“Fire and Fury…..”

“Fire and Fury”

The United States has remained technically at war with North Korea since the 1950-53 Korean conflict ended in an armistice rather than a peace treaty. Tensions in the region have risen since North Korea carried out two nuclear bomb tests last year and two ICBM tests in July.  On Wednesday North Korea said that it is considering plans for a missile strike on the US Pacific territory of Guam, which is a military base that includes a submarine squadron, an airbase and Coast Guard Group and is home to about 163,000 people. Washington warned that it prefers to use global diplomatic action including sanctions rather than using force.  The UN Security Council unanimously has imposed new sanctions on North Korea on Saturday.  Trump said that “North Korea best not make any more threats to the United States.  They will be met with fire and fury like the world has never seen.”  His comments have rattled markets globally.  Asian shares and US stock futures slipped and investors sought havens such as US Treasuries, gold and the yen.

China

The Chinese economy has expanded quite solidly this year as commodity prices recovered boosting the industrial sector. The producer price index (PPI) rose 5.5 percent last month from a year earlier unchanged from June according to the National Bureau of Statistics (NBS).   China has set its inflation target and economic growth at a 3 percent and 6.5 percent respectively.

Japan

Core machinery orders in Japan fell for a third consecutive month in June, underscoring the reluctance on companies to boost spending. This is contrary to the recent indications that the economic recovery is gathering momentum.  Core orders suffered a second straight quarter of declines in April-June, the first instance of consecutive quarterly falls since 2012.  Core orders fell 4.7 percent in April-June from the previous quarter, which is the biggest quarterly decline in a year.  The first quarter had a 1.4 percent decline.  Robust global demand has boosted business confidence in Japan to a three year high in the second quarter.

US Tax Overhaul

Republicans are discussing a major tax overhaul that does not add to the federal deficit. It will entail mixing permanent revisions with temporary rate cuts for individuals and businesses.  A hybrid plan is not a new concept, but seems to be gaining popularity now that the controversial border-adjusted tax (BAT) on imports has been eliminated from the tax negotiations.  The BAT was estimated to generate more than $1 trillion in revenue over a ten year period.  Alternatively, other forms of revenue sources have to be found in order to offset rate cuts.  In April the White House released a tax plan of cutting the corporate tax rate to 15 percent down from the current 35 percent.  It would reduce the existing seven individual income tax rates to three and cut the top rate to 35 percent from the current 39.6 percent and also double the standard deduction.  Trump’s agenda has been to provide the middle class with a tax cut.  Changes affecting corporations must be permanent as executives would need some certainty in order to plan appointment of new employees or capital expenditure such as the building of new factories.

US – Job openings

JOLTS (Job Openings and Labour Turnover Survey) released by the Labour department on Tuesday underscored the strength in the labour market. This will likely encourage the Federal Reserve to continue tightening monetary policy despite concerns over consumer spending and sluggish inflation. Job openings which is a measure of labour demand increased by 461,000 to a seasonally adjusted 6.2 million.  This is the highest level since the data series started in December 2000.  The ratio of job openings to unemployment hit a 16 year high. The hiring rate remained steady at 3.7 percent, which in June was little changed at 5.4 million.

Germany

Industrial production in Germany slipped in June as manufacturing and construction caused an unexpected temporary deviation in the growth path. According to the Ministry of Economy in Berlin output adjusted for seasonal swings and inflation fell 1.1 percent in June after rising 1.2 percent in May, representing the first drop in six months.  Production increased by 2.4 percent from a year earlier.

United Kingdom

Concerns over the health of the economy continues as inflation continues to outpace the wage growth. The latest figures leave both household expenditure and the property market at their weakest in more than four years.  IHS Markit and Visa reported that consumer spending dropped 0.8 percent year-on-year with clothing, household goods and food transport being the worst hit.  Since April 2013 home prices increases have weakened by 2.1 percent annually.  Consumer expenditure has been hit by concerns about the outlook of the economy after it slowed dramatically in the first half of the year.   According to the Office for National Statistics, Britons saved a smaller portion of their incomes whilst household income adjusted for inflation, fell for a third straight quarter, which is the longest stretch in 40 years.  The low savings ratio clearly below the 2 percent means households have little aside as they are spending more just to maintain their standard of living.

Oil Producers on Crude Cuts

Meetings in Dubai which were scheduled for the 7-8 August started on Monday as Russia and Kuwait met to examine why some producers who agreed on a global pact are falling behind in their commitment to cut output. Separate talks were held with representatives from Iraq, United Arab Emirates, Kazakhstan and Malaysia.  A representative from Saudi Arabia is attending the session as president of the Organization of Petroleum Exporting Countries.  The agreement has come in effect at the beginning of the year and brings together OPEC and non-OPEC nations in an effort to take as much as 1.8 million barrels of oil a day off the market.  Complying with the cuts has fallen to 86 percent in July which is the lowest since January.

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