A canary in a coal mine is an old metaphor for an advanced warning of danger. The metaphor originates from the times when miners used to carry caged canaries down into the mines. If there was any methane or carbon monoxide in the mine, the canary would die before the levels of the gas reached those hazardous to humans. Singapore’s economy could be the modern day equivalent of the canary in the coal mine.
While lower global interest rates has fueled a sharp global equity explosion over the past six weeks, the global economy remains at risk. Trade tensions, tariffs, and uncertainty are causing diminished trade flows globally that are having downstream effects for many economies that are integrated into regional and global supply chains. Singapore reported on Friday that Q2 GDP shrank 3.4%, which is the biggest decline since 2012. Korea already reported a negative print for GDP in Q1.
Singapore’s complicated integration in regional and global supply chains makes it vulnerable to a slowdown in world growth and trade tariffs. Exports for Singapore amount to an amazing 176% of GDP; the U.S. equivalent for exports relative to GDP is only 13%. Adding to Singapore’s woes is the fact that 40% of Singaporean exports are concentrated in integrated circuits and there has been a sharp downturn in the global semiconductor sector.
Why is this important? Because supply chains and global trade are highly integrated. If trade tariffs and disputes continue to linger and trade volumes continue to contract, there will be a continuing ripple effect throughout the entire global economy that portends weaker growth. While the U.S. has largely been insulated, there have been numerous warning signs of U.S. manufacturing and PMI weakness here that could have repercussions for weaker U.S. growth ahead despite the equity market’s frenzy of buying that signals optimism going forward.
MAJOR CENTRAL BANK ACTIVITY THIS WEEK
Expectations for rates to be cut by 25 bps to 5.75%
Expectations for rates to remain unchanged at 1.75%
Expectations for rates to remain unchanged at 2.50%
KEY MARKET MOVING ECONOMIC RELEASES
United States and Canada
US Retail Sales
Expectations for a MoM increase of 0.2%
US Industrial Production
Expectations for a MoM increase of 0.1%
Canadian Mfg. Sales
Expectations for a MoM increase of 1.8%
Expectations for a MoM increase of 0.1%
German ZEW Survey
Expectations for a decline from 7.8 to 5.0.
UK Unemployment Rate
Expectations for UR to remain flat at 3.1%
Asia/Japan, and New Zealand
Expectations for a YoY Increase of 0.7%
Australia Employment Change
Expectations for an addition of 9k jobs from a prior 42.3k
Australia Unemployment Rate
Expectations for Unemployment to remain unchanged at 5.2%
The EUR remains trapped between 1.1200 to 1.1400 over the past six weeks. It continues to whipsaw in both bullish and bearish trends relative to economic data or Fed speak that seem to last a few hours to a day or two before momentum wanes and paralysis sets in. Expect more of the same next week.
Brexit uncertainty continues to hinder and undermine this currency and despite periods of U.S. dollar weakness, the GBP has difficulty gaining upward traction. Political developments have narrowed the Tory field to two candidates with Boris Johnson remaining the heavy favorite. He too, will face a daunting task of facing a much divided country and Parliament in reaching a conclusion to the Brexit process. Expect the GBP to lag behind the advancement of other currencies and remain susceptible to weakness.
For the past three months, the JPY has been one of the top performing major currency appreciating by near 4%. The combination of a weakening U.S. economy and the collapse of U.S. interest rates is behind the JPY’s outperformance. Continue to expect the JPY to track U.S. – Japanese interest rate differentials and be most sensitive to “risk-on” or “risk-off” strategies.
Up to the beginning of June, the CAD had remained range bound testing both the upper and lower limits (1.3500 to 1.3100) numerous times with the net result of a near unchanged CAD since January. Since June, the CAD has appreciated 3.10% as a combination of lower U.S. interest rates and improving CAD economic data have it testing the key 1.3100 level again. The Bank of Canada stood pat this week and in light of dovish tendencies in other key G7 central banks (US), the C$ appears to be entering a new higher range.
After weakening sharply in April and May, the CNY finally stabilized in June. After the FOMC meeting on June 19th, the CNY has reflected overall U.S. dollar weakness but has returned to a consolidation pattern in July despite the temporary trade truce between the U.S and China and another leg down in U.S. interest rates. Expect more consolidation this week.
The AUD remains very resilient and continues to show a near term bottoming pattern. This is despite the RBA cutting interest rates by 25 bps at back to back meetings in June and July. There is an element of the market that believes that the RBA is near the end of its rate cutting cycle. While susceptible to the U.S. dollar weakness and strength, the AUD, along with the NZD and CAD have been outperforming over the past weeks. Expect a steady to slightly stronger AUD this week.
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