We have gone from “don’t fight the Fed” to “don’t fight the White House”

Outlook

Bloomberg points out 10-year yields are going sideways for the past month—“stuck in a rut.” The 30-day trading range is now the tightest it’s been since the 1970s. Meanwhile, the trading range for the 30-year reached a record low.

The Odd Lots editorial has this: “…we’re so far into the abnormal right now, that even volatility can’t react to it. The environment is too volatile to generate volatility in bonds.

“It seems pretty likely to me that eventually the bond market will move again — perhaps in a big way. Squishing down volatility tends to be like coiling one of those prank snakes in a tube of chips. At some point, it springs back out.”

Forecast

The world is starting to convert distrust and dislike of Trump’s America into alternative relationships. It’s not just Canadian PM Carney making deals with China on the ground, but also a possible new European Union “lite” deal with Ukraine, not to mention several NATO countries sending live troops to Greenland instead of just words.

The FT even has a headline saying “Trump is making the world fall in love with China.” Much of this is pretty small potatoes but may lead to something hard and real in the next year or two, if those opposing Trump “policies” do not lose their nerve.

In markets, we have gone from “don’t fight the Fed” to “don’t fight the White House” but as more than one editorial writer points out, that’s a rule change without precedent and also without any guidelines. We never know what stunt the mismanager-in-chief will pull next.

The wiser course is to keep the faith in economic data and central bank principles even as we fear an assault on the Fed’s independence. If that were to come about—Trump taking over the Fed—we would still evaluate the data and trends as though the real Fed were in charge. That means given actual inflation in key sectors, no rate cut for a long time to come.

Meanwhile, just about everybody else is on hold, too. We could even speculate that the Fed and BoJ might act at the same time, the BoJ hiking and the Fed cutting in (say) April or June.  This tends never to happen but hey, you never know in the Trumpian wild west.

For the dollar, this means sideway and small ranges, at least until the next Big Thing comes along.

Food for thought

You don’t have to be a bleeding heart liberal to worry about this chart from Bloomberg: