The CPI report is all but meaningless to the Fed

Outlook:

In Europe, the big news will be whether PM May survives the vote of no confidence, but we won't find out until late in the US day. A UK website named oddschecker.com reports "Bookmakers have cut odds on her winning from 1/1 into 1/4, indicating a huge surge in favour of the Prime Minister. In layman's terms, that's the equivalent of an 80% chance that she emerges victorious from the vote." Unhappily, should she lose, Boris Johnson is the odds-on favorite to replace her. Yikes. Johnson is not Trump, but of the same rude ilk.

At a guess, this means perennial pessimists (including us) should pare those sterling shorts. We should be covering shorts anyway. The currency futures contracts expire next Monday and everybody will be closing out positions starting today into Friday morning. This always happens when futures roll over and we are often surprised at how powerfully the rollover moves the vastly bigger spot market.

One small thing—it's very confusing that the Swiss franc is moving at its own pace—sometimes comatose—and not "leading" the euro. It's also at odds with the yen, the other supposedly safe-haven currency (if you are Japanese). One explanation lies in the SNB tracking the ECB but until something new develops, having a historically lowest of lows interest rate. Assuming the ECB behaves as expected, Switzerland will continue to suffer from a huge differential against it. Who wants to own the stuff if you have to pay the central bank 0.75% to hold your money?

In the US, the story today is headline inflation, likely to come in at 2.2% with core rising an inch to 2.2% (Bloomberg). We also get the EIA oil inventory report after the API reported a huge draw yesterday, 10.18 million barrels for the latest week, when 2.990 million was forecast. Last week the API had a build of 5 million and then the next day, the EIA reported a 7.3 million draw. No wonder oil traders are confused.

The CPI report is all but meaningless to the Fed, which meets next week. We have seen a lot of chatter about the CME probabilities of hikes at various points and we indulge in it ourselves periodically, but let's not forget that Fed funds futures have a lousy track record of prediction. By now we should stop expecting any significant moves in any market that can be attributed to expectations of the Fed's stance. Everyone has exhausted everything there is to say about it.

Going into the ECB (little or no change) and Fed next week (hike all but certain), the dollar should benefit. Happy thought: There are only 9 days to the shortest day of the year on Dec 21.

Political Tidbit: In the US, a government shutdown just before Christmas is very, very likely. Yesterday Trump held a temper tantrum in front of TV cameras with House leader Pelosi and Senate Dem leader Schumer, rude and incompetent for a self-described top deal-maker--no deal-making skills were in evidence. Trump behaved in his worst loudmouth jerk manner, disgracing himself and the office. He also told multiple lies while VP Dense sat impassively by (one analyst said he could be likened to Lurch).

Pelosi and Schumer were visibly not scared by intimidation tactics. Pelosi pointed out his statistics were not correct, eschewing the word "lie," and contradicted Trump when he said he could get the Wall funded in House and Senate today. Schumer also corrected Trump that the Dems are the ones wanting a shut down and a thin-skinned, out-of-control Trump said if they won't give him the $5 billion for the Wall, he will be glad to own the government shutdown. The two Dems didn't seek to paint Trump into that corner. He did it himself, gratis. They could have pressed him more on the campaign promise to make Mexico pay for it (instead of the US taxpayer).

It's only a little funny that the Republican's own budget calls for $1.6 billion and Trump changed the stakes at the last moment. He got $1.3 billion last time and it hasn't all been spent, either. Trump vowed the wall will get built "one way or another, including the military." Does that mean soldiers pouring concrete or that he will steal Wall money from the defense budget?

The biggest Trump lie is that the Wall is partly built. Not so. No concrete has been poured, just repairs to existing fences and miles of new concertina wire. He said the Wall is working, but if there is no real Wall and what we have is working, why do we need a Wall? Later Pelosi said Trump was exercising a "manhood thing,' and it wasn't working in his case. Trump left the meeting scattering papers along the corridor. Trump has yet to find out that Nancy is not his usual bimbo. Schumer was so aggravated he could look at Trump only sporadically even while addressing him directly, and seemed surprised he could so easily tip Trump into a childish tantrum.

Markets did not care and the dollar barely burped. We are sure to start getting the usual complaints about the debt being already too high and a shut-down reflecting badly on the competence of government, if not a failure of democracy. But past shut-downs failed to move markets. People in all markets already understand that Trump is a one-man financial crisis. They are prepared to ignore him when the case in point is something as trivial as a government shut-down. Threaten a shooting war with N. Korea or start a trade war with China and that's a different matter.

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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