Good things tend to happen when the US dollar weakens

US stocks are trading modestly higher on Monday amidst little macro news to trade on. Still, positive risk sentiment remains intact from last week amidst a more benign rate environment.

10-year US Treasury yields changed little on Monday, and as rate volatility ebbs, yields are settling in around 4.45% after briefly touching 5% only a month ago. Last week's drop in CPI inflation helped to push down rates and provide support for equities -- particularly longer-duration Tech stocks.

The clear impression is that US data is in the driver's seat, ISM misses a soft-ish jobs report, and last week's cooler CPI reading has fueled Fed pivot speculation. "Insurance cuts" in 2024 are a foregone conclusion given the Fed's apparent buy-in for the idea that a static policy rate against receding inflation would mean passive tightening.

Increasingly, though, traders are inclined to bet on outright easing from the Fed next year and putting the dollar on course for its most significant monthly drop in a year.

It's worth noting that good things tend to happen in the global economic environment when the US dollar weakens. The recent trend of a declining dollar is reminiscent of November 2022, when a discernable drop in the US Consumer Price Index (CPI) report led to lower Treasury yields and a weaker dollar, contributing to improved financial conditions and a boost for equities.

In addition to the ricochet into equities, the dollar’s November decline is bolstering Asia EM FX. MSCI’s gauge sits at its highest since February, with YTD highs just a few points away.

The weaker dollar is a relief for central banks in the region previously engaged in efforts to support their exchange rates. The current backdrop allows them to feel more at ease, and there is potential for them to advocate for a stronger currency more confidently or even cut rates to support the economy.

However, there are several caveats to consider.

Falling inflation in the US and substantial wage gains are positive for workers' real spending power and may contribute to a soft landing. However, excessive wage growth could complicate the inflation fight. The ongoing industrial action and collective bargaining in the US and Europe, generating high nominal wage settlements, might keep wage growth robust in real terms, potentially impacting policy decisions.

Additionally, there is a possibility that November's soft data in the US could be a temporary deviation, and upcoming data releases in December will provide a clearer outlook. Still, the prevailing momentum suggests a favourable environment for dollar bears and bond bulls.

Just remember, it’s all fun and games until the US economy actually crashes.

No crystal ball is any more precise than any other. It is conceivable the S&P 500 will hit 4700 by year-end 2024, assuming 2% GDP growth. However, the benchmark could climb to 5000 if growth is resilient and inflation still falls, or it could plummet to 3700 in a recession scenario.