US stock markets continue to gyrate though the high-low range for the Dow Jones Industrial Average this last week was ‘only’ 540 points with 50 points for the S&P 500 index. Whereas for the whole of last year, the S&P 500 gained or lost more than 1% on a single day only eight times - the least since the mid-'60s - there have already been twenty-nine 1% moves in the first 69 trading days of 2018. Against this background, the performance of the US Dollar looks pretty tame. The USD index against a basket of major currencies opened last Monday at 89.75 and fell slowly but steadily to a low on Wednesday just below 89.00. It then rallied over half a point to a best level on Thursday around 89.50 before ending the week at 89.35. For all the worries about trade, tariffs, China, Russia and Syria, the entire range over the last 3 weeks for the USD index has been barely 1 ½ points.
On Tuesday, Chinese President Xi Jinping gave a keynote speech at the Boao Forum – often referred to as the Chinese version of the Davos Forum, on the tropical island of Hainan - where he addressed the trade situation. Xi called for an upholding of the multilateral trade system and said dialogue was the way to resolve disputes, diffusing trade tensions with the US. He vowed to open sectors of China’s economy from banking to auto manufacturing, increase imports and expand protection to intellectual property: "China does not seek trade surplus. We have a genuine desire to increase imports and achieve greater balance of international payments under the current account." He said countries should "stay committed to openness, connectivity and mutual benefits, build an open global economy, and reinforce cooperation within the G-20, APEC and other multilateral frameworks. We should promote trade and investment liberalization and facilitation, support the multilateral trading system… This way, we will make economic globalization, more open, inclusive, balanced and beneficial to all."
On the US economy, the latest inflation figures showed an increase from 2.2% in February to 2.4%. Stripping out the often-volatile food and energy components, core CPI rose 0.2% on the month to take the annual rate up from 1.8% to 2.1%. The main reason for the jump in the annual rate is fairly well-known; this time last year saw some aggressive price reductions for cellphone plans and as the falls now drop out of the y/y calculation, so the annual rates jump. Fed Chair Jerome Powell explicitly referenced this in his speech last Friday. Whilst the Minutes of FOMC meetings are often little guide to policymakers’ thoughts as there’s such a variety of opinion expressed and recorded, one thing which was noteworthy about the latest set was the uniformity of views. “All participants agreed that the outlook for the economy beyond the current quarter had strengthened in recent months… In addition, all participants expected inflation on a 12-month basis to move up in coming months.” A number of participants said the outlook for the economy and inflation could lead to a slightly steeper path of rate increases over the next few years and some suggested that at a given point the Fed might have to change its statement language to acknowledge monetary policy would have to move to a neutral or “restraining factor” for economic activity.
The USD index ended the week around 89.75.