By Greg Valliere
Horizon’s Chief Global Strategist

August 6, 2018

Four Major Developments to Watch This Week

FIRST – IS A WAVE ELECTION COMING THIS FALL? We’ll get a major clue tomorrow night from a reliably conservative House district south of Columbus in Ohio, the state to watch for political trends. What looked like a fairly easy win in a special election by Republican Troy Balderson now is a cliffhanger, as moderate Democrat Danny O’Connor has closed fast.

PRESIDENT TRUMP DECIDED, WITHOUT BEING INVITED, to hold one of his raucous rallies in the district this weekend, apparently unconcerned about the controversy over his insults to the state’s favorite son, LeBron James. A victory by the Democrat would set off alarm bells in the GOP, which is fighting an enthusiasm gap, as Democrats seem more motivated to turn out.

TRUMP’S MATH MAY NOT WORK: He has fanatic support from 85% of the GOP base, which means he can intimidate moderate Republican lawmakers and get the most conservative candidate nominated in primaries – but the general election in November may be another story. Latest Gallup figures show only 26% of U.S. voters self-identify as Republicans, compared to 30% for Democrats and 41% for independents. This race shouldn’t be close, but suddenly it is, as independent women cool to Trump.

SECOND – IRANIAN SANCTIONS: The price of oil could be volatile this week as the White House announces the reimposition of sanctions against Tehran, with the prospect of tough oil sanctions by Nov. 4. Shipments of a wide range of Iranian goods into the U.S. will be banned, starting today, with U.S. secondary sanctions on countries that trade with Iran.

THE ULTIMATE U.S. GOAL is regime change as Tehran’s economy collapses, but the idea that President Hassan Rouhani would capitulate any time soon seems very unlikely; the country’s hard-liners have been emboldened and Iran has stepped up naval exercises in the Persian Gulf. We continue to believe that the most significant threat to geopolitical stability involves Iran, which can count on support from China and Russia.

THIRD – PROGRESS ON TRADE WITH MEXICO? U.S. and Mexican trade negotiators resume talks this Thursday, amid signs of a thaw between the two nations. Any sign of progress on trade would be a welcome development, in light of the dramatic escalation of tensions between the U.S. and China, and the lack of any talks between the U.S. and Canada until later this month at the earliest. Meanwhile, the details are daunting, as we expected, as talks slow down between the U.S. and the EU.

FOURTH – IMPORTANT INFLATION DATA THIS WEEK: Finally, perhaps the most important development for the financial markets may be inflation data to be released late this week – the PPI on Thursday and the CPI on Friday. Both have run a little hot lately, but the consensus estimate for both is for a rise of just 0.2%. Anything higher would raise the same issue as with last Friday’s jobs report – are tariffs starting to have an impact on the economy?