We see how powerful central banks minutes can be

Outlook:

We see how powerful central banks minutes can be—Australia and Britain so far this week—so earlier sanguinity about the FOMC minutes today is giving way to anxiety that the US hawks will be raucous. But then Yellen may be dovish on Friday at Jackson Hole, even though everybody and his brother admits Jackson Hole is not the venue for policy. Hawkishness in the minutes but then dovishness at Jackson Hole have the potential for confusion and volatility, not to men-tion yet another failed dollar rally. After all, the global investing gang wants risk and embraces risk now, including equities and emerging markets, on already built-in Fed dovishness. But the Jackson Hole topic is “Re-Evaluating Labor Market Dynamics,” implying that we might get some original research that could shift the degree of perceived dovishness. And yet Yellen is thought to be taking a very cautious stance and great effort to avoid roiling any waters.

We would welcome a new approach to thinking about these issues and would like to see wages become more central in the Fed’s policy. To a certain extent, this has already happened, with both the UK and US breaking “forward guidance” from the single unemployment number. Now it’s time for the wage aspect to be developed more fully. Well, a girl can hope.

If the dollar is stronger because traders think the FOMC minutes will be less dovish and that Yellen will be less dovish on Friday, we could be in for a crash. Some analysts (Goldman) say zero returns in Ger-many, plus geopolitical problems and Mr. Draghi’s plans, will send money hot-footing it out of Europe to the dollar’s benefit. This is a pipedream. Investors demanded ¥8 billion of ¥4 billion on offer of the German Schatz today—at zero return. Does that look like capital flight? The euro has permanent rock-star quality because the ECB credibly promises no inflation. The US is still seen in many quarters as playing an uncertain game with inflation, risking too much. If investors want yield, they can go to equi-ties and emerging markets, where at least you know you will get inflation but can more easily adjust yield for it.

In short, the new dollar rally is highly susceptible to the same disappointments as before. We don’t ex-pect a new taper tantrum or even much of a rise in the benchmark 10-year yield, not to 3% as we had at year-end. Without a rising yield curve and in the absence of horrible geopolitical condi-tions, what really supports the dollar?

And let’s not forget other upcoming data, including Japan’s Aug PMI and the HSBC flash manufactur-ing PMI for China, both tonight.

Note to Readers: We will take off next Thursday and Friday, Aug 28 and 29. These dates precede Labor Day on Monday, Sept 1, which is a national holiday in the US. There will be no reports on Thurs-day, Friday or Monday. We return Tuesday, Sept 2.