Stability is always the first priority for the Fed

Outlook:

We get the University of Michigan consumer sentiment survey today, with all eyes on inflation expectations. Here's the problem: what respondents say they expect may have little or no relation to actual data or any sensible idea of economic relationships. Regular people are notoriously economically irrational. Even first-class economists and market watchers can be irrational. The stock market is up and making new highs every week—gee, the economy must be in rip-roaring good health. If the stock market is shrugging off a government shut-down, respondents to economic polls may think they should, too.

Instead it may be like Trumps' weight—one pound shy of morbidly obese.

At a guess, the Fed doesn't give more than a passing glance at these surveys, and relies instead on its own metrics. Yes, expectations matter, but not as much as we might think. And yes, the Fed has a pub-lic relations mandate to keep the public on the same page as to the appropriateness and responsiveness of the Fed, but let's not go too far here. The Fed has a hard enough time with its real constituency, the bond market. The Fed can manage the short end but not the long end. And when it gets a robust rise in the long end, it may be happy just to see talk of inverted yield curves and recession go away.

We have Fed speakers today but eyes are on San Francisco Fed Williams, now purportedly a candidate for Vice Chair, along with Lindsey and El-Erian. Expectations of massive change at the Fed are silly. Stability is always the first priority.

Elsewhere, various reports, including Bloomberg, have it that some EU members are rooting for anoth-er referendum and/or a super-soft Brexit, but French leader Macron said "No." According to seekingal-pha.com, Macron said "Britain will not be allowed full access to EU markets unless it pays into the EU budget and accepts all its rules. ‘You want to accept a single market with finance being part of it? Be my guest, but that means financial contributions and accepting European jurisdiction.'" And he said it in front of May at a joint press conference after the UK-France summit.

The FT adds that Macron said "I want to make sure that the single market is preserved because that is very much the heart of the EU. The choice is on the British side, not on my side. But there can be no differentiated access for the financial services. If you want access to the single market — including the financial services — be my guest. But it means that you need to contribute to the budget and acknowledge European jurisdiction. There will be no hypocrisy in this respect otherwise it would not work. It would destroy the single market and its coherence." Macron also said if Britain doesn't accept EU rules, "then it would be offered a trade deal ‘closer to the situation of Canada.'"

Ouch. This is an insult to Canada as well as the UK. Macron probably has no idea that Canada is a vast country, with oil and other natural resources, into which ten Frances would fit. In fact, France is less than the size of Texas. Okay, France has language and food and history, but it's not really in a position to go around insulting other countries.

Off on the side, Germany may be able to form a government over the coming weekend. Several ana-lysts, including Bridgewater's Dalio, have said that politics is running the table now in this new world. But Germany has been, technically, without a government for many months now. Curious, right? One reason for Germany being able to get away with something that looks like disarray anywhere else is that the government has been cutting its role in the economy for years. Government spending as a percentage of GDP is about 44% (as of 2016). In the US, it's less, about 22%, but the absolute dollar amounts are far bigger.

Bottom line, the dollar decline is not going to end even if the Congress were to pass a stop-gap budget today and Trump were to fly back from Florida to sign it. FX market players don't like the whole pic-ture, from the erratic and incompetent Trump to the bubbling stock market to the absence of a decent amount of fear. The FX market is taking the role of the canary in the coal mine.

Tidbit: Quartz reports "Earth just had its second-hottest year since 1880. NASA says 2017's heat pat-terns were only surpassed by 2016, and it wasn't even an El Niño year." It doesn't feel that way, with snow in the Deep South and our office thermometer regularly under 10 degrees F every morning. The snowplowing bill is horrendous. We are planning to leave Connecticut for warmer climes sometime this spring.

Next month S. Korea hosts the winter Olympics and the Olympics Committee is in a confused quanda-ry about how to deal with North and South agreeing to march together under one flag. What does it mean?

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. To see the full report and the traders’ advisories, sign up for a free trial now!