The Dollar surge yesterday came during US

The dollar surge yesterday came during US hours and on the back of higher GDP, rearview Q2 or not, decent durables, and lower unemployment claims. The CME Fed Watch tool shows the probability of two cuts by year-end shifting down a bit to 63.6% from 78.6 a week ago, and the Oct cut at 87.7% from 91.9% a week ago.

PCE inflation data will cap the week and if as expected, still little sign of tariff-induced inflation. Small companies are falling by the roadside in droves, but they don’t contribute to Trump’s library. The Big Picture is that not even Trump’s bad management can hurt the robust and resilient US economy all that much. Besides, down the road we will have chip and drug factories, even if the skilled labor shortage will remain an issue.

The important factor is how the Fed views PCE and next week’s nonfarm payrolls, which we may not get if the government shuts down. About PCE, we already know (or suspect) that personal income will be up about 0.2-0.3% and spending about 0.5%, but spending incorporates higher prices. As Chandler never tires of pointing out, the official Fed focus is headline PCE, even though the press insists on looking at core. But again, in either case, not much change is expected.

The consensus for the headline PCE is 2.7% y/y from 2.6% in July and core PCE at 2.9% from 2.9% in July. The Cleveland Fed Nowcast has 2.8% and 3.0%. Inflation can be said to be stalling and upside risks not materializing—yet. After PCE this morning ,we get an Atlanta Fed GDPNow revision, too.

Forecast

As we have noted before, there are hundreds of reasons to dislike what is going on in America today and to fear the longer-term effects of Trumpian political acts. Attacking freedom of speech and political enemies is just the latest. On the economic front, the base may not mind tariffs but everyone worries about how haphazard and impulsive they seem.

And yet the economy keeps on trucking. Traders in all asset classes try to ignore political stuff and keep their eyes on the ball. In this case, the ball is an above-expectations economy while much of the rest of the developed world is struggling for growth. Markets like growth, however lopsided. It’s hard not to deduce that this move has legs.

So, if inflation is scary enough to tilt the Fed to no or fewer cuts, yields stay firm and get firmer and so does the dollar. If inflation is not scary at all, cuts stay on the table and that promotes the growth narrative. It looks like a no-lose situation for the dollar.

Every economist on the planet dislikes grifter Trump and the way he conducts himself, but he is not the tradeable asset. It’s the economy, stupid.

Food for Thought: Bloomberg has an editorial on the disconnect between America and America, Inc. America, Inc. is big tech and successful big companies, and foreign investors just love that even as they sneer or despair over the country.

As of right now, nothing that’s happening domestically has really obviously altered the course of these big businesses. Trade policy hasn’t affected them. The volatile immigration landscape hasn’t affected them. I doubt investors in Meta think that Federal Reserve independence is a particularly relevant thing, at least in the first instance.

“But it’s still a weird disconnect between America and America Inc., and obviously you have to wonder whether at some point the tension gets resolved in some way, where the underlying conditions in the US bleed into the actual performance of these firms.”

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