Powell will have to speak of data dependency and caution, the new favorite word

You might think Trump’s erratic and reckless behavior would cut confidence in the US in half and lead to a dollar sell-off, but that’s not what is happening. Instead the resilient labor market and tariffs combine to point to higher inflation and thus keeping the Fed on hold or at least a limit of how much it can cut rates.

Before payrolls, Fed fund futures pointed to 42 bp in cuts. Now it’s 36 bp. As for the expected June cut, a week ago those betting on it gave it a 44.4% probability. That has fallen to 40.9% and may have further to fall. It now looks like traders are betting on September. For the Dec 10 meeting, only one cut gets a 36% probability while two cuts only gets 29.1%, albeit that number goes up to 45.5%  if you include the possibility of more than two cuts. That would happen if the economy falls into recession. 

Fed chief Powell speaks to Congress on Tuesday and Wednesday in the usual bi-annual testimony. Tariffs will surely be one of the questions. Powell will have to speak of data dependency and caution, the new favorite word.

The other big political thing is US cabinet bigshots headed for Europe to talk about tech regulation, trade, military spending, NATO and Ukraine. The American gun is loaded with VP Vance, SecyState Rubio and Defense Sec Hegseth. The only one who can put together two sentences coherently is Rubio; the European press says Europe is ready.  

Almost as a footnote, check out the chart of the Australian dollar. It’s mysteriously strong, given the expectation of an easing cycle starting in the spring. As longtime readers know, we see the AUS as a canary in the coalmine—it moves first.

Tidbit: We think economic data is more important to FX than politics. But this month we have a barn-burner—the German election on Feb 23. The commentary is about breaking the budget deals, but we suspect the real issue is immigration and closing the borders to asylum seekers or anyone else who is not European and has a job or a deeply needed capability.  Before we get all high and mighty about rejection of humanitarian principles, the American voter just did the very same thing.

Forecast

We had said we didn’t buy the dollar recovery just yet but of course, even the shortest-term forecast is vulnerable to the awful things coming out of Washington. Technically we can’t call it a for-sure recovery until the last lowest low is matched and surpassed. Tomorrow is turnaround Tuesday, too. Keep your powder dry (but don’t bet on any EM’s like Mexico).

Tidbit: The NY Times has a front-page op-ed by five—yes, five—former Treasury Secretaries (Robert E. Rubin, Lawrence H. Summers, Timothy F. Geithner, Jacob J. Lew and Janet L. Yellen). They say the tule of law includes respect for Congress’ sole authority to spend federal money, and various Supreme Court judges have said so in the past.

“During our collective 18 years at the helm of the Treasury, we never were asked to stop congressionally appropriated funds from being paid out in full. Not since the Nixon administration has this type of executive action been contemplated. At that time, the Supreme Court ruled unanimously that the president did not have the power to withhold federal funds that Congress had authorized.”

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