In this week's Macrocast, Ylan, John, and Brendan unpack the global instability and domestic politics contributing to macroeconomic uncertainty. The group begins with a discussion of the oil markets, impacted most recently by U.S. strikes against Houthi rebels and geopolitics more broadly. Other factors, such as weak demand and rising U.S. reserves have put downward pressure on crude oil prices and contributed to price swings. Ylan, Brendan, and John continue their conversation about international affairs by unraveling the potential 'geopolitical recession' that could impact both giants like Tesla and your local gas station. The episode then dives into the Federal Reserve's high-stakes maneuvers around inflation and interest rates.
Ylan, Brendan, and John then turn to domestic politics, with a focus on House Speaker Mike Johnson in his new role facing the looming government funding countdown that helped sink his predecessor, Speaker McCarthy. The group considers the implications of yet another stopgap spending bill amidst an election year. Finally, the group taps into the Republican frontrunners facing-off in Iowa next week, whose economic visions reveal subtle yet critical policy differences, especially on the trade front with China.
In this week's Macrocast, Ylan, John, and Brendan unpack the global instability and domestic politics contributing to macroeconomic uncertainty. The group begins with a discussion of the oil markets, impacted most recently by U.S. strikes against Houthi rebels and geopolitics more broadly. Other factors, such as weak demand and rising U.S. reserves have put downward pressure on crude oil prices and contributed to price swings. Ylan, Brendan, and John continue their conversation about international affairs by unraveling the potential 'geopolitical recession' that could impact both giants like Tesla and your local gas station. The episode then dives into the Federal Reserve's high-stakes maneuvers around inflation and interest rates.
Ylan, Brendan, and John then turn to domestic politics, with a focus on House Speaker Mike Johnson in his new role facing the looming government funding countdown that helped sink his predecessor, Speaker McCarthy. The group considers the implications of yet another stopgap spending bill amidst an election year. Finally, the group taps into the Republican frontrunners facing-off in Iowa next week, whose economic visions reveal subtle yet critical policy differences, especially on the trade front with China.
Hello and welcome to the Macrocast. I'm your host, elan Mui. I'm Managing Director at PENTA. My co-host today are John Fagan and Brendan Walsh of the Market's Policy Partners, and I have to let you know that we're taping this episode during a very tumultuous and fluid time in geopolitics. The US has begun military strikes on the Houthi rebels that have been attacking ships in the Red Sea and making it difficult for them to pass through the Suez Canal. Rebels say this is all to protest Israel's campaign in Gaza. Unlikely, though, that these new strikes will deter them, and already we're starting to see some impact, not just in the markets, but on businesses. Brendan. This has been driving a lot of volatility in the oil markets, in particular, over the past several days, so what's your read on the situation here?
Speaker 2:It's obviously fluid and it has been kind of fascinating to watch the oil markets on a day-to-day basis. If you had told me 12 months ago that this was going to happen and where I would have predicted oil prices would have been.
Speaker 2:I would not have thought that it would still kind of be in the 70 to 80 dollar range. So they're taking it fairly well. But every day that more and more news comes out on this front, we push back and back. So Brent crude, which is the global benchmark, and now it's close to $80. And then we also have Brent, which is the US, so we're at $74 there. But every day for the previous couple of weeks the oil markets have looked through it. But now I think we're realizing that this thing might be lasting longer and, more importantly, it could result in supply chain disruptions which then can kind of feed through. So today oil is up 2%, 3% and I think if it keeps going we could kind of see us marching back up to the maybe $9 range and the $100 range is obviously a big problem for the global economy.
Speaker 4:Oil prices have really been caught in a range here. We've seen this sideways price action for oil. It really is sort of caught between two big drivers the geopolitical and supply constraints. It's not just the Red Sea and the potential expansion of the Israeli Gaza war in a way that would disrupt supplies coming through the Red Sea in a very persistent way, but also other aspects. The Libyan oil field, shirara, is shut down because of political unrest, and then there's the sort of broad uncertainty around the China-Taiwan. Now that's a tail risk, but super low percentage but high risk. Geopolitics is keeping oil prices elevated. There's a risk premium there.
Speaker 4:Opec has not been particularly forceful in recent meetings but is still on the job putting support under the market, and on the other side of the equation has been concerns about demand, and it's not. The US economy has tended to outperform, but Europe is, by the most recent readings, potentially going into next year in a technical recession. China, which is a big swing demand sources, has been kind of flat on its back this past year in terms of growth and there's not really a lot of expectation for it to get better. We got a big chunky build in the US oil stockpiles in this last round of data releases. So it's kind of been.
Speaker 2:And, john, I would also add to that US production has been much larger than kind of anyone would have predicted. So that is also what is. Those two factors are weighing against it as keeping us in that 70 to $80 range, and now we'll see, going forward whether that can hold. But, as John was saying as well, which is higher because of geopolitics, growth then slows, which every day we see that dynamic played out in the markets.
Speaker 1:Yeah, ian Bremmer of the Eurasia Group is talking about the potential for not a recession caused by a Fed policy mistake, but a geopolitical recession possibly happening this year, just because of all the volatility, uncertainty and turmoil that we're seeing, as we're talking about right now, across the Middle East. Even here at home, lots of volatility happening on Capitol Hill right now. So it seems like there's just this heightened period of uncertainty, which we talk about a lot, but it just is really hitting home right now and I wonder when that starts to have that real impact on businesses. We heard in the past few hours that Tesla is going to be halting production at its factory in Germany I think it's its largest factory across Europe for two weeks because it can't get the parts that it needs because of the delays from the blockades and the attacks on the Red Sea. So curious, guys, what you're thinking about, how this might ripple through other industries beyond the oil markets, even.
Speaker 4:Yeah, I mean that's supply chain, having to redirect shipping away from the Red Sea and down around the Horn of the Cape of Good Hope.
Speaker 2:These are not.
Speaker 4:It's about 40% longer, yeah, and insurance rates on shipping, and this is the kind of thing that you know in the immediate term. You know we're not going to see it show up in necessarily in stock prices. It's hard to quantify the kind of impact that these come in. You know it's something that you would see maybe in earning season when we get the first quarter results. But you know sort of a broad sense of unease, a sense that you know, with energy prices being propped up here with, you know supply chain snarls it's a junior varsity version of you know the kind of dynamics that led to that big spike in inflation.
Speaker 4:And so, although the Fed and we'll talk a little bit more about the data that came in this week although the Fed must be looking at the incoming CPI consumer price and producer price index data and feeling pretty good about it that's, looking in the rearview mirror and looking out ahead, seeing some of these dynamics that could end up causing at least a slowdown in the improvement of inflation, if not a reversal in some of the progress that they've made the Fed is less likely to have conviction enough to start cutting aggressively. As we've talked again and again about, the markets are highly convicted that the Fed is ready to start slashing interest rates as early as March. This is the kind of uncertainty that could potentially keep the Fed on hold and waiting and watching. It remains to be seen. Team transitory obviously may feel a little bit vindicated here, given the dynamics, but that doesn't mean they can be complacent about the kinds of dynamics that we're seeing coming back into global supply chains and energy prices.
Speaker 2:This PPI report that just came out is a perfect example of geopolitics screwing up a good forward looking indicator. The producer price index usually leads the consumer prices by three or four months because this is what the producers are doing and then it feeds through. This producer price for December came in well below expectations For the headline. It was actually down a 10. And that was because goods prices were flat, and I mean good prices were down 0.4% and services were flat. So if you're the Fed, you're looking oh good, the supply chains are fine, goods prices are going to come down and that's going to feed through to the consumer. But this is what used to be a forward looking indicator. But January is obviously a very different geopolitically than December. So now you can't have necessarily that huge confidence that those good prices are going to continue to drag down both producer prices and, in the future, consumer prices.
Speaker 2:So this if you take away geopolitics was a great number, because this number also feeds into the PCE price index, which is the Fed's preferred index. So you kind of take the numbers from the CPI and the PPI and you can figure out what the PCE is going to be, because they use the same numbers but they weight them different. And this number would show that core December PCE will now be below 3% on a year-over-year basis, which the Fed would obviously be very, very happy about that. And also, when you look at a six-month basis, we're kind of down in that 2.5% range. So that is what the Fed was looking at. But now you have to, if you're the Fed and markets, question whether you know, especially the good price deflation is going to be able to sustain.
Speaker 1:Brenton, obviously there's a question of duration here, how long the sort of backup and the the violence in the Red Sea continues. But is there any metric that we can use to determine when we might start seeing this feed through to what prices consumers pay at the pump? I feel like I just was able to find that elusive below $3 a gallon gas, and now maybe that's in question.
Speaker 2:So here in the, especially with with WTI still, you know, in the 70s 75,. That keeps prices around $3. We shouldn't see a spike. But I mean it's not perfectly quantifiable. But A shipping container is so big that there's no way to replace it, and also all of our airplanes are fully booked too. So we just have to either take the risk of going through the Red Sea and get shot or you add that 40% extra cost to the shipping. So I suppose it is quantifiable. I haven't done it and I can't do it in my head.
Speaker 2:But, yes, it's going to take that much more time and that much more fuel to get your goods to where they need to be.
Speaker 1:Great. Well, certainly it's something that we're going to be talking about and watching for a while and seeing how all these tensions unfold throughout the world. Let's take a quick break right now and when we come back we'll talk about the political volatility that's happening here in the US and on Capitol Hill. Stay tuned.
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Speaker 1:Welcome back to the Macrocast. We are just days away from another government funding deadline. Some federal agencies could shut down after January the 19th. The rest would go dark on February the 2nd. Lawmakers are now publicly floating the idea of another short-term spending bill, probably that would last through March. Once again, the House Speaker this time it's Mike Johnson could find that his job is on the line. John, I don't even know where to start with this one, because it just feels like the umpteenth chapter of this saga that's played out over and over and over again. 15 times for House Speaker Kevin McCarthy before he became Speaker, played out again in the fall, played out over the debt ceiling debate, but each time it feels like Republicans have been unable to agree amongst themselves on the direction of the nation's fiscal trajectory. I almost wish it was only that that they were fighting about, because then you could have a real policy debate. But the border, foreign aid so many other factors have gotten wrapped into these government spending debates that they simply seem like an intractable mess.
Speaker 4:It's an absolute disgrace. I completely agree and we just. It's just an endless cycle. The likelihood of a short-term extension, I think, is relatively high.
Speaker 4:The questions about can Mike Johnson survive the rebellion of the hard right? There's a sense that he's got a lot better chance than Kevin McCarthy. There was just a lot of baggage around McCarthy. It seems as though and I'm not a political expert, but it seems as though Speaker Johnson just has less baggage, less history, less a little bit more trust, and it's just is this do they really want to go through another speaker fight? Do they really want that nation to see them in all of the infighting and the tupperative idiocy that is surrounding this process?
Speaker 4:It's just there's a sense that Speaker Johnson's probably going to survive this just because of the other option of bringing him down and going through another of these votes to pick a speaker is just too unpalatable, particularly in an election year when we've got Iowa, the Iowa caucus, in the middle of a polar vortex happening on Monday. There's the likelihood is that there's a fudge here. Coming the CR, they kick the can and then, with the far right kicking and screaming, they get something done that looks a whole lot like the deal that McCarthy struck and it's just a sound and the fury signifying not a whole lot. Do you agree with that outlook?
Speaker 1:Yeah, I mean, I thought about sort of going through all the ping-ponging of who agreed to what when and then who reneged on what when and who may still be in the process of reneging on what when. But it's almost like we lose the thread because the bottom line is that there seems to be a sort of limited number of outcomes. One is that we could be faced with another government shutdown partial to start with, potentially full. Ultimately that has sort of limited economic consequences. Eventually the government opens back up. Eventually workers get repaid.
Speaker 1:The question mark really is what is the political sacrifice that has to be made to reopen the government and keep the government funded? Is this political sacrifice going to be Mike Johnson? If that is the case, what is the maximum deal that he would be willing to strike? Is the maximum deal a CR that lasts through March? That seems like a very. That seems like you're sacrificing, potentially sacrificing a lot for a very little gain. Could he potentially be willing to sacrifice the agreement that essentially modeled the legislation that was passed back in the spring that would set top line numbers for defense and non-defense spending, et cetera? That would take this drama off the table for the foreseeable future?
Speaker 1:One hopes that September 17th the USOCCP is doğ pretty much burned down and mimic Joe Biden's strategy. Tafts are not strong enough for astate who wants to камooker benefits. That is the ultimate goal that we're not just going to have go through all this drama for something that's a very short-term gain that ultimately, this is the time to actually pass away, pass a legislative vehicle, pass the appropriations in order to keep the government funded, and so we don't have to tap this fight again, over and over again, on repeat through the November elections.
Speaker 4:Yeah, shutdowns are not popular and the Republicans have the majority in the house. As slim as it is now with the resignations, I mean razor thin now.
Speaker 1:I think two seats.
Speaker 4:Right, but still a majority still, and just barely by a fingernail or two, and they would own that to the extent that it creates any sort of political damage. It's probably pretty minor, but not given the fact that these usually don't drag on very long. But it's still not a good look, as they say these days. At the end of the day, the likelihood is that they want to get the hard right, want to get their sound bites in, they want to be able to grandstand a little bit and kick and scream and I think that's probably going to be the extent of their opposition and Speaker Johnson, get something across the line that's a little more durable and just maybe they do like a CR can kick here to just a bob and weave and get to the other side of the Iowa caucus, see where we are. But who knows?
Speaker 1:Interesting I'm thinking too about. Again, all roads lead to the Fed, about the calendar here. So the early discussion though nothing has been set in stone at the time of this taping is that we could see a short-term spending bill that lasts through maybe mid-March and that's right before the Fed's March meeting, when right now markets are expecting the Fed to potentially start cutting at that meeting and I think it's hard to imagine one if we're in a government shutdown that the Fed would actually cut rates. So there's that. Two, if we're in this period of just sort of lurching to the next short-term funding deadline from March to whatever comes after that, it's hard to see the Fed really cutting and that sort of uncertainty in Washington.
Speaker 4:Yeah, and right now, just checking on the futures, it is better than 85% likelihood, priced into futures markets, that the Fed starts its easing cycle with a 25 basis point rate cut at the March 20th decision.
Speaker 4:That is really high conviction and it's hard to. If you look at the data and draw extrapolated lines, I can see where that confidence is coming from. The Fed is certainly not encouraging a degree of complacency that's supposed to be that high. The messaging from the Fed has been much more on the side since the last meeting, which was taken as dovish Fed Chair Powell's commentary. Ever since then, the verbiage from Fed officials has really been trying to pull in the other direction. Yeah, it's a situation where the Fed is in marches right around the corner and could certainly be at that time in a position where we're looking at an expanded Middle East war, not just into Yemen, but there's the risk of it up north as well, in Lebanon, with Hezbollah and some of the targeted strikes up there kicking the hornet's nest. It's a really big mess. I don't know how the markets arrive at such a convicted position that the Fed is really going to get off their higher for longer and start cutting as really as much.
Speaker 1:John, are the markets even thinking about what a Nikki Haley or DeSantis term or DeSantis win or nomination might look like for the economy? Thinking about the Iowa caucuses next week? And there's been so much sort of back and forth between is Nikki Haley finally pulling above Ron DeSantis? Is Ron DeSantis out of steam? Can he still continue on as he lost his mojo? Is Nikki gaining it? So many different things right, but the bottom line is the former president, donald Trump, is still leading the pack, with over 50% of voters saying that they support him. So I wonder if the markets even thinking about any other probability beyond Donald Trump securing the Republican nomination for president.
Speaker 4:Yeah, it's a good question.
Speaker 4:At this point in the political cycle, the election, the presidential election outcome is kind of tends to be beyond the short term investable horizon when you go back and look at some of the performance.
Speaker 4:There's always this sort of the Trump basket and the Biden basket and they constructed that in the 2020 campaign. And if you look at something like I'm just looking at it right now, going back and looking at the solar company ETF, which was a Biden trade right, it didn't really start to move until the summer and it ran up heavily into the elections and beyond and then into the Georgia runoffs and so it really is kind of that summertime dynamic. The campaign, the candidates, you've gotten through the primaries, the two candidates have been squaring off and you can see November on the horizon. So it really is not usually until then that you see the markets really work to price in some of these outcomes. And, to be honest, the difference between an economic policy difference between Nikki Haley and DeSantis and Trump, these don't seem to be, at least to the non-political expert like myself. They don't seem to be a ton of daylight between the candidates on economic policy. It's more about sort of vibes and social stuff.
Speaker 1:Well, there might be trade war versus no trade war. Yeah.
Speaker 4:I think that's there you go. That's fair to say, and I think that in this environment the Biden White House has been pretty tough on China too, and it's a consensus. I mean, maybe Trump would be a little bit harder line on it. But yeah, I don't think that these trades really begin to kick in, to follow the political cycle until the summer before the general.
Speaker 1:Yeah, and also bottom line for this year is that no new major fiscal spending. We're talking about whether or not there's going to be a fiscal cut and what size there could be, and then post-November big question mark. Donald Trump is a low-rates guy but is also someone who was very willing to see big spending projects. How did the desire to have infrastructure week for many weeks of his presidency? So there could be opportunities for potentially significant fiscal legislation and fiscal spending under probably either candidate, but we'll just have to see because really all the positions and all the traditional stances that Republicans and Democrats had on these things seem to have flip-flop so many different times.
Speaker 4:Yeah, they've kind of turned on their heads and there's a lot of the chessboard of American politics has really been thrown up in the air over the last few years and we're going to see. And maybe Iowa on Monday is the Iowa caucus is potentially it's historically been kind of a surprising outcome in Iowa. There's been a tendency yes, as a political expert and now we've got the factor of this polar vortex white-out conditions. Who is that going to help? Who's it going to hurt? Trump's lead in the polls is so commanding that the bar is pretty high for him to surprise on the upside. And so when everybody kind of looks at the path for Haley in particular is she outperforms expectations in Iowa, wins in New Hampshire and then she's got to go back to her home state and try to take it from Trump, who has a commanding lead there according to the polls. But at this point it does look like it's Trump's to lose. What are your thoughts on this Republican primary picture?
Speaker 1:Well, you know what? I will have to say that when you bring up the polar vortex, the thing that I think about most of all is the poor reporters who are standing outside in the snow. In Iowa I saw someone on CNN earlier this week and I just thought she looks so cold and I just remember that feeling of being outside and thinking can I just get through this live shot and go somewhere and have a hot cup of coffee?
Speaker 4:Oh, my gosh, it is going to be like a lunar landscape out there. It is just going to be subzero, howling winds, and yeah, you got to feel for those people and the voters. My gosh, I mean, there's a. The question is, you know, with such a commanding lead, you, our Trump voters, gonna say, ah, he's got this in the bag.
Speaker 1:I'm gonna stay home. I don't know. They're pretty hardy stock there, John.
Speaker 4:Yeah, trump in a press conference said that his a pine, that his supporters were so passionate that they would crawl across broken glass to vote for him. But you know.
Speaker 1:A frozen tundra.
Speaker 4:Yeah, but but yeah, as you know, iowa is a kind of surprising. It's a. It's a place where a lot of surprises happen, and you know we shall. We shall see.
Speaker 1:Well, taking the picture sort of globally for a moment after, after focusing in on Iowa, curious about what the economic picture looks like. You know, not just here but but around the world, the World Bank came out with its global growth forecast this week and found that it is projected to slow in 2024. Economic growth will fall about 2.4% from 2.6% in 2023. And you know the World Bank pointed out that that we sort of began the 2020s pre COVID as a with the sort of hope that this would be a really transformative decade, both in terms of social on social metrics, climate metrics, economic metrics, et cetera. And you know, partly due to COVID but also partly due to some of the geopolitical tensions we've been talking about, you know, a lot of that has just simply not materialized in the ways that people had hoped at the beginning of the decade. What does the picture look like in China, elsewhere and other major economies?
Speaker 4:Yeah, it's kind of grim, as you say, starting in China. The data that's come in. They had better than expected exports and imports for for December. That's good. The data seems to have stabilized, but stabilized at a pretty, you know, a pretty tepid kind of pace, particularly for China which you know has enjoyed such fantastic growth rates, you know, until recent years. And coming out of this COVID zero, it really has been a big disappointment. The stimulus efforts from Beijing have been piecemeal, haven't been particularly effective, seems like kind of running faster to stand still in certain cases. And every time you know market participants, you see all the commentary from Wall Street oh, china has dramatically underperformed. Their stock markets sank last year when everything else rallied. This is the bottom, you know, jump, jump in now. And every time there's been, you know, this inkling of hope about, you know, the next set of data is going to look better.
Speaker 4:Beijing has gotten the property legacy debt problems under control. You just tend to get hit, it seems like, with another piece of bad news, and this week it was the collapse of a prominent shadow bank Song. He is a, you know, a leading, you know non-bank financial institution and it was allowed to liquidate. I mean it declared bankruptcy a week ago and then was put into liquidation. That's very quick and China usually has a lot of you know kind of bailout gradualists you know don't rock the boat kind of approaches to these sort of things, where you get sort of shadow bailouts and you know debts extended and that sort of thing behind the scenes so it doesn't make a big splash on global headlines and doesn't dent the markets. But you know, this was just a very much straightforward. These guys collapsed and they're getting liquidated. That was, you know, that's weighed on Chinese stocks, which were really weak last year in contrast to pretty much everywhere else in the world, and they've started out this year stumbling out of the gates. So it's not a pretty picture.
Speaker 4:Although growth appears to have stabilized, that property sector issue keeps rearing its ugly head when you look at, you know, europe we talked about it earlier in the demand context for energy, technical recession kind of conditions in Europe. You know, maybe this year is China's upswing a little bit better than last year, but you know, europe is probably kind of bouncing along the bottom here and it's you know, the big swing factor is just, it's going to be the US and you know, is this, is this a soft landing? That's really what everybody's betting on. But people are increasingly betting on, you know, a relift off of the economy and that's you know that that's based on. You know, we know it's not going to be fiscal spending, but a lot of that is probably, you know, owing to expectations for Fed easing and the Fed. You know, cutting interest rates 150 to 125 basis points in a year would provide a meaningful cushion for the US economy and for business activities, but, you know, is the Fed really going to deliver that? That's really one of the biggest swing factors this year.
Speaker 1:Yeah, and is it going to be up to the Fed alone to determine relift off? I love that term. We'll have to keep that one in rotation on the macrocast. That does it for us today. I'm Elan Moy with Penta. My co-hosts are Brendan and John of Markets Policy Partners. We hope that you enjoyed our show and remember you can always listen, like and subscribe to the macrocast wherever you get your podcasts. Thanks for listening.