Morning Commentary: The Weakest Link

Foreign Exchange - Morning Commentary
The Weakest Link
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
While the trade war between the U.S. and China garners much of the headlines in terms of potentially derailing the global economy, Europe is increasingly looking like the weakest link in the global economy. Recent data continues to reinforce the fact that the EZ economy is losing momentum and continuing to weaken rapidly.
Italy is in a technical recession already and Germany, which is seen as the locomotive for Europe, is continuing to see its economy deteriorate. The EZ economy is more dependent on trade than the U.S. and is getting squeezed between international pressures, weaker Chinese demand and their own manufactured domestic drags accompanied by dysfunctional politics.
Industrial production figures today for the 19-nation euro area came in much weaker than expected and are falling at the fastest pace since the Great Recession. December Industrial production was supposed to fall by 0.4% but instead fell by 0.9%. This brought the YoY rate down from -3.3% to -4.2%. The euro is weaker today and continues to be pinned down near its yearly low.
What makes this more concerning is that there are not many more levers for the central banks or governments to use to help jumpstart the EZ economy. 2-year yields are already deeply in negative territory and 10-year yields are fractionally above 0.0% in many countries. Governments are constrained and required to abide by budgetary deficit guidelines combined with the usual dosage of dysfunctional and splintered political leadership (Italy, Spain, etc.). For the short term, Europe continues to look like the weakest link in the global economy and the euro will probably reflect that weakness.
  • U.K. CPI for January fell below 2% today for the first time in two years. CPI came in at -0.7% for January and brought the YoY rate down from 2.1% to 1.9%. CPI inflation had reached 3.0% in 2017 after the Brexit vote and the collapse of the British pound.
  • U.S. CPI for January came in at 0.0% and the YoY rate has dropped from 1.9% to 1.6%. Ex-food and energy, inflation rose by 0.2% and kept the YoY rate at 2.2%. The data continues to suggest that inflation will remain near the 2% Fed inflation target for the near term allowing the Fed to continue to pause on raising interest rates amid continuing concerns about headwinds from a global slowdown.
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