Are managers really making decisions on expectations of expectations?

Outlook

Ahead of payrolls on Friday, today we get the usual Thursday jobless claims, likely a big drop. These two jobs reports may end a string of somewhat disappointing US data.

For fun, check out the statements from various Feds after TreasSec Yellen said the day before that conditions may well call for higher rates. Vice Chairman Clarida said the time is not ripe for such talk. Chicago Fed Evans said the chances of persistently higher inflation are remote. Boston Fed Rosengren copied Clarida with “premature.” This is precisely what you would expect.

But as some observers note, inflation expectations embedded in indirect indicators show the bond boys are still very much on the warpath. The 5-year breakeven inflation rate is 2.68%, the highest since 2008. Weirdly, the 10-year breakeven rate is lower at 2.47%. We have no idea what this means. At issue is the concept of “transitory.” These numbers suggest the market expects inflation five years from now at about 2.7%, or 70 bp over the formal Fed “target” but by an acceptable amount if we accept the Fed has already said it’s okay to let inflation overshoot. Then during the next five years, inflation will FALL to 2.5%.

This is like backwardation in commodity prices. The problem we see is the tenor. Five and ten years are awfully far away, Are managers really making decisions on expectations of expectations? While we ponder that, simply watch the yield over the past few days and months. Everybody and his brother expects a taper tantrum at some point–but not yet. Falling yields tell that tale.

In keeping with this observation of a postponed taper tantrum, the WSJ has a rare story on FX. The paper gave up reporting on FX years ago so this is a treat, although we need to be careful about self-promotion by interviews subjects (“talking their position”).

The story says “Hedge funds and asset managers are scooping up derivatives that pay off when the dollar declines slowly or stays within a narrow range. In one strategy, known as a strangle, traders sell both bullish and bearish options for short periods. They can collect a premium from selling the contracts and profit as long as the underlying currency remains steady and doesn’t trigger the options.

“The bets on a calm retreat mark a shift after last year’s pandemic-heightened swings. Many expected the dollar to slide in 2021, as global growth outpaced the U.S. expansion. Instead the U.S.’s rapid vaccine rollout and economic resurgence have supported the currency, reducing volatility along with the opportunity for traders to make money off swings. The WSJ Dollar Index has gained roughly 1.4% this year.”

Here is a splendid quote from one analyst: “Foreign exchange has not been the trending market most clients were hoping for. Nobody is calling for the demise of the dollar as they were in the beginning of 2021, but we are starting to enter a phase where you can see the dollar dripping lower.” Another analyst says sustained volatility won’t return until central bank policies around the world diverge more.

The “sell volatility” playbook works only as long as some wiseguy doesn’t come along to make it fail. And let’s not neglect that some countries (well, Norway and Canada) are already diverging, and the US is almost sure to join with at least a whisper before year-end. In fact, you have to wonder if the Fed is not whispering in ears already and that accounts for the lack of response to Yellen this week.

We smell geopolitical developments starting to seep into markets after the lovely post-Trump hiatus. First up is the much maligned “globalization” that Fat Donny tried to end. Not gonna happen–it’s too beneficial, economically and financially, for too many. That means a firming of old rules and norms, even if the WTO remains fairly screwed up and weak. Second, the US is taking a firm stance on a number of issues, most prominently today the waiver on vaccine patents. Notice that we don’t actually have to get the waiver, just as we didn’t get the waiver for the anthrax meds in 2001. That time, Bayer folded at the threat and not only ramped up output, but lowered the price. Some kind of compromise is on the way again. But the point is that the US took leadership and others may follow. We’re back, baby.

Tidbit: We remain enchanted by the idea that TreasSec Yellen knew perfectly well what she was doing when she said rates will have to go up, while later denying it was a prediction or a recommendation. Yellen is meticulously careful and it’s simply out of character for her to commit a gaffe. Yellen may have started out as mostly a labor market economist, but she knows full well that rising interest rates are currency-supportive and a forecast of rising rates should lift a currency.

The number of times a finance minister or central bank chief has moved the FX market on purpose is vanishingly small. We have TreasSec Rubin with “a strong dollar is in the US best interests” in the late 1990’s (despite there being no policy initiative to make it so). We had ECB Gov Duisenberg naming the euro’s initial drop “brutal” in the late 1990’s. The most recent is ECB chief Draghi’s “whatever it takes” in 2012. Yellen’s remark is not likely to go down in history as one of those watershed moments. For one thing, it was indirect. For another, it didn’t work, as least not so far. But we imagine it remains on the watch-sheet for some time to come.

As an aside, we threw out this thesis to several ex-Feds and some economists. They all agree Yellen knew exactly what she was doing–although some say the retraction, such as it is, might have been imposed by the politically-minded in the White House.

Tidbit: Facebook’s “Oversight Board” ruled that the ban on Trump will continue but be revisited in six months. The Twitter ban is permanent. Social media experts say Trump violates the rules consistently and Facebook putting up a “not proven” banner is a bunch of hooey with no heft. Still, the Facebook decision is based on Trump continuing to promote a lie, that the election was fraudulent and he did not lose.

The Oversight Board protocols are not well designed and certainly not well-enforced. Trump puts up his toxic election lie on other media that fans copy&paste to Facebook, anyway, depriving Facebook of ad revenue that would accompany Trump postings. Still, a publisher has the right to refuse to publish anything it chooses, like letters to the editor, and that is not in conflict with the First Amendment, however much the right tries to make it so. If Facebook relents in the end, it will be vilified for going for the ad revenue instead of principle. Zuckerberg’s reputation and public image are already deep in the dumpster, anyway, so maybe he views it as a lost cause.

A perspicacious Reader noted yesterday that the Royal Family brings in a ton of revenue to Great Britain and that may suffice to keep them at the top and stymy a move to “republic” from “constitutional monarchy.” The Facebook issue is parallel. In other words, follow the money.

One recent article (Vanity Fair) says Trump will fade just like VP candidate Sarah Palin, who went for the money from appearances instead of an actual run for office–and has now vanished from the political stage. One source says her net worth is now $8 million, from less than $1 million while governor of Alaska, from TV appearance, books and one real thing, real estate. Her husband divorced her for "incompatibility of temperament,” her son went to jail for being a stalker/thug, and she and the whole family caught Covid 19. Nobody with a grain of sense pays any attention. Trump going the same way? Not out of the question, especially if the legal cases against Trump and cronies start making more noise.

Tidbit: A federal judge named former Justice Dept chief Barr a liar for misrepresenting the Mueller report to the public, to Congress and to the court. Separately, a Giuliani crony called on Trump to pay Rudy’s vast legal fees. That will happen when pigs fly (although we are intrigued by Rudy’s remark that he has “insurance.”).

On the sidelines of the Secy State Blinken trip to Kiev, an aide to the Ukrainian president gave an interview to Andrea Mitchell that confirmed Rudy’s trips to Ukraine were directed specifically at getting help in finding misdeeds by one or both Bidens. The aide said the corruption was crystal clear and both appalling and frightening. At the time, Ukraine did not know about the hold on military supplies that Trump had imposed. Separately, the memoir by Hunter Biden does a decent job of explaining his position at Burisma as fully proper. We read the whole book in one sitting. Most memorable is the lengthy narrative on addiction, which is terrifying.

Separately, the Justice Dept wrote to the Arizona state Senate about its “audit” of the ballots by a self-described auditor that has zero experience, credibility, or standing to conduct audits. The state is supposed to safeguard the ballots, not turn them over to just anyone, let alone someone with an agenda. This could go somewhere.

---

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.

To get a two-week trial of the full reports plus traders advice for only $3.95. Click here!