The Weekly Update

US-North Korea tensions continued to evolve last week, exacerbated by Trump’s bold comments at his first ever address at the UN General Assembly. Last week Trump also proposed a further set of sanctions on North Korea and Chinese president, Xi Jinping, ordered Chinese banks to cease all dealings with entities operating in North Korea. According to sources, Chinese banks have been told to halt all new financial services provisions to North Korean customers and wind down current loans. In a historic move, we heard that China will look to limit LNG and oil supplies to North Korea almost immediately, and stop importing the nation’s textiles (Pyongyang's second largest export). With threats coming from North Korea of a further H-Bomb launch into the Pacific, tensions are expected to remain heightened this week.

Away from the ‘Rocket Man’-’Mentally Deranged U.S. Dotard’ insults the big news was the FOMC meeting, where all was pretty much as expected. The Fed maintained short-term interest rates at 1-1.25% and officially divulged more information on the balance sheet unwind, which will commence in October. This has been well telegraphed in the lead-up to the meeting, in order to avoid shocking financial markets. What did surprise some market commentators however, is the fact that a December hike has been left on the table, despite the ‘mystery’ lacklustre inflation. In fact, the central bank’s inflation (PCE) forecasts were downgraded to 1.5% in 2017 (from 1.7%) and 1.9% in 2019, with the 2% mark pushed out to 2019. The long-run Fed Funds rate once again trended lower, to 2.75%, from 3% last December.

Later today we’ll see the August Chicago Fed National Activity Index release, which could be interesting after the disappointing July print. On Thursday, the Q2’17 GDP (third) reading could grab attention, markets have revised their expectations slightly, to 3.1%. Personal consumption and core PCE qoq releases follow. Friday will see the August PCE readings (Fed’s favoured inflation numbers), the consensus shows a marginal pick-up on the PCE deflator reading to 0.3%mom and 1.5%yoy. We expect to hear more on the US’ tax reform proposal in the upcoming weeks; this week the ‘group of six’ are reportedly meeting to formulate a tax plan to kickstart the process with Congress. Over the weekend we heard that a cut to 20% is being discussed, despite Trump calling for a 15% rate.

Elsewhere, citing an increasing debt burden, S&P downgraded China’s long-term rating by one notch to A+, bringing it in-line with the other two main rating agencies (A1 and A+); this is the rating agency’s first downgrade to the country since 1999. Market reaction was muted post the announcement, which suggests asset classes already priced in the downgrade. The reaction was definitely starkly different from the sell-off witnessed after Moody’s downgraded China in May. Off the back of this downgrade, expectations are for policymakers to implement supportive policies, if necessary, ahead of the highly anticipated party congress in a couple weeks. Over the weekend, authorities announced further property tightening measures including: banning sales of new and existing properties in several large cities, and increasing the mortgage rate for first-time buyers in Beijing by 5-10%. Another quiet week in terms of data will see the industrial profits reading for August on Wednesday, Q2’17 balance of payments reading on Thursday and Caixin manufacturing PMI on Friday.

Over in Europe, German elections took place over the weekend, Angela Merkel was re-elected for a fourth term, but her party witnessed its worst election outcome in ~70 years. The euro has started the week on the back foot, expectations are for the currency to remain under pressure as coalition discussions continue through this week. September German IFO readings released this morning disappointed which did little to temper sentiment. Eurozone confidence prints for September will be released on Thursday, followed by CPI on Friday. Meanwhile, Theresa May’s address in Florence last Friday was pretty much a  non-event, as her Brexit blueprint was thin on detail. What did grab market attention was Moody's one notch downgrade to the UK’s long-term rating, to Aa2. The final reading of UK’s Q2’17 GDP on Friday will be of interest; expected at 0.3%qoq and 1.7% yoy.

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