It’s not clear the ADP number or even the JOLTS numbers will have any effect on the Fed

Markets were in turmoil yesterday, including FX, due to a sudden burst of volatility in bond markets. Reuters reports “Fed week got off to a rocky start in global markets, courtesy of bond market hits across the world, but government debt yields stabilized on Tuesday as the Federal Reserve started its two-day meeting.

“A sharp jump in yields on U.S. Treasuries, German bunds and Japanese government bonds on Monday was fueled by a slew of factors - some hawkish policy noises from several regions, another heavy week of year-end U.S. debt sales and a likely Bank of Japan interest rate rise next week. The jolt knocked stock markets back and the S&P 500 ended in the red on Monday.”

As we await the Fed’s "hawkish cut,” attention naturally turns to the CME Fed funds betting.  For the June 17 meeting—when we must assume Trump has his lackey installed as chief—40.6% expect two cuts, 24.2% expect no cuts after this one, and 25.5% expect three, including this one. This last one means Fed funds at 3-3.25% and we know Trump wants something far lower. But bettors think—so far--he won’t get it. Food for thought.

Analysts are expecting dissent, perhaps as many as three calling for no cut at all. Along with the hawkish cut idea, the dissent story is everywhere and caused yields to rise, presumably in case Mr. Powell says again the next cut is by no means a sure bet. At about 7 pm last evening, the 10-year was 4.168% from 4.158% at 7 am and 4.112% on Friday morning. Yields this high (and having risen from 3.990% at the low less than a month ago on 11/27) are dollar-supportive. See the 5-day chart of the 10-year.

Bloomberg reports Trump, in an interview with Politico, said he will judge a new Fed chair by whether he immediately moves to cut interest rates. Trump then denigrated Powell by saying he should be doing it now, and “I think he’s a combination of not a smart person and doesn’t like Trump.” For someone who so clearly does not understand basic economic principles, it’s rich for him to call anyone else “not smart.”

It's that “immediate” part that spooks observers. If the Supreme Court rules that Trump can fire anyone in any agency at any time, which seems likely, then he can just fire the Fed govs who decline to agree to a rate cut proposed by the new chief on Day One. 

Again, we don’t agree with the Bloomberg opinion writers who say the absence of any visible response to the threat of the Fed losing independence means it will be okay. It will not be okay.

Today we get the JOLTS report with openings and voluntary quits in the spotlight. We also have an auction of $39 billion of 10-year Treasury notes. We already have the ADP private sector update—the addition of an average of 4,750 jobs per week during the four weeks ending November 22. 

It’s not clear the ADP number or even the JOLTS numbers will have any effect on the Fed, which is also looking at inflation. The verdict of a rate cut tomorrow is not affected, and yet we have to wonder whether inflation expectations were behind the yield rise yesterday. One argument is that the Fed is downplaying inflation to favor employment and all but admitting it can’t “manage” inflation. Well, yes, we knew that. Anyone just discovering it must be an amateur.

This is one of the top reasons for uncertainty to be on the rise again. The Fed is relatively toothless in the face of inflationary pressures like tariffs, but at the same time, we want it to try. And we don’t want political interference that ties its hands, even if the few measures it can take to fight inflation are feeble and ineffective.

Forecast 

The yield rise yesterday was frightening and while conditions seem calmer so far today, we are not sure it’s all over. If the narrative is valid that the Fed has given up on inflation and rising yields reflect the inflation premium as in days of yore, we can’t expect the dollar to retreat.

We knew this was coming but we didn’t see it coming this soon. By the time the US gets actual inflation and the “neutral” rate is dead and buried, then the dollar can fall. To be fair to forecasters, the technical signals are wildly confusing. Longer indicators say sell the dollar. Shorter-term indicators say buy.

Tidbit: The last few chapters of 1929 describe the backlash in the early 1930’s against the conditions that led to the crash—influence peddling, cronyism, corruption, insider trading, tax evasion. The public was outraged and dismayed by the betrayal of public trust. Sound familiar?