So many others on Wall Street think that we need rate cuts to match others internationally, but not for stimulating our economy. Well if you read yesterday’s mailing, you’d know what’s really going on. Click here to catch up if you missed out. All the fuss for rate cuts could be much more for our dollar than anything that the rates themselves do. It’s clearly evident how the top retailers are doing it right in getting consumers to stay as the big apple feeding the economy. Click here to watch.
In spite of the Federal Reserve lowering rates, the U.S. dollar has been strong and getting stronger.
There are several reasons why the dollar’s appreciating and lots of implications for stocks and bonds.
It made sense when the U.S. dollar started rising as the Federal Reserve began raising rates in 2015.
When interest rates in the U.S. were higher than in other countries and the Fed announced it was going to start “normalizing” rates (raising them from artificially low levels) as the economy showed better strength, as deflationary fears gave way to talk about inflation prospects, as equity markets climbed higher, it made sense the dollar would strengthen.
That’s because when rate differentials widen, when the U.S. raises rates while other countries’ rates remain the same, money flows into the U.S. so it can be invested in higher yielding instruments.
In order to buy dollar-denominated U.S. Treasuries or U.S. corporate bonds, foreign investors must exchange their currencies into dollars. Those transactions, done in huge volumes, raises the dollar’s value relative to other countries’ currencies.
But the dollar didn’t move up dramatically against other currencies, because most of them were doing better economically too, and their central banks were expected to end their quantitative easing programs and eventually start to raise rates too.
This week could be a make or break week for the markets. It could also be a lot of nothing.
There’s a big difference.
A lot of nothing ultimately means very little net movement by the close this Friday from where we closed last Friday.
And less than noting means a flat week on noticeably diminished volume.
That’s a possibility because we’re coming to the end of summer, the end of traders and big decision-makers being on vacation. So, it wouldn’t be surprising to see a lot of nothing going on over the next two weeks leading up to Labor Day weekend.
On the other hand, there’s already been a lot of big-wig vacationers calling into their offices barking trading instruction to their minions from their Hamptons homes and the resorts of Southern Europe, on account of not being able to relax as news flow moves markets more than usual in the usually quiet half summer.
Back in the 1992 presidential race, James Carville, Bill Clinton’s campaign strategist wanted his candidate to blame incumbent George H.W. Bush for the recession the country was facing and pressed the Clinton team into focusing on that key talking point by telling them, “It’s the economy, stupid.”
That phrase is still used today.
But it shouldn’t be when it comes to the stock market.
In fact, anyone who thinks the market’s wobbling because the economy is wobbling might be stupid.
The market is having an ugly bout of hiccups, not because there are any problems with the economy, it’s hiccupping because the Federal Reserve is stupid.
Last week President Trump had his Treasury Department brand China as a currency manipulator.
Is the President right to call out China as a currency manipulator?
Most currency analysts and financial news pundits say the President is wrong, that China didn’t manipulate its currency and the President, by implication threatening to knock the U.S. dollar down in retaliation for alleged Chinese manipulation, will sink world trade and equity markets.
On Making Money with Charles Payne yesterday, we discussed how rough the markets have been not just this week, but for the past few weeks, despite some rebounds. Obviously the markets and professional investors are on edge, even though it wasn’t as bad as it seemed at the end of last week the DOW was only down by 4%. Just yesterday, the DOW closed further on the down, so as a technical analyst, I see the lows being tested, which means all bets are off and there will be more profit taking. I point out the two types of stocks that matter the most for knowing how the market will bode in this continuing volatility… Click here to watch.
President Trump just forced the Fed’s hand by calling out China as a currency manipulator.
What the President couldn’t do by publicly ripping the Fed via Tweets for raising rates and demanding to lower them, he accomplished by a more acceptable, and politically brilliant maneuver.
Calling out China for lowering the value of its currency to make its exports cheaper as it struggles with U.S. tariffs and slowing economic growth draws attention to how the value of the U.S. dollar rises against currencies that are manipulated lower, making U.S. exports more expensive, imports cheaper, inflation lower, and U.S. multinational companies’ overseas earnings weaker when they are translated back into more expensive dollars.
To offset a strengthening dollar and its negative implications the Fed can and will lower rates to at least match other central banks lowering their benchmark rates.
President Trump just guaranteed that, and at the same time gave the Fed cover to sell the public on it lowering rates again come September, on account of potentially negative economic implications stemming from the ongoing trade war with China.
They won’t say they’re lowering because the President forced their hand, or because they want to soften up the dollar. They’re too independent to admit they’ve been played.
But central banks are kowtowing to politicians, like never before, and it’s going to end badly.
Just yesterday I shared on Varney some of the implications of interest rates dropping throughout the world. The primary short-term effect is that the dollar will gain strength, which is problematic for international companies who make profits from overseas and explains why we are seeing the problem now in this earnings cycle. But there’s much more going on, so click here to watch and then read on to what I couldn’t share on tv.