Morning Commentary: Preventive Medicine

Foreign Exchange - Morning Commentary
Preventive Medicine
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Preventive medicine is a medical practice with the goal to protect and promote health and well-being as well as prevent disease, disability, and death. Preventive medicine is actually what the Federal Reserve doctors are going to apply today as it is with almost 100% certainty that the Fed will cut interest rates for the first time in over ten years. While we continue to extend the longest economic recovery in our country’s history, there are numerous warning signs within our economy that the global economic expansion is in jeopardy.
Our morning report has cited numerous economic statistics over the past weeks and months that the global economy is slowing, impacted primarily by reduced trade volumes and tariffs. Many countries have already turned to preventive medicine, lowering interest rates to compensate for the economic weakness that has impacted their respective economies. Within our own country, while consumer spending and job creation have continued to hold up well, our manufacturing, industrial and agricultural components have been deteriorating.
Today’s expected 25 bp cut in the Fed Funds rate should be seen as the equivalent of providing a flu shot to protect the entire U.S. economy from getting sick. To provide some historical context to today’s FOMC meeting, this will be the first rate cut since the 2008 financial crisis that led to the Great Recession. Today’s action is following nine previous rate increases of 25 bps starting in December of 2015 and ending in December of 2018. Markets will be highly attentive to the Fed’s action today (small probability of a 50 bp cut) and, in particular, to the Fed’s language and Fed President Powell’s press conference that will follow at 11:30 a.m. PST today.
  • Hong Kong reported Q2 GDP at 0.6% against expectations of a gain of 1.5%. In quarter-to-quarter terms, GDP contracted by 0.3% compared to a consensus forecast of a gain of 0.9%. Consumer spending is holding up well, but exports contracted by 5.4% which has widened from Q1’s decline in exports of 3.7%. Today’s data from Hong Kong is just the latest report showing the ripple effect of a slowing Chinese economy and the impact of tariffs on the entire region.
  • Today’s U.S. ADP private sector employment report for July showed another steady gain in job creation at 156,000. Expectations were for a gain of 150,000 so the report slightly beat expectations along with a small upward revision to June. Friday’s official labor department report is forecasting a gain of 165,000 with the UR remaining unchanged at 3.7%. U.S. interest are nearly unchanged on the session.
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