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February 07, 2019

Waves of a Global Slowdown come Ashore in the U.S.

Earlier this week Paul Single, our colleague at City National Rochdale, focused his Economic Perspectives video on weakness in Europe.

The news from Europe got even worse during the course of this week. German industrial orders declined at the fastest rate since 2012 and the Italian economy posted slightly negative GDP in the last two quarters of 2018, officially putting that country into recession.

In our morning commentary earlier this week, we talked about developments in Australia. A day after its central bank issued a rate decision that was considered a “hawkish hold," the governor warned markets that the next move could be a cut, due to fears of a global slowdown.

In today's interdependent global economy, these developments will obviously wash back up on our shores. The transformation of the U.S. Federal Reserve's outlook in the last three months seems to have a certain finality to it. Just a little over three months ago, the central bank seemed to be set on autopilot when it came to raising rates and shrinking its balance sheet. Now, it seems to be firmly on hold and waiting for data to inform it of its next move.

Federal Reserve Chair Jay Powell is already juggling equity market volatility, winding down the fed's balance sheet and questions about executive interference in the economy. Add to all that weak foreign economic data, and the troubles multiply.

If the global economy moved in sync, monetary policy could be applied with less concern about the effects in certain markets. But with many U.S. companies' earnings tied in with foreign economies, a lot of unintended consequences can result.

With this last round of corporate earnings releases, we saw how that works. Caterpillar and Nvidia were two of the U.S. companies that had disappointing quarters, and they specifically cited Chinese weakness as a major problem. General Motors reported pretty good results, but they were the result of cost-cutting the company undertook to offset poor sales outside of the U.S.

For the Fed, this results in U.S. businesses needing looser credit conditions, while at the same time the U.S. economy continues to add jobs. It also multiplies the amount of economic analysis the Fed must consider when backing into U.S. monetary policy

Our View: We're only a month into the year and already we are seeing shifts away from what we were expecting for 2019. These changes could bleed over into our expectations about the U.S. dollar, which we thought would drift lower over the course of the year on U.S. weakness. Now, it is looking like we may get outdone in that weakness by a few other countries.

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