Final update before Christmas. Last week, markets were once again at the mercy of the Dollar. Expectations regarding future rate cuts on the Greenback continue to be the dominant factor pushing currency pairs back and forth. Commodities and stocks were equally vulnerable to the whims of the Federal Reserve. So what did the Fed board members have to say? Essentially, that the unexpected resilience in the US economy and labour market, coupled with decreasing inflationary pressures, mean that the need for rapid rate cuts is simply not there. The same cannot be said for other economies around the world, hence the strength observed in the USD. In a well-telegraphed move, the Bank of England elected to maintain rates on the Pound at 4.75% last Thursday, however the decision to do so was less unanimous than economists had predicted. A small surprise, but one that caused Cable to test $1.25 for the second time in as many months. The Euro is facing its own battle, dipping below $1.04 once again and now perched precariously above the danger zone. The Yen also has its own problems to contend with, USDJPY remaining stubbornly high all year and creeping back up to the 160 level last week despite the Bank of Japan’s best efforts. A surging Dollar has put a lot of pressure on gold, which now sits more than $150 off its record high set in late October. Bitcoin has shouldered the pressure much more valiantly over the past couple of months, although it too suffered a harsh reality check last Wednesday following the Fed meeting, which forced it back down to five figures. The economic calendar is looking especially barren this week, as well it might. Time to focus on matters closer to home. Merry Christmas.
Brutal. Markets across the board suffered through a nasty correction following the latest Fed meeting. The decision itself was not unexpected – an interest rate cut from 4.75% to 4.5% was thoroughly priced in beforehand. The surprise came in the form of next year’s forecasts, which now predict fewer and slower rate cuts than had previously been assumed. The US Dollar shot up unilaterally, demolishing currencies pairs from America to Europe to Asia. The Euro smashed down to $1.035; Cable is down to $1.25; the Australian and New Zealand Dollars are hitting multi-year lows; the Korean Won is now matching prices from back in 2009. Greenback dominance pushed the DXY above 108 for the first time since 2022. Yesterday, the Bank of Japan and Bank of England both elected to forego any rate cuts of their own, as widely expected. Of course, a surging Dollar comes at the expense of everything else. US stock markets fell precipitously on Thursday, the Dow falling 2.6%, the S&P 500 losing almost 3% and the Nasdaq Composite faring the worst of all with a 3.6% loss. Major indices in Europe did not escape unscathed either. Gold took a devastating blow, falling over $60 on Thursday to $2,585 an ounce. Bitcoin plummeted back below $100,000 following the meeting, taking the wider crypto market along with it. A rough day in the office to say the least. The only real significant event remaining this week is the publication of the PCE price index later today. The figures have been known to influence the Fed decisions in the past, but the next FOMC meeting is not until the 29th of January. Next week has almost nothing to offer in terms of tradeable events either. Time to settle down for the year.
More than you might think… At first glance, the extravagance and glamour of the fashion industry seems entirely opposed to the serious and sombre world of finance. Fashion shows are sometimes so over the top that they defy any attempt at parody. Financial expos on the other hand can be so mind-numbingly tedious that they make attendees wish they had chosen different career paths. So what is the connection? The answer lies in economic indicators. Economists love indicators. Everyone has heard of the Purchasing Managers’ Index (PMI) and the Consumer Price Index (CPI), but there are many more out there, such as the Big Mac Index or even the Guns to Caviar Ratio. Some are clearly more serious than others. Economists routinely pluck data from a number of different sectors and the fashion industry is no exception. Here are some tailor-made indicators sewn into the world of fashion. 1. The Hemline index The Hemline index dictates that during times of financial growth, skirts get shorter; during times of hardship, they get longer. This trend was first observed in America all the way back in the 1920s. This period is referred to as the roaring 20s for good reason. The decade was characterised by massive growth, prosperity and consumerism. The boom was not limited to economic factors however, the 1920s saw the rapid development of technology, music, arts and of course… fashion. Interestingly, women’s skirts followed the same rise and fall as the stock market. Looking at the Dow Jones Industrial Average and the length of women’s skirts shows a clear link. At the beginning of the decade, skirts barely rose off the ground. By 1926, skirts were short enough to reveal the knee and stayed that way until 1929. It was an exciting time to be alive, but as with all good things, it came to a crushing end. The roaring 20s culminated in the stock market crash of 1929, resulting in both the Dow and hemlines dropping precipitously. Traders and perverts both suffered a devastating blow. The roaring 20s quickly gave way to the great depression which characterised much of the 1930s. The financial landscape changed dramatically for the worst and fashion sensibilities reflected this. Dresswear returned to a more formal style and hemlines stayed low for the entire decade. With the advent of the Second World War, fashion took an understandable step back. Wartime economies took over and a huge number of women entered the workforce. Out of necessity, women’s clothes became more functional, knee-length skirts became the norm but offered very little in terms of flair. Although somewhat of a special case, wartime economies generated considerable growth and women’s clothes reflected the robust nature of the time. By the 1950s, people were practically begging for a little extravagance. They would get it in spades. The post-war economic boom, particularly in America, saw a healthy injection of elegance into the world of fashion. Layered skirts, poodle skirts and cocktail dresses were all the rage. Financial markets were booming again, and hemlines would rise along with them. By the 1960s modesty went out of the window completely and women were showing more of their legs than ever before. Economic largesse pushed the boundaries of fashion to create the mini-skirt. Hurray. The decades that follow are a little harder to track. Fashion became much faster from the 70s onwards. New trends would spring up seemingly overnight only to disappear within a season. Culturally, society was also much less uniform. Distinct cliques appeared, each with their own dress sense. The hemline trend became muddier from this point onwards. Like all such indices, the Hemline Index is kind of half way between a joke and a genuine economic indicator. Nevertheless, a group of researchers in Rotterdam with far too much time on their hands looked at the data and concluded that there is indeed a link between situation of the time. Not only that, but they discovered that there is a three-year lag between the two. Unfortunately for traders, the market moves first, making all this research useless for predicting market movements. The connection between finance and fashion is not merely limited to clothes but extends to make-up as well. The lipstick index is a bit of a strange phenomenon: it states that during times of economic downturn, lipstick sales actually increase. The term was first coined by Leonard Lauder, chairman of the board and son of Estée Lauder. He made the claim in the early 2000s that there was an inverse correlation between cosmetic sales and the wider economy. The Dot-com bubble burst in 2000, leading to a period of brief economic decline. During the same period, sales of lipstick and other basic make-up items actually increased. Lauder speculated that during times of hardship, women tend to forgo more expensive fashion accessories and jewellery in favour of more simple and high-impact items like lipstick. About ten years later, in the 2010s, people began to dismiss the index as a silly idea. Ah yes, the lipstick index, how ridiculous! The nail polish index on the other hand, now that’s the kind of serious indicator the world of economics yearns for. The nail polish index did indeed gain traction for a while, following the same rationale, but similarly fell out of use after a few short years. One more attempt was made to resurrect the concept, in the form of the mascara index. This occurred during the Corona virus pandemic, which prompted the worldwide widespread use of masks. What’s the point of using lipstick when wearing a mask all day? Absolutely no point. Mascara however? Just visible enough to justify the extra expense. We now push the connection between finance and fashion one step further, this time expanding into the sacred realm of the hair salon. Japan serves as the stage for this one. The Japanese post-war economic boom came to a brutal halt in the late 1980s, resulting in a market crash that would take decades to recover from. The Nikkei 225 peaked in December 1989 and wouldn’t see such valuations again until 34 years later. For Japan, the 1990s could not have contrasted more starkly with the previous decade. The financial fallout was obvious to see, but once again, many other aspects of society and culture followed suit. One observable element was the length of women’s hair: after the crash, hair noticeably shortened. There is an obvious explanation for this: haircare products cost money. Shorter hair is cheaper and easier to maintain. An attempt to quantify the phenomenon was made by Kao Corporation, one of the leading cosmetics companies in Japan. The results, published by Nikkei Business Daily, claimed that up until 1990, 60% of women in their twenties kept their hair long. Following the stock market crash, short hair became the dominant style. In the years that followed, long hair would gradually some back in style, reflecting the growth in the Nikkei from 2010 onwards. As we begin to scrape the bottom of the barrel of financial indicators, we stumble across the Sports Illustrated magazine, in particular the swimsuit edition, more precisely the model on the front cover. Unlike previous entries, this indicator actually seems to have some predictive power. The theory goes that the nationality of the model on the front cover of the magazine predicts the performance of the S&P 500. If the model is American, the S&P 500 performs well; if the model is of a different nationality, the index will underperform. The index has been retroactively calculated back to 1978 and the results are indeed impressive. Between 1978 and 2008, the S&P 500 averaged a 10.5% annual return. Around half of those years featured an American model and during those years average return rose to 14%. In contrast, the years featuring a model from outside of the US produced an average return of just 7.2%. Not a bad correlation at all. Beats most hedge funds. Unfortunately, 2008 was a terrible year for the index. Sports Illustrated featured American model Marissa Miller on the front cover that year, only for stock markets to undergo one of the worst sell-offs in history a few months later. Can’t win them all. Conclusion Looking at charts all day, it is easy to forget that the numbers on the screen do in fact have real world equivalents. Stock markets are not isolated entities. The rise and fall of asset prices have a profound effect on our lives. The roaring 20s encapsulated a genuine cultural revolution that changed the world forever. The 60s likewise permanently shifted societal norms. In Japan, the implosion of the Nikkei in 1989 had a profound impact on the nation, its people, and its culture. The financial crisis of 2008 likewise left an indelible mark on the world, affecting the global monetary framework to this day. With such far reaching effects, is it any wonder that the whimsical fashion industry is one of the first to reflect the economic conditions of the time?
The exception is of course the crypto markets, which saw Bitcoin prices push beyond $108,000 yesterday. Bitcoin is now up over 50% following the election of Donald Trump and cryptocurrencies in general have experienced a wave of optimism since the 5th of November. The biggest factors behind the drive are investors piling into Bitcoin ETFs but perhaps more importantly the expectation that greater regulatory clarity will bring forward more actual adoption of the technology. Despite US-based companies practically begging for more transparent legal frameworks, the outgoing SEC administration utterly failed to deliver over the last few years. The new SEC chair appointee has yet to take up the mantle but has already drastically shifted sentiment in that regard. The total crypto market cap is now approaching $4 trillion, rivalling the largest US tech stocks. Speaking of which, Apple (AAPL), Amazon (AMZN) and Alphabet (GOOG) all established record highs this week, pushing the Nasdaq Composite to do the same on Monday. The rally has been firmly confined to the tech sector however. The Dow is currently in the midst of its worst losing streak since 1978 with nine consecutive daily closes in the red. Still some time to go before the Fed makes its decision. Most markets participants will have to wait until tomorrow to see any kind of reaction, if indeed there is any. FedWatch is now predicting a 25-bps cut with 96% certainty. Likewise, the Bank of Japan and Bank of England aren’t expected to produce any surprises tomorrow either, markets fully anticipating rates on the Yen and Sterling to remain at current levels.
The last week before Christmas is upon us. The New Year is just around the corner. Time is running short but Santa may have a few surprises in his sack before much of the world slows down for the holiday period. The Dollar took an unopposed step higher last week, traders seemingly unfazed by the Fed’s impending rate decision. Gold did not fare so well, opening the week strongly only to squander its momentum in the final stretch and end with a mere $15 weekly gain. As things stand there was very little enthusiasm this morning either. Bitcoin made a more decisive move on Sunday, reaching up to $104,000 and actually staying there for once. Judging by the movements earlier today, the move may still have some legs on it. Oil prices also saw some optimism, with Brent Crude aiming towards $74 and WTI climbing back above $70 a barrel. Much like the last, central banks dominate the economic calendar this week. The Federal Reserve is the one markets have all been waiting for and arrives late on Wednesday. A 25-bps rate cut is thoroughly priced in at this point, so expect any deviation from that on either side to have a significant impact. Thursday offers rate decisions from both the Bank of Japan and Bank of England. Neither are expected to budge from current target rates, but currency traders would do well to keep an eye out just in case. The other major event this week is the PCE price index on Friday, although given its publication straight after the Fed’s decision, it is likely to have less of an impact than it otherwise would.
The Swiss National Bank surprised markets yesterday with a 50-bps rate cut, bringing the target rate down to just 0.5%. The larger-than-expected adjustment weighed heavily on the Swiss Franc, pushing it down against the Dollar and the Euro, to $1.12 and €1.07 respectively. Over the last few years, the Swiss Franc has stubbornly appreciated against other major currencies but particularly against the Euro. The strength of the Franc has suppressed inflationary pressures locally and also negatively affected the Swiss export market. Monetary authorities in Switzerland have sought to mitigate these issues in recent times, with mixed results. The currency remains attractive due to safe-haven inflows and because interest rates on the Euro are expected to continue to decline further. The SNB still has a couple of tricks up its sleeve, including negative interest rates, which were used to great effect between 2014 and 2022, as well as the ability to deploy its huge balance sheet. The European Central Bank enacted a rate cut of its own yesterday, lowering rates on the Euro by quarter of a percentage point, to the surprise of no one. Nevertheless, the Euro continued its fall this week, now approaching $1.045. The Dollar is back on the front foot, pushing the DXY over 107, despite an all but certain incoming rate slash from the Fed next week. The fact is that most currencies are in a race to the bottom, interest rate wise, and the Dollar is falling slower than the rest.
