Opening Statement from the August 2018 CCPM Forecaster
Originally published on August 5, 2018
Overview
Most commodities continue to sell off in response to USD strength, as well as worries of adverse consequences of trade tensions.
Previously we discussed that the global economy remains on solid ground despite having been negatively impacted by uncertainty in global trade dynamics. The IMF confirmed our sentiment in its July 2018 World Economic Outlook as it acknowledged less uniform growth due to trade tensions, higher oil pricing and changes in capital flows as a result of monetary policy actions by the Federal Reserve.
While the IMF’s global growth estimates for 2018 and 2019 remain unchanged at 3.9 percent, estimates have been revised slightly downward in the Eurozone, Japan and the United Kingdom. Meanwhile...
China
After mounting a nice retracement rally, the Chinese stock market sold off back down into bear market territory, erasing all the gains made since the June lows as a result of escalating trade tensions with the U.S. In addition, the yuan continued to sell off.
Trade tensions between Washington and Beijing are adding further strain on China’s economic growth picture, which already faces credit growth constraints during a critical period...
US Dollar Strength
We have been forecasting a retracement in the USD index with a high probability of a reversal in the bullish trend since the beginning of 2017. Since that time the USD index has declined by as much as 15%. We also put a bottom target in the USD index of the mid to low-80s. The USD index bottomed at 88 and has since mounted a strong rally largely as investors seek the dollar’s safe haven status.
Moreover, it appears that investors are finally allowing the USD to appreciate in accordance with interest rate hikes from the Fed. We believe if it were not for Washington’s focus on trade the USD would have declined to the mid-80s. Thus, we must question to what extend the USD will weaken once trade negotiations have been made. Resolution of current trade disagreements is likely to...
Interest Rates
As expected, the Federal Reserve kept the target range for the federal funds rate at 1.75 percent to 2.00 percent during its August 2018 meeting. The Fed appears to be leaning towards a September rate hike of 25 basis points. We believe this is the right move given the most relevant macroeconomic variables. Finally, a fourth rate hike of 25 basis points in 2018 is highly likely.
Given the high chance of a boost in the Fed funds rate by...
Inflation Watch
Over the past 18 months we have noted the gradual pickup in global inflation, specifically pointing to improvements made in the Eurozone and Japan. While inflation remains below many official targets, gradual progress continues to be made. At the same time current trade tensions...
It is important to have an idea about future inflation rates because it helps us forecast short-term interest rates which of course impacts...
As the only major economy in a trend of rising short-term interest rates, it is of especially high importance to monitor macroeconomic variables from within the U.S. Accordingly, we believe...
Focus on the Yield Curve
In recent weeks investors have been focused on the U.S. Treasury yield curve. The yield curve is an important variable to consider because it is one of the variables used by the Fed when deciding whether or not to change short-term interest rates.
Currently the yield curve is in the process of flattening. The significance of a flat yield curve is that it represents the stage prior to an inverted yield curve. And an inverted yield curve has often served as a leading indicator of a recession. Incidentally, some Fed officials have cautioned that interest rates should be raised more slowly than estimates indicate in order to avoid an inverted yield curve which could materialize as early as 2019.
At this point we...
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