Needless to say, Wednesday’s US inflation figures pulled the rug out for the dollar.
This calls for a brief trip down memory lane. The “dollar wrecking ball” dynamic went into overdrive following Jerome Powell’s terse Jackson Hole address 11 months ago. Within weeks of Powell’s hawkish remarks, the Japanese were compelled to intervene on behalf of the flagging yen, the yuan was in a tailspin and with a little “help” from Liz Truss, the pound slumped to a record low. There’s plenty more one could say about that episode, but those were the high points. Or low points, depending on how you want to look at it.
After loitering near oppressive levels for an uncomfortably long time, the greenback finally receded thanks in part to a cool US CPI report in mid-November. The dollar’s decline helped buoy risk assets (notwithstanding a rough December for US stocks) and also contributed to the global liquidity impulse which some analysts credit with facilitating the equity rally from October’s lows.
Wednesday’s CPI report pushed the greenback to the bottom of a range that’s generally defined 2023’s trade.
Note that Wednesday’s intraday dollar decline was among the largest since the huge drop that accompanied October’s CPI report.
Those figures (the October inflation numbers) turned out to be a false dawn in some respects, but recall that on the day they were released (November 10), the NYSE FANG+ Index rose more than 9% and five-year US reals fell 26bps.
That’s relevant today for obvious reasons. Reals have trekked higher recently, posing a risk to an equity rally built atop a surge in mega-cap tech shares so dramatic that Nasdaq felt compelled to institute a special rebalance.
As I wrote on November 10, the price action engendered by October’s CPI report was counterproductive for Jerome Powell. “The Fed would’ve probably rather this didn’t happen,” I remarked, describing the combination of soaring stocks, a plunging dollar and a sharp decline in US 10-year yields as “a significant financial conditions easing impulse.”
It’s not too much of a stretch to suggest that those market moves helped set the stage for the US economy’s robust performance in Q1, which ended up prolonging the Fed’s tightening campaign. Certainly, November 10 was a landmark session.
The question, then, is whether the Fed is truly ready for inflation to subside. That might sound odd, but one concern is that CPI reports like June’s have the potential to excite “animal spirits,” and not just in markets. Traders and consumers, operating on the assumption that Fed hikes will conclude after one final increase later this month, may be inclined to celebrate the ostensible end of America’s inflation nightmare with stock purchases and discretionary spending.
If that happens, the seeds could be sown for a resurgence in price pressures. And we may look up a month from now and find Powell reprising his “bad cop” role from last year’s Jackson Hole conference.
Unless rates and the US$ go down because the economy slows down……..
For a surge in discretionary spending, you need income. Real income have mostly traded water since pre-COVID, though, yes, with some composition changes that might support broader low quality consumption.
But I think the main components of inflation – COVID savings, supply chain disruptions, rapid change in demand composition and greedflation/companies taking advantage of the chaos to increase prices significantly above rising costs – are all pretty much exhausted.
Well, if you get a 2-handle headline CPI print in July, that’ll be juxtaposed with 4% to 8% YoY wage growth depending on sector. Obviously, some of the buffers are dwindling and the student loan payments are restarting in Q4, so that’s a factor in the US, but wage growth is positive again.
That’s true and the climb of the last months shows it’ll pay to keep an eye on wages; but, inflation adjusted, I believe weekly earnings for all employee are up 1% since Jan 2020… That cannot be what’s been setting the world on fire… And it could be that employees want to catch up a bit too (if they get the power to negotiate for it)
I don’t think Powell ever thought he had god like powers over the economy. I think he does what he acts in the way he best will achieve the dual mandate of the fed and he tries to speak honestly. People attribute hidden meanings in his statements. I don’t think he is trying to talk up or down the market or the economy or spending or animal spirits or the housing market or whatever. He uses the policy levers at his disposal, including forward guidance to achieve the dual mandate to the best of his ability. I don’t believe they are trying to manipulate anyone. The fed forecasts forward looking statements are just as inaccurate as anyone else’s but are their honest best efforts. Just take their statements at face value. There really is no reason to do otherwise.