Markets are wallowing in a magical pool of imaginary all-good conditions

Outlook

Markets are wallowing in a magical pool of imaginary all-good conditions. Yes, earnings are up and a little better than forecast, but the war might not exist at all. The big indices are nearly back to pre-war levels. There is no accounting for the probability of the next move leading to disastrous outcomes. The IMF fed this wishful-thinking with no change to its 2027 economic forecasts.

This is all best-case scenario. We say it’s dangerous because a setback can so easily set off a panic sell-off. Considering the US’ inept leadership, markets should not be so bubbly. 

Today the meaningful release is the Beige Book. This is anecdotal and each side will easily find comments to support the case for more/less growth and rate cut/hike. The hearings for the new Fed gov candidate Warsh begin next week but getting attention already because he disclosed over $100 million in assets, the most of any Fed gov ever. Warsh’s hearings begin on April 21, or a mere 25 days before Powell’s term expires. The debate about whether Trump can fire Fed govs, including the regionals, is still roaring in back rooms awaiting the Supreme Court.

We also get import/export prices and the TICs data showing capital flows. Somebody will be sure to try to make hay out of straw on that one, despite only about five people being able to navigate the report design. 

One mystery is why US yields are dropping at the same time inflation, in this case PPI, is rising. Yield down, price up. Somebody must be bidding. In the long, long term, the 10-year yield “should” be something real plus an inflation expectation premium, or (say) 2% plus 3.5-4.5%. That adds to 5.5-6.5%. As things stand, buyers are willing to accept a true negative real return. So, either they are scared half to death or they don’t believe inflation will go that high. This, in turn, implies confidence in the Fed’s ability to wrestle inflation down inside the 10-year time horizon. Food for thought, indeed.

Forecast

The charts indicate we should be expecting a dollar pullback at any time. It could be “normal” or it could be catastrophic, depending on the news. If talks resume, it can be mild and short-lived. If the war returns and the US escalates, it can be huge.

Some analysts believe the US is losing safe-haven status and that is a lasting shift in sentiment. Given Trump’s horrible, awful, really bad performance on every matter, this is an understandable idea. But it doesn’t fly. The safe-haven aspect is underpinned by the sheet size of the US markets, especially sovereign bonds, and you can add up all the other candidates and not come close. The world is stuck with the dollar, however it feels about the current government.

Tidbit: The FT reports US hotels are starting to get scared and cut rates because bookings are way below forecast for the World Cup, due to expensive match tickets, inflation fear and anti-American sentiment.

We wish the Brits would acknowledge the sentiment is chiefly anti-Trump, not against all Americans. UK sports hooligans are actually worse than American rednecks. To be fair, so are the Canadian sports hooligans.

Yesterday the Trump and Vance insulting remarks about the Pope were badly received and added to the disgust over Trump depicting himself as Jesus, a story that had surprising lasting power.

Trump playbook: “deceive, disrupt and deny.”