Yesterday the FX markets were subdued, with plenty of dojis and inside day bars. Today we can see already at 8 am it’s going to be spikes all over the place, some of which is pent-up energy and frustration and some of which trying to be clever positioning. Again we have to say that to extrapolate an end to the trade war from some minor development, especially one that is out of character like a Trumpian goodwill gesture, is silly. Yes, we will likely get some trade war resolution in the end because it’s in Trump’s best interests in terms of the election next year, but there’s a lot of water to flow under that bridge before then.

Today we get the August CPI, expected to be fairly tame at 1.8% y/y in the headline and 2.3% in the core. As everyone keeps reminding us every time, the Fed purportedly doesn’t make decisions on this version but rather the PCE version. The point, probably, is that inflation levels and outlooks do not call for either rate cuts or rate hikes.

The real action lies at the central banks. Trump calling the Feds “boneheads” and demanding more rate cuts could be more than noise as it’s becoming clearer the Fed is not interested, sees no need, and is reluctant to act on trade events outside its influence or control. Besides, although the Fed would be too polite to say so, Trump’s assertion that he is qualified to comment on this matter is obviously mistaken. But Trump smells disrespect in the air and is highly likely to lash out. We think a Fed crisis (Trump firing Powell) is as bad for the US economy as the trade war.

Trump’s incompetence is about to get disclosed again once former National Security Advisor Bolton delivers his comeuppance. Bolton was opposed to letting N. Korea define “nuclearization” and can provide the Dems with some splendid campaign fodder. He was also opposed to the Taliban being entertained in Washington near the 9/11 anniversary and re-opening talks with Iran. Most analysts point out that you can disagree with Bolton’s foreign policy stances but still recognize he is smart--and honest. To object to Trump cozying up to the worst of the worst dictators is hardly unreasonable behavior.

The big central bank action is the ECB’s “bold and sweeping” rate cut to -0.50% and resumption of quantitative easing. To those who say negative rates are not actually working and QE is the same-old running the printing press, the only sensible reply is “Yes, that’s right. What else do you propose that central bank do?” The Keynesian solution is fiscal, but that’s not in the central bank wheelhouse. Ironically, it’s the German economy most at risk of recession and Germany that has the highest savings rate and the rock-hard commitment to fiscal balance. Weimar inflation has a lot to answer for. We can probably expect the euro to bounce today and tomorrow before resuming the Big Move down next week, all other things staying the same.



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