Increasing Tyranny Of King Dollar
Sober Look | Oct 12, 2015 07:08AM ET
We begin the week with some data on the US economy where the dollar strength takes its toll. According to Barclays (L:BARC), the economic slowdown we are seeing now is the result of last year's dollar appreciation and the impact of this year's rally has yet to make its way through the economy.
The decline in US exports this year has been broad, with sales to South America weakening the most.
It will take time to work through the higher inventories that resulted from weaker sales abroad (due to a stronger dollar). Higher inventories combined with falling net exports is creating a drag on the GDP.
Another way to look at the situation is via the difference between the year-over-year change in sales and in inventories.
As a result, both the Barclays and the Atlanta Fed GDP models point to US Q3 growth at 1.0-1.25%.
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A year ago, some at the Federal Reserve published a paper arguing that the dollar rise will have only a limited effect. That didn't work out so well and the central bank is no longer ignoring the currency effects.
Given the soft economic data from the US, one would think the Fed is on hold for some time. However many economists believe that a 2015 liftoff is still a possibility.
The last quarter-end marked a significant uptake in the Fed's reverse repo program (especially by foreign banks), as window dressing activity spiked during the period of highly elevated market uncertainty.
This is one of the reasons the Fed wants to limit the use of RRP as a tool to raise rates. When markets become volatile, institutions will move significant amounts of liquidity to the Fed at quarter/year-end, potentially disrupting the private repo markets.
This year we've had a significant divergence between the CPI and the PCE inflation indices.
A great deal of this divergence is due to shelter inflation resulting from the rental housing shortage in the US.
The final piece of US data I'd like to share is the labour force participation rate. Pundits, the financial media, and even politicians love to discuss falling US labour force participation as an indication of slack in the US labour force.
The reality is far more complex – although inconvenient for many. While discouraged workers in the US remains a problem, the key factor contributing to falling participation ratio these days is that increasing numbers of Americans simply don't want a job.
Many Americans are leaving their jobs and simply exiting the workforce.
Disclosure: Originally published at Saxo Bank TradingFloor.com
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