In a seeming break from the recent pattern, Chinese data came out slightly better than expected. Although it’s no barn burner, Q3 GDP was forecast at 6.8%, but came out at 6.9% versus the 7% in Q2. Perhaps the weaker industrial production numbers and retail sales data are of greater relevance as they are more current, and less subject to inaccuracies than lagging GDP numbers. But even here, while the industrial production numbers were slightly disappointing, the retail sales data looked quite encouraging to me – a slight improvement on both the previous data and expectations. At the end of the day the Chinese are trying to rebalance their economy from manufacturing to a more consumer driven structure, this data will certainly help, although we need a decade of such numbers to get us to the end goal.
It’s no surprise that markets in general are fairly calm, as the data is not particularly controversial. Today is actually a very quiet day on the data front, with the Chinese data by far and away the most significant. The only other item of interest to look forward to today is another speech from Lael Brainard, one of the newer FOMC members. She is very much on the dovish side, and seems to one of a few members who strongly oppose the tone of recent speeches by Chairwoman Yellen and her deputy Fischer. Both have been talking up interest rate normalisation given the achievement of the Fed’s labour market target. The problem is that Brainard and one or two others do not agree with the underlying economic theory behind the push for interest rate normalisation. The theory states that once the labour market tightens up, wage growth is inevitable and therefore there is a serious risk of rising inflation. This is all about the Philips Curve, and to be fair, Brainard has a point… this theory was discredited in the 1970s. I’m sure the likes of Yellen are aware of this, but there are other arguments for normalisation, not least the fact that investment decisions in this current zero bound environment seriously misprice the cost of money and are likely to prove to be expensive misallocations of capital. You only have to look at the problems the Chinese are having now. The bottom line is that there is an increasing uncertainty as to when interest rates will normalise in the United States. On this basis there might not even be a positive case to be bullish dollars at the moment. There would still, however, remain a strong negative case for dollar bullishness, which is that other currencies actively want to depreciate versus the greenback at the moment. Whether you look at the Japanese yen, the euro or even the Swiss franc. And given the relative strength of the US economy this should remain the case.
From all this I remain comfortable with my bigger picture view which looks for an eventual continuation of dollar strength, the seeming dissent amongst US policy makers does make the timing more difficult to determine at the moment.
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