Week 36 In Review

Florida eyes powerful winds, rain, storm surge
Fed job openings in focus
Trump strikes deal on debt limit, Harvey relief
North Korea tests hydrogen bomb

Global equities were little changed this week as markets digested escalating tensions on the Korean Peninsula and the potential impacts of hurricanes Harvey and Irma on the US economy. The odds of a third US Federal Reserve rate hike this year declined this week, prompting a drop in the yield on the US 10-year Treasury note to 2.06% from 2.14% a week ago. The price of a barrel of West Texas Intermediate crude oil rose to $48.95 from last Friday’s $46.75 while volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX), advanced to 12.35 from 10.3.

MACRO NEWS

Another major storm set to hit US coast

Hurricane Irma, a Category 5 storm that wreaked havoc in the Caribbean, is set to make landfall this weekend in south Florida. The storm comes on the heels of Hurricane Harvey, which dropped a record 50 inches of rain along portions of the Texas Gulf Coast. The price tag for Harvey is still being calculated, but the cost of two storms together could be several hundred billion dollars.

Property and casualty insurers entered this hurricane season with strong balance sheets after several quiet seasons but will likely be hit with sizable claims in coming quarters. US economic data is likely to be impacted by the storms for some months to come, making underlying trends more difficult to discern. Hurricanes are not the only natural disasters affecting North America this week: Southern Mexico was shaken by an 8.2- magnitude earthquake, the strongest to hit the country in a century.

And then there were three

The US Federal Reserve’s seven-member Board of Governors is now down to just three members, with Vice Chair Stanley Fischer this week tendering his resignation, effective in mid-October. Fischer, 73, whose long career includes stints at the International Monetary Fund, the World Bank and the Bank of Israel before he joined the Fed, is leaving roughly a year before his term is set to expire.

Meanwhile, nominee Randal Quarles awaits final confirmation. And the Wall Street Journal reported this week that US President Donald Trump is unlikely to appoint Gary Cohn, his chief economic advisor, to replace Janet Yellen when her term expires in February. Cohn’s sharp criticism of Trump’s reaction to the recent violence in Charlottesville, Virginia, in an interview with the Financial Times, has diminished his chances of being nominated to the top job at the Fed, the Journal reported.

Trump, Democrats kick the can

With the government close to hitting the debt ceiling and the end of the fiscal year approaching without a budget in place, President Trump struck a deal with congressional Democrats to extend the debt ceiling and fund the government for three months while providing Harvey relief funds for Texas and Louisiana. This is the first time Trump has reached across the political aisle to strike a deal. Republican leaders pushed for a longer-term package to avoid having to repeatedly vote to raise the debt ceiling — an unpopular move with the party’s base of supporters — before next year’s mid-term elections.

North Korea tests more powerful bomb

Markets were unsettled early in the week as Kim Jong-un’s nuclear program continued to advance rapidly. North Korea successfully tested a hydrogen bomb, further raising the stakes in its standoff with the United States. A further missile test is believed to be planned for Saturday, according to South Korea’s prime minister.

Escalating tensions have prompted South Korea to reverse its opposition to additional THAAD missile interceptor launchers. Four launchers are being deployed to join two launchers that have been operational since May.

ECB raises growth view

The European Central Bank did not adjust monetary policy at its September meeting, but it did up its 2017 economic growth outlook to 2.2% from an earlier 1.9% forecast. The inflation outlook remains subdued, however, with the ECB downgrading its full-year forecast to 1.2% from 1.3%. At Thursday’s press conference, ECB president Mario Draghi hinted that any adjustment to the bank’s asset purchase program would wait until its October meeting.

Draghi also cautioned that recent euro strength has tightened financial conditions. While the ECB held the line on policy adjustments, the Bank of Canada tightened policy a quarter of a percentage point for the second straight meeting, to 1%.

Madrid seeks to halt Catalonia’s referendum

Spanish prime minister Mariano Rajoy vowed this week to “stop at nothing” to derail a planned independence referendum in the region of Catalonia. On Thursday, Spain’s Constitutional Court suspended the referendum law passed late Wednesday in Catalonia’s parliament, though Catalan officials vow to press on with the vote regardless. Polls show only a slight majority of Catalans support independence from Spain.