Morning Commentary: “Short Strokes”

Foreign Exchange - Morning Commentary
“Short Strokes”
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Every White House attempts to put its own political spin on events to impact markets, voters, the press, etc. This White House is no different. Back in September, when the White House and China agreed to restart trade talks, markets responded strongly to the news, and in particular, equity markets rallied strongly and yield curve inversion reversed course.

In September, the White House led the market to believe that a date would be set in October for President Trump and President Xi to sign Phase 1 of a multi-phase conclusion to end the trade war. That has come and gone, but the White House continues to micro-manage market expectations surrounding a conclusion to Phase 1, and for the most part, markets continue to believe that Phase 1 will be concluded shortly even though there remain key differences between the two sides.

Overnight, White House economic advisor Larry Kudlow again put a positive spin on the negotiations saying that trade talks were in the final phase with the two sides in close and regular contact. “We are coming down to the short strokes…We are in communication with them every single day right now.” Markets continue to believe this even though Larry Kudlow gave no timetable or date for a conclusion to Phase 1.

Global equities are generally higher once again and G7 interest rates have reversed their two day slide. Safe haven currencies (DXY, JPY, and CHF) and gold are in decline, and emerging markets are higher supported by a resurgent Chilean peso. Mixed economic U.S. data this morning (see below) has not changed those dynamics. Have a good weekend and we will see what surprises are in store for next week.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • Mexico cut interest rates yesterday by 25 bps to 7.50%. Two board members dissented in favor of a 50 bp cut which occurred in the previous meeting. This is the third consecutive meeting in row where the central bank has cut interest rates. With inflation pressures waning, market expectations are nearly 60% for another rate cut at the next meeting on December 19. The Mexican peso is stronger today primarily due to a strong rebound in the Chilean peso.
  • U.S. Retail Sales for October beat expectations rising by 0.3% and reversing September’s decline of 0.3% which was the first decline in seven months. Ex-auto, retail sales grew by 0.2% which was below consensus. The key control group of retail sales grew by 0.3%. Industrial production for October disappointed, dropping by 0.8% against expectations of a decline of 0.4%. U.S. interest rates are higher supported by new record highs for the DJI, S & P 500, and the NASDAQ.
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