The Dollar is higher for longer, alongside the Fed’s narrative

Outlook: Today the data overload slows down and the main event is the S&P manufacturing PMI for Dec, expected unchanged at 47.7 from Nov, with services perhaps up to 45.5 from 46.2. San Francisco Fed Daly speaks at noon. As the data above indicates, everybody is slowing down, if by less than the gloomsters were predicting only a few weeks ago. All the central banks that raised rates this week and promised an unbreakable commitment to killing inflation are calling for a soft landing.

The US economy is slowing, if not fatally so. The Atlanta Fed’s latest Q4 GDPNow stands at 2.8%, from 3.2% last week. Each of the big factors fell.

Christmas is 9 days away and while interest in year-end closing levels is as keen as ever, the quality of the analysts’ work gets smudgy and weak. There is too much distracting attention to Musk, who is nearing Trump in obnoxiousness and narcissism. Are we getting the dollar bounce that so many factors seem to justify, or was yesterday a flash in the pan? To get to an answer, we need to decide whether the Fed in particular will chicken out if data shows recession—go back and look at the Empire State and Philly Fed indices. This is what the market is counting on—an end to hiking sooner than the Fed says, in 2023 instead of 2024.

But on the whole, we don’t see catastrophically bad data anywhere—yet. Ah, but winter can be a hard one, and economists are already warning that while energy inventories may suffice this time, next year wil be a different kettle of fish.

Next week we will be flooded with forecasts for 2023. Every forecaster knows perfectly well it’s a foolish and wasteful enterprise to try to forecast, but markets pay us to do it and it’s needed for decision-makers, who also know perfectly well they will probably have to changes horses in midstream. Our own forecast for the dollar is higher for longer, alongside the Fed’s narrative, but we have yet to see it begin to take hold.

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