Yields are moving on the race for Fed chair

Outlook:

The divergence trade is coming down to a fight between the Trumpflation trade, as Reuters names it, vs. ECB tapering and normalization. The powerful two-day euro rally got stopped dead in its tracks when the Senate announced a budget bill, the prerequisite for a tax bill. Bund yields were also on the rise at the same time, but the differential rose to 197 points last even-ing, the highest since June.

The fight is hope over expectations. We say "hope" about the budget and tax reform because the track record of the US government getting anything done is pretty bad so far this year, whereas ECB tapering is on the table, if not imminent. Besides, the budget bill includes a toxic approval to open the Arctic Na-tional Wildlife Refuge in Alaska to oil exploration. Anyone who has ever given $1 to a wildlife fund is being bombarded by emails to protest this bill. And it includes cuts to Medicare, one of the third rails of US politics.

As for Trump picking a new Fed chief, the WSJ analyzes a Taylor appointment. See the chart. Under the Taylor Rule, Fed funds would be 2.5-3%, more than 1% higher than the current level (1-1.25%). The story notes that the majority of board members would not like the Taylor Rule. Minneapolis Kashkari says "following the rule would have meant 2.5 million fewer jobs created during the recovery." What if a majority on the Board disagree with the chief? The last time that happened, the chief (Volcker) re-signed. Hey, this is exactly what Trump prefers—disruption and divisiveness. (Volcker, by the way, an-nounced yesterday he is writing an autobiography.)

We were forced into following the issue because traders are following the issue, with yields moving on Warsh last week or Powell this week (CNBC predicts Powell). And there is actual betting. One bookie is Predctit. See below. We say this is unseemly and if online poker is prohibited, how can betting on Fed chiefs not be prohibited? Well, online poker is allowed in some states and for virtual currencies, so the online poker ban is incomplete and possibly crumbling.

On the political front, two former US presidents, Bush II and Obama, spoke out yesterday to rebuke Trump, without naming him, for being a jerk who is harming the reputation of the US and ruining the image of the presidency. He is embracing bigotry, divisiveness, crassness, and bad policies. Obama was always an excellent speaker, but Bush is the surprise, going from foot-in-mouth practically to Cicero now that he has left office. He said, "We see a fading confidence in the value of free markets and inter-national trade, forgetting that conflict, instability and poverty follow in the wake of protectionism. We've seen the return of isolationist sentiments, forgetting that American security is directly threatened by the chaos and despair of distant places.... We've seen nationalism distorted into nativism, forgotten the dynamism that immigration has always brought to America." And "Bullying and prejudice in our public life sets a national tone, provides permission for cruelty and bigotry, and compromises the moral education of children. Bigotry or white supremacy in any form is blasphemy against the American creed." Wow.

In European politics, nobody knows what will happen next in Spain/Catalonia. It looks like Spain in-tends to withdraw some or all of the autonomy, starting with a Spanish cabinet meeting tomorrow to start the process of imposing direct rule. The BBC reports "The Spanish government has agreed with the opposition Socialists (PSOE) party to hold regional elections in Catalonia in January, according to the PSOE. The elections are part of a package of measures being put in place to suspend the region's autonomy, as its leader threatens to declare independence." The fear of Catalonian contagion, the rea-son the EU refused to mediate, seems to be real enough. The FT reports that Italian regions Lombardy and Veneto are following every jot and tittle of the story. Separately, Bloomberg reports Catalan sepa-ratists tried to spark a bank run but it didn't work. One day is not enough to judge.

And in the UK, PM May was rebuffed at the fancy dinner last night at which she pleaded for the trade talks and two-year transition to get going, while the EU wants a commitment on payments first. Merkel and Macron are making soothing noises, but the rest of the EU wants the money. The FT reports "At a press conference on Friday, Mrs May confirmed that the UK would go through Brussels' demands for a net financial settlement of up to €60bn on a "line by line" basis. So far, she has put €20bn on the table. She also reassured fellow EU leaders that the UK wants a trade deal with the EU based on "high regu-latory standards" — a signal that she does not want to ditch a European economic model to pursue a ‘Singapore-style' regime of lower taxes and light regulation."

Every European newspaper is full of stories about one aspect of Brexit or another. Just as there are sto-ries about whether Catalonia or Lombardy could survive as independent countries, most analysts insist Britain will fall in to the slough of despond without a trade deal with Europe. Two points: got along with it before they had it, and maybe lower standards of living are the price you pay for freedom. Be-sides, for all we know, May intended all along to fork over the €60 billion and this hoo-ha is a negotiat-ing ploy.

Sterling has been on a general upswing since March, despite all this doom and gloom and charges of incompetence on both sides. In fact, the lowest low was about a year ago, 1.1950 on Oct 7, 2016. See the chart. The current upmove in sterling is the longest-lasting since the pound started to drop in 2014. And yet the current six months is the period when the outlook for a smooth Brexit has been disintegrat-ing daily. The coexistence of these two things—worsening talks but rising pound—doesn't make sense. Granted, on the weekly chart, that upswing looks like it "should" be ending, meeting rough resistance. We don't know if there is some kind of unfounded hope of a deal or just positioning that is giving us this pattern, but every time we want to sell sterling, we poke ourselves to think twice.

And finally, notice we are not talking about China anymore as the source of a Shock from left field. Maybe the artificially smoothed data this week is calming or maybe it's the currency being managed in a non-shocking way. The annual Party conference this week provided the occasion for The Economist to name Xi "the most powerful man in the world." And don't forget it.

Next week is the ECB policy meeting, at last. We continue to believe it will become the Main Event, although perhaps we, too, are falling victim to wishful thinking.

Fun Tidbit: "Over two-thirds of America's wastepaper exports and more than 40% of its discarded-plastic exports ended up in China last year. Paper and plastic scrap exports to mainland China topped $2.2 billion." The WSJ reports that China has banned the import of US trash and while that demand can't be matched domestically, US recyclers are happy, like Pratt Industries, which makes boxes for Amazon. A slew of box-users just signed on to recycling, including Target, P&G, Campbell Soup, and Coca-Cola. Silver linings.

Currency	Spot	Current Position	Signal Date	Signal Strength	Signal Rate	Gain/Loss
USD/JPY	113.35	LONG USD	10/20/17	NEW*WEAK	113.35	0.00%
GBP/USD	1.3158	SHORT GBP	10/03/17	WEAK	1.3247	0.67%
EUR/USD	1.1805	LONG EURO	10/20/17	NEW*WEAK	1.1805	0.00%
EUR/JPY	133.82	LONG EURO	10/20/17	NEW*WEAK	133.82	0.00%
EUR/GBP	0.8971	LONG EURO	10/20/17	NEW*WEAK	0.8971	0.00%
USD/CHF	0.9827	LONG USD	09/25/17	WEAK	0.9732	0.98%
USD/CAD	1.2495	LONG USD	09/27/17	WEAK	1.2389	0.86%
NZD/USD	0.6978	SHORT NZD	10/06/17	STRONG	0.7088	1.55%
AUD/USD	0.7847	SHORT AUD	09/25/17	STRONG	0.7963	1.46%
AUD/JPY	88.95	SHORT AUD	10/11/17	WEAK	87.35	-1.83%
USD/MXN	18.9013	LONG USD	09/22/17	STRONG	17.8066	6.15%
USD/BRL	3.1516	LONG USD	09/27/17	WEAK	3.1670	-0.49%