Cross-Asset Crisis ‘Completely Rational,’ Popular Strategist Says

If it feels to you like the tension across markets admits of no readily discernible resolution, or that a cathartic capitulation in equities would prove insufficient as a release valve for the screeching macro-market tea kettle, you’re not alone. And you’re not wrong either.

The problem goes well beyond stocks. The dollar “wrecking ball” zeitgeist is a self-fulfilling prophecy. The outperformance and continued resilience of the US economy presents upside inflation risks for the Fed, which means a dovish relent is a non-starter.

That, in turn, means the Fed’s global counterparts are compelled to retain a hawkish bias or risk currency depreciation. Currency depreciation risks imported inflation, but ongoing rate hikes risk domestic recessions. Both of those outcomes are conducive to currency weakness too.

Fiscal profligacy (to support the economy) is a dead end when set against deteriorating fundamentals, as the UK learned the hard way last month. It also amounts to driving with one foot on the gas and one on the brake when monetary policy is beholden to a “Keeping Up With the Jeromeses” dynamic, as TD’s chief Canada strategist Andrew Kelvin called the global effort to avoid falling behind the Fed.

In short, there’s no way out. There are no good options. And FX is reflecting that (figure above).

None of that is lost on market participants, which is why the dollar — and USD cash, yielding 3% — remains “the asset du jour,” as Nomura’s Charlie McElligott put it.

With that in mind, and in anticipation of another “interesting” week (to employ a euphemism for “tumultuous”), consider the incisive assessment of the current macro predicament below, as penned by McElligott. I’ll present it without further editorializing.

Let’s be fair: All of these things are happening for completely rational reasons, particularly for the USD versus lack of viable global alternatives, as the US economy remains the “cleanest dirty shirt” by far, while the rest of world is running increasingly incongruent monetary versus fiscal policy on structural issues.

Looking at the generic UK / Europe-type setup, you see a laundry list of messy inputs:

• Collapsing terms of trade / trade deficits largely due to energy imports
• Manufacturing / industrial growth slowing due to high energy / input costs
• “Hiking into recession” with the consumer negatively impacted by broad inflation (e.g., energy bills, food costs) and shock-resets on mortgage rates
• Demand construction policies which actually feed consumption and thereby inflation (energy caps, subsidies, fiscal stimulus / tax cuts)

And again, all while those central banks are trying to “rage-tighten” monetary policy with hot inflation, but against collapsing currencies thanks to the USD “wrecking ball.”

So yes, the saying that “markets stop panicking when policymakers begin panicking” means that we should be paying strong attention now to 1) USD direction (higher = stress, lower = pressure valve release / + risk) and the 2) increasing signaling velocity of global authorities who are outwardly pushing-back against USD and / or being forced into intervention action — “the worse it gets, the more asymmetric the policy response becomes.”

Hence the growing murmurs (really “pleas for help”) for some sort of “Plaza Accord 2.0,” or even the poor man’s 2016 “Shanghai Accord,” where Janet Yellen informally made her weak USD pivot, which saved the entire global risk-asset universe in the months that followed.

Clients are kinda-sorta sensing this “nearing shift” as well, where a fair bit of macro guys I speak to who’d been riding fixed-Income shorts all year have now closed a lot of that trade, while others are voicing a desire to try and fade USD after its run, but with few actually willing to put that trade on yet with “hard delta.” That’s because at this juncture, the Fed is still actively seeking out a 4.5% terminal at minimum and more FCI tightening via a strong USD, higher real rates, wider credit spreads and higher equities vol, and is in no position to back away from the current “sole” inflation-fighting mandate with core CPI near the highs, trimmed mean inflation at the highs, and all while the US labor market and wage growth remain white-hot.