The current pullback in the EUR/USD could be the start of something much bigger

Outlook

We are stuck with very little hard data until later in the week, allowing time to contemplate stock markets and the US political scene. Today it’s two Fed reelases and existing home sales, but we have to wait for Thursday (labor market report) and Friday (PCE) for the good stuff. Tomorrow it’s the plateful of PMIs and the Bank of Canada decision.

PCE Inflation: We are going to keep this material in the report until we get the actual data on Friday. The latest core PCE rose only 0.1% from 0.2% and against a forecast of the same 0.2%. It was the smallest rise since Feb 2021. Even the contentious shelter fell from 0.4% to 0.2%. On the y/y basis, core PCE fell to 2.6% in May 2024, the lowest since March 2021, down from 2.8% in April and matching market forecasts.

The y/y chart shows the steady decline and the m/m chart shows the Q1 shocker that caused so much turmoil, even to the extent of some forecasting a rate hike. That was a punch in the face for the Fed, which had not expected it. To be fair, nobody else did, either, but it accounts for the Fed being especially cautious these days lest we suffer another flare-up.

Forecast

The current pullback in the euro/dollar could be the start of something much bigger, but it’s too soon to say. The euro could get a boost from decent PMI readings tomorrow. If the market decides the US political situation is less threatening to economies and the world order, the pile in to dollars on risk-off could fade, but it’s far too early to suggest that. We expect the euro to continue south, meeting support around 1.0705 and the ultimate test, 1.0620, the last low, from April 16. This is too big-picture to deliver much confidence. Still, do not bet against the dollar.

Tidbit: Whatever you think of Pres Biden, his stepping aside was heroic, honorable and patriotic. You can’t imagine Trump acting this way.

The Democratic Party has about a month to get its act together before the convention. In years past, this wouldn’t happen among the famously quarrelsome member groups. But this time the party is behaving as it should. In less than 48 hours, the majority (and a sufficiency) of delegates has crossed over to Harris. She has raised $81 million in her own name. And 28,000 volunteers signed up without being asked. The press is astonished.

The FT chooses to be skeptical, saying Harris can’t count on unions, despite a surge in union support yesterday, including the auto workers. That’s because she is elite, and the Republicans have cornered the market on working class anger. “I don’t think Trump cares at all about labour, and I’m not sure Vance does either. Working people who back them are voting to protect against change, not prepare for it. But while Democrats’ labour policies may be more constructive, Republicans excel at marketing.”

Two points: VP Harris has to pick a running mate very wisely. As one Reader wrote to us, we need a manly Midwesterner. We like Mark Kelly, a pilot and real-life astronaut, who can poke fun at draft-dodger Trump who calls those who volunteer for the armed forces “suckers.” Kelly is a senator from Arizona, not exactly the Midwest, but never mind. Late yesterday the Washington Post came out in favor of Kelly.

The real midwesterner and smartest guy is Pete Buttigieg, but he is gay. Then there Gov Josh Shapiro of Pennsylvania, but he is Jewish. One minority per ticket, please. Andy Beshear, Kentucky Governor, has a shot, too.

Also, Biden pulling out is a bad outcome for the Trump side. Now it has to construct a new set of insults to try to sway the big group of undecideds. This is dangerous considering the candidate is a woman and not white. The situation is also a former prosecutor vs. the convicted criminal. Harris is pretty good at making that distinction, as well as a splendid debater. Trumpies have dismissed his crimes, but some may be persuaded to reconsider and it’s a powerful argument for the independents and undecideds.

Polls and betting sites continue to show Trump in the lead, although a CNN poll in late June showed Harris at 45% vs. Trump with 47%--within the margin of error. Independents favored Harris 43% vs. 40% for Trump. See a list of polls so far at Axios.com (https://www.axios.com/2024/07/22/trump-harris-polls-2024-election). It is, of course, complicated.

We await new polls as the keystone events come along: the August convention, September debate and November election. It may already be happening. “The data from Public Policy Polling found that Harris — with the right running mate — likely can defeat the Republican ticket of former President DONALD TRUMP and Ohio Sen. JD VANCE in two of the three “Blue Wall” states the Biden campaign now sees as critical: Pennsylvania and Michigan.”

Trump is the old guy now. As the NYT and others note, the Harris campaign is going to be designed to make Trump lose. The Dems will make him look ridiculous, pathetic, incompetent, and not a little nuts. It won’t be hard. A bit cute as usual but still useful, Bloomberg says “And Harris — a woman of many talents — is more than qualified to fight back against a man who thinks he can stop World War III by inviting Kim Jong Un to ‘chill out’ at a Yankees game.” So much for show biz.

While we were not looking, Nate Silver left 538.com and started a Substack. Now that Biden has stepped aside, he says the odds for the Dems are improving. We forgive him for past transgressions (Hillary will win) because he is an excellent statistician.

In addition, Trump can’t stick to his teleprompter and can’t resist bloviating (90 minutes in the convention speech). He continues to tell lies (the election was stolen, crime is up, immigrants have killed hundreds of thousands of people, etc.). Also, he’s incoherent some high percentage of the time. It’s not out of the question that even some supporters will get fed up with it. Stay tuned.

Reasons for the Fed to cut rates

Avoid embarrassment from getting inflation wrong twice.

Normalize the yield curve.

Head off any recessionary tendencies.

Help housing via mortgage rates.

Help banks rollover commercial property loans.

Help the stock market.

Synchronize with the ECB (and Riksbank and SNB).

Help the current White House and/or avoid accusations of political bias if delayed to after the Nov election.

Avoid “higher for longer” morphing into “higher for too long”.

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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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