FX liquidity will crash after the European close and the US data

Outlook: We get some fresh data today—see the calendar—but the focus will remain on three things—the debt ceiling, the Fed’s stance on pause/skip/cut-or-hike, and tomorrow’s plateful that includes April income and spending, PCE inflation, and a bunch of vegetables (the trade balance, inventories, durable goods, and the final University of Michigan survey).

As we wrote yesterday, the Fed minutes were of almost no help in reading the tea leaves, but when the long-experienced Fed watchers at the Wall Street Journal spend half their word count on what Gov Waller said separately, we should pay attention. See above for more but net-net, Waller said a skip in June might be appropriate but if so, a hike in July will likely be warranted because inflation is just taking too long to get to 2%. The CME probability of a July hike was shown as 47.2% at 4:45 pm yesterday, up from 22.1% a week ago. It’s little changed this morning.

About the debt ceiling—Fitch said the US is on “Rating Watch Negative.” Well, no kidding. We continue to believe a deal will get struck before next Tuesday or Janet Yellen has a stroke, and nothing is better than a 3-day weekend to get it done. US markets are closed Monday for Memorial Day and it’s a hard holiday—all markets are well and truly closed.

Yesterday McCarthy said “We’re going to solve this problem,” following his remark the day before that the debt ceiling would indeed be raised. Many press reports had it that talks were not ongoing, but that was not true. They did go on, and for all we know, are ongoing today and tomorrow and all weekend, too. After days on end of reporting only gloom, Bloomberg says today “McCarthy Signals Debt Deal Optimism as US Put on Credit Watch.” Finally.

The problem for us is that it’s unclear whether the deal is dollar-favorable (as logic calls for) or dollar-negative (as classic FX perversity calls for). Now the Dow has got the willies, we fear announcement of the deal will drive all equities back up (and at lightning speed) while pulling down the dollar (and gold). 

Note that now is one of those times it will pay to read what passes for news and analysis with a jaundiced eye. A lot of misinformation and falsehoods is being bandied about, including by respected sources. Nearly all of them said on Tuesday there were no debt ceiling talks on Wednesday—but there were. Each of them had a headline about the Fed, and whichever way it leaned, it was wrong because the Fed spoke with forked tongue.

Funny enough, the news outlet least respected for savvy business news, the NYT, says the Fed was “split over June rate pause,” which is dead-on accurate. Many reports had it that the DeSantis announcement on Twitter of his run for president failed because so many people overloaded the servers. This was decidedly not true. Twitter has been failing a lot lately (look it up) and the readership for this occasion was under 200,000. Rocky’s Rule No. 4—be careful what you read.

Forecast: Financial markets are largely unfazed by the debt ceiling issue, except for short-dated Treasuries and some equity market action, now being reversed by a single name. It is, therefore, possible that an end to the crisis will deliver barely a burp. The dollar “should” fall back on the idea that a safe haven is less needed, but perhaps only to be followed in short order by recovery and even additional gains on hikes expected in July and on far better growth. Tomorrow we get the newest Atlanta Fed GDPNow in addition to PCE inflation.

Do NOT forget that Monday is a holiday in the US and traders will start taking off as early as noon today and if not today, by noon tomorrow. FX liquidity will crash after the European close and the US data. Any re-positioning then will not necessarily reflect new sentiment—only paring ahead of the holiday. Don’t be fooled, and watch out for over-interpretation by headline-grabbers who have already shown their true colors (lies to get eyeballs). 

Tidbit: The oil story is messier than usual. Saudi Arabia issued a (futile) warning against speculators shorting oil and the US persists in drawing down the Strategic Reserve, now down 33.46% y/y to the lowest in decades (if still offering 4.9 years of capability).  Trading Economics reports “The CRB Commodity Index was around the 290 mark, close to over 1-month lows due to a weakening macroeconomic outlook. Concerns about subdued demand and looming recession persisted as interest rates remained elevated, while doubts on the Chinese recovery and the country's ability to boost the global economy mounted, especially after the imports' significant decline in April.

“In the energy sector, WTI crude was changing hands below the $73 per barrel mark. In the industrial sector, copper, considered a barometer for the world's economy, dipped below $4 per pound. Meanwhile, agricultural commodities, which account for more than 40% of the index, resumed their upward trend on tight sugar and cocoa supplies but held below their April peaks. At the same time, gold prices hovered close to record levels due to a risk-off mood.”

Gold down on risk-off—really? But the important news is oil and natural gas prices still low and falling, which is a huge amount of relief for everybody’s inflation rates, especially in Europe. Can it last and if so, for how long?

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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