Morning Commentary: 27.8%

Foreign Exchange - Morning Commentary


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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
The U.S. February jobs report was a major disappointment with only 20,000 jobs created against expectations of a gain of 180,000. Upward revisions to previous months made the 3-month average come in at 186,000.The UR fell from 4.0% to 3.8% and the labor participation rate remained unchanged at 63.2%. One of the bright spots in the report was the fact that wages rose by more than expected; average hourly earnings rose by 0.4% and the YoY rate rose from 3.2% to 3.4%.
This past week, equity markets have turned south as they have been in the process of downgrading global growth once again after all the equity euphoria in January and February. Yesterday, the ECB acknowledged that the EZ economy had been weaker than forecast and overnight Chinese equities collapsed by nearly 4% sending a ripple effect through all other equity markets.
The combination of the Fed’s dovish pivot earlier this year combined with continuing weak G7 economic data is causing the markets to begin to price in a Fed rate cut down the road. U.S.-10 year yields have reacted sharply this week and have fallen 14 bps in five days. On Monday, the probability of a Fed rate cut in January 2020 was at 13.2%, and today, that number has jumped to 27.4%.
Bottom line: U.S. economic exceptionalism has been able to power through the continuing weak economic data from China (see below) and the EZ. How long that will continue remains to be seen as global supply chains are strongly interconnected. Fortunately for the U.S., we are not as dependent on exports as many of our trading partners. That being said, markets remain concerned about weaker U.S. growth down the road and are slowly building in the need for the Fed to pivot once again and have to lower interest rates to react to a slowing U.S. economy.
  • China reported another large trade surplus for February, but the markets focused on Chinese exports and imports as a sign of the vitality and strength of their economy. Exports contracted by 20.7% YoY against expectations of a decline of 5.0%. Imports also fell by more than expected at 5.2%. Chinese stocks cratered and caused a ripple effect through all other Asian and European stocks.
  • The one bright spot in today's news cycle was the Canadian jobs report for February. Canada overachieved for the second month in a row by creating 55,900 jobs against expectations of a gain of only 2,000; in January, Canada created 66,800 jobs also widely beating expectations.  This two month run is the best start to a year since 1981.  The UR remained at 5.8% and the labor force participation rate rose from 65.6% to 65.8%. Unfortunately, other economic data has been softening and, combined with a dovish Bank of Canada report earlier in the week, caused the Canadian dollar to weaken six straight days. Today, the Canadian dollar is correcting higher.
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