The Inflation Train Has Left the Station: Why I'm Most Convicted on a Stronger Dollar

TL;DR I think the inflation train is leaving the station. Oil is still near $100, yields are rising, and the dollar is firm. My most convicted idea is a dollar index breakout (100.5) and higher yields — which can coexist with a pullback in stocks.

My most convicted view: dollar and yields rising together

My base case is clear: a higher dollar index, higher yields, and re-igniting inflation. The dollar index has been stuck in a range for over a year, going essentially nowhere — but I think the market is now entering a more interesting phase.

The dollar broke above 99, retested it, and held that level again today. The real inflection I'm watching is 100.5. If that technical breakout happens, I think dollar strength and a stock pullback can show up together.

Why inflation is the problem again

Inflation is so devastating to the consumer because it hits everyone at once, whether you have a job or not. Rising unemployment is painful for those who lose their jobs, but rising inflation forces even employed people to pull back on spending instantly. It's an immediate subtractor from economic activity.

Last week's PPI came in well above expectations in both the U.S. and Japan. I see Japan as an important catalyst. When the BOJ and Japanese government bond (JGB) yields blow out, that's a problem that lifts yields everywhere. We're seeing global yields float higher in tandem.

Oil matters too. Even with ceasefire and "it's over" headlines flying back and forth, oil is still sitting around $100 a barrel. Historically, recessions often follow a sharp rise in oil prices. When everyone's gas bill jumps 50%, spending stops, companies lay people off.

Jobs: "quiet" rather than "bad"

The employment figure came in at 115,000 versus 65,000 expected. But ADP and jobless claims were softer than expected — a mixed bag. And even as a beat, 115,000 is very low compared to the last few years. I'd call this jobs market "quiet" rather than bad or good. It's not falling off a bridge right now, but it could if we get a shock, like a spike in oil.

Can stocks still hit all-time highs with a strong dollar?

One question remains: can stocks make all-time highs while the dollar rallies to 104-105? If it happens, it's probably a rotation. I have a hard time picturing the dollar breaking out while tech just keeps ripping.

A market where the dollar, yields, and tech are all screaming higher at once would be like the late-2001 pandemonium — a slap-in-the-face moment where valuations are completely disconnected from prices. In that kind of market, I'd step to the side.

Here's my conclusion: the inflation train is already moving. Maybe it hits a brick wall and stops, but more than likely it keeps going. That's why I'm leaning to the dollar-bullish side.

FAQ

Q: What's the key level on the dollar index? A: 100.5. If that technical breakout occurs, I think dollar strength and a stock pullback can appear together.

Q: Why does Japan matter for global yields? A: When the BOJ and JGB yields spike, they put upward pressure on yields everywhere. We're already seeing global yields rise in tandem.