Daily Macro: Anatomy of a Shutdown: Scenarios for an Outcome and more

In this briefing:

1. Anatomy of a Shutdown: Scenarios for an Outcome
2. Trade Talks/Commercial Spying/Cars ‘N Consumers/Easier Credit/Yuan Rise
3. FLASH: UK GDP Boosted by Consumers in Nov-18
4. Widodo, PDI-P Lead / Siregar to DC / Tobin Tax Unlikely / KPK Bomb Scare / Industry Minister Eyed
5. Extraordinary Fiscal and Monetary Policies Have Disrupted the Global Economy

1. Anatomy of a Shutdown: Scenarios for an Outcome

The Republican president and Democratic House of Representatives remain at loggerheads over a partial government shutdown.  This is not because their differences over a ‘border wall’ are unbridgeable – it is because their mutual enmity is feirce to the point of existential. 

For the first time since 2016, the democrats have a weapon (a House majority) with which to fight Trump.  Unfamiliar with the mechanics of divided government, Trump blundered by demanding wall funding.  The shutdown is unpopular and poll data shows that Trump garners the most blame; it therefore provides a boon to Democrats, who are content to hold firm, watch Trump suffer and hope that the affair finally depresses his approval rating below the 40-42 percent threshold. 

There are five apparent ways that the shutdown could come to a resolution.  These include one of the two sides capitulating, Republican senators defecting or Trump invoking emergency powers.  At this stage it seems more likely that a resolution will hinge on a deal involving a reduced amount of spending – but there will be extended wrangling over the details, including the definitions of “fence” versus “wall”.  Neither side is showing any initiative to compromise thus far, and the shutdown seems likely to continue. 

In these circumstances, the 800,000 Federal employees who lack paychecks are collateral damage.  The shutdown adversely affects certain services, especially in transportation and economic data collection, while impacting GDP by an estimated 0.1 percent every two weeks.  More generally, circumstances damage perceptions of the US and its ability to govern itself.  The strife will have achieved something if it debunks Trump’s doctrines and diminishes his appeal.  But it will exact a toll in the meantime in terms of depressed sentiment among consumers, traders and investors. 

Given Trump’s record to date and the dearth of relatively reasonable moderates left in his administration, continued frontal conflict with House Democrats appears likely to persist for the remaining two years of his term. 

2. Trade Talks/Commercial Spying/Cars ‘N Consumers/Easier Credit/Yuan Rise

China News That Matters

• Progress, yet trade war still morphing into tech war
• Economic espionage: US targets Chinese spying
• Tesla dreams big in China despite consumption fears
• Bank funding beckons for SMEs
• Yuan leaps as hopes fade for US rate hikes

3. FLASH: UK GDP Boosted by Consumers in Nov-18

• UK monthly GDP exceeded expectations by growing 0.2% m-o-m in Nov-18. Consumption supported the distributive trades well beyond retail and this more than counterbalanced the disappointment in IP.
• Absent revisions, no growth is needed in December for 4Q18 GDP growth to exceed the BoE’s pre-Christmas forecast at 0.3% q-o-q, which remains my prediction.

4. Widodo, PDI-P Lead / Siregar to DC / Tobin Tax Unlikely / KPK Bomb Scare / Industry Minister Eyed

Widodo maintains his 20 point lead in a late December poll, while PDI-P looks poised to control over 40% of the next parliament — rendering the recalcitrant Party Chair Megawati an unconstructive power broker.  Uno is pressing salient points about inflation and jobs, but Prabowo strikes discordant tunes.  KPK members suffered bomb threats at their homes.  The Riau-1 case increasingly implicates the industry minister, Golkar Chair Airlangga Hartarto.  The new ambassador to the US is a competent economist. 

Politics: Megawati delivered a high‑profile address to party members and dignitaries, including President Joko Widodo, that showed no inkling of embracing economic or governance reforms, despite their clear urgency.  Widodo lavished praise on the chair of the party to which he belongs; the hyperbole merely underscored his awkwardness with the powerful and imperious party chair (Page 2).  Vice Presidential Nominee Sandiaga Uno reiterated the importance of prices and jobs to voters, and downplayed the benefits derived by the poor from infrastructure works.  He is honing his messaging, but he still lacks solutions and Prabowo Subianto strikes discordant tones (p. 3).  The Solidarity Party (PSI) gained notice by issuing ‘Falsehood Awards’ to Prabowo, Uno and Partai Demokrat’s Andi Arief.  But the inspired party is languishing with negligible popular support (p. 4). 

Surveys: President Joko Widodo still had a 20 percentage point lead over Prabowo Subianto as of late December, according to the survey firm Indikator Politik.  The poll also found that only 15 percent of respondents believe that Prabowo abducted pro‑democracy activists in 1997‑98, even though he himself has admitted to doing so (he denies having abducted those that never returned) (p. 5).  The Survey Network (LSI) noted continued strong support for Megawati’s PDI‑Perjuangan, while parties such as the National Democrat (Nasdem) Party, the National Mandate Party (Pan) and Hanura could suffer exclusion from the next parliament.  Islamic-oriented parties appear poised to lose a third of their seats – but it remains to be seen if Gerindra, which is expanding, embraces elements of an Islamic agenda.  Dominance by PDI‑P in the next parliament would bode ill for economic and institutional reform (p. 7).   

Justice: Although unharmed, two Anti-Corruption Commission (KPK) members were targets of attacks on their homes by unknown assailants.  Two Molotov cocktails hit Laode Syarif’s home and a fake pipe bomb was found at KPK Chair Agus Rahardjo’s (p. 9). 

Policy News: A former finance minister suggested a reverse Tobin tax on portfolio funds, but the current minister, Sri Mulyani Indrawati, pointed out its costliness (p. 10).  The information minister promised a long‑awaited ride‑sharing regulation soon (p. 13).

Appointments: A prominent macro‑economic policymaker of the Yudhoyono‑era, Mahendra Siregar, received induction as ambassador to the US, after having served for two years as the government’s chief advocate for the palm oil industry (p. 13). 

5. Extraordinary Fiscal and Monetary Policies Have Disrupted the Global Economy

In their public presentations, central banks seem to be contemplating the use of neutral interest rates (r*) in addition to unemployment/inflation theories. R* has the advantage of appearing to be subject to mathematical precision, yet it’s unobservable, and so unfalsifiable. Thus, it permits central banks to present any policy conclusion they want without fear of verifiable contradiction. R* is the policy rate that would equate the future supply of and demand for loans. It rises and falls as an economy strengthens and weakens. Long-term observation during the non-inflationary gold standard, period indicated that r* in an average economy was 2% plus, which would become 4% plus with today’s 2% inflation target. The Fed may soon end this tightening cycle with the fed funds rate at or near 2¾%, which would be r* if the rate of lending and borrowing in America remained stable thereafter. Rising (falling) lending would indicate a higher (lower) r*.