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It’s Time To Go Long the U.S. Dollar

Global Trade Momentum Slows in Second Half

The global growth story of 2017 has always been about the low base – first half  (H1) growth of 2016 slow while the second half (H2) was strong.  

However, actual trade remains stuck at 2015 levels.

Consider China, where trade volume is set to flatten again. Hong Kong export and import growth is at low single-digit levels. In nominal terms, H1 cargo shipments are ~10% above last year. But only 2% above 2015 and 10% below 2014 levels.

China’s latest trade data miss underscores the point. July import growth fell from 17% to 11% versus June. Exports dropped from 11% to 7%.

The global impact of slower China trade is already noticeable

  • Germany’s latest Factory Orders report indicated falling international (aka Chinese) orders.
  • South Korea exports to China fell in half.  One of the reasons I said last month that Korea would hold off on a rate hike for now was that they needed to know that current growth would hold and not roll-over.  They were right to wait.
  • Australia exposed.  Iron Ore imports track the M1 and they are already falling.  And 2H is the soft period for steel production, so the excess won’t be easily absorbed.

More Trade Pain To Come

Liquidity plays a big role, and it’s slowing.  

Current trade levels depend on China’s M1 supply which is slowing.  

The Chinese government will try to stimulate the economy further, but the impact will not be as strong as desired.  Certainly the first half 2018 is looking dicey at best.

The other big factor is market saturation: demand for goods is slowing.

China – the epicenter of world production – reflects that slowdown.

Consider smartphones, a big part of that story.

China’s incremental export growth to the US has always been dominated by phones. As phone exports to the U.S. have slowed… so too has China’s total export growth to the U.S.

 

In general, global trade growth is slowing – that base problem again. U.S. trade is already peaking while the Moneyball EU Trade Index points to an EU that is already set to slow (the Index leads the EU economy by 3+ months)

What to Expect: A Q3 Head-fake And Then Slowdown

  • A brief flurry of growth from Asia
  • Problems in 1H 2018

You’ll see a head-fake from Asia over the next few months.

Asian economies will be focused on delivering product for seasonal sales: back-to-school and Christmas.  A new Apple iPhone release will trigger a lot of Q3 activity out of South Korea and Taiwan.

U.S. inflation will perk up a bit thanks to the sudden burst of inflation in Trucking (it will likely fade in Q4).

Central Banks Are Scrambling

Everybody wants to extend this growth cycle.

The flurry of positive macro data and inflation will lead markets to be more hawkish on Fed rate hikes. But the slower growth that will be seen in Q4 will reverse those expectations.

The Case For The U.S. Dollar

If inflation picks up in the U.S., rate hike possibilities increase.

Then, if global trade slows further, the U.S. economy will look the strongest.

KEY TAKEAWAY: You’ll see a head-fake in inflation due to the holiday season coming up plus the iPhone 8 sales super-cycle.

Central banks will do their best to keep inflation up through monetary stimulation… but it’s all a smokescreen.

As foreign central banks stimulate, the U.S. dollar will be considered the best place to park money. It’s been beaten down over the past few months.

I see it as a buying opportunity.

Best,

Andrew Zatlin

Editor of Moneyball Economics

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