by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EST]

Good morning all! Equities are trading stronger as fears of a recession have been calmed by upward revisions to GDP for the third quarter. Below are the stories we will be tracking today:

Mexico infrastructure: On Tuesday, Mexico’s government announced the first phase of its infrastructure program for 2020-24. The program includes 147 projects that range from railways and ports to water and tourism, and it will cost $43 billion. The announcement comes a day after official data revealed that the Mexican economy dipped into recession this year.

Keeping in line with his pledge not to expand the fiscal deficit, President Andres Manuel Lopez Obrador, often shortened to AMLO, has called on business leaders to pitch in. At this time, it appears the project has the backing of Mexico’s richest man, Carlos Slim, but may struggle to find help from abroad. A recent dispute by the Mexican government over a gas pipeline has raised fears that this administration may not honor its contract. In addition, investors are not confident that the projects are profitable as a lot of the projects mentioned were old ones that weren’t completed. As a result, we are not confident the projects will be enough to get the country out of its current rut. We also suspect that if the economy worsens the president will come under increased pressure to boost government spending.

More repo uncertainty: As the end of the year approaches, there is growing speculation that a liquidity squeeze could lead to another surge in repo rates. The surge that took place earlier this year was largely attributed to banks needing funds for corporate tax payments, whereas this time a surge could occur in response to banks trying to meet regulation requirements. Last week, banks were given an assessment of their systematic importance to the global financial system, in which it was determined the amount of capital needed to be held against assets. Since many of the major banks are close to the capital threshold, there are fears that these banks may be hesitant to lend toward the end of the year. Although the Fed has stated that it is prepared to act to prevent a liquidity crunch, there are concerns that banks could be gaming the system in order to ensure they keep expanding their balance sheets. Currently, there doesn’t seem to be an obvious fix to liquidity markets, outside of forcing banks to borrow from the discount window. Therefore, we are not confident that the Federal Reserve has a plan to end its balance sheet expansion anytime soon.

Hazardous weather: There have been tumultuous weather conditions throughout the country, but particularly in the Northwest and Pacific regions. Heavy snow and “stronger than hurricane-force winds” have already disrupted flights and closed some major highways. Although this may be good news for those looking for an excuse to avoid family during Thanksgiving, this will likely have a negative impact on the economic data, particularly construction and retail sales. As a result, we would not be surprised if economic data for November were weaker than expected as bad weather conditions typically lead to slower economic activity.

NHS on the table? Labour Party leader Jeremy Corbyn revealed that he has a dossier proving that the U.S. demanded the National Health Service (NHS) be included in trade discussions. Specifically, Corbyn stated that the U.S. wanted the patents for drugs for pharmaceutical companies to be extended, which would prevent companies from creating cheaper generic versions. The NHS is a sensitive topic in the U.K. as most people would like its funding to be increased and remain publicly controlled. That said, PM Johnson has not always been forthright about the NHS. During the run-up to the Brexit vote, Johnson drove around in a red bus that claimed leaving the EU would allow the U.K. to use the £350 million it spends per week to remain in the EU to fund the NHS; this claim was later debunked. Accordingly, the public’s trust in PM Johnson could be seriously undermined if the allegation is true. That said, we are still confident the election is PM Johnson’s to lose.

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