Partly due to will-this-ever-end White House political circus, the U.S. dollar is weakening like my knees whenever I see Justin Bieber. Here’s my take:
- Confidence surveys (e.g., NFIB, U of Mich) are down only slightly from elevated levels.
- A stronger dollar would indicate that the Fed is getting ahead of the curve. Since this isn’t the case, the FOMC still has room to raise rates. Which they’ll probably wait until December to do. Dollar will strengthen like when Superman feels the sun if the Fed follows their dot-plot forecasts.
- I still expect a pro-growth US tax bill to pass despite the healthcare reform attempt failing.
- A weak dollar should benefit the US and emerging markets (EM). A stronger dollar benefits EU and Japan. EM growth is picking up so I see faster global growth for now which should help corporate earnings.
- Historically, a weak dollar means higher commodity prices, which sucks for the consumer. But with oil prices declining, due to oversupply factors (e.g. fracking, Libya/Nigeria production, etc.), this historical relationship isn’t happening.
- Low oil prices + US at full employment. Wages are rising (slowly) and trending upward. US ain’t looking so bad at the moment.
Bottom Line: Business cycles do not end with corporate profits up AND wages up together. The weaker dollar supports profits. Commodity prices are in check. And full employment in the US supports wage gains. We’re in the Goldilocks…not-too-hot-not-too-cold mode.