We have to wait all blessed week for the PCE inflation data

For what it’s worth, the equinox is today at 2:19 pm Eastern.

We have to wait all blessed week for the PCE inflation data—it’s delivered on Friday, 9/26. Thursday is actually bigger, with a ton of new data, See the calendar at the end. Today it’s the Chicago Fed (national outlook) and Canada’s industrial prices.  Five Fed Gova speak today, including the newly appointed Miran. Tomorrow it’s the prelim Sept PMI from S&P (with ISM the preferred version) and the Q2 current account, which will show the contracting trade deficit.

Off on the side, the Swiss National Bank meets on Thursday with the consensus it will stick to zero and doesn’t want to go negative. This is of some interest in case the ECB does feel the need to cut again. 

This would happen despite the ECB being in a sweet spot at the moment. Reuters’ Dolan has an interesting idea: “Financial markets think the European Central Bank has found its "happy place" with a policy rate of 2%. An outsize surge in the euro might change that, which means it probably has another cut in its back pocket just in case.

“The threat of an ECB "contingency cut" could slow further dollar losses in arguably the world's most pivotal exchange rate even as the Federal Reserve resumes easing, thwarting an overwhelming investor consensus that the dollar will fall even further from its recent four-year low against the euro.”

Europe is actually in good shape.  Inflation—2% Policy rate—2%. Long-term inflation expectations—2%. Neutral rate—zero. The worry—deflation. And the euro is too strong. “The euro's effective exchange rate index against 41 trading partners is at an all-time high, up 7% since February and up 27% over the past decade. The real effective exchange rate is at its highest in 11 years and up 18% over the past 10 years.

“So even though the euro gains of 13% against the dollar this year dominate market chatter, the euro has also gained 10% against China's yuan and 6-7% against both Japan's yen and Britain's pound.” A stronger euro curtails exports, among other effects, including being deflationary.

Back in the US, we remain confused by the bond market lifting yields all along the curve even as the Fed cut the Fed funds rate. The reasoning is not hard—giant budget deficit, inflation expectations—but 30-years out? The 30-year ended the week at 4.75%, up by 10 basis points from the day before the Fed’s rate cut. WolfStreet has a list:

From before the rate cut:

• 2-year: +7 basis points.

• 3-year: +9 basis points.

• 5-year: +10 basis points.

• 7-year: +11 basis points.

• 10-year: +10 basis points.

• 30-year: +10 basis points.

How should we stir this into a forecast? There are 87 reasons to shun the dollar—or at least buy dollar assets but hedge the dollar all the way—and only one to buy it—those yields.

Forecast

We suspect that the current euro relief may be temporary. The euro can continue to fall, with support all the way down at 1.1604 and the 62% retracement and B band bottom at 1.1595. In practice, the 50% retracement is more likely and stands at 1.1657. 

Tidbit: The WSJ writer Jacab has a story today about a manager named Spitznagel (Universa) who expects the stock market rally to keep going, peak—and then crash, like 1929. His asset of choice is something named tail-risk derivatives.  He’s often, but not always, right. “The reason Spitznagel thinks the current bull market’s comeuppance could be the worst since 1929 is repeated federal rescues of markets and the economy. He compares it with the practice of quickly putting out forest fires only to have too much dry brush accumulate. Amid today’s near-record valuations, the eventual ‘firebomb’ could burn hotter.”

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