Market volatility is abnormally low

Outlook:

We get the Bank of Canada decision at 10 am. We take a contrarian view this time. Yes, the BoC may sound dovish, but so much dovishness is already built in that we wonder if any bright words might drive the CAD up. The BoC will likely keep rates on hold but the statement might be a little happier. We had expected the BoJ results but evidently that’s tomorrow. When a slew of calendars get a central bank meeting date wrong, we might be in some trouble.

It’s all downhill from here. Unless something happens in earnings, it would take an earthquake to shake markets out of torpor. But even in record-setting equity markets, volatility is abnormally low. Elsewhere, analysts say central banks are in “pause” mode while they await more data. That leaves bonds and FX in limbo and also having no real volatility. A little intraday choppiness sometimes, but no real vol. Reuters says FX market volatility is near a 5-year low.

It’s not that nothing is happening. Plenty of things are happening. It’s just that the things that are happening are not driving trendedness, so everyone has to fall back on the same-old, same-old risk appetite/risk aversion story, which is getting pretty ragged around the edges by now. Besides, it’s not really working. Emerging markets, for example, “should” be thriving. Where are the yield-seekers of yore? Maybe they are all in the US equity market. See the VIX chart (from Yahoo!Finance). If there is regular cyclicality, we are due for another 2-4 months of the blahs before we see a spike.

As the WSJ reports, corporate earnings are at historic highs. See the chart. A fallback into more normal earnings mode might be a catalyst. But not yet. 

That leaves Friday’s US GDP as the mover-and-shaker. We have forecasts raging from 1.37% to 2.8% for a raw average of 2.09%. A low number might have the effect of driving capital to fixed income and the yield down below 2.50%. But a drop in the US yield advantage does not necessarily harm the dollar, at least not when others show no sign of improvement. Don’t take a nap, but don’t bet big, either.

Reminder: Q1 GDP forecasts:

• Atlanta Fed: 2.8%

• IMF: 2.3%

• St. Louis Fed: 1.89%

• NY Fed: 1.37%

Tidbits: The Trumpies are refusing to honor Congress’ Constitutional authority to get tax returns from the IRS, to subpoena former White House employees (like the presidential lawyer), and other acts of intransigence. It looks like the framers didn’t anticipate the Executive disobeying the law.

Aside from a citation for “contempt of Congress,” it seems there is no other recourse. It’s not as though Congress can send in some US Marshalls to grab documents, let alone put anyone in jail. The lefty cable TV analysts are all but hysterical over Trump’s lack of respect for the law, not only because it’s unprecedented but also because it sets a precedent for the next presidents. Experts like Harvard law prof Tribe say Trump is worse than Nixon for this reason. But Nixon was also far smarter than Trump. Funny, the US constitutional system of checks and balances is getting wrecked by a vain and stupid man.

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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