Friday was interesting. However, it’s the weekend developments that will probably set the tone for the week. After Friday in some ways became a risk on day, I expect that the Asian markets will see Monday very differently now given the recent developments on the Korean Peninsula. More on that later.
Nonfarm payrolls were released Friday. There were two pointers that that will make the Fed’s task of when to hike rates all the more difficult. The unemployment rate climbed slightly to 4.4%, a revision down for the previous two months. In addition, wage growth remains a tepid 2.5%. U.S. factories ramped up in August and grew at the fastest pace for some six years whilst consumer sentiment continues its improvement. The improvement in consumer sentiment and factory output was just enough to take the shine off the bonds causing the bonds to sell off some 4 bp. Equities staged a tepid rally.
Weather is also continuing to play its part in the saga. The East coast’s drenching by Harvey may continue with another Hurricane building strength. Hurricane Irma is possibly expected to hit the Carolinas based on the current weather forecast models. In the West, we have the largest wildfire in history in the vicinity of Los Angeles. Mother nature is currently playing havoc with the U.S.
However, all the joy of last week may well come to an abrupt stop this week as geopolitical risk has now become significantly elevated. The testing of an H-bomb by the North Koreans is a massive leap in technology and somewhat disturbing. The comments from Russia that the closure of diplomatic sites in the U.S. is a “blatantly hostile act” only adds fuel to Lil’ Kim’s bonfire of vanity.
How Trump deals with all of this is hard to imagine. The diplomatic tightrope that he now must walk has now become all the more difficult. Lil’ Kim can continue to goad his nemesis in the knowledge that there is nothing the U.S. can do other than rattle the sabre, threaten but that’s it. China steadfastly says North Korea is not their problem and Russia is now incentivised to assist North Korea. Any trade war that the U.S. imposes on China will for the moment only hurt itself. I cannot imagine Trump vetoing Chinese manufacturing as he and his daughter would be impacted as well as many large GOP donors such as the Walton’s (Walmart) and gambling interests would be also significantly impacted.
The S&P 500 index rose 0.2%, the Dow rose 0.18%.
The 10-year U.S. treasuries rose 4 bp to close at 2.16%. The 2 -year note rose 2 bp to close at 1.346%. The yield curve steepened between 2/30 with the curve steepening about 3.4bp. The Curve closes were 2/10 82.1bp, 2/30 143.1% and 10/30 60.8bp. The probability of a rate hike in December 2017 is now 27.7% and June 2018, 49.3%. This suggests that the bond market remains somewhat sceptical about inflation and growth forecasts.
Commodities remain mixed. WTI rose 0.1% whilst gasoline fell 2%. Gold rose 0.3%. Gold is now trading near a ten-month high. Rare earth prices are booming. Driven by Chinese speculation and demand from the next generation batteries, rare earths are staging a strong recovery.
Aluminium reached its highest price since 2013, up 0.9% and nickel rose to a nine-month peak after rising 2%. The prices were driven by increasing steel prices and strong factory data in China. Rebar jumped 6%.
Aussie Market Today.
Depending upon further news out of the Korean Peninsula, I expect that today could be a risk off day. Even though the trend from offshore is for higher bond yields, I expect bonds to rally and the yen to rally on heightened geopolitical risk. How this standoff plays out is anybody’s guess but any rhetoric from the U.S. will need to be somewhat tempered as tensions escalate.