Morning Commentary: S-L-O-W-I-N-G?

Foreign Exchange - Morning Commentary


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Alan Rose
Alan Rose
Foreign Exchange Head Trader
The U.S. has been in an economic recovery since 2009 making this economic expansion one of the longest since World War II. Over the last 18 months or so, the U.S. economic recovery has gained momentum spurred on by tax cuts and deregulation. Unfortunately, the rest of the major industrialized world has struggled at times to keep pace which has allowed U.S. economic exceptionalism to force the Fed to keep raising interest rates which in turn has also pushed the U.S. dollar to stronger levels.
Last night, both Japan and Germany reported Q3 GDP (see below) and it was disappointing despite the fact that exogenous factors impacted the Japanese data and the German data had its own peculiar twist. A key concern for the markets and many asset classes is how much longer U.S. growth can continue to march on in the face of higher U.S. interest rates, trade wars, and evidence of further slowing among our trading partners.
Despite the rhetoric, we live in a globalized economy where supply chains are all interconnected and when an economic slowdown grips multiple parts of the global economy, it has a ripple effect for all the participants. This, combined with an economic recovery that is increasingly getting longer in the tooth, raises concerns about our future economic momentum. These are key questions that the markets will have to constantly assess over the next weeks and months and will determine the level of equities, interest rates, commodity prices and the future course of the U.S. dollar.
  • Japan reported Q3 GDP at -1.2% annualized which was worse than expected…Q2 came in at 0.3%. Exogenous factors related to earthquakes, typhoons and flooding caused GDP to weaken, but in addition to these factors, exports declined by 1.8%, the fastest decline in three years, adding more negatives news implying weaker global demand for Japanese exports...
  • The German economy shrank for the first time since 2015 as Q3 GDP fell into negative territory at -0.2% against expectations of 0.1%. Q2 GDP came in at 0.5%. Government officials are downplaying the data as temporary due to auto plant shutdowns related to reworking production to meet emission standards.
  • U.S. equities are opened stronger this morning on the back of a benign October CPI that met market expectations as the investors were concerned that the very strong October PPI would filter into higher consumer prices. CPI rose by 0.3% and ex-food and energy rose by only 0.2%; YoY CPI moved higher from 2.3% to 2.5%. Oil prices are seeing their first bounce in almost two weeks which is also positive news for energy stocks.
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