Sleeping On The Job

Sleeping on the job.  Stocks experienced more turbulence in yesterday’s session as lawmakers failed, once again, to advance a much-needed fiscal stimulus package.  An early session rally was extinguished by mounting anxiety over fiscal policy and a reminder that a vaccine may not come as fast as hoped.




Money, money, money.  Unless you are an avid international traveler, you probably do not think much of exchange rates.  I write about it from time to time and you have probably heard it on the news, but largely ignored it.  The reason why many investors don’t pay attention to exchange rates is because it is obscure and it is unclear how they might affect everybody’s favorite topic: the stock market.  Back in 2018,  the US economy was expanding, consumer confidence was high, unemployment was low, stocks were rising, and corporate earnings were growing.  All in the wake of the 2017 tax package which provided a boost to the long-in-the-tooth economic expansion.  The Eurozone was not experiencing the same boom and was struggling with negative rates and debt crises with some of its members.  China, too was experiencing an economic slowdown, which for them meant slower growth than it had experienced in the prior years. During that time, the US was essentially the strongest economy compared to its major trading partners.  All of this led to a strengthening of the US Dollar. Higher interest rates in the US lured foreign investors who must convert their local currency to US Dollars, thus driving up the currency’s value.  You may also recall that inflation was relatively low for a long period of time, despite the Fed’s efforts to hit a 2% target.  Low inflation makes a currency stronger as it is expected to retain its purchasing power.  In contrast, high inflation means that a dollar will buy less in the future, causing the dollar to weaken.  So, the economic conditions in the US relative to its trading partners caused the dollar to strengthen in 2018.  You might also recall the President often bristling that the dollar was too strong.  “Wait, what?” you are thinking, “Why would the President want a weak dollar?” The most obvious reason is that a weaker currency means that foreign buyers can afford to buy more American-originated products.  That would cause the trade deficit to shrink which would, in turn, increase the GDP. Further, US products that become cheaper to foreign buyers also means an increase in sales for US companies, which is good for the stock market.  It is kind-of counter intuitive that a weak currency is good for the economy and the stock market but, at a high level, that inverse relationship exists. So if we want to add juice to the economy and the stock markets, how do we weaken our currency? Well, if you have been paying attention, you might think that the easiest first step is lower interest rates so that sovereign bonds are less desirable.  That is the job of the Fed, and they were actually raising interest rates during 2018… and the President made it clear that he didn’t like it.  He wanted lower rates hoping that they would spur growth, cause inflation, and weaken the dollar. But the dollar remained strong throughout 2019.  The US-China trade war, BREXIT, and a further-weakening EU economy left the US the strongest relative economy.  Though the Fed lowered interest rates in 2019 to offset trade-related headwinds, the move was not enough to weaken the dollar.  Then came the pandemic earlier this year.  In fact, today is the 6-month mark of COVID being declared a pandemic.  At first China, Japan, and Korea were hit with economic affects, followed by several EU members.  Initially, the US dollar became a safe haven, but soon the affects of the pandemic hit the US economy.  Today, the Chinese economy is on the road to recovery and many EU members have the virus somewhat contained allowing their economies to recover.  The US recovery is occurring, but slowly.  The Fed has not only lowered rates to zero, but they have pledged to keep them there for some time.  Yields are extremely low making dollar-denominated debt less desirable. Further the Fed just recently announced that they would allow inflation to exceed their previous 2% target.  Weaker US economy + increased deficit + inflation + low interest rates = (you guessed it) a weaker dollar.  The President may have gotten what he wished for.   Hopefully the sales increases and export growth will follow, which were his ultimate goals.  We could certainly use that on the road to recovery.  Check out Chart 13 in my attached Daily Chartbook to see the Dollar Index, which shows the Dollar relative to a basket of the US trading partner currencies.




Stocks rallied earlier in the day in response to a weakening of the dollar but ultimately sold off in response to the Senate’s failing to pass a skinny stimulus bill.  Even though the bill was not expected to pass, its failure was a reminder that there may not be a package passed any time soon.  The S&P500 sold off by -1.76, the Dow Jones Industrial Average fell by -1.45%, the Russell 2000 slid by -1.23%, and the Nasdaq Composite Index gave up -1.99%. Bonds traded up and 10-year treasury yields fell by -3 basis points to 0.67%.




– CPI Excluding Food and Energy (Aug) may have grown by +0.2%, slower than the prior month’s +0.6% growth.

– Baker Hughes Rig Count (Sept 11) is expected to have fallen slightly from 256 to 254.75. Traders will watch this closely as recent numbers suggest a buildup in crude inventories.

– Next week we will get some housing numbers, Retail Sales, some regional Fed reports, and University of Michigan Sentiment.  Most importantly, the Fed will release its policy statement and hold a press conference on Wednesday, which will be closely watched.  Check back on Monday for calendars and details.



daily chartbook 2020-09-11


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