Written by Jim Welsh
Macro Tides Monthly Report 02 July 2021
Bad Timing
For decades the Federal Reserve anticipated inflation whenever the Unemployment Rate fell to a low level. In 9 of the last 10 recessions since 1954 the Fed hiked the federal funds rate over a period of time until they went too far. The Unemployment Rate subsequently jumped as the economy entered a recession causing the Fed to slash the federal funds rate. This pattern is consistent especially with benefit of hindsight. The one exception was in 1990 when Saddam Hussein invaded Kuwait causing oil prices to spike and a brief war.
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After wage inflation failed to appear even though the Unemployment Rate fell below 4.0% in July 2018, the Federal Reserve decided to change course and not anticipate inflation and increase the federal funds rate until wage inflation appears.
At the annual Jackson Hole symposium of central banks in August 2020, Chair Powell said the Fed had formally agreed to a policy of ‘Average Inflation Targeting” (AIT). The goal of AIT is for inflation to average 2.0% over a complete business cycle. This can only be achieved if the FOMC allows inflation to move above 2.0% during the expansion phase to offset the decline below 2.0% as the economy goes into a recession.
The original mandate for the Federal Reserve when it was established in 1913 was maximum employment. In 1977 Congress established the second mandate of ‘stable prices’ after inflation soared in the 1970’s. The FOMC formally adopted the 2.0% Inflation Target in 2012 and in 2016 stated that it was equally concerned about inflation above and below its target. From the Gang that Can’t Shoot Straight all of this Forward Guidance is academic hot air. After formalizing its 2.0% target in 2021, Core PCE inflation held consistently below 2.0% other than for a brief time in 2018.
The average lifespan in the U.S. is more than 78 years which means prices will quadruple during their lifetime for the majority of Americans. (Rule of 72 means prices double in 36 years with 2.0% inflation and quadruple in 72 years). Only a member of the FOMC could consider this a success and achievement of stable prices. When Chair Powell announced Average Inflation Targeting last August, he made it a point to scare people with the following statement:
“Many find it counterintuitive that the Fed would want to push up inflation. However, inflation that is persistently too low can pose serious risks to the economy.”
This is the Fed’s go to statement in justifying their 2.0% inflation target and when FOMC members repeat it they are implying the sky might fall if inflation was below 2.0%. This is malarkey.
As noted core inflation remained below 2.0% from 2012 until February 2020 during the longest expansion in U.S history. From 1960 through 1965 Core CPI inflation stayed under 1.5% and yet GDP averaged an annual increase of 5.0%. The U.S. can use as much of this serious risk as the Fed will allow!
The FOMC’s penchant for keeping the real federal funds rate below zero percent for much of the past 20 years has pushed the valuations of stocks and real estate into bubble territory. The massive increase in asset prices has contributed to income and wealthy inequality which are serious problems. The FOMC believes that Average Inflation Targeting will address income inequality as Chair Powell noted in his Jackson Hole speech last August.
“This change reflects our appreciation for the benefits of a strong labor market, particularly for many in low and moderate income communities. This change may appear subtle, but it reflects our view that a robust job market can be sustained without causing an outbreak of inflation.”
I wouldn’t be surprised if Congress saddles the Federal Reserve with a Social Justice mandate after Powell is replaced by President Biden next February and before the 2024 election.
Unfortunately for the FOMC, the timing of their decision to implement Average Inflation Targeting couldn’t have come at a worse time. Extraordinary fiscal stimulus has created a surge in demand resulting in supply-demand imbalances, supply chain bottlenecks, and a big increase in pricing power that represent a perfect inflationary storm. Base Effects are peaking, supply chain bottlenecks will gradually ease in the next 3 to 5 months, so headline inflation will recede in coming months. Investors will conclude that Chair Powell’s assessment that the surge in inflation will be transitory is correct.
This complacency could be replaced by doubt if core inflation holds above 3.0% through the end of 2021 as expected. Eventually, doubt will be replaced by concern as investors anticipate a less accommodative Fed as job growth accelerates and the unemployment rate falls sharply in coming months. This shift in investor’s perception of what the Fed may do is likely to lead to a period of risk off, during which the majority of equity sectors decline together.
There has been a rotational correction in recent months as cyclical stocks rallied in February and March, and Mega Cap stocks fell. In recent weeks cyclical stocks have pulled back even as Mega Cap stocks rallied to new highs.
Some will interpret a broad based decline as a sign the market is in trouble. Instead it may mark the end of a corrective period as the overall market becomes oversold and sentiment becomes less optimistic. Potentially, a broad based correction could set the stage for another rally and new highs.
Demand Surge and Supply Constraints
As a percent of GDP the combination of fiscal and monetary stimulus is comparable to the 1940’s with an important difference. Fiscal spending soared as the U.S. was fighting World War II. The surge in demand didn’t occur until GI’s came home from the war found jobs, started families, and could afford modern appliances to compliment their new track home.
A surge of inflation began in early 1946 and lasted about twelve months before topping in the first quarter of 1947. It didn’t return to 1946 levels until 1949 almost three years later.
The current burst of inflation was ignited by a large increase in government spending and generous income transfers via $600 of weekly unemployment benefits and a total of $3200 for those earning less than $75,000 and Joint Filers earning less than $150,000. These funds were distributed to tax payers whether they were working or not.
As a result consumers have amassed almost $3.5 trillion in excess savings. Some of this will be used to pay off credit card charges in coming months and some will stay in savings. If just $1 trillion is spent, GDP will get a boost in the next year of 5% and the demand for services and goods will continue to be strong.
The simple mathematics of Base Effects and the use of a 12 month rate of change in calculating them will bring headline inflation down. The economy began to rebound in June 2020 so the 12 month rate of change will drop in coming months. This isn’t rocket science which is why a grasp of the math has made it easy for many investors to agree with Chair Powell. Since demand is likely to remain strong the unwinding of Base Effects may not fall as much as expected in coming months or may, after receding from the peak, plateau for a period of time.
Commodity prices have exploded and many have already begun to fall as expected in the June issue of Macro Tides. It is likely that many commodity prices will stabilize at a higher level than they were before the Pandemic. Lumber prices skyrocketed to $1700 but have since fallen to $716 but are still up 75% from January 2020. The cost of many raw materials will be higher than in early 2020 and force firms to absorb the higher costs or pass some of them along to customers.
After the financial crisis the majority of companies wouldn’t raise prices because they didn’t want to lose market share to competitors. With every company experiencing higher input costs, firms now have the cover to raise prices without the fear of losing market share since everyone is pretty much in the same boat. Manufacturers, Retailers, and companies producing Consumer Staples have more pricing power than at any time in at least 15 years.
Companies are also responding to the big increase in demand for their goods and services. In the Markit survey of firms in June, the highest percent of companies in a long time reported charging more for Services. This is significant since services comprise more than 80% of GDP versus 12% for goods.
Restaurants have increased their prices at the fastest clip since the financial crisis as they pass along the higher costs for food and labor. Consumers are flush with cash and just want to go out and enjoy themselves so they don’t mind paying a bit more.
The imbalance between demand and supply is really evident in prices for new vehicles. According to J.D. Power almost 75% of all vehicles sold in the U.S. in June were sold at or above the sticker price. This was up from 67% in May and 36% before the Pandemic. Prior to the Pandemic the average price paid was less than 84% of the Manufactures Suggested Retail Price (MSRP). In June it was up to 94% so haggling is a waste of time. If you don’t want to pay more than the sticker price, the dealership knows someone else will.
The huge surge in demand caught many businesses off balance. After cutting production as the Pandemic took hold manufactures were surprised that demand rebounded so quickly. Retailers were forced to deplete inventories to meet the initial surge in demand but now have very little in inventory.
Production must not only ramp up to satisfy higher demand but also to restock inventories. The above-average demand in the supply chain will take time to get back to normal.
During the financial crisis Supplier Delivery Times dropped modestly as orders fell at the same pace as deliveries. During the Pandemic and recovery, the mismatch between the surge in orders and the capacity to meet demand has become historically unbalanced, which is why delivery times have lengthened dramatically.
There is no quick fix to improve delivery times so the restocking of shelves will take longer than expected even after delivery times begin to improve.
A contributing factor to the longer delivery times is supply chain bottle necks at ports in the U.S. and China. In early June a Covid outbreak caused the port of Yantian in China to reduce unloading activity to 30% of normal. The busiest port in the U.S. is the Port of Los Angeles. In 2020 Yantian handled 50% more freight than the Port of Los Angeles and in the first quarter of 2021 saw its volume increase by 45% from the first quarter of 2020. At the end of June Yantian was processing containers at 70% of its capacity.
Data from Denmark-based Sea-Intelligence ApS show that in the first five months of this year, more than 400 ships on the trans-Pacific trade lanes and 140 from Asia to Europe were late by more than two weeks. That compares with 388 and 69 ships on the same routes, respectively, for the combined 8 years from 2012 to 2020. Sea-Intelligence ApS summarized the problem in a recent report:
“In the past few months, schedule reliability has been largely consistent, albeit at an extremely low level of 35%- 40%, compared to a long-term average of around 75%. It’s a crisis of excessively high demand and a severe shortage of supply of vessel space and empty containers. Any type of disruption like Yantian can create a lot of mess for an extended period so don’t be surprised if your Christmas shopping list comes out short. Capacity will stay tight into the fourth quarter and this could affect the year-end shopping season and put more pressure on freight rates.”
Daily rates from China to the U.S. West Coast are up 66% since January and more than 400% since the beginning of 2020, according to the Freightos Baltic Index. Spot rates from Asia to Northern Europe are up 92% and 480% over the same periods. Some of the higher shipping costs will be passed along to end users. More importantly, the shipping bottleneck will persist and hamper efforts to meet current demand and restock inventories.
The auto industry is the sector that has been most visibly impacted by the computer chip shortage. Ford and GM resumed production at a number of plants in May based on the expectation (hope) that the computer chip shortage would ease. In late June Ford said the chip shortage was forcing them to lower production at 6 plants including some of Ford’s most profitable truck models.
Taiwan accounts for a fifth of the world’s chip manufacturing capacity and a significant proportion of the chips used in the automotive industry. Taiwan suffered a sharp increase in Covid cases in mid May that caused some problems for semi-conductor firms. The number of Covid cases has fallen during June, but any disruption only exacerbates the computer chip shortage. The chip shortage is leading to higher prices particularly for chips used in consumer products like laptops, video games, and PCs. In the past two months prices have increased by 6% to 10% for the most popular items.
Prior to every FOMC meeting the 12 Federal Reserve districts prepare a summary of business conditions in their district, which are combined to create the Beige Book. The 18 members of the FOMC use the Beige Book as a valuable resource in framing their projections for GDP, unemployment, and inflation. References to ‘shortages’ in the 12 districts soared in the June 2021 Beige relative to the prior 12 years.
FOMC members are certainly aware of the problem. In his prepared text before the post FOMC meeting on June 16 Chair Powell acknowledged how supply chain bottlenecks have influenced FOMC members:
“Supply bottlenecks have limited how quickly production in some sectors can respond in the near term. These bottleneck effects have been larger than anticipated, and FOMC participants have revised up their projections for inflation notably for this year.”
At the December 2020 FOMC meeting only one FOMC member thought inflation risks were skewed to the upside, but in June 13 members were concerned.
Boosts to Core Inflation
Owner’s Equivalent Rent (OER) and Rent comprise more than 41% of the Core Consumer Price Index (CPI), so changes in these categories have a far greater impact on the Core CPI than any other factor. These factors are affected by home prices and apartment rents.
After plunging last year as apartment dwellers moved out of major metropolitan areas, rents have rebounded aggressively in 2021. Changes in home prices impact OER with a lag so the large increase in median home prices over the past year will gradually filter through to OER and lift the Core CPI in coming months.
On June 29 Standard & Poor’s reported that its S&P CoreLogic Case-Shiller national home price index posted a 14.6% annual gain in April and the 11th straight month of accelerating prices. The 20-City Composite posted a 14.9% annual gain, up from 13.4% a month earlier.
OER and Rents just turned up from their lows, so the Core CPI will continue to rise as the Housing contribution increases in the next year. The Case-Schiller Home Price Index is shifted 14 months forward to adjust for the time lag between OER, Rents, and home prices.
Home prices are not likely to drop in coming months and may continue to move up. As has been the case for more than a year the inventory of homes for sale is still down 20.6% from last year. The supply of homes isn’t going to increase enough to pressure home prices.
Demand isn’t likely to wane materially, although it is unlikely that home buyers will continue to pay more than the list price. In April of this year 44.3% of buyers were eager enough to pay more than the asking price, up from 27.2% in 2020. According to Redfin in mid May the percent of homes sold above the List Price increased to more than 50%. The longer home prices keep climbing the more catch up OER and Rents will make.
Tight Labor Market Will Persist
Job growth has underwhelmed in recent months for a number of reasons. The Labor Department uses seasonal adjustments to smooth out annual fluctuations. In most of the country construction jobs disappear in the dead of winter and zoom higher during the spring and summer. Retailers hire hoards of workers in the fourth quarter for the holiday stampede and then let most of those workers go in the first quarter. There are solid reasons to employ seasonal adjustments.
However, when there are large changes in the labor market particularly around the onset of a recession or coming out of a recession, the Labor Department’s seasonal adjustment process struggles. The variation in job growth since the beginning of the Pandemic has been extreme, which has posed a problem and has likely resulted in a smaller reported increase in jobs than is probably occurring in the economy.
The closure of elementary schools during the Pandemic and the staggered reopening has meant many women with young children have not returned to the labor market. If schools are able to reopen in September, women will look for a job. This cohort will remain on the sidelines during the summer which will weigh on job growth until schools reopen in September.
The total number of workers in February 2020 was 152.5 million, plunged to 130.1 million in April 2020, and rebounded to 145.7 million in June. The shortfall of 6.8 million jobs understates the loss of jobs since it doesn’t include the growth in jobs had the pre-Pandemic trend of 2.0% growth continued. The adjusted shortfall is 9.8 million (155.5 million – 145.7 million). In response to the Pandemic the number of Baby Boomers who retired jumped from 18.5% of the labor market to 19.5%. The 1% increase equates to about 1.5 million of the total 152.5 million jobs in February 2020.
Some of these retired workers may over time reenter the labor force but most won’t. The available supply of labor has thus shrunk by 1.5 million, which represents 22.0% of 6.8 million job shortfall and 15.3% of the adjusted labor market deficit. This suggests that the labor market will remain tight well into 2022 and put upward pressure on wages.
Employers have struggled to find workers and have turned to teenagers to fill openings. The Unemployment rate for 16 to 19 year olds fell to 9.6% in May and lowest rate since May 1953.
Employers have found that young workers don’t have to stay home with elementary age school kids, nor are they receiving unemployment benefits. This is another hint that unemployment benefits that pay workers more not working is succeeding in keeping them out of the labor market.
Higher Wages Will Lift Core Inflation
The full impact of extended unemployment benefits on job growth won’t be known until after September when 70.6% of those receiving benefits are terminated.
There should be some indication of how much benefits have retarded job growth when the July jobs report is released on August 6, after 23.4% of benefits were stopped in June. Job growth will be weaker in the next few months due to Mothers staying home with their children, several million workers continuing to collect unemployment benefits, and more than 1 million retired workers look on from the sideline.
All of these factors will put upward pressure on wages, and more companies will resort to paying a bonus to lure people to work for them. In June 20% of job postings on Zip Recruiter offered a signing bonus up from 2% in March. Hiring bonuses of $500 are common with some firms offering $1,000 or more.
In the last 30 years there has been a good correlation between the Employment Cost Index (ECI) and changes in the federal funds rate. The ECI measures changes in the cost of compensation not only for wages and salaries, but also for an extensive list of benefits. This makes the ECI a better indicator of labor costs than Average Hourly Earnings.
As the unemployment rate fell during a business expansion the ECI increased. This prompted the Federal Reserve to increase the federal funds rate to slow the economy and lower pressure on wages.
The FOMC has charted a new course and won’t respond to the huge gap between the ECI and the federal funds rate. If the ECI holds up in coming months as seems likely, Core inflation will be dragged higher, and financial markets will take notice.
More Inflation as Output Gap Closes
Excess capacity in the economy increases during a recession as demand falls and narrows as the economy begins to grow. As an expansion progresses the amount of slack in production capacity and the labor market narrows and eventually closes. The FOMC has decided to ignore a low unemployment rate and will instead wait for inflation to materialize. The FOMC believes higher wages will help lower income workers and is worth the risk of a broader wave of inflation. Chair Powell has assured investors that the Fed has the tools to deal with higher inflation if they are wrong.
The Output Gap could turn positive before the end of 2021 and begin to put more pressure on goods and services. In the past the Output Gap turned positive as the Unemployment rate fell to a low level prompting the Fed to increase the federal funds rate. The economy would begin to slow and the Output Gap reversed lower prior to every recession since 1960.
By waiting for the unemployment rate to fall below 4.0% before thinking about raising the funds rate, the Output Gap will also be allowed to become progressively more positive. The net result is that core inflation will get a boost as companies raise prices.
There is no social redeeming value to Output Gap inflation!
Headline inflation will trend lower in coming months as Base Effects unwind and investors conclude that Chair Powell’s assessment that the surge in inflation will be transitory is correct.
If core inflation (excluding food and energy) holds above 3.0% through the end of 2021 as expected, investors may wonder if inflation will prove more of a problem and force the FOMC to react sooner than currently expected.
The Taper is Coming
The majority of members on the FOMC will resist announcing the timing of tapering until they see more job growth and a lower unemployment rate. But there are a number of Fed presidents that are concerned about the $40 billion a month in Mortgage Backed Securities (MBS) given the record surge in home prices. Dallas Fed president Robert Kaplan has stated that unintended side effects from the Fed’s MBS purchases may be offsetting the benefits:
“These mortgage purchases for example might be having some unintended consequences and side effects. Sooner rather than later I think it would be wise to start talking about moderating some of these purchases that we put in place during the crisis.”
Boston Fed president Eric Rosengren has concerns that the purchases may be creating a boom that could lead to instability:
“The last thing we want to do is to try to get to full employment, and then unintentionally cause a boom and bust of the housing sector that prevents us from getting to full employment or staying at full employment.”
It must be noted that Kaplan and Rosengren are not voting members in 2021, although they certainly offer their views at FOMC meetings.
There are 12 members of the FOMC who are voting members of the FOMC which includes the 7 members of the Board of Governors and the New York district Fed president. The remaining 4 voters are rotated out of the 11 other district Fed presidents. Barclays has provided its assessment of the voting bias of each member based on prior votes.
Those on the left have usually favored a more accommodative policy, while those on the right have tended to support less accommodation. There is currently 1 vacancy on the Board so the total number of votes is 11 and not 12. Of the 11 current voting members, there are 7 favor accommodation and only 4 who lean toward less accommodation. In 2022 the bias of voters will change with there being 6 favoring less accommodation and 5 tilting for more accommodation. If Jay Powell isn’t reappointed next February, it is certain President Biden won’t nominate anyone who favors less accommodation than Powell.
As they say, ‘You can’t tell the players without a score card.’ Printing this schism out as a reference would be helpful in matching speeches of FOMC members and their voting bias. When those favoring more accommodation start talking about tapering, you can be confident that an announcement regarding the timing of the tapering program is imminent.
At last year’s Jackson Hole symposium Chair Powell announced the FOMC had adopted Average Inflation Targeting, so an announcement regarding the timing of tapering would not be a surprise. The key is whether the FOMC uses its July 28 meeting and speeches in July and early August to prepare markets for the ‘taper’.
Treasury Yields
The financial markets want to believe (and do believe) Chair Powell is right and that inflation will prove transitory. Since 1985 the 10-year Treasury yield has hovered above and below the yearover-year change in the Core CPI, which was 3.8% in May. The spread between the 10-year Treasury yield (1.44%) and Core CPI is fairly wide, which increases the risk that the Treasury bond market has mispriced the inflation risk. The majority of market participants believe markets discount the future which means the Treasury market is ‘telling’ them that inflation will be transitory.
This circular logic passes for analysis and market wisdom on Wall Street. In 1981 the Treasury yield was above 15.0%, so the market was saying that inflation would continue to be a big problem. The 10-year Treasury yield subsequently fell from 15.0% to 0.50% in 2020. OOPS! In November 2018 the 10- year yield rose to 3.25% right before it dropped to 1.43% in August 2019. At turning points the markets are always wrong. For most Wall Streeter’s this reality check amounts to heresy. What this means though is that Treasury yields could jump if core inflation proves less than transitory which seems likely.
The correlation between the Breakeven Inflation Rate and the real 10-year Treasury yield has been good.
The correlation was very weak though in 2012 and early 2013 when the spread widened considerably. The Taper Tantrum in May 2013 quickly closed the gap and restored the relationship. With faith in Powell so high the markets could be jolted in coming months.
In the April 5 Weekly Technical Review I discussed why Treasury yields would likely decline in coming months. This outlook clashed with Wall Street’s expectation that the 10-year Treasury yield would soon assault 2.0%.
“After Treasury bonds experienced the largest decline in a single quarter, sentiment is even more negative according to the weekly survey by Consensus. In the last decade sentiment has only become this negative on four other occasions. This suggests that 15 15 Treasury bond yields could fall for a period before the rising trend reasserts itself. The Treasury market generated an inter market divergence last week as the 10-year yield rose to a higher high (1.765% versus 1.754%), while the 30-year Treasury yield held well below its prior high (2.448% versus 2.505%). This type of inter market divergence often occurs near trend reversals, even if it is short term in nature. In this instance the 10-year could fall to 1.50% as the 30-year drops to 2.25% at a minimum. TLT has the potential to rally to $143.00. Once this decline in yields runs its course, Treasury yields are expected to rise to higher highs in the second half of 2021.”
The yield pattern in the 10-year Treasury yield indicated that the high in March at 1.765% was wave 3 off the March 2020 low. The expected decline in yields would represent wave 4 which has occurred as expected. The yield pattern suggests the wave 4 decline in the 10-year yield is nearing an end and will be followed by an increase to 1.90% to 1.97% in coming months for wave 5. In July 2012 the 10-year yield bottomed at 1.39% and recorded a lower low of 1.33% in July 2016. If the outlook for higher yields is correct, the 10-year shouldn’t close below 1.30%.
Last summer the Treasury Department sold a lot of Treasury bonds and by early September had amassed a balance of $1.8 trillion at the Fed. The Treasury Department built this balance up in anticipation that Congress would pass another stimulus package in August. Congress didn’t pass the stimulus bill until mid December, so the Treasury’s balance with the Fed was $1.6 trillion at the beginning of 2021. As the Treasury began to distribute money as prescribed in the December bill, the balance fell and the decline accelerated after Congress passed an even larger stimulus bill in March. The huge balance at the Fed allowed the Treasury to trim the amount of bonds and bills auctioned.
The Federal Reserve continued its monthly purchases of Treasury paper at $80 billion since March 2020. As a proportion of Treasury issuance the amount of Fed purchases was far less last summer than it has been in recent months as issuance declined. By the end of May the Fed’s monthly purchases covered all of the issuance.
This has likely played a role in lowering Treasury yields since the yield peaks in March. In the next few months the Treasury’s balance at the Fed will be down to where it was before the Pandemic. This will necessitate an increase in issuance. As issuance exceeds the amount of Fed purchases, the tailwind Treasury yields have had in the last few months will be replaced by a headwind, which reinforces the expectation of higher yields in the second half of 2021.
Dollar
The Dollar was expected to make an important low as the Federal Reserve moved toward a less accommodative policy and the U.S. economy experienced solid growth. There has been an increase in chatter that the Dollar was on the verge of losing its status as the world’s reserve currency. As proof, Dollar bears point to the increase in the Fed’s balance sheet, record setting trade deficit, negative real interest rates, and the trend in the Dollar since it topped in March 2020. All of these are reasonable and may contribute to the Dollar losing its reserve status at some point, but that’s not going to happen anytime soon.
The negative sentiment did cause short positions in the Dollar and long positions in other currencies to become quite large. The negative positioning in the Dollar became more extreme in June 2020 than in February 2018, which coincided with a significant trading low in the Dollar. (See Dollar chart below.) After bottoming at 88.25 in February 2018, the Dollar quickly rallied to 96.70 by December 2018, and subsequently up to 102.99 in March 2020.
The Dollar jumped on June 16 after the FOMC meeting, a shift in the Dot Plot, and Powell’s comments. Investors realized that tapering was coming and potentially a rate hike before the end of 2022, which seems a reach. No one including members of the FOMC have a clue as to when they will support the first rate hike, but perception matters. The spurt in the Dollar was certainly given a boost from short covering.
The price pattern in the Dollar suggested that a low in the Dollar would complete the correction that began after the Dollar topped in January 2017. This was discussed repeatedly in the Weekly Technical Review in May and early June. This excerpt is from the June 7 WTR.
“The expectation is that the Dollar will fall below its January 4 low of 89.21 to complete wave 5. The big news is that the coming low may be the end of the correction that began after the Dollar peaked in January 2017 at 103.82. Wave A of the correction lasted from January 2017 until the Dollar bottomed at 88.25 in February 2018. Wave B of the correction carried the Dollar up to its high in March 2020, with Wave C now near completion. The price pattern suggests the Dollar has the potential to rally above 100.00 in the next 12 months.”
Although the Dollar didn’t fall below 89.21 (actual low was 89.53), the strength of the rally in the last two weeks suggests the low is in place. In coming months the Dollar is expected to test the September high of 94.74 an ultimately could test the March 2020 high of 102.99 by the end of 2022. A rally of this magnitude would become a headwind for U.S. equities in 2022 and a bigger negative for Emerging Market equities.
Related Links
https://www.cnbc.com/2020/08/27/powell-announces-new-fed-approach-to-inflation-thatcould-keep-rates-lower-for-longer.html
https://www.wsj.com/articles/tight-capacity-on-shipping-lines-brings-record-rates-delays11625058004
https://www.wsj.com/articles/general-mills-warns-of-inflation-readies-for-shifting-consumerbehavior-11625066446
https://www.wsj.com/articles/chip-shortages-are-starting-to-hit-consumers-higher-prices-arelikely-11624276801
https://www.wsj.com/articles/ford-to-close-or-curb-output-at-some-plants-because-of-chipshortage-11625068975
https://finance.yahoo.com/news/case-shiller-home-price-april-2021-130003824.html
https://www.cnbc.com/2021/05/27/feds-kaplan-cites-real-estate-excesses-as-onereason-to-start-tapering-purchases.html
https://finance.yahoo.com/news/boston-feds-rosengren-hot-housing-market-could-threatenlabor-market-recovery-161209658.html
I hope you and your family have a great 4th of July.
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