Since the COVID recovery began, there have been more than a few reasons why inflation was worse in the US than any other nation in the world AND has lingered longer than any nation in the world. The biggest among them has been (and continues to be) the budget deficit. An already overleveraged entity like our nation-state simply cannot print annual budget deficits to the degree that we have without eventual repercussions, and the result to this has point has been stubborn and sticky inflation. The inevitability is a significant weakening in the USD, again for similar reasons – the US will have to somehow print more USD to pay for all of the deficit spending that we are addicted to and refuse to curtail, and that continual and significant increase in USD supply will invariably create a weaker USD. Simple economics 101.
The only questions are timing and severity. Severity to me, at a minimum, is below the March 2008 lows, which would likely imply €1.50+, £2+, and <¥100. Timing for that move is unquestionably measured in years, whether that’s later this decade or into the early part of the 2030s, but the market reaction to the FOMC decision on Wednesday and JPow’s press conference should be fascinating from a technical perspective, given the global significance of the USD.
Right now, the DXY is perched on significant support, and yet it also looks perilously close to significantly breaching that support on multiple time frames. The term “significant inflection point” appears to be completely appropriate here, without using too much hyperbole.
- On a monthly basis, DXY is <1% from both its lower Bollinger Band and its 50 month moving average. The last time that happened was March 2020, just before the USD dropped almost 10%.
- The 15+year rising channel on the chart off the 2008 lows has largely held, the exception being the UST yield scare last fall that send the DXY into a bullish exhaustion. It’s highly unlikely we’re in danger of breaching that in either direction anytime soon, but…
- With the exception of last fall’s aforementioned bullish exhaustion, the DXY has been in the green bearish channel for almost 25 years! Given the amount of leverage and annual budget deficits, it’s hard to rationally believe that green channel would be breached to the upside.
So… what is the FOMC going to do on Wednesday, and what is JPow going to say???!! Right now, the market is apparently just as uncertain as the FOMC is. As of Friday’s weekly close, Fed Funds Futures were implying a 50/50 chance of a 25bps or 50bps cut on Wednesday. To me, that is absolutely extraordinary – we’re going to get our first FOMC rate cut since COVID and the market has NO idea what it’s going to be. That also tells me the FOMC has no idea because there have been no WSJ leaks to guide us in a specific direction.
My gut tells me JPow wants 50bps and is going to twist as many arms as he can to get there, as his Jackson Hole speech was dovish enough to make me believe that (FWIW, I also think he’ll be successful getting what he wants). On top of that, what does 25bps really do when you’re at 5.50%? If you’re going to cut rates, do something meaningful.
Market reaction to that announcement would likely be material because it’s not positioned for 50bps at the moment – DXY down, front end of UST curve down, gold and other commodities up, equities probably up but who knows. But then what JPow says will determine where we go from there… is he so nervous about the economy and labor and consumer spending that he suggests more cuts are coming because they’re equally not worried about inflation? Is he balanced? Or does he say “we’re going to cut 50bps now and see how everything reacts, inflation is slowing but we’re still watching it, unemployment is normalizing but we’re not worried about it, economic data is softer but that’s to be expected…” etc. etc.?
In many instances, the reaction to the press conference often is more consequential than the decision itself. Wednesday appears to be one of these very consequential occasions.
Away from the DXY, nearly all other asset classes are portraying similar and significant inflection points. Keep in mind, the latter half of September and early October are usually the weakest seasonal periods of the year for risk assets…
- S&P 500 looks like it wants a new all-time high above 5670ish, but there should be quite a bit of resistance into ~5725 that will be hard to break. The downside has been reasonably protected for nearly the entire year (with the obvious exception of the USDJPY crash in early August), but the range is increasingly tightening… and that usually means there’s a BIG move coming.
- There are more reasons for gold to go up than probably any asset class out there, but this chart is just simply overextended and exacerbated by the USD weakening. I’d personally LOVE to see a blowoff top post the FOMC rate cut announcement on Wednesday and then a monster retracement, but markets rarely follow what I want to see.
- I’m still holding firm on my 3.50% call on 30 year yields before year end (see here). 30s broke 4% without much difficulty, and while there’s significant resistance here at the moment, I still think we’re going quite a bit lower given the degree of weakness that we’re seeing in the broader economy, coupled with what I think is coming more broadly in the next ~45 days.
