‘This Is The Big One, Elizabeth!’

Several dozen (at least) members of the financial Twitterati nearly lost their wits on Thursday when, just before lunchtime in New York, US equities swooned, apparently in response to a Global Times story documenting what the paper described as a “whopping rise” in coronavirus infections at a hospital in Beijing.

You might have called it a Fred Sanford moment, although I suspect most of those who took to social media to post charts of what, in the grand scheme of things, was a small (albeit somewhat harrowing in terms of rapidity) decline in equities are too young to appreciate the reference.

“This is the big one, Elizabeth!“, too many market participants shrieked, all at once, into the digital void.

It wasn’t – “the big one”, that is. And it’s probably not a coincidence the sudden lurch lower came right around the European close. I’d be willing to bet systematic flows of some kind contributed to whatever it was that “broke”. Remember: These types of swoons and “fragility” events are a fixture of modern markets. While not quite “the norm”, calling them the “exception” is something of a misnomer by now.

In any event, it made for compelling headlines. CNBC was still running a story about a “sudden midday selloff that confused traders” more than seven hours later.

More interesting are the yen (which has seemingly relinquished its “safe haven” status amid economic woes and Japan’s proximity to the epicenter of the virus outbreak), gold (which has run to a seven-year high) and the dollar (which, if it doesn’t take a breather soon, is going to exacerbate the deflationary impulse from the epidemic and could well derail the equities train, too). That the greenback and gold are surging together is remarkable, and Treasurys are along for the ride. 10-year yields fell to the low-end of the recent range on Thursday.

Dealer hedging may well have added fuel to the fire. “[There was] lots of focus during the Asia session on an influx of Formosa issuance, which is usually hedged from the dealer side through buying Treasuries or receiving fixed-rate swaps, adding downward pressure on long-end yields”, Bloomberg’s Edward Bolingbroke noted.

Dollar up, bonds up, gold up – it’s an interesting dynamic, that’s for sure.

That the dollar is screaming higher is down to a number of factors, all of which we’ve discussed here at length on too many occasions to count lately. But if you really wanted to, you could crystallize the narrative to i) the safe haven appeal of USD assets in the current environment and ii) the assumption that persistent economic outperformance relative to the rest of the world will continue, and likely be exacerbated by the fallout from the virus.

Thursday’s data did nothing to dispel that narrative. As Bespoke observed, “not only was this month’s [Philly Fed] strong, but it also followed the January report which increased 14.6 points on a MoM basis”. When you combine those, you get the largest two-month jump in the headline gauge since September 1995 and one of the strongest two-month gains ever.

It’s that kind of data that continues to underpin the dollar from a fundamental perspective.

When you throw in rate cuts across the globe and a Fed that, even if lower rates are all but inevitable, seems destined to remain relatively “hawkish” (e.g., Clarida suggesting the market doesn’t really believe the Fed will cut again soon, an assessment you might very fairly describe as “out of touch”), and it’s little wonder the greenback continues its ascent, especially with Trump’s reelection odds rising (at least anecdotally) the more discordant the Democratic primaries seem.

Amusingly, this comes at a time when the White House finally admitted that the trade war likely dented the US economy. “Uncertainty generated by trade negotiations dampened investment”, Trump’s chief economist Tomas Philipson told reporters at a briefing coinciding with the release of the annual Economic Report of the President.

The Washington Post summed things up pretty effectively on Thursday, as this is one situation where you don’t need to be possessed of any special knowledge to hit the high points (or, in this case, the lower points). To wit:

In the annual Economic Report of the President released on Thursday, Trump’s Council of Economic Advisers predicts that if the president and Congress do not make further policy changes, the U.S. economy will grow at a 2.4 percent annual pace this year and at a 2.3 percent pace in 2021. That kind of growth is well below what Trump promised and similar to what occurred under President Barack Obama.

The report is the latest acknowledgment by the Trump administration that the economy is unlikely to grow at 3 percent or faster, a goal Trump has yet to achieve in his presidency. The economy grew 2.3 percent last year, 2.9 percent in 2018 and 2.4 percent in 2017, according to the Commerce Department. Trump’s large tax cut and his increase in federal spending lifted growth in 2018, but it has since moderated, especially after he escalated his trade wars. Business leaders were spooked by Trump’s fondness for tariffs on goods from China and other nations and pulled back sharply on investments in factories and equipment, creating a drag on growth.

It’s the same story over, and over, and over again. Trump’s economy is good. But it’s not “great” – “again”, or otherwise. And that’s the way it’s going to stay, even in the best-case scenario.

But, as noted above, “good” is just fine right now considering the myriad headwinds to growth abroad. Trump will never achieve EM-like headline GDP numbers, but he doesn’t have to. The largest economy on the planet growing at a steady, respectable clip is more than enough to make the US “the cleanest dirty shirt”, which is, in turn, facilitating dollar strength. (Trump doesn’t seem to understand that 2.5% GDP growth for a massive, highly-developed economy is just fine.)

That dollar strength, though, will eventually break something. In an environment where the coronavirus has rekindled growth concerns outside of the US and raised the specter of deflation and demand destruction, just about the last thing the world needs is an unchecked surge in the greenback.

(Annotations are from my buddy Kevin Muir)

So, for the Fred Sanfords among you, the “big one” may be this dollar rally.

If it doesn’t abate soon, you may yet get an opportunity to legitimately traffic in the kind of hysterics that littered financial-focused social media during Thursday’s “unexplained” midday swoon.

Read more: Yen-Sanity. Dollar Delirium.