Slow news day in the US

Outlook:

Today is a slow news day in the US—mortgage applications and EIA crude oil inven-tories. The market is already thinned out by folks taking a super-long holiday weekend but it’s conceivable some traders can work up a lather over German CPI tomorrow and Friday’s euro-zone CPI and thus maybe a QE announcement at next week’s ECB policy meeting. We give QE a proba-bility rating near zero.

The FT reports Nomura sees a 10 bp rate cut at the Sept 4 policy meeting or the Oct 2 meeting, and an-nouncement of an ABS program by December. Nomura sees the probability of QE in 2015 at 45%. These are reasonable forecasts but face a cliff of already short-euro positions. This forecast appears in the wildly influential “Global Market Overview” and that gives it a lot of weight.

Mr. Draghi has to build consensus among his policy members and that’s not an easy task when Germany frowns on unconventional measures. Maybe Draghi named fiscal loosening as a distraction to get asset-buying and QE, which are arguably less bad than breaking the Stability Pact. We agree that guessing the outcome of next week’s policy meeting is a crap-shoot. Maybe he will and maybe he won’t. But expec-tations that Something Must Be Done are driving European yields down and the differential increasingly favors the dollar. There is even cute talk about the euro having become the funding currency for carry trades. We should expect the usual corrective pullbacks but experience so far this spring and summer leads us to believe they will be short-lived and tepid.

One item not on the radar is whether the US starts a war in the Middle East. So far Pres Obama is taking the legalistic approach—we can bomb ISIS because it is a threat to the “homeland.” The real reason the US public wants to bomb ISIS (and without regard for the British borders so disastrously drawn two generations ago) is more visceral—revenge, pure and simple. If you behead our citizens, we will crush you with overwhelming force.

Politically, it’s very hard for the winner of the Nobel Peace Prize to start a war. Obama got elected—twice—on the promise to be more grown-up about using US power and putting forth the idea that war is not always the first option. The Dems repudiation of the childish Plub approach was a welcome change. The Plubs lied and were embarrassed, in every European capital if not in redneck country. Over the long holiday weekend, we expect to hear of more bombing runs, but in the absence of others in the region putting their boots on the ground, it’s a losing venture. Until something else happens, it will come down to US air power and Peshmerga. Peshmerga is amazingly impressive, but not big enough to get the whole job done. Bottom line, things are about to change big-time but we don’t know how just yet, and therefore we don’t know the chances of success. At a guess, the US getting into a war, officially de-clared or not, drives US yields down on continuing safe-haven inflows, but as long as other yields are falling too, so what? But anyone who is not nervous about another 9/11 is not paying attention.

We may not issue a blanket “buy dollars” recommendation but we can issue “sell euros” advice.

Note to Readers: We will take off this Thursday and Friday, Aug 28 and 29. These dates precede Labor Day on Monday, Sept 1, which is a national holiday in the US. There will be no reports on Thurs-day, Friday or Monday. We return Tuesday, Sept 2.