Until we get a shock from the White House, the dollar rout looks safe

Outlook:

We are always unhappy about payrolls because the data is always lousy and unrepresentative, and traders overreact to it. Payrolls becomes more useful when there is a big move, however, because it shows change, even if the underlying data misses a good 15-20% of the facts. This time the number is probably going to be lower than expected only a few days ago and lower than the month before, so the new rule of “less-bad” probably means everyone brushes it off.

Instead of economic data, we might more usefully be looking at some financial data, specifically the steepening yield curve. Everybody likes a different version—3 month vs. 10-year, 2-year vs. 20-year, etc. Regardless of which version you like, they all show the same thing—higher yields at the longer end. It’s authentically noteworthy but not everyone agrees on what it means. One set of analysts think a steepening yield curve means inflation is expected to remain low. Others say it means inflation is expected to rise. Both interpretations have twisty logic but can be defended. See the St. Louis Fed version (10-year minus 2-year) and don’t forget to notice the spike in March when the stock market was tanking.

Then there is the conventional reason for steepening—expectations of a gain in growth itself. This is the stance of the Cleveland Fed, which uses the 10-year minus 3-month. It sees US growth at 1.9%, albeit not naming the period that number applies to.

Our old standby, the Atlanta Fed, “nowcasts” for Q2 and that is so weird it can’t be stuffed into a Big Picture of 1.9%. As of yesterday, the GDPNow model has -53.8% (annualized), worse than -52.8% earlier on June 1.

Here’s the problem: how can we accept US growth at about 2% when Europe is forecasting a contraction of 8-12%? This discrepancy is too big. We get new forecasts from the Fed next week and boy, do we need them. It’s not likely they will show the US doing so much better than other economies that it justifies a dollar bump, but stay tuned. The real threat to the dollar depreciation is, as before, the Mismanager-in-Chief doing something outrageous, if only to distract from widening disapproval of his aborted attempt to militarize policing. Opportunities include the next shoe to drop on China, something pertaining to that Iran-Venezuela oil threat, or something we haven’t imagined yet. Cuba, maybe. Mexico again, maybe. Tariffs on the Mercedes on Fifth Avenue. But until we get a shock from the White House, the dollar rout looks safe.

Political Tidbit: Twitter disabled a Trump campaign “tribute video” to George Floyd, saying it violates copyright law. At the Floyd funeral, Rev Sharpton pulled out all the stops. He said the Bible is not a prop and Trump should read it instead of trying to grandstand with it. “Keep your knees off our necks.” He also quoted Ecclesiastes about a time for everything in its season and now is the time to repair civil rights. As eulogies go, it was excellent if you can stand the Rev’s voice.

PredictIt published a lovely chart yesterday showing Trump’s mismanagement of the pandemic and of the civil rights protests has worsened his re-election chances. See the chart and rejoice.

 

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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.

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