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January
18
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Week In Review

China

China reportedly offered to increase purchases of U.S. goods over the next five years to eliminate the current trade imbalance at the end of that time period in exchange for ending tariffs imposed over the past year. Neither the Treasury nor the USTR’s office would confirm this offer or comment on its desirability. Risk assets gained on hopes that the trade conflict could be moving toward resolution.

Our Take

The Chinese offer is a bigger version of the offer negotiated by Mnuchin last May that was then scuttled by the White House. The offer would not address the state subsidy or technology transfer issues that are the most important grievances that the Trump administration claims. Also, ending the current trade conflict is unlikely to stop the significant economic slowdown in China or to reduce the Chinese financial system risk from greatly increased leverage since the financial crisis.


Brexit

The deal that May negotiated with the EU was overwhelmingly defeated in Parliament with a large number of Conservatives voting against it. The next day her government survived a confidence vote by about 20 votes as Conservatives and the Democratic Unionist Party (DUP) voted together. Since then, May has reached out to open talks with the EU about possible revisions to the deal and with opposition parties about a Brexit outcome that can get a majority in Parliament. Corbyn has refused to meet with May until she takes a no-deal outcome off the table, but Labour MPs have been holding talks with May’s government. May must present the government’s “plan B” for Brexit next week.

Our Take

The magnitude of defeat for May’s deal makes it difficult for it to be salvaged. There may be a cross-party majority in Parliament for a softer Brexit or a second referendum, but May’s government views both of these options as not delivering on the outcome of the referendum and thus setting up the Conservatives for a defeat in the next election and putting Corbyn in power. Unless May’s government changes its stance and presents a “plan B” that can pass Parliament on a cross-party basis, there will likely be another confidence vote prior to March 29th. In this vote, Conservative and DUP MPs will have to decide which outcome they dislike the least – having a no deal Brexit at the end of March, or having a general election that will most likely put Corbyn in power and lead to a significant leftward shift in the UK’s economic policies.


U.S. Economy

Industrial production rose 0.3% in December after being revised lower, from 0.6% to 0.4%, in November. Retail sales, business inventories, and housing starts were among the data reports postponed due to the government shutdown.

Our Take

Industrial production was about as expected in December and still paints a fairly robust manufacturing sector. The government shutdown, while possibly affecting economic growth, is also making it more difficult to get a read on the economy, as numerous data points are not being reported in a timely fashion.


Municipals

J.B. Pritzker was sworn in on Monday as Illinois’ 43rd governor. Pritzker, a Democrat, defeated Republican incumbent Bruce Rauner in November. In his inauguration address, Pritzker called the state’s fiscal situation “challenging” and stated that “the solution requires a collective commitment to embracing hard choices.”

Our Take

Illinois continues to struggle with unpaid bills and rising pension costs. Investors will be watching to see how Pritzker and lawmakers will work together to address the state’s finances. Many hope that the days of budget impasses and partisan gridlock are over for the state of Illinois.