Morning Commentary: What is Reality?

Foreign Exchange - Morning Commentary

What is Reality?

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Alan Rose
Alan Rose
Foreign Exchange Head Trader
Markets have been cratering since October as a combination of factors have sent investors to the sidelines. You can pick your poison as to whether it is weakening economic data from China or Europe, higher U.S. interest rates and potential Fed policy mistakes, Washingtonian politics, or most recently, weakening U.S. economic fundamentals, etc. All these factors and more have caused investors to liquidate equities, sending U.S. and global interest rates and commodity prices lower as investors prepare for what they see as an economic slowdown in 2019.
Today’s U.S. jobs report was a blockbuster and widely beat all expectations with an NFP gain of 312,000 against expectations of a gain of 180,000; this is the biggest monthly job gain in 10 months. Revisions to the previous months added another 58,000 jobs. Average Hourly Earnings also came in stronger at 0.4% with YoY gains rising to 3.2% which is the fastest pace since 2009. The labor force participation rate also moved higher from 62.9% to 63.1%. All in all, this is a great jobs report and could/should possibly rekindle the possibility of the Fed being on track to raise interest rates one or two more times in 2019.
What is the true economic reality? Markets have been reacting to weakening economic data from China and the EZ for weeks and months now; it is beginning to wash ashore here (U.S. ISM report and Apple iPhone sales). Markets have priced out all of the proposed Fed rate increases from the FOMC meeting on December 19 which was barely two weeks ago. Jobs data is known to be a lagging indicator and is not a good forward predictor for future growth, but today’s number was incredibly strong on many fronts. More time will be needed to sort out the state of the U.S. economy.
Chairman Powell will be speaking shortly at a symposium along with Ben Bernanke and Janet Yellen. He will need to choose his words more carefully than he did on December 19. He will need to try to thread the needle this time between a more balanced view of acknowledging recent economic weakness here and abroad along with keeping the Fed’s options open regarding rising inflation and a strong jobs market. This is a tough job for anyone – hopefully he learned something from his press conference two weeks ago.
  • China has continued to take proactive measures to keep their economy afloat in the face of weakening economic data. PMI data has fallen into the contraction zone and the PBOC has reacted today with a strong cut of 100 bps in the bank’s reserve requirements. They cut the reserve requirements four times in 2018. Chinese equities have reacted positively with gains of nearly 2% and the CNY is unchanged.
  • EZ inflation came in weaker than forecast at an eight-month low of 1.6% for December; November inflation was at 1.9%, and core inflation remained at 1.0%. Weaker energy prices was the main source for the weaker inflation.
  • Canada reported its December Jobs data and it came in near expectations. Job gains totaled 9,300 with losses in full-time employment but larger gains in part-time employment. The UR remained unchanged at 5.6%, and the labor participation rate was also unchanged at 65.4%.
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