The coming Monday is a US holiday, Memorial Day and markets are closed. We will not publish a morning or futures report, but we will publish a spot report. We can expect activity to taper by noon on Friday in the US.

The gains in equity markets are based on "a swift economic recovery from coronavirus-driven lockdowns and the potential for more stimulus measures from the Federal Reserve," according to Reuters. The measures are, so far, unspecified and yesterday's minutes of the April 28-29 FOMC just said the pandemic is a severe threat to the economy. That includes risks to financial market stability and stress for banks, presumably from bank customers failing all over the place. This is what we got from the Powell press conference and not anything new, although negative rates are still off the table—not even discussed—and yield curve control got some attention.

The Fed worries that additional waves of coronavirus outbreaks will need additional action. The CDC and other scientists have been warning all along that a second wave is nearly a dead cert, and here we are opening up again only a little more than two months since the pandemic crisis was declared in the US. See the charts from the NYT. You can see the curve bending in both cases and deaths, but it's a judgment call whether this bend is good enough. In Europe, the commitment to public health and welfare is a lot more evident, but that's cold comfort to the poorest. The WSJ reports that in Italy, even middle-class people are seeking food from food banks.

Various bits of data—like the nicely improving eurozone PMIs reported today—show "the worst is over." This attitude permeates markets from equities to oil and gold, not to mention currencies. From an economics viewpoint, it may be true that the worst is over, in terms of data like the weekly number of newly unemployed. But sometimes numbers lie. The worst is not over. If the scientists tell us—and sane and reasonable people from Fed chairman Powell to French president Macron—that more waves of outbreak are coming, we'd be dunces not to believe them.

James Carville famously said during the Clinton years, "It's the economy, stupid." Now we need to remember that this time, "It's the pandemic, stupid." The pandemic determines the economic outlook. We may get the swoosh in June and July only to get another collapse. The economic data can take on the sawtooth pattern we already see in currencies.

In fact, the FX market may have the best take on current conditions of all the markets. Many currencies are just going sideways, up a little and then down a little three days later, like the dollar/yen. We know confusion and uncertainty reign when the crosses start getting more attention than the majors. We just saw a reference to the CAD/MXN for the first time in twenty years. The euro/CHF is behaving strangely, which is presumably a relief to the Swiss National Bank. We say it's strange because the move is disproportionate to the data. The battle between the short-term and the long-term has never been more pointed. It shows on the charts as dueling channels. You draw a standard error channel from an obvious low and get a rising set of lines. When you can also draw another channel from an obvious high to get a falling channel, which do you believe? Both are "scientifically" true and accurate, but no help at all in thinking about sentiment, let alone a forecast.

Today the data includes the Philly Fed, the flash PMI and weekly jobless claims, probably about 2 million but "less bad, therefore good." We also get the backward-looking April leading indicators and existing home sales. PMIs are the top leading indicators these days and the US will probably deliver something similar to the eurozone in overall shape and meaning, so unless something Awful comes along, it can be another dollar slump today.

Those who like international affairs point out, though, that the Trump assault on China extends beyond blaming it for the pandemic and includes a whole series of other actions, including banning companies from listing on US exchanges if they are majority government owned—and companies have to take the equivalent of a loyalty oath and put it in writing that they are not. Alibaba shares fell yesterday on this one. Other issues are the status of Taiwan and Hong Kong, where the autonomy as promised in the UK handoff has yet to be "verified" by the US State Dept. We may think it's none of the US' business but Hong Kong gets a special trade status because of autonomy and that may be removed. There is even a bill in Congress that authorizes the president to levy sanctions on individuals if they are shown to mistreat minorities. This is more extreme than it sounds because it's so rare.

Here's a thought—whatever happens between Trump and China has probably only another six months to run, to the November general election. If Trump is defeated, and independents are abandoning him in droves in swing states like Michigan, the new president will reverse or ameliorate all of this animosity. We will have other factors and they may not be dollar-favorable, but not this one. Still, Trump tapped into a big vein of anti-China sentiment and it has served him well politically. He's the terrier with a bone. It's going to get worse before it gets better.

And here's a question: does the dollar get a risk-off bid if and when the second pandemic surge appears? At a guess, that depends on sentiment when that happens. If Trump-China is already a big bad factor, yes. New pandemic cases in the US and resurgent fear the Fed and Congress are not up to the job would contribute to the risk aversion. The dollar ain't off the board yet.



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.

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