Risk Assets Rise Despite Weak Economic Data, Escalated Geopolitical Tensions

Global financial markets experienced a flight to safety this morning following yet another test missile launch by North Korea, however haven assets paired gains within minutes as investors don’t seem to be convinced this conflict will continue to escalate.  The intermediate-range missile traveled over Northern Japan at around 7am local time before crashing into the Pacific Ocean.  Of particular concern was the distance it traveled — 2,300 miles, which is further than the distance from Pyongyang to the US territory of Guam.  The missile launch comes less than two weeks after its sixth and most powerful test conducted on September 3rd,  and days after the United Nations voted in favor of increased sanctions against North Korea.  “These continued provocations only deepen North Korea’s diplomatic and economic isolation,” U.S. Secretary Rex Tillerson explained in a statement, while again stressing the importance of Chinese and Russian participation in measures against the rogue nation. Further unnerving markets was another terrorist attack in England. A bomb was detonated Friday morning during rush hour in the London subway, injuring 29 people.  This was the country’s fifth such attack in the last 6 months.

Key economic data released on the day failed to meet expectations, beginning with retail sales which declined a seasonally adjusted 0.2% in August (+0.1% estimated).  Also adding to the weak consumption outlook for Q3, consumer purchases in the prior two months were revised lower to -0.1% in June (+0.3% previously) and +0.3% in July (+0.6% previously).  Much of the weakening was attributed to a drop in motor vehicle demand, which may end up being reversed to some extent in coming months due to car damage attributed to Hurricane Harvey.  Excluding autos, retail sales were up 0.2% last month. 

 

 

Industrial production in the US last month was also soft, decreasing a seasonally adjusted 0.9% (+0.1% expected) during August.  Each component of the Federal Reserve’s report displayed a decline as a result of Harvey – utilities fell 5.5%, mining dropped 0.8% and manufacturing decreased 0.3%.  Capacity utilization also weakened in August, down 0.8% to 76.1%.  Compared to a year earlier, overall industrial production gained 1.5% in August.

 

 

All three major US stock indices are trading higher despite the uncertainties surrounding the weak economic data, North Korean launch and subway terror attack in the UK.  Treasurys extended this week’s selloff on Friday, with yields/swap rates up an additional 1-3 bps across the curve.  The yield on the 10-year note is poised to finish the week near 2.20%, nearly 15 bps higher than Monday’s opening level.  The US dollar edged lower on the day, down 0.2% against major currencies.  Next Tuesday, the FOMC begins its two-day policy meeting. While there is no rate policy change expected to be announced, investors will pay close attention to the Fed’s commentary as it relates to the unwinding of its balance sheet and forecasts for future rate hikes.