US stocks remain near record levels as Americans prepare for a long weekend. Liquidity remains thin as most of Asia celebrates the Lunar New Year holiday. Today’s lone data point was a surprise drop in US consumer sentiment. The preliminary University of Michigan sentiment reading came in at 76.2, lower than both the consensus estimate of 80.9 and the prior reading of 79.0. Wall Street was more focused on inflation expectations which saw the 1-year surge to 3.3%, a 7-year high. The Fed has nicely telegraphed they are expecting a jump in yields, so financial markets will be comfortable with some hotter readings. The key test will be in the summer if we continue to see US growth exceptionalism.
Trading the dollar just got a little bit more complicated. The Biden administration is nearing the passing of at least $1 trillion in COVID relief and starting infrastructure spending, but the dollar refuses to break as investors become fixated with the surge in Treasury yields. US growth exceptionalism and a shift on how high the curve will steepen could mean the dollar might have some short-term strength.
The dollar is in for some pain this year as the long-term drivers of an enormous amount of stimulus, ballooning deficit, and the expectations that the Fed will be the last major central bank to move rates higher, will not change anytime soon.
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