THE SURGE? The inevitable spike in inflation

The surge. What? may you wonder. The surge of course refers to the inevitable spike in inflation after Hurricanes Irma and Harvey. You see the Fed is seeing inflation in the numbers and the problem is this is rather transitory. The hurricanes caused significant damage and what you have are people replacing lost items. The replacements are causing a distortion to the market price. For example, you once went to Texas to buy a cheap car, a bit like going to Adelaide, there are many Porsche’s for sale but relatively few buyers. So, you get a good price. That dynamic has changed and is squeezing buyers across the country.

Whilst on weather related events, the Mexican Government stands to make a claim on a catastrophe bond to the tune of several hundred million which it will use to help the rehabilitation of recent earthquake victims. Not that I am calling an earthquake weather related; it is geological, of course.

This is all on an unremarkable day where once again NAFTA is the point of discussion and suddenly many lobby groups are becoming interested because Trump stands to damage their business. A day when Trump trumpeted he could revoke or unhinge fake news CNBC which of course he cannot under the 1st Amendment and where Bannon has set the goal of challenging every GOP Republican up for re-election in the South except for Ted Cruz. This is a first and interesting because many of these GOP members are solid voters for Trump. And in yet another unhinged comment, Bannon believes Trump has a 30% chance of serving his term and not because he is likely to be impeached but because his Cabinet may invoke Amendment 25 and rid themselves of Trump. Wow, the politics is getting rather spicy.

It looks like the Fed is readying itself to hike rates although the division appears to be closely split. More importantly for markets is who gets the nod to become Chairman. Warsh appears to be the likely candidate. However if one listens to Krugman (Nobel Laureate Economics) then Warsh is a bellwether for everything wrong. Just take the opposite position to him and you will be right.

And it was yet another bad day for Kobe Steel. Kobe Steel’s price has fallen some 30% over the last two days after it emerged that employees had been faking test results. Kobe steel is used in planes, cars and in high strength high tensile situations. This has been damaging for Kobe Steel and places many of its manufactured components under a cloud. For example, Toyota uses Kobe steel in the manufacture of its cars.

Market Recap:

Equities: the S&P 500 rose 0.1%, the Dow rose 0.18%. The Stoxx 600 was unchanged.
Currencies: the euro rose 0.5% and the Bloomberg Dollar Spot Index fell 0.3%
Bonds: were slightly stronger. The U.S. 10-year closed at at 2.35%. The two- year bond closed at 2.51%. The 30-year closed at 2.88% down 2 bp on the day The yield curve flattened slightly.
The U.S. bond curve was steady with the 2/10 closing at 82.2 bp, the 2/30 at 137.8 bp, and the 10/30 closed at 53.6bp.
Commodities: Gold rose 0.4% and WTI rose 0.77% as indications are that the glut is falling and copper climbed 1.2%. Rebar fell 3% and nickel fell 1%.

Aussie Market Today.

Aussie bonds will continue to trade in a tight range with little direction being offered up by offshore movements. If anything, the bonds are likely to drift lower in yield (higher prices). Credit may be slightly weaker. However, demand for assets with yield can easily see credit continue its steady rally.
Equity market to be slightly stronger on the day as the global theme remains bullish.