The dollar is beset by conflicting viewpoints

Outlook: An impressive bit of new data is that Covid/Omicron is starting to cause port delays in NY/NJ, which had so far escaped the blockages on the West coast—it’s a labor shortage. In addition, Bloomberg reports beef output last week fell 5.3% y/y and wholesale prices climbed by 1.3%, the most since August, due to slowdowns from Covid at meat-packers, “at the center of outbreaks during Covid-19’s initial spread in 2020. While meatpackers have so far have avoided similar closures with omicron, food inflation is rampant and slowing output will only exacerbate increasing prices.”

If we generalize from a small sample, we have to revise both our recovery and inflation forecasts.

Sure enough, a World Economic Forum member survey shows only 1 in 10 see growth still accelerating in three years. Three years is probably too many, but still, pessimism rules and you have to wonder why it is not having an effect on central bank tightening forecasts.

Poor Mr. Powell faces the Senate Banking Committee today and while the subject is his re-nomination as Fed chairman, he will get peppered with questions about inflation (as well as the resigning Vice Chair Clarida).

There is little on the agenda to influence FX, a market deeply confused about contradictory developments. For example, the AUD lost its moxie and the nascent rallyette/pushback is fizzling, while the CAD continues to thrive. Granted, Canadas has oil (but Australia has China). Even more pronounced is the sharp and substantial drop in the Swiss franc yesterday at the same time the Japanese yen was reversing itself and posted a fat gain (although it’s retreating so far today). Should we deduce that risk-off/risk-on is not a factor? Or that relative yields work in one case but not the other? Note that Japan is the only developed country with no central bank plans to hike rates—although the BoJ started what is really tapering months ago, and without fanfare. 

The dollar is beset by conflicting viewpoints--the Fed is right, the Fed is wrong—and a grudging acceptance that the Fed can’t do a single thing about the number of workers at the New Jersey port or the cost of hamburgers. Once that acceptance gains full force, we are likely to see the dollar fall, especially if the noise from Europe about the need to end QE (if not embrace QT) gets louder, as seems certain. Better to bet on a low probability rate hike than a high probability central bank behind the curve.

The demise of the dollar is not certain, and in fact today could well be a pullback Tuesday. The Atlanta Fed GDPNow doesn’t yet show existing data—not forecasted data, but the real stuff already printed—bringing down the economy. Yesterday’s Q4 nowcast is still right up there at 6.8% (from 6.7%). The reason this time--real gross private domestic investment growth up from 17.4% to 17.8%.

We need to worry about yields having moved up too far, too fast—and correcting.

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