Market Dancing with the Dollar

The dollar got clobbered on Friday and stocks rallied. It is down again this morning and the equity futures market has a positive disposition.

Currently, the U.S. Dollar Index is down 0.3% to 110.53. The S&P 500 futures, meanwhile, are up ten points and are trading 0.3% above fair value, the Nasdaq 100 futures are up 32 points and are trading 0.3% above fair value, and the Dow Jones Industrial Average futures are up 93 points and are trading 0.3% above fair value.

It is an interesting symmetry, only because the Fed has been pretty clear that it is not done yet raising rates. It might slow the pace of its rate hikes but it has “a ways to go,” according to Fed Chair Powell before getting to a restrictive level that is sufficient for getting inflation back down to the 2.0% target.

Other central banks are starting to signal that they, too, might be slowing the pace of their rate hikes. In relative terms, then, the dollar should still be in demand, but for whatever reason, it isn’t at the moment. 

The selling could be tied to some unwinding of a crowded trade, meaning the dollar is hitting a tactical air pocket. Again, we can’t say for sure, but the action in the currency market bears close watching as a market driver.

To that end, it is one of several moving parts this morning that is drawing attention. Other moving parts include the following:

• Apple (AAPL) warning of lower-than-expected iPhone 14 shipments because of production issues in China
• The Wall Street Journal reporting that Meta Platforms (META) could announce a large number of layoffs this week
• A Washington Post report that suggests the White House is urging Ukraine to be more open to possible peace negotiations with Russia
• Lingering speculation that China will relax its zero-COVID policy in coming months even though health officials there said China will continue to adhere to that policy
• The specter of Tuesday’s midterm election and the possibility that it will lead to legislative gridlock for the next few years
• China reporting a 0.3% yr/yr decline in October exports and a 0.7% yr/yr decline in October imports as a reflection of a weakening in global economic activity
• An 8.5% jump in natural gas futures to $7.33/mmbtu and oil prices, while down 0.6% at the moment, hanging above $90.00/bbl

The Apple news might have been considered a bigger shock to the stock market a week ago, but a week ago it was considered to be a possibility given the reported COVID restrictions that impeded production capabilities at the Foxconn manufacturing plant in China.

AAPL has fallen 11% from its high last Tuesday, so the fallout this morning after the warning has been relatively modest all things considered. It is down just 1.5%, but nonetheless that has created a drag on the S&P 500, Nasdaq 100, and Dow Jones Industrial Average futures.

META, which is up 3.0%, is helping to offset some of that weakness. Investors are responding favorably to the notion that large layoffs are going to create some expense savings for the company.

Still, Apple carries far more market weight than Meta does. With a $2.2 trillion market capitalization, it is nearly 10x the size of Meta Platforms.

These companies will be talking points today, yet the October Consumer Price Index that will be released on Thursday will be a talking point throughout the week. That report will offer the latest read on consumer inflation and it will certainly fuel the market’s thinking about whether the next rate hike in December will be 50 basis points or 75 basis points.

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Originally Posted November 7, 2022 – Market dancing with the dollar