Awaiting Payrolls tomorrow

Outlook:

There are lots of things to worry about these days, foremost of which is that Draghi may decline to enlarge/prolong QE when the December meeting rolls around and the Fed announces the hike as no longer a “live possibility.” This could happen if European data is far better and US data is far worse.

But for the moment, any self-respecting chart reader has to accept the evidence that the consensus has shifted wholesale to the divergent-policy thesis. This leads us to the question--What is a breakout and should we trust it? Breakouts can come in several forms, including taking out the last intermediate lowest low, in this case, 1.0897 from Oct 28, aka Fed day. We also have various Fibonacci levels, and don’t forget, you can draw Fib levels to prove just about any point you want to make—just change the timeframe and something will “fit” your bias. We also have hand-drawn (“red”) support and resistance, actually of little value but a nice organizing principle, and pivot point levels, another suit-yourself methodology.

While the new sentiment is getting baked in the cake, we need to remember that prices never move in a straight line. Breaking a round number—like 1.0800—can be devilishly hard. And indeed, Market News interviews with traders come up with the consensus that this particular line in the sand is not going to get broken any time soon. Aside from the special-case China-driven spike in August, the euro range since May has been 1.0800 to 1.1500. It will not get broken easily or soon. When it does, it’s okay to imagine the target is the April 13 low at $1.0521 and then the March 16 low-of-the-year at 1.0458. But don’t hold your breath.

While we await payrolls tomorrow, we have some other things to chew on. One is that BoE Gov Carney had said the rate hike scenario would become clearer near year-end, but today’s BoE statements sounded particularly dovish. Critics complain Carney noted the year isn’t all in yet. This is a bit of tap-dancing we could all do without. To be fair, our hero Draghi did some tap-dancing, too, saying that enlarging/prolonging QE is not a done deal (after the market interpreted his earlier comments exactly that way). And of course we don’t have to mention for the umpteenth time that the Fed’s “communications” skills could use a lot of improvement.

When the only credible institution in a government system is the central bank and the central bank engages in weaselly hedging of its bets, the end result is a general loss of confidence in government.

This may not be a big deal in the UK and eurozone, but it could be a very big deal in the US. The Yellen testimony brought into view, again, the bias against Fed independence held by some of the ideology-addled members of Congress. Their ideas are based in neither facts nor logic, but that doesn’t stop them. It’s a bit like critics saying Clinton had no emails to and from the Benghazi ambassador when State Dept communications are done by cable. In the Yellen questioning, one Congressman said banks are complaining they don’t get enough interest on reserves. Yellen tartly responded the Fed sets the rates not to help banks but rather the economy. Today Vice Chairman Fischer has a piece in the FT defending Fed independence. We say the Fed is being too polite. Greenspan would have had these guys tangled up in knots in no time. Volcker, too.

And this brings up something possibly not strongly related to international markets, although you never know. The local elections this week were a catastrophe for the Dems. Republicans won nearly every-where, including felons and nitwits. As we are seeing in the Republican candidate primary debates and polls, the Republican voter is mad as hell and willing to turn out to vote against the Establishment, even at the expense of favoring loonies. Carson, for one, thinks the world began 6000 years ago, a religious idea completely contrary to all the scientific evidence. A rejection of Science (and by a supposed scientist, at that) disqualifies him for high public office. Trump has many proposals entirely at odds with current law and practice, like expelling Syrian refugees wholesale on the mere suspicion they are terrorists. Most of the candidates embrace a flat tax when progressive taxation has been the ruling principle for 100 years.

But the public is lapping it up, or at least the “likely primary voters” in the Republican party. These people may be a minority, but we say they are going to win the 2016 election. The world should start getting ready for a replay of the Bush disaster years—proposals to privatize Social Security, wars in places we have already lost, twice, and other whackado stuff.

Our best hope is that we do indeed enter a virtuous circle in which normalization is perceived as a Good Thing and that very perception strengthens the case for the Fed to do it, as we wrote yesterday. This won’t necessarily give pause to the anti-government fruitcakes, but at least we will have some facts on the side of reasonableness. With any luck, financial markets will just ignore the political fallout. Let’s hope they don’t ignore it until it’s too late.