The FOMC may address tapering directly or indirectly

The big news this week, or rather the Big Hint, is the Fed policy meeting on Tuesday/Wednesday. Also Wednesday is the Biden meeting with Putin, and Canada reports CPI. In the US, tomorrows retail sales might be interesting.

The FOMC may address tapering directly or indirectly, but everyone is fairly sure we dont yet have “substantial further progress” on the jobs front, even if the Fed has convinced market players that the inflation bump really is only temporary. A point of contention—the Fed expects tapering to take all of next year with no hike until 2023, something the market almost certainly sees as needing to be accelerated.

A modification to the Fed‘s thinking on jobs may come from some new demographics. The Dallas Fed reports that maybe it’s okay if some of those 7.6 million lost jobs never do come back, since the pace of retirements has speeded up. The WSJ reports “Roughly 2.6 million people have retired since February 2020, according to the Dallas Fed. As the population ages, more workers will become retirees, holding down the number of workers available to take new jobs. The evolving situation means Fed officials may be willing to end some of their pandemic-related asset purchases earlier than expected.”

The dollar was a winner in recent days as it follows several narratives, including relative bond yields but also “confidence in institutions” as well as most economic fundamentals. Over long periods of time, growth is a decent predictor of a currencys level. So what happened to the endless dollar decline？ Some of it is short-covering ahead of important data and now the Fed. Some of it is dismissal of the too-much-debt narrative. Some of it is a really very good vaccination program. Some of it is likely a vote of confidence in the US political system for having gotten rid of the erratic and incompetent previous president.

The question is whether it‘s a temporary correction or a harbinger of more to come. The postponement of the UK lockdown ending may be a test, but the UK has a strong backboard in the form of a high percentage already vaccinated. One of the mysteries of the latest currency moves is the emerging markets. Today the Turkish lira benefited from good trade numbers and Erdogan possibly pulling in his horns, but on the whole, EM’s have moved in mysterious ways of late and refused to rally as they “should” on commodities and overall global recovery. Bottom line, theres a fair amount of doubt about the story of the endlessly depreciating dollar. One story having some plausibility is the dollar gaining a bit against the Chinese yuan, as China grapples with numerous credit issues.

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