US is still in better shape than Europe

Outlook:

The US gets the Markit flash PMI for September this morning, along with the Richmond Fed. Frankly, worries about the Fed are already taking a back seat to geopolitical worries in terms of the yield curve. Alan Blinder has a lucid story in the WSJ today that points out the disagreement between the doves and the hawks is far bigger than the vote implies. The data and the dots tell the story. For one thing, the GDP forecast was cut from 3.1% for 2015 to 2.8%, “a pretty big revision in six weeks, and it isn't clear where the newfound pessimism came from. It does, however, suggest less urgency about raising rates.”

As for the dots, the median forecast for Fed funds is 1.25-1.5% by year-end 2015 and 2.75-3% by end-2016. “Both are higher than before, and a bit higher than traders expect. One way to make sense of all this is to say, as some have, that the Fed may wait a little longer but then raise rates more rapidly once it starts. Perhaps. Another interpretation is that the Fed is projecting faster rate hikes because it is underes-timating how strongly bond traders will push long-term interest rates up once Fed hikes begin. The cen-tral bank has underestimated market reactions before.”

The Blinder story makes the comments yesterday by Minneapolis Pres Kocherlakota look irrelevant and silly. He said unemployment data may overstate the true job market (duh) and the FOMC members should name a date for inflation to hit the 2% target. We want to be sure we are going to get 2% before raising rates—to avoid Japanese and European style disinflation. Getting an economist, let alone a poli-cy-maker, to name a date is tilting at windmills. He should know that. Meanwhile, NY Fed Dudley said the forecasts were so uncertain that they provide almost no guidance at all. Dudley was dovish in the extreme—more progress is needed on jobs before the Fed hikes. "You have to make sure when you raise rates,,that the economy can take it."

The Dudley comment may mean we should disregard the Q2 GDP revision later this week, perhaps as high as 4.6% (from 4.2% at the last revision). The economy can’t “take it” yet.

But the US is still in better shape than Europe. The FT’s global markets story today contains words like “malaise” and “torpor.” We can’t see a single reason for the euro to be on a corrective upswing except a little re-positioning and profit-taking after a big move. It’s even weirder for the Swiss franc to be firm when we just had the SNB policy meeting threatening negative deposit rates and reso-lute intervention to keep the euro/CHF rate stable and capped.

Bottom line--keep the faith, as least with regard to the euro. As for the yen, the move may develop into a full-blown correction or it may fizzle. Analysts had been talking about a dollar cap at 110 (the high was 109.46), so to a certain extent, the correcting yen is a self-fulfilling prophecy. We just have to wait and see. We can think of plenty of reasons for the yen to be weak—maybe 125 again—but “reasons” have little to do with the yen sometimes. It’s all positioning, all the time. We haven’t seen it yet but someone is sure to say the bombings in Syria are behind the rising yen—it’s repatriation. We doubt it, but never mind. Corrections can fly on any old excuse.