The U.S is not immune to a global slowdown

It had been anticipated by the market that the U.S. economy was somehow immune to the slowdown in activity which has been slowly affecting the rest of the developed world.

That theory has been shattered by recent economic releases which have shown that the issues that have developed globally have finally reached U.S. shores. Manufacturing was the first to show weakness which prompted the FOMC to act by cutting short-term rates even though producer prices, the precursor to higher consumer inflation had started to tick up.

The Central Bank, unsure of either the direction of inflation or whether the economy could weather the storm, cut rates again this month with commentators taking at face value the comment that a further cut was nothing more than insurance should anything untoward occur.

That shock didn’t take long to emerge with yesterday’s services activity data adding to a surprising fall in manufacturing output and weakening business conditions.

The data is not yet conclusive and two of the lesser employment reports, ADP and Challenger were mixed with ADP showing fewer jobs being created in the private sector than had been anticipated but a fall in layoffs according to Challenger.

Of course, later today will see the true “acid test” of the jobs market with the release of the September non-farm payrolls data. The estimates have become more dovish as the week has progressed with the latest estimate around 125k new jobs created.

The calls made earlier in the week that the dollar index has made a short-term high at 99.67 appear to be well-founded. Yesterday, the index continued to correct, reaching a low of 98.63 before rallying on some profit-taking to close at 98.96.

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Sterling reacting positively to Brexit hopes

Fatigued by the months, if not years of speculation over the economic effect of Brexit, the market has decided to look positively on the fact that despite Boris Johnson’s new proposals not being uniformly accepted; they have not been thrown out.

Brussels has, so far, reserved judgement on passing comment on the new arrangements being suggested to solve the issue of the Irish border arrangements and the backstop should a trade deal fail to be agreed. However, the Irish Prime Minister believes they fall short of what is needed.

Eurosceptic Government rebels, who have been denied the right to remain as members of the Conservative Party for failing to support the Prime Minister, have given a cautious welcome to the plans. They have called proposals “tolerable”. This is about as much encouragement as Johnson would have expected.

While this is not a “done deal” neither has it been rejected out of hand which is being interpreted as a good sign despite misgivings particularly form Dublin.

Next week is being given over to discussion in Parliament, where the Leader of the Opposition called it a deal that no Labour member would vote for.

It remains to be seen just what the Prime Minister will have in his pocket to discuss with EU Heads of State at the EU Summit but whatever it is, it is more than could have been expected just a few short weeks ago.
Versus the dollar, the pound rallied to a high of 1.2413 as the greenback weakened following the data releases earlier. It eventually settled back to close at 1.2332.

Euro: too high to buy, too low to sell

The euro is in a classic situation for a currency which has few “friends”. As it rallies it fails to attract buyers but instead attracts those who have no faith in its ability to rally above the 1.10 level versus the dollar.

Then, as the sellers gain control, they run out of steam as it approaches the 1.0840 support. The market remains structurally short of the single currency and just as there is no impetus to seek out stop losses above the 1.10 level there is no great desire to add to short positions as the support approaches. Short term “jobbers” then take profit, safe in the knowledge that they will get another chance to sell.

Overall the market is highly dubious that either Brussels or Frankfurt have the desire, ability or tools at their disposal to haul the economy out of its current funk.

The ECB has lost any remaining shred of credibility it had by not acting sooner to arrest the slowdown but also allowing banks to virtually ignore the bad debts still remaining from the financial crisis by putting in place artificial aids to allow them to provide for the losses over a longer period than is generally acceptable.
There is little consideration being given just yet to the long-term viability of the entire project but should the coming recession last well into next year, questions will start to be asked.

Yesterday, the single currency rallied versus a weakening dollar, reaching a high of 1.0988, closing at 1.0965.