Trade War Looms Between China and US

Geopolitics is going to cause some background noise as President Donald Trump addresses the General Assembly of the United Nations.

If Trump sticks to the script, there will be a measured critic of North Korea and also of Iran. The emphasis on Iran is something that may become a focus for investors, but for now it’s too early to tell.

If Trump does not stick to the script, there is no telling what will be covered.

What is for sure now is that if the North Korea situation doesn’t get a diplomatic solution, a trade war between the U.S. and China is a possibility.

Meanwhile, on the economic front, the United States will be providing import and export price data for August, a month where the dollar slipped further against the currencies of its main trading partners.

Export price inflation is likely to be supported by this, but because exporters try to hold their export prices constant in foreign currency terms, the price will rise in dollar terms. This strategy of “pricing to market” is especially prevalent for manufactured products.

Service contracts are more likely to be issued in dollars.

Import prices will reflect the impact of the dollar on commodity prices as commodity prices due tend to react to currency moves.

However, other imports into the U.S. are not likely to fully reflect the shift in the dollar’s value because foreign companies do not want to throw away carefully built market share in America.

That said, and ahead of the Federal Open Market Committee’s policy decision tomorrow, Mark Carney who chairs the Bank of England (BoE) monetary policy committee has made an interesting statement yesterday in a prepared speech for the 2017 IMF Michel Camdessus Central Banking Lecture in Washington DC.

He said that: “The case for a modest monetary tightening is reinforced by the possibility that global r* may be rising, meaning that monetary policy has to move in order to stand still.”

Mr. Carney’s statement is worth of investors’ attention, especially in the context of where the Fed’s monetary policy interest rates could be headed for.

No, this is not some childish riddle, but in fact a comment on the fact that the global neutral interest rate may be rising, and if so, an unchanged nominal interest rate would offer more accommodation, which in the case of the Federal Reserve is not what Ms. Yellen has on her road map.

One could also argue that the rise in price and wage inflation is reducing the real interest rate and that an unchanged nominal interest rate is therefore increasingly accommodative as a policy position.

BoE Governor Mark Carney also noted in his speech that the real trend of growth in the United Kingdom is likely to be reduced by the exit from the European Union (EU). A fact that is widely assumed by most economists. That will then reduce back capacity in the United Kingdom and create another reason to look to tighten central bank policy.

The market is listening to these signals pretty clearly and last year’s (in August) emergency Bank Rate reduction of 0.25 percent to 0.25 percent should be considered to be vulnerable therefore.

Sterling remains near its post referendum highs against the dollar.

Besides that, Don Kohn who is the Bank of England’s (BoE) “external” member of the Financial Policy Committee (FPC) and former vice Chair of the Federal Reserve, and who is an expert on monetary policy, financial regulation and macroeconomics is also scheduled to speak.

It would be surprising if Carney’s tightening message was not communicated again. There seems to be a degree of coordination in the communication at the moment.

Finally, over in Germany, the ZEW Indicator of Economic Sentiment for Germany jumped by 7 points to 17 in September, way above market consensus of 12.5. The improvement was boosted by solid growth figures in the second quarter of 2017 in combination with a steep rise in bank lending and increasing investment activities by both the government and private firms.

Etienne “Hans” Parisis is a bank economist who has advised investors on financial markets and international investments.


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