Overgrown fear of the side-effects of recovery can return time and again

Outlook

We had expected the dollar revival to be short-lived because the inflation/yield story was mostly baseless (so far), but the pushback ended after only two days, abnormally short and therefore a little fishy. This probably means overgrown fear of the side-effects of recovery can return time and again. It can even become the boy who cried wolf. By definition, recovery means reflation to some degree. But it’s important that both the Fed and ECB are pushing the idea that any rise in inflation should not be mistaken for a sustained increase, and “Not every increase in nominal yields should be interpreted as an unwarranted tightening of financing conditions and trigger a corresponding policy response.”

In other words, both central banks are accusing financial markets of overreacting and interpreting data incorrectly, and the central banks are not going to give markets what they think they want because what they want is wrong. ‘Tis a pity so many in the markets show disdain bordering on disrespect for central banks. Central banks have two things the markets do not–"a fair amount of independence from political considerations, and backrooms full of first-rate economists who may themselves have a bias but have to offer hard proof for policy changes. As we often complain, the academic papers they produce are unreadable and often veer off in weird directions, but they are not stockbroker economics. So, in a sense, it’s about to become the battle of the private sector economists vs. the central bank economists.

Today the data includes a bunch of releases (existing home sales) but the mover is likely the PMIs. In Jan, the manufacturing PMI rose sharply to 59.2 from 57.1 and services was better, too, at 58.3 from 54.8, both lifting the composite to 58.7 from 55.3 in Dec. Expectations are running fairly high for today’s data, despite a partial lockdown and lousy weather. But anyone expecting a dollar boost from the data is likely to be disappointed. For one thing, Europe and the UK just did well on this measure and the relative performance counts. For another, a good outcome is already priced in. Finally, other events are developing, including the $1.9 trillion stimulus bill that looks ever closer and may not be fully priced in.

Besides, the WSJ forecast is for a disappointing PMI, manufacturing down to 59 from 59.2 and services to 58.0 from 58.3. Small changes, to be sure. At a guess, PMI will be a non-event today, or perhaps a small dollar negative. Watch the yields to get a clue. If the 10-year slides back well under 1.30%, the dollar loses steam going into the weekend.

Tidbit: A House committee (numbering over 50) chaired by the unlovely Maxine Waters (D, CA) held a hearing about the GameStop short squeeze and the role of broker Robinhood. The degree of ignorance about the stock market displayed by the members is shocking and a little scary, since these are the folks who think they are qualified to impose regulations.

US Politics: The debacle of the “energy capital of the US,” Texas, losing power (and water) statewide points up some interesting facts about political life in the US. Conservatives rail against federal regulation and accordingly, Texas has cordoned itself off from the interstate grid, meaning it can avoid federal regulations but also can’t get help from other states when needed. Regulation is such a dirty word in Texas that even common-sense recommendations like winterizing facilities are only recommendations, not requirements. This reminds us of those Russian immigrants who turned around and went back when they discovered “capitalist freedom also means freedom to starve.” To be sure, the US is riddled with some stupid regulations, but energy security for the Average Joe should not be considered over-regulation.

Critics in Texas are hopping mad over what is coming to be seen as a failure of government and a failure of leadership. Well, no. This is the government the people elected, including a governor who told bald-faced lies about the real fault lying in the 10% of the Texas grid that uses solar and wind. Those green alternative sources did fail, but less than the carbon stuff. Lurking just under the surface is that Texan leaders are climate change deniers. They are also heavily funded by donations from oil companies. Krugman has a cute NYT op-ed title–""Texas, Land of Wind and Lies.” Without naming the name, Krugman makes the point that Trump accustomed us to lies and “alternative facts.” This is not going to get fixed anytime soon.

The 4 million electricity outages from Tuesday was down to 2.5 million on Wednesday and 350,000 last evening, but over 7 million were still under orders to boil water. That’s about 25% of the total state population. The number of deaths directly attributed to the outage seems to be about 15-20.

Not an Average Joe is Senator Cruz, who fled a freezing Houston on Wednesday for the Ritz Carlton in Cancun, only to get overwhelmed by negative publicity. He returned the next day to face the music and mockery for not-credible excuses (it was for the kids). He’s not up for reelection until 2024.

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