Morning Commentary: A Looming Problem

Foreign Exchange - Morning Commentary

A Looming Problem

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Alan Rose
Alan Rose
Foreign Exchange Head Trader
Markets continue to consolidate and attempt to try to find some footing regarding the near term direction and interaction of equities and interest rates. In general, markets are equipped to handle no more than three risks at a time, and right now, there are multiple fronts of concern that are both domestic and geopolitically based that have raised the angst and anxiety levels of investors and traders. Not getting much attention at the moment is a looming problem for the U.S. regarding its debt levels and budget deficits that could eventually spill out into the markets and impact the U.S. dollar.
Yesterday, the U.S. reported a budget deficit for FY 2018 ending in September of -$779 billion. That is the widest deficit since FY 2012 and is up from -$666 bln in FY 2017. Spending rose by 3.2% while revenues rose by only 0.4%. The supply side argument is that a roaring and booming economy ignited by tax cuts will pay for themselves…so far that is not the case. What makes this problematic is that budget deficits and debt levels usually spike when the U.S. is in a recession or at war…not at peacetime.
While the debt and budget deficit levels are not a tipping point for the U.S. economy or the U.S. dollar as of yet, it is one of many background issues that is concerning for the future of the economy. If and when the next economic slowdown or recession hits, it leaves the government less wiggle room to maneuver as an economic slowdown will only reveal that spending programs remain on auto-pilot while revenues will collapse leaving the Fed shouldering the burden once again. Sooner or later, Congress and the country will have to face up to this forthcoming nightmare to reduce spending and balance their books.
  • The British pound is stronger again today on the back of their September jobs report. The labor market report was mixed, but weekly earnings moved up from 2.6% to 2.7% and weekly earnings ex-bonuses jumped from 2.9% to 3.1%. Markets are anticipating another Bank of England rate hike by midyear 2019, but much will depend on the outcome of the Brexit negotiations.
  • The German ZEW business survey for October was disappointing as it came in below expectations at 70.1 after a print of 76.0 in September. The expectations component within the data was much weaker than expected at -24.7. The euro is stronger today as are many other European currencies as the U.S. dollar is slightly weaker overall.
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