Morning Commentary: S-L-O-W-I-N-G

Foreign Exchange - Morning Commentary


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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Beginning in Q1, U.S. and global interest rates began to diverge from equity performance. While U.S. and global equities have rebounded from their dismal performance in Q4, U.S. and global interest rates remain suppressed as investors and traders become increasingly concerned about a global slowdown precipitated by the trade war between the U.S. and China. This morning, U.S. 10-year yields are revisiting their Q1 lows and German 10-year yields are revisiting their lows seen in 2016. The U.S. dollar is slightly stronger on the session but is a sidebar issue relative to interest rates and equities today.
Disappointing Chinese economic data from overnight and weak U.S. retail sales and industrial production data this morning have caused another sharp downward move in G7 interest rates. One of the key metrics for forecasting an economic slowdown or a recession is when yield curves begin to invert. This is when longer term interest rates fall below short term interest rates. In the U.S., 3-month and 10-year yields have inverted for the second time this year, a warning sign of weaker growth ahead.
Markets will remain on edge as the trade talks have reached an impasse as the war of words continue between China and the U.S. The ability of the White House to micromanage the markets and the trade negotiations is slowly diminishing as China digs in and plays the long game. Both sides need a win and to be able to say that they got the best deal for their respective countries; that appears to be increasingly more difficult. President Trump meets President Xi next month at the G20 meeting; let’s all hope for a breakthrough.
  • China reported much-weaker-than-expected April Industrial Production and Retail Sales. Industrial Production was supposed to rise by 6.5% YoY but rose only 5.4%. Retail sales rose only by 7.2% YoY instead of 8.6% YoY.
  • U.S Retail Sales and Industrial Production were much weaker than forecast. Retail Sales were supposed to rise by 0.2% but fell by 0.2%; they have now fallen for the second time in three months. Weak automobile sales was the main reason for weakness. Industrial production data fell by 0.5% against expectations of a 0.0% print.
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