Nobody expects a Fed rate hike, everybody expects balance sheet tightening

Outlook:

The FOMC statement is due at 2 pm ET and the Yellen press conference at 2:30. Nobody expects a rate hike and everybody expects an announcement of letting maturing issues run off without replacement. This will probably be $10 billion per month and thus a drop in the bucket.

We also get new projections going out to 2020. These dot plots get far more attention than they de-serve... even the best economists can't forecast cycle peaks and troughs. The market is expecting a mod-eration in expectations embodied in the dot plot. This is considered "dovish." We say that's a mistake. Yes, after much debate and angst, the "natural" rate is now lower compared to historical norms. But moderation in a trend is not a reversal. A shock (e.g., oil, war) can always ramp up growth and inflation back to pre-crisis norms. And to consider the alternative, the probability of needing to pull Fed funds back to zero is not... zero. Both the Bank of Canada and the ECB are watching the Fed's normalization closely, having flirted with the idea that nobody knows what's on the other side of QE, including the currency effect.

Note that both the Atlanta and New York Feds are forecasting GDP at falling rates in Q3. The Atlanta GDPNow forecast (2.2% for Q3, the same as Friday) is below the Blue Chip consensus. The New York Fed has a lousy 1.34% from 2.17% on Sept 1. These forecasts support the "dovish Fed" scenario and are dollar-negative. Fed funds futures are not paying attention to these forecasts. The CME FedWatch tool has a probability of a hike by December at 58.8%, from 37.3% a month ago.

There is a glimmer of hope that Yellen will comment on whether she will stay on for another term, assuming she is asked. We doubt it. Trump likes to shock and dismay and will wait until the very last minute.

Perhaps the most important development pertaining to the Fed is the increasing acceptance by the usually ornery fixed income gang that normalization really is here and there will be hikes, someday. The WSJ notes that the 10-year yield has now risen for seven days in a row, something it hasn't done since March. If data starts coming in weak, even this week's housing statistics, the Treasury market is all too likely to tank toward 2%.... again. Seven up days does not a lasting trend make.

On the world stage, it's bad economic news for Europe if the US really does pull out of the Iran accord, as Trump asserted yesterday. Trump changes his stance too often for panic to be setting in (e.g., Nato, Paris climate accord), but US denial of the accord instantly restores all the sanctions. European leaders really don't want that. They do a lot of business with Iran. The Big Five (UK, China, France, Germany and Russia) will join the US for talks today about it.

Separately, Bloomberg is holding a "Global Business Forum" to compete with the UN, Clinton and Davos. Speakers include Bloomberg himself, Bill Clinton, Bill Gates, Christine Lagarde, Jack Ma, Em-manuel Macron, and Justin Trudeau, among other big shots. It starts at 8:25 am ET and you can see it online. We predict some stunning rebuttals of the crude America-first crap that Trump is promoting.

All in all, the only thing standing in the way of a lower dollar is the already too-low dollar. It's down 11% so far this year and at the lowest since Jan 2015. For the immediate future, a dovish-seeming Fed today certainly has the potential to drive it lower, although that "should" be already priced in.

The GDP and inflation forecasts are a strong back-wind. Trump is a strong back-wind, too, not to men-tion the tragically dysfunctional Congress. On the positive side, we are getting actual normalization, a Good Thing in its own right. But the market will have to start buying new issues previously assured of a buyer in the form of the Fed, and while we imagine it will go well, a hiccough can turn into a wheeze and a wheeze into tuberculosis. There's not a lot of danger, but some. Fingers crossed.

Tidbit: A survey of 2245 persons by a personal finance site (Finder.com) shows that one in four have a gig off the tax books. One in three millennials has a "side hustle." The amount of taxes being evaded is about $214.6 billion. This shows not only the entrepreneurial spirit but also utter desperation and des-pair at what is available in the job market.

Tidbit 2: The latest political scandal is not only that the Feds told former campaign manager Manafort he is due to be indicted, but that the Trumps are spending campaign donations on private business, spe-cifically their legal bills for the Russia investigation. This is digusting but not illegal.

Tidbit 3: The most interesting statement in Trump's UN speech was not the threat to destroy North Korea, but his assertion that socialism/communism has been proven not to work. We heard the whole room, and it's a big room, go silent. Trump was clearly waiting for applause that never came.

He said ""The problem in Venezuela is not that socialism has been poorly implemented but that socialism has been faithfully implemented. From the Soviet Union to Cuba, Venezuela — wherever through socialism or communism has been adopted, it has delivered anguish, devastation, and failure. Those who preach the tenets of these discredited ideologies only contribute to the continued suffering of the people who live under these cruel systems. America stands with every person living under a brutal regime."

Some wit has said capitalism is a flawed system and communism is a failed one. Trump would have done better he had brought up the flawed part and if he had distinguished between socialist ideas and communist regimes. Scandinavians flooded social media with jokes about being oppressed, some of them really quite good

. You really have to wonder which of the Trump advisors/speech writers inserted this section. It has the potential to be a bombshell, implying Americans are ready to go fight (say) the Russians to free the suffering persons living under Putin's "brutal regime." In reality, of course, Trump has no real knowledge of economic history or the history of economics. It's doubtful anyone in the White House ever read Heilbroner's Worldly Philosophers or Sylvia Nasar's Grand Pursuit, at least not now that Bannon has departed.

Do we imagine that other leaders, like Merkel, May, Macron and Renzi (not to mention Draghi) have read these or equivalent books? Yes, of course they have. Just about everybody in Europe with a college education can talk about capitalism vs. socialism, and at some length. Quick, name three Americans you know personally who can hold their own on the subject.

It's the sad truth that we are so imbued with anti-communism in the US from an early age that we never actually think about it. Or perhaps we should say the older adults are in that position. The younger ones just don't give a hoot. Accordingly, this may not become a political hot potato within the US, although it's not that long ago (the 2008 election) that the anti-Hillary crowd called her a communist. Bleeding heart Dems and Bernie Sanders (Medicare for all) can easily be tarred with that brush. Meanwhile, Europeans will sneer at Trump as they have always done.

Currency	Spot	Current Position	Signal Date	Signal Strength	Signal Rate	Gain/Loss
USD/JPY	111.29	LONG USD	09/13/17	WEAK	110.05	1.13%
GBP/USD	1.3528	LONG GBP	09/07/17	STRONG	1.3075	3.46%
EUR/USD	1.2005	LONG EURO	06/28/17	WEAK	1.1218	7.02%
EUR/JPY	133.59	LONG EURO	09/13/17	STRONG	131.76	1.39%
EUR/GBP	0.8874	SHORT EURO	09/13/17	WEAK	0.9033	1.76%
USD/CHF	0.9607	SHORT USD	08/10/17	STRONG	0.9655	0.50%
USD/CAD	1.2242	SHORT USD	08/24/17	STRONG	1.2533	2.32%
NZD/USD	0.7370	LONG NZD	09/13/17	WEAK	0.7282	1.21%
AUD/USD	0.8053	LONG AUD	08/17/17	WEAK	0.7931	1.54%
AUD/JPY	89.65	LONG AUD	09/05/17	WEAK	87.30	2.69%
USD/MXN	17.7350	SHORT USD	09/15/17	WEAK	17.6890	-0.26%
USD/BRL	3.1344	SHORT USD	09/05/17	WEAK	3.1409	0.21%