|
United States
Despite Uncertainty, Fed Ease Still Unlikely Until 2008 March 12, 2007 By Richard Berner | New York Forecast at a Glance
Source: Morgan Stanley Research E = Morgan Stanley Research Estimates
The ongoing subprime mortgage meltdown and fears of a credit crunch that could further undermine housing and the broader economy have called into question the consensus view that the current slowdown will give way to stronger growth and that the Fed will be slow to ease monetary policy. In our view those developments do pose downside risks for growth, and we’ll concede that the magnitude of those risks is uncertain. But we think neither the financial market turmoil itself nor somewhat slower growth than we expect would persuade the Fed to ease monetary policy soon. Both of those developments are disinflationary, but officials have made it clear that they will patiently wait for inflation to decline further before contemplating a move. To be clear, we have adjusted our views from a month ago. Slightly tighter financial conditions and higher energy prices have prompted us to scale back our near-term growth prognosis, primarily reflecting a reduced pace of housing activity. Over the three quarters ending in Q2 2007, we now see growth at a 2.3% annual rate compared with 2.9% in our February update (see “Fed Ease Unlikely Until 2008,” Global Economic Forum, February 5, 2007). Yet in our view, the recent bout of market turmoil reflects a turn in the credit cycle, not a credit crunch, so the adjustment has been moderate. The subprime mortgage meltdown will delay the end to the housing recession, but we think it is unlikely to intensify its pace. Offsets from growth abroad and income gains are still promoting a two-tier economy. And while inflation is low, we think the dispersion of inflation risks has risen, and further declines in inflation will come slowly. Here’s why. Three weeks ago, we considered the possibility that the subprime meltdown and its spillover effects would morph into a credit crunch; our view then was that a crunch was unlikely (see “Will the Subprime Meltdown Trigger a Credit Crunch?” Global Economic Forum, February 12, 2007). The reasons: The balance sheets of most prime lenders are strong, and early payment defaults are confined to aggressive lenders that stretched to maintain origination volume to cover a high fixed-cost business model, rather than to broad-based weakness in household cash flows. Moreover, investors are differentiating among rungs of the mortgage credit ladder, and the limited incipient spillover into prime loans and other asset classes signals that a credit crunch is remote. We still strongly believe those four points. Over the intervening period, not surprisingly, we’ve gotten a lot of pushback to that view, and the subprime crash has continued, so some further clarification is in order. We were not arguing that there will not be significant fallout for subprime lenders and some spillover into prime mortgage lenders. The incipient bankruptcy of a handful of lenders is only the beginning of this process, in our view; more are likely. Furthermore, investors are being more selective in their willingness to sell protection, and liquidity in the structured mortgage market has dwindled. If CDO demand disappeared, it would affect the subprime, Alt-A, and prime mortgage markets, and perhaps we did not go far enough in analyzing that possibility. We’re not CDO experts, but our colleagues who are, like VishwanathTirupattur, point out that pricing matters, and that CDO liabilities have cheapened significantly relative to the underlying collateral over the last few weeks. Moreover, underlying issuance of cash home equity collateral actually peaked in 2004 and is now running only at about the same pace as home prices (2-5%). Issuance likely will fall and spreads may widen further, but the CDO market is far from seizing up. Moreover, our point was not that spreads would stay tight across the board. Rather, it was that spreads would reprice to greater risk and reduced liquidity, previously provided by the eager CDO investor, but not so much as to provoke a credit crunch. The jury is still out, but we see no reason to change that view. Moreover, even if financial conditions do begin to tighten somewhat further than we expect, the impact likely will be muted and will unfold slowly. The reasons: Financial conditions have become slightly more restrictive, but unlike the more broadly based credit crunch of the early 1990s, there has been no sign of any noticeable swing toward restraint in other types of bank loans. If anything, weekly data hint that the lending pace has strengthened slightly. Courtesy of financial-market deregulation and innovation, the sensitivity of the economy to changes in financial conditions is more muted than commonly thought. Changes in financial conditions also affect the economy with a lag, and the earlier improvement in financial support is still working its way through the economy (see “Does Market Turmoil Change the Outlook?” Global Economic Forum, March 2, 2007). Nonetheless, the housing recession is not over. A return to seasonable winter weather or even storms and brutal cold in some regions unmasked the ongoing decline in housing demand that has taken new home sales down by 31.5% from their peak in July 2005, and sales of existing homes down by 10.4%. Both could decline by another 5-10%, given the fundamentals underpinning demand, although indicators of housing affordability and housing traffic have rebounded and mortgage applications have stabilized. Moreover, single-family housing starts may decline by up to 15% from January’s levels to eliminate the overhang of unsold new homes in inventory relative to the future lower level of demand. That puts our forecast for housing starts considerably below the consensus. However, many fear that the subprime mortgage meltdown will further intensify the depth and pace of those declines by denying credit to lower-rated borrowers. Some have even calibrated the impact to be 200,000-500,000 home sales. In our view, the lower end of that range is realistic, based on the prospect that tighter lending standards would cut net new subprime debt issuance by one-third. While that sounds like a big number, it amounts to just 2.7% of total sales. Consequently, more restrictive credit conditions likely will delay the end to the housing recession but not intensify it. Focusing on the challenges to growth from more restrictive financial conditions has resulted in many losing sight of the non-financial supports to growth — including still-vibrant growth abroad and healthy consumer income gains at home— that are essentially intact and consistent with our ‘two-tier’ economy view. Reflecting strong demand for US deliveries, real goods exports grew six times faster than imports in January when compared with year-ago levels. That’s not sustainable, but a two-to-one ratio should be, and would position net exports to contribute modestly to Meanwhile, the combination of lower energy prices and strong job and wage gains produced a 6.2% annualized surge in real wage and salary income in the six months ended in January, helping to explain the 3.6% rise in real consumer spending over the same period. Neither pace is sustainable. Already job growth is slowing, to 156,000 monthly in the three months ended in February. However, we believe that adverse weather conditions depressed February’s payrolls and the average workweek. As evidence, the number of people in the household survey saying they were not at work because of bad weather jumped to 522,000 from 250,000 last February. And the number of people saying they usually work full time but were part time in February because of the weather surged to 3.9 million from 753,000 last year, one of the highest readings ever. So a snapback in each seems likely in March. That income gains matter more for consumers than home equity withdrawal (HEW) is still hotly debated. Yet the data so far prove the point: The Fed’s just-released flow of funds data show that HEW fell to just $169 billion in the fourth quarter of 2006, down from $576 billion in 2005 and $309 billion for all of last year. Yet consumer spending rose by 3.6% over the four quarters of 2006. That performance is consistent with the notion that the ongoing deceleration in home prices will promote more saving relative to incomes over time, but not with the claim that lower HEW itself will do the damage. Inflation is low: Measured by the Fed’s preferred gauge, the core personal consumption price index (PCEPI), underlying inflation is running at a 2.3% rate from a year ago. Moreover, with some further cooling in the pace of shelter costs, which accounts for about 19% of that core inflation measure (and more than 40% of core inflation measured by the CPI), a decline in core inflation seems likely. And slower growth plus the uncertainty that is the product of financial market turmoil are both disinflationary. But we still think that the dispersion of inflation risks has risen, and that further declines in inflation will come slowly. Energy prices are one factor to consider. We think that oil prices will revert to a $50-60/bbl range (see “Oil Update: Fast Forward” Global Economic Forum, January 26, 2007). But for now the upside in crude and gasoline prices, which have jumped 8% since the start of the year, may affect inflation expectations and pass through to higher finished goods quotes. Constructively, median 5-10 year inflation expectations measured by the Moreover, the slowing in productivity growth, to 2.1% over 2005 and 1.4% over 2006, raises questions of whether trend productivity and thus potential output are lower than previously thought. As we see it, trend productivity growth is roughly 2½%, which is good news for long-run inflation prospects. But these developments create uncertainty about inflation fundamentals. It will take time to resolve these crosscurrents one way or the other. Absent an unforeseen shock to the economy, therefore, it appears the Fed will be on hold for at least the next few quarters. Against this backdrop, we continue to think that 10-year Treasury yields will trade in a range between 4½% and 5%. Courtesy of the turn in the credit cycle, risk reduction and volatility have returned to financial markets. Ultimately, that will represent a healthy development for investors who may now discriminate among borrowers by their creditworthiness. Transitions from embracing risk to avoiding it are always bumpy, and this one has only just begun. In our view, therefore, the correction in risky asset markets is probably not over, and market participants may again judge that the Fed will ease to guard against downside risks to growth. So for now, bonds and cash look safer than equities and spread product. Market dynamics will be especially difficult to judge, because the structured credit market hasn’t been tested in a credit downturn. And forces that suppressed volatility for years may now quickly reverse as uncertainty and adverse news predominate. But such transitions nearly always create buying — and selling — opportunities. We concede that downside risks to growth outweigh the upside ones for now: The credit cycle downturn has a long way to go, and the diffusion of risks through the financial system makes it harder to assess points of stress and spillovers to the economy. Growth in
United States
Review and Preview March 12, 2007 By Ted Wieseman and David Greenlaw | New York Treasuries posted big front-end losses and a significant flattening of the curve over the past week, after plummeting in response to an employment report that, considering clear, sizable negative weather impacts, was relatively robust, dashing market hopes for a near-term Fed rate cut. Despite the improvement through the week in various other markets — stocks, credit, dollar/yen, sub-prime mortgages — where earlier turmoil had initially seemed to be a key driver of the prior surge in Treasuries, the market ended Thursday very close to unchanged on the week heading into Friday’s jobs numbers. Apparently, a legitimately pessimistic economic outlook had been (or at least became) as important a trigger for the market’s prior upside as any flight to safety bid, as futures markets stubbornly clung to pricing in a high probability of imminent Fed rate action through Thursday’s close despite the improvement in various risky assets and a continued run of Fed speakers denying that any such thing was under consideration. During the early part of the week, there was some fundamental support for the market’s much more negative economic view. Weakness in the factory orders report and chain store sales results had led us to cut our 1Q GDP forecast to +1.8% by Thursday from +2.2% coming into the week. And clearly investors were looking for a much weaker employment report than the economists’ consensus, a result that it was expected, along with the worsening growth picture, would cause an about-face by the Fed. But these hopes were crushed by an employment report that, while far from robust in any absolute sense, was relatively strong, considering obvious signs of a major negative weather impact, most notably in one of the biggest drops in construction jobs on record and in a surge in the number of survey respondents saying they missed work because of the weather. And upside in the international and wholesale trade reports and strength in government jobs in the employment report reversed all of the prior downside in our 1Q growth estimate, which we raised back to +2.2%. Coming out of Friday’s data and looking ahead to the upcoming March 20-21 FOMC meeting, we see little reason to expect any significant changes from the Fed and look for the long-held tightening bias to be retained. Benchmark Treasury yields ended the past week 7-12bp higher, breaking a run of five straight winning weeks that had cumulated to a 33-44bp rally. The 2-year yield rose 12bp to 4.665%, the 3-year 11bp to 4.59%, the 5-year 9bp to 4.54%, and the 10-year and 30-year 7bp each to 4.585% and 4.72%. This still left the 2-year yield 10bp below the close the prior Monday before the big stock market sell-off. All of the week’s net losses came Friday in the aftermath of the employment report, as the market was very close to unchanged on the week across the board at Thursday’s close, despite rebounds in various markets, which continued to varying degrees into Friday. On the week, the S&P 500 gained 1.1%, the on-the-run 5-year Hi-Vol CDX index tightened 10bp, dollar/yen rose to 118.3 from 116.8, and the ABX BBB- 07-01 sub-prime mortgage index rose 4%. There was a sharp scaling back of near-term rate-cutting expectations after the employment report. After an 8.5bp plunge Friday, the July fed funds contract ended the week down 11bp at 5.17%, cutting the odds of a rate cut by the June FOMC meeting to about 33% from 75%. The market is still convinced that rates will be cut by the end of 3Q, but now sees only one 25bp move instead of two after the August fed funds contract lost 11bp to 5.09% and the September contract 12.5bp to 5.045%. In the eurodollar futures market, the Sep 07 and Dec 07 contracts led the way down Friday after leading the prior upside, losing 13 and 12bp on the week, respectively, to 5.065% and 4.915%. The 2008 contracts lost 6.5-11bp on the week, with the low-rate Dec 08 contract off 6.5bp to 4.72%. Relative to the close on February 26 before the next day’s 3.5% stock market drop, the Sep 07 and Dec 07 contracts still ended the week about 10bp stronger and the reds on average 6.5bp stronger. Movements in the TIPS market pointed to a notable decline in inflation expectations, which Fed Vice Chairman Kohn called “critical to policy success” in a Friday speech. Based on the benchmark issues, the 5-year inflation breakeven fell 1bp and the 10-year 2bp, resulting in the 5-year/5-year forward falling 4bp to 2.29%, a low since August 2005. Non-farm payrolls rose 97,000 in February, and January (+146,000) and December (+226,000) were revised up a cumulative 55,000. Although February’s job gain was the smallest in two years, given clear signs of a big negative impact from the sharp swing in the weather — the survey week for the January employment report fell during the unusually warm start to the winter, while February’s survey week was unusually cold — the result was relatively strong. In particular, construction payrolls plunged 62,000, the biggest drop in 16 years, the number of people in the household survey saying they were not at work because of bad weather jumped to 522,000 from 250,000 last February, and the number of people saying they usually work full-time but were part-time in February because of the weather surged to 3.9 million from 753,000 last year, one of the highest readings ever. The sharp drop in construction jobs was offset by good gains in various service sectors, including government (+39,000), healthcare (+34,000), leisure (+31,000) and business services (+29,000). Other details of the report were mixed, with significant weather impacts apparent. The unemployment rate dipped a tenth to 4.5% but only as a result of 190,000 drop in the labor force, likely a weather effect; household survey employment fell 38,000. The average workweek dipped a tenth to 33.7 hours, which combined with the modest gain in payrolls resulted in a 0.3% drop in aggregate hours worked. The drop in the workweek was largely attributable to declines in construction and leisure, again likely weather-related. On the positive side, after a curiously subdued reading in January despite minimum wage hikes in some large states, average hourly earnings accelerated to +0.4%, keeping the annual rate steady at +4.1%. After taking into account the weather-related distortions in the data, the employment report suggested that the labor market is holding together reasonably well at this point. Indeed, if conditions return to normal in March, we would expect to see a snapback in job growth, and there was some indication of that in a decent improvement in the past week’s jobless claims report. In our view, the underlying strength of the February report makes it unlikely that the FOMC will drop its tightening bias at the upcoming meeting. While focus was primarily on the employment report through the past week, there were a number of reports bearing on GDP growth released through the week. We came into the week forecasting a 2.2% rise in 1Q GDP, marked this down to +1.8% before Friday’s data, but were back up at +2.2% at week-end. The initial weakness was driven by the factory orders report, with January manufacturing inventories down 0.2% on a 0.7% drop in the non-durables component, a much lower result than we expected, and weaker-than-expected chain store sales results. Taken as a whole, February sales results from the major retailers disappointed already soft expectations and led us to forecast declines in the general merchandise and clothing components of the upcoming retail sales report. Incorporating this downside into our GDP forecasts, we trimmed our 1Q consumption forecast to +3.7% from +3.8%. These inventory and consumption negatives to our 1Q forecast were fully reversed Friday by better-than-expected results for wholesale inventories, employment and international trade. The bigger-than-expected 0.7% rise in January wholesale inventories offset most of the downside in factory inventories, while a strong gain in state and local government employment had a positive impact on our forecast for the government spending component of GDP. Meanwhile, the headline results in the trade report were a good bit better than the US$61.4 billion deficit we expected, but the underlying details were less positive. The trade deficit narrowed to US$59.1 billion in January from US$61.5 billion in December, with exports rising 1.1% and imports declining 0.5%. The export gain was led by a sharp rise in capital goods, with the bulk of the upside in aircraft and computers. Consumer goods also posted a significant gain, while autos fell, in line with the plunge in North American assemblies in January to the lowest level since the 1998 GM strike. On the import side, a surprising jump in petroleum products that was all volume-driven as prices fell and a good gain in capital goods were offset by sharp declines in autos and consumer goods. The weakness in consumer goods was surprising in light of the acceleration in Chinese export growth in January, which suggested some pre-holiday front-loading. Relative to our assumptions, the surprise in the real trade numbers (with the real goods deficit narrowing marginally to US$56.7 billion from US$56.8 billion) was not as significant as the nominal results. The drop in consumer goods imports was out of line with the Chinese export results and suggested some timing issues related to the Chinese New Year, so we will probably see a snapback in February. In addition, based on the softness in capital goods shipments in January and industry-specific data, the jump in capital goods exports was surprising and pointed to even softer investment than the flat reading we previously estimated. We now look for a second straight small decline in equipment and software investment in 1Q, though beyond near-term cyclical headwinds we think cyclical and secular tailwinds likely will ultimately get the upper hand and capital spending will pick up as the year progresses (see The Capex Conundrum by Dick Berner for a discussion). With the less impressive result for real figures than nominal, a likely rebound in imports next month, and the negative implications of the capital goods results, the trade report as a whole had only a slight positive impact on our GDP forecast. Added to the inventory and government boosts, however, it was enough to raise our 1Q GDP forecast back to the +2.2% we saw coming into the week, which would match 4Q06. If we make it through the early daily savings shift without the world ending, the main focus in the coming week will be on the start of the NCAA basketball tournament, but there are also some key data releases due out, highlighted by retail sales Tuesday and CPI Friday. Other releases include the Treasury budget Monday, business inventories Tuesday, the current account Wednesday, PPI and the * We forecast a February federal government budget deficit of US$124 billion, about US$5 billion wider than in the same month a year ago, with just about all of the swing accounted for by slightly faster processing of tax refunds. We continue to see the deficit tracking at about US$210 billion for the fiscal year as a whole — down nearly US$40 billion from 2006. * We look for a 0.4% rise in overall retail sales in February and a 0.1% rise excluding autos. Although unit sales of motor vehicles held steady in February, differing seasonal adjustment factors point to some upside in the auto dealer component of retail sales. Also, higher gasoline prices should lead to an uptick in the service station category. However, the chain store reports were disappointing, and we now anticipate outright declines in both the general merchandise and apparel components. Also, we look for weather-related softness in sectors such as building materials. Indeed, sales excluding auto dealers and gas stations are now expected to be flat. For the quarter as a whole, we currently see real consumption tracking at +3.7%. * A significant rise in wholesale inventories should be mostly offset by an outright decline in the manufacturing component and an expected pullback in auto dealer stockpiles, leading to an expected 0.1% gain in overall business inventories in January. We look for the I/S ratio to tick up to 1.29. * We forecast a 0.6% in the overall producer price index in February and a 0.2% increase ex food and energy. A partial reversal of the decline in energy prices seen in January should lead to some elevation in the headline PPI this month. Meanwhile, a modest rebound in quotes for motor vehicles is expected to be roughly offset by some softening in drug and apparel prices, leading to a trend-like rise in the core measure.
Europe
Central Bank Rate Forecasts: More Transparency, Credibility or Volatility? March 12, 2007 By Thomas Gade | London A recent trend in the conduct of monetary policy making is for central banks to publish their own interest rate forecast. They then use this forecast as the policy assumption for predictions of inflation and demand. This increases transparency, but there is a risk that central banks could lose credibility in the process. The Swedish Riksbank recently switched from a market-implied interest rate assumption to publishing its own interest rate forecast. Previously, the Reserve Bank of 1. Does monetary policy become more transparent by publishing an in-house interest rate forecast? 2. Do central banks put their credibility more on the line when publishing an interest rate forecast? 3. Do short-term interest rate expectations become more stable or more volatile with the adoption of such a policy? A number of academic studies analyse the first two questions, most notably through those by L.E.O Svensson, Frederic Mishkin, Charles Goodhart and Michael Woodford. Very few, if any, studies have tried to analyse the last point. Historically, three types of assumptions regarding future interest rates have been applied by central banks. Ranking these methods in terms of the alleged level of transparency, the first is a constant interest rate assumption, i.e., assuming that future monetary policy rates will remain constant. The second method is assuming that the future monetary policy rates will develop in line with those implied by financial markets. This method is currently applied by the Bank of England, the ECB and the Bank of Japan. The third and most recent development is for the central bank to publish a projection of what it deems to be the most probable path for future monetary policy rates, i.e., to publish an interest rate forecast. Academic studies on transparency and credibility are focused mostly on the credibility issue and the issues involved for the governing body actually having to decide on a monetary policy in terms of the path of monetary policy rates and not the current monetary policy rate only. The former member of the Bank of England’s Monetary Policy Committee, Charles Goodhart, argues that it is more difficult for the governing body of a central bank to agree on the most likely future path of monetary policy rates rather than a one-point monetary policy decision. We agree that it may well be more difficult, but one would assume that members of the governing bodies have an idea of the path of future monetary policy rates in mind when deciding on the current monetary policy decision. To face this challenge, L.E.O. Svensson of It is generally agreed that publishing an interest rate projection places the central bank at the current frontier of transparency. The issue is whether a central bank can become too transparent and in that process risks losing its credibility. During the last 20 years, more and more central banks have switched towards inflation (forecast) targeting. As credibility in price stability or an inflation objective has been gained, inflation and nominal interest rates have moved sharply lower. Credibility for a central bank is therefore an important factor in controlling inflation expectations in the general economy. The argument goes that it is easier for a central bank to explain to the public why, for example, actual inflation has deviated from the inflation forecast put out by the central bank, than to explain why actual monetary policy has deviated from the bank’s rate forecast. The reason is that monetary policy is likely to be perceived by the general public as being more under the direct control of the central bank, according to Frederic S. Mishkin, who serves on the Board of the US Federal Reserve. The central bank therefore runs the risk of losing its credibility should monetary policy deviate from its previous projection. Hence, while publishing an interest rate forecast is more transparent, this transparency could be taken a step too far, and therefore the cons could outweigh the pros. Should a central bank lose its credibility, which we agree there is a higher risk of, then inflation expectations could become more volatile and financial markets would most likely demand a higher risk premium. Second, companies and households in particular are likely to be making spending, investment and financing decisions based on the baseline interest rate path provided by the central bank. The example in many countries would be for the general public to decide on how much to borrow and how to finance such a loan, e.g., a fixed-rate loan type versus a flexible-rate loan type. Therefore, the future path not only influences the investment decision, but it also the financing decision, which again may influence the transmission mechanism. Taking the argument to the extreme, central banks have better control of the transmission mechanism by providing a specific path for monetary policy rates. In the investment decision, the baseline monetary policy path will dominate, with perhaps less attention given to the uncertainty surrounding the baseline projection by the general public. To counter this, the central banks in As the objective for a central bank to publish its own interest rate forecast is to increase transparency, one would expect short-term interest rate expectations to become more stable and therefore a reduction in the risk premium. Central banks that have switched to publishing their own interest rate projection instead of using an interest rate assumption as implied by financial markets are the Reserve Bank of Preliminary evidence from We looked at the variance ratio between the various maturities of short rates, in which we have corrected for the effect of changes in monetary policy at each maturity. The indication would follow that monetary policy expectations on a one-year horizon have become more stable after the switch to an in-house interest rate projection. In essence, this could mean that the risk premium in the short end of the curve should decline following such a change of method. A drop in the risk premium should have positive implications on real economic activity. Further, this should in isolation be positive for equities. The effect on the domestic currency is not clear-cut, but in isolation, a lower nominal interest rate path should have a negative impact on the domestic currency. In On balance, there are arguments both for and against central banks providing an interest rate forecast. That said, there seems to be a clear trend that more and more central banks are moving in that direction. In the
Global
The Pro-Labor Train Leaves the Station March 12, 2007 By Stephen S Roach | New York It’s a new game in There are three legs to the stool of the pro-labor agenda that is now making its way through the corridors and committees of Capitol Hill. The first entails proposals that would provide direct support to lower- and middle-income workers. The first increase in the minimum wage in 10 years – a 41% multiyear adjustment – is likely to be signed by the President in the next few weeks. The “Employment Free-Choice Act” has passed the House – legislation that would significantly relax the rules of labor union organization; the odds makers don’t give this bill much of a chance in the Senate – to say nothing of a likely presidential veto – but it’s an important pro-labor marker nonetheless. There’s also movement to fund relief to middle-income taxpayers from the Alternative Minimum Tax by increasing taxes on upper-income individuals. The second leg to the pro-labor policy stool focuses mainly on workers and investors at the upper end of the pay and reward scale. Consistent with concerns voiced by President Bush, congressional hearings have been held on the excesses of executive compensation, with one legislative proposal of a nonbinding shareholder approval for executive pay offered by House Financial Services Chairman, Barney Frank (Democrat from Massachusetts). Private equity and hedge funds are also coming under scrutiny of a new Congress that is concerned about excess returns to risk takers and the owners of capital that may have come at the expense of middle-class workers. But the big story, in my view, is the third leg – a growing outbreak of pro-labor protectionist sentiment. For starters, the new Congress is raising serious objections about renewal of the President’s Trade Promotion Authority. TPA – the means by which the White House can enter into “fast track” trade agreements without opening them up to congressional amendments – is set to expire on June 30. Without TPA, US approval of any breakthrough on the Doha Round of multilateral trade liberalization is highly unlikely; the same would be the case for any bilateral initiatives on new free-trade agreements, and those already negotiated with Peru, Panama, and Columbia could well be jeopardized. Then, of course, there’s Highlights of recent anti-China proposals that have surfaced in the new Congress in early 2007 include the following: The “Fair Currency Act of 2007,” co-sponsored by a bipartisan coalition of six Senators, takes dead aim on what it would consider to be exchange-rate misalignment. The “Nonmarket Economy Trade Remedy Act of 2007” has been introduced by a comparable bipartisan group in the House; this bill would address the “China problem” by revoking the special exemptions China currently receives from US trade laws as a nonmarket economy. Senators Stabenow (Democrat from Nor has the Bush Administration been effective in stemming the pro-labor congressional tide. That’s especially the case on Nor can than this shift in Financial markets remain largely in denial over the ramifications of In the end, investors believe that reason will prevail and the body politic will ultimately heed some of the 20th century’s most important lessons. But as one leading member of Congress put it to me recently, “We don’t want a trade war. But if we did nothing, we’d never solve any problems. We have to do something.” That something is now coming into clearer focus in the early days of the 110th Congress. The pro-labor train is leaving the station. |
|||||||||||||||||||||||||||||