Morning Commentary: Conventional Wisdom – Right or Wrong?

Foreign Exchange - Morning Commentary
Conventional Wisdom – Right or Wrong?
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Equity markets are starting the year right where we left off after a spectacular performance in 2019. Asian, European and U.S. equities are all higher today, spurred on by additional Chinese monetary stimulus and Asian PMI readings that have moved higher. Despite the optimism in equities, G7 interest rates are lower and the U.S. dollar has regained its footing against many of the major and emerging market countries.

As we begin a New Year and a new decade, what are we to make of conventional wisdom looking towards the future? As the U.S. and global economies emerged from the Great Recession almost 10 years ago, the conventional wisdom was that we would see a normal post World War II economic recovery with interest rates gradually moving back to more normal levels of ~4% or higher.

For all the wisdom in Washington and Wall Street, no one foresaw back in 2009 and 2010 that the U.S. would enjoy its longest but weakest post-recession economic expansion in history. No one foresaw or anticipated that it would take nearly five years for the Fed to move away from its ultra-low interest policy and to begin the process of slowly tightening monetary policy and that 10-year yields would peak at just 3.25%.

Conventional wisdom looking into the New Year continues to see the U.S. economic expansion continuing as recessionary fears fade spurred on by a Chinese trade deal and hopes for a positive conclusion to Brexit. With inflation continuing to remain below Fed targets combined with this being a Presidential election year and the Fed not wanting to appear political, monetary policy is seen as being on hold throughout 2020.

But what if conventional wisdom is wrong? What if world growth rebounds stronger than expected or inflation indices rise above expectations?  Perhaps the U.S. dollar weakens by more than anticipated. For sure, there will be surprises in 2020 and the conventional wisdom at the start of the year will most certainly be tested in ways we cannot yet anticipate.
  • PMI readings in many Asian countries helped give Asian equities a boost. PMI readings for Thailand, South Korea, and Taiwan all moved back above the key 50 expansionary metric in December after being suppressed for most of 2019. China’s official manufacturing PMI reading was unchanged at 50.2. EZ PMI readings were much less optimistic as the EZ PMI reading weakened to 46.3 which is the 11th consecutive month for the reading signaling economic contraction and partially explains why the euro and other European currencies have weakened since Tuesday.
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