Morning Commentary: The Weakest Link in the Chain

Foreign Exchange - Morning Commentary

The Weakest Link in the Chain

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
It is not a groundbreaking statement to make that the world economies are interdependent upon each other. Supply chains and globalization have connected us all together. When global growth is on the rise, a rising tide lifts all boats. But when the global economy falters and weakens, each economy reacts and responds differently to disruptions; each country’s economy is unique as they are weighted differently regarding domestic growth or whether they are more reliant upon exports.
The U.S. economy is experiencing the second longest economic expansion since World War II and the economy has held up very well over the past 18 months despite economic weakness in China and in particular the EZ. Now, there are signs that the Chinese economy is stabilizing; hopes were building of a positive ripple effect from China and the U.S. for the slumping EZ economy. It is not yet to be.
The EZ reported preliminary April PMI readings today, and they show a second monthly drop supporting the view that the EZ economy continues to slow. Germany, the locomotive engine for the EZ, reported a weakening manufacturing PMI again with the reading coming in at 44.5 against estimates of 45.0. This is four months in a row of declines for German manufacturing PMI readings. Germany, like many other EZ economies, is overly dependent upon exports and feels more pain when the global economy slows.
The net result of EZ PMI readings has sent EZ interest rates down the most of any G7 countries and caused the euro and other European major and emerging market currencies to falter. Even U.S. interest rates are down on the session despite much-better-than-expected U.S. retail sales and jobless claims (see below). While the EZ currencies are weaker today, they remain within the same general ranges we have been witnessing ad nausea over the past weeks and months; continue to expect more of the same in the short term.
  • Australia reported stronger-than-expected March jobs data. Employment rose by 25,700 against estimates of an increase of 15,000 and the best part of the report was that 48,300 full time jobs were added to offset a drop in part-time employment of 22,600. The UR rate ticked up from 4.9% to 5.0% and the labor participation rate rose from 65.6% to 65.7%
  • U.S. Retail Sales for March widely beat expectations rising by 1.6% against estimates of an increase of 1.0%. The 1.6% increase is the biggest increase since September 2017 with 12 of the 13 major retail categories showing increases. Ex-autos also showed a strong increase of 1.2% against expectations of a gain of 0.7%. In addition, jobless claims were much better than forecast dropping to 192,000. Despite the better than expected data, U.S. interest rates are down on the session and U.S. stocks are mixed.
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