Can the dollar hold up against economic deterioration?
The news this past week seems to be concentrated on politics, the history of Hillary Clinton, the letter sent to the religious leader of Iran, Iran and Iraqi fighting ISIS, and the lack of any definitive action by the United States.
To the markets, the more important factors were the "runaway" U.S. dollar and the question of when the Federal Reserve will start to raise rates. The basis for all transactions is the U.S. interest rate, its dollar impact relative to its foreign trading partners and valuations of markets. My concern is the effect on the U.S. trade number which must be impacted by the strong dollar and its effect on U.S. goods exports—primarily grains.
The only "positive" for U.S. grain exports is the effect of the weather on other producing countries, i.e. Brazil, Argentina, Canada, Russia, and China. We will have to wait and see if the dollar can maintain its strength in the face of U.S. economic deterioration and geopolitical ramifications of the continuing "animosity" between world powers. Now for some actual information.
The June 30 year treasury bond closed Friday at 159 and 12/32nds, down 10/32nds mostly tied to expectation of a U.S. Fed rate increase and the strong dollar. The University of Michigan’s consumer sentiment index declined to 91.2 in March from the February 95.4 was below expectations and the worst reading since last November. We will have to await Wednesday’s Fed minutes for a clearer picture of its intentions going forward. For now we are on the sidelines, but with a bearish bias to prices and the resulting upward expectations for yields.
The Dow Jones Industrial Average closed Friday at 17,749.31, down 145.91 points and for the week lost 0.6%. The Standard & Poor's 500 Index closed at 2,053.00, down 12.55 points or 0.6% and for the week lost 0.9%. The energy sector was a factor in the S&P weakness. The Nasdaq closed at 4,871.76, down 21.53 points and for the week lost 1.1%. U.S. stocks posted losses for the third week in a row. Weaker than expected U.S. economic data and continued weak energy prices coupled with the strong U.S. dollar is impacting U.S. corporations and results.
The Friday producer price report was a surprise, showing a decline as well as the consumer sentiment slide. We continue to be concerned with the state of the labor situation where the "underemployed" and low jobs participation rate could halt any suggestion as to economic expansion. Less money in the hands of those with jobs means reduced spending. We will be getting the result of the Tuesday and Wednesday Fed meeting and minutes on Wednesday to see if certain "words" are used by Chairperson Janet Yellen as an indication of the Fed’s intentions.
For now we continue to strongly suggest the implementation of risk hedging strategies for holders of large equity positions to protect against the strong possibility of a 2008 type selloff in equities. There is no reason, in my opinion, to "take the ride." I am open to discussion as to strategies.