Morning Bid: Dollar Bills and Dollar Bulls

Jan 9, 2014 13:58 UTC

The dollar’s performance hasn’t been anything to write home about in the last few years. It has weakened against major currencies like the euro and the Swiss franc, and been held back by lower interest rates thanks to the Federal Reserve’s triple-dose of quantitative easing, but there’s been a turn of late, though it’s too early to say whether it will have lasting power.

In 2013, the dollar was at least better than the yen, amassing a 35 percent move against the Japanese currency, which countered the Fed’s QE with Abenomics and a massive monetary dose of its own.

Now in 2014, the U.S. dollar index – measuring the dollar against six currencies, including the euro, yen, and pound – has reached a six-week high, and those expecting a steady move higher in interest rates wouldn’t be out of line to expect the dollar to appreciate, along with bond yields. It didn’t happen in 2013, which is sort of counterintuitive – higher rates would seem to be a boon for the buck, but the volatility exhibited in the Treasury market was too much for the dollar types.

That’s probably not going to be the case this year, according to Jens Nordvig, strategist at Nomura. He notes that if volatility is relatively low as rates go up, that’ll support dollar appreciation against the big currencies, other than yen. His firm is also going short the euro against the Mexican peso, with the latter benefiting from U.S. growth and the former still struggling.

Flows into the U.S. from overseas have been strengthening, which helps the dollar story, and it wouldn’t be surprising to see additional strength in the greenback if jobs figures are better than anticipated, as suggested by the ADP figures (even though they come with their own problems).

The dollar’s gains come at a time when long dollar bets have fallen to their lowest levels since November, perhaps out of concern the recent run has been fueled by too much optimism.
Speculators are net short in the yen, Aussie, and Canadian dollar, but they’re still long the euro, pound, Swiss franc, peso and the New Zealand dollar (known as the kiwi, or the “Peter Jackson,” if you’re into Tolkien).

The jobs data could force more of those positions in the direction of the U.S. currency. Oddly, the steady rise in U.S. rates wasn’t much of a catalyst for the dollar in the mid-1990s, and it was only later that the dollar picked up, Morgan Stanley researchers noted in a recent report.

While various emerging markets aren’t the disasters they were in the 1990s, the private sector depends a lot on dollar funding. And if borrowing costs are rising and growth isn’t quite what it was, those flows aren’t going to be robust as in the past – particularly with the Fed cutting its massive stimulus. Taken in total, it bodes well for the buck, but only if there’s an ongoing sense of improvement, which will be something to watch for on Friday.

RETAILERS, DISCOUNTS AND DEMAND
The last of the same-store sales figures, meanwhile, are coming out, including the likes of Costco, The Gap and L Brands, and all of the good cheer reported at this higher level (better consumer spending and hiring trends, more positive sentiment) seems to have eluded the retailers. Indeed, they mostly say things stink, either because of surprises in the calendar, cold weather (and it’s been damned cold, so we’ll let that one go), and lots of promotions that promise almost everything just to lure people into the store.

Consumer discretionary shares were among the best performers in the S&P 500 last year, but repeating that trick won’t be easy. L Brand cut its earnings forecast for the holiday quarter after its lousy numbers, and Family Dollar and Zumiez also cut estimates in response to their weak showing.  One thing we’re sure of – few are going the JC Penney route, in tersely saying that the company is “pleased with its performance for the holiday period, showing continued progress in its turnaround efforts,” without offering, y’know, any numbers or anything.

Morning Bid — The Minutiae of the Minutes

Jan 8, 2014 13:52 UTC

December’s last salvo before going into holiday mode was the surprise Federal Reserve decision to trim its monthly $85 billion in bond buying to a more modest (but still enormous) $75 billion, that helped balloon its balance sheet to north of $4 trillion.

Suffice to say, on some levels, there was a bit of a disconnect here: The Fed’s inflation outlook showed inflation not getting back to its 2 percent target for a long time (like, forever; several years out, it was seen as just sneaking its way over 2 percent, never mind what Charles Plosser of Philly says).

With the Fed’s minutes due out later Wednesday, there are a number of unanswered questions about the Fed’s decision as Ben Bernanke exits and Janet Yellen (confirmed on a 56-26 vote, with “OMG IT’S COLD” coming in third place with 18 votes) enters the scene:

THE SCHEDULE OF REDUCING STIMULUS
There’s been no guidance on this so far. Ben Bernanke, in his final press conference as the Fed head, said he could envision a steady reduction in $10 billion increments at each meeting, which would drop the monthly buying to nothing by the end of 2014. Richard Fisher, Dallas Fed head and now a voting member for 2014, said he would be comfortable with a more accelerated rate of purchases. And dovish John Williams of San Francisco said yesterday he’d expect to see the end of buying by year-end.

So it will be interesting to see any commentary on this – whether a faster pace was considered or not. (There will probably be some boilerplate on the Fed saying it could ‘reduce at a faster pace’ or ‘resume additional purchases’ or something. Just as a warning.)

But the October minutes provide some clues, as the Fed said some participants “mentioned that it might be preferable to adopt an even simpler plan and announce a total size of remaining purchases or a timetable for winding down the program. A calendar-based step-down would run counter to the data-dependent, state-contingent nature of the current asset purchase program, but it would be easier to communicate.”

ECONOMIC EXPECTATIONS
Recent inventory figures, construction data and durable goods orders point to better-than-expected figures for the fourth quarter, and a first quarter where the economy gains momentum. The baseline projection for GDP growth in the fourth quarter has been for around 2.5 percent, but it could be higher thanks to a boost in exports.

The Fed sees 2014 GDP growth of 2.8 to 3.2 percent, which may end up being optimistic, while they see inflation as not much of a threat.
Yellen, in the past, has been more explicit about the idea of living with additional inflation, if needed, to help reduce unemployment, so there’s that. Again, that central tendency only ticks up to 2 percent in 2015 and 2016, and that’s the just the upper end of the Fed’s forecasts.

THE CONSUMER OUTLOOK
October’s minutes sounded a note of caution when it came to regular people, saying that “consumer sentiment remained unusually low, posing a downside risk to the forecast, and uncertainty surrounding prospective fiscal deliberations could weigh further on consumer confidence.“

Said fiscal shenanigans have receded for the time being (give it a day or so), which has removed a layer of uncertainty, though it’s debatable that consumers make decisions based on what’s happening in Washington to begin with. But a weak September payrolls figure and a few limp sentiment surveys put the Fed in a mind to be more concerned, and later economic figures don’t show a similar kind of worry.

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