It's hard to believe the Dollar is so firm when there is a giant deficit

Today we should get a new GDP Now from the Atlanta Fed which said “no later than Nov 3” the last time out (Oct 27) when GDP was estimated at 3.7%. Estimates have it that the shutdown has already cost the economy some 1.5% but will that show up in the Atlanta?

 We also get the ISM manufacturing PMI. Overnight it’s the Reserve Bank of Australia. ADP reports on Wednesday as usual along with ISM services, and Thursday it’s the Bank of England.

 Given inflation and the looming Budget later this month, the consensus is for no change in rates. But Goldman and Barclays both call for a rate cut, and we don’t argue with Goldman. If it’s seen as political to soothe the budget nerves, okay. It wouldn’t be the first time. And it will give some marginal help to the property market, which has some signs of life.

It's hard to believe the dollar is so firm when there is a giant deficit, the government has been shut down for over a month, the House leader refuses to open the chamber for any reason whatsoever, and so on. The only favorable outcome is a rise in yields, and is that enough to buttress the dollar? Apparently so, even as flows from dollar-avoiders resume  into gold and crypto.

As a footnote, remember that for many years the S&P and the dollar index were inversely correlated. Nobody had an explanation. Now the boomy stock market is coupled with steady to higher yields and a firm dollar. Analysts with long memories are befuddled.

Forecast

We wrote on Friday the dollar move could potentially go much further and named the otherwise meaningless 200-week at 1.0826, which is also the reversal point for the cloud.

At a guess, the dollar isa hanging on to gains and due to make some more, if subject to profit-taking and position-paring on turnaround Tuesday, because of the very strong economy and the super-strong stock market.

Those who wanted to exit the dollar for good have already bought gold or other sovereign assets and now it’s sweeping the floor. It would be nice to see the likely drop in voluntary foreign direct investment, a category that will be messed up going forward by Trump’s extortionate demand for foreign investment. Normally FDI is a pretty food barometer of confidence in the US economy.

The US is riddled with negatives but they are nearly all political. As usual, markets like to ignore politics (until politics bites them on the rear). We are not getting horrible inflation from tariffs, We are almost certainly not getting rising unemployment. The Fed will almost certainly cut in Dec again, no matter what the rebellious Mr. Powell said. Trump will get to keep his tariffs no matter what the Supreme Court says because other routes are available. The dollar is not “popular” because of any of these things, but despite them.

We continue to say the two to watch are the pound and yen, not because we could get a surprise from their central banks but rather because their management is so specific to their own economies. What ARE they thinking?

US Politics: On Wednesday this week, the Supreme Court will consider whether Trump’s use of emergency power to impose tariffs was used properly. The decision is personal to Trump. He thinks that because he appointed so many of the judges, they should side with him. This is the usual demand for loyalty despite the appointments for life and his persistent failure to give loyalty in return.

It will seem political to the rest of the world, which is frightening to those who see the courts and the Constitution as the guardrail against autocracy. But in the end, Trump will get to keep his tariffs—there are several other laws that can be used. Trump may appoints ridiculously unqualified cabinet members and agency heads, but he is street smart enough to hire good lawyers.

Then there’s the shut-down. Trump’s seeking to end the government shutdown is purely short-term political. Polls show a two-thirds majority of the public blame him and the Plubs, not the Dems. Tomorrow is a governor’s election in two states and the Dems are far, far ahead in both. Hints of the midterms next year? Experts say polls show the public has a low opinion of Trump and the Do-Nothing Congressionals, but that doesn’t mean they will vote for Dems.

A big drop in government spending is a key component of the Heritage plan. It’s basically  deflationary via a cut in government spending (remember DOGE?), among other things. But sane plans were never adopted to repair the SNAP food stamp and health insurance issues. We don’t know if Heritage had plans, but the Trump gang and the Republican Congress do not.

Most people like the idea of cutting Big Government down to size. We do, too They just don’t like the way it’s being done. Not paying air traffic controllers is just plain stupid. The Army, too. Example: 1 in 8 Americans get food stamps. They average $322/month. To qualify, your net income has to be under $2000 for a single and $3400 for a family of four, although it varies by state. As even the lefty Washington Post writes, “Are 42 million Americans really in such danger of suffering malnutrition that the federal government should spend about $100 billion every year to help them feed themselves?”

Two things: first, $100 billion is not much in the grand scheme of US government spending. But second, how many of these 42 million are lying to the government about their incomes in order to get food stamps? Surely researching SNAP for fraud and inefficiency over the past nine months would have been Good Management. In the end, two federal judges ruled the SNSAP emergency funds must be used, but that will take a while and will last only a few weeks. 

We do not see any noticeable effect on any market arising from these political issues, including the dollar.

This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

To get a two-week trial of the full reports plus traders advice for only $3.95. Click here!