Ransquawk

Trump and Mattis provide a stark warning

North Korean Leader Kim Jong-un should be in no doubt over the consequences should he continue to test missiles in his ill-fated search for a racket that can carry a nuclear payload to the mainland United States. President Trump commented that Kim should be “very very nervous” about any act that endangers the U.S., its territories or allies.

The FX market continues to react to heightened global risk aversion buying both the JPY and CHF. Both Japan and Switzerland have strong current account surpluses and Japan is the largest creditor nation in the world. Equity markets are under pressure and gold has seen a rise from $1,250 to $1,280!

The next few days will likely see this issue come to a head. It is possible that the U.S. performs a pre-emptive strike but the proximity of its major Asian allies; South Korea and japan as well as China should bring caution. Trump will need to ensure that the U.S. acts in accordance with U.S. mandates to ensure that the Chinese remain “onside”

U.S. data dampens rate hike talk

Factory gate prices are a useful barometer of future consumer prices. Yesterday’s release of producer prices in the U.S. showed an unexpected fall. The 0.1% fall followed May’s 0.1% rise and illustrated the benign inflation outlook that is driving a few FOMC members view that rates should remain on hold probably for the remainder of 2017.

Next week’s consumer price data is likely to remain below the 2% threshold seen as the catalyst for the Fed to have its interest piqued.

Following the past two employment reports, both showing 200k+ new jobs have been added to the U.S. economy, analysts have been revising their impressions about a further hike this year. So far, the widening of the interest rate differential between the U.S. and its major trading partners has done little to support the currency. Should President Trump manage to produce viable tax reform and economic stimulus packages then the market may “sit up and take notice” pushing the dollar to levels closer to when the President was first elected.

Sterling holding on as official Brexit comments fade

Given that the whole market now accepts that there won’t be a rate hike in the U.K., possibly until after Brexit has been finalized, if not completed, in March 2019 Sterling is holding onto its gains against the dollar with dogged determination.

A final acceptance that neither the ECB nor BoE can justify hiking rates in the current climate means widening of the interest rate differential with the dollar is an almost certainty. The U.S. even without a hike in the remainder of 2017 will almost certainly hike in Q1 ‘18.

Next week’s inflation and employment data in the U.K. will determine the pounds short term trajectory. It would be a major surprise were inflation to fall again as it did in June so a further fall in “real” wages is likely. Should inflation comply with expectation and reach 2.7%/2.8% and average earnings remain at or just below 2% consumers will see their buying power further eroded.

Benign neglect is all that the MPC can offer. In Mark Carney’s view Brexit is the cause of any stresses currently in the U.K. economy and with the tools at his disposal there is very little he can do to improve the situation. He is “he is keeping his powder dry to deal with any further Brexit shock although there is unlikely to be any good news for the U.K. on that front for some time to come.

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