The deceleration in backward looking inflation signals continues, to little surprise.
We have been managing a Goldilocks macro (inflation not too hot, not too cold) and that is where we still are. So with bond yields under pressure, the macro signaling is not inflationary at this snapshot in time. The markets are not surprisingly celebrating and that will probably include the Goldilocks stuff.
But what of the inflation stuff? The inflation trades? Well, our theory has been that they are also anti-USD and with the implication of reduced pressure on the Fed to hawk, the removal of an important USD underpinning is in play, again, assuming that this snapshot in time continues the disinflationary trend.
We have been planning for a potential bounce, possibly a big one, in the inflation trades (commodities, EM, etc. along with the precious metals putting on their anti-USD suit) and just as a strong USD somewhat counterintuitively correlated to rising inflation fears in 2021 and 2022, a weak one would correlate with declining inflation fears in 2023, with the assumption of a softening Fed.
The bottom line is that I see little reason now to abandon the SPX 4800 (with a possible throw over to a new all time high) target as our former Q4, 2022 to Q1, 2023 timeline officially stretches into H2, 2023. The USD has dropped right to the support area that would decide whether a much larger decline is possible. All Uncle Buck has going for him now would be if the machines pull an improbable contrary rug pull against the happy macro data and casino patrons seek out liquidity on a mass scale. At this snapshot in time, that does not seem likely.
If the buck breaks down here (breaks the neckline support of the weekly chart we review in NFTRH), recall that it could drop all the way to the 93s within the context of an ongoing bull market. In other words, it is possible there could be a hell of a stock and commodity rally before the buck bottoms and wrecks the world some many months out in the future. Okay, I am using hyperbole there, but the dollar is not nearly dead, although it could get very sick in the interim. Let’s watch 101 (+/-) area support.
Gary, IF the $USD breaks down, which currencies do you think will rise?
Hi Dagny, I am far from a FOREX guy, but not to sound overly obvious, I’d say most of them. CHF would probably be my favorite. It’s dinging a new high today.