We’re hearing about it all the time these days – the U.S. trade deficit widened in 2018 to a 10-year high, with the goods gap with China jumping to a record high despite tariffs on USD 250 billion worth of Chinese imports – all while the U.S. economy reached a level of growth it hadn’t seen since before the Great Recession.
President Trump sent out a tweet late Friday afternoon announcing that he would delay the next round of tariffs against China that had been set to go in effect on March 2nd. He expressed optimism that the trade talks would yield a resolution on the many structural issues at stake, culminating with a summit at Mar-a-Lago between President Xi and himself to conclude an agreement.
How is that possible? As history has shown us, global economic uncertainty leads to global investors shifting their money to safer U.S. assets which drives up the value of the dollar since dollars are needed (think supply vs demand) to purchase these assets. This is depicted by the U.S. Dollar Index (DXY), which tracks the strength of the dollar against a basket of major currencies. The dollar has held its strength and reamined near the peak its 52-week high. U.S. Dollar Index goes up when the U.S. dollar gains "strength" (value), compared to other currencies. In particular, it has gained 7% against the Euro since it began its ascent last April, and nearly 10% against the Chinese Yuan over the same period.
The economic outlook for 2019 can be looked at in one of two ways – through the scope of the pessimistic geo-political noise dominating the headlines, or via the time-tested evidence our economy is spitting out indicating continued strength for U.S. markets. We at Dynamic Capital choose the latter, as do many of this nation’s CEOs surveyed by the Business Roundtable CEO Economic Outlook Survey. Jamie Dimon, Chairman and Chief Executive Officer of JPMorgan Chase & Co. and Chairman of Business Roundtable said, “The BRT CEO survey shows that confidence among America’s business leaders remains strong.”
According to William Dudley, President of the New York Fed, the central bank may begin shrinking its balance sheet to get closer to normal levels as early as this year.
From time to time, governments consider it beneficial to have a weaker currency to increase exports as products will become cheaper for the receiving country allowing them to purchase more. However, such a tactic sets competing businesses in the home countries at a disadvantage, thus many economists and world leaders frown on the financial maneuver as it is seen as an attempt by the exporting country to gain an unfair advantage over the competition in the receiving country.
Private sector job growth severely beat estimates, sending the dollar higher against its international counterparts as the stronger the economy is (with job growth being a leading indicator), the more likely the US Federal Reserve is to continue raising the federal funds interest rate.
President Trump used his executive authority today to introduce regulatory reform to task forces within federal agencies, which appears to be a bold step towards peeling back red tape which conservatives argue has stifled US growth for decades.
Both the Dow Jones Industrial Average and the S&P 500 reached new all-time highs on Monday amid comments from the President that he would be making a “big” announcement on infrastructure by Tuesday.
European stocks saw a rise on Monday, led by gains in telecom and financial corporations despite Unilever having its worst day in 13 years after Kraft Heinz walked away from its takeover attempt.
© Dynamic Capital
