Wednesday, March 11, 2015

Almighty Dollar Risky for US (except)

There are risks for the US in a soaring dollar. It gives a competitive advantage to our trading partners. That means it stimulates our imports while depressing our exports. In addition, it depresses the dollar value of profits from overseas. Profits drive employment and capital spending. So weaker profits attributable to the strong dollar can slow the economy down.

There is a strong correlation between the y/y growth rates in S&P 500 forward earnings and aggregate weekly hours worked in private industry. The y/y growth rate of capital spending in real GDP is also driven by this profits cycle. Forward earnings was up just 1.4% y/y at the beginning of March, down from 8.2% at the end of September. That’s the lowest growth rate since December 2009. Before we get all panicky, keep in mind that this drop was mostly attributable to the S&P 500 Energy sector, which currently accounts for just 5.3% of S&P 500 forward earnings.

The bottom line is that the Fed has a problem. The FOMC rarely considers the impact of the dollar on the US economy. The subject is almost never discussed at the FOMC meetings. The members of the committee may need to give more weight to the soaring dollar in their deliberations. They have three options for the rest of this year. They can proceed to normalize monetary policy and raise interest rates a few times this year. “One-and-done” is another option. So is “none-and-done.” I still believe that the last two are more likely than normalization given that the dollar will continue to soar if the Fed doesn’t back off.

Today's Morning Briefing: Almighty Dollar. (1) Trade-weighted dollar started lift-off last summer and has achieved escape velocity. (2) ECB and BOJ adding rocket fuel to dollar. (3) Euro/dollar parity, here we come. (4) Yen down 36%. (5) Commodity producers jumping off currency cliff. (6) Break out in the dollar could break something. (7) Foreign earnings could depress the profits cycle which drives employment and capital spending. (8) Odds still favor “one-and-done” or “none-and-done” for Fed if dollar soars higher. (9) Searching for oil-drop winners and strong-dollar losers. (More for subscribers.)

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