Morning Commentary: Batten Down the Hatches

Foreign Exchange - Morning Commentary

Batten Down the Hatches

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Today’s U.S. jobs report for July combined with the White House’s threat of extending a 10% tariff to the remainder of Chinese imports not already taxed has painted a gloomy picture for the near term. The threat of more tariffs on Chinese goods covering the consumer sector (phones, apparel, toys, etc.) will impact the consumer more directly this time. China has threatened retaliation and global equities are down sharply today in anticipation of weaker growth ahead.
The headline number came in near expectations at 164,000, but revisions to the two previous months subtracted 41,000 job gains. There are clear signs that job growth is slowing from the 223,000 average of 2018 to the latest three-month average of just 140,000. The UR remained unchanged at 3.7%, and average hourly earnings (AHE) rose by 0.3% bringing the YoY gains up to 3.2% from 3.1%. The good news in the report was that the labor force participation rate rose from 62.9% to 63.0% (highest since March) and that the total labor force rose to 163,400,000, which is a new record.
The combination this week of a hawkish interest rate cut by the Fed and the promise of more tariffs has U.S. and G7 interest rates plummeting along with commodity prices. Yesterday’s Bloomberg Commodity Spot index fell sharply by 2.5% with crude oil collapsing by nearly 8%. While commodity prices have recovered slightly today, markets are preparing and bracing for potentially much weaker growth ahead if the U.S. and China cannot find common ground. As we pointed out, markets will be much more volatile in the weeks and months ahead.
  • The U.S. trade deficit for June came in larger than expected at $55.2b, slightly smaller than May. The American consumer remains in good shape and the consumption of foreign goods, products, foods, etc. remains strong. China remains the biggest beneficiary of our demand for cheap high quality goods. Despite all the rhetoric and politics governing the trade negotiations, our trade deficit with China widened in June to a five-month high.
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