Millennial Macro

Earlier this year, the USD broke its downtrend to the upside which was confirmed when it closed at a new six month high on a daily basis.  As has been the case since the beginning of the 2000s , periods of dollar strength have tended to coincide with weakness and volatility in risk-assets along with rising credit spreads.  Thus far, 2018 has followed this pattern albeit much more violently in emerging markets.  Given the above, the purpose of this post is to highlight critical support and resistance areas in specific currency pairs that have exhibited clear risk-on and risk-off behaviors as a way to understand whether or not this phase of dollar strength is likely to continue or dissipate.  To be clear, the USD is still very much in an uptrend within a multi-year sideways consolidation.  Risks remain elevated until the greenback breaks down.         As the chart shows, UUP- US Dollar Index Bullish Fund has rallied since the end of...

October's global sell-off in risk assets served as a warning that the dollar's 2018 uptrend is still a headwind that is dampening risk appetite.  This combination of dollar strength and global equity market weakness returned in late January of this year after a one year reprieve following the greenback's 2017 top.  This strongly suggests that future global equity market returns are likely to be lackluster until the dollar's current move higher ends.  Please see,  Keep your eye on the dollar as an indicator of risk sentiment , for a long-term analysis of this relationship.  As for this month's post, the focus will be squarely on this ongoing bout of USD appreciation and what its subsequent direction could mean going forward for US & global equities, credit markets, Oil, inflation expectations, and US monetary policy.

The purpose of the following post is to pull back the lens to better think about the possible secular set ups for US equity indices, US government bond yields, & nominal GDP.  By taking the big picture into view and ignoring the daily noise, the hope is that we can more accurately contextualize the present shorter term trends.  Keep in mind, the analysis of the big picture is used to help determine whether or not the present is a good risk taking environment and shouldn't be used for short term positioning.   Long term charts for US equity indices support a continued bias toward risk-taking. The chart above applies a standard 50 period relative strength index (RSI) on the quarterly price of the DJIA along with major trendlines to identify secular trend changes. The three green arrows on the chart mark a time when price first made a new multi-decade high after the RSI 50 quarterly moving average began sloping upwards.  By combining a new decade hi...

The February 2018 post,  Keep your eye on the dollar as an indicator of risk sentiment , warned that the greenback's path should be closely monitored given that it has been a key determinant of returns on risk assets for nearly 20 years.  This has particularly been the case for foreign securities and currencies.  The USD has since gone on to make a six month high in May for the first time following its 2017 top.  Predictably, doom and gloom concerning the prospects for risk assets, currencies, and growth outside of the US has ensued.  This facet was touched upon in the subsequent May post The Bull & Bear Case for Risk Assets. As for foreign currencies and assets, both will very likely underperform their US counterparts until the USD begins to weaken materially.  Whether the USD's rise is the cause, effect, or a symptom of potential troubles in the rest of the world, market participants have a tendency to bid down the currencies, eq...

China, the European Union and others have been manipulating their currencies and interest rates lower, while the U.S. is raising rates while the dollars gets stronger and stronger with each passing day - taking away our big competitive edge. As usual, not a level playing field... — Donald J. Trump (@realDonaldTrump) July 20, 2018 Is Donald Trump justified in his complaints concerning the path for policy rates in the United States?  Yes and no.  Are Donald Trump's comments an accurate and fair reflection of what is going on in the foreign exchange markets?  In the humble opinion of this blog, no they are not. Before even trying to explore such questions, it is important to acknowledge the current trends. The Fed Funds rate has moved from under .15% before the first Fed rate hike in December 2015 to 1.91% which is within the Fed's range of 1.75% & 2%. During this time the two year treasury rate rose from .91% to roughly 2.67% at present. Following the July ...

After a year of very little volatility in 2017, the first half of 2018 has been far less easy to navigate.  With that in mind, the following seeks to outline the bull and bear case for the remainder of the year.  The points listed below represent signs that one would expect to see when the financial markets finally break one way or the other.  Bull Case: Long term treasury yields continue to climb signaling improving expected nominal growth (rising inflation and aggregate output). US equity markets end this period of consolidation following the Q1 intermediate price peak by making new all-time highs as investors price in improving future earnings.  This would confirm the ongoing strengthening in aggregate nominal growth. High yield credit spreads remain narrow which show little indication of distress in debt markets.  This again is consistent with a stable economic and financial backdrop. The USD weakens after eventually hitting resistance....

After the end of a volatile and tumultuous Q1 2018 for risk assets, this felt like an opportune time to recall the last risk-off period that started midway through 2014 and ended in Q1 2016.  The purpose of doing so is in large part to determine whether today's financial and economic backdrop is similar to that one.  Although the 2014-2016 volatility in US equities did not result in a major cyclical disruption, financial market price trends suggested that the US and global economy had come perilously close to a possible downturn. 1.)  Nominal GDP growth topped out in Q3 2014. In Q3 2014, nominal GDP (total domestic spending) growth hit a high of 5.2% before sliding to as low as 2.45% in Q2 2016. Unlike that two year period, nominal GDP is currently experiencing an upswing with the latest Q4 reading coming in at 4.49%.  In fact, aggregate domestic demand growth has reaccelerated after a temporary dip in Q2 2017. Importantly, during much of 2014-2015 the Fed ...