Trump team braces donors for potential recession Presented by U.S. Bank

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Quick Fix


Trump team braces donors for potential recession — The White House may be putting on a happy face in public, but “in private, they’re increasingly worrying about a global economic slowdown triggering a U.S. recession — and weighing options to shore up the economy in an election year,” POLITICO’S Nancy Cook reports.

At a fundraiser this week, acting chief of staff Mick Mulvaney “acknowledged the risks to the GOP elite behind closed doors. If the U.S. hypothetically were to face a recession it would be ‘moderate and short,’ Mulvaney told roughly 50 donors, according to an attendee,” Nancy reports. Among the measures White House officials are mulling is shaving another point or two off the corporate tax rate.

Payroll tax cut, indexing capital gains on the table – President Donald Trump said yesterday that his administration is considering a variety of tax cuts to boost the economy, just a day after White House officials tried to bat down a report in the Washington Post, telling the paper that “cutting payroll taxes is not something under consideration at this time.” POLITICO’s Bernie Becker: “The president said he could index capital gains [to inflation] through his own executive authority, though such a move would almost certainly be met by a court challenge.”

“Payroll tax is something that we think about and a lot of people would like to see that,” Trump said in a White House appearance with President Klaus Iohannis of Romania. “And that very much affects the workers of our country.” Still, “Trump said he wasn't planning to do anything on taxes at the moment, stressing once more that he doesn't think the U.S. is heading toward a recession and that he believes the economy is strong,” Bernie reports.

FDIC, OCC approve Volcker rewrite — The Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency both gave the green light yesterday to a rewrite of the Volcker rule that would ease trading restrictions for mid-size banks and streamline compliance for larger banks. Once the remaining three regulators sign off, the rule is scheduled to go into effect Jan. 1, with a compliance date set for Jan. 1, 2021. Some reactions:

House Financial Services Committee Chairwoman Maxine Waters (D-Calif.) said the rewrite “will not only put the U.S. economy at risk of another devastating financial crisis, but it could potentially leave taxpayers at risk of having to once again foot the bill for unnecessary and burdensome bank bailouts.” The final rule, she said, “would curtail prohibitions in a manner that Congress never intended.”

Senate Banking Committee Chairman Mike Crapo (R-Idaho), meanwhile, praised the rule for “reducing unnecessary compliance burden” but added, “Unfortunately, the Volcker Rule is extremely complex and further revisions to the ‘covered funds’ definition’s overly-broad application to venture capital, other long-term investments and loan creation, are necessary to improve market liquidity and preserve access to diverse sources of capital for businesses.”

Industry groups echoed Crapo’s statement, encouraging the agencies to move ahead with a revamp of the covered-funds section of the Volcker rule. The regulators aim to produce something on that front this fall. Read more about the rule on POLITICO.

IT’S WEDNESDAY — Thanks for hanging with me today. Ben White will be back in your inbox after Labor Day. You can reach him at [email protected] and @morningmoneyben and Aubree Weaver at [email protected] and @AubreeEWeaver. Drop me a line on financial regulation and macroeconomic policy at [email protected] and @KatyODonnell.

Driving the Day

Minutes of the July 30-31 Federal Open Market Committee meeting will be released this afternoon.

Markets

STOCKS EDGE LOWER, SHED SOME GAINS — AP’s Alex Veiga: “Stocks edged lower in midday trading Tuesday, weighed down by a mixed batch of company earnings and another decline in bond yields. Financial sector stocks accounted for much of the selling as investors reacted to the decline in yields.… Household goods makers and communication services stocks were among the decliners. Energy stocks fell along with the price of crude oil.… Technology stocks, which like banks have tended to lead the market’s gains recently, moved higher, having bounced back from the early slide. Apple rose 1.4 percent and Broadcom gained 2 percent.”

And traders are placing their bets on falling volatility — WSJ’s Gunjan Banerji: “Stock volatility has receded in recent days, and some investors have bet the tranquility will persist. Derivatives traders have increased positions that pay out if market swings dwindle and stocks continue to climb. After the Dow Jones Industrial Average recorded the biggest drop of the year on Wednesday, major indexes have rebounded, rising for the third consecutive day Monday. That has sent a measure of market turbulence, the Cboe Volatility Index, or VIX, lower. It fell by 8.6 percent to 16.88 Monday, the lowest level so far this month.”

DON’T BET ON TRUMP RESCUING STOCK MARKET — WSJ’s James Mackintosh: “Should investors rely on Donald Trump underpinning the stock market by backing away from trade threats as stocks fall? In short: not as much as they seem to. Many market watchers believe the pattern of the administration announcing progress on trade talks after falls in the S&P 500 amounts to a ‘Trump put,’ similar to a derivative that pays out when prices drop to a certain level….

“There’s no doubting that Mr. Trump’s tweets have the power to move markets both up and down. It’s also obvious that Mr. Trump regards a strong stock market as a measure of success, something he has repeatedly referred to when it’s doing well. That’s led many to think that Mr. Trump will do what’s necessary to keep the market strong ahead of the 2020 election to win votes.”

WALL STREET SWAPS STEEPENING FOR INVERSION — Bloomberg’s Yakob Peterseil and Luke Kawa: “Investment banks are offering a fresh way to profit from a U.S. yield curve flashing renewed warnings of recession. Barclays Plc has sold $2 million worth of structured notes that benefit if the U.S. swap curve fails to steepen materially, or if it inverts a year from now. The product would typically pay off in a scenario in which bond investors fear the outlook for growth and inflation, amid diminished Federal Reserve firepower. It appears to be the first issued this year by a major investment bank riding a flatter yield curve. Wall Street tends to sell a slew of ‘steepeners’ that profit from a wider gap between short- and long-term rates, commonly associated with a bullish growth environment.”

Fly Around

POMPEO: TRADE WAR COULD END BY 2020 ELECTION — CNBC’s Brian Schwartz: “Secretary of State Mike Pompeo told a group of business executives and free-trade economists that he believes the trade war with China could come to an end by the 2020 presidential election, according to people who attended the gathering. At a private lunch in New York on Tuesday, Pompeo spoke in front of a crowd of about 40… Pompeo told CNBC's ‘Squawk Box’ earlier Tuesday that he wasn't sure about where things will ultimately stand between the U.S. and China.”

CRITICS QUESTION CEOS SPURNING INVESTOR-FIRST MODEL— Bloomberg’s Anders Melin and Jeff Green: “It seemed, at least on paper, like a tectonic shift of American capitalism: The deviation from the long-held conviction that shareholder returns must always reign supreme. In a 300-word statement released Monday, 181 leaders of some of the world’s largest companies endorsed a philosophical redrawing of the purpose of a corporation. The goal, according to JPMorgan Chase & Co.’s Jamie Dimon, chairman of the Business Roundtable, must be to promote an economy that serves all Americans, not just investors.

“Critics quickly seized on the unknowns. Would activist investors overlook stock price dips if the cause could be traced to higher wages and better benefits for workers? Can chief executive officers, who last about six years on average and mainly get paid in company stock, reasonably be expected to run businesses with a decades-long mindset?”

BANKS WANT EFFICIENCY, CRITICS WARN OF BACKSLIDING — NYT’s Jeanna Smialek, Peter Eavis and Emily Flitter: “A decade after big banks needed government support to dig out of the financial crisis, the Federal Reserve is slowly, but steadily, making a series of regulatory changes that could chip away at new requirements put in place to prevent a repeat of the 2008 meltdown. Some of the changes, seemingly incremental and technical on their own, could add up to a weakening of capital requirements installed in the wake of the crisis to prevent the largest banks from suffering the kind of destabilizing losses that imperiled the United States economy. Another imminent change will soften a rule intended to prevent banks from making risky bets with customer deposits.”

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