Until the Fed starts talking rate hike again, the dollar is in a funk

Outlook:

Today we get auto sales and a slew of Fed speeches. Tomorrow is the big data day (until payrolls on Friday). Tomorrow we get ADP estimates of private sector payrolls, the trade report, the Markit and ISM non-manufacturing indices, and factory orders.

Here’s a question: if the European Commission foresees slow growth and low inflation over the next two years—stagnation—and the outlook for the US is only a little better—why is it the euro benefitting from the economic outlook? Let’s say the Keynesians are correct—fiscal spending is the only cure and let’s ignore debt-to-GDP ratios for a while. Are European countries any more likely to open the fiscal spigot than the US? Aside from France, the answer is no. Spain, Italy and Portugal are at or near breaking the EU rules on deficits. Germany has a balanced budget requirement and is notoriously stubborn about it, deaf to pleas from the IMF.

In the NYT today, the tiresome Krugman writes “When long-term interest rates on safe assets are very low, that’s an indication that investors don’t see a strong recovery on the horizon. Well, German five-year bonds currently yield minus 0.3 percent; in fact, yields are negative out to eight years.

“How should we think about these incredibly low interest rates? Recently Narayana Kocherlakota, the former president of the Minneapolis Fed, offered a brilliant analogy. Responding to critics of easy money who denounce low rates as ‘artificial’ — because economies shouldn’t need to keep rates this low — he suggested that we compare low interest rates to the insulin injections that diabetics must take.

“Such injections aren’t part of a normal lifestyle, and may have bad side effects, but they’re necessary to manage the symptoms of a chronic disease. In the case of Europe, the chronic disease is persistent weakness in spending, which gives the continent’s economy a persistent deflationary bias even when, like now, it’s having a relatively good few months. The insulin of cheap money helps fight that weakness, even if it doesn’t provide a cure.

“But while monetary injections have helped to contain Europe’s woes — one shudders to think of how badly things might have gone without the leadership of Mario Draghi, president of the European Central Bank — they haven’t produced anything that looks like a cure. In particular, despite the bank’s efforts, underlying inflation in Europe seems stuck far below the official target of 2 percent. Meanwhile, unemployment in much of Europe… is still at levels that are inflicting huge human, social and political dam-age. It’s notable that in Spain, which these days is being touted as a success story, youth unemployment is still an incredible 45 percent.”

It seems obvious that “The case for more public spending… is overwhelming.” And yet this cure is not acceptable politically. It’s also not politically acceptable in the US. That leads us to the current political situation. Cruz led the government shutdown in 2013 in part because of Obamacare but with the backing of the Tea Party and its insistence on removing deficits and reducing the size of government. He is currently winning state delegates in the back rooms despite Trump winning the popular vote, the same kind of trickery he used to get elected to the Senate on the first place.

Is this the kind of guy you would want to put in charge of the US checkbook? One is reminded of Shrub removing the cost of the Iraq war from the general budget, something only Stiglitz noticed at the time. But Trump can hardly be expected to be any more honorable about budgets. Cruz may be willing for the US government to declare the equivalence of bankruptcy—defaulting on the sovereign debt—but Trump is the guy who actually went bankrupt, and more than once. He also won’t disclose his taxes like every other candidate.

This is not to say the US is turning into a banana republic, but Trump’s despotic tendencies and Cruz’s utter sliminess are really very frightening. We have no idea how much the candidacy race is affecting sentiment toward the US, but if it has any effect, it’s a negative effect. Tonight we have to watch the results from Indiana. We don’t want to, but it’s like a train wreck—you have to stop and look.

Meanwhile, skepticism is growing by leaps and bounds about the ability of a single government institution, the central bank, to run the whole show. That’s the single identifiable factor behind the dollar’s decline. The Fed is uncertain and says so, and that makes everyone else uncertain, too. VIX doesn’t show uncertainty rising to panic levels, but recently gold was pointing that way. Is there anything Friday’s payrolls can offer to provide relief? At this point, probably only a drop in U6 and/or more meaningful wage gains. Neither is expected. U6 was 9.8% in March, a nice improvement from 11.0% in March 2015, but tracking the headline unemployment number, which must be nearing its ability to go any lower. Unless and until the Fed starts talking rate hike again, the dollar is in a funk.

Tidbit: Market News alerts us to the ECB’s 68-page White Paper on market price action in stock index and Treasury futures markets before the release of US data over the period January 2008 to March 2014.

“Seven out of 21 market-moving announcements show evidence of substantial informed trading before the official release time. Prices begin to move in the 'correct' direction about 30 minutes before the release time. The pre-announcement price drift accounts on average for about half of the total price adjustment.” Before you have a stroke on the idea, the ECB says the “drift likely comes from a combination of information leakage and superior forecasting based on proprietary data collection and reprocessing of public information.”

It’s a really interesting report in a world in which central bank research papers are pure drudgery. The 30 data sets studied include factory orders, various home sales, ADP private sector payrolls, ISM non-manufacturing, CPI and PPI, and the University of Michigan consumer indices. Leakage is still in the mix but not the main idea and the ECB goes to some length to affirm that official US agency data is closely guarded. The data point mostly to much better macroeconomic forecasting capabilities over time. In fact, widening the period back to 2003, better forecasting is the key factor.

		Current	Signal	Signal	Signal
Currency	Spot	Position	WEAK	Date	Rate	Gain/Loss
USD/JPY	105.77	SHORT USD	STRONG	04/29/16	107.07	1.21%
GBP/USD	1.4684	LONG GBP	STRONG	04/12/16	1.4309	2.62%
EUR/USD	1.1586	LONG EURO	STRONG	03/11/16	1.1094	4.43%
EUR/JPY	122.56	SHORT EURO	STRONG	05/02/16	122.33	-0.19%
EUR/GBP	0.7889	SHORT EURO	STRONG	05/02/16	0.7864	-0.32%
USD/CHF	0.9464	SHORT USD	WEAK	04/29/16	0.9632	1.74%
USD/CAD	1.2538	SHORT USD	STRONG	02/01/16	1.4031	10.64%
NZD/USD	0.6991	LONG NZD	STRONG	02/01/16	0.6478	7.92%
AUD/USD	0.7571	LONG AUD	WEAK	01/25/16	0.6980	8.47%
AUD/JPY	80.06	SHORT AUD	STRONG	04/02/16	81.17	1.37%
USD/MXN	17.3721	SHORT USD	STRONG	02/23/16	18.1208	4.13%