Trick or Treat? (excerpt)

As I’ve often observed, the current bull market has been a series of panic attacks followed by big relief rallies. Last year and this year, the panic attacks were less severe and shorter than those from 2009-2012. That’s until October’s severe, but short panic attack. Just this year alone, the list of anxiety-provoking events has been a long one: Emerging markets mini crisis (January 23), Crimea invasion (February 28), Yellen rate-hike scare (March 19), momentum stocks meltdown (April 3), ISIS invasion of Iraq (June 10), Portuguese bank panic (July 10), Malaysian jet crisis (July 17), sanctions imposed on Russia (July 29), and the global growth and Ebola scares (September 30). And the year isn’t even over yet. So far, the trick to this bull market is not to panic. Investors who haven’t panicked have had quite a treat, with the S&P 500 up 193% since March 9, 2009.

Today's Morning Briefing: Mission Accomplished. (1) No surprises. (2) QE gets credit from its proud conceivers. (3) The right message. (4) Is inflation back on right track as Fed claims? (5) Harry Truman and the Fed’s two-handed economists. (6) Does forward guidance make sense, or is it nonsense? (7) Running out on “considerable time” on March 18, maybe? (8) Gradual normalization ahead or “one and done?” (9) Sentiment roller coaster, panic attacks, dips, and relief rallies. (10) Lots of earnings weakness across most MSCI sectors overseas. (11) Focus on overweight-rated S&P 500 Health Care. (More for subscribers)

Happy Days Are Here Again (excerpt)

All of a sudden, everyone seems to be bearish on oil and bullish on its implications for the economy. That’s fine with me since I started to speculate about a big downside move in the price of a barrel of Brent crude oil to $75 in mid-September. It was around $95 back then. On Monday, with the price around $85, I discussed some reasons why it might not have much more downside. Lower prices might be even too painful for the Saudis, who might reduce their output. The Chinese have been bargain hunting at these prices.

In any event, the drop in the price of gasoline and heating oil is a nice and early holiday present that could boost holiday retail sales. The national average pump price of gasoline has dropped 53 cents from this year’s peak of $3.70 a gallon during the week of July 2 to $3.17 in mid-October. The futures price suggests it will fall below $3.00 in the next couple of weeks.

That’s certainly helping to boost the Consumer Confidence Index. I average it with the Consumer Sentiment Index to derive our Consumer Optimism Index. My derived index rose during October to the highest reading since September 2007.

Interestingly, the Consumer Confidence Index among respondents under 35 years old soared during October to the highest since December 2006. This group’s confidence typically exceeds that of the older groups. I’m not sure why it surged so much for the younger crowd. Maybe they drive more. Maybe they are happier than others that jobs are less hard to find. In any event, they tend to form households. They buy houses, furniture, and cars, especially when they are optimistic.

Today's Morning Briefing: Considerable Time. (1) FOMC likely to treat rather than trick. (2) Fed officials were probably spooked by recent market turmoil. (3) QE has been terminated, until further notice. (4) FOMC has to fear stoking current melt-up. (5) Fed policy is market dependent. (6) Rosengren denies Fed’s role in wealth and income inequality. (7) No exit for central banks from ultra-easy monetary policy for a considerable time. (8) The “one and done” scenario. (9) Long expansion scenario would justify higher P/Es until it doesn’t. (10) Focus on market-weight-rated S&P 500 Industrials. (More for subscribers.)

Eurozone Remains Challenged (excerpt)

In a 10/10 statement, ECB President Mario Draghi noted that the results of a stress test of the Eurozone banks would be released on October 26. This “year-long exercise” has strengthened their capital base, in his opinion. In my opinion, it also explains why banks haven’t been lending. However, Draghi hoped that the banks will finally be in a position to transmit the ECB’s easy monetary policies (including TLTRO and ABS purchases) by lending more soon.

The results are in, as noted in the 10/26 NYT: “The bulk of Europe’s biggest banks would be able to survive a financial crisis or severe economic downturn, the European Central Bank said on Sunday, concluding a yearlong audit of eurozone lenders that is potentially a turning point for the region’s battered economy.” Only 13 of 130 big banks failed the test. The hope is that the others will find it easier to raise money that they can lend out.

For now, the Eurozone’s economy remains challenged. Consider the following:

(1) Business surveys. It was mildly encouraging to see the uptick in the Eurozone’s flash M-PMI during October to 50.7 from 50.3 the month before. It was led by Germany’s flash M-PMI, which rose from 49.9 (the first reading below 50.0 since June 2013) to 51.8. However, France’s M-PMI fell to 47.3 from 48.8. That was the sixth consecutive month below 50.0 for France.

The bad news is that Germany’s M-PMI is highly correlated with the country’s Ifo business expectations diffusion index, which fell below zero during September for the first time since January 2013. The overall Ifo business confidence index dropped to a 22-month low of 103.2 during October from this year’s April peak of 111.2.

(2) Money and credit. While the Eurozone’s M2 growth rate has picked up lately, loans to the private sector continue to fall. During September, M2 rose 3.0% y/y, up from the year’s low of 2.0% during April. However, loans are down 1.7% y/y.

Deflationary pressures are mounting in the Eurozone, with the CPI up just 0.3% y/y during September. The Markit news release on the Eurozone’s composite PMI noted: “Prices were increasingly being cut in order to help boost sales. Average prices charged for goods and services showed the largest monthly fall since February 2010, having now fallen almost continually for just over two-and-a-half years.” Critics of the ECB’s bank stress test complain that it did not stress the risk of deflation.

Today's Morning Briefing: Earnings Swooning. (1) Upside hook missing for Q3 earnings. (2) Oil is weighing more on earnings than the dollar. (3) Energy’s NERI drops sharply this month. (4) Big cuts in S&P 500’s Q4 and 2015 estimates last week. (5) Forward earnings losing some mojo. (6) Will ECB bank stress test results lead to more lending, or more stress? (7) Two Eurozone skeptics. (8) Italy’s economic suicide movement. (9) Germany’s Ifo vs. M-PMI. (10) Corruption is officially forbidden in China. (11) Power to the People, or the Party? (More for subscribers.)

Long Recovery, Long Expansion in US (excerpt)

Despite the steady improvement in the Index of Coincident Economic Indicators (CEI) since the end of the last recession, there continue to be lots of downbeat assessments of the performance of the US economy during the current expansion. But there is potentially an important upside. Consider the following:

(1) A very long recovery. It has taken 68 months--from January 2008 through October 2013--for the CEI to fully recover from its severe decline during 2008 and early 2009. The previous five recovery periods averaged 26 months with a range of 19-33 months.

(2) Looking forward to a long expansion. The good news is that the average increase following each of those recovery periods through the next peak was 18.6% over an average period of 65 months with a range of 30-104 months. If we apply these averages to the current cycle, then the CEI would peak in 54 more months during March 2019 with a substantial gain from here.

By the way, also looking forward to a long expansion are manufacturing companies, as evidenced by soaring new orders for industrial machinery. They jumped 5.9% during August, and 28.4% during the past three months. They’ve been in record-high territory since March. Also rising to a record high were new orders for metalworking machinery.

Today's Morning Briefing: Bottom of the Barrel? (1) From “Peak Oil” to “Trough Oil.” (2) Oiling the secular bull market in equities. (3) Transports at record high as Energy loses energy. (4) Raising Energy sector back to market-weight because stocks are cheap. (5) Downside of oil prices is a known unknown. (6) Saudis can inflict only so much pain on others before it hurts them too. (7) China is bargain hunting. (8) Technology could reduce breakeven for shale oil producers. (9) More upside for US economy following long recovery. (10) Industrial machinery orders soaring. (11) “St. Vincent” (+ + +). (More for subscribers.)

US Economy Is on the Right Track (excerpt)

The strength of the US economy is reflected in the S&P 500 Transportation index. It edged down yesterday along with the broad market, but remains above its 50-day moving average and only 1.8% below its record high on September 18.

The fundamentals are just as strong. Railcar loadings of intermodal containers rose to a record high in early October. The ATA Trucking Index did the same during September. The railroad and trucking industries are running on cheaper fuels. Both forward revenues and earnings are rising rapidly to new highs.

Today's Morning Briefing: Earnings World. (1) Is the strong dollar depressing Q4 earnings estimates? (2) Not much impact so far on S&P 500/400/600. (3) US forward earnings remains on uptrends in record territory. (4) Sector search shows Energy weighing most on S&P 500 earnings. (5) Cyclical sectors showing earnings resilience despite strong dollar. (6) Overseas, the earnings picture is less bright. (7) S&P 500 Transportation index is on the fast track. (8) Railcar loadings and trucking freight index at record highs. (More for subscribers.)

Accentuating the Positives (excerpt)

Over the past few weeks, as stock prices plunged, investors all focused on the reasons behind the rout. It wasn’t too hard to come up with a worry list. Now that stock prices have been rebounding over the past few days, the worry list seems a bit less worrisome, as I noted on Monday.

After falling as much as 2.3% below its 200-day moving average last Wednesday, the S&P 500 rebounded to 1.8% above it yesterday. On a closing basis, the S&P 500 dropped 7.4% from its record high on September 18 to its recent low last Wednesday. That’s more of a dip than a correction. Even on an intra-day basis, the drop was 9.8%, just shy of the 10% definition of a certifiable correction.

The S&P 500 Transportation index actually held its 200-dma last week, and rebounded dramatically since then above its 50-dma and yesterday to within a whisker of its September 18 record high. It had sold off, led by airline stocks, on fears that Ebola would depress passenger traffic. Now that Ebola fears are subsiding, investors are focusing on the positive impact of lower fuel prices on transportation companies.

So far, buying on dips remains in fashion. That’s because the news about the most worrisome issues of the past few weeks has become less worrisome, while stocks have gotten cheaper. The panic over Ebola seems to be subsiding as it becomes more apparent that the virus isn’t easily transmittable. The US economy continues to perform very well. Members of the Federal Open Mouth Committee are chattering about possibly delaying raising the federal funds rate next year. The ECB has started buying Eurozone bonds sooner than expected. The region’s auto sales continue to recover. China’s economy is experiencing a soft rather than a hard landing.

Today's Morning Briefing: Accentuating the Positives. (1) V-shaped stock rebound toys with moving averages. (2) Transportation stocks flying high again. (3) Buying on dips still in fashion. (4) Oil provides a nice windfall for consumers. (5) US federal income tax revenues up big. (6) S&P 500 forward revenues in record-high territory. (7) Forward earnings still moving forward. (8) The current earnings season is mostly upbeat. (9) What about Q4? (10) ECB is back in the game. (11) China continues to emerge. (More for subscribers.)

Oil Demand Shows Slowing Global Economy (excerpt)

Let’s review the latest data on crude oil demand and supply through September, which continue to show that the global economy is slowing:

(1) Supply soaring to record high. Global oil supply jumped to a record 92.7mbd during September, a jump of 3.0mbd in just the last four months. Leading the way are the US and Canada, which are now producing 12.6mbd, well exceeding Saudi output of 9.6mbd.

(2) Demand stalling at record high. Global oil demand has been flat around a record 92.6mbd over the past five months, using the 12-month average to smooth the volatile data. The growth rate, on a y/y basis, has fallen from a recent high of 1.8% during September 2013 to only 0.6% this September.

(3) Demand falling in OECD, slowing in non-OECD. Among the 34 advanced economies in the OECD, demand fell 0.6% y/y after rising a bit briefly early this year. Demand has been falling at a faster pace among the big four economies of Europe and Japan too.

Demand among the non-OECD economies, which are mostly emerging ones, rose 1.8%, the lowest since August 2009. In China usage rose to a record high of 10.2mbd during September, which was up 1.0% y/y, near August’s 0.7%, which was the lowest since November 2007. This confirms that China’s economy isn’t tanking, but it is slowing significantly. The same can be said for India, where oil demand was up just 1.2% y/y last month, the slowest since March 2006.

Today's Morning Briefing: Yin & Yang. (1) Yin is deflation. Yang is easy money. (2) Why can’t central banks boost inflation? (3) Easy credit has boosted supply more than demand. (4) Aging demography also weighing on Japan and Eurozone. (5) Secular stagnation is a serious problem in Japan and Eurozone. (6) Postmortem: Commodity super-cycle was latest bubble to burst. (7) Oil’s super-cycle is also over. (8) Global oil demand has stopped growing. (9) What is the breakeven price for shale oil producers? (10) Focus on underweight-rated S&P 500 Energy. (More for subscribers.)

Fannie, Freddie, and Feddie Doing It Again (excerpt)

The big dive in the 10-year Treasury bond yield last week pushed the 30-year mortgage rate below 4.00% for the first time since May 28, 2013. That drop could revive mortgage refinancing activity, providing another windfall for consumers. In addition, housing starts, which have stalled around 1.0 million units for the past year, might move higher.

Even more stimulative for housing activity may be the government’s push to allow Fannie Mae and Freddie Mac to lower lending standards and restrictions on borrowers with weak credit. Lenders would also be protected from claims of making bad loans, according to a 10/17 WSJ article. Déjà vu all over again: The government encouraged sub-prime lending during the previous decade, and it ended very badly. In any event, here we go again: The two biggest assemblers of mortgage-backed securities--that will now be explicitly guaranteed by the government rather than implicitly, as before--“are considering programs that would make it easier for lenders to offer mortgages with down payments of as little as 3% for some borrowers.”

God help us! More likely, when the next batch of subprime mortgages hits the fan, Fed Chair Janet Yellen will help us. She’ll do it with QE-10. Thank goodness for Fannie, Freddie, and Feddie.

Today's Morning Briefing: The Bottom? (1) Manic market. (2) From “the top” to “the bottom” in one month. (3) October selloffs have been buying opportunities. (4) Too many bottom pickers? (5) Less worrisome worry list. (6) Investors love central bankers shooting bullets, even if they are blanks. (7) Bully for Bullard! (8) Fannie, Freddie, and Feddie to the rescue. (9) More jobs and cheaper gasoline boosting US confidence. (10) A bit of good news from Europe. (11) Putin playing a weak hand. (12) Ebola, VIX, and high-yield bonds. (More for subscribers.)

The Downside & Upside of Cheaper Oil (excerpt)

The plunge in the price of crude oil should be a positive for the S&P 500 Transportation index. However, in addition to using diesel fuel to power their locomotives, the railroad industry has enjoyed a booming business in transporting crude oil produced by shale drillers. Drillers might have to stop their operations if they turn unprofitable at lower oil prices.

On the other hand, the plunge in gasoline prices is a big positive for consumers. The nearby futures price of gasoline is down 30% since this year’s peak during the summer. Retail sales of gasoline totaled $535 billion during September at a seasonally adjusted annual rate. So a 30% drop in the price would provide a $161 billion windfall to consumers.

Today's Morning Briefing: Early Halloween. (1) Trick or treat? (2) From nothing to fear to plenty of fear. (3) Bears are hiding in the correction camp. (4) Sentiment takes a dive. (5) Cheap oil is good for consumers, but not so good for railroads. (6) Airline stocks have been contaminated. (7) Meet Obama’s Ebola “czarina.” (8) The commodity super-cycle was the bubble this time. (9) Lots of blank bullets. (10) Retail sales don’t add up. (More for subscribers.)

Oil Is Slip Sliding Away (excerpt)

The weakness in the Energy sector is attributable to the plunge in the price of a barrel of Brent crude oil. It has plunged 27% from this year’s high of $115 on June 19 to $84 yesterday. The ratio of the S&P 500 Energy Index to the S&P 500 is highly correlated with the price of oil. The drop in oil prices is also putting downward pressure on the S&P 500 Industrials sector because the oil industry spends a lot of money on capital equipment. A rebound in oil prices would create a good buying opportunity for both sectors. However, the news remains bearish for oil for now. Consider the following:

(1) Demand. Yesterday, the International Energy Agency cut its 2015 estimate for global oil demand growth by 300,000b/d from its previous forecast and now expects demand growth of 1.1mb/d to 93.5 million. It cut its 2014 estimate by 200,000b/d to 0.7mb/d. Debbie and I have been monitoring the slowdown in the growth of global demand since the start of the year.

(2) Supply. In theory, lower oil prices should boost demand. However, the supply side of the equation may continue to weigh on oil prices. The glut of US shale oil is forcing many OPEC producers to keep producing to hold onto their market share. Even Saudi Arabia may no longer be willing to play the role of the swing producer to boost prices.

On the contrary, the Saudis are hoping that lower oil prices will reduce output in countries with higher production costs. This past Sunday, Kuwait’s oil minister said there was a natural floor limiting how low prices could fall, at about $76-$77 per barrel. That, he said, is near the average production costs per barrel in Russia and the US.

Today's Morning Briefing: The Fear Factor. (1) Going viral? (2) Emotional market. (3) Technicians looking into the abyss. (4) Bad Octobers and good Octobers-Mays. (5) Breaching protocols and support levels. (6) Valuation multiples are depressed and compressed. (7) SMidCaps are much cheaper now, especially relative to LargeCaps. (8) Supply factor depressing oil prices and Energy stocks. (9) Saudis want to shut down high-cost producers in US and Russia with lower oil prices. (More for subscribers.)

Buybacks Are Back in the News (excerpt)

Yesterday’s print version of the FT included an article titled, “Buybacks: Money Well Spent?” It makes the same argument that I have been making for the past few years: The Fed’s ultra-easy monetary policies, including NZIRP and QE, have given a tremendous incentive for companies to issue cheap debt to buy expensive stock. This has “diverted corporate cash from creating jobs and investment,” according to the FT story.

Let’s quickly review the data on this. S&P 500 buybacks have totaled $2.0 trillion from Q1-2009 through Q2-2014. Over the same period, net issuance of nonfinancial corporate bonds totaled $1.2 trillion. Operating profits of the S&P 500 companies totaled $4.4 trillion since Q2-2009. So S&P 500 buybacks amounted to 45% of their profits since Q2-2009, and over 50% during the first half of this year. In current dollars, capital spending in the GDP accounts increased from $1.64 trillion (saar) during Q2-2009 to $2.19 trillion during Q2-2014.

Today's Morning Briefing: Running Out of Ammo? (1) Global slowdown front-page news. (2) Litany of woes. (3) From “shock and awe” to “Aw, shucks!” (4) Divided we fall. (5) G20 have no plan. (6) Abe sees downside of yen’s downside. (7) Fed’s Fischer leaning towards “none and done.” (8) Lagarde’s plea. (9) Unintended consequences of ultra-easy money include buybacks. (10) China isn’t tanking just yet. (11) S&P 500 forward revenues at record high. (12) S&P 500 forward earnings stalling at record high. (More for subscribers.)

Global Economic Slowdown Depressing Stocks (excerpt)

The selloff in the LargeCap stock indexes in recent weeks coincided with mounting evidence of a global economic slowdown, which I have been monitoring since the start of the year. This development seems to have become of greater concern in recent weeks as the CRB raw industrials spot price index and the price of a barrel of Brent crude oil have dropped sharply. I combine these two into our Global Growth Barometer. Our GGB is down 13.7% since June 19 through Friday, to the lowest readings since June 28, 2012.

Some of the drop in our barometer is undoubtedly attributable to the strong dollar. In addition, the drop in crude oil prices reflects not only weakening oil demand but too much supply. Figures released on Friday showed OPEC had lifted output by 402,000 barrels a day in September to 30.47mbd--the biggest monthly increase in almost three years. So our GGB may be exaggerating the global slowdown.

Today's Morning Briefing: Behind the Curtain. (1) Curtain call. (2) Bad wizards. (3) Crisis of confidence. (4) More than just another dip? (5) Our Global Growth Barometer is taking a dive. (6) Strong dollar and too much oil supply may be exaggerating GGB’s drop. (7) Curtain raisers at the ECB, BOJ, and Fed. (8) Draghi says fixing economy isn’t his job. (9) Kuroda ready to buy more assets. (10) Fed’s “lift-off” may be delayed. (11) October selloffs can create opportunities. (12) More recession risks overseas than at home. (13) Risk off for now. (14) “The Judge” (+ +). (More for subscribers.)

Stress Tests for ECB & BOJ (excerpt)

At his 10/2 press conference, ECB President Mario Draghi indicated that monetary policy may not be the solution to what’s ailing the Eurozone economy. Indeed, he ended his prepared remarks by reminding everyone that the main job of the ECB is to maintain price stability. Then he said, “However, in order to strengthen investment activity, job creation and potential growth, other policy areas need to contribute decisively. In particular, the legislation and implementation of structural reforms clearly need to gain momentum in several countries. This applies to product and labor markets as well as to actions to improve the business environment for firms.”

He also stressed that “insufficient progress in structural reforms in euro area countries constitutes a key downward risk to the economic outlook.” In other words, if the next round of monetary easing, including TLTRO liquidity injections and ABS purchases, don’t work, don’t blame him. The EMU MSCI has dropped 4.0% in euros and 3.3% in dollars since the day before Draghi’s press conference.

On Tuesday, after the latest meeting of the BOJ’s policy committee, Gov. Haruhiko Kuroda acknowledged that Japan’s economy remains stubbornly weak despite the sharp increase in the monetary base since the implementation of Abenomics by the bank during April 2013. Extraordinarily, the meeting was halted for 90 minutes when Kuroda was summoned suddenly before parliament for the second time in less than a week. He was grilled about whether the falling yen was hurting rather than helping the economy. He implicitly backed the weakening yen, saying, “When exchange rates move in reflection of financial and economic fundamentals, that is not a minus for the overall economy.”

Today's Morning Briefing: Heavy or Light Weights? (1) Is the Fed coming or going? (2) Stress tests for ECB and BOJ. (3) Is bad economic news bad or good news? (4) Competitive devaluation is an issue. (5) Dudley sees first rate hike in mid-2015, or not. (6) Stocks and bonds. Mars and Venus. (7) Draghi and Kuroda are less confident. (8) IMF’s concern about global growth depresses stocks. (9) FOMC’s concern about global growth boosts stocks. (10) Time to go fishing for the rest of the year, or until mid-term elections. (More for subscribers.)

Germany’s Economy Is Weakening Fast (excerpt)

Over in Europe, one of the worst-performing stock markets is in Germany. The German MSCI is down 15.3% ytd. This reflects the dramatic weakening in Germany’s economy in recent months. The Eurozone’s recovery since last summer was very slow and fragile.

The region’s economy seems to have been especially hard hit by the Ukraine crisis and the sanctions imposed against Russia. That’s especially so for Germany, where manufacturing orders dropped 5.7% during August to the lowest level since May 2013. Industrial production excluding construction plunged 4.3% during the month to the lowest since January 2013. The situation might have actually worsened during September given that Germany’s M-PMI dropped below 50.0 to 49.9, the lowest since June 2013. This series is highly correlated with the expectations diffusion index of the Ifo Business Climate Index, which dropped below zero for the first time since January 2013.

Today's Morning Briefing: Dollar Play. (1) Home field advantage. (2) No currency risk at home. (3) “Stay Home” still beating “Go Global.” (4) Is the strong dollar bullish or bearish for stocks? (5) The short answer: Bullish on a relative basis. (6) Three trends since 1995. (7) From US-centric to China-centric, and back again. (8) Germany hard hit by Ukraine crisis. (9) Depreciations of euro and yen won’t help Eurozone and Japan, but should benefit US MSCI relative to other major stock markets. (More for subscribers.)

Why Does Wage Inflation Remain So Low? (excerpt)

There certainly has been no sign of inflationary pressure on wages in US employment reports this year, including the most recent one for September released on Friday. Fears that the tightening labor market will lead to higher labor costs, which will boost price inflation, may be receding as a result. Wage inflation remains subdued at 2%.

Previously, I’ve argued that the “cost-push” model of inflation might be flawed. There may be several forces at work keeping a lid on price inflation including globalization, automation and robotics, debt-financed excess capacity, and global secular stagnation, particularly in Japan and the Eurozone. It may be that low price inflation is moderating wage inflation. As I observed last week, inflation-adjusted wages are rising, albeit at a slow pace.

Today's Morning Briefing: US Dollar, Inflation, & Earnings. (1) Is there a relationship between the dollar and expected inflation? (2) Fed tracking TIPS yield spread as expected inflation measure, which is falling recently. (3) Anchor aweigh. (4) TIPS measure in US actually reflecting deflationary forces in Japan and Eurozone. (5) There may be a simpler story. (6) Either way, the Fed is likely to normalize monetary policy very gradually. (7) Or else it might be either “one and done” or “none and done.” (8) Low price inflation keeping a lid on wage inflation. (9) Dollar may take center stage during Q3 earnings season. (10) Usually, strong dollar and weak commodity pricing not good for earnings. (11) Focus on overweight-rated S&P 500 Transportation. (More for subscribers.)

Expected Inflation Falling in TIPS Market (excerpt)

On 9/24, Bloomberg’s Simon Kennedy reported that FRB-NY President William Dudley is the first Fed official starting to freak out about the strong dollar: “‘If the dollar were to strengthen a lot, it would have consequences for growth,’ the 61-year-old Dudley, a former Goldman Sachs Group Inc. economist, said at the Bloomberg Markets Most Influential Summit in New York. ‘We would have poorer trade performance, less exports, more imports,’ he said. ‘And if the dollar were to appreciate a lot, it would tend to dampen inflation. So it would make it harder to achieve our two objectives. So obviously we would take that into account.’”

The JP Morgan trade-weighted dollar is up 5.8% since this year’s low on July 1. Dudley is right about the dollar and inflation; they are inversely correlated. There has also been a strong inverse correlation between the dollar and the 10-year TIPS expected inflation rate, which has dropped 36bps since July 31 to 1.93%, the lowest since June 24, 2013. The dollar was up again on Friday following the strong employment report. The euro and yen are likely to remain weak as long as the US economy continues to outperform the economies of the Eurozone and Japan. That’s because the Fed’s next move is likely to be a rate hike, while the ECB and BOJ might provide more rounds of easing.

Today's Morning Briefing: One and Done? (1) Jobs report poses numerous challenges for Fed’s doves. (2) March 18, 2015 could be the Fed’s D-Day. (3) Fed’s best and brightest fumbled jobless rate forecasts. (4) “Considerable time” should be over by the end of this month. (5) More green than red on Yellen’s dashboard. (6) Full-time employment rising and Earned Income Proxy makes another new high. (7) Doves freaking out: Evans and Dudley worrying about dangers of Fed’s exit strategy. (8) Will strong dollar shut Fed’s exit door? (9) Inflationary expectations falling as greenback soars. (10) Could it be “none and done” followed by stock market melt-up? (11) Buy the consumers, not the producers of commodities. (12) “Gone Girl” (+ +). (More for subscribers.)

Emerging Markets Are Submerging Again (excerpt)

The strength in the Emerging Markets MSCI stock price index since early February has been somewhat surprising. That’s mostly because the EM MSCI tends to be highly correlated with the CRB raw industrials spot price index, which has been weakening since it peaked this year on April 24.

In recent days, the correlation has come back with a vengeance as the stock index has plunged 8.7% since September 3. There may be more trouble ahead given the close correlation between the EM MSCI and the inverse of the trade-weighted dollar. Why is this happening all of a sudden? It looks like another Fed tightening tantrum may be underway. If so, then the confidence that Fed officials have had in their ability to normalize US monetary policy without destabilizing the global financial system may get shaken.

Today's Morning Briefing: October Feast or Famine? (1) Aging vs. maturing bull. (2) Bull killers. (3) Bull stumbled during September, tripped yesterday. (4) This may be the month for fasting rather than feasting. (5) Four main issues to worry about. (6) Could a tiny rate hike unglue illiquid bond markets? (7) Record bond issuance by corporations in US and Europe. (8) Blackrock sounds the alarm. (9) Central bankers’ credibility on the line. (10) Are Eurozone and Japan exporting their weak economic performances to US? (11) Focus on market-weight-rated S&P 500 Auto industries. (More for subscribers.)

Russia Could Slip in the Oil Patch (excerpt)

Yesterday, the Russian government submitted its budget to the Duma, the lower house of the parliament. Once approved, Vladimir Putin will sign it into law. A 9/30 post on The Economist website reported that “over the last few years the budget’s reliance on oil revenues have increased. When excluding oil, there was a shortfall of 3.6% of GDP in 2007 but now it is more like 10%. Russia expects to run a small budget deficit (about 0.6% of GDP) this year. That prediction is optimistic--the Kremlin is banking on an oil price of $100.”

Everyone tends to compare US crude oil production to Saudi production. Given the current world disorder, it might make more sense to compare the US plus Canada to Saudi Arabia and Russia. The former has steadily exceeded Saudi output since October 2012 and Russian output since July 2013. Putin produces and exports lots of oil. Khrushchev promised to bury us. Maybe we can drown Putin by continuing to produce more oil.

Today's Morning Briefing: Good Break. (1) A couple of timely calls on energy stocks and the price of oil. (2) Bombing ISIS oil. (3) A happy story in the US oil patch of more output and exports, and fewer imports. (4) Rising fuel efficiency is part of the happy story. (5) The US is #1 in liquids. (6) Demand for oil still falling in Eurozone and Japan. (7) The strong dollar is depressing oil price, which is strengthening the dollar. (8) Khrushchev didn’t bury us, but we can drown Putin! (9) A brief history and requiem for Peak Oil. (More for subscribers.)