Morning Commentary: Hope Springs Eternal - Part Deux

Foreign Exchange - Morning Commentary
Hope Springs Eternal - Part Deux
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Despite what would seem an inordinate amount of negative economic data and some recessionary signals coming from inverted U.S. yield curves, U.S. and global equity markets have remained upbeat and positive. We are closing out the month and quarter on an upbeat note with global equities almost all in positive territory today; G7 interest rates are correlating with equities once again and are moving higher.  
Global equities and U.S. equities are in fact closing out the strongest quarter since 2012. For today, global equities seem to be responding to headlines regarding renewed “trade talk optimism” between the U.S. and China as negotiators have been working “line-by-line” through the text of a trade agreement and Treasury Secretary Mnuchin said he had a “productive working dinner”.
But the main reason U.S. and global equities have been outperforming and ignoring the weak data and yield curve implications of a potential recession is the fact that the U.S. and other G7 central banks have shifted or pivoted away from potential tightening of monetary policy to either easing or being on hold.
The Fed’s change in stance has been critical and instrumental to the renewed optimism regarding equities as the Fed has moved from committing to further interest rate increases in Q4 to being “patient.” Markets, on the other hand, see a much greater probability of the Fed’s next move being a cut in interest rates (73% probability in January 2020). This critical change in stance has allowed for a nearly 10,000 point roundtrip in the DJIA. While all is well and good for now, we still have many hurdles to get over this year…stay tuned.
  • Despite continued weak economic data and very weak manufacturing and export data, German unemployment continues to fall. For the month of March, German unemployment fell by 7,000 after dropping by 20,000 in February. The UR fell from 5.0% to 4.9%.
  • Canadian GDP for January came in much stronger than expected at 0.3%; this is the largest gain in output in eight months and provides more optimism surrounding the economy as both November and December GDP data were both slightly negative. Canadian interest rates are up the most of any G7 country and the Canadian dollar is outperforming.
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