Chart of the Month
Central banks have voted for a manufacturing recovery but will one appear? Taking into account the net monetary policy actions that cover 39 of the largest countries, a revival is imminent, but this ignores the impact of escalating trade tensions and random events such as the disabling of Saudi oil installations. Helpfully, China’s Caixin PMI has lifted from 48.3 in January to 51.4 in October but, unhelpfully, Germany’s PMI continues to slide (41.7 in October as compared to 49.7 in January). Central banks were powerless to arrest the 2008-09 activity slump and post-crisis recoveries have been muted, especially when QE is also taken into account.
The US president has unleashed successive waves of chaotic dislocation to global goods supply chains, prompting rapid adjustments to inventory levels. While the annual growth pace of final demand, illustrated here by retail sales values, is rarely punctuated by steep declines, industrial production values have larger and more frequent episodes of correction. The weakness of industrial production reflects the urgent desire to reduce goods inventory. It is not a reliable indicator of the course of the overall US economy.
Over the past 15 years, the real interest rate differential has been an important driver of the US Dollar index or NEER (nominal effective exchange rate). NEER measures the strength of a currency as the weighted average of bilateral exchange rates with its major trading partners. Until last month, when the Fed reduced its target funds rate for the first time in almost a decade, market participants had favoured the greenback against lower-yielding currencies, especially negative yielding ones (i.e. Yen and Euro). If US policymakers decide to cut rates aggressively in order to counter the negative effects of uncertainty on economic growth, could this mark the end of the US Dollar bull trend?
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