Outlook: The calendar today has nothing for the US except the Baker-Hughes rig count. We might get some info from the G7 finance ministers meeting in Germany that ends today, but don’t hold your breath. G7 is likely to say nothing about markets setting exchange rates, the discreet disapproval of intervention. Declining to mention it means it stands, and we have no evidence Japan wants to intervene, anyway. That’s all trader talk. What we have so far is a likely agreement G7 will give some $19 billion in aid to Ukraine in the form of guarantees of short-term debt.

In contract, the US is giving actual money and goods. Bloomberg says it’s “$100 million in military assistance to Ukraine including artillery, radar and other equipment ahead of the $40 billion aid package for the east European country sent to [Biden] by Congress on Thursday. The latest shipments will bring the total amount of US military assistance provided to Ukraine since Russia’s invasion to $3.9 billion.”

It’s peculiar that we had a freak-out in the stock market and the very next day, risk aversion apparently fell enough to deliver a lower dollar. This is abnormally fast and also inconsistent. Remember that during the unfortunate presidency before the current one, we had some twisted cause-and-effect outcomes, too, although this one is far bigger.

Or maybe it’s some second-tier data deemed bad overriding risk aversion. That, too, is not usual.

Market players pay attention to whatever takes their fancy… and to whatever everyone is talking about. The medium is literally the press, both formal and informal (all those blogs and newsletters). This can lead us astray, like that WSJ headline saying markets are underpricing a recession for which the probability is only about 30%.

We had something similar yesterday–the Philadelphia Fed index was down to 2.6 in May from 17.6 in March when 16.0 was forecast and the worst reading since May 2020. Every story on the Philly Fed mentions that but without elaboration–May 2020 was at the height of the pandemic, so maybe it’s supposed to instill fear. To be fair, the Empire State on Monday was pretty bad, too (down 8.4 points) and the Morgan Stanley extrapolation gets a drop in the May ISM manufacturing PMI (due June 1) down to 51.0 from 55.4.

We are focusing on the “bad” news and missing that a drop by 4 points to a level still over the boom bust line at 50 is not the end of the world. After all, manufacturing is a small part of the US economy.

We saw something similar earlier in the week on the housing story. Hysterical posts are everywhere, including one that says a “housing bust” is underway. Well, no. the decline was 2.4% in existing sales and for the third month, but honestly, look at the chart. Trendline drawn by hand, not by Trading Economics. The point is that seeing everything through gloomy glasses results in gloomy headlines and becomes incorporated into a generalized gloomy mood. These are data releases–the regional Fed indices, housing–that most of the time we don’t bother to talk about because they are not market movers in a normal market.

To push the point past the finish line, consider that the Atlanta Fed GDPNow model for Q2 was cut by 0.1% earlier this week on the housing starts data (pointing to “real residential investment growth” probably down 1.1% to -0.6%. Starts are more important for overall economic activity than existing sales because they involve materials and labor that a mere transfer does not. And yes, starts fell 0.2% m/m in April but less than -2.8% (revised) in March. Gee, starts falling on rising mortgage rates! We are shocked.

Honestly, is any of this cause for alarm? No, but a persistent accumulation of news presented in the worst possible light (when other lights are available) shows bias. That doesn’t mean the threat of recession is not growing by leaps and bounds, but it does suggest that recession may be about to become a self-fulfilling prophecy. We are not unrealistically Pollyannish, but do want to recognize that a lot of this is foolish. Well market crowds are often foolish. It’s one of their primary characteristics, after all.

Most of all, it’s critical to remember the stock market is not the economy. As a general rule, the stock market can and often does signal the general health of the economy. That’s because when the economy is booming, earnings go up and stock prices follow. And as reported the other day, S&P earnings are still expected to go up this year.

Notice there is no mention of inflation being a prime mover in those earnings going up. Up is up. And while inflation hurts sentiment more than earnings or decent data help it, the current round of inflation is caused by China, the Ukraine war and supply chains, not a dearth of demand, at least in the US. Most of all, there is no sign of a financial crisis as we had in 2007-09. Regular people are not going to made homeless by being evicted by the Treasury Secretary (having been dumb enough to buy a house when they were subprime in the first place).

We have been dissing the theme, sometimes hidden under a pile of bumpf, that the falling stock market will cause the Fed to pause its hikes. One analyst points out that the “S&P 500 is down 18.2% in the first 96 trading days of 2022, the worst start to a year since 1940.” (So what? Is that supposed to impress the Fed? In 1940 Europe was already at war and the US had not yet joined it.) But the Fed is not frightened. Kansas City Fed Pres George said market volatility is not surprising and equity markets are “one of the avenues through which tighter financial conditions will emerge.”

Now that several publications (like The Atlantic) are touting the strong dollar as an important factor, we are getting the pullback. This irony occurs every decade or so. Pullbacks are all but impossible to forecast and they wreak havoc on trend-following models like ours, which is why we have to fall back on fundamentals during those times. Usually basic economics is not much help. We’d guess we have another week or two to suffer through this and then it will be the June Fed meeting. The US yield advantage “should” restore the dollar, but you can’t bet on it.

Foreign Affairs: Pres Biden is hardly “sleepy Joe.” He’s in S. Korea today with some idea the US can somehow help get more chip production. US presidents hardly ever do things like this and in person. Also, Bloomberg reports he may be meeting Saudi Arabian Prince Mohammed bin Salman as soon as next month. This is the guy who wouldn’t take Biden’s phone call when he was seeking an increase in oil supplies. Stories about Biden’s intervention in the baby formula shortage--using the Defense Production Act, for heaven’s sake!–usually neglect to mention the shortage occurred because the industry is a 2-name oligopoly and at least one of them had stopped production because the goods were found to be contaminated by the FDA. The next time you want to complain about government over-regulation, think of that.


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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This morning FX briefing is an information service, not a trading system. All trade recommendations are included in the afternoon report.

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