Daily Agenda: Derailing the Trump Express

GOP erupts into civil war while police target Lula in Brazil; Costco raises wages; Chinese copper stockpiles set record; Barclays Jeffrey Melli on the uncertain future.


The events of the past 24 hours have increased political uncertainty in a number of countries around the world, leaving investors to ponder whether these issues will spill over into financial market sentiment. In the U.S., a debate among Republican presidential candidates devolved, as expected, into a series of personal attacks as Senators Ted Cruz and Marco Rubio desperately attempted to derail the campaign of New York real-estate developer and reality TV personality Donald Trump. Meanwhile, a day after a strongly worded attack on Trump, former GOP presidential candidate Mitt Romney has reportedly been exploring a move to block Trump through an appeal to delegates at the Republican convention even if other candidates fail to overtake the populist frontrunner on the campaign trail. Another political fight is unfolding in Brazil where increasingly unpopular President Dilma Rousseff skipped her own party’s anniversary celebration in Rio de Janeiro last week for fear of protests over the ongoing Petrobras scandal, slumping economy and controversial preparations for the Olympics. Brazilians awoke this morning to the news that the investigation into corruption at state-controlled Petrobas had reached a new stage as police searched the home of former President Luiz Inacio Lula da Silva, Rousseff’s political mentor. Lastly, with both the National People’s Congress and the Chinese People’s Political Consultative Conference set to kick off, Beijing is said to be taking no chances of any market meltdown that might spoil the party (see below).

Beijing reportedly buying stocks as window dressing. Multiple media outlets are reporting that unusual buying in Chinese equity markets today may be linked to preparations for the annual National People’s Congress. State-run funds and allied financial-services firms took significant positions, helping the Shanghai Composite Index to close up by 0.5 percent and lock in a gain of nearly 4 percent for the week despite a selloff of nearly 5 percent for the ChiNext small-cap index.

Costco to raise wages. On Thursday, Costco Wholesale Corp. announced the first base wage increase at the big-box retailer in nearly a decade, lifting the hourly pay for the company’s lowest-ranking employees by $1.50 per hour. In a conference call with analysts, management at the second-largest U.S. retailer indicated a need to attract and retain talent in a more competitive job market. Separately, the company reported fourth-quarter earnings of $1.24 per share, slightly lower than consensus analyst estimates with same-store sales growth that also disappointed.

Chinese copper stockpiles set record. Shanghai Futures Exchange data released on Friday hit an all-time high and exceeded inventories at London Metals Exchange warehouses for the first time in over 10 years. At more than 305,000 metric tons, copper inventories have swelled in Shanghai as Chinese speculators purchased cheaper imported copper when prices fell globally in recent quarters.

Mixed jobs report in the US. The February Department of Labor employment report on Friday sent mixed signals as the number of employed rose but wages stagnated. Non-farm payrolls rose by 242,000 following an upwardly revised 172,000 in January to beat consensus forecasts by a wide margin. Meanwhile average hourly wages contracted by 0.1 percent for the month as the headline unemployment rate remained unchanged at 4.9 percent. The decline in wages, the first for the measure since December 2014, comes as the labor force participation rate jumped to 62.9 percent from 62.7 in January –suggesting that more workers are leaving the sidelines as demand increases.

Portfolio Perspective: What It Is Ain’t Exactly Clear

Events in the political realm have flummoxed all the prognosticators, and nobody seems to know what will happen next. The economic situation looks rather staid in comparison, but here, too, the situation is confusing. Oil was up another 6 percent this week, the S&P 500 was more than 2 percent higher and credit continued to rally from the wides of mid-February. Investment-grade cash spreads tightened 8 basis points and high-yield cash prices rose $1.16 this week through Wednesday. Despite the rally, economic fundamentals and market sentiment are telling two different stories. Barclays economics team’s recession probability model for the U.S., when given only economic data, shows a low probability of recession. The same model using financial variables alone shows a recession probability above 70 percent—consistent with an economy in the midst of recession. This dissonance might resolve itself if markets continue to rally, but for now, it is quite striking.

Within the economic data, the general trend seems to be strong employment indicators and weak industrial indicators. On the negative side, Chicago PMI, which came out Monday, remains contractionary at 47.6, but is off the low of 42.9 recorded in December. The ISM manufacturing PMI gives a similar reading at 49.5, up from 48. On the positive side, construction spending is running at close to 10 percent year-over-year as of January (up 1.5 percent month-over-month). Monthly initial jobless claims remain in the same range as the past 12 months, at lows not seen since 2000. In this context, this Friday’s payroll release will be important in determining if the disconnect between macro data and financial markets will be fixed by a rally in markets or a worsening of economic indicators.

Further support from central banks is unlikely in the near term. The opinion of our economists is that central banks are likely to remain largely on the sidelines, opting to wait for clear signs of a global downturn before embarking on new proactive easing. The European Central Bank governing board will meet on Wednesday, March 10, but the probability of a major pronouncement is lessened by the growing awareness that negative interest rates weaken the banking system and small private savers. Bank valuations have already sold off meaningfully this year, and policymakers will be mindful of the growing risk that weakness in banks could spread to the broader economy.

Jeffrey Meli is the head of credit research for Barclays in New York.