I’m not sure if you noticed, but Donald Trump’s economic “miracle” is dying on the vine.
Mercifully (for the optimists anyway) we got a blockbuster payrolls report on Friday, but generally speaking, the data stateside has taken a turn for the worst. In fact, both Bloomberg surprise indexes are now negative for the first time since Trump’s bizarre “American carnage” inauguration speech.
Of course Trump’s “miracle” was never all that “miraculous.” For one thing, nobody ever suggested he couldn’t provide a short-term boost to the economy if he decided to mortgage America’s future by issuing a bunch of debt to pay for corporate tax cuts. Clearly, that had the potential to juice corporate profits and catalyze an S&P-boosting buyback binge, so the “we did what nobody thought we could do” argument is (and always was) a ridiculous strawman – like blowing through three eightballs of coke in 72 hours and then saying “nobody thought I could stay up for three straight days, and look how wrong they all were!”
But beyond that, Trump has demonstrated a remarkable penchant for touting things that were already moving in the right direction long before he took office (e.g., the unemployment rate) and exaggerating the relative “greatness/tremendousness” of data that’s good, but by no means historically anomalous (e.g., his “gee dee pee” press conference which immediately became the laughing stock of the economic world last July). Meanwhile, Trump hasn’t done the best job of championing the numbers that actually do suggest his policies created historically anomalous euphoria because, again, he doesn’t know what numbers to tout in the service of perpetuating his narrative.
In any event, now things are moving in the wrong direction at just the wrong time. Everyone knew the fiscal impulse was set to wane in 2019, but the hope was that the economy would still be steaming along providing a nice cushion – at least during H1 of the new year. One problem is obviously the trade war, which folks hoped would be some semblance of resolved by the time the fiscal euphoria wore off, but again, those hopes are proving to be misplaced.
Now, worries about the impact of the trade war on global growth are colliding with the reality of the fading fiscal impulse (and a recalcitrant Fed) to weigh on the domestic economy, which appears to be rapidly catching down to the rest of the world’s “reality”. Goldman’s current activity indicator, for instance, is plummeting.
All of this is obviously prompting the Fed to rethink the rate path and when you consider a possible dovish Fed pivot in conjunction with the incoming data, you’re left to question the viability of the long USD trade which, you’ll recall, replaced “long FAANG+BAT” at the top of BofAML’s “most crowded trades” list in December.
A bearish outlook on the greenback started to look like the consensus on Wall Street starting in November and here’s how things have played out alongside disappointing data and, of course, falling long-end yields during December’s bond rally.
Now, dollar bears are latching onto Jerome Powell’s Friday remarks in Atlanta to make the case. Or at least Goldman is.
“Comments from Fed Chair Powell Friday raised the odds that the FOMC will move to the sidelines over the coming months”, the bank wrote Saturday, adding that “combined with net softer US data for December, we think a more data-dependent Fed creates space for further Dollar downside.” For Goldman, shorting DXY with a target of 93.0 (and stop of 97.5) makes sense.
As an aside, Goldman also reiterates something we said on Thursday – namely that the USDJPY flash crash matters. “While it is tempting to ignore market ‘flash crashes’ or chalk them up to technical issues, we think it is telling that USD/JPY ultimately settled more than 1% below its pre-crash level”, the bank says, in the same cited note, comparing this week’s episode to the Sterling flash crash in October 2016.
“GBP/USD settled down three big figures and then continued to struggle over the following weeks”, Goldman reminds you. “In both cases, liquidity issues likely played a role, but the underlying drivers were fundamental, in our view.”
“Apart from expectations for a more dovish Fed, the USD has another factor going against it: crowding”, Barclays said Sunday, before noting that “FX consensus trades tend to perform poorly in the first few weeks of the year, with the last three years’ consensus trades performing poorly right at the start of the year.”
The best reason to doubt the short dollar thesis might well be that it’s now the consensus on Wall Street, but if you’re looking to be a “contrarian”, I suppose the whole thing rests on who you want to fade. That is, long dollar is clearly crowded, but short dollar is how Wall Street is leaning in the new year.
Oh, and meanwhile…