding with the Republican political establishment against the hard-line conservatives who were some of his most ardent supporters.

At the same time, Trump has never been a favorite of libertarian conservatives such as the Kochs, or of groups such as the Club for Growth, because, among other things, he has never taken a strong stand on reining in federal spending. They opposed him during the Republican presidential campaign.

For them, the healthcare vote is a test of their continued relevance in a party seized by Trump.

The Koch network spent an estimated $250 million on last year’s election. The Koch-run Americans for Prosperity, which has chapters in more than 30 states and boasts that it can deploy 3.2 million citizen activists, spent almost $14 million on the 2016 elections, according to federal records. Freedom Partners, another Koch entity which largely targeted Democrats with attack ads, spent $30 million.

Tim Phillips, president of Americans for Prosperity, would not say directly that Republicans who support the bill will face consequences next year, but noted, “Members of Congress know how serious we take a vote like this.”

James Davis, a spokesman for Freedom Partners, said “network organizations will stand with principled lawmakers who will oppose the House healthcare proposal.”

Davis said the Koch network would spend between $300 million and $400 million ahead of the 2018 elections.

Koch Influence

Last year, Americans for Prosperity and the Club for Growth targeted an incumbent House Republican, then-Representative Renee Ellmers of North Carolina, for being too close with House leadership and not holding the line on government spending. Ellmers lost in a primary fight.

House Republicans have been nervous about primary challenges since 2014 when Eric Cantor, then the majority leader, lost to a little-known conservative named David Brat.

Phillips said his organization last year was instrumental in getting Republican incumbents Senators Rob Portman of Ohio and Pat Toomey of Pennsylvania re-elected. The two leading Koch groups sat out then-Senator Kelly Ayotte’s tight race in New Hampshire. Ayotte lost by 0.1 percent of the vote.

“Groups such as the Kochs have been an important part of a coalition of outside Republican money,” said Nathan Gonzales, a congressional political analyst in Washington. “If that coalition falters, that could contribute to Democratic gains.”

But several lawmakers interviewed by Reuters were dismissive of the opposition by conservative groups.

“For me, this healthcare bill is an absolute no-brainer,” said Representative Devin Nunes of California, a close Trump ally. “Any conservative group who opposes it, I don’t even understand how they can categorize themselves as being a conservative group.”

The bill’s supporters have argued that voters are more likely to punish Republicans who do not act to replace Obamacare when given the chance. “If it fails there are going to be a lot of people who are looking for work in 2018,” said Representative Mike Conaway of Texas.

The political implications of the bill, though, remain largely unclear.

Even if it passes the House, the bill faces a difficult path in the Senate, where several conservatives have declared their opposition. Veteran House members recall in 2009, when then-Speaker Nancy Pelosi forced a vote on a bill that would cap carbon emissions. The bill did not pass the Senate, and many Democrats from coal states lost their seats in the 2010 elections for their votes.

Article Link To Reuters:

Democrats Gripped By Special Election Performance Anxiety

Expectations are high in several upcoming races. Maybe a little too high, party leaders worry.

By Gabriel Debenedetti
March 22, 2017

Money is flooding into Democrat Jon Ossoff’s campaign. The national party has started running focus groups on his behalf. Thousands of volunteers have flocked to his team to help him win his April special election for a vacant Atlanta-area congressional seat.

The race for Georgia’s 6th District has suddenly become a focal point, viewed as a chance to send Donald Trump a message by channeling the party’s grass-roots rage, energy and frustration into a single contest. But party leaders are growing increasingly frustrated by the nationalization of this race and another in Montana — and worried about unrealistic expectations in Republican-friendly seats where the Democrats are at a decided disadvantage.

Just a few high-profile losses in races framed as referendums on the Trump agenda, Democrats fear, and the currently heightened level of engagement and hope might fall off the cliff.

“I would caution heavily against resting the entire future of a party on the outcome of a special election,” warned Rebecca DeHart, the Georgia Democratic Party’s executive director.

The polarizing nature of the presidential election and the early months of the Trump administration are already amplifying the noise surrounding not just the Georgia special election but a handful of congressional special elections slated in coming months. The national press, and activists and officials in both parties, are looking for clues to understand Trump’s newly refashioned political landscape — in places like Montana, where there’s a contest to replace Interior Secretary Ryan Zinke; in South Carolina, where Budget Director Mick Mulvaney’s former seat is vacant; in Kansas, where CIA Director Mike Pompeo’s seat is open; and in California, where there’s a crowded contest to succeed Xavier Becerra, now the state’s attorney general.

Nowhere is grass-roots Democratic optimism more acute than in Georgia, where Ossoff, a 30-year-old documentary filmmaker, is vying to capture the suburban Atlanta seat left vacant by Health and Human Services Secretary Tom Price. The state is trending toward battleground status, and Trump won the district in question by a single percentage point.

Ossoff has raised millions of dollars online from angry activists, and he spent Thursday night at a fundraiser hosted for him by party bigwigs like Reps. Nancy Pelosi, Steny Hoyer, James Clyburn and John Lewis at Democratic National Committee headquarters.

A Pelosi-signed fundraising email for the Democratic Congressional Campaign Committee claimed on Thursday that the energy surrounding the race has Republicans “terrified.”

But local Democrats see risk in raising expectations too high. Trump may have underperformed there in November, but Price typically won the seat by landslide margins. At best, Ossoff is a long shot — and local party officials fear even a narrow Ossoff loss could create the impression that Georgia is still too red to warrant attention from the national party.

“You can make two mistakes with special elections. One is to over-read and assume that because you won or lost, that is a predictor of the midterms. The flip side is that you can under-read,” said strategist Jesse Ferguson, a former top official at the House Democrats’ campaign wing.

“Special elections are indicators, not prognosticators. They are testing grounds, but not conclusive proof-points, [so] it can be a mistake to read into a special election as giving the party a perfect road map for where to invest in the future. But at the same time, ignoring the consequences of these testing grounds comes at your peril," he said.

The Georgia race will feature an April primary with candidates of all parties, and assuming none reaches 50 percent, there will be a June runoff that’s widely expected to pit Ossoff against a Republican who will likely be the favorite.

“If Jon Ossoff is the future of the Democratic Party, the future is very bright for Republicans. Jon Ossoff has a better chance of being cast as Han Solo in the next 'Star Wars' movie than becoming a member of Congress,” said Corry Bliss, executive director of the American Action Network and Congressional Leadership Fund, groups tied to GOP House leadership — which has run anti-Ossoff ads. He was alluding to clips that have circulated of Ossoff dressed as that character in college.

Not all of the special elections are viewed as Trump-era barometers. The South Carolina and Kansas seats are expected to remain in GOP hands, while the Los Angeles-area seat is almost certain to remain in Democratic control. But along with the Georgia contest, the May special election for Montana’s at-large House seat is being watched closely, and some Democrats see it as a promising — if slightly more difficult — pick-up opportunity.

In its endorsement of Rob Quist, the Democratic nominee, the popular liberal website Daily Kos described the race as "the perfect test, then, of a populist outsider versus an out-of-touch one-percenter.”

But the conventional wisdom in Montana is that in order to win statewide, a Democrat needs exceedingly high name recognition. That doesn’t describe Quist, a musician who is running against Greg Gianforte, a businessman who waged an unsuccessful challenge against Democratic Gov. Steve Bullock in 2016.

“There are some people on the national level who are saying this is the referendum of what’ll happen with Trump, because our state went for Trump. But the reality is it’s local. Our state is unique: We elected Steve Bullock and Trump by a wide margin,” said Jim Larson, chairman of the state Democratic Party.

Bullock himself warned against attempts to nationalize the race.

“We haven’t really seen what this election is going to look like,” he said. “It’s hard to say it’s going to be one thing or another until it starts to be a little more defined.”

Montana GOP chairman Jeff Essmann, a local legislator and former state Senate president, said he’s skeptical about Democratic chances in a state where Trump won easily.

“If they want a laboratory for that, they need to do it in a state where Trump didn’t win by 20 percent, like Montana,” said Essmann. “He’s very popular, his policies are, and I think this race is going to simply come down to a race between one experienced candidate who will support the Trump agenda and one who will oppose it."

Even local Democrats are hesitant to use their race as a potential piece of evidence regarding Trump’s standing among voters.

“For Democrats and Republicans to [look at the results and] say, ‘Oh, America hates Trump,’ or ‘America loves Trump’? Well, both of that is true,” said Larson. “Can there be lessons learned on elections that we win? Well, what worked in Delaware isn’t necessarily going to work in Montana."

Article Link To Politico:

Trump’s Perfectly Normal Approach To The Health-Care Fight

By John Podhoretz
The New York Post
March 22, 2017

The Republican health-care bill is making its way toward passage in the House of Representatives Thursday. And though the course of the legislation hasn’t been smooth and its future in the Senate is uncertain, we’ve learned a great deal about Washington politics in the Trump era from its journey thus far.

President Trump may be the most unconventional White House resident of our time, and perhaps of all time, but when it comes to this bill, he’s behaving the way anyone in his position would behave.

It’s the first bill of his presidency. He and House Speaker Paul Ryan agreed they would tackle health care first. The actual piece of legislation itself was designed by Ryan and Trump’s own Health and Human Services Secretary Tom Price.

Whatever the bill’s failings, and they’re huge, Trump clearly recognizes that his credibility as a political leader is resting on the outcome of its journey.

If the bill passes, he will have a big procedural win in his column in his maiden outing as an elected pol. If it fails, he will look like a paper tiger, a guy who couldn’t even get a bill he championed through a Congress controlled by his own party.

Conservative skeptics who dislike the bill — apparently even some inside the White House, if gossip is to be believed — were hoping Trump’s populist, anti-establishment approach during the primaries would allow him to transcend this classic calculus.

After all, he ran against the Republican establishment in the Republican primaries and continued to do so during the general election. Why couldn’t he turn on the bill on the grounds that it violated his own populist promises and maintain his standing as a critic of politics as usual?

Trump’s behavior during the three weeks of the bill’s existence made it clear he flirted with this notion at first. He complained about the bill in a couple of rallies and said he wished they’d done tax reform first.

And then he stopped, and began doing what political leaders do when they want something that recalcitrant members of their own coalition are resisting. He calls them. He meets with them. He says nice things to them.

And then he threatens them with his displeasure should they balk at following his wishes.

He is following the same course other presidents before him have in somewhat comparable situations.

In 1993, President Bill Clinton cajoled and bullied a Pennsylvania congresswoman into casting the pivotal vote for his tax increase even though she knew it would mean her eventual defeat the following year. (That soon-to-be-ex-congresswoman, Marjorie Margolies-Mezvinsky, eventually became Chelsea Clinton’s mother-in-law.)

President George W. Bush promised a prescription drug benefit in the 2000 campaign, and when conservative Republicans balked in 2003, he and House leaders turned up the heat. He lobbied ferociously and got four GOP members to change their “nay” to a “yea” at the last minute — while the bill was being voted on.

It passed the House by a single vote.

The point here is that presidents can’t sit it out on controversial legislation when their party has chosen to tackle a major issue. Not even Trump.

Presidents have a lot of actual power. But they must also show they have the power to persuade — and even if persuasion doesn’t do it, they have to show they have the power to intimidate.

In the end, a win is a win and a loss is a loss. This basic statement is gospel for Trump, who has nothing but contempt for people he thinks are losers. If the bill goes down in the House, in his own eyes, he’ll look no better than . . . I don’t know, than someone who got captured.

And he hasn’t even gotten to the really hard part yet: the Senate.

Article Link To The New York Post:

Mexico Warns Firms: 'Not In Their Best Interest' To Build Border Wall

By Anthony Esposito
March 22, 2017

Mexico's government on Tuesday warned Mexican companies that it would not be in their best "interests" to participate in the construction of U.S. President Donald Trump's border wall, though there will be no legal restrictions or sanctions to stop them if they tried.

While some Mexican companies stand to potentially benefit from the controversial infrastructure project, residents south of the border view the wall and Trump's repeated calls to have Mexico pay for it as offensive. That is putting public pressure on firms to abstain from participating.

"We're not going to have laws to restrict (companies), but I believe considering your reputation it would undoubtedly be in your interest to not participate in the construction of the wall," said Mexican Economy Minister Ildefonso Guajardo.

"There won't be a law with sanctions, but Mexicans and Mexican consumers will know how to value those companies that are loyal to our national identity and those that are not," Guajardo added.

His comments echo those of Mexico's foreign minister Luis Videgaray, who said on Friday that Mexican companies that see a business opportunity in the wall should "check their conscience" first.

Mexico's Cemex (CMXCPO.MX), one of the world's largest cement producers, has said it is open to providing quotes to supply the raw materials for the border wall. Competitor Grupo Cementos de Chihuahua (GCC.MX) has also signaled a readiness to work on the project.

Both companies have a strong presence in the United States.

Commenting on a media report published last week that stated Cemex will not participate in construction of the border wall, company spokesman Jorge Perez told Reuters: "I confirmed that we will not participate in the bidding process. That is all we have said."

Asked if Cemex would be willing to provide raw materials, such as cement, to the companies eventually selected to build the wall, Perez said he could not comment.

The only Mexican company, out of some 720 in total, to put its name down on the U.S. government's website for business opportunities as an interested vendor for the wall construction, is a small, four-member concern from the central city of Puebla that wants to provide LED lights that it imports mostly from China.

Mexican activists have called on consumers and local government officials to boycott that company, Ecovelocity.

Article Link To Reuters:

What’s Next After Stock Market’s Sharp Drop? Here’s What History Says

On average, the S&P 500 gains after a long period without a sharp stock-market decline.

By Mark DeCambre
March 22, 2017

What happens after the stock market suffers a sharp drop for the first time following a protracted period of quietude? That is precisely the question Wall Street investors may be pondering after Tuesday’s downdraft—the biggest daily decline for the U.S. stock-index benchmarks since Oct. 11—resulted in the end of a 109-day streak of days without decline of at least 1%.

Strategists at Bespoke Investment Group ran the numbers on returns for the S&P 500 SPX, -1.24% going back to 1928 following a period of 100 days or more without a 1% decline (see graphic below):

The data group have cited only 11 such instances in which trading without a down day hit the century mark, and on average during the week, month and three months following the first decline during those periods, the broad-market S&P 500 tends to end higher.

For the week, the average gain is 0.65%, advancing 8 out of 11 times. The average return after a month is 2.34%, with returns positive in 9 out those 11 occasions. After three months, average returns are about 2.44%, boasting gains in 8 out of those 11 periods (see table below).

To be sure, those statistics may offer no solace (and no guarantee of future gains) to investors fretting that the wheels may be coming off the equity train that has been powered by promises of fiscal stimulus from President Donald Trump. Anticipated delays in his health-care overhaul has led some to fret that the slog toward implementing pro-business policies, including deregulation, tax cuts and infrastructure spending could be longer than initially expected.

But it isn’t exactly clear, beyond lingering concerns about lofty stock valuations, what set off a sharp tumble in stocks on Tuesday, which saw the Dow DJIA, -1.14%fall 237 points, or 1.1%, to end at 20,668, the S&P 500 sink 1.2% to close at 2,344, and the Nasdaq Composite Index COMP, -1.83% to suffer a 1.8% drop to finish at 5,793. Broadly, it was the worst daily drop for the benchmarks in five months.

To many, the market selloff was overdue. But it is hardly anything to write about because as Salil Mehta, a graduate school finance professor, who has worked at Georgetown University and New York University, has noted, stock markets normally decline by least 1% once every 6 sessions.

The four-month period without a drop for the Dow and S&P 500 was uncanny and historic, but may provide some brave souls with buying opportunities, while others wait for the next shoe to drop.

Article Link To MarketWatch:

US Stocks Set For 5% Correction -- Or Perhaps Something Far Worse

By Karen Gilchrist
March 22, 2017

U.S. equities are headed for a 5 percent drop – at least – after suffering their biggest falls since the election of President Donald Trump, says Dennis Gartman, editor and publisher of the Gartman Letter.

"This is the start of at least a 5 percent correction, and perhaps something far worse than that over time," Gartman told CNBC Wednesday, after markets began to doubt the president's pro-growth tax reform and stimulus policies during Tuesday's session.

U.S. markets led the declines, with the benchmark S&P 500 index tumbling 1.2 percent Tuesday — and breaking a run of 109 trading days without a drop of 1 percent or more. The Dow Jones industrial average and the Nasdaq also suffered their biggest slumps of the year.

"I take this very seriously," said Gartman, "This is not just a one off circumstance in the equities market."

Alongside equities, base metals and crude oil posted lows while gold and bonds broke out to the upside, suggesting a wider shift in capital markets.

"I think there's something to the downside that could be quite serious," Gartman said. "Let us hope it's merely a 5-7 percent correction and nothing more than that."

A correction indicates a shorter and smaller downturn than a bear market, which usually refers to falls of around 20 percent over a two month period, or a recession, which refers to a prolonged downturn. However, a correction can be a precursor for both. UBS also predicted a correction for stocks on Tuesday, saying the fall could be closer to 10 percent.

"We've been saying that we expect a 5 to 10 percent correction. We've been saying that for weeks now," Julian Emanuel, equity and derivatives strategist at UBS, wrote in an analyst note.

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Sears Warns Of ‘Substantial Doubt’ About Company's Future

Troubled retailer adds ‘going concern’ language to filing; Company has struggled to recover from billions in losses.

By Nick Turner and Lauren Coleman-Lochner
March 22, 2017

Sears Holdings Corp. acknowledged “substantial doubt” about its ability to keep operating, raising fresh concerns about a company that has lost more than $10 billion in recent years.

The retailer added so-called going-concern language to its latest annual report filing, suggesting that weak earnings have cast a pall on its future as a business.

“Our historical operating results indicate substantial doubt exists related to the company’s ability to continue as a going concern,” the Hoffman Estates, Illinois-based company said in the filing. But the company added that its comeback plan may help alleviate the concerns, “satisfying our estimated liquidity needs 12 months from the issuance of the financial statements.”

The disclosure comes after more optimistic signs from the company, which has been working on a turnaround under Chief Executive Officer Eddie Lampert. Sears posted a narrower loss than predicted in the fourth quarter, and it has pledged to lower its debt burden and cut annual expenses by at least $1 billion.

Lampert, a hedge fund manager who is also Sears’s biggest investor, aims to reduce debt and pension obligations by $1.5 billion. The CEO has helped keep the ailing retailer afloat by offering more than $1 billion of assistance, including a $500 million loan facility announced in January.

As part of its comeback plan, Sears had closed stores, sold real estate and offloaded businesses. Earlier this month, the department-store chain completed the sale of its Craftsman tool brand to Stanley Black & Decker Inc. for about $900 million.

“While our historical operating results indicate substantial doubt exists, we want to be very clear that we’re taking decisive actions to mitigate that doubt,” Howard Riefs, a Sears spokesman, said in an emailed statement.

Article Link To Bloomberg:

Fed Looks Past Trump Stocks Rally, Sees Same Old Tired Expansion

Stock investors pin hopes on growth pickup as Fed sees 2% slog; Yellen & Co. avoids trying to forecast messy political process.

By Craig Torres and Mike Dorning
March 22, 2017

If U.S. stock investors are true believers in President Donald Trump’s economic agenda, count members of the Federal Reserve as agnostics.

The S&P 500 Index rose in seven of Trump’s first eight weeks in office before suffering on Tuesday its biggest one-day setback under the new administration. Yet the Fed appears unswayed by the market’s euphoria. It unveiled forecasts last week that showed officials predict about 2 percent growth in the first three years of Trump’s presidency -- little changed from their December estimates. Also unaltered was their expectation for three interest-rate increases in 2017 and three next year.

The Fed’s cautious outlook shows central bank officials aren’t prejudging whether Trump can deliver on a plan to revitalize the U.S. economy with shock therapy: deregulation, infrastructure spending, retooled trade agreements and tax reductions intended to raise growth to 3 percent or more.

Trump’s first two months in office are proving that getting an ambitious agenda through even a Republican-controlled Congress is easier said than done. “There are a lot of hopes and dreams built around this administration,” said Ellen Zentner, chief U.S. economist at Morgan Stanley in New York. “It is a tall order to deliver.”

For eight years, the expansion has been driven by Fed monetary policy that kept interest rates at or only slightly above zero. But now, as it raises rates and slowly withdraws from the stimulus game, the Fed is effectively handing off the burden of spurring growth to the White House and Congress. They control the levers of fiscal policy -- taxes, infrastructure spending, and a key propellant the economy needs to reach a higher gear: federal funds to invest in human or physical capital that yields more output per hour.

When asked how the Fed is responding to the Trump economic plan, Fed Chair Janet Yellen said at her March 15 press conference: “There is great uncertainty about the timing, the size, the character of policy changes that may be put in place.” She said some Fed officials had “penciled in” some fiscal policy changes into their forecast, while “we have plenty of time to see what happens.”

The Fed’s forecast underscores its view that there aren’t any inflation-inducing booms in store for the economy soon.

Sub-Par Growth

“They don’t see regime shift” and “are definitely not incorporating some comprehensive reform into their forecast,” said Ethan Harris, head of global economics research at Bank of America Merrill Lynch. Indeed, the top end of the range of gross domestic product growth forecasts from 17 Fed officials was 2.4 percent in 2018. Their longer-run estimate of how fast the economy can grow was unchanged in their most recent forecast at 1.8 percent.

Stock investors still anticipate that the Trump plan could be a boon for corporate profits, giving growth a big boost at a time when the rest of the world is looking healthier: China’s economy has stabilized and Brexit hasn’t turned out to be a disaster in the U.K. that spread to the rest of Europe.

“When was the last time the economy was as healthy as it is today, and Washington began to talk about a cocktail of fiscal stimulus, deregulation, and tax cuts?” said Richard Bernstein, who oversees more than $4 billion at the New York investment firm that bears his name. “The answer is never.”

Some of the excitement fizzled Tuesday. A stock benchmark constructed by Richard Bernstein Advisors called the RBA American Industrial Renaissance Index, which includes companies such as RBC Bearings Inc. and American Railcar Industries Inc., sank Tuesday to its lowest level since early December, but is still up about 18 percent since the election.

There’s a lot at stake for people of all incomes: The economy will either prosper and accelerate with productivity-enhancing investment, or slog along with the moderate growth and meager compensation gains for workers.

At the heart of the Republican tax reform proposal is a cut in corporate rates to 20 percent, from 35 percent, the biggest reduction in history, Republicans say. Corporate investment expenditures can be fully written off.

Ike Brannon, a former tax specialist in the U.S. Treasury Department under President George W. Bush, said that Republican plan could boost productivity by stimulating investment. A measure of such spending slumped for four consecutive quarters before rising at a 1.9 percent annual rate in the final period of last year, a dire sign of corporate expectations about the future.

By moving the corporate tax rate more in line with other countries, it could also provide incentives for U.S. companies to keep operations here instead of moving them offshore, and possibly create more jobs, Brannon said.

That gets to the political delicacy of the Trump experiment. If the whole package fails to deliver faster growth and simply skews toward the wealthy and to stock investors, then a significant part of his constituency hasn’t won anything.

“If Trump doesn’t deliver for middle-class people, they are going to look for something else,” said Brannon, who is now president of consultancy Capital Policy Analytics. “They understood that he was going to look after them first.”

Obamacare Fight

And then there’s Congress. While Republicans have a majority in both chambers, the troubled Trump-backed effort to repeal and replace the Affordable Care Act shows just how difficult it is to pass a big, sweeping law with multiple stakeholders. A loss or a prolonged political battle could sap the president’s political strength if it goes down in defeat.

Tax reform also faces formidable obstacles. The bitter partisan divide in Washington makes it difficult to attract Democratic support in Congress, and Republicans are fractured over issues such as whether to shift to a border-adjusted tax, which is vehemently opposed by retailers.

“It is incredibly difficult to know what will make it through the process we have,” said Donald Marron, the director of economic policy initiatives at the Urban Institute in Washington.

For now, Fed officials don’t seem perturbed that some business sentiment indicators are around the highest levels in years while their own forecast calls for more of the same slow but steady growth. They want to move rates higher, and shrink their $4.47 trillion balance sheet -- in other words, return policy to something more normal. Their bigger worry may be that they can’t because the current administration doesn’t deliver.

“There is an underlying current of discomfort among key policy makers that all this incredible rise in sentiment could be built on a house of cards because it is based on the assumption” that stimulus passes later this year, said Morgan Stanley’s Zentner. “Fiscal policy could very well disappoint.”

Article Link To Bloomberg:

Saudi Arabia’s Oil Supremacy Falters

The world’s biggest crude exporter is rejiggering its long-held strategy of clinging to market share.

By Sarah McFarlane, Benoit Faucon, and Summer Said
The Wall Street Journal
March 22, 2017

Saudi Arabia is losing its grip on big oil markets it once dominated amid a deep production cut that has reshaped global petroleum trade routes and benefited rivals like Iran, Russia and the U.S.

As it pursues a steep production cut aimed at putting a floor under oil prices, the world’s biggest crude exporter is conceding ground to American shale producers and hastening a retreat from the U.S., people familiar with current Saudi policy said.

Saudi Arabia’s crude exports to the U.S. for the week ended March 10 fell by 426,000 barrels a day compared with the previous week, according to the latest U.S. data. That represents the sharpest weekly drop in the time since the Organization of the Petroleum Exporting Countries decided in late November to cut production to raise oil prices.

The drop was by design, the people said, as the kingdom is looking instead to Asia for growth.

But Saudi Arabia is falling behind Russia when it comes to supplying China, China’s General Administration of Customs data shows. China is one of the world’s fastest-growing major oil consumers.

Elsewhere, the Saudi oil machine has been outmaneuvered by Iran and Iraq among big European customers in France, Spain and Italy, according to data from the International Energy Agency.

The Saudi retreat from an all-out battle for these markets reflects the compromises the kingdom is now making to achieve a higher oil price, as it faces fiscal pressures from a burgeoning population and as the planned offering of its state oil company, Saudi Arabian Oil Co., or Saudi Aramco, nears.

“Saudi Arabia is under extraordinary pressure both internally and externally,” said Dr. Jean-Marc Rickli, head of risks analysis at the Geneva Centre for Security Policy.

For years, maintaining market share was a major priority for Saudi Arabia. In 2014, when the price of oil plunged, the Saudis opted against an OPEC output cut to avoid surrendering its share of key markets.

Now, that strategy has changed in ways that would have been unimaginable just a few years ago.

Since Saudi Arabia and OPEC decided to cut production last November, American shale companies have taken advantage of the resulting higher prices to launch a comeback, adding 412,000 barrels a day of new output, according to the U.S. Energy Information Administration. While some of that oil has gone to satisfy the U.S. market, American crude exports have surged to more than 1 million barrels a day this year.

In an interview, Saudi energy minister Khalid al-Falih said the return of U.S. production was “good”—as long as it doesn’t throw global supply and demand out of balance. “Extremes are not good,” Mr. Falih said. “Saudi Arabia is for balance.”

Saudi Arabia—which throttled output to record levels to compete with a flood of U.S. oil two years ago—is now pulling back amid the renewed onslaught. The kingdom has cut its production by nearly 800,000 barrels a day since October. That is 60% more than it promised as part of the OPEC deal and signals its seriousness about stabilizing the oil market.

“This stabilization has meant sacrificing market share,” said Alan Gelder, vice president of refining, chemicals and oil markets at Wood Mackenzie, an energy consulting firm.

The cuts in exports to the U.S. are the latest in a long series of pullbacks in what was once the kingdom’s most lucrative market. In the 1990s, Saudi Arabia accounted for almost a third of all American crude imports, but it represented only 12% in November, according to the EIA.

To be sure, Saudi Arabia remains the world’s dominant oil producer, able to influence prices because, as it says, the kingdom pumps about 2 million barrels a day below capacity. That means the country has the ability to quickly ramp output up and down, swaying prices in the process.

The Saudi pullback has allowed rivals to pounce.

Russia, which isn’t part of OPEC but agreed to cut output anyway, is pumping near post-Soviet highs. The group’s second-biggest producer, Iraq, remains at near-record output levels. OPEC member Iran was allowed to keep increasing a certain amount of output.

Iraq and Russian officials say they are committed to cutting production and not taking advantage of the Saudis. Iran’s oil ministry declined to comment.

Even before the OPEC production cuts were announced, there had been a clear drop in imports of Saudi oil by major European economies. Shipments of Saudi oil to Spain, Italy and France fell by 11% between July and October, according to International Energy Agency data.

At the same time, Iran sent stored oil to the export market, with a sweetener: a 3% discount against crude from OPEC rivals, according to a rival producer. The result: Iranian oil shipments to Europe surged 45% in December compared with August, according to ship tracker Clipper Data.

“The Saudis are impacted by the OPEC cuts and not the Iranians, so that is helping Iranians to keep pushing a little bit against the Saudi crude,” said Alfonso Mingarro, the head of trading at Spanish refiner Cepsa, which buys from both the Iranians and Saudis.

Saudi Arabia also has been bruised in Asia.

In China, the kingdom accounted for 13% of imports in 2016, down from 15% in 2015, Energy Aspects said.

The kingdom has sought to shore up its Asian market after Russia flexed its muscles there. Last year, Russian state-owned oil company OAO Rosneft outbid Aramco for the second-largest Indian refinery, Essar Oil.

King Salman is on a monthlong Asian tour to promote the Aramco initial public offering and to secure outlets for Saudi crude, including a $7 billion refining agreement with Malaysia. Mr. Gelder of Wood Mackenzie said Saudi Arabia was working to nail down future market share, even as it pulls back today.

Saudi Arabia is trying to become more flexible to capture new demand.

Saudi Aramco has revamped its Chinese operations, selling more to independent refineries there that prefer buying individual cargoes to sealing long-term contracts. The kingdom is also accelerating plans to rely more on refined products like gasoline, which are more profitable than crude.

“They are becoming more proactive,” said a Saudi oil-industry executive.

Article Link To The Wall Street Journal:

Hot U.S. Real Estate A Potential Red Flag

By Jonathan Spicer
March 22, 2017

The run-up in U.S. real estate prices could potentially amplify any future economic downturn, a Federal Reserve official said on Tuesday, urging regulators globally to consider tools beyond interest rates that could help cool the sector.

A sharp downturn in U.S. residential and commercial property prices in 2007 and 2008 rocked banks that were highly leveraged in the sector, sparking the global financial crisis and deep recession. With the economic recovery now well under way, bank holdings of commercial and apartment mortgages rose 9 percent and 12 percent, respectively, in the past year.

Eric Rosengren, president of the Boston Fed and an influential financial regulator at the U.S. central bank, said the "sharp" rise in apartment prices in particular may signal financial instabilities that interest rates, which are only gradually rising, may not be able to contain.

"Because real estate holdings are widespread, and the monetary and macroprudential tools for handling valuation concerns are somewhat limited, I believe we must acknowledge that the commercial real estate sector has the potential to amplify whatever problems may emerge when we at some point face an economic downturn," Rosengren said in prepared remarks for delivery to a banking supervision conference in Bali, Indonesia.

He noted that real estate has repeatedly played a big role in episodes of financial instability, and that prices are now outpacing growth in building owners' operating income.

Since equilibrium interest rates - the Fed's traditional tool to guide the economy - could remain lower than decades past, Rosengren said, "this would require a greater emphasis on macroprudential tools if valuations became a source of concern."

Such tools include rules and restrictions on bank holdings. "It is prudent to keep a healthy, ongoing focus on the sufficiency of these tools and their ongoing enhancement," he added.

Article Link To Reuters:

Fed's Kaplan Sees Three Rate Hikes In 2017, No Rush On Balance Sheet

By Ann Saphir
March 22, 2017

With the U.S. workforce nearly fully employed and inflation heading toward 2 percent, the Federal Reserve should raise interest rates two more times this year and continue work on a plan to gradually trim its massive balance sheet, Dallas Federal Reserve Bank President Robert Kaplan said.

But, Kaplan was careful to emphasize in an interview with Reuters late Tuesday, there is little rush on either score.

"I think we are moving toward a period where we should begin allowing the balance sheet to gradually and patiently run off," said Kaplan, a voter this year on the Fed's policy-setting panel. "But I think we have work to do, probably, to get to that point."

By "work to do," Kaplan was referring to further interest-rate hikes. Kaplan supported last week's interest-rate increase, only the Fed's third since the financial crisis, and said Tuesday the "country will be well-served" by the decision.

"Now that we’ve done it, I think that we’ve got the benefit of a little time here to see how the economy unfolds," he said. "I plan to take advantage of that to assess how the economy is unfolding and be prepared to make a judgment as we head toward the next meetings."

Over a Dr. Pepper and bagel after a morning of meetings at the San Francisco Fed, Kaplan reiterated his view that two more rate hikes this year is a "reasonable" base case, as long as labor market slack continues to decline and inflation continues to rise toward the Fed's 2-percent goal.

"We are still accommodative and I think it’s very appropriate for us to be accommodative," he said. If inflation rises above the Fed's 2-percent target for a brief period, it is not going trigger faster rate hikes as long as it is not a persistent trend, he said.

Though the current rate of U.S. unemployment, at 4.7 percent, is below the level historically thought to be consistent with full employment, Kaplan said he does not believe it will generate undue upward pressure on prices.

Kaplan also said he is "mindful" that some of the policies expected under President Donald Trump's new administration, including changes to immigration and trade policies and changes to health insurance, could slow economic growth or hurt consumer spending. He and his staff have been trying to figure out why some of the latest readings on consumer spending already suggest some sluggishness, and will keep a close eye on those figures going forward.

But, he said, he will not be factoring in impacts from Trump's new policies, including those like tax reform that may boost growth, until he is pretty sure they will be enacted.

Balance Sheet

Last week, in addition to raising rates, the Fed discussed what to do with its $4.5 trillion balance sheet, built up after years of bond-buying aimed at stimulating investment and hiring by pushing down long-term borrowing costs.

Now that the economy is in better shape, the Fed wants to eventually trim the balance sheet to a more normal size. So far Fed Chair Janet Yellen has given few details on the plan, and has said nothing has been decided yet.

Kaplan said he believes the discussion on what to do with the balance sheet should continue throughout the year, and that once rates are a bit higher, the plan should be published and put into effect soon after.

He declined to say when that should be, but said he would like rates to be high enough that there would be little chance of rates falling back to zero any time in the near future.

Kaplan said he would favor a plan to reduce the balance sheet in a way that would not "unduly affect" financial markets. "That for me means gradually," he said, adding that reductions should be kept to a "reasonably manageable" percentage of the daily volume of trading in mortgage-backed securities and Treasuries, among other factors.

Article Link To Reuters: