The dollar rose Wednesday, extending recent gains following a hodgepodge of US economic data including the lowest read on initial jobless claims in more than 50 years.
Although the claims surprise was written off to the seasonal adjustment component, the greenback’s ongoing surge is worth monitoring given the read-through for financial conditions and risk assets.
The Bloomberg dollar index touched the highest since July of 2020. It’s up 2% in November.
Separate data out Wednesday morning showed an eighth consecutive monthly increase in capital goods orders (figure below). The gain in core orders was better than expected and marked an extension of a virtually uninterrupted streak of gains following the COVID-inspired plunge.
Although the headline durable goods print missed (-0.5% versus +0.2% expected) it’s the core that counts. It’s worth noting that shipments (black line in the figure) missed. The 0.3% gain for October was shy of the 0.5% forecast. That, BMO’s Ian Lyngen remarked, “will be a net drag on Q4 growth expectations.”
The point, though, is that as long as the US data continues to come in a semblance of strong, it’ll reinforce expectations for a hawkish Fed pivot.
Those expectations were priced in fairly aggressively this week following Joe Biden’s renomination of Jerome Powell. The more aggressive the market is in that regard, the better for the dollar. And the worse for overvalued growth shares. That, in turn, presents a headwind for equities as discussed at some length in “How Powell’s Renomination Created ‘Liquidation’ Optic In Tech.”
“We continue to expect liftoff shortly after tapering ends, with the first hike in July 2022, the second in November, and a pace of two hikes per year thereafter,” Goldman said this week, in a brief note following Powell’s renomination.
Although you could easily argue that the Fed is behind the curve and that, as such, “continuity” means staying that way in perpetuity, even some who view Powell’s stance as dovish see hikes on the horizon.
“As Powell has remained on the dovish side of the Committee and continues to advocate a more patient stance, we continue to expect that market pricing on liftoff is a bit too aggressive at the moment,” Credit Agricole’s Nicholas Van Ness wrote this week. “That said, we believe that the likelihood of the first hike coming in 2022 is increasing, as a larger and more persistent inflation overshoot than had been previously expected may nudge the Fed in that direction.”
Apropos, “transitory” inflation persisted last month, key data confirmed. In the second round of pre-holiday figures released on Wednesday, PCE prices rose 0.6% in October and 5% YoY. The monthly print was slightly below expectations (0.7%) but won’t change the narrative.
Core prices rose 0.4% MoM, in line with estimates.
The YoY core print was 4.1%. That means both core CPI and PCE are running at twice the Fed’s target rate (figure below).
“A core PCE reading of 4.1% YoY will only push yields and the dollar up by increasing the likelihood of earlier and more aggressive hikes,” Bloomberg’s Alex Wittenberg remarked.
Meanwhile, personal income and spending beat estimates for October. Spending rose 1.3% from September (figure below), well ahead of the 1% economists expected, and more than double the previous month’s gain.
Last week, retails sales surprised to the upside, and although the data is in current dollar terms and probably reflected some pull-forward as consumers fretted over possible shortages and rising prices during the holiday shopping season, it nevertheless suggested rising inflation hasn’t yet torpedoed Americans’ propensity to consume.
The government on Wednesday described “widespread” spending increases last month for both goods and services. The report also said increases in employee compensation and “receipts on assets” outstripped a decrease in government social benefits to boost personal incomes, which rose more than twice as much as expected. Real personal spending in October was well ahead of estimates at 0.7%.
All of this might fairly be construed as supportive of a more hawkish Fed and thereby a stronger dollar. That’s not necessarily the best news in the world for risk assets. We could be on the brink of entering a “good news is bad news” regime.
Feels like we’ve been here before and not long ago.