Morning Commentary: Food for Thought

Foreign Exchange - Morning Commentary

Food for Thought

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Alan Rose
Alan Rose
Foreign Exchange Head Trader
All this week, there have been articles and commentaries about the 10-year anniversary of the Lehman default and the after effects of a real estate bubble and credit crisis that brought on the Great Recession. Extraordinary measures by central banks and governments helped to aid the global recovery and prevent further damage to the world economies, but they were not coordinated so there has been an uneven global recovery.
10 years after this event, the U.S. economy has been in a slow and steady recovery and most recently (through tax cuts, deregulation etc.) has grown at an even faster pace. The Fed has taken a series of small measured steps to raise interest rates beginning a full six years after Lehman, and we are now approaching our eighth Fed rate increase of 25 bps in a few weeks.
The rest of the G10 world lagged behind the proactive steps taken by the Fed and have thus lagged behind the U.S. recovery. As a reminder that we are far from out of the woods, nearly 17 countries in Europe and Japan still have negative 2-year interest rates. This is in stark contrast to the U.S. and what has been happening regarding emerging market currencies and the reaction by their central banks (see Russia below) to protect their currencies and fight inflation where Argentina has 60% short term rates and Turkey raised rates by 625 bps yesterday to 24%.
2017 was the first year that all G20 countries had positive growth since the Great Recession and 2018 is looking to repeat that storyline. The recent shift away from globalization toward economic nationalism potentially puts at risk the global economy once again as trade friction and potential trade wars continue on. Hopefully, common ground can be found as the global economy remains at risk.
  • The Central Bank of Russia surprised the markets today by raising interest rates by 25 bps to 7.50%. This was the first rate hike since 2014 and appears to be a preemptive step regarding rising inflation pressures. Inflation in August rose to 3.1% which was the highest monthly rate going back to August 2017.
  • U.S. Retail Sales for August was a disappointment. Economists were looking for a gain of 0.4% but instead retail sales rose just 0.1%. July was revised higher from 0.5% to 0.7%. Excluding automobile sales, retail sales rose 0.3% against expectations of a gain of 0.5%. U.S. interest rates have ignored the data and are higher by 2-3 bps.
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