Apart from the rattlings of a North Korean dictator and the ramblings of a marketer, the world was caught up somewhat in slumber. Yes, things happened and yes, markets moved along but the summer heat has put the markets to sleep. Stuff that markets once reacted to like firing missiles or heated rhetoric or a shutdown of 16% of a country’s oil capacity no longer moves markets.
So, what will move these markets? Who knows and until that moment happens, it appears as though markets will barely move in either direction. To be fair, the U.S. market is once again caught up in the marketing of a tax cut by Trump and his team. This is the thousandth time this old chestnut has been wheeled out and a thousandth time the markets sat back and given plausibility to the proposition.
We now know the Big 6, as that is what Mnuchin and Cohen and their team are called, are now targeting December for the release of a tax plan. Somewhere I recall this was due, March, April, June, July and it was going to be great. To date Trump is out there on the hustings marketing why America needs a tax cut. However, and importantly, there is no detail as to HOW this tax cut will be funded and what services will be cut. As they say, the sting is in the detail and there is no detail. This is even more problematic when those people behind the scenes, such as the lobbyists, the accountants, the advisers and the lawyers who assist in putting the detail together and doing the working papers constantly complain about the release of no detail.
What we do know, however, is that we are getting closer to a Government shutdown if the debt ceiling is hit. If the Government were to shut-down, the cost over a two-week period is expected to be about $12bio and hit the GDP by about 0.2% at least that’s what a study has demonstrated. The irony of the situation is that it would be cheaper to agree to Trump’s Wall because at $5-$8 bio, Trump’s Wall is cheaper! Trump does have a point.
Within the broader economy, we saw a revision upwards in the GDP, suggesting now that the U.S. is growing around the 3% mark. However, whilst everything looks all rather optimistic it is worth looking at some of the broader indicators. The Transport Sector is down 5% since July. And if 2014 is anything to go by, transport led the S&P500 down by about seven months. Transport is a leading indicator. Another strong indicator is fund flows. Recently, there has been significant outflows from high yield and equities into Government bonds. This is another indicator that the equity market is ripe for a change in direction.
Hurricane Harvey will create some interesting effects to maybe mitigate these issues. Harvey will cause a slowdown in growth because businesses won’t be able to operate properly for a while. Some 500k cars are expected to be written off and that means probably a large portion will need to be purchased. Such a heavy number of purchases will lead to price rises on cars so no discounting. This effect will be felt through the U.S. as cars will not have to be discounted to be sold as is the case currently. Whether this helps to clear surplus stocks or means a significant increase in output is hard to judge, and could be the fillip that the car industry needs.
On the day we had a strong revision to the GDP number to 3%. The bond market yawned and went back to sleep whilst the equity market sleep walked to the buy button and went back to bed.
Equities rebounded on the day. The driver was the better than expected news. First, on the revision upwards of GDP growth. Second, strong consumer spending in the second quarter. The Government jobs data will be keenly watched and a lead into Friday’s number indicates that hiring remains robust. It will be important to dissect the numbers to determine what is part time and what is services related and what is technology or manufacturing related.
The S&P rose 0.5% and the Dow rose 0.12%.
Bonds had an interesting day. On a day when bonds should have moved, they hardly battered an eyelid. Bonds retreated 1 bp but remain at low levels. The U.S 10-year is still at 2.14%. The market still has no rate hikes priced in this year with a rate hike in December now at 28%. That’s post the strong GDP revision and up from yesterday’s 24.8%. There are no rate hikes priced until June 2018 with a probability of 51% up from 46.7%. The U.S yield curve flattened slightly with the 2/10 closing at 80.2bp, the 10/30 closing at 60.5 and the 2/30 closing at 140.90.
The Dollar bounced off its lows as speculation mounted that the ECB may try to push the euro lower. The euro lost 0.73%.
About 4.2 million barrels of refining capacity has been shut as a result of Harvey. Gasoline futures jumped 5% as fuel shortage worries are boosting retail fuel prices. Shale production has been curtailed for the moment. WTI fell 1%. Once again, the Chinese have a way with metals. The latest hot product is or was ferro-silicon. Trading over the last month or so has been chaotic. Substantial however this enthusiasm is, it is expected to subside once margin fees and trading fees are increased this Friday. Ferro -silicon is used in the production of steel. The next new product is expected to be silico-manganese. Speculators rule the Chinese exchanges. Citic has thrown down the gauntlet to Australia’s Mineralogy over royalties and debts to be paid or due.
Aussie Market Today.
Equity to rally in a quiet market. Bonds to see slight selling as rates edged higher overnight.