The relationship between the dollar and the stock is a weird one

Outlook: Yesterday’s data was mostly ignored, including the Atlanta Fed’s GDPNow, down to a lousy 0.4% for Q1om 1.3% last time. We get another estimate today. The drop was due to “yesterday’s annual revision to retail sales by the US Census Bureau showing real personal consumption expenditures growth declined from 3.8 percent to 2.4 percent.” In other words, the consumer is flagging.

The relationship between the dollar and the stock is a weird one. Just about anything you want to say about it will be true for one period or another, and you will see strongly held views on the subject that are very hard to argue with.  For many years, they were inversely correlated—stock market up, dollar down. This was weird and somewhat inexplicable, and had nothing to do with international capital flows. For the past decade or so, the two markets have been positively correlated, if not very closely. See the monthly chart (the green candles are the dollar).

We have been keeping an eye peeled for a spillover in sentiment from equities to the dollar, and are tentatively deciding it’s there now, if not every day. Yesterday is a good case in point—all the equity indices down by a lot but the dollar up on the day. Still, there’s a bit of leakage there. It shouldn’t come as a surprise—both markets respond to the same factors—the Fed, bond yields, growth prospects, geopolitics. But the self-interest is not the same, and of course things like important company earnings are of only secondary interest to FX (and tucked away as a growth factor). 

The FX market doesn’t need any uncertainty fuel from equities—it’s generating enough of its own. We are seeing multi-year lows in the euro with some wild-eyed folks mentioning the old lows around 1.0350 (December 2016) and perhaps parity. Sterling is also on the ropes but note that on the weekly chart, it’s nearing the 62% retracement level of the rise off the April 2020 Covid freakout level. There was no data reason driving the pound down, just the Crowd. Here’s the thing—we almost always get a pushback higher off that 62% line. Softly, softly.  

It should go without saying that trend-following charting fails when you don’t have trendedness, and also when you have moves in the same direction as the trend but breaking the norms as shown by bands and channels. Those speed limits lose their usefulness when the FX market is in full freak-out mode, and that what we see today. Only the yen, pulling back as it “should,” has any semblance to normalcy. Even if the analysis, such as it is, justifies the move, as we see with Europe likely going into recession later this year and the ECB falling farther behind the Fed, the FX moves are excessive. Watch out! A backlash against the dollar is on the agenda.

Tidbit: The WSJ writes that China is serious about getting growth better than the US, despite the US surpassing China is Q1 with 5.5% and China, 4.8% President Xi tells his government this will prove “that China’s one-party system is a superior alternative to Western liberal democracy, and that the U.S. is declining both politically and economically.”

So, China plans to ramp up big construction projects and issue coupons to individuals to boost spending, plus regulatory loosening in real estate. The target is 5.5% in GDP this year—but the IMF sees 4.4%, which will still beat the US with 3.7%, if the IMF is right, although it might not satisfy Mr. Xi.

Russia’s invasion of Ukraine is a distraction from the authentic threat posed by China, not least because they steal every invention and innovation they can get their hands on, according to the FBI. Now we have a new book by trade expert Fred Bergsten, The United States vs. China: The Quest for Global Economic Leadership, published April 18. It’s getting rave reviews. According to the Peterson Institute (which Bergsten founded in 1981), “Bergsten calls on China to exercise constructive global leadership and on the United States to reject a policy of containment, avoid a new Cold War, and instead pursue ‘conditional competitive cooperation’ to work with its allies and China to lead, rather than destroy, the world economy.”

Wonder what ‘conditional competitive cooperation” means… The Petersen Institute is holding a discussion with bigwigs today from 10 to 11 am, including Larry Summers.

Tidbit: Why is the US not pumping massive amounts of oil and shipping it to Europe? The NYT has a sensible explanation—producers fear the high prices won’t last. The US is pumping a mere 2% more since Dec and only 11.8 million bpd, compared to 13.1 million bpd in March 2020 (the record).

The Dallas Fed surveyed 141 oil companies in mid-March and found 60% of them gave the price reason. They need an average oil price of $56 per barrel to break even, but some expect a price under $50 by year-end. They remember the oil price crash when Covid hit. The Middle Easterners share that fear. “Only two years ago, oil prices plummeted by more than $50 a barrel in a single day to less than zero as the pandemic took hold and producers had no place to store oil that nobody needed to buy…. Exxon Mobil’s stock fell so much that the keepers of the Dow Jones industrial average kicked it off the index. The company had been in the average in one form or another since 1928….”

Oil company price disaster scenarios include Russia losing the war, China’s zero Covid policy taking its economy into recession, or a deal with Iran bringing more supply. Besides, oil company costs are rising for labor, materials and services. And Wall Street would rather invest in green energy than fossil fuels, not from embrace of greenness but seeing the handwriting on the wall.

Well, gee, a dozen solutions are staring us in the face, although we can hardly expect the NYT to mention it—the US government can write a long-term contract with the oil companies that fixes prices or guarantees a floor. Then it can turn around and ask the EU/Germany to make up any difference. It could also give oil companies an even bigger tax break than the one they have already for each shipment to Europe, although that doesn’t solve the price problem. And any first-year economics student could go on to devise a work-around. Not exactly full free market capitalism, but that’s a pipedream, anyway.

Tidbit: The Musk/Twitter free speech issue is roiling the commentariat, but some analysts note there is a long way to go and obstacles to surmount before Elon gets his hands on Twitter—likely not until next year. Musk says he’s not buying Twitter to make a profit but he jolly well needs to in order to satisfy lenders, unless he wants to pay them off with profits from other businesses. But if Twitter shares are collateral, watch out. And by then the free speech issue may be better understood. The US may even copy the EU with its Digital Services Act that requires social media to police content for “harmful content.” Like Trumpian lies.

This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

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