Chart of the Month
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?
Despite a drop in the broadest measure of annual global inflation in Q1, from 2.9 to 2.5 per cent, remarkably, the number of countries with high inflation rates than a year ago outnumbers those with lower annual rates by 26 to 9. The Q4 slump in traded goods prices knocked back inflation in China, Indonesia, Malaysia and Philippines, and modestly in US, but in Europe, EMEA (ex-Russia) and Latin America, the inflation trend is holding firm.
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