Mnuchin says a key goal is a dependable Dollar

Outlook:

GDP for Q4 is the important release today. The WSJ survey gets a consensus read of 2.2%. The Atlanta Fed update yesterday gives us 2.9%, although the NY Fed still has 2.1%. Market News has 2.1% and notes we had 0.9% in Q4 a year ago.

The Fed had 1.9% in the Dec outlook. The WSJ reports the average over the past 71/2 years is 2.1%, so one question is whether the trend is accelerating. Analysts will be watching to see whether the consumer is still on board (as auto sales suggest), whether housing has a firm grip (with higher mortgage rates ahead), and capital spending is on the rise after a slumpy patch. And oh, yes, where is the core PCE de-flator? This is what the Fed cares about, not market expectations of rising inflation. One report has it that the core PCE deflator may have eased to 1.3% from 1.7%.

We also get the University of Michigan final consumer confidence index and inflation expectations. The index was 98.1 in the flash from 98.2 in Dec but up 6.6% over Jan a year ago. On inflation expectations, the flash version had inflation expectations at 2.5% for the upcoming 5 years. See the chart from the U Mich website for the upcoming year. We are a little worried that the actual is matching the expected sus-piciously well.

Not getting a lot of press, at least so far, is the nominee for TreasSec Mnuchin writing in his prepared presentation to the Congressional vetting committee that "I will maintain the position that long-term, a strong and dependable dollar is in the best interests of the United States, while recognizing that at times over the long-term, that may not be the case.... The strength of the dollar has historically been tied to the strength of the U.S. economy and the faith that investors have in doing business in America." While "from time to time, an excessively strong dollar may have negative short term implications on the econ-omy, a stronger dollar increases U.S. dollar purchasing power." A key goal is a dependable dollar."

This is exactly what a TreasSec nominee should say—the Rubin mantra—even when it contradicts the boss. The problem is that Mnuchin is a disagreeable character with a less-than-stellar ethical track rec-ord. As with all the cabinet nominees, the Plubs have the votes. The Dems have 48 and would need three Plub defectors to reject a candidate. So far it looks like the education and interior selections might get that effort, but not Mnuchin. We shall see.

Mnuchin also made a long-needed comment, that the IMF is a lousy currency cop. The Trump admin-istration would hold its feet to the fire and start calling out currency manipulators. The WSJ writes, pre-sumably in its own voice, "The IMF is supposed to be the global arbiter on acceptable exchange rate policies, but has been criticized for failing to be an effective currency cop. (Though if the U.S. hadn't been hit by the financial crisis, the Chinese—named by the U.S. as one of the most egregious violators of currency norms—might have been shamed into appreciating the yuan at a much faster pace than it ultimately did.)"

This is not strictly accurate, although the comments should strike fear in the heart of IMF and World Bank officials. It was the underappreciated TreasSec Snow at G7 in Italy in 2005 that "shamed" China into de-pegging and devaluing. G7 is a far more important institution on currency matters than the IMF. And to a large extent, G7 was invented because the IMF was failing. It started as a G5 in 1974, the year Nixon devalued the dollar. It became the G6 in 1975 and G7 in 1976 when Canada joined. From the very beginning G7 was oriented toward currency matters. For its part, the IMF focused more on emerg-ing market currency crises and according to some, embraced conventional austerity and prohibited cap-ital controls when a more aggressive fiscal policy and capital controls would work better.

We really hate to admit it, but shaking up the fuddy-duddy institutions is not a bad idea. Doing it stu-pidly is a bad idea, but the birds-eye view of inadequate institutions is not wrong.

Also not getting much attention is the ECB taper problem. Market News reports there is a louder noise coming from the BBK. Both BBK chief Weidmann and ECB board member Lautenschlaeger say the time is coming to end monetary stimulus. This is partly behind the recent firming of eurozone yields.
The other big story today, after GDP and the often flaky durables, is PM May's visit with Trump to get a trade deal. She said "opposites attract." Yesterday the government introduced a bill of only 137 words asking Parliament for permission to begin Brexit. The bills seeks a two-week debate period so that the deadline of March 31 will be met. The two-week deadline is really to avoid contentious amendments, including Scotland's demands.

Of the many, many tidbits and nuggets on Brexit coming out every blessed minute, one catches our attention. Bloomberg reports that the pound is losing favor: "... the currency's share of global reserves has fallen for the last two quarters to 4.5 percent, according to the International Monetary Fund. Meanwhile, its use in global transactions has dropped to 7.2 percent, the lowest since August 2011, the Swift RMB internationalization tracker found."

We are not sure this passes the "So What?" test. The expected trade deal between the UK and US is the main focus. Trump wants to poke a stick in Europe's eye and it's not inconceivable that this motive will suffice. A lot depends on how much May flatters and kowtows to the insecure Trump. She is going to be accused to kowtowing anyway, so she might as well just do it. We don't have a schedule from the White House (which misspelled May first name) so we don't know whether to expect a joint press con-ference and when. But we would bet a dollar that before the day is over, we will have fresh news on both Mexico and the UK and both items pertaining to trade. Do not go short sterling into that dark night.

Down in the Weeds on the Mexican Tariff: Press secretary Spicer initially said the US would im-pose a 20% tax on imports from Mexico that would raise $10 billion per year. A little later, Spicer came back out to say the House version, the "border adjustment," would be used instead, despite Trump having said it was "too complicated." This version (which must have the green eyeshade boys tearing their hair out) would tax whatever component of an import that was made on foreign soil while exempting any US parts (and 40% on US imports from Mexico were exported to Mexico in the first place). The border adjustment version has the virtue of preventing transfer pricing, a trick companies like to use to avoid taxes, but the important point here is that Mexico would not actually be paying the tax. It would be American or US-domiciled importers paying the tax. And it would be US consumers paying the higher prices.

Political Tidbit: Charles Blow in the NYT has a splendid rant: "Donald Trump is a proven liar. He lies often and effortlessly. He lies about the profound and the trivial. He lies to avoid guilt and in-vite glory. He lies when his pride is injured and when his pomposity is challenged.

"Indeed, one of the greatest threats Trump poses is that he corrupts and corrodes the absoluteness of truth, facts and science. It is no coincidence that the rise of Trump is concurrent with the rise of "fake news." It is no coincidence that his rise comes during an age of severely damaged faith in institutions. "And now that he has been elected, Trump wants absolute control over the flow of information, to dic-tate his own version of facts rather than live with the reality of accepted facts. Trump is in a battle to bend the truth to his benefit.

"He hates members of the press because, when properly performing, they are truth seekers rather than ego-strokers. The press may sometimes get things wrong, but it most often gets them right. A truly in-dependent press is not stocked with political acolytes but political adversaries. This doesn't sit well with an administration that wants to be perpetually patted on the back and never rapped on the knuck-les."

Tidbit: We were nominated at FXStreet for something named "Forex Best Awards 2017." Re-member a few years ago our book with Vicki Schmelzer, The FX Matrix, won Best Book of the Year.

Voting begins today and ends Feb 3 at 8 am GMT.