by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] U.S. financial markets are quiet, but there is a lot going on again today.  Here’s what we are watching this morning:

Taylor to the Chair?  John Taylor, the creator of the “Taylor Rule,” visited President Trump yesterday and, according to news reports, the president was very impressed.  Taylor is a well-respected economist with a good deal of government and academic experience.  What makes him a bit of a surprise is that he is considered rather hawkish.  When these reports emerged yesterday, the dollar rallied and Treasuries dipped.  We would be surprised if Taylor gets the nod for chair, although it wouldn’t be a shock to see him appointed to the FOMC.  In general, Trump favors lower interest rates; Taylor is on the record calling for a 2% real fed funds rate, or, assuming 2% CPI, a 4% nominal fed funds rate.  Eurodollar futures are nowhere near that level and so we would view Taylor as a bearish event for equities and Treasuries, and bullish for the greenback.

Friends Again! Yesterday, Senate Majority Whip McConnell and President Trump stood side-by-side in the rose garden in a sign of unity as they prepare to pass tax reform.  It has been reported that the two had a falling out after the Senate failed to repeal Obamacare.  This display of friendship should be taken with a grain of salt as there have been reports that officials in Trump’s administration believe that Senate Republicans are an impediment to Trump’s legislative agenda.  It is also worth noting that while speaking on their improved relationship Trump mentioned that he would talk Steve Bannon out of setting up primary challenges to Senate Republicans; earlier this month, Bannon stated that he is willing to go to war with establishment Republicans.  We would interpret this gesture as a final olive branch before Trump gives up on the GOP and tries to pass legislation on his own.  We will continue to monitor this situation.

More Headaches for the Catalan President: Yesterday, Spain’s high court sentenced the leaders of the Catalan National Assembly (ANC) and Omnium Cultural, Jordi Sanchez and Jordi Cuixart, to prison without bail pending an investigation of alleged sedition.  The two men were accused of sedition due to their involvement in setting up massive protests to counter the Civil Guard’s crackdown on the October 1st referendum.  As the two men were escorted from the courthouse, they were given a hero’s welcome from separatist supporters.

This event will likely put more pressure on Catalan President Carles Puigdemont to clarify his position on whether Catalonia has declared independence from Spain.  Following the results of the referendum, Puigdemont stated that he has the mandate to declare independence but will suspend doing so in order to set up negotiations with the Spanish government.  In response, the Spanish government has stated that it will not consider negotiating with Catalonia as long as it insists on becoming an independent state.  In addition, Spain has given Puigdemont until Thursday to clarify his position or risk having his government dissolved.  In rebuke of the Spanish government, the ANC sent a letter to Puigdemont urging him to immediately end the suspension of Catalan independence.  Puigdeomnt appears to be in a lose-lose situation; if he formally declares independence he risks being removed from office, and if he does not declare independence he will likely lose the support of his base.  Currently, Spanish equities are up but are trading slightly lower than last week.

So, you’re saying there’s a chance?  Yesterday, CNN reported that a North Korean official stated that the region would only be willing to engage in diplomacy with the Trump administration if it has the capability to strike the East Coast of the U.S.  Given all of its bluster, this statement represents a victory for SOS Rex Tillerson, who has maintained that sanctions will help bring North Korea to the negotiating table regarding its nuclear program.  Over the past few weeks, SOS Tillerson and President Trump have offered differing strategies on how to deal with North Korea’s nuclear program.  Tillerson would prefer to curb the program through diplomacy, while the president has advocated for ending the program militarily.  These comments could be a prelude to possible negotiations but we are not prepared to rule out the likelihood of a U.S. preliminary strike.  We will continue to monitor this situation.

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