Market Strategy Radar Screen Weekly September 19, 2016

  Ch-ch-ch-ch-Changes (Turn and Face the Strange)

Last week’s rotation was a small part of the larger rotation that began at the end of Q2

In this week’s MSRS we consider some of the action we observed last week on the radar screen.

The dollar advanced 0.8% last week against the DXY index (a basket of six developed nation currencies) on expectations for a Fed hike before the end of the year. The dollar, though higher on the week, was as of last Friday 2.6% lower from where it started the year and 1.4% lower from its post-Brexit peak on July 22nd.

Manufacturing:

The Empire Manufacturing Index and the Philly Fed index data released last week added to the mixed picture as the Empire State (NY) region delivered disappointment in manufacturing while the Philadelphia region saw a rebound.

To us a combination of the dollar’s post-Brexit rally along with persistent weakness in global growth will broadly remain a challenge for the foreseeable future for US manufacturers. That said, with some foreign investors beginning to lighten up on their US holdings as foreign central bankers begin to show a reluctance to provide much more stimulus, the dollar may resume a weakening trend that could add to the competitiveness of US multinationals.

Inflation? We say compared to what?

Economic data tied to stateside inflation released last week added some support to a call for higher interest rates while other data points argued against it.

The CPI (Consumer Price Index) and the PPI (Producer Price Index) respectively showed some better than expected increases for the month of August (see charts on page 6 for details) but they’ll need to be followed by further gains in subsequent months before establishing a trend of higher inflation.

For now we believe that inflation looks like it’s headed in the right direction but still remains below the Fed’s objectives for the metric. To us that signals that while things are getting better from an economic perspective they’re not getting so good that they’re at risk of pushing the Fed into over-reacting.

Weakness in the advance retail sales number last week along with a drop in the University of Michigan Consumer Sentiment index also added to the thought that enough challenges remain in the consumer space (the key driver of the US economy) for the Fed to remain vigilant but patient in the process of normalizing interest rates.

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