Outlook

Today at 8:30 am ET we get US inflation, 1.3% expected for Dec with core at 1.6%. The headline will be 0.1% higher due to the base effect but core will be the same. There's nothing to see here, meaning the early tapering idea has no underpinning. Another dash of cold water comes from World Bank chief economist Reinhart, who says the expected robust recovery can be poisoned by overwhelmed balance sheets and a potential financial crisis. Eeek! Which companies/banks might those overwhelmed balance sheets belong to?

Yesterday the FT reported that some big players are revisiting their weak dollar forecast. The reason is a wavering conviction that the Fed will let inflation exceed 2.5% now that the Biden recovery is in sight and it looks enormous. The famously resilient US economy will roar. So far the dollar has recovered about a third of the loss booked in the final two months of 2020.

The Deutsche Bank currency guru says it's time for a consolidation of the falling dollar trend because of the pending fiscal stimulus. The fixed income guy at Julius Baer says bond yields are reflecting the risk that the Fed could reconsider its supportive stance sooner than previously thought. The JP Morgan guy says the key driver of dollar weakness, confidence that the Fed would allow inflation to overshoot its target, seems less sure. Still, it's too early to call for an outright dollar recovery. Yields are still low and assumptions about the Fed are still unproven. Deutsche Bank points out a dollar rally could be "limited."

This was our judgment yesterday, and we agree with the big boys, but with some emphasis on the "unproven assumptions" about the Fed. Offhand comments by one Fed gov or another is hardly the same thing as a policy shift. It took the Fed a long time—years--to arrive at the policy stance of allowing overshooting. It seems unlikely they are going to drop it like a hot potato. St. Louis Fed Bullard is the most prominent member to say let's wait and see. Besides, that inflation hasn't appeared yet. Where is it going to come from? Not more expensive imports. Rising import prices have only a marginal effect on inflation when imports are only about 15% of GDP. That doesn't mean bond yields can't keep rising in anticipation of inflation, but it's not the Fed's job to respond to what the bond gang imagines—the job is to respond to facts and data.

And therein may lie the reason the naysayers got egg on their face—the dollar retreated. Again. Position-paring yes, and it's maybe not fully over yet. But the underlying sentiment remains, not least because you shouldn't put cold, hard cash down on a low probability that is far out in the future. As Keynes said, "The market can remain irrational longer than you can remain solvent." It's just not a good bet. We don't know if the low probability of an early Fed taper accounts for yesterday's correction, but it's not a bad reason.

Sophisticated analysts point to the yield curve steepening as already having hit a ceiling. See the chart of the 5-year breakeven from the St. Louis Fed. The number is 2.06% from yesterday, with 2.16% from mid-May 2018 as the highest high on this timeframe. The implication is clear—those expecting inflation (and betting on it) got over-extended.

FRED

For other reasons for the dollar to devalue, look no further than the infamous twin deficits, although the Republicans are in the doghouse at the moment and it may take a while for Joe's spending to raise the usual hackles.

In addition, the political news is actually pretty good. Foreigners can't really appreciate it, but it's nearly a miracle the state of Georgia voted for a Jew and a black for the Senate. This is a state where anti-Semitism and racism are bred in the bone. And their election gives the party in the White House both the House of Representatives and the Senate. Obstructionism has ended. We are going to get some action now! Optimism about the economy seems to clash with a violent insurrection, but consider that we had Kent State and other VietNam war violence, not to mention Tulsa and several other scary events, and the railroad kept running.

Once Trump is well and truly gone—and under siege from various prosecutors and losing money hand over fist in his businesses—the Trump dollar premium will be well and truly gone. Biden is as far from erratic and impulsive as Pluto is from the sun. The demise of this particular political risk will subtract the need for a safe haven.

Politics: A lot in the impeachment saga depends on when the House leader sends the article of impeachment to the Senate. Technically if she sends it this week, perhaps first thing tomorrow morning, the Senate can be called back into emergency session and could hold the trial on Friday and the vote on Monday. By then the Republicans willing to convict Trump could be a much higher number, with 17-20 needed or that many not showing up. It's possible, barely, for Trump to be evicted from office before his term is up and this is the best-case scenario.

But the Senate can't be expected to hold the trial and the vote starting Monday and get it done before the inauguration. It's still unclear whether impeaching and convicting a president after he has left office is Constitutionally correct. As for whether this obstructs Biden, some say the Senate can walk and chew gum at the same time. The Senate can hold the trial in the morning and do other business in the afternoon.

Regardless of how the impeachment part works out, both houses are almost certain to pass the 14th Amendment-based rule that Trump committed sedition and will be banned from ever again holding public office, like Confederate generals. This also effectively purges him from the Republican party, something Senate leader McConnell wants.

This action would be a black mark against the Republican leader in the House, a dimbulb named House McCarthy, who is one of the least intelligent members ever elected and also one of the most Trump-enamored. He put forth a proposal for censure.

On the sidelines, so far three Democratic members of Congress caught Covid during the lockdown in forced company with Republicans who refused to put on masks, which is actually a Rule. Now a proposal is on the table to fine anyone not masking $1000/day. That ought to do the trick.

Far more serious is the judgment of a former FBI counter-terrorism expert who told TV audiences (more than once) that the briefing yesterday by the Washington district attorney is fishy. It should have been the FBI chief Wray and/or the Justice Dept acting attorney general. That those guys stayed away may be a sign they were ordered to stay away by Trump, another example of his intransigence. Still, some 160 rioters are being charged with federal crimes. Many were picked up at their hometown airports when they arrived from Washington, including one in Arizona and another in Hawaii. The Arizona guy claims he is being starved because the prison doesn't offer organic food. Boo-hoo.

The number of people charged with sedition and lesser crimes needs to get far higher than 160, and that includes members of Congress, staffers and cops who aided and abetted. The rioters had maps of the tunnels and other inside information. The FBI is fully equipped to winnow out these people and it remains to be seen whether they do. It also remains to be seen whether states can protect their capitols and elected officials going forward. Some elected officials will no doubt decline to vote against Trump in any of the upcoming actions because their lives have been threatened.


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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