The Dollar lost some of its recovery momentum, leaving us in a muddle

Outlook: The big story today may well be the 10-year auction ($40 billion) after  demand was okay for the 3-year yesterday. The auction might stiffen the spine of the 10-year yield, still floppy down around 4.5-4.6%.
So far we have the wobblies but not the heebie-jeebies.

It’s rare when a corrective pullback takes place on a Monday instead of the more customary Tuesday, although this time the preceding breakout move had itself been extraordinary. It’s hard to swallow that the upside breakout in the pound, euro, et al. was a false one, even if we know there are more false breakouts than real ones.

The dollar gained far more ground than the 10-year, leading analysts to speculate that central bank easing expectations shifted substantially over the weekend for the reasons we noted yesterday, including simple excess in the first place (like three rate cuts next year, which is silly. But “speculate” is the right word.

Then over the course of the day yesterday, the dollar lost some of its recovery momentum, leaving us in a muddle. Believe the primary trend or go with the flow? This is when we can recognize that if sentiment is embodied in the chart, the market is thoroughly confused about what sentiment is—or should be. We thought we knew the dollar rally was overdone because the yield move was overdone, but now what do we do with the excessive, overdone pullback?  Well, the 10-year yield fell, mostly, over the course of the US day.

That pushes us back to the factors that determine sentiment, either economic data or the institutional context. Of all the institutional factors, the central bank always rules. We got revived warnings that the economy is too hot and inflation far from conquered.

Fed Gov Waller said the Q3 GDP at 4.9% is a blowout number that bears watching.

Fed Gov Bowman agrees and went further, worried not only that the economy is strong but it could gain speed and require a hike. More than one analyst says it’s laughably premature to speak of rate cuts and the markets still don’t get it—higher for longer is the real deal.

Fed Gov Bowman said there may be a reasonable need for more hikes. Chicago Fed Goolsbee said reducing the pain from price rises is the No. 1 Thing but also that the recent bond market tightening might well do the trick. Earlier, Minneapolis Fed chief Kashkari repeated the Powell line—the FOMC had no discussion of rate cuts.

Today is going to deliver a doozie—Fed chief Powell alongside BoE chief Bailey and ECB chief Lagarde plus a few more Feds (Jefferson, Barr, Cook and Williams). Of the three, Williams is the unopposed expert on liquidity and Lagarde seems to be the least hawkish (despite saying all the right things) and this could pose a threat to the euro.

We also get another Atlanta Fed GDPNow estimate. Yesterday it chopped around at 2.1% for Q4—from 1.2% last Thursday.  Notice the Blue Chip forecast is still on a rising trajectory. The splendid Authers at Bloomberg titles his latest essay “The Recession is Over.”

Forecast: The message from the Fed is “higher for longer” and when the FX market accepts that, it will restore the dollar’s primary trend, although it needs stalwart help from the bond market. Besides, a little risk preference turned out to be scary—look at those long the AUD. And then the US has better growth, better inflation declines, and that Middle East war.

For what it’s worth, we find it hard to believe that US gasoline demand will hit a 20-year low next year as folks drive less. We also find it hard to believe that a war in the Middle East will not, in the end, raise the price of oil. There are excuses all over the place—higher Russian output, etc. But both these things are abnormal and not to be trusted. While the Fed looks at inflation data ex-oil, it has to be acknowledged that oil prices permeate everywhere—notably plastic. 

One big fat worry that is being ignored so far—the government will shut down on Nov 17 if Congress can’t get its clown car back on the road and pass a bill that the president will sign. But if this heightens risk, it may not harm the dollar at all but do the opposite. As noted before, shutting down the government in the past has had very little to no effect on the dollar.

Fun Tidbit: The New York Fed has an article on the rise in consumer credit delinquencies, chiefly credit cards and student loans.

In Q3, total household debt balances grew $228 billion, of which credit cards were $48 billion for the 8th quarter of growth. “The $154 billion nominal year-over-year increase in credit card balances marks the largest such increase since the beginning of our time series in 1999.”

So who is stiffing the creditors? It’s the so-called Milennials (born 1980-94).  The most virtuous? Baby boomers. Of course low-income household delinquencies are rising the most, and so are those with both car loans and student loans. The NY Fed claims not to know whether the rise in delinquencies is due to “shifts in lending, overextension, or deeper economic distress associated with higher borrowing costs and price pressures,” but come on—those credit card companies would give my cat a card. If bread were one dollar cheaper, it wouldn’t help the delinquent. Not having overborrowed in the first place is what would have helped.

US Political Tidbit: The Dems won both state houses in Virginia, the governorship in red Kentucky, and women’s reproductive rights in Ohio, despite Republican efforts at trickery. To a certain extent all the voting was about women’s rights.

Separately, Trump disgraced himself in court again yesterday and drove another nail in his punitive damage coffin, admitting he himself approved and submitted the financial statements to banks. We get testimony from daughter Ivanka some of those banks today. It’s a little interesting that Trump supporters are okay with his being indicted but will likely not vote for him if he is convicted.

Goofy Tidbit: You can vote for the New Zealand bird of the century in New Zealand from wherever you live. New Zealand says you can also donate to wildlife preservation, and they will take your $10-25 donation gladly (and efficiently).

Note this is just New Zealand birds. If you like a bird from somewhere else, go start your own contest.

Comedian John Oliver likes the Puteketeke, or crested grebe. It carries its chicks on its back and there are only 1000 remaining. Most if not all the birds live only in New Zealand, which we consider paradise (and almost moved there). We also like the white heron, a cousin to our Adirondack blue heron (you did notice our logo, didn’t you?). The falcon is handsome, too, and there is a bird named a fairy. Go vote! 

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