But Wall Street tends to quickly get sucked into emotional ebb and flow. In the case of the past couple of months, they’ve been adjusting down the bar for earnings and the economy, and we get positive surprises, which are good for stocks.  Today’s number was a big positive surprise — 304k added jobs.

Maybe a more interesting number was the manufacturing number.

The economic activity in the manufacturing sector continued to expand in January, and came in hotter than expected.  In a month of January, where all we heard was the story of slowdown, the nation’s supply executives broadly reported the manufacturing sector to be growing, and a faster clip.

Meanwhile, the inflation component came in softer.  And as you can see in the chart below, it has been on the slide.

To this point, stocks have followed a December loss of 9% with a bouncein January of 6%.

We remain about 10% off of the October highs (all-time highs).

The opportunity to take advantage of this bounce in stocks is very attractive, but there are even more attractive opportunities in stocks outside of the U.S.

First, and importantly, the dollar is in a long-term bear cycle….and it’s early.

Here’s a look at the long-term dollar cycles dating back to the failure of the Bretton-Woods system …

The dollar is down 8% in this new bear cycle, and about two-years into a cycle that should run another five to six years. These are the early innings.

A lower dollar should fuel capital flows into foreign stock markets.

Among the most interesting:  Japanese stocks and emerging markets.

Here’s a look at the Nikkei…

Back in late 2012, Shinzo Abe, then candidate for Japanese Prime Minister, promised a big and bold QE plan to beat two decades of deflation, and he had his hand selected candidate to run the BOJ, in waiting, to execute it.  As you can see in the chart on stocks, that beganthe sharp rise in Japanese equities. And that trend too, still holds after the recent sell-off.

Seven years later, the Bank of Japan is now the lone global economic shock absorber (i.e. they are the last major central bank still easing and will be in QE mode for the foreseeable future).  As part of their QE program, they continue to outright buy Japanese stocks.  While U.S. stocks are 10% from the highs of last year, Japanese stocks would still need another 20% to regain the 2018 highs.

As for EM:  If we consider where emerging market stocks were a year ago, and now introduce the possibility that China may be coming to the table later this month with a deal (at least on trade) that will include balancing trade with the U.S. over six years.  How might EM economies look if the world’s leading exporter (China) no longer unfairly floods the world with its cheap products?

Here’s a look at the chart on emerging markets.  You can see we’re getting a big trend-break this month of the ugly downtrend of the past year. 

Finally, a falling dollar and a deal with China is jet fuel for commodities. And you can see in the chart below, this huge downtrend of the past decade is nearing a break.  

January 11, 5:00 pm EST

Trade talks with China came and went again this week without any notable progress, at least in the respective statements from both parties.

But the behavior of the Chinese currency tells a different story.

Remember, China controls the value of its currency.  They “fix” it every day. And they’ve been walking it higher.  That’s a big signal.

Here’s a look at the chart …

This chart shows the dollar/yuan exchange rate.  When the orange line is rising the dollar is strengthening, the yuan is weakening – and vice-versa.

You can see in 2015 and through 2016 (Line 1) the Chinese devalued the yuan by about 16% to respond to weak exports and sluggish growth.  When Trump was elected, he made it clear he would be coming after China for their cheap currency policies (i.e. manipulating the yuan to retain dominance in global exports).  With that, the Chinese strengthened the yuan in effort to stave off a trade war.  It didn’t work. And you can see in the most recent run up (Line 3) how they’ve responded.  They’ve gone back to weakening the currency.

Now, as we’ve discussed, the lower stock market has put pressure on the Trump agenda, which makes it more likely that some ground will be given on the demands that the U.S. has made on China.  So, with this backdrop in mind, how can Trump get to a deal on trade that gives him a win — and gives China an out, for the moment?  The Chinese currency could be a tool to get to an agreement – maybe China taking it back to 6 yuan per dollar in the near term.