Daily Market Color March 22, 2018Financial Markets Shudder as Tariffs on China Threaten Trade War Global financial markets opened in risk-off mode today with the expectation of President Trump formally announcing his plans to levy up to $60 billion worth of tariffs against China. Trump officially signed the memorandum this afternoon, but did so with a more conciliatory tone than expected, opening his speech with the words “I view them as a friend” before explaining China’s ability to respond to the actions via a consultation period prior to any enactment of the tariffs. Regardless, it is widely anticipated that Beijing will respond with retaliatory tariffs of their own, specifically targeting US agricultural exports which would have the biggest impact in “pro-Trump” midwest states. Treasury yields/swap rates gapped lower during the first half of the session, declining 4-10bps across the curve before a selloff erased nearly half of that movement. The yield on the 10-year note is currently near 2.83, down 7bps on the day, after touching as low as 2.80% initially. Major US stock indices tumbled more than 1% as the threat of a trade war weighed on equities, with the tech sector leading all decliners. In commodities, crude oil futures reversed a portion of this week’s rally, as WTI crude fell 1.25% to $64.35/barrel. Amazing Race: Avoid a Shutdown The House passed a $1.3 trillion spending bill with about 36 hours to spare in the race to avoid a government shutdown which would provide for funding of federal agencies through the end of September. This now moves the Senate to center stage, needing to approve the bill before the clock strikes midnight this Friday. While the bill is expected to pass with bipartisan support, Senator Rand Paul (R-KY) is expected to try to prevent a vote from taking place on procedural grounds. President Trump had previously threatened to veto the bill due to a lack of provisions for a border wall and punishment for sanctuary cities. He had also opposed money earmarked for rail infrastructure in the NY area (specifically a new rail tunnel under the Hudson River linking New Jersey and New York City) as part of the Gateway Plan to improve rail infrastructure. House Speaker Paul Ryan travelled to the West Wing to sell the need for this bill to become law and left with a pledge from the administration that the bill would have the President’s support. Both parties were quick to share credit for additional money for infrastructure and to fight the opioid crisis. Republicans touted additional military spending, while Democrats took a victory lap over child-care subsidies and low-income housing credits. Jobless Claims Remain Low A relatively light day of key economic data releases included a report from the Labor Department which showed initial jobless claims in the US holding near the lowest level since December 1969. The number of new claims for the week ended March 17th rose slightly to a seasonally adjusted 229,000 (225,000 expected), while the four-week moving average of claims decreased by 2,250 to 223,750. Also detailed in the report, the number of continuing claims declined by 57,000 to 1.828 million for the week ended March 10th. The Ongoing Quest to Simplify Regulation The House Financial Services committee started paving the way to make the Federal Reserve the primary regulator for the Volcker Rule with significant bipartisan support. While this is only an initial step, this decision could lead to an easier approach to the rule. Currently, all five of the various banking regulators have authority to examine institutions on the regulation with varied approaches. Ultimately, the goal of Congress is to simplify the overall regulation, especially the definition of market making. Streamlining the examination to one regulator would ease stress and confusion during regulatory audits. The bill will need to advance to obtain full House, Senate and Presidential approval, but progress is being made in that direction. CFTC Chairman Christopher Giancarlo also made statements yesterday regarding the initial margin rules on bilateral trades. He believes the rules should be relaxed to ensure a level playing field in all jurisdictions. Within the banking sector, initial margin regulations do not apply to banks with less than $10 billion in assets, but does affect those with over $10 billion. The CFTC Chairman is seeking to streamline and ease some of the regulations in an effort to ensure that US counterparties are not burdened with more stringent regulatory demands than their foreign counterparts. BOE Leaves Policy Unchanged Across the pond, the Bank of England concluded its second monetary policy meeting of 2018 with the decision to leave its benchmark borrowing rate unchanged at 0.5%, in line with expectations. Unlike the unanimous vote in February, two of the nine voting members of the Monetary Policy Committee supported a rate hike at yesterday’s meeting, referencing diminished slack in the economy and acceleration in wage growth. The MPC also confirmed that recent economic growth has been in line with previous forecasts, but uncertainty over the final impact of Brexit on trade remains a key risk. The British pound traded 0.2% lower against the USD on the day.