The good news is that US equities followed the lead of their counterparts in Hong Kong, mainland China, and Europe on Monday, surging for a second consecutive session.
The bad news is, the dollar continues to firm, helped along Monday by Boston Fed chief Eric Rosengren who said, in no uncertain terms, that he isn’t inclined to support unnecessary rate cuts. “I just want to see evidence that we’re actually going into something that’s more of a slowdown”, he told Bloomberg’s Kathleen Hays in an interview.
The Bloomberg dollar index subsequently hit its highest levels of the year. DXY isn’t far behind.
The S&P has moved 1% or more in nine of 14 sessions since the July Fed meeting (and five of the last six).
Risk assets were bolstered by a selloff in the long-end. 10-year yields cheapened 5bps, but the 2-year fell to session lows late in the day, with yields higher by 7bps at the front-end, thanks in no small part to Rosengren. In light of what’s unfolded over the last two weeks, risk assets are better able to digest bear flattening than bull flattening at the current juncture.
Semis are up nearly 5% over the past two sessions on trade “optimism”, or what counts for “optimism” these days. The Huawei reprieve (made official by Wilbur Ross on Monday) helped.
Although fiscal stimulus hopes (think: Germany) and the fact that President Trump didn’t say anything overtly egregious about China were enough to propel equities higher for a day, it’s likely that the dollar will present something of an obstacle eventually.
From a big picture perspective, the combination of relatively tight Fed policy (which is what Rosengren telegraphed on Monday) and a resilient dollar acts as a boa constrictor during times of slowing global growth and trade – it squeezes everyone further and exacerbates things, something Powell should have learned last year during the emerging market mini-crisis, if he didn’t full appreciate it before ascending to the chairmanship.
As far as the current situation is concerned, it’s a recipe for imported disinflation, as Deutsche Bank’s Stuart Sparks talked at length about late last week.
“Dollar strength has been associated with – or an indirect cause of – episodes of risk aversion throughout the last five years”, Bloomberg’s Luke Kawa reminded folks on Monday afternoon, adding that although “there’s been a solidly negative correlation between global equities and the greenback for most of the year, lately, non-US stocks have proved quite capable of shaking off the greenback’s ebbs and flows”.
We’ll see how long that lasts.
One thing we know for sure is that the US president isn’t “quite capable of shaking off the greenback’s ebbs and flows”, unless the currency “ebbs” weaker. He reiterated that rather loudly on Monday.
Oh, and just a quick reminder…