Originally published by The Commonwealth Bank of Australia
Hurricane Harvey was still in the headlines as Hurricane Irma approached. And now Hurricane Jose flanks Hurricane Irma. Florida has been hit hard by the hurricane. The economic impact of the hurricanes will be significant, but eventually recovered. The chances of a Fed hike this year have gone from probable, to possible, to pause‑able…
The North Korean nuclear missile “crisis” continues to fester. China told the US (and South Korea), again, that they will back North Korea if the US acts first. But they will stay “neutral” if North Korea acts first. Nothing but semantics here. It’s easy to say they started it, from both sides. North Korea is similar to Cuba, it will always be between China (Russia) and the US.
The Aussie employment report could be strong, again, this week. But the report is unlikely to drive market pricing for long.
Hurricane Irma is lashing the Florida shores, and power is out in parts. Irma is the largest Atlantic hurricane in recorded history, and she has backup. The first image shows the other two hurricanes of note, Katia and Jose. Hurricane Jose is on a similar path to Irma. The three hurricanes, Harvey, Irma and Jose, are the first in recorded history to have attained category 4 or higher, at the same time. So not only do we have the largest, Irma, but we have the most, along with Harvey, Jose and also Katia to make four.
The hurricanes will have a significant impact on US economic data prints. The lift in jobless claims last week, will persist, and impact national payrolls. Industrial production figures will fall, with Harvey impacting refining capacity. GDP prints will soften in Q3 and Q4. All indicators should bounce into calendar year end as the rebuild commences. The inflationary impact will be mixed. In fact the overall impact is generally mixed with natural disasters. Devastation leads to rebuilding. And the central bank stalls.
The probability of a third Fed rate hike this year was already in doubt, with very weak inflation prints this year. The impact of the hurricanes is unknown, but growing by the day. The Fed will most likely pause until the likely rebound occurs in the data, in 2018. The balance sheet at least will be in the process of being partially unwound.
The tensions with North Korea remain red hot. Many feared another nuclear test over the weekend, because they did one this time last year to mark the nation’s anniversary. Nothing happened, but the threat remains. China has warned the US, as they did in 2011, not to escalate. And China will support North Korea if the US acts first. If tensions in the region continue to escalate, the risk is North Korea becomes the Cuban missile crisis of our time. For now, we need to see if stronger sanctions against North Korea are implemented by the security council, and how North Korea retaliates. The market is taking the threat seriously, as the price of gold and of safe haven bonds are steadily bid by nervous hands. But pricing is far from panicked. And hopes of geopolitical cooling persist.
In Australia, the roll will take a lot of attention, and we also have one key economic indicator of note: Labour Force. We expect another strong print. But it won’t be enough for Australian markets to cut their path this week. Antipodean markets will remain at the mercy of global developments.
The persistent weakness of the US dollar has allowed the little Aussie battler to burst through 80c. The move has been supported by a lift in Australian commodity prices, and a lift in Australian economic momentum. But until Australian private sector wages (public sector wages are outperforming) show signs of lifting, materially, thoughts of RBA hikes are premature. The lift in the currency alone constrains the lift in momentum, as exports become a little dearer, and imported inflation eases a little further.
Australia’s lift in economic momentum has been most noticeable compared to New Zealand, see chart. The widow‑maker (AUD/NZD) has lifted from thoughts of parity to thoughts 1.15. The widow‑maker has taken out many a stop in a savage move from 1.0360 in June to a recent high of 1.1140 last week. Interest rate differentials between the two Antipodean nations have compressed to levels, we deem too low.
Thursday’s budget from WA was a local highlight. There was no reaction in rates markets to the budget. WATC updated their borrowing programme Friday. The newly nominated number is lower, at $6.1b, but that represents the volume required for the balance of 2017 18, not the entire year. The new estimate is an $800m increase on their previous borrowing estimate on a like for like basis. As we noted in the Budget report, the WA budget had some weak areas, but was treading carefully around the major pain points that S&P had previously identified. We don’t believe a downgrade is likely, we expect WA will remain AA+ with negative outlook.
In Europe, the ECB did nothing and said nothing, so markets reacted to nothing. The next meeting should bring more than nothing after the ECB formerly discuss tapering to nothing. The ECB’s forecasts were revised slightly, with GDP up a bit and inflation down a bit. Nothing worth reacting to. Growth this year was upgraded by 0.3% to 2.2%, while 2018/19 was left unchanged. Inflation projections were revised lower for 2018 and 2019 and unchanged for this year, which mainly reflected a stronger euro. Exports were revised 0.6% lower in 2018.
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