Bracing for Hurricane Florence, Higher Tariffs, More Fed Restraint and Ultimately Inflation

September 12, 2018

The Carolinas are expected to be slammed by a storm of historical proportions with 100+ MPH winds, a huge storm surge, and Harvey-like rainfall. Landfall is predicted late Thursday/early Friday.

President Trump has hinted that a colossal new round of tariffs may be announced this week.

The Federal Open Market Committee’s next policy meeting is scheduled for September 25-26. All systems are go for another interest rate hike — buoyant U.S. growth, upwardly creeping price and wage pressure, newly emerging inflation risks, suggestive rhetoric, and the facts that the committee is preparing new forecasts and Chairman Powell will be holding a press conference afterward.

Recent dollar behavior offers no constraint against further Fed tightening. The dollar has risen recently but too gradually to eliminate the need for a higher interest rate. Dollar movement overnight against other major currencies has in fact been infinitesimal. The U.S. currency is unchanged against the loonie, sterling, Mexican peso and Australian dollar. It’s down 0.1% versus the yen and yuan but up 0.1% relative to the euro, Swiss franc and kiwi..

As expected, the Central Bank of Argentina declined to raise its key interest rate further at yesterday’s meeting. The rate was hiked twice in August, first by 500 basis points on the 13th and again by 1500 basis points to its current level of 60% on the 30th. During the first half of 2018 following a 1 percentage point reduction in January, the central bank interest rate had been raised 300 basis points in April and 475 basis points in May. The Argentine peso continues to be the object of selling pressure, however, dropping over 1.0% overnight and more than 50% since end-2017.

Equities were mostly on offer in the Pacific Rim earlier today but have firmed in Europe. Share prices dropped 1.1% in Hong Kong, 0.6% in Indonesia, 0.4% in New Zealand, and 0.3% in China, Japan, and Taiwan. Stocks are up 0.6% in Greece, 0.5% in France, 0.3% in Switzerland and 0.2% in Germany.

Ten-year sovereign debt yields dipped a basis point so far today in the U.S., Germany, U.K., and Japan.

Gold is flat, but WTI oil has climbed 0.8% to just shy of the $70 per barrel level.

Industrial production in the euro area dropped another 0.8% in July, marking the fifth decline so far this year — four times by 0.8% and once by 0.6%. Weakness in July was most concentrated in consumer goods, both durables and non-durables. For the first time this year, output was even lower than its year-earlier level.

In July, industrial production fell 1.8% on month in both Germany and Italy. For Italy that drop was four times greater than forecast and the biggest monthly slide in six months. Output also fell by 1.2% in Finland, 0.6% in The Netherlands, and 0.3% in Spain.

Spanish CPI inflation stayed level at 2.2% in August, but with a core inflation rate of 0.8%. In Portugal, CPI inflation was only 1.2%, down from 1.6% in July.

Japan’s Ministry of Finance published results of its third-quarter business sentiment survey. Confidence improved strongly for both large manufacturers and large non-manufacturing firms, and each anticipates additional improvement during the final quarter of 2018.

The Westpac index of Australian consumer confidence fell 3.0% in September on top of a 2.3% slide in August to reach its lowest level in 10 months.

South Korean unemployment rose 0.4 percentage points to 4.2% in August, its highest level in at least a year.

Retail sales in Singapore slipped 2.9% on month and by 2.6% on year in July. That’s the greatest on-year decline in six months.

Business sentiment dropped to a one-year low in South Africa last month.

President Trump’s zero-sum view of all competition and transactions has some support in recent data flows. The solid performance of the United States does indeed seem to be coming at the expense of slowdowns and other struggles elsewhere around the world. But will this pattern persist?

U.S. producer price data and the Federal Reserve Beige Book of regional U.S. economic trends will be released later today.

Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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