Tags: Fed | dollar | stocks | taper

What's Good for the Dollar Isn't Necessarily Good for US Stocks

Tuesday, 05 August 2014 02:06 PM Current | Bio | Archive

The first estimate for the U.S. GDP growth rate for the second quarter came in at a much-better-than-expected 4 percent year-over-year, after having decreased by 2.1 percent during the first quarter. The first revision for the second quarter will be reported on Aug. 28 and could come in somewhat lower.

The Conference Board Employment Trends Index (ETI) came in at 120.31, which represents a 6.6 percent gain compared with where the ETI stood a year ago and the strongest we've seen in more than two years. This suggests solid job growth is likely to continue while the economic activity pickup will likely increase employers' need and willingness to accelerate hiring.

In short, that could mean the International Monetary Fund (IMF)'s "Economic Outlook Projections" for the United States is probably prone to be revised upward from the actual estimated 1.7 percent growth rate in 2014.

Additionally, the quarterly Federal Reserve "Senior Loan Officer Opinion Survey on Bank Lending Practices" shows a broad-based pickup in loan demand, as U.S. banks continue to ease their lending standards and terms for a growing range of loan types and categories, but that are overall still far from full potential. For example, while standards on most types of commercial real estate have continued to be eased, there has been little change in standards and terms for loans to households other than for prime residential real estate. So, a diminishing but still "partial" risk off in bank lending practices is still on, although it's improving but not enough to get the housing market's recovery definitively underway. I mention this survey, which is under "normal" circumstances not really of such importance, because the final path of the Fed's quantitative policy seems now definitively having been mapped out.

In the latest Federal Open Market Committee (FOMC) policy statement, the following couple of sentences caught my attention: "Labor market conditions improved, with the unemployment rate declining further. . . . Inflation has moved somewhat closer to the Committee's longer-run objective."

The statement came in about the same time that the Conference Board Consumer Confidence Index improved in July, to 90.9 from 86.4 in June, while the Present Situation Index increased to 88.3 from 86.3 and the Expectations Index rose to 92.7 from 86.4 in June. In one sentence: "It was all positive!"

All this is important because I don't think it's an overstatement to say that during the next FOMC meeting, which is to be held Sept. 16 and 17, we can expect considerable debate to take place within the committee about keeping the "low interest rate forever" message as we'll be practically at the endpoint of the tapering process. I want to recall here that only a few days ago, Philadelphia Federal Reserve President Charles Plosser (known as an inflation hawk and the only dissenter at the last FOMC's meeting vote) stated that the intention to keep rates low for a considerable time after the Fed stopped buying assets did not reflect "considerable economic progress."

By the way, the FOMC September statement will also include an extension of the so-called "dots" into 2017, which will provide us with important insights into the longer-term thinking on where the Fed Funds rate could go once the tightening process begins by showing the FOMC participants' assessments of the appropriate timing of monetary policy firming.

In the meantime, the Kansas Fed's annual Jackson Hole, Wyo., economic policy symposium will take place Aug. 28 through Aug. 30. This year's main topic is "Re-Evaluating Labor Market Dynamics," which will undoubtedly give Fed Chair Janet Yellen plenty of opportunity to make her case about labor market slack.

Yes, we could say the fuse on monetary tightening that was first lit on the announcement of tapering in May of last year is at long last nearing its target, which should, at least in my opinion, translate into a higher dollar thanks partly to higher U.S. bond yields, which will certainly be welcomed by long-term investors who have an important share in dollar-denominated assets, but also by the European Central Bank as well as the EU business community.

Please take care, this will not be the case for all those investors who have bought "un-hedged" euro-denominated debt.

Also emerging market investors who have continuously shown too much complacency as of late certainly have overlooked the fact that at some point the dollar might rise to a point they do have to care about the strength of the dollar and then, reassurances from the Fed that policy tightening will proceed in a "measured" fashion (if the markets allow it) would count for very little.

Also keep in mind what is good for the dollar is not necessarily good for U.S. stocks.

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The first estimate for the U.S. GDP growth rate for the second quarter came in at a much-better-than-expected 4 percent year-over-year, after having decreased by 2.1 percent during the first quarter.
Fed, dollar, stocks, taper
Tuesday, 05 August 2014 02:06 PM
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