Europe has stalled, Asia is slowing and Australia has stumbled but the US economy continues to power ahead.
Eventually rate rises will sap US economic strength but we're not there yet. Today's jobs report shows a resilient economy that's diverging from the rest of the world.
Unemployment at 3.5% is at record lows once again and there are no signs of mass layoffs outside the bloated tech sector.
The FX market has largely priced in divergent economic fortunes and that's why the US dollar has been so strong this year but there's an expectation that the Fed will pause before 5.00% and see how the economy evolves. For much of the past week bets were growing that the move after that would be a cut but now the risks are growing increasingly two-sided.
Pivots from other global central banks have prompted the thinking that the Fed will do the same but we could be entering a scenario where the divergence grows. That will prompt another leg in USD strength all the problems that come with it, especially for emerging markets.
The refrain is that the Fed will hike until something breaks and with numbers like this, that's increasingly possible.
The other risk is that monetary policy still operates with a long and variable lag. Several Fed officials -- including Cook yesterday -- asserted that lags aren't as long anymore because of the bond market and forward signaling but companies are still loathe and slow to cut workers and draw down inventories. That could mean that lags are longer than usual and that hiking rates will eventually be a big policy mistake.
For now though, you have to go where the data leads and that means US dollar strength -- at least until next Thursday's CPI report.
