The obsessive Fed-watching is over

Outlook:

The US is getting growth of around 2.4% while the eur ozone is getting 0.4%. The Fed is hawkish and hiking, while the ECB is still engaged in extraordinary measures for the next nine months, if not more. The sensitive 2-year note yield differential between the US and Germany is 207 bp, the most since 2000.

In the US we have normalization while other major currencies do not. The phrase "monetary policy divergence" has gone out of style, but that's exactly what it is. And in comparison with the Other Dollars, it's no contest. The most surprising thing in Yellen's press conference was her assertion that the Fed has mostly accomplished its goal of stabilizing the economy, even if inflation will not likely hit the target for another two years.

In a nutshell, it's over. We can turn away from obsessive Fed-watching toward other things, including fiscal policy and political risk.

The Atlanta Fed lowered its latest Q4 GDP forecast to 2.4% from 2.6% on Dec 9, based on a revision to real personal consumption expenditures derived from the retail sales report yesterday. PCE growth will moderate from 2.3% to 2.1%. We get a new version on Friday. The overall picture is an economic engine ticking over but drivers not gunning the engine for an accelerated take-off.

Now consider the eurozone. It will get an export boost from devaluation, but so far, Markit surveys indicate growth will be 0.4%. And besides, clearly there is potential for political risk on elections in Netherlands, France and Germany, not to mention Brexit.

Analysts can go on (and on) about what Yellen said, but we have two takeaways from the press conference. First, the Fed is resolutely non-political and will not comment on any fiscal initiatives to come from the new administration. Yellen refused to be baited by the press corps. She conceded that some fiscal measures could boost growth without also boosting inflation, while noting unemployment has been cut dramatically and growth, if tepid, restored without any help from the fiscal side. Some but not all members may have factored fiscal changes into their forecasts. And the term of the Fed chief was deliberately set to differ from the presidential cycle specifically so the Fed could act without fear of political interference. We say that given Trump's proclivity to pick fights with the Establishment, this observation won't hold up for long. See "Politics" at the end.

Secondly, on the real economy, Yellen said "I want to emphasize that the shifts that you see here are really very tiny" and "I do not judge that we are behind the curve." What Yellen means is that the core PCE deflator will not likely rise above the 2% target until 2019 and unemployment seemingly below the sustainable rate has yet to demonstrate it has the power to push wages up or result in a labor short-age. This is not wild enthusiasm. Yellen said the economy is not at risk of "running hot" and she doesn't favor letting it run hot. The implication is that if it does start running hot—meaning inflation over 2%--the Fed would step in.

But the dot-plot tells a different story. This is a hawkish set of forecasts, regardless of Yellen's warn-ings.

And it's not all roses in Europe, despite a decent PMI this morning. Yesterday the European Stability Mechanism announced it would freeze the latest financing deal as a protest against the Tsipras gift of a Christmas bonus and VAT relief to tourist islands. The ESM is going to reconsider. Tsipras doubled down, refusing to alter the plan and adding a gift of €11.5 million to feed schoolchildren. Tsipras claims the pensioner bonus was already factored into the budget. Earlier, Tsipras dissed the IMF, saying "they can't get their numbers right." And the IMF is on his side. The Guardian says Tsipras "has signalled that he will ask the IMF to withdraw from the bailout altogether. Few believe that will as-suage creditor sentiment at a time when Athens is perceived to be dragging its feet on reforms."

Yesterday the European Commissioner for Economic and Financial Affairs Moscovici had an op-ed piece in the FT saying "Greece cannot be condemned to austerity forever" and debunking "myths" about the Greek economy, including the calumny that Greek pensions are on a par with German ones. They are not. "Data from EU member states show that average public pensions in 2013 were €1,233 per month in Germany, 45 per cent higher than the €846 per month in Greece." Besides, Greece really has made "unprecedented efforts on fiscal policy."

And various other stories have pushed Italy and Italian banks off the front page, too. Nobody really knows how much these southern state issues affect the euro. Confidence is a funny thing. It's likely that worries about Greece and Italy contribute to the euro's decline, even if the main mover is the monetary policy divergence. That raises the question of whether and by how much the euro recovers if and when Greece gets back on track and Italy fixes the banks, with or without bailouts. Judging from Grexit, the euro will get a boost when all this stuff is over.

But then there's Brexit, which is a colossal mess. Bloomberg reports the House of Lords issued a report urging the government to act fast "to prevent financial-services firms from restructuring or relocating on the basis of a worst-case scenario"—New York could end up the winner, and not the EU. But it may already be too late—the FT reports Lloyd's of London is already planning to establish a base else-where in Europe in 2017. And today EU leaders are meeting in Brussels to prepare for Brexit negotia-tions.

Bottom line, there's nothing much to like about the yen, the pound or the euro under these circumstanc-es, and everything to like about the US and the dollar—for the moment.

Politics: The comment that Trump will "fire the Fed" calls for some explanation. Technically, the Fed can't be fired by anyone, including the president, except for cause or malfeasance. Congress would have to change the law. We went through this back in 2011 when presidential candidate Gingrich talked about firing Fed chief Bernanke. Explanations of the Fed law were well expounded at the time and still available online. WSJ Fed-watcher Hilsenrath noted at the time it has never been accom-plished. In a 1988 case about a federal appointee, even the dissenting Scalia agreed that "good cause" for removal has to be "misconduct".

Trump could never be able to demonstrate misconduct or malfeasance—Feds are a bunch of Boy Scouts—so that leaves changing the law. The Republicans will control both houses of Congress but plenty would bolt to side with the Dems. The Fed really does need to be independent of political pres-sure and all sane people see that. But that doesn't mean Trump can't stir up a Twitter storm. At a guess, Yellen and the others would resist stoically. Besides, if Yellen resigns, next in line is Stanley Fischer, who used to chair the Israeli central bank. Trump likes to pick fights but even he would think twice be-fore picking a fight with Fischer.

A side note: when JFK in 1963 issued an order to have the Treasury stop issuing silver certificates and supporting the price of silver, a thoroughly sensible thing to do after silver had found industrial uses and prices soared, some nitwits turned it into the president trying to kill the Fed. Books and articles were written along the usual lines that somehow the fat-cat elites (proxy name "Rothschild," which makes real bankers laugh) were out to rob the average Joe. Some even say this was the real reason be-hind the assassination. Then we got a flurry of rebuttals of this and other Federal Reserve-based conspiracy theories (http://mcadams.posc.mu.edu/weberman/jfk.htm). It was a shame to waste good brain-power on this idiotic and unfounded accusation, especially because the conspiracy gang is incorrigible and determined never to change its mind anyway and the story lives on to this day.

The public is just as prone to conspiracy theories as it ever was, maybe more so. This is ripe fruit waiting for Trump to pluck it. For the moment, Trump is happy with the Fed and the Trump Twitter storm is not on the horizon now. But just wait until some fat cats start complaining that their funding costs are going up too far and too fast. The erratic Trump can turn on a dime and start attacking the Fed, in keep-ing with his practice of picking fights with the Establishment. We may be getting a temporary reprieve, but in the end, Trump is going to make a mess. The inevitable deduction—buy gold at the first tweet. Bottom line—nothing will come of it, probably, except a vague distrust of the Fed. The public never thinks about the Fed anyway, although it prefers its banks to be FDIC-insured.

		Current	Signal	Signal	Signal
Currency	Spot	Position	Strength	Date	Rate	Gain/Loss
USD/JPY	118.20	LONG USD	STRONG	11/10/16	106.47	11.02%
GBP/USD	1.2527	LONG GBP	WEAK	12/05/16	1.2717	-1.49%
EUR/USD	1.0488	SHORT EURO	WEAK	12/10/16	1.0605	1.10%
EUR/JPY	123.96	LONG EURO	STRONG	11/03/16	114.30	8.45%
EUR/GBP	0.8371	SHORT EURO	STRONG	11/14/16	0.8598	2.64%
USD/CHF	1.0251	LONG USD	WEAK	11/10/16	0.9678	5.92%
USD/CAD	1.3306	SHORT USD	STRONG	12/06/16	1.3259	-0.35%
NZD/USD	0.7072	LONG NZD	STRONG	12/06/16	0.7173	-1.41%
AUD/USD	0.7390	LONG AUD	WEAK	12/06/16	0.7438	-0.65%
AUD/JPY	87.35	LONG AUD	STRONG	10/06/16	78.48	11.30%
USD/MXN	20.5954	LONG USD	STRONG	10/31/16	18.9054	8.94%