The Dollar is back on the “shun list”

The main release today is existing home sales, expected to be flat and not an influencer in FX. Getting more attention is PM Ishiba denying he will resign, contradicting earlier reports. We have no idea how this affects FX traders. As noted yesterday., we have seen top officials, including prime ministers, get thrown out for corruption and other political shocks, to no effect on the yen. It’s a little interesting that Japan auctioned a 40-year bond and got lousy demand. The yield is now 3.46%. This is still almost 1% below the US 10-year.

The US-EU trade talks resume today. If we were to get a deal, that would wrap up the biggies except for China. There is some chance that would deliver support to the dollar.

Forecast: The die has been cast—the dollar is back on the “shun list,” along with other places led by unsavory and unreliable leaders. As noted above, there is some small chance a deal with the EU today (or soon) would give support to the dollar. It’s practically certain the stock market will like it. The reason is not economics, which remain dismal, but rather the winding down of uncertainty. We say beware that attitude. Trump will devise some new outrage. Tigers and stripes.

Tidbit: WolfStreet reports that home prices are falling, and sometimes by a lot in some places. Big country, wide results. “So here are 10 bigger cities where prices of single-family homes have declined more seriously, seasonally adjusted, after the gigantic price explosion over the prior few years. Of these 10 cities, 8 have double-digit price declines for single-family homes from their peaks in mid-2022 through June. The remaining 2 have declines of 9% from their peaks:

1. Austin, TX: -23%.

2. Oakland, CA: -22%.

3. New Orleans: -18%.

4. San Francisco, CA: -16%.

5. Birmingham, AL: -15%.

6. Washington, DC: -12%.

7. Fort Myers, FL: -10%.

8. Denver, CO: -10%.

9. Portland, OR: -9%.

10. Phoenix, AZ: -9%.

Tidbit: We remain worried about the stock market. A section of the BoA report by an analyst named Harnett is making the rounds. The title is “Our Sell Signals Have Been Triggered.” The underlying data deals with cash percentages, flows and market breadth, among other factors.

Here is the conclusion: “War between Trump and Powell and the president’s now daily insistence that the Fed Chair cut rates. This is all a carbon copy of what happened in the early 1970s: 1971 was the most infamous “White House = Fed cuts” event. Back then, on Aug 15th Nixon announced his "New Economic Policy" (the end of Bretton Woods, wage-price frozen, 10% import tariffs) with the unemployment at 6% and CPI 4%.

“Pouring gasoline on the fire, that’s when then Fed Chair Arthur Burns stoked a boom-bust cycle with his Aug-Dec 225bps Fed funds cuts…And while the market initially “sold” (US dollar -5%, SPX -9%, UST yields -70bps), one year later, in 1972, the S&P was up 11% as the dollar devalued a further 8% in run-up to Nov’72 Nixon reelection. Expect a rerun if Powell is shown the door.”

Let’s assume he means not only the Powell departs, but also that the new guy somehow engineers a big, fat rate cut, overcoming the other members of the FOMC who still fret about inflation zooming around the corner.

Investopedia has the US inflation rates from 1929 to today. For reference, inflation in 1973 was 8.7%, following by 12.3% in 1974 and 7.9% in 1975. By 1978, it was 9.0% and in 1979, 13.3%. In other words, it was persistent. We worked on a bank Fed funds desk in 1979 and were astonished that big banks had not planned for the illiquidity and seeming shortage of overnight funds except at exorbitant prices.

If you like economic history, see the Cleveland Fed’s narrative about how “too big to fail” became a theme. It started with the $1.2 billion Bank of Commonwealth failure in 1972 and went straight on to Continental Illinois in 1984.

Nobody is forecasting bank failures these days—we have stress tests, after all, and higher capital requirements. So now ask whether DOGE gutted the FDIC. Of course it did. Some senators cried wolf, like Warren (D-MA). We suspect she may not be wrong. 

Fun Tidbit: The Speaker of the House closed down early for the August holiday to avoid a vote on forcing a disclosure of the Epstein docs. It had enough Republican votes with the Dems to pass. Mish has a splendid forecast: jailed accomplice Maxwell will speak with the Justice Dept and agree to say whatever it wants her to say, mostly that Trump never engaged in pedophilia. The result will be a smaller sentence and a pardon when T. leaves the building. Boy, does that sound right. 

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