US recession: only a matter of time?

Weak industrial data is fueling fears of slowing growth in the United States. Those fears also spread to the interest rate markets and into the exchange rate of the dollar.

Will there be one recession to the United States? On Tuesday, October 1, it was announced that the ISM Index has fallen to 47,8%. When a percentage below 50% is reached, this is an indication that the industry is contracting. The last time this Index was this low was more than 10 years ago. So it's no wonder that investors are concerned about the country's economy. Due to fears of a recession, the Dow Jones Index fell by more than 1 points on October 300. On Wednesday, October 2, a drop of almost 500 points followed. The last time Wall Street got off to a bad start in a quarter was in the 2008 credit crunch.

Dollar under pressure
For the currency world, however, the interest rate market is much more important than what happens in the stock market. On the interest rate front, the message from various market parties was also clear. On the CME futures exchange, investors are pricing in the chance that the Federal Reserve will cut interest rates before the end of October at 60%. Before the publication of the economic figures, this was still 40%. The prospect of another cut is making the dollar less attractive again. In the days following the release of the ISM Index, this currency fell nearly 1% against the euro.

Of course, US President Donald Trump also spoke again. He accused Federal Reserve chairman Jerome Powell on Twitter of letting the dollar rise too much. Trump also said interest rates are too high. In doing so, he conveniently ignores the fact that he is the main cause of the impending slowdown in growth. The trade war with China creates a lot of uncertainty and increases costs. Despite the rising tariffs, China still supplies a large part of the raw materials for industry in the United States. As Trump further increases import duties, the costs for the manufacturing industry will also increase.

Do not panic
It is a bit premature to panic based on a disappointing industry figure. The US economy is increasingly reliant on the service sector, which accounts for 66% of gross domestic product (GDP). This sector is doing much better than the industrial sector, while consumer confidence remains high for the time being and unemployment is hovering around its all-time low. If the Federal Reserve already cuts interest rates in October, it will most likely be a one-off action. In that case, the dollar could continue the gains against the euro that started in early 2018.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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