Today we get the Philly Fed non-manufacturing index. Tomorrow it’s mortgage application and the leading index. Thursday it’s the usual initial jobless claims and the Kansas City Fed manufacturing activity, ending on Friday with the S&P flash manufacturing and services PMIs plus the University of Michigan final sentiment reading and existing home sales.
The Atlanta Fed GDPNow update on Friday went from 2.7% on Jan 9 to 3.0%, the same as the day before. The summary is pretty interesting: Q4 consumption spending rose from 3.3% to 3.7%. Government spending went from 2.9% to 3.0%. But “the nowcast of fourth-quarter real gross private domestic growth decreased from -0.4 percent to -0.8 percent.” We do not know for sure what that means—it says a doubling of a drop in growth. We get another update on Jan 28, just ahead of the Fed policy meeting.
It’s fair to say the macro data is all second tier now that Trump has been sworn in and is about to inundate the world with initiatives. The stock market thinks his tenure will be good for earnings, so it’s not scared. But the bond gang and thus the FX world are mired in deep anxiety.
It's the yield, stupid. Last week Bloomberg wrote “The rate on 10-year notes alone has soared more than a percentage point in four months and now is within sight of the 5% barrier last breached briefly in 2023 and otherwise not seen since before the global financial crisis nearly two decades ago.”
We have seen yields retreat over the past week but the story has not changed—yields are on an upward trajectory because the bond gang sees higher inflation and worsening deficits ahead. Full stop.
Bloomberg wrote “’The bond vigilantes are waking and it’s not a good omen:’ Historians point out that rising 10-year note yields have foreshadowed market and economic spasms such as the 2008 crisis as well as the previous decade’s bursting of the dot-com bubble.”
But in addition to yields, it’s also those tariffs. As noted above, the dollar took a hosing yesterday on every currency for any or all of several reasons. Early reports had it that tariffs on Mexico and Canada would be postponed to Feb 1. See the dandy Reuters chart.
Or it could be some “sell on the news” effect. It could also be the rest of the world thumbing their nose at Trump while the US markets were closed for the holiday. It’s no secret the rest of the world is appalled at the election of the twice-impeached, jury-convicted felon who lies, a lot, and is also mean-spirited and a terrible manager.
L'État, c'est moi is especially obnoxious. We have gone from observing and enforcing the law without fear or favor to always with fear and always with favor.
Apparently we have to wait for the tariff story to develop. Trump ordered Commerce, the Treasury and US Trade Rep to look at the “economic and national security risks” of the trade deficit and come back with policies. This includes the 2020 deal with China that called for large increases in Chinese purchases from the US that never came.
Forecast
The dollar got whipsawed on the postponement of the expected tariff announcement and all the currencies rallied. But it appears to be short-lived because after all, tigers and stripes. On the hourly chart, the euro has already lost over 62% of yesterday’s gain.
We see two possible outcomes: first, a sideway move near what we had last week, about 1.0250-1.0350. This is always a misery because important macro data gets squashed and you can’t put a finger on sentiment, which really does require some momentum. The alternative is restoration of the pre-exiting trajectory—euro to parity. Unfortunately, as of the first day, we see the sideways path the more likely, for the near-term, anyway.
Fed Tidbit: Bloomberg wrote yesterday that “Based on options linked to the Secured Overnight Financing Rate, traders currently see about a 25% chance that the Fed’s next move will be to lift rates by year end… Up until over a week ago, a hike wasn’t even entertained — 60% of options traders were betting on more Fed cuts and 40% for a pause.
“As with so many things in financial markets these days, it’s effectively a bet on soon-to-be President Donald Trump’s policies. And it hinges on the idea that tariffs and other policies imposed by the new administration will trigger a bounce back in inflation that forces the Fed into an embarrassing about-face.”
It’s a good thing this fringey bet is not slated until later in the year. At this point in time, the Fed is awaiting Trump bringing down the hammer. A rate hike now would be catastrophic for their job security. We continue to expect Trump to try to dismantle the Fed or castrate it with lackeys who will cut rates.
Trump Inauguration: It’s no exaggeration to say the financial markets are in a state of high anxiety nearing emergency over the uncertainty of what Trump will do. He declared almost 100 new things on Day One but delivered only a few. He has already defied the Supreme Court by allowing TikTok to resume operations (TikTok thanked him). You have to wonder how much he got paid. His meme crypto coin has already attracted over $6.5 billion, according to Bloomberg. Reuters names a market cap over $10 billion.
He has forced the resignation of top State Dept officials and declared an end to diversity policies saying there are only two sexes. He intends to dismantle or defy a Constitutional birthright to citizenship. He will rename the Gulf of Mexico and return Mount Denali to Mount McKinley.
Trump pardoned some 1500 Jan 6 insurrectionists, a slap in the face to the judicial system. He’s rolling back climate and environmental initiatives, including resigning from the global talks and pulling support from wind, and repeated that oil will be king.
By invoking the Emergency Act, he can get away with almost everything, bypassing Congress and the courts. First will come raids on immigrants that will be harsh and in many cases, unfair. Then come the tariffs. See the Bloomberg chart of the most-affected countries.
Trump has no respect for morals and ethics, nor rules, laws and norms, and often enjoys breaking them to show off. Everything is a transaction in which he has to “win,” so fear tactics and extortion are high on the list. Outgoing Biden understands it all too well, pre-emptively pardoning the many names Trump said he would go after in reprisal for the Jan 6 hearings and other matters.
Every major mainstream news outlet describes the dangers Trump poses, even the WSJ. The most vociferous is Bloomberg but it’s all of them. You could read every news release all day yesterday and not find approval anywhere. It must be lurking in the far-right news outlets and social media. A point might be that sane and reasonable people don’t bother with the far-right and that’s how we got to this dreadful, terrifying place. But also, mainstream opposition to Trump means some brave souls will be inspired to fight back. This is not Kristallnacht.
Best tidbit ever: Over the weekend, Canada’s retaliation against Trump’s tariff threats put on some muscle. It may be only $25 billion in imports from the US, but there is a plan., a three-part plan, and it targets stuff made in red states. The NYT reports “Mélanie Joly, Canada’s foreign minister, who spent Thursday and Friday in Washington, met with a slew of Republicans to make her country’s case, including Senator Lindsey Graham of South Carolina, Senator Jim Risch of Idaho, and the Senate majority leader, John Thune of South Dakota.
“Ms. Joly said she hoped her outreach to senior Republicans would persuade them to intervene to avert or limit a trade war and its negative impact on consumers and jobs on both sides of the border.”
The products include orange juice from Florida, whiskey from Tennessee and peanut butter from Kentucky but there are hundreds more. Trudeau and his cabinet have a US war room for immediate response today and tomorrow if Trump moves that early, as expected. Canada is also looking at duties on exports, including energy and that includes Alberta oil and the hydroelectric power needed in New England.
That would be step 3: “… restricting the sale of “sensitive commodities worth hundreds of billions of dollars, including oil and gas, potash, uranium and critical minerals. All are exports that are crucial to the United States. Remember, “more than half of the oil imported into the United States comes from Canada.”
Not named step 4 but on the table is preparing to assist the Canadian businesses that will suffer from US tariffs or Canadian export restrictions. “While mass bailouts or blanket funding for entire industries may not be on the table, the official said it would be unthinkable to allow a tariff war with the United States to wipe out thousands of jobs and businesses without the government stepping in to mitigate the blow.”
Judging from past performance, this defiance will not put any stumbling blocks in front of Trump. His Congressional lackeys will fold. He will impose those tariffs, starting small at first, in an effort to trick Canada, like the frog in the increasing hot saucepan of water coming to a boil.
Canada will not be tricked. Every news outlet is covering the looming trade war—the BBC, the FT, social media—everywhere except the front page of the WSJ. On Friday, the FX market freaked out and bid the USD heavily into an upside breakout. The USD/CAD had been rolling along sideways since mid-December. Is it a genuine breakout? Yes. The idea is that Canada will suffer far more than the US and have to capitulate in the end.
We are not convinced. Canada has the world behind it and Canadians can be tremendously stubborn. When the power goes out in New England and gas and heating oil prices rise, Americans will be on Canada’s side, too. There is no way the US can “drill, baby, drill” fast enough to replace Canadian exports of energy products.
And while Canadians may be willing to give up peanut butter, Americans are not willing to pay $35 for toilet paper. Americans are uniquely focused on TP. Most of it is made in the US but only a small amount from Canada, but about half the wood pulp for TP comes from Canada. We hope this turns out to be named “the toilet paper war.” It will make Americans and Trump look ridiculous. As it should.
Trump did not declare the trade war with Canada on day one, as promised. Here is an opening statement from a normally sedate Canadian bond analyst. “The feared Opening Day Tariff War On Canada has been at least delayed. Although Trump is a big fan of tariffs as an economic policy, he also likes using them as a club. At present, the club is being used to get Canada to up its spending on controlling the fentanyl trade, as well as stopping the dozens of people annually who enter the United States covertly from across the U.S.’s northern border.
Instead of looking at policies that might matter for the U.S. public, Trump’s team has focused on the more important priorities by fleecing his credulous supporters and/or providing a conduit for bribes via issuing a pair of meme coins. This is exactly the policy focus we should expect for the next four years. Governing is hard, grifting is easy.”
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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