Outlook: Yesterday we saw more dollar short-covering, bolstered by the lift in yields (although minor), and there might be more today. With both the US and UK trading centers on holiday next Monday, the best place to be is out of the market.

We get a ton of US data today and it’s a tossup whether we get little response or an exaggerated one. The biggest number, if not the most important one, is the trade deficit in goods, averaging $87.3 billion per month in Q1. It can get worse.

Personal income and spending are the focus, with a dip expected from March for mechanical reasons—March brought $1400 stimulus checks to the consumer. On the spending side, we already know from retail sales that it might be disappointing, the main inference from that being a not-scary PCE deflator.

We also get the Biden budget plan today, lifting federal spending to $6 trillion in the coming fiscal year and $8.2 trillion by 2031. The Republicans will oppose because the only big government they like is the military and they refuse to raise taxes, and never mind the voting public embraces the infrastructure plan by a wide margin.

Lest we miss the point, yield performance is returning as a driving factor in FX and we have a dandy case to show it:  sterling abruptly reversed a run-of-the-mill ordinary retracement and turned on a dime after a BoE policy committee member Vlieghe appeared to shift his stance from resolutely dovish to more neutral. He is worried about integrating furloughed workers back into the economy, a major challenge, but if it goes well, “a somewhat earlier rise in Bank Rate would be appropriate.” The timing would be “soon after” Q1 2022, with a “slightly steeper path” than in his central case. UK yields and the pound rose in sync. 

This is consistent with the US 10-year and the dollar rising and falling, if by tiny amounts, in response to statements by various Fed members. After today’s PCE deflator number, the noise volume is sure to go up, unless everyone has one foot out the door already. The forecast is for a rise to 3.5% annualized from 2.3% last time. Those who prefer simplicity will note that 3.5% is significantly higher than the Fed’s target of 2% and they disapprove of the Fed allowing the economy to run hot in case it can’t, in the end, control it.

Gittler at BDSwiss points out that the data today will be more than base effects. “The forecast +0.6% mom rise in the core PCE deflator would be the largest rise since the bad old days of 1984, when the US was still struggling with high inflation and the Fed funds rate was as high as 11.75%, not 0.125% as it is today.” This brings up the usual question of how to project one data point into the future—can you just multiply by 12? No, the correct procedure is more complicated than that, and besides, some of the impetus for higher prices will be fixed over the next few months, like long lines at ports and other supply chain issues.

We need to distinguish between demand-driven price rises and supply-constraint price rises, and we also have to factor in the classic responsiveness of both demanders and suppliers to higher prices. It may seem a silly example, but consider hand sanitizer, which went for as much as $10 a bottle a few months ago and now you can get a case for $10, or less than $1 a piece. The one place where we worry about lasting price rises is the supermarket, which is not only food but also things like paper towels and TP. Anyone who shops knows the weekly cost is up a good 15% in just a few months.

Bottom line, the income and spending numbers and the PCE number today are not a reliable indicator of conditions that will prevail by September, when the Fed will have to face the music. We can also note that next Friday’s payrolls are of equal or perhaps greater importance to the Fed, making the June FOMC the top tension point. On the whole, interpreting the US data today should be very messy and unclear.

Since we are already in the grip of a market paring dollar shorts, we need to worry about a bandwagon effect taking hold. We already see it in the yen, which is especially worrisome because of the looming extension of the state of emergency and the increasing odds the Olympics will need to be cancelled (or just flop). We had thought a flood of orders would appear when 110 came into view, but apparently the old lines in the sand have been forgotten and the dollar/yen slid right through it this morning. The yen is its own special case and not exactly a leader, but we need to worry about a spreader event. 

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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