- The US economy grew at an annualized rate of 6.9% in the last quarter, beating estimates.
- Inflation eroded another 7% of growth, indicating the Fed's hawkish stance and boosting the dollar.
- Fast growth in inventories is a sign of easing supply-chain issues, supporting stocks.
Finally, some straightforward responses – the dollar and US stocks rise together in response to strong US data. Good news for the economy is also positive for traders, who now have an easier path to trade. The safe-haven dollar trade is gone, or at least suspended.
Gross Domestic Product figures help shape this new correlation, but it builds on top of the Federal Reserve's decision. Starting from the data release, Washington reported an annualized growth rate of 6.9%, far above 5.5% expected, and an encouraging figure in absolute terms.
That came despite higher inflation, 7% annualized in the fourth quarter. In nominal terms, the economy expanded at a whopping rate of 14.3%, or 10% for the entire year – far above 5.7% in real terms.
Fast growth and strong inflation justify the Fed's decision to tighten its policy, kicking off with a rate hike in March – one of many. It also vindicates the words from Chair Jerome Powell, who said that the labor market can handle higher borrowing costs. The strong economic figures point to employment growth.
While tighter policy supports the dollar, shouldn't stocks suffer? Apart from the easy explanation – economic growth means higher company profits – one detail in the report also provides hope. Inventories added no fewer than 4.9 percentage points to GDP growth.
What does inventory data mean? In normal times, when companies replenish inventories during one quarter, they tend to deplete them in the next one. However, these are times when supply-chain issues dog the US and global economies. This leap in inventories is a sign that supplies are moving along.
When there is merchandise in storage, it is easier to fulfill consumer demand. Moreover, it should help ease inflationary pressures as well. That is a win for stocks.
At the moment, price increases remain rapid and the labor market is tight – meaning higher rates and a stronger dollar.
This tandem increase in the dollar and stocks is set to continue, assuming no geopolitical shock.
