The euro is vastly oversold and “should” correct

Outlook: We get a flood of data today ahead of markets closing early for the Thanksgiving Day holiday tomorrow. First up are durable goods, jobless claims and Q3 GDP at 8:30, then consumer confidence and new home sales at 10 am, with personal income and spending at the same time. This is probably the important one because it includes the PCE and core PCE deflator, the Fed’s preferred inflation measure.

The forecast is for PCE to exceed 5% by a little and core also a tad over 4%, new highs. Since we already know CPI, this should be old news but the markets are fixated on inflation, so maybe not. Actual fresh news might be the Atlanta Fed GDPNow for Q4, which was 8.2% last week but likely bending down a bit more.

Jobless claims may grab the headlines if they show another decline to add to the seven weeks of decline already under the belt. It’s also the penultimate release before payrolls next Friday, forecast at 500,000 at least. Finally, if anyone is still around at 2 pm, we get the minutes of the Nov 2 FOMC. That’s the one at which the vote to start tapering was unanimous. It’s hard to see how details of who said what can add anything.

Interestingly enough, it’s not the US economy that should get the attention—it’s Japan and Germany. Japan weathered the pandemic better than anyone except China and is getting growth and likely even some inflation. The inflation is not organic but due to supply constraints, but never mind. The new stimulus package will add to growth, although we need to worry it’s pushing on string again.

The other economic outlook of great interest is Germany, where Covid took down a big chunk of the economy and turned sentiment sour. Given the latest Covid outbreak and agitated statements by the likes of Chancellor Merkel, reprieve is far off. Germany is likely getting its new government in the next few days and boy, does it inherit a messy crisis-riddled economy. This is a new thing for the eurozone—Germany has been the stolid, reliable touchstone, even as it was making a stink over Grexit and then Spain and then QE (remember those court cases). Now it’s at risk of turning into a poor man and a drag. It’s hard to see what will rescue the euro from tracking Germany downward, perhaps as far as 1.10.

But again, note that the euro is vastly oversold and “should” correct, even if we can’t see a reasonable reason. But player positioning could suffice. We recommend going square into the long US weekend.

Tidbit: The release of oil from the Strategic Reserve, plus the other countries’ contributions, is getting belittled with great sarcasm. It’s feeble—will cut the cost of gasoline by only 10 cents. Bloomberg writes nobody is impressed. The world is using about 96.5 million barrels per day, according to data from Statistica last August. We might get lucky and manage to inject one whole day of consumption—probably less.

The WSJ writes that the combined releases by six countries will be about 65-70 million barrels, or a “a little more than half of the world’s daily consumption, which the Energy Department estimates will surpass 100 million barrels in the final three months of 2021. That rate would put world consumption nearly 5% higher than it was a year ago as the recovery from the pandemic has steadily driven consumption higher.”

Sarcasm rests on the details—that the other countries are offering only token amounts and the US release will be spread out over several months, and some of it had already been planned. By the time it’s done, the amount of extra oil will be symbolic, not a market mover.

But while true, not useful—and all the criticisms miss the point, that of sending a message to the producers and players. The oil market is a nest of vipers, spiders and scorpions, including the oil companies themselves (see Blowout by Rachel Maddow or any biography of JD Rockefeller [distant cousin many times removed, alas]). Nobody, not even the US, has ever taken on the OPEC cartel, let alone as an alliance. An effort to sue at the WTO went down in flames a few years ago.

The world is fed up to the eyeballs with OPEC determining our standard of living, in part because it’s regressive but also because producer countries are doing practically nothing to build economies not dependent on a single commodity. Talk of US self-sufficiency in energy has been around for decades and while the US achieved it a couple of years ago and it scared the Middle Easterners, OPEC+ still thinks they run the show, with all the arrogance of a monopoly/oligopoly. 

For the US and China to take the initiative to break their bones, if not their back, is a huge foreign policy and economic initiative. It can’t last very long—we don’t have enough reserves for a stand-off-- and there is some possibility OPEC calls the bluff, but if all bullies are cowards at heart, we will get an output increase at the next OPEC meeting. This will be the first time the Reserves will have been used in a joint effort and with a clear understanding of the battle lines. The old colonialists would have been proud.

The Strategic Reserve was begun in 1975 specifically to counter Middle East interference in the US economy and to mitigate the foreign affairs blackmail. But it was never used effectively or consistently as a foreign affairs management tool. Even the foolishly brave Reagan didn’t use it. The first and only foreign affairs-related release was by Big Bush in 2001 (Kuwait War) and later by Shrub (2005) because of Katrina. See the list at Wikipedia. The former president is critical now mostly because he cozied up the Saudis (and did a silly dance) instead of using US power—he’s jealous of Sleepy Joe for having the jones.

Of course it can end badly. That probably why nobody has tried it before—the risk of failure is very high. Of course, it will do very little to bring inflation down. Of course, it will do almost nothing to change the price of oil over the long run. Again, not the point. The point from the domestic perspective is that this is a bold, unprecedented initiative that sends a message—the lights are on at the White House. Biden is not playing golf. 

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