More Growth to Ignite

While Congress continued to fight
The President stole the limelight
Four orders he signed
As he tries to find
The kindling, more growth to ignite

As I return to action after a short hiatus, it doesn’t appear the market narrative has changed very much at all.  Broadly speaking, markets continue to be focused on, and driven by, the Fed and other central banks and the ongoing provision of extraordinary liquidity.  Further fiscal stimulus remains a key objective of both central bankers and central planners everywhere, and the arguments for the dollar’s decline and eventual collapse are getting inordinate amounts of airtime.

Starting with the fiscal side of the equation, the key activity this weekend was the signing, by President Trump, of four executive orders designed to keep the fiscal gravy train rolling.  By now, we are all aware that the Democratic led House had passed a $3.5 trillion fiscal stimulus bill while the Republican led Senate had much more modest ambitions, discussing a bill with a price tag of ‘only’ $1.0-$1.5 trillion.  (How frightening is it that we can use the term ‘only’ to describe $1 trillion?)  However, so far, they cannot agree terms and thus no legislation has made its way to the President’s desk for enactment.  Hence, the President felt it imperative to continue the enhanced unemployment benefits, albeit at a somewhat reduced level, as well as to prevent foreclosures and evictions while reducing the payroll tax.

Naturally, this has inflamed a new battle regarding the constitutionality of his actions, but it will certainly be difficult for either side of the aisle to argue that these orders should be rescinded as they are aimed directly at the middle class voter suffering from the economic effects of the pandemic.

Another group that must be pleased is the FOMC, where nearly to a (wo)man, they have advocated for further fiscal stimulus to help them as they try to steer the economy back from the depths of the initial lockdown phase of the pandemic.  Perhaps we should be asking them why they feel it necessary to steer the economy at all, but that is a question for a different venue.  However, along with central banks everywhere, the Fed has been at the forefront of the calls for more fiscal stimulus.  Again, despite the unorthodox methodology of the stimulus coming to bear, it beggars belief that they would complain about further support.

So, while political squabbles will continue, so will enhanced unemployment benefits.  And that matters to the more than 31 million people still out of work due to the impact of Covid-19 on the economy.  Of course, the other thing that will continue is the Fed’s largesse, as there is absolutely no indication they are going to be turning off the taps anytime soon.  And while their internal discussions regarding the strength of their forward guidance will continue, and to what metrics they should tie the ongoing application of stimulus, it is already abundantly clear to the entire world that interest rates in the US will not be rising until sometime in 2023 at the earliest.

Which brings us to the third main discussion in the markets these days, the impending collapse of the dollar.  Once again, the weekend literature was filled with pontifications and dissertations about why the dollar would continue its recent decline and why it could easily turn into a rout.  The key themes appear to be the US’s increasingly awful fiscal position, with debt/GDP rising rapidly above 100%, the fact that the Fed is going to continue to add liquidity to the system for years to come, and the fact that the US is losing its status as the global hegemon.

And yet, it remains exceedingly difficult, at least in my mind, to make the case that the end of the dollar is nigh.  As I have explained before, but will repeat because it is important to maintain perspective, not only is the dollar not collapsing, it is actually little changed if we look at its value since the beginning of 2020.  And as I recall, there was no discussion of the dollar collapsing back then.  Whether looking at the G10 or the EMG bloc, what we see is that there are some currencies that have performed well, and others that have suffered this year.  For example, despite the dollar’s “collapse”, CAD has fallen 3.0% so far in 2020, and NOK has fallen 2.9%.  Yes, SEK is higher by 7.0% and CHF by 5.3%, but the tally is six gainers and four laggards, hardly an indication of irretrievable decline.

Looking at the EMG bloc, it is even clearer that the dollar’s days are not yet numbered.  YTD, BRL has tumbled 25.9%, ZAR has fallen 21.2% and TRY, the most recent victim of true economic mismanagement, is lower by 18.6%.  The fact that the Bulgarian lev (+4.8%) and Romanian leu (+3.8%) are a bit higher does not detract from the fact that the dollar continues to play a key role as a haven asset.

Finally, I must mention the euro, which has gained 4.8% YTD.  When many people think of the dollar’s value rising or falling, this is the main metric.  But again, keeping things in context, the euro, currently trading around 1.1750, is still below the midpoint of its historic range (0.8230-1.6038) as well as its lifetime average (1.2000).  The point is, there is no evidence of a collapse.  And there are two other things to keep in mind; first, the fact that it is assumed the Fed will continue to ease policy for years ignores the fact that the ECB will almost certainly be required to ease policy for an even longer time.  And second, long positioning in EURUSD is now at historically high levels, with the CFTC showing record long outstanding positions.  The point is, there is far more room for a correction than for a continued collapse.

One last thing to consider is that despite the shortcomings of the US economy right now, the reality remains that there is currently no viable alternative to replace the greenback as the world’s reserve currency.  And there won’t be one for many years to come.  While modest further dollar weakness vs. the euro and some G10 currencies is entirely reasonable, do not bet on a collapse.

With that out of the way, the overnight session was entirely lackluster across all markets, as summer holidays are what most traders are either dreaming about, or living, so I expect the next several weeks to see less volatility.  As to the data this week, Retail Sales and CPI are the highlights, although I continue to look at Initial Claims as the most important number of all.

Today JOLTS Job Openings 5.3M
Tuesday NFIB Small Business 100.4
  PPI 0.3% (-0.7% Y/Y)
  -ex food & energy 0.1% (0.0% Y/Y)
Wednesday CPI 0.3% (0.7% Y/Y)
  -ex food & energy 0.2% (1.1% Y/Y)
Thursday Initial Claims 1.1M
  Continuing Claims 15.8M
Friday Retail Sales 1.9%
  -ex autos 1.3%
  Nonfarm Productivity 1.5%
  Unit Labor Costs 6.2%
  IP 3.0%
  Capacity Utilization 70.3%
  Business Inventories -1.1%
  Michigan Sentiment 71.9

Source: Bloomberg

While I’m sure Retail Sales will garner a great deal of interest, it remains a backward-looking data point, which is why I keep looking mostly at the weekly claims data.  In addition to this plethora of new information, we hear from six different Fed speakers, but ask yourself, what can they say that is new?  Arguably, any decision regarding the much anticipated changes in forward guidance will come from the Chairman, and otherwise, they all now believe that more stimulus is the proper prescription going forward.

Keeping everything in mind, while the dollar is not going to collapse anytime soon, that does not preclude some further weakness against select currencies.  If I were a hedger, I would be thinking about taking advantage of this dollar weakness, at least for a portion of my needs.

Good luck and say safe