Like any prize fighter you sometimes get a knock down. What normally happens is your training kicks in, you get up, gasp for breath then wait desperately for the bell to go. You then scuttle back to your corner to regain posture.
In my opinion, this describes the current US macro picture. A little down, but certainly not out. It happens to everyone – no matter how pristine your wellbeing is. And let’s be clear the US is still largely in the rudest of health. Jobs are below NAIRU* and at full capacity, GDP last quarter at 4.1% - fit, ISM’s# not tanking – check. Even the once unreliable wages has shown a firm footing for more strength. Housing of course is still the only doubt but despite it being a “big ticket” I’m doubtful it will upset everything else – for now.
All well and good until last week with a big miss in Core CPI at 0.2% lower. This is a problem and another miss next month will cause concern for the FED. OIS^ is still pricing in an 80% hike for December after the slam-dunk in September and we now sit at 3x25bps hikes for 2019. The potential pause for neutral rates hitting March 2019 at 2.75% has been down played last week by Brainard. This is a very wise move if you need to hike a little more down the line. Be aware.
As you can see CPI is still in an uptrend but another miss could confirm a cap below 3%. A few models I’ve seen point to this breaking upside but the counter to this is some long term standard deviation models suggest a revert to the mean. This is much lower at 2.4%.
So, if you want to get long USD and relied on the macro picture you’d be making a mint – only in your dreams. This is because markets are the other side of the story.
Last week, quarter-end rebalancing had USD winging around like a bull in a China shop – with no pun intended. Trying to get on a USD long position has not been easy. Risk flows have ruled – not helping things was when emerging markets came back storming – albeit momentarily. With China tariffs, Italexit and daily Brexit fervour/fatigue you had to bring out your tin hat for protection on capital preservation.
Back to the big question - will the ending be happy? I think ultimately yes, but it will be far from the fairytale we expect or like for that matter.
Glossary
NAIRU - The non-accelerating inflation rate of unemployment (NAIRU) — also referred to as the long-run Phillips curve — is the specific level of unemployment that is evident in an economy that does not cause inflation to rise up. NAIRU often represents equilibrium between the state of the economy and the labor market.
ISM – The Institute of Supply Management - ISM Manufacturing Index, which is an index of national factory activity. The Index dropped in September 2018 to 59.8 from 61.3 in August, which was the highest since May 2004. A redaing above 50 indicates growth in manufacturing, which accounts for circa 12% of the US economy.
OIS – Overnight indexed swap - The OIS is a swap derived from the overnight rate, which is generally fixed by the local central bank. The OIS allows LIBOR-based banks to borrow at a fixed rate of interest over the same period. In the United States, the spread is based on the LIBOR Eurodollar rate and the Federal Reserve's Fed Funds rate.