The Finance 202: Investors track new Washington drama as debt ceiling deadline approaches

Monday, July 15, 2019
The Washington Post

Investors won’t be getting a break from Washington-bred drama this summer. 

Just as a pause in escalating U.S.-China tensions seemed to promise a respite, a fast-approaching deadline for lifting the debt ceiling presents a new potential crisis. 

Treasury Secretary Steven Mnuchin informed House Speaker Nancy Pelosi (D-Calif.) in a Friday letter that the federal government could exhaust its borrowing authority in early September, far earlier than the October-November range the administration projected in May — and potentially before lawmakers return from their August recess. “We model various scenarios for cash projections. Based on updated projections, there is a scenario in which we run out of cash in early September, before Congress reconvenes. As such, I request that Congress increase the debt ceiling before Congress leaves for summer recess,” Mnuchin wrote Pelosi on Friday.

That leaves eight House workdays for the administration and Congressional leaders to reach and pass an agreement. Pelosi has projected confidence that a deal will get done. She told reporters Thursday that Congress should combine a measure lifting the debt ceiling with a broader budget bill that lifts caps on spending, and pass it before the recess. And she has been in frequent contact with Mnuchin by phone over the past week.  “We’ll see,” Pelosi said of reaching a deal. “We’re going back and forth.”

Across the Capitol, Senate Majority Leader Mitch McConnell (R-Ky.) last week said he doesn’t think “there’s any chance we will allow the country to default.” 

Markets so far have shrugged off the threat, with major indexes all closing the week at record highs, up 2.4 percent this month. 

But Federal Reserve Chair Jerome Powell, for one, isn’t taking a debt ceiling fix entirely for granted. In prepared testimony to the House Financial Services Committee last week, he cited the matter alongside trade fights and Brexit as “government policy issues” menacing the economic outlook as the central bank eyes interest rate cuts. And he told the Senate Banking Committee that breaching the debt limit would do “unthinkable” damage to the economy at home and abroad. “I wouldn’t be able to capture the range of possible negative outcomes from that,” he said, warning that “no one should assume that the Fed or any other agency can be relied upon to shield our economy from the short, medium, and long-term negative consequences of such an act.”

Trump's acting chief of staff Mick Mulvaney and Mnuchin leave the Capitol after a budget meeting with Congressional leaders in May. (Eric Lesser/ EPA-EFE)

Other analysts are unsure what to make of the current state of play. “We just don't know if Mr. Mnuchin's letter was prompted by an abundance of caution, or whether he's genuinely losing sleep over the potential cashflow drop-dead date,” Pantheon Macroeconomics chief economist Ian Shepherdson wrote in a Sunday note. “Mnuchin’s letter has increased the chance that a deal will be done much sooner than we have been expecting. We very much doubt that any congressional leader wants to run the risk of being blamed for the economic and financial market chaos that would follow hitting the debt ceiling, but both sides will want to extract the biggest spending concessions from the other as possible. This usually means the negotiations go to the wire, but it now seems that the wire might be much closer than anyone had expected.”

Shepherdson also noted that the Trump administration suffers a credibility gap with some lawmakers that could become an issue. “On economic matters, this administration has some serious credibility issues, and it's not clear to us that the Treasury Secretary's very short letter alone will convince everyone that action is needed now,” he writes. 

The matter “should be a relatively straightforward task for Congress to agree on a two-year spending deal that also raises the debt ceiling,” Capital Economics’ Paul Ashworth wrote in a Friday note. “But anything could happen amid the acrimony between Democrats and the president.”

Adding to the uncertainty is the possibility that faced with an impasse in Congress, Trump tries to find a creative solution involving unilateral use of executive power. Then-President Obama dismissed suggestions from some in his own party that he resort to such measures when he confronted his own debt ceiling standoff with Congress in 2011. “That can not be said of this President who has strikingly different views,” Chris Krueger of Cowen Washington Research noted last week. 

An option that allowed Trump to bypass Congress and flex his executive muscle, even if it invited legal challenges, “would both appeal to his visceral instinct for unilateral action,” Krueger writes. “One of the reasons we are worrying about these options and returning to these outside-the-box ideas is because we have an Attorney General and legal team around Trump with a far more expansive view of executive power than early Trump or Obama Administrations...a low Barr for executive action in the parlance of our times.”

TRADE FLY-AROUND: 

A Huawei retail store in Beijing. (Andy Wong/AP)

— U.S. manufacturers are leaving China: “U.S. manufacturers are shifting production to countries outside of China as trade tensions between the world’s two biggest economies stretch into a second year,” WSJ’s Austen Hufford and Bob Tita report.

“The moves by U.S. companies add up to a reordering of global manufacturing supply chains as they prepare for an extended period of uneven trade relations. Executives at companies that are moving operations outside China said they expect to keep them that way because of the time and money invested in setting up new facilities and shifting shipping arrangements. Companies said the shifts accelerated after the tariff on many Chinese imports rose to 25% from 10% in May.”

— Chinese growth slows. Bloomberg's Enda Curran: "The last time China’s economy grew this slowly, a youthful Bill Clinton was campaigning for the presidency on the mantra, 'it’s the economy, stupid!' It’s a sentiment not lost on today’s Chinese leadership, which can take solace from data beyond the headline statistics suggesting their efforts to keep the world’s second-biggest economy on course may be gaining traction. Those signs of robustness will embolden China’s negotiators as they face down trade hawks in Washington.

"While China’s 6.2.% growth from April to June was the slowest since quarterly data began in 1992, factory output, retail sales and investment all looked more rosy. That’s a fillip for Chinese efforts to prioritize stimulus."

Amid trade fight, Huawei plans extensive layoffs: “Huawei Technologies Co. is planning extensive layoffs at its U.S. operations, according to people familiar with the matter, as the Chinese technology giant continues to struggle with its American blacklisting,” the Wall Street Journal’s Dan Strumpf reports. "The layoffs are expected to affect workers at Huawei’s U.S.-based research and development subsidiary, Futurewei Technologies... The unit employs about 850 people in research labs across the United States, including in Texas, California and Washington state."

POCKET CHANGE

A Puerto Rican flag. (Xavier Garcia/Bloomberg News)

— The fight over Puerto Rico’s future: “After three years of negotiations, Puerto Rico’s federal overseers are at last finishing up a plan to complete the restructuring of the island’s roughly $124 billion in debt,” the New York Times’s Mary Williams Walsh reports. “To resolve the biggest government financial collapse in United States history, they have had to untangle the island’s thorny finances, negotiate with creditors and figure out how to do it without endangering the livelihoods of retirees who rely solely on their pensions.”

“At the center of it all are two intertwined issues. The oversight board wants to cut back the amount paid to some of those who hold the territory’s debt while also giving an unexpectedly good deal to more than 300,000 workers and retirees, some of whom do not even have Social Security. The good deal for the pension holders means a worse one for the holders of Puerto Rico’s debt.”

— Banks report earningsBloomberg's Felice Maranz: "Citigroup Inc. is the first big U.S. bank to report second-quarter earnings when its latest results come out Monday at 8 a.m. Investors will be keeping a close eye on how tightly the bank reined in expenses, and how its international businesses fared, as weak trading revenues are already anticipated... JPMorgan Chase & Co., Goldman Sachs Group Inc. and Wells Fargo & Co. follow Citigroup with reports on Tuesday. Then comes Bank of America Corp. on Wednesday, and Morgan Stanley on Thursday."

— 2019 could set a record for store closures: “Despite the year being more than halfway over, the pace of store closures doesn’t appear to be slowing down in the retail industry. More companies piled on the bad news this week,” CNBC’s Lauren Thomas reports.

“So far, 7,062 store closures have been announced by U.S. retailers this year, according to a tracking done by Coresight Research. And the tally could top 12,000 by the end of 2019, setting a new record, Coresight says. Last year, Coresight tracked 5,524 store closures, down more than 30% from an all-time high of 8,139 closures announced in 2017.”

— Boeing’s 737 MAX debacle could last until 2020: “Boeing Co’s 737 MAX planes are unlikely to be ready to carry passengers again until 2020 because of the time it will take to fix flight-control software and complete other steps, an increasing number of government and industry officials say, even as the company strives to get its jet back into service this year,” WSJ’s  Andy Pasztor, Alison Sider and Andrew Tangel reports. “The situation remains fluid, no firm timeline has been established and Boeing still has to satisfy U.S. regulators that it has answered all outstanding safety questions."

Acting White House chief of staff Mick Mulvaney in the Oval Office on March 19. (Jabin Botsford/The Washington Post)

— Mick's kind of show: "... [Acting White House chief of staff Mick] Mulvaney has focused much of his energy on creating a new White House power center revolving around the long-dormant Domestic Policy Council and encompassing broad swaths of the administration. One White House official described Mulvaney as 'building an empire for the right wing,'" my colleagues Seung Min Kim, Lisa Rein, Josh Dawsey and Erica Werner report.

"Mulvaney’s biggest successes so far have come in deregulation efforts, where he prods agencies to move faster in case Trump loses or Democrats win the Senate in 2020, advisers say. Aside from the domestic policy shop, Mulvaney has also tapped allies to fill roles in the White House’s legislative affairs operation, the Office of Information and Regulatory Affairs, and his old haunts at the OMB. He regularly suggests ideas to all of them."

In this courtroom artist's sketch, defendant Jeffrey Epstein, center, sits with attorneys Martin Weinberg, left, and Marc Fernich during his arraignment in New York on July 8. (Elizabeth Williams/AP)

— How high society welcomed Epstein back: “A strange thing happened when Jeffrey Epstein came back to New York City after being branded a sex offender: His reputation appeared to rise,” the Times’s Jodi Kantor, Mike McIntire and Vanessa Friedman report.

“In 2010, the year after he got out of a Florida jail, Katie Couric and George Stephanopoulos dined at his Manhattan mansion with a British royal. The next year, Mr. Epstein was photographed at a ''billionaire’s dinner' attended by tech titans like Jeff Bezos and Elon Musk. A page popped up on Harvard University’s website lauding his accomplishments, and superlative-filled news releases described his lofty ambitions as he dedicated $10 million to charitable causes.” (Amazon CEO Jeff Bezos owns The Washington Post)

— Epstein’s New Mexico ranch is now under investigation: “At the center of Jeffrey Epstein's secluded New Mexico ranch sits a sprawling residence the financier built decades ago — complete with plans for a 4,000-square-foot (372-square-meter) courtyard, a living room roughly the size of the average American home and a nearby private airplane runway,” the Associated Press’s Mary Hudetz reports.

“Known as the Zorro Ranch, the high-desert property is now tied to an investigation that the state attorney general's office says it has opened into Epstein with plans to forward findings to federal authorities in New York. Epstein, who pleaded not guilty this week to federal sex trafficking charges in New York, has not faced criminal charges in New Mexico. But the scandal surrounding him has still sent a jolt through the rural southwestern state as it comes under scrutiny for laws that allowed him to avoid registering as a sex offender following a guilty plea a decade ago in Florida.”

MONEY ON THE HILL

Democratic presidential candidates at the first debate in Miami on June 26. (Wilfredo Lee/AP)

— The two economists fueling the 2020 debate: “For decades, William Darity Jr. and Darrick Hamilton toiled in obscurity. They criticized mainstream economists and politicians for failing to address racial inequality, and touted more radical remedies of their own,” WSJ’s Jacob M. Schlesinger reports. “Now, with the 2020 presidential campaign under way and liberal Democrats ascendant, the two economists are in the spotlight, thrust into the middle of an intraparty debate over how much to embrace big government and a race-oriented message.”

“Their signature ideas — guaranteed jobs for all adult Americans seeking them, government-backed trust funds for American babies and reparations for slave descendants — are being talked about on the campaign trail and, in the case of reparations, during a raucous congressional hearing in June. The two African-American economists’ theories on ‘stratification economics,’ which focuses on economic gaps between whites and blacks, have helped shape the rhetoric and platforms of several candidates.” 

— Unemployment rate loses relevanceWSJ's David Harrison: "The U.S. unemployment rate last month hit 3.7%—one of the lowest levels in half a century. In theory, that should mean we’re living in a very tight labor market, where workers are scarce and employers are boosting pay and benefits to attract new hires. That should push up inflation, as firms raise prices to afford higher salaries.

"Instead, wage growth has been muted and inflation weak, leading economists to re-evaluate how they measure the labor market. They’ve concluded the official unemployment rate is increasingly inadequate to gauge the health of the job market."

U.S. proposes barring big tech companies from offering financial services, digital currencies

A proposal to prevent big technology companies from functioning as financial institutions or issuing digital currencies has been circulated for discussion by the Democratic majority that leads the House Financial Services Committee, according to a copy of the draft legislation seen by Reuters.

Reuters

DAYBOOK

Today:

  • The Brookings Institution holds a two-day seminar on municipal finance.
  • Citigroup and J.B. Hunt are among the notable companies reporting their earnings, per Kiplinger.
  • Second quarter fundraising reports for presidential candidates are due to the Federal Election Commission by midnight.

Upcoming:

  • AEI holds an event about whether there is a new “PhD standard” to getting on the Federal Reserve on Tuesday.
  • The Urban Institute holds an event on black ownership and the gap that continues to persist on Tuesday.
  • JPMorgan Chase, Goldman Sachs, Johnson & Johnson, United Airlines, CSX Corp. and Domino’s Pizza are among the notable companies reporting their earnings on Tuesday, per Kiplinger.
  • The In|Vest 2019 two-day conference in New York kicks off on Tuesday.
  • The House Financial Services Committee holds a hearing on Facebook’s proposed cryptocurrency on Wednesday.
  • Netflix, Bank of America, Alcoa, eBay and  International Business Machines are among the notable companies reporting their earnings on Wednesday, per Kiplinger.
  • Capital One Financial, Morgan Stanley, Novartis, Philip Morris International, UnitedHealth, Union Pacific and Honeywell are among the notable companies reporting their earnings on Thursday, per Kiplinger.
  • American Express and BlackRock are among the notable companies reporting their earnings on Friday, per Kiplinger

THE FUNNIES

From The Post's Tom Toles:

Read the full article here.