JP Morgan Previews Obama's Tomorrow Speech: "We Anticipate That Little Will Come Out Of It"

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JP Morgan, whose Banker In Chief has not spared harsh words in the past to describe the POTUS, has released its just as uncompromising assessment of tomorrow's Obama speech which if predictions are correct, will be such a load of hot air, that the mere non-news factor alone should send the market into a volumetric coma on Friday, hence pushing ES limit up easy by close of Friday. Michael Feroli's take: "Cynically, one could say this is merely pushing back the fiscal drag past the time of the next election. More constructively, one could argue that this is pushing back the fiscal drag to a point in time when household sector balance sheet repair has hopefully progressed enough that the private sector can generate self-sustaining growth momentum. Either way, the Republicans in the House are unlikely to be easily impressed by the President's arguments. None of the major programs proposed has received much support from Republicans, and if any were eventually passed it would probably only be after bruising negotiations later in the year. All in all, we anticipate that little will come out of tomorrow's speech to make us re-think the near-term outlook." The outlook, in question and presented previously, being one that jives with the S&P at 900, and certainly not at 1200.

From JP Morgan's Michael Feroli

Preview of tomorrow's policy talks

 

Tomorrow will bring two closely-followed speeches, one by Fed Chairman Bernanke, the other by President Obama. We expect the former will create much less news than the latter. Bernanke's 1:30pm address to the Minnesota Economics Club will discuss the economic outlook but likely deliver few clues about the actions to be considered at the upcoming two-day FOMC meeting. The shift to a two-day meeting to air views could represent an attempt to re-affirm a sense of collegiality into the deliberations. Any strong signalling of a pre-ordained policy preference in tomorrow's speech could be seen as front-running the committee and at odds with the spirit of collegiality.

 

The President's speech at 7pm, before the Packers-Saints game, will be much more explicit about policy preferences, even as he is much less likely than Bernanke to see all of his preferences realized. Media reports indicate that the President will likely petition Congress for an additional $200-$300 billion of tax cuts and spending increases. The centerpiece of this will almost surely be an extension of the one-year, 2%-point reduction in payroll withholding taxes. With a price tag of around $110-$120 billion, this tax cut could represent as much as half of the dollar value of the President's proposals. Another significant proposal will likely be an extension of emergency unemployment benefits, which, like the payroll tax cut, is scheduled to lapse in January of next year. More generally, we see the aim of the proposed initiatives as largely to offset the impending fiscal drag scheduled for next year. As the table below shows, the expiration of the two above-mentioned programs, as well as the gradual phase-out of other temporary stimulus measures, implies a narrowing of the structural (i.e. non-cyclical) deficit of around $350 billion next year. Our estimates put the implied drag on GDP growth at over 1.5%. If the President were to get all he wanted, this would offset almost all of that drag.

 

Cynically, one could say this is merely pushing back the fiscal drag past the time of the next election. More constructively, one could argue that this is pushing back the fiscal drag to a point in time when household sector balance sheet repair has hopefully progressed enough that the private sector can generate self-sustaining growth momentum. Either way, the Republicans in the House are unlikely to be easily impressed by the President's arguments. None of the major programs proposed has received much support from Republicans, and if any were eventually passed it would probably only be after bruising negotiations later in the year. All in all, we anticipate that little will come out of tomorrow's speech to make us re-think the near-term outlook.