In what was supposed to be a party for central bankers, economists and bankers the thunder was stolen once again by the thunderous Trump. Trump spoilt the party and there was nothing the central bankers could do. The heart of the matter was two-fold. The debt ceiling was the first issue and was a major distraction for a number of key speakers and the other distraction was Trump’s pledge once again rearing its ugly head, “The Wall”.
The Wall is an issue for two reasons, one is that Trump pledged to shut down Government if he does not get his $1.6 billion to commence building a new piece. The other is that he is using the wall as leverage to possibly shut down Mexico and with it the NAFTA Agreement. The ceasing of NAFTA goes against free trade and over the weekend Trump has made a lot of noise threatening both Canada and Mexico that they are being difficult by not roiling over and agreeing to new terms. A change in NAFTA between the U.S. and Canada would be especially difficult for Alberta but so too for about five states abutting the Canadian border.
The noise regarding the wall and debt ceiling found its way into Draghi’s speech. Whilst Federal Reserve Governor Jerome Powell commented on the debt ceiling and the necessity for it to be raised. Paul Ryan and a number of GOP members have said that the debt ceiling should be raised temporarily with further discussion to be held in December as the budget bills for 2018 are being discussed and settled. Meanwhile Dallas Fed Governor Robert Kaplan has suggested that the Fed could start shrinking its balance sheet very soon.
Amongst the froth and bubble of the central banks’ discussions, the paring of the Fed’s balance sheet was of strong interest. Much discussion also centred on whether Yellen would get another term as the Fed Chair. Trump sent Cohn and a number of observers to the conference.
In an another twist, the U.S. economy appears to be having some problems. Bank lending has fallen for the 3rd consecutive quarter and its rate of growth is now at 3.7% yoy compared to 6.7% a year ago. Housing numbers are slowing and profit margins are thinning. In still another twist, the economy will get a slug from Hurricane Harvey. The economy could also experience a loss of confidence from a stalling of NAFTA or indecision over the debt ceiling.
Business cycle appears to be very mature and one can easily build a case for an economic slowdown. Currently, we have the major assets moving in a similar way with commodities, bonds and equities all performing. This is unusual and in previous cycles has been a portent of asset repositioning.
Equities rallied on Friday post Yellen’s somewhat dovish speech. The Dow rose 0.14%, the S&P rose 0.2%. The Stoxx 600 fell 0.1% and is set for its 3rd consecutive monthly loss.
Bonds staged a rally with U.S. 10-year closing about 2.17% and the curve flatted about 3.5bp. The 2/10 closed 82.5bp, the 2/30 closed at 140.9bp and the 10/30 was steady at 57.9bp. The European benchmark 10 -year bonds were steady. The Gilt closed at 1.05%, the bund closed at 0.38% and the OAT closed at 0.694%. It would appear that the odds of a rate hike over the next few months has not risen. The current probability of a rate hike in December is about 29.4% and in June 2018 is about 55%.
Commodities continue to see new highs in metals. WTI rose 1% as a result of Harvey and probably will rise further. Gold rallied 0.5%. Palladium is up 39% for the year with some analysts suggesting that palladium could cost more than platinum. Palladium is used in industry especially the auto industry and sometimes used as a substitute for platinum in jewellery.
And in a hit to free speech, Valerie Wilson the CIA agent famously outed by George Bush is trying to use GoFund Me to raise $1 bio to take a major stake in Twitter and use that stake to force Trump off Twitter. This would be an attack on free speech and should be roundly condemned no matter what your thoughts on Trump are.
Aussie Market Today
Equities could drift lower and bonds rally on the day post international developments. Geopolitical tensions in the region could rise as a result of North Koreas recent missile tests. A rise would see more demand for bonds and selling of equities.