Expressing a need for caution is not the same thing as being outright hawkish

After very little hard data for over a month, today we start getting some. First up is construction spending today, factory orders tomorrow, the trade balance on Wednesday and the big one, nonfarm payrolls on Thursday.

Brown Brothers reports non-farm payrolls are expected at 50,000 after 22,000 in August, meaning the employment rate is sustainable. ADP had a drop by 32,000 in Aug while competitor Revelio, including the public sector, had a gain of 35,000. 

The important issue is changing the mind of the many cautious Fed members who are expressing doubts about the Dec rate cut. This is considered the driver of the stock market swoon and the dollar gain. We are wary of single cause-and-effect but see little else to account for the dollar.

It seems obvious that the labor market data we do have showed conditions are softer and a rate cut is appropriate, especially because we do not have hard evidence of inflation. The Fed hates to read the tea-leaves wrong for credibility reasons and we suspect the markets are exaggerating the implications of the Fed member comments. Expressing a need for caution is not the same thing as being outright hawkish.

Besides, a rate cut is what Trump wants and his lackeys will be out in force (Warsh and Miran, among others). Remember there are a number of regional Fed govs being replaced in the new year, ahead of Mr. Powell’s term ending in May. 

On Friday, chatter about the Fed being at sixes and sevens had led the CME Fed funds betting pool to cut the probability of the Dec rate cut from 94.4% a month ago to 53.2% on Friday and 44.6% this morning at 7:30 am. Remember, this is a betting position, not a Fact. The Fed meets in 23 days and before then we have the Thanksgiving Day holiday.

We expect to see the odds of the Dec rate cut start going up again, a dollar-negative.

About that Atlanta Fed GDPNow that we expected on Friday. Not delivered. Here is the message: “The next GDPNow update will be postponed until further notice. The first GDPNow nowcast for fourth-quarter GDP will be delayed until after the US Bureau of Economic Analysis releases its first estimate of third-quarter GDP growth.”

Amid all the chatter about overvaluation and an inevitable bubble bursting, the Dow closed at a historic high last Tuesday. Silver hit an all-time high on Thursday. Who are you going to believe, Jamie Dimon or your lying eyes? The Economist magazine cover story is “How Markets Could Topple the Economy.” It’s the worst issue ever. The pathway for economic ruin is somehow, unconvincingly, the consumer pulling in his horns. No data or even a crackpot theory behind it.

Here we are back to not having any grip at all of risk appetite. Is it risk-on (sell dollars) or risk-off (buy dollars)? Gold is not behaving the way it has behaved for a few thousand years. If we reverse sentiment, risk-on means buy gold alongside Nvidia and its cousins. Note that Nvidia went up on Friday. So did the 10-year yield, which should mean investors were selling and holders/buyers were demanding higher returns to hold/buy. This is not what to expect when bubble burst fear is dominating the press. The fear/greed clocks all show extreme fear. But Nvidia closed higher and so did the dollar, while gold saw profit-taking or something—it went down. If we have extreme fear, gold should be going up, not down. 

Wait a minute. Gold going down for whatever reason suggests risk-off. Nvidia up means risk-on. But the dollar went up to end the week. Apart from normal squaring ahead of a weekend, does that mean risk-on or off?

The point here is that traders and investors are not one giant crowd selecting assets from a menu that includes everything. Traders and investors are in tiers, with the big players at the top and retail at the bottom. There could be as many as ten (or more) layers. To untangle this messy picture, we would need to see what each layer is doing. As far as we know, nobody has ever been able to do that.

We can guess what the last layer will do—that’s you and me, “retail.” What could cause a general collapse is not valuations, but plain, old-fashioned, bone-chilling confusion. Better to liquidate and put the cash under the mattress. But the professionals at the upper layers have a mandate to make gains. They don’t have a corporate mattress. Two things: they can pare positions and put the money into cash. The BoA managers survey had abnormally low cash (c. 4%) in August and Sept. We await the Oct report due any day now.

But secondly, it’s well-known that professional managers hardly ever beat the indices, which is why retail goes for the ETFs. But while the professionals may not beat the market, they are pretty sophisticated about allocating risk. And the folks trading stocks are not necessarily looking at the dollar while the folks trading FX are, nowadays, looking at the equity market as well as the yields. 

This doesn’t explain Friday—Nvidia up, dollar up, gold down. For the month to date as of Friday, the S&P is net down about 1.55% and the Nasdaq, down about 3.5%. This is billions of dollars. Well, that may account for the dollar—but not gold. If there is a rotation away from equities, you’d think gold would be the first beneficiary. All this leaves us with a worry about crypto, now having fallen under what some had named support. Will a return to the rate cut expectation fix it? 

Forecast

As long as the Fed funds betting has the probability of the Dec rate cut at under 50%, the stock market will be unhappy and the dollar can be firm. We expect this to reverse as the fresh data comes in. We are not a fan of calling reversals before there is hard evidence, but these conditions really do point that way. We would not be surprised at a lunch of crow by Friday.

A rising rate cut bet may be enough to soothe the valuation blues and return the dollar to a downward trajectory. We will need the yields to calm down, too, although as noted before, the correlation of the yields and the dollar is a bumpy road this time.

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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