Monday, October 6, 2014

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.)

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