Outlook:

The data starts flowing now—today we get housing starts, PPI, industrial production, the Atlanta Fed business inflation survey, and the Fed minutes from the January FOMC. This evening we get China’s PPI and CPI.

Traders everywhere are watching one another rather than data, sick to death by worries about volatility. The WSJ has a “number of the day”—8.98%, the percentage change from high to low for WTI oil yesterday. “The contract traded up as much as 7.1% at $31.53, and as low as 2.5% at $28.70. It settled down 1.4% on the day at $29.04.” Is adding the up and the down the right way to measure anything?

Elsewhere the WSJ advises not to get too comfy with the idea the US equity indices hit bottom last Thursday. “The Dow is up 3.4% since Thursday's close, while the S&P 500 is up 3.6% over that span. Since hitting 1810 Thursday, the S&P is up 4.7%.” But both the selloff and the rally are due to the same thing, central banks. The drop was caused by traders thinking the banks are “out of ammo” and the recovery is credited to renewal of faith that the central banks can indeed do something. “If the move in the equities market is more than just a short-covering bounce, then this run should have more strength to it. If instead this is just a short-covering rally amid a larger downturn, then the bulls shouldn't get too comfortable.”

It’s almost unbearably annoying for a major financial newspaper to count volatility on a giant news day as somehow systemic and meaningful. Yes, oil gyrated wildly when the output freeze agreement was announced and then perceived as improbable because of conditionality. Of course it did. Prices always fly off the handle when a Big Story comes out and then subside as analysts get to work on it. As for the stock market rout being due to central bank weakness, okay, maybe. But a recovery on renewed faith in central banks? Hardly. The only instance we could point to is Draghi repeating “we have plenty of tools” and that came after the Thursday rally in the US. Fed funds futures are no better than they were last week. Where does this central bank confidence factor come from? The WSJ made it up.

Besides, the correlation between oil prices and stock indices is a function of the herd mentality. It does not reflect the proportional weight of the energy sector, oil market supply and demand, or anything else basic and causative. Another gripe is that this volatility narrative ignores the financial sector, where worries have driven down stock prices in the US, Europe and elsewhere (Japan). Just yesterday Fed Gov Kashkari came out with the shocking statement that US banks are still “too big to fail” and should be broken up.

And finally, the WSJ volatility story is cute and breezy, but fails to acknowledge that the oil output freeze proposal is of historic proportions. First, Saudi Arabia is changing its strategy from maintaining market share to leading participation in the OPEC cartel. Second, Russia has joined a group, any group, to act as a global economic player. Russia hardly ever does that. Third, the output freeze and the conditions are just the opening move in a long chess game. Nobody ever expected Iran and Iraq to capitulate on Day One, least of all the group making the proposal and setting the conditions.

By setting the conditions, the parties now have a really good reason to go talk to Iran and Iraq. Qatar oil minister and OPEC president al-Sada will visit Tehran today. We don’t know whether Qataris often visit Iran or this is a first, but it’s notable the Saudis will not be there (Venezuela will). Maybe next time. We can hardly say the effort to get an oil deal is the pretext for rapprochement, but we can’t dismiss it out of hand, either. After all, Iran agreed to accept the delegation. Iraq, the second largest producer, is also a target. No one would say Iraq is not a failed state. Maybe the output freeze is a pretext for getting in there, too, now that the US has departed.

And lastly, the group calls for a freeze in output, not a cut and not a specific price or price range. This means, of course, that prices are still vulnerable to production in non-OPEC places and at the mercy of rogue producers who never obey rules or quotas, like Nigeria. It’s an admission that the big producers in OPEC no longer rule the world but do not accept that OPEC is a failed organization. OPEC used to be a very big name. We still often make note of its summits. If Trump wants to make America great again and Putin wants to make Russia great again, the Saudis want to make OPEC great again, using Qatar as the front man. That’s a price Venezuela and Russia are willing to pay.

And not to get too conspiracy-theorist, but some kind of oversight of the wild oil market is in the US’ interest. There is not the slightest whiff that the US is somehow inspiring the new proposal—and it may seem weird for a free-market defender to say so—but stabilization of oil prices would be a good thing in its own right. Bottom line, don’t dismiss the oil freeze deal as a cockamamie curiosity. There is a lot going on behind the scenes and we can’t see the end game yet.

To be fair, the likelihood of a deal that cuts production and thus addresses oversupply is very low. The January levels accepted so far are high ones, and it goes without saying that Iran’s response was the Persian equivalent of “no way, Jose.” Well, of course it was. Iranian citizens were just getting used to the idea of normalization on removal of the sanctions and an inflow of lovely oil money. Leaders can’t snatch away prosperity before it’s even grasped, even dictatorial ones. But that doesn’t mean the deal is “largely symbolic,” as Capital Economics told the FT.

It may be symbolic today, but it may also lead to all kinds of unseen pathways. Iran was always going to dismiss a production freeze. It was a foregone conclusion. Why anyone is disappointed, let alone surprised, is amazing. In fact, we might even say that Iran feels weak. Folks who talk about their “rights” (in this case, to raise output) are often on the defensive. What is important is the change of heart in Saudi Arabia and Russia. They are not seeking to do the world a favor but the idea of an output freeze does exactly that.

To shift to another unknown, the EU is holding a summit on Thursday in Brussels to discuss the UK’s proposals for a new EU deal for the UK. Depending on what happens, PM Cameron may set the date for the referendum on membership. The FT names June 23 as a likely date. The outcome is murky. In fact, the issues are murky. The most obvious issue is that the UK seeks to restrict immigration by withholding benefits, and this runs counter to EU rules.

And finally, new Fed Gov Kashkari was outspoken yesterday and got both financial and political sentiment roiling. He told the FT that citizen anger that is leading to protectionist rhetoric in the presidential campaign is justified. The lack of trust arises from the bailouts during the 2008-09 crisis that “really violated a core American belief” that risk takers had to bear the consequences of things going wrong. This was “made worse by a history of opacity at the Fed and a past institutional reluctance to explain monetary policy clearly to the American public.” Kashkari calls for regulators to break up the big banks—they are still too big to fail.

The best part (from the FT): “The Fed was now paying the price for decades of ‘very poor’ communica-tions during which it ‘adopted this Wizard of Oz routine that “We are so mysterious and you can’t un-derstand what we are doing”… and that really hurt trust between the people and the institution.’” Wow, a direct shot at Greenspan, who famously said “If you understood what I said, I must have misspoken.”

Kashkari praised Yellen for her forthright statements and called for more to fight back against antipathy against the Fed and to promote authentic core US Values (free markets among them). We say this is just wonderful. Maybe not the part about breaking up the big banks, but the part about public trust in the Fed having been lost and how to get it back. The Fed generally steers well clear of anything remotely resembling politics, but Kashkari did it in a direct way that is true and useful. Let’s hope he is not the nail sticking up that gets the hammer.

Very little of this has anything to do with the fate of the dollar. If we can assume less volatility in the equity and commodity markets going forward, it’s possible that expectations of ECB easing come March 10 will restore the divergent-policy thesis that has generally driven the euro down and the dollar up.

But do we not also need a renewal of the Fed’s rising-rate scenario at the same time? This is the question and nobody has an answer. We are not likely to get an answer from the minutes today, but everyone will search for the answer there, anyway. The savvy Market News reporter notes “People will scour the release for hints on how worried the Fed was about the global meltdown that had been underway since January 4. People will also want some clues as to why the Fed did not offer an updated balance of risks assessment. Keep in mind, the last time this happened was in March 2003 at the beginning of the Iraq war.

“Others will want to find out why the Fed left out the reference that it was "reasonably confident" inflation would return to 2%. That was in the December statement when the Fed made its debut 25 bps hike.”

If the minutes seem to point to more delay, as seems likely and however outdated, the dollar may lose whatever moxie it has.

CurrentSignalSignalSignal
CurrencySpotPositionStrengthDateRateGain/Loss
USD/JPY114.11SHORT USDSTRONG02/04/16117.572.94%
GBP/USD1.4316LONG GBPWEAK02/02/161.4386-0.49%
EUR/USD1.1131LONG EUROSTRONG02/04/161.1182-0.46%
EUR/JPY127.02SHORT EUROWEAK02/11/16126.19-0.66%
EUR/GBP0.7775LONG EUROWEAK10/23/150.71948.08%
USD/CHF0.9910SHORT USDSTRONG01/04/160.99790.69%
USD/CAD1.3833SHORT USDSTRONG02/01/161.40311.41%
NZD/USD0.6596LONG NZDWEAK02/02/160.64861.70%
AUD/USD0.7132LONG AUDWEAK01/25/160.69802.18%
AUD/JPY81.39SHORT AUDWEAK02/11/1678.47-3.72%
USD/MXN18.7857LONG USDSTRONG12/07/1516.725812.32%

This morning FX briefing is an information service, not a trading system. All trade recommendations are included in the afternoon report.

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