What set off the dollar rally?

Outlook:

The big item today is US PMI’s, following somewhat disappointing Empire State and Philly Fed surveys. The PMI’s are forecast to show a slight gain but it looks like over-confidence in the robust recovery is draining away.

But markets may be distracted entirely by the shiny new thing, existing home sales, forecast to rise again (and conveniently released 15 minutes after Markit delivers the PMI’s). The current forecast is a gain of 14.6% m/m back to winter levels after 20.7% in June or 4.72 million units. TradingEconomics.com says this was “the largest increase in existing home sales since the series began in 1968 as mortgage rates remained at record low levels and as the economy reopened from coronavirus-induced restrictions.”

Does existing home sales outrank PMI’s? We will find out. Another shiny new thing is vaccine development, with final stage tests announced almost daily and the due date for availability moved up to late September. The authentic risk-killer would be Congressional agreement on a spending bill of virtually any size. These few items seem not that hard to put into the risk-on/risk-off baskets, but that model is becoming terribly complicated. What seems like risk-on (stalemate on new spending bill) can morph into risk-off or be offset entirely by something else (existing home sales). In other words, it’s terribly hard to keep score. 

We are starting to get tangled up in cause-and-effect. What set off the dollar rally the other day? We noted at the time that the move began in the morning while the Fed minutes that gets the credit didn’t come out until 2 pm. Yesterday we had something similar—the dollar retreated but on seemingly bad news, the unexpected rise in jobless claims. That should have set off a risk-off/buy dollar incident, and indeed we see spike lows on the chart, but it lacked staying power.

It remains to be seen whether the unfavorable European PMI’s today have muscle, or will be swept aside once the US data comes in. We are inclined to think this is the case—in other words, only US data counts. Analysts can make a case for better and faster recovery in Europe, led by better and faster recovery from the pandemic, but many asset prices are set pretty much solely on US data. This is good news for those poor souls who think they can trade high-frequency events—they have fewer to follow and obsess over now, if the only ones that count are the US releases.

Focus on the high-frequency events tends to blind traders to the bigger picture. We try to maintain perspective, but bigger-picture data seems not to get recognition, let alone weight in the perpetual re-mixing of factors. Here’s a terrific example: Gittler at BDSwiss found a shocking bit of news: “In fact, yesterday the US Internal Revenue Service (IRS), the agency that collects taxes, forecast that there will be about 37.2mn fewer jobs this year than it had estimated last year. Job losses will persist at least through 2027, it forecast, with about 15.9mn fewer jobs that year than it previously estimated. The forecasts are contained in the IRS’s estimates of how many tax forms it expects to receive.”

Read that again. Next year will have 37.2 million fewer jobs. Only about half will be recovered by 2027, when a whole new generation of kids will have entered the workforce. How on earth can anyone forecast full recovery during the upcoming year with 37.2 million fewer jobs? This affects not only retail sales and general household consumption (and inflation), but also things like housing, especially starts, and consumer debt, not to mention the US sovereign fiscal deficit. In Europe, the ECB expressed worry the other day about unemployment dragging down the entire recovery effort. Surely the Fed is thinking the same thing.

The presence of risk-on anywhere is a puzzle and yes, we mean Apple and Tesla. So, wither the dollar? We think it can come back a bit and for a few days, but on the whole, the euro rally has legs and can persist. See the weekly chart. We are at the 62% retracement level at which we get a pullback some 75% of the timer before either a resumption/continuation or a fizzle. We are not buying into the idea that only US data counts and we are buying into a better recovery in Europe (and probably Japan and the UK, too). But it’s hanging by a thread and also depends on Trump not devising a new Shock, at least not until October. 

Tidbits: Around 11 am yesterday, a federal judge dismissed Trump’s latest effort to withhold his tax returns from a grand jury in New York. A half hour later, Reuters reported Trump ally Steve Bannon was charged with fraud, along with two others. They took crowdfunding donations to build the Wall and used the money for themselves.

 “We Build the Wall” claims to have raised more than $25 million from 500,000 donors, probably an exaggeration, of which Bannon took $1 million.  The WSJ reports the outfit hired a contractor to build a half-mile stretch of private border wall in New Mexico—it cost about $9 million. Looks like the contractor is a fraudster, too.

Reuters says “The charges are being handled by the same federal office that prosecuted Trump’s former personal attorney, Michael Cohen, and is investigating his current lawyer, Rudolph Giuliani.” Insiders joke the “S” in the official name is for the “sovereign” District of New York in place of its real name, the Southern District. Looks like that is still true, despite Trump firing two of its top guys. You can hear the cheering from lower Manhattan all the way to Richmond.

Politics: The gloomiest of the gloomsters think we fear a failed election and it’s a realistic fear. Social media is full of violence that drives voters to Trump, more than off-setting post office shenanigans. While the elite may disregard social media, at least some voters do not. If it’s true that faith in the US system is the lowest ever, it’s conceivable the vote is suppressed on that cause alone, although Dems hope the US will instead rise up and claim its birthright. If they can do it in Belarus, we should be able to do it, too.  Well, false equivalency, but never mind.

Both sides are preaching to the choir. Some of the political commentary is interesting but nearly all of it is irrelevant to the financial world. Where we may spot an intersection of politics and finance is whether we get more or less cold war with China, a more robust federal response to the pandemic and recession or continuing incompetence and neglect, and a few other things.

The BoA ML survey of fund managers released Tuesday ranked the election third in their list of tail-risk factors, after a second Covid-19 wave and US China trade war, but before a “credit event” and “populism (redistribution policies).” Funny, this is the old non-Trumpian definition of populism.

The usual talk of a Dem causing the stock market to crash (which isn’t true, anyway, historically) has faded pretty far. One veteran analyst told us this means markets are not worried about Joe as president. Or maybe “stock market crash” (for any reason) is just not on their radar using those words. The closest we can come is “allocation to cash,” which went from a 54% overweight in April, one of the biggest ever, to 33% in June, 32% in July and now 26% in August. 

Not to get gooey, but near irrelevance of which party holds the White House is a triumph of capitalism. In July, the election came second after “second Covid wave” and before “credit event.” In that survey, the populist entry is listed like this: “populist policies to end inequality.”

This tells more about the survey makers and their respondents than about anything else—populism is “redistribution” (presumably via taxing the rich) and/or “ending inequality” (which has near-zero to do with finance except maybe some racist CEO getting caught out). In other words, the Trumpies have claimed they are “populist” but the survey managers know better—actual populism means less income inequality, including the vast inequality between the races. 

We might also note that “credit event” moved from third to fourth place but is still on the list. Well, remember these are equity guys and distrust of the Fed tends to run high in that group, in many cases because they do not actually understand monetary policy except as it pertains to their self-interest. That’s the main reason we don’t bother to follow this survey. When a big majority (79%) say they see a fat recovery next year, we can’t tell if it’s based on the reams of excellent analysis their economists are churning out, or wishful thinking.

We got most of this information from MaceNews, manned by some of the journalists from the old MarketNews, including Fed-watcher Steve Beckner, always worth following, and FX Matrix co-author Vicki Schmelzer.

 

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