Dollar Weakness Continues

Macro Man has previously observed that blog traffic can sometimes say a lot about the significance of market events or interest in a particular theme. If this is the case, then it appears that concern about the weakness of the dollar is very real, as yesterday's post generated a near-record level of traffic. This was largely due to the fact that a few high profile sites very kindly linked to Tuesday's post, but still....someone has to be interested enough in the subject to click through. For the first time in a couple of years, Macro Man finds the subject of external imbalances to be of paramount interest, and since Brad Setser moved on to bigger things, there is perhaps a dearth of commentary on the subject.

Regardless, the drumbeat of dollar weakness rolls on, as the buck is back close to its lows of the year against the euro. Exotic barriers around 1.50 have, by all acccounts, helped put a lid on spot for now, but one would have to believe that it's only a matter of time before the level breaks. Hell, even sterling has continued last week's bid tone; if the BOE minutes don't hint at an appetite for more QE in December, one might reasonably conclude that the Queen's head could enjoy another dies mirabilis.

Although equities had a bit of a setback yesterday, the pro-risk drumbeat marches on (despite the swirling winds of financial and economic protectionism). While the Bank of Canada intimated yesterday that loonie strength would stay their hand on rates for another couple of quarters, another strong currency phobic CB, the RBNZ, changed its tune by suggesting that the strength of the kiwi would not preclude rate hikes.

And in the London morning, China leaked its September industrial production figure, due to be released tomorrow, at a better than expected 14.1%. You could almost literally hear the risk longs shouting "hip hip hooray!"

Regular readers will know that Macro Man has been (incorrectly) fairly sceptical of the green shoots phenomenon and has fought the equity rally (if not position-wise, at least intellectually) for much of the way up. One factor that he almost certainly underestimated, or missed altogether, is that of margins. As a top-down macro guy, he doesn't really gt his hands dirty with company - or sector-specific margin analysis; he has neither the data nor the expertise to do so.

But as a top-down macro guy with a penchant for crafting little indicators, he does have a proxy that he has watched for the last few years to give him a rough idea of what margins are like. Simply put, he looks at the y/y change in US CPI ( a proxy for corporate selling prices) against the y/y change in finished goods PPI ( a proxy for corporate costs).

To be sure, the proxy isn't perfect, nor is it intended to be. But it ain't half bad as a rough-and-ready indicator, as you'll observe that prior "negative margin" readings have typically coincided with recessions/bear markets/ticking timebombs.

As you can observe, after plunging to record negative territory in H2 of last year (a period that coincided with near-record negative equity performance!), the margin proxy screamed higher earlier this year. Macro Man ignored this signal to his detriment. Today, the margin proxy is stabilizing at relatively high levels which, much as Macro Man may hate to admit it, could suggest upside profit surprises (such as those observed thus far for Q3) if maintained.

Rest assured that he will pay this little indicator a bit more attention in the future; it won't just be with currencies that Macro Man gets back to his roots.

Comments

[Macro_Man:]

This is how tops form, when all the sceptics give up their convictions. A big cause of margin expansion has come from a weaker dollar and cutting labor costs. Material and energy costs form only a small proportion of total costs. Rents, medical and food forms a large part of CPI. Sure, that is why healthcare and consumer staples have been posting good results.

For the rest, just give it time. Revenues, margins and the market will roll over sooner or later.

Oct 21 09:28 AM

[Commercial ...:]

Concern for the health of the dollar is real and justified. The current US administration appears oblivious and indifferent to the national debt, current deficits, the nations competitive advantage and national defense.

Pushing a dubious cap & trade bill, a trillion dollar health care revamp, talking about a second stimulus when the last one failed and all-the-while delaying a critical decision on the Afghanistan war for weeks and weeks on-end. The printing presses at the US Mint are running non-stop and it’s all going to be paid for by taxing the mythical “rich”.

What encouragement can we take away from all that has gone on? Not much I’m afraid.

Oct 21 11:39 AM

[sportsguy:]

interesting article, as I myself had all my money OUT of equities within two weeks of the very top of 2008, however, I have not re-invested, as the liquidity source for the current rally can be withdrawn at any time, via the FED or via the collapse of the treasury's funding source, resulting in higher interest rates. However, macro man is missing the same point i missed, a domestic indicator does little to help understand international + domestic growth. If the SP500 represents the worlds' top 250 intl companies, and IF the rest of the world recovers faster and sooner, the domestic indicator will be a misleading indicator.

sportsguy

Oct 21 12:52 PM

[phdinsuntan...:]

Phillips curve revival: is the unexpected, not the expected inflation the way to create jobs. Gold is telling us that no jobs will be created in the US with the devaluation: no deception is policy failure. Inflation will come to both CPI and PPI suddenly with the devaluation via import costs, as all imported inputs go bananas starting with crude oil, thats why natgas is free in the US. Estanflation the obvious outcome. Total macroeconomic mismanagement now: Study Bolivia economy in the 1970s was better treated. Oz dollar only currency doing the right thing. maybe the Korean won. Better than gold until now. China free riding. Europe? Is not a country: statu quo by consensus. Perseve in FX
Chile pesos south african rand and willing to set the trigger anytime. Paul V, too senior to do the right thing? W got Bj funds for the 1001 night oil games and now crude flowing east home, debt well thanks, dying. Kenya folk, oh boy, a bank soon to play your white dust trade sport and get folks under control dude. What a well planned mess! And totally predictable. Orange growers and rigs necks smiling.

Oct 21 07:25 PM