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Has the US Regained the Title of the Proverbial Locomotive of Global Growth?

July’s job’s data was largely as expected making the type of progress the Federal Reserve wants to see in order to raise interest rates in September.  I am anticipating the narrative to rise to deafening levels similar to that of today’s oil market as the inevitable date approaches.

Regarding actual market activity, a ton of ink has already been spilled ranting about the inevitable change in monetary policy which some would then suggest a change has already been discounted.

I have two immediate thoughts.  First, any immediate increase is economically meaningless given if a 25 or 50 basis points increase from current levels deems a project non-viable, that project should not have been built or even considered being built.  Secondly, I think any such increase would be an indicator of strength.

Speaking of discounting, the dollar has been exceptionally strong, the third major bull run since the 1973 termination of the Brenton Woods agreement (1944 agreement that established the fixed rate foreign exchange rate system) according to the Financial Times.  The dollar strength is the result of the inevitable change in monetary policy.

The surging dollar has hampered foreign trade.  As noted several times, about 48% of The S & P 500 revenues are from trade.  Second quarter many multinationals disappointed.

However the surging dollar as benefited our trading partners.  The trade gap rose by 7.1% in June, the largest gap in three months.  As noted several times, the EU and Japan are showing unexpected strength, perhaps the result of exports to the US.  Has the US regained the title of the proverbial locomotive of global growth, partially the result of a stronger dollar?

Returning back to the Financial Times article, the FT believes the dollar’s bull run is in its final days.  Their rationale is rather simplistic.  Currencies are commodity like products and all expected positives and negatives are overly discounted before an environment develops.

Speaking of commodities, oil fell another 1.75% Friday.  Crude is down almost 27% since June 30.  Oil companies are slashing capital expenditure programs by the greatest amount since 1986; some companies to protect dividend payouts while others to remain financial viability.

Will this curtail production?  The obvious answer is yes.  But such drastic reductions in expenditures may also cause growth to flat line as was the case in 1999 (and 1986).

What will happen this week as stocks are now in their longest decline since 2011?  The data is heavy, including retail sales, inflation statistics and several manufacturing data points.

Last night the foreign markets were mixed.  London was down 0.73%, Paris up 0.41% and Frankfurt up 0.34%.  Japan was up 0.41% and Hang Sang down 0.13%

The Dow should open moderately higher on merger news and a very slight rebound in oil.  The 10-year is off 11/32 to yield 2.21%.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.