A Gun Fight

I couldn't resist inserting this link to the You Tube clip of Indiana Jones taking on the sword wielding bad guy.  The rule of course is never bring a knife to a gun fight!

https://www.youtube.com/watch?v=7YyBtMxZgQs

So while the market tries to blow off the Chinese devaluation of the yuan (twice in two days) it is clear that the Federal Reserve is bringing its sword to the gun fight that is currency devaluation.  Already this year the dollar has surged against a basket of currencies (see graph below) but apparently the Chinese economy, the second largest in the world, needs more help to try to resume its growth.  (This is a five year graph with 2015 in the last block of the graph.)

This dollar surge is hurting the large companies that represent the S&P 500 for the simple reason that the price of US goods and services when priced in dollars is becoming more expensive throughout the globe.  Already we are seeing companies from Apple to Tesla complain of the negative effects of the dollar rise and all are ratcheting their growth projections down.  Behind this slowdown are the announcements of large scale layoffs but according to the Wall Street Journal this morning more than 80% of economists expect the Federal Reserve to raise interest rates in September.

Now while I do not expect them to raise rates they might just to show the world how tough they are but that would be akin to the sword wielder in the clip above.  Raising rates would fuel a further expansion in the value of the dollar and would hurt an already slowing economy even further.  Not only would it hurt what is left of economic sales growth outside of the US but it would hurt internal growth as well as a rate increase would feed negatively into housing and investment.

It is interesting then that in light of this and the impending interest rate raise that the bond market is gaining momentum to the upside lowering the yield on the ten year note to levels not seen in months.

So it appears that the bond market is signalling no interest rate hike is coming which to me makes the most sense.  The market itself has struggled to break the trading range since February and briefly broke below support on Thursday before showing a strong recovery but I would not want to be the canary in the stock market's coal mine or the sword carrying Federal Reserve as once they raise rates the rest of the world will relish the chance to devalue further killing off the only economy in the world showing any form of strength.