|Dow||-145.97 to 17,749.25|
|S&P 500||-12.57 to 2,053.38|
|Nasdaq||-21.53 to 4,871.76|
|10-YR Yield||+0.02 to 2.112%|
|Gold||+$2.50 to $1,156.20|
|Crude Oil||-$1.92 to $45.13|
Will That Lead to an Intervention Surprise?
What’s the dollar surge doing to inflation here at home? Check out some of the figures we got in the last 48 hours, and you’ll be shocked:
Import prices have dropped in seven out of the last eight months. On a year-over-year basis, they tanked 9.4 percent in February. That’s the biggest drop since September 2009.
Sure, oil was a big factor in the decline. The cost of imported crude plunged 43 percent from a year earlier. But ex-petroleum prices sank 0.4 percent on the month and 1.8 percent from a year earlier.
A separate report on producer prices showed they sank 0.5 percent in February after dropping 0.8 percent a month earlier. That was much worse than the 0.3 percent rise that economists expected. The year-over-year wholesale inflation rate sank to negative-0.6 percent, the lowest since records began in 2009.
Again, it wasn’t all oil. The “core” PPI that strips out food and energy dropped 0.5 percent as well, compared with the expected 0.1 percent rise.
|The rising dollar makes all those imports we buy even cheaper.|
What’s going on? The rising dollar is importing deflation, that’s what. All those foreign imports we take in get cheaper in dollar terms. And as the dollar goes up, the price of contra-dollar assets like commodities goes down.
Simultaneously, our exports become more expensive on a relative basis versus those sold by foreign competitors based in countries with falling currencies. That puts severe pressure on the large multinational companies that dominate the major averages (Exhibit A: Intel, Weiss Ratings: B).
Bottom line: This dollar surge … the biggest, fastest increase in more than three decades of record-keeping … is creating an inherently unstable situation. It’s destabilizing emerging market economies. It’s hurting corporate titans here at home. It’s working against the aims of policymakers in a wide swath of government.
And that’s why I think we’re getting to the point where intervention is all but inevitable. Verbal intervention. Actual intervention. You name it. Let the imagination run wild and you can come up with all kinds of scenarios …
The Federal Reserve raises rates soon because of the normalization of employment, but simultaneously launches a program of dollar sales to keep the buck from soaring?
The European Central Bank, Fed and Bank of Japan launch a program to buy emerging market bonds and currencies, rather than just their own governments’ bonds, to keep foreign economies from imploding?
|“I think we’re getting to the point where intervention is all but inevitable.”|
Mario Draghi gets so much heat from his U.S. counterparts that he comes out and says “Mission Accomplished” on bond buys? That, in turn, sends the euro up by five cents in a day?
OPEC joins in the “fun” by announcing a surprise production cut of 2 million barrels over a weekend, causing crude and other contra-dollar assets to surge in price? That, in turn, crushes the greenback?
I know it all sounds far-fetched. But so did all the other major interventions I’ve seen in my two decades of watching the markets — right up until the flashing red headlines started crossing my Bloomberg screen!
Bottom line? When moves in any asset market get so extreme that they lead to extreme consequences, I just have one bit of advice. Strap in, buckle up, and expect the unexpected!
Am I completely off base here? Or do you think we’re reaching the point where the dollar rise has become a systemic problem, one that might prompt a major policymaker reaction? What kind of surprise moves might we see, and when? How do you think markets would handle them? Use the Money and Markets website to weigh in on these potentially important matters.
|Our Readers Speak|
Jobs, the dollar rally and the Apple Watch were all discussed in the last 24 hours, and I don’t see those topics going away anytime soon.
Reader Steven said: “So what the heck is causing the dollar’s precipitous rally? My nose is beginning to catch a whiff of something that belongs either in the trash or in the toilet.”
Reader John added: “The euro continues to weaken, probably moved a bit soon as all are indicating parity. However, the strengthening dollar is causing big problems for American companies. How long before the U.S. government takes action to reduce the value of the dollar, as otherwise jobs will be lost in the U.S.?”
Reader Richard also picked up on that line of thinking, saying: “Will someone please grab the CEOs and presidents of the great and good corporations of the world by the throat and give them a good shake? Get them to wake up that they cannot expect the U.S. gravy train to run forever.
“The U.S. dollar is strong, which is going to hurt the bottom line on U.S. exports. Great for Germany and the U.K., which still manufacture and export to the U.S. Just look at the charts — everything has flipped to extremes, from their highs and lows: Gold, oil, currencies, stocks.”
QE talk in Europe, coupled with tougher talk from the U.S. Fed has caused the fastest, most severe rally in the dollar ever. I don’t think that move can extend or even hold for much longer, as verbal (and possibly, actual) intervention from central banks and Treasury officials is likely right around the corner. But we will see!
Finally, Reader Jo shared an interesting thought about who might be interested in an Apple (AAPL, Weiss Ratings: A+) Watch — and it’s not what you might expect at first! The comments:
“Concerning the fear that the Apple Watch might be an Apple flop: I got a late-night call from my son, a hard working rancher, who has his hands in gloves, water, grease, and who knows what. He said he would be first in line to buy the Apple Watch because dealing with his iPhone can be very inconvenient. Just thought the people who will have no use for the new device probably work in nice clean offices with a desk in front of them!”
Thanks for that perspective, Jo. These are the kinds of great insights many people are sharing at the website, and I encourage you to join in so we can all be better investors. Here’s the link to get started!
|Other Developments of the Day|
Is there too much oil in storage, and is it only going to get worse? That’s the question the International Energy Agency tried to answer in a new report. It noted that U.S. oil storage tanks at the Cushing, Oklahoma hub are around 70 percent full, and that the 468 million barrels of oil in storage is much higher than the five-year average.
At the same time, the IEA boosted its 2015 forecast of worldwide oil consumption by 130,000 barrels per day. And it noted that rig usage has collapsed at the fastest rate since the 2008 financial crisis. That’s the kind of thing that will ultimately restore the supply/demand balance in crude.
Not so long ago, Russia was jacking up interest rates to stabilize its plummeting currency and other financial markets. Now, the central bank has just lowered rates by a percentage point to 14 percent. That sign of normalization was appreciated by investors. But Russia’s markets are closely tied to oil prices. So if energy slumps, Russian stocks, bonds, and the ruble currency will likely fall, too.
Which companies have been the most aggressive with firings and layoffs? USA Today called out the corporate cutters in an article today.
Not surprisingly, energy companies Hess (HES, Weiss Ratings: C) and Chesapeake Energy (CHK, Weiss Ratings: B-) were the worst offenders. Others were a mix of firms in the financial, media, consumer staples, and tech industries.
It’s Pi Day tomorrow! No, not apple pie. Pi, the geometry term. Not only that. But on March 14, 2015 at 9:26 a.m. and 53 seconds, the numerical representation of that moment in time will be equal to Pi carried out to 10 digits (3.141592653). That won’t happen again for 100 years. If you’re not excited, then you must have hated math class!
Thoughts on any of these topics? Then don’t hold them in — let loose at the website. And if you’re eating pie for breakfast in celebration of this momentous event tomorrow, don’t forget the whipped cream!
Until next time,