The main thrust of our bullish US dollar outlook is the divergence in monetary policy trajectories. We do not think the divergence has peaked and anticipate it to persist through next year and into 2017.   

Since the Federal Reserve finished QE3, the divergence has been driven by easing of policy by the European Central Bank and the Bank of Japan, and a broad number of high and medium income countries, including China. We expect the Fed to participate in the divergence by raising rates.  It has been particularly challenging this year to time the Fed’s lift-off, but the vast majority of Fed officials still anticipate it taking place this year. Of course, some doubt this, and a few Fed officials prefer to wait until next year, but fund managers, corporate treasurers, pension managers and debt managers recognize the risks of a move this year.  And investment is just as much about risk management as it is about securities analysis.  

We thought it helpful to frame this week’s discussion about the macro-developments in terms of the divergence meme.  On balance, we expect the developments in the week ahead to strengthen the theme.  Barring a surprise, which is always possible, the key US economic data is expected to to show that labor market slack continues to be absorbed, the core PCE deflator may tick up, and the consumer is still healthy in terms of real consumption and new auto sales.   

No fewer than eight Fed officials have speaking engagements in the week ahead.   Aside from Chicago Fed’s Evans, we would be surprised if any of the speakers disagreed in tone or substance from Yellen’s remarks from last week.   

On the other hand, the eurozone’s preliminary read of September CPI may ease back to zero from 0.1% while the manufacturing PMI softened.  The ECB staff cut its growth and inflation forecasts earlier this month.   While ECB officials have indicated that it is still monitoring developments to understand if the flexibility of its asset purchases is necessary.  Evidence needs to accumulate, and that evidence is largely in the form of economic data.   The economic reports paint a picture of a region that is expanding by a little more than 1% annualized pace with no price pressures. The growth is too slow and inflation too low to allow the region to grow from under its debt burden. 

Before the weekend, Japan reported that August core inflation (excluding fresh food) slipped back into deflation for the first time since April 2013.  The government downgraded its economic assessment last week.   The Tankan Survey this week is expected to show minor deterioration in sentiment among the longer companies, and a somewhat more worrisome slowing in capital expenditure intentions.