Fed govs are not helping

Outlook

The huge drop in the 10-year yield from over 4.17% to 4.10% this morning bodes well for the dollar pushback to come to an end, but we can’t count on it.

The dollar is up mostly because other currencies are down, chiefly the euro and yen, for their own reasons. Markets really prefer to ignore politics, but in both cases, a critical factor is the too-high public debt. The French opposition and the new Japanese LDP leader are okay with it. The US gets away with it (exorbitant privilege) because it’s the reserve currency and global trade numeraire.

Bloomberg says the absence of data because of the shutdown is driving bond traders into new hedges that include even more rate cuts, and others into fewer cuts, specifically a cut this month but no cut is December (or the other way around).

Fed govs are not helping. Two (Miran and Bowman) may call for 50 bp at the Oct meeting. Others (Kashkari) are happy with two of 25 bp each by year-end. It seems unlikely that a cut will be skipped but those Big Bank forecast of just that are not to be brushed off.

This raises the question of what inflation data the Fed is looking at for the Oct meeting. We get the minutes of the last meeting later today but it’s not likely to deliver a clue on that one, critical point. The Fed has some 400 brainy economists. What are they doing all day?

For reference, the CPI last time out was an annual rate of 2.9% in August after 2.7% in July and June, and the highest since January. “Prices rose at a faster pace for food (3.2% vs 2.9% in July), used cars and trucks (6% vs 4.8%), and new vehicles (0.7% vs 0.4%). Also, energy cost increased for the first time in seven months (0.2% vs -1.6%).”

That’s CPI, not the PCE the Fed prefers. But never mind. To the extent the Fed responds to what the surveys say the public sees as rising inflation (self-fulfilled prophecies), CPI will do just fine. Some economists expect numbers well over 3%, like 3.5%, by the end of Q1. Will the Fed consider future expected data or only existing data? For what it’s worth, Trading Economics expect 3%. But we are not getting the data next week because of the shutdown, another reason to expect the White House to drag out the shutdown as long as possible.

We will go with the consensus view of two 25 bp cuts before year-end, but don’t forget two things—consumption is still roaring, if at the lower end of the demographic pile it’s being fueled by debt. And GDP is robust, suggesting inflation can more easily appear.

Forecast

The dollar story is being told by gold. Anxious investors and traders want a safe haven. The dollar doesn’t have any intrinsic value—its value is based on Trust. Gold at least has value in manufacturing and global demand for pretty stuff, even if it yields zip. Crypto has no intrinsic value, either, except for demand demonstrated by price.

We are not sure that trust in currencies, including the euro and yen, is eroded away only by deficits. The shiny new things, gold and crypto, take some credit and are, of course, fads that can crash when real return looks more sane.

But there is probably a cycle of some sort that leads to the idea of a longer-lasting rejection of G7 currencies for all sorts of reasons, including the political. Weirdly, we imagine the pound will end up a winner in all this—the economy is a mess but it’s working on the deficit.

---

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!