Choppy market ahead, retreat looks like the best policy

Outlook:

This week we get a lot of information on the US housing market—the FHFA home price index (Sept), Case Shiller (also for Sept), October pending sales and Oct new home sales. Wall Street guru Lynne says the weather is about to be disastrous for this sector, so take early profits if numbers are good and boost sector equities.

We also get another revision of Q3 GDP and some preliminary Q3 corporate profits. And don’t forget OPEC on Thanksgiving day. For today, we get the preliminary Markit service sector PMI and the Chi-cago Fed index as well as the Dallas Fed manufacturing index for Nov. Dallas is not as important as (say) Philadelphia but Dallas Fed Fisher told the Financial Times that “Right now, we’re all much closer together. Right now it’s really a question of when [to raise rates]. Even I wouldn’t advocate moving to-day.”

Fisher sees no inflation risk at the moment and jokes that he is not really uber-hawkish, since he could take inflation a little over target for a little while. “I think we should have a symmetrical view around 2 per cent. A little bit below doesn’t bother me, particularly if it’s supply driven. A tiny bit above, as long as expectations stay in place, wouldn’t bother me. Does that sound über-hawkish to you?” And like Plosser, he would rather move early and gradually than delay too long and have to move sharply and late. He would get rid of the meaningless “considerable period” and urge more Fed regional chiefs be bankers and not PhD economists (9 of 12 are economists). Having been both a banker and a bank econo-mist, we vote for the bankers on style and decisiveness, but for the economists on sanity and reasonable-ness.

The net effect of the Fisher interview in the FT is to paint a picture of a Fed that is not riddled by in-fighting and vast differences of opinion (like the ECB). And when a hawk says we can go slow, it’s tantamount to a modification of the dots on the members’ forecast chart of the timing of the First Rate Hike. The discrepancy between comments and the dots was always a problem and it’s becoming a bigger one. It looks like the bond gang is right to doubt the dots. That means we can’t look for rising yields to support the dollar in any particular pair, so must look to bad developments to trash the other currency.

One more thing: on Sunday, the Swiss referendum will take place. It’s called “save our gold” and would require the SNB to acquire enough gold to back 20% of its assets within 5 years. The initiative also for-bids selling any gold and bringing back to Swiss soil any gold held in overseas vaults. Analysts note that this would give Switzerland the same problems as the old gold standard—contraction of the economy when gold prices fall, a severe limitation on FX market intervention, and other negatives. So far it looks like a fruitcake move that will not survive the vote, but you never know.

Overall, we see a choppy market ahead with some potential for unhappy surprises. We had to end the month with a whimper, but retreat looks like the best policy. Don’t trade—clean your desk. Paint your office.

Note to Readers: Next Thursday (Nov 27) is Thanksgiving in the US, a national holiday (that purports to celebrate the Indians helping out the Pilgrims with food and look how we are repaying them, a disgrace on a par with slavery). We will not publish any reports on Thursday and only the traders’ re-ports on Friday.