The dollar’s rapid rise is abnormal and will correct at some point – When Fed delivers that 50 bp?

Outlook: Today we get US GDP for Q1 and remember that yesterday, the Atlanta Fed GDPNow had lowered its forecast from 1.3% to 0.4%, on consumer lassitude. (Tomorrow’s eurozone GDP is expected at 0.3%, by the way.) The Conference Board has 1.5%. We also get the usual jobless claims today, which show the rearview mirror of Q1 GDP likely not having any influence on sentiment at all. When jobs are still on the upswing, despite peculiar participation rates, it’s hard to talk of a slowdown. Besides, in Q1, we were still coming off the latest Covid surge, which peaked around the first week of January.

The relative return theme attracts a higher number of traders every day with no end in sight. He who has the highest rate wins and notice that’s nominal rates, not the real ones. So, with the US about to raise by 50 bp, the dollar wins regardless of any other “high-frequency” data. Canada loses, but only a little because it intends to copy the US, as does Mexico. The Brazilian central bank, in contrast, has been dealing with high inflation from the cradle and is getting weary of hikes.

Japan stands out with its stubborn adherence to the idea inflation is transitory. Not using that exact word doesn’t alter the fact that the BoJ feels the Japanese economy has been mired in deflation for decades and this burst of higher prices will not contaminate the Japanese economy. If Mr. Kuroda and his economists are right, what is it about the Japanese economy that has inflation-proofed it? And can we get some?

It’s worth noting that the latest stimulus program gives cash to Japanese families (a little under $400 per child). The last time we saw this, it was $200 and most of it was never spent and the coupons expired worthless. At the time there was a lot of talk about Keyne’s “pushing on string.” We wrote that this shows Japanese are not materialistic as are Americans, and in part because they literally lack the space to put Stuff.

Europe is somewhere in never-never land. The latest idea from ECB chief Lagarde is that asset purchases will, maybe, end in July, after which the bank can consider raising rates. Caution on Lagarde’s part is probably warranted considering Europe is at war, whether it admits it and names it that. There is a whisper of hope that opening the fiscal purse will “take care of” donations to Ukraine, for those excellent German tanks or some country’s gas or whatever (not to mention the cost of refugees). Lagarde doesn’t speak of inflation as transitory but seems to think it must be borne with clenched teeth because of other factors. She may be right.

As we have said before, the dollar’s rapid and steep rise is wildly abnormal and will correct at some point, possibly when the Fed actually delivers that 50 bp (“buy on the rumor, sell on the news”). Whenever the timing, come it will. Pullbacks are normal, although this one could be a doozy. Start shaking in your boots. Technical analysis king Larry Williams says “buy high and sell higher” for occasions like this, and he’s not wrong, as long as you know your last trade is going to be a giant loss.

The guture of Europe

We keep writing that the Europe of the Maastricht Treaty in 1993 is gone. The Russian invasion of Ukraine and the first land war in Europe in more than 75 years has altered “Europe” in ways that can never be turned back. Solidarity with Ukraine is heart-warming and noble, but misses the point entirely–f something named “Europe” is to come out the other side, it has to change in some fundamental ways nobody is yet willing to admit.

Foremost is the concept of union and what that means. EU and EMU critics have long bemoaned that federalism was adopted in only a few areas, like the Schengen passport rules and the currency. But a true federal union, like the US, has a lot more both on the surface and under the skin. Economists name nationwide unemployment insurance and Social Security for example, not to mention various forms of health and safety regulations, health care, food stamps and a dozen other things. Just social security pensions alone have been political nightmares in Italy and France, for example. We don’t have that in the US.

We also don’t have a national security or foreign affairs function at the state level. In the current situation, it’s nice that the European governments are banding together, but they shouldn’t have to. A European foreign policy should already be in place. (Why is Ireland not a member of Nato?) To be fair, the US has been an obstacle to federalism in Europe. So far the only time the EU take a united stand vis-à-vis the US is on trade (and that’s recent, because of Trump) and on competition and privacy, where the EU is ahead of the US when it comes to internet platforms and outfits like Apple and Amazon.

The Maastricht Treaty was meant to be a starting point, not an ending one. Plenty of progress has been made in the form of various laws and treaties since Maastricht, but only about 10% of what is need for a true federal union. It’s nice that most countries are taking refugees, but there is no trans-national policy and procedure that might silence the anti-immigration political forces in some places (France).

A Reader sent me the following excerpt from the Ezra Klein podcast. It’s scary good. We were stunned by the highlighted bit. “So what’s next for Europe? Will Putin’s invasion reinvigorate the collective European project? Or will the continent revert to its preinvasion path of fracture, division and nationalism?

“Ivan Krastev is the chairman of the Center for Liberal Strategies in Sofia, Bulgaria and the author of numerous books, including “After Europe” and, with Stephen Holmes, “The Light That Failed: Why the West Is Losing the Fight for Democracy.” He’s also one of my favorite people to talk to on the subject of Europe, liberalism, democracy and the tensions therein.

“We discuss how European identity went from revolving around war to being centered on economic trade, why Europe has treated the Ukrainian refugee crisis so differently from previous refugee crises, how the West’s overly economic understanding of human motivation blinded it to Putin’s plans, what the relative success of politicians like Le Pen and Orban means for the future of Europe, how fears of demographic change can help explain phenomena as different as Putin’s invasion and Donald Trump’s election, whether Putin’s invasion can reawaken an exhausted European liberalism and much more.” 

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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