Be careful what you read

Outlook:

Today we get the ADP forecast of the private sector component of nonfarm payrolls on Friday. This often causes the major forecasters to adjust their own forecasts. Some analysts point out that Dec usually gets a seasonal effect. We also get EIA crude oil inventories and the Beige Book, plus speeches by Yellen and Fischer. The BoC meets, too, ahead of its own payrolls report on Friday, which always get overshadowed by the US version.

We don’t know whether the economy is fragile or robust. We have evidence of both—a mixed bag. And let’s keep the rate hike in perspective. Yesterday the Business Roundtable survey showed 27% of the executives plan to lower capital spending over the next 6 months. It’s actually a small number--the survey encompasses 140 persons, but still the biggest percentage since 2009. Of the reasons busi-ness leaders feel uncertain, the top of the list in uncertainty in Washington, especially tax policy. Fed rate hikes are not mentioned.

CEOs want renewal of various tax loopholes, if not a complete overhaul of the corporate tax code that sends firms overseas. They also care about infrastructure spending and the EX-Im bank. “Uncertainty around fiscal policy combined with worries about terrorism and a slowdown in China and other overseas economies are causing CEOs to be cautious.” Again, not a word about the Fed. “The Roundtable’s CEO Economic Outlook Index dipped to 67.5 in the fourth quarter. That’s down from 74.1 in the third quarter and the lowest reading since executives saw the economy contracting during the recession. Readings above 50 indicate expansion.

“The CEOs forecast the economy to grow 2.4% next year, a pace roughly in line with the first six years of the expansion. The survey showed a slightly higher share of CEOs expect sales to decline in the next six months, compared with the prior quarter, but the majority still expect sales growth. CEOs’ hiring plans were essentially unchanged from the summer, with about a third expecting to add staff and a third expecting to cut.”

So, we have business leaders feeling uncertain about the structural environment, especially fiscal policy, and the Fed feeling uncertain about the unknown effects of normalization. Looks like top players are scaredy-cats and this is something the bond and FX markets can smell a mile away. It’s going too far, however, to try to light a dollar-negative fire out of it, as Bloomberg is doing. The headline is “Dollar Longs the New Pain Trade as Evans’s Nervousness Spreads.”

Well, no. Evans might be uneasy about what the hike will bring and might honestly see the Fed funds rate at under 1% by this time next year, but Evans is famously a dove. The Bloomberg article doesn’t name a single big-time name joining Evans, just an observation from a Singapore FX trader at ANZ Bank that dollar longs pared back on the news. And so they did—yesterday, when there were other fac-tors contributing.

In other words, we had some minor one-day position adjustment on the story, but hardly a sea change in sentiment.

Market News suggests we may be seeing nothing more the unwinding of old positions, not new ones. Who would put on a new position long the euro a day or two ahead of the ECB when it is universally expected to be extremely dovish? Only someone with inside information that the measures will be less than expected. After today’s inflation data, that idea has flown out of the window.

Consider the big-picture position. Market News report the CFTC data released Monday (delayed be-cause of the holiday) showed a net euro short position of 175,484 contracts as of Nov. 24, versus 164,177 the week before. “The latest position was the largest net euro short seen since May 12, when speculators had a net euro short of -178,976 contracts and getting closer to the record net euro short of -226,560 contracts seen March 31.” The euro was at 1.0643 on November 24 and has gone lower since then, so positions could have risen.

Here’s the kicker: “It would take a decisive euro move above a congestion zone of old 2015 lows from May to August, in the $1.0809 to $1.0856 zone, for the market to become less bearish.” The statement comes from a deeply experienced FX reporter who interviews more than one trader and was a trader her-self and speaks the language. So which reporter do you want to believe, a fly-by-night newbie in Asia with one source or the respected reporter with more background than just about anyone else on the planet (also the co-author of our book, The FX Matrix, which won the FX Street best-book prize last year). The only time a single source is to take top ranking is when it’s Yellen or Draghi.

This brings up one of Rocky’s Rules—Be careful what you read. It’s all too easy to mistake a short-term move for the beginning of a bigger long-term move. And to be fair, our annual rant about amateur re-porters aside, there is a case to be made that the dollar will suffer once the hike is out of the way and players come to accept that what Evans said is true—lower for longer.

But while we may expect a very big correction next year, and possibly early next year, it’s unwise to plan your trades or hedges on that scenario. As Keynes said, in the long run we are all dead. Other fac-tors can jump up and overwhelm the expectation of rising rates at any pace, including acts of terror and war, politics, natural disasters, a new emerging market crisis (we nominate Brazil but it could be Vene-zuela), a whole complex of China factors, civil war in Saudi Arabia, and so on. We could even have a crisis from left field—the Marshall Islands could vanish underwater and wake up the climate change deniers, or at least their voters. Not unrelated to predictions of a crashing dollar is the primaries to be held in Feb and Super Tuesday on March 1. We will know March 2 whether Trump is just an outrageous entertainer or a real threat to American and world sanity and reasonableness.

Going into tomorrow’s ECB policy meeting and the long-awaited Draghi press conference, we guess that the effect of the revised policy is not fully priced in. The euro “should” fall some more, and maybe a lot. We could get a profit-taking bounce afterwards, but one thing at a time. Unless payrolls is really lousy on Friday, we should end the week and go into the weekend with a far stronger dollar/weaker eu-ro. Want a number? We see a test of the March low at 1.0459 over the next 3-4 trading days.