by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Although overall market activity is quiet this morning, there is a good bit of news.  Here is what we are watching this morning:

Catalonia blinks—Rajoy presses: Yesterday, Catalan leader Carles Puigdemont declared and suspended independence, asking for talks with Madrid.  PM Rajoy is having none of this, calling for Puigdemont to either send him a document outlining what he intends or stop talking about independence.  If Catalan leaders follow through on independence, we expect Rajoy to respond with force and disband the provincial government.  Puigdemont his trying to thread a needle, holding his independence coalition together while avoiding a crackdown from Madrid.  We suspect the Catalan leadership doesn’t have enough support to risk civil conflict and so it will back down.  Clearly, that is what the market expects.

PM May backtracks on Brexit?  In a series of interviews, PM May would not say she would vote to leave the EU if another referendum were held today.  May made a rookie political mistake—never comment on hypothetical questions.  May has indicated she voted “remain” and we suspect she probably would again.  This is raising pressure on her from Tory backbenchers who strongly lean toward Brexit.  May is on shaky political ground which is making it difficult for her administration to negotiate Brexit with the EU.  Political risks in the U.K. are rising.  Corbyn’s Labour Party would probably win if an election were held today.  There is great dissent within the Tories over May’s leadership but the party wants to avoid a leadership challenge, fearing a no-confidence vote and new elections.

Minutes today: The Fed minutes are due later this afternoon.  We will be watching this release closely to monitor the degree of dissent from the recent path of policy tightening.

Rattling sabers: The U.S. flew two strategic bombers over the Korean Peninsula and President Trump met with military leaders to discuss a response to the North Korean threat.  In addition, the U.S. Navy performed a freedom of navigation operation, sailing near islands claimed by China in the South China Sea.  Perhaps the most interesting comment to emerge from the White House is that NBC is reporting that President Trump said in a meeting earlier this year that he wants to increase the U.S. nuclear arsenal.[1]  This idea flies in the face of established trends and international agreements.  The U.S. nuclear arsenal peaked in terms of warheads in the 1960s.  From a strategic standpoint, the U.S. arsenal is large enough that the survivability of the human race would be in question if deployed.  Thus, adding to that number of warheads seems counterproductive.

IMF upbeat: The IMF annual meetings are being held in Washington this week and the new World Economic Outlook is favorable.  The IMF says the world is enjoying its most widespread and fastest growth spurt since the bounce observed in 2010, which was off the low base of the 2008 Great Financial Crisis.  The world economy’s growth forecast was raised by 0.1%, with advanced economies increased by 0.2%.  The Eurozone forecast was raised by 0.4% while the U.S. was reduced by 0.1%.  Global growth is expected to rise 3.6% this year and 3.7% in 2018.  Emerging economies are forecast to see 4.6% growth, with 4.9% in 2018.

Turkey increases tensions: A court in Turkey has sentenced a WSJ reporter, Ayla Albayrak, to two years in prison on terrorism charges based on an article she wrote.  Albayrak is currently residing in New York, and carries dual citizenship in Finland and Turkey.  Her article reported on the war between Kurdish militants and the Turkish state.  We suspect this high-profile sentencing was designed to raise tensions with the U.S, which are already elevated due to a spat over travel visas.

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[1] https://www.nbcnews.com/politics/donald-trump/trump-wanted-dramatic-increase-nuclear-arsenal-meeting-military-leaders-n809701?utm_source=newsletter&utm_medium=email&utm_campaign=newsletter_axiosam&stream=top-stories