If the dollar is set to rally from here, what does that mean for inflation? A short 🧵
Conventional wisdom holds that if the dollar rallies, US inflation will fall. A good narrative, as the US is a net importer, and imports become cheaper when the dollar strengthens
BUT...
1/8
...but note how in 2022 the dollar peaked right at the same time as core CPI peaked. Sometimes narratives don't work so well
2/8
The dollar rallied hard late last week from a potential key level #bigflip
3/8
A much hotter than expected jobs number (517k) with the unemployment rate (3.4%) at 54-year lows was the catalyst #bigflip
4/8
We also saw a significant improvement in ISM last week, from contractionary territory back into expansionary #bigflip
5/8
Leaving the market with doubts over whether the Fed is as close to the end of its hiking cycle as was assumed
6/8
The dollar will rally if the market is concerned the Fed is behind the curve (again) and has more work to do. The dollar rallying won't itself cool inflation fears, a higher terminal will
7/8
I'll be discussing these issues in context at a free online workshop I'm hosting next Thursday. If this is of interest to you, please come along! taooftrading.com/jumpstart
8/8
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Yeah, yeah, I know the saying. But what if this is a zombie market? One that looks dead but is about to spring back to life as a flesh-eating monster?
Anyway, IMO the risk/reward of going short here justifies a position. I'll explain...
a 🧵
1) The S&P hasn't been able to make any progress at the trendline from the ATH. This coincides with the 1.618 extension from the July highs to the Oct lows
2) Nasdaq futs - this is looking like a false breakout.
I love false breakouts (breakdowns) because they result in trapped longs (shorts) if the breakout (breakdown) doesn't work
Since 1928, the S&P 500 has only posted back-to-back negative years on 4 previous occasions
So that makes another down year in 2023 highly unlikely, right?
Well, maybe not (a short 🧵)
The first time since 1928 the S&P posted consecutive down years was 1929 to 1933
It happened again in 1939-41
Then again in 1973-74 and again in 2000-02
With the exception of 1939-41 (the outbreak of World War II), all back-to-back annual losses in the S&P have occurred during/after the Fed raising the FFR and during a recession