A dollar recovery is gathering pace and the question is whether the move will continue this week? Economic growth trends are key to sentiment with the flash PMIs, whilst there is also the ECB and BoJ to contend with. We consider the outlook for forex, equities and commodities markets.
John Williams, FOMC permanent voter and a centrist, is an advocate of “prudence, patience and good judgement”; whilst Charles Evans another voter on the FOMC (leans dovish) believes “we are just at a good point for sort of pausing.” There is increasing concern over faltering inflation, and not just in the US. The first inflation reads of 2019 show the hard data following a worrying trend in declining inflation expectations (worrying as falling inflation is seen as a direct response to faltering economic activity). The Fed’s preferred inflation gauge (core PCE) is struggling below its 2% target, core Eurozone inflation is stuck around 1%, whilst the Bank of Japan has pretty much thrown in the towel on hitting its inflation target. Perhaps most concerning is Chinese inflation is falling fast and reflects an accelerating slowdown in the world’s second largest economy. Major global economies are feeling the pinch of a cyclical downturn coming amidst tightening global liquidity (a shrinking Fed balance sheet) at the same time that the two mega economic powerhouses are engaging in a trade war. However, dovish Fed rhetoric is encouraging risk, whilst there is hope with regards to the US/China dispute resolution which is helping to improve sentiment. Essentially, China will be worried that if a trade dispute is not nipped in the bud quickly, it will significantly impact on growth prospects in 2019 too. Even Brexit suddenly seems to be positioning for a softer outcome (whatever it may be amidst the ongoing uncertainty). Perhaps this risk rally has legs after all, but positive newsflow on trade is key.