US Growth Revised Lower US Dollar Paradox

US Growth Revised Lower USD Paradox

US Growth was not as strong as first thought in Q4.

GDP was yesterday revised lower to 2.7%, confirming a year that was a real struggle. As we had forecast, but certainly against the general sentiment at the start of 2022.

Equities have continued to price in this reduced economic reality and outlook from the badly mistaken Nirvana sentiments of the time.

As we progress through 2023, we have seen the Services PMI claw its way back to basically flat, at 50.1. After starting the year in contraction.

While the Chicago Fed Activity Index experienced a momentary bounce out of negative territory, the Kansas Fed Manufacturing Production Index confirmed five straight months of contraction.

As we have highlighted here before, both manufacturing and housing in the US have been in Recession for some time. Services looks likely to join them very soon.

There were those who tried to spin revised lower Q4 GDP, as a positive? It isn’t, and is it in any case even relevant as we approach the start of March 2023?

There is no doubt, as I have said, that the US economy stabilised a fraction, but it has done so at most probably near zero growth in this first quarter, and such strength, if you can call it that, looks likely to be short lived indeed.

Yesterday, former Treasury Secretary, Larry Summers, joined my view that the US economy, while showing a glimmer of hope, could ‘pivot’ lower at any moment.

We are indeed in dangerous waters. Stocks have resumed to their downward trajectory a little aggressively over the past week or two, to be accompanying other US asset classes lower.

This has created a great deal of volatility in the US dollar market. Which is being torn between the prospect of another 4-8 Fed rate hikes, and the on-going profound damage this will do to the US economy. Not to mention, of course, the on-going extreme trade deficits scenario.

All of the fundamentals are pointing south for the US dollar. Except two.

That there is a war in Europe which may still engender some safe haven US dollar buying, and that the FED, as forecast all along, will be continuing to hike rates to the horizon and beyond!

For the moment, I expect these later two points to dominate and guide market sentiment to the upside. Particularly, as the Greenback had already experienced a significant correction over the previous six months.

In the longer term, we will be keeping a watchful eye for any price action signs of that previous downward momentum being resumed. As in back of such a development, may well be the global realisation that the US dollar and the US economy are no longer the dominant stories they once were.

Selling stocks and buying the US dollar are, for now, the ultimate defensive strategy.

At some point, we may well see US stock capitulation and accelerated collapse. It would not surprise me if shortly thereafter, it may be the US dollar’s turn to join the great decline.

Clifford BennettACY Securities Chief Economist

The view expressed within this document are solely that of Clifford Bennett’s and do not represent the views of ACY Securities.

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