Morning Commentary: Making a Bad Situation Worse

Foreign Exchange - Morning Commentary

Making a Bad Situation Worse

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
This is the first full week of the New Year and it appears to be ending on a downer. A combination of increased tension over the U.S. government shutdown and economic downgrades for future U.S. growth are taking its toll on the recent optimism that has helped equities, interest rates, and commodity prices rebound from a horrific December.
On the political front, President Trump appears to be moving closer to ending the government shutdown by declaring a national emergency. The White House has directed the Army Corp of Engineers to examine an unused $13.9 billion from a 2018 emergency spending bill to potentially pay for a wall on the Southern border.
This action is seen as politically groundbreaking and would probably be challenged by the democratically controlled House and in the courts. The move would end the stalemate and reopen the government but at a price. The President’s potential action would not bode well for future Congressional cooperation and in particular, regarding the upcoming debt limit debate. In addition, the rating agencies would not look kindly on such a dysfunctional solution to the government closure.
On the economic front, markets are pricing in a greater probability of a U.S. recession over the next 12 months. Economists are raising the risk of a U.S. recession to the highest level in six years as a combination of the trade war with China, a Federal government shutdown and bearish markets are taking its toll. The probability of a recession has risen to 25% from 20% in December. JPM Chase uses their own in-house formula to calculate the probability of a recession and those odds have risen to 41%.
As we have constantly reminded our readers, economic performance and politics are heavily interweaved and cannot be separated. Dysfunction in Washington will have a negative effect on the economy and ultimately the U.S. dollar. In the short term, the U.S. dollar has remained remarkably strong with the exception of a few currencies. How long that will last remains to be seen.
  • U.S. CPI for December came in at expectations at -0.1% dropping the YoY rate from 2.2% to 1.9%; this was the first time in nine months that consumer prices fell. A sharp plunge in the price of gasoline was the main cause of the decline. However, underlying inflation pressures remained firm with the CPI ex-food and energy remaining firm and unchanged at 2.2%. U.S. interest rates are down sharply on the day.
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