Busch: Three Things You Need to Know Now: SOTU, Davos, Wheat

1. State of the Union or SOTU. Most of the content has been leaked already in the NYTand Washington Post so it won’t be new news by the time the President speaks tomorrow night. However, the President is likely to push for new spending on infrastructure, education and technology. The Republicans are going to oppose any new spending and the House Budget committee meets today to lay out their framework for limiting federal government growth.

One of the rumors that keep surfacing is a new push from Obama for a Homeland Reinvestment Act II. Allegedly, this new act would again cut the dividend tax for repatriating income held overseas from 35% to 5%. In 2004, President Bush got this done and it went into effect in 2005. It led to a strong rally in the US dollar in Q4 of 2005. It’s estimated that close to $1 trillion dollars is held overseas currently and most of that is by US drug companies. Democrats don’t like this dividend cut as they believe that the money brought home won’t specifically be channeled into jobs and factories.

For the markets, this will be the most compelling reason to watch the spectacle.

2. DAVOS. The World Economic Forum meets again in Davos, Switzerland and this year the focus undoubtedly will be on China. Here’s the agenda. You’ll see right at the top, “China’s role in the world recovery.” This weeks’ Economist magazine covers the central issue of the rise of the yuan and whether it can be a rival for the US dollar as a global reserve currency. The question for America is whether this is our “Sputnik” moment that spurns significant change to our behavior to maintain the US dollar as the world’s global reserve currency of choice.

Davos 2011 - See Complete Coverage
Davos 2011 - See Complete Coverage

The Economistmakes this salient point for all those afraid of a “redback” surge: “But one rule still holds: China will have to open its financial system to the world if the yuan is to be the dominant currency.” While China is in the midst of slowing removing capital controls, President Hu Jintao said it would take some time before the yuan would be in the position to rival the US dollar.

3. Wheat. It appears that all things bad are all things good for the price of wheat. Cold weather in the US, a drought in China and the floods in Australia has impacted the global supply of wheat. Last week, the US Department of Agriculture reported that weekly US sales to overseas buyers surged 700% to 1.054 million metric tons and it's the most since August. The price should begin to bite US producers of bread and bakery products. Like other soft commodities, it will be a contributor to an increase in global inflation.

What's fascinating to me is the comment from ECB's Trichet in the WSJ. The Journal asked: Does the Fed have it right by focusing more on core inflation?

Mr. Trichet answered, “In the U.S. the Fed considers that core inflation is a good predictor for future headline inflation. In our case we consider that core inflation is not necessarily a good predictor for future headline inflation. That being said, all central banks, in periods like this where you have inflationary threats that are coming from commodities, have to go through the hump and be very careful that there are no second-round effects. This is what we are doing.” It is the clearest rebuke of Fed policy I’ve ever seen from the ECB.

Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.