Markets may be starting to accept that Trump is gaining ground on his extreme policy initiatives

Outlook

The calendar is light today with the big news, CPI, coming next week and expected to have risen a bit but only a bit. The consensus is holding that unemployment is the new big thing and will drive the Fed to cut rates on Sept 17. The CME FedWatch tool has the probability of a single cut at 89.5%, from 91.9% yesterday but 60.8% a month ago.

We also get retail sales next week, so far refusing to show the slowdown so long expected.

It’s conceivable that markets are starting to accept that Trump is winning on all his extreme policy initiatives, based on ignorance and badly executed though they may be. We are now back to the sentiment that the US economy is so robust and resilient that not even Trump can do much harm.

Again we need to point out that the equity markets are refusing to be cowed or even much influenced except once in a blue moon. The stock market is not the economy but is itself a barometer of the Zeitgeist. We are shocked, shocked! That Trump attacked a top company CEO for being Chinese (and having old ties) but nobody is standing up against it as racism. We should have known it would go that far, since T. started with the Muslim ban back in 2017 and is building concentration camps for immigrants collected off the streets willy-nilly.

Is there a comeuppance in sight? It’s an obvious unforced error to antagonize Brazil, India, China and even Russia. But we can’t see hideous real-world consequences, just a rise in anti-Americanism. And Wall Street, Congress, the courts and most of the public are not fighting back, at least not effectively. So far.

Forecast

As we expected, the FX market is dithering. We could easily see a sideways move today and next week while the world comes to accept that Trump is getting his way and everybody else can go pound sand. This is not exactly dollar-positive but it does take away some degree of negativity.

We need to expect some fresh outrages on the trade front because Trump loves the spotlight and needs distractions from the Epstein affair. But new stuff would have to be Big to move the bond and FX gang. Consider getting out for the next week.

Tidbit opinion: Of course Trump knew Epstein was using underage girls. He probably did not partake, but he said nothing. He will get away with this, too.

Tidbit: Further to our gripe about nobody naming higher inflation ahead, the NY Fed’s consumer expectations are in line. See the full quote below and the Reuters chart. This means a Shock when the numbers are so much worse, right?

Ah, but imports are a mere 14% of US GDP. Price increases there due to tariffs may have only a smallish effect on inflation, even if low-income households are hit hard.

NY Fed

Median inflation expectations in July increased at the one-year-ahead horizon to 3.1% from 3.0% and at the five-year-ahead horizon to 2.9% from 2.6%. They remained steady at the three-year-ahead horizon at 3.0%. The survey’s measure of disagreement across respondents (the difference between the 75th and 25th percentile of inflation expectations) decreased at the one-year horizon, was unchanged at the three-year horizon, and increased at the five-year horizon.

Median inflation uncertainty—or the uncertainty expressed regarding future inflation outcomes—declined at the one-year and three-year horizons and was unchanged at the five-year horizon.

Median home price growth expectations remained unchanged at 3.0%. This series has been moving in a narrow range between 3.0% and 3.3% since August 2023.

Median year-ahead commodity price change expectations decreased by 0.3 percentage point for gas to 3.9%, 0.1 percentage point for the cost of medical care to 9.2%, 0.4 percentage point for the cost of college education to 8.7%, and 2.1 percentage points for rent to 7.0%. The year-ahead expected change in food prices was unchanged at 5.5%.

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