If QE was crisis-era stimulus, the normalization announced yesterday means the end of stimulus. Nobody is getting this message just yet. The only concession to the new permanently lower natural rate is the ending point for Fed funds at 2.80% in the dot plot from 3% forecast in June. This is taken as a dovish signal for the longer-term, and while that's probably the correct idea, the immediate future has a hike in the cards. This is the classic short vs. long-term outlook.
We say the economy today and the outlook for the economy to 2019 and 2020 does not support the dot plot (one more hike this year and three next year). See the WSJ chart. We do not see growth in GDP or inflation, and we do see a rise in joblessness. This is just some of the data that was behind the ex-pectation the Fed would have to abstain from the third hike this year and reduce the number of hikes next year. By sticking to the scenario already written, the Fed shows "consistency" but may also be showing it's out of touch with its own data. Cutting the terminal Fed funds rate by a mere 20 points is not enough.
In addition, while we may intuitively agree that normalization is a good thing in its own right, the mar-ket is out of touch with what the Fed has in mind. Equities in particular don't believe rising rates are a negative because it's clear the Fed is not all that aggressive. But to the extent that marginal speculators get cut out of the herd and companies face higher funding costs, rising rates are equity-negative—usually.
We continue to be befuddled by the Fed failing to come up with explanations about the inflation mys-tery. The FT makes a point of it—"Janet Yellen refuses to be derailed by low-inflation mystery." The implication is that normalization is such a compelling objective that the Fed is willing to overlook a giant obstacle. The market is accepting this stance, for the moment. It's a win for Fed credibility. But it won't last. The Fed sees three hikes in 2018 but the market is pricing in only two. Many analysts are noting the divergence between Fed and market expectations. Yellen can bask in the glow of normal-ization for only a short time, maybe just long enough to leave office.
As we write above, the Brexit model suggests red support in the euro/dollar will not hold. The Fed Shock will continue to drive the euro down, perhaps as far as the 38% retracement target of 1.1722.
Oh, dear. We really hate it when the chart suggests a stronger dollar. That forecast almost always ends in tears. The probability of a political bombshell, probably a charge of obstruction of justice against Trump, is growing by the day. Some analysts say it's a foregone conclusion of the Mueller investiga-tion. But getting rid of the embarrassment in the White House is not a quick process. It's the Fed Shock vs. a grindingly slow process. And to be fair, Europe is not without its political negatives, including Catalonia and darling Italy, a wonderful place that so sadly can't seem to get its politics right. Still, these threats are small potatoes compared to LePen or Trump.
US Politics: Trump is an embarrassment and a dangerous one. Bloomberg reports Nicaragua joined the Paris Accord, leaving the two outsiders the US and Syria. Today Trump meets with the leaders of South Korea and Japan at the UN to talk about North Korea. The number of things that can go wrong is far bigger than the number of things that could go right.
Those of us who consume a daily dose of cable TV news on the Russia investigation are learning that the scope and depth of Russian interference was far wider and deeper than anyone imagined, and evi-dence keeps mounting. Campaign manager Manafort was the one who got the GOP plank on sanctions on Russia over the Ukraine invasion removed. He also offered to brief Russia while the campaign was still in full gear. This guy is going to jail. More important than one corrupt guy is that fake news on social media reached over 7 million views. Since Trump won by 77,000 votes in specific districts and vast gangs of trollers can target demographics with a surprising amount of precision, it's not outlandish to imagine that Russian interference really did change the outcome and Russia really did get Trump elected.
To return to the narrative from last fall, we have to ask why Russia would have wanted Trump, or did they just not want Clinton? If they wanted Trump, it might because they perceived him to be easily ma-nipulated, given his lack of knowledge and perspective, his vanity and the narcissism that prevents him from consulting experts. What do they want Trump to do? Lift sanctions and not complain when Russia invades the next country to add to the Russian empire. Most recently Russia seems to be eyeing Bela-rus.
Trump's popularity in polls is the worst of any president in recent years. According to the UK newspa-per Telegraph, "... the bookmakers are banking on things getting worse for Trump with the latest odds from Ladbrokes showing that there is a 48 per cent chance he will fail to make it to the end of his first term in office. Their latest odds are as follows:
Impeachment or resignation before 2020: EVENS (50 per cent chance)
To serve full first term: 4/5 (55.6 per cent chance)."
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This morning FX briefing is an information service, not a trading system. All trade recommendations are included in the afternoon report.