Dollars And Doom

This is a good time for a reminder: The world’s a much friendlier place when the dollar’s on the back foot.

Again and again this month, I conjured a parallel with November of 2022, when a cool US CPI report likewise drove Treasury yields and the dollar lower, easing financial conditions and bolstering previously beleaguered equities.

That parallel is holding up. The dollar came into this week on track for its largest monthly decline in a year.

Five-year US reals are down 20bps this month so far. That’s contributing to dollar weakness and it’s also aiding and abetting the risk asset rally.

“The clear impression is that US data is in the driver’s seat,” SocGen’s Kit Juckes said. That data (ISM misses, a soft-ish jobs report and last week’s cool CPI reading) has fueled Fed pivot speculation. “Insurance cuts” in 2024 are a foregone conclusion given the Fed’s apparent buy-in for the idea that a static policy rate against receding inflation would mean passive tightening. Increasingly, though, traders are inclined to bet on outright easing from the Fed next year. At least one bank penciled in 275bps of rate cuts as their base case.

In addition to the ricochet into equities, the dollar’s November decline is obviously bolstering EM FX. MSCI’s gauge sits at the highest since February with YTD highs just a few points away.

As Bloomberg’s Paul Dobson noted on Monday, this is “a blessed relief for most currencies across Asia.” “Not very long ago central banks here were fighting to support their exchange rates,” he remarked. “Now they can breathe a little easier — and maybe even press the case.”

There are caveats. Plenty of them. In the latest Weekly, I noted that falling inflation in the US against strong wage gains bodes well for workers’ real spending power, and could help facilitate a soft landing. But too much of that could prolong the inflation fight.

“In both the US and Europe, industrial action and collective bargaining are continuing (or have just ended), generating relatively high nominal wage settlements just as inflation appears to be moving back to target [which] means wage growth could also stay robust in real terms well into next year and keep demand resilient,” BNY Mellon’s Geoffrey Yu said Monday. “Real wage growth is always welcome, especially if generated by productivity growth [but] too much of it at present would represent a policy complication.”

And then there’s the possibility that November’s soft data in the US was another “head fake” (to employ Jerome Powell’s characterization). “The first half of December will see plenty of data points to disturb Christmas lunches,” SocGen’s Juckes remarked. The outlook will be clearer once that round of first-tier US macro data is in hand, Juckes said, before conceding that for now, “the momentum is with dollar bears, bond bulls and strategists who like to warn of doom.”

On that latter point, remember that in an environment where Fed officials are inclined to hawkish banter, macro data amenable to “doom” spin is good news for stocks. It’s all fun and games until the economy actually crashes.


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