Outlook: Fed chief Powell made it clear yesterday that clamping down on demand is the only path for the Fed when supply shortages/blockages can’t be addressed by monetary policy. This is actually a cruel approach from the human point of view because it means imposing financial suffering on the lowest earners and dashing the hopes of the rising and younger middle class. The Fed doesn’t care and can’t care, because chopping demand through higher prices is The Tool—but we will soon be hearing from the lefty left.

Powell points out the three channels of squashing demand—first, anything involving an interest rate, notably housing and autos. Second, letting asset prices dip if that’s where the market wants them to go, without concern from the Fed. The Fed “put” is a thing of the past. Powell also spoke of the dollar, pointing out that a strong dollar fights inflation in the form of import prices.

You have to tell Congress this because they are all lawyers and missed Econ 101. At a guess, Powell was warning some in Congress not to talk about managing the currency because “a strong dollar is the best policy” and we like it that way, anyway.

We have seen some stories recently about how the too-strong dollar means this or that and should be managed for this reason or that reason. We don’t bother rebutting because the stories are always so biased that you’d have to knock down he first assumption to get anywhere at all—and the first assumption is that “prices should be fair.” No, not so. Nowhere in the capitalist handbook does the word “fair” enter the story as a principle. Even Adam Smith pointed out in 1776 that if you want fair, you have to fiddle with institutions, especially banks.

The other Big Story that is still building (and will have a currency effect in the next 3-6 months) is the European energy crisis. The FT reports “Ten EU states including Germany, Sweden and Italy have declared early warnings of a gas emergency after Russia reduced supplies in recent days, the European Commission said.”

Trading Economics adds “A week ago Gazprom started curbing a large part of its supplies to Germany and Italy bringing to the total of affected member states to 12. As a result, Germany has now enacted the second stage of its emergency gas plan, which includes tighter monitoring of the market and the reactivation of coal-fired plants. On top of that, the region is expected to receive limited imports of US LNG cargoes until late 2022, due to repair works at a key export terminal in Texas after being damaged by an explosion. Adding to upside risks, the TurkStream pipeline has shut for maintenance until the end of the month, while flows from Norway, Europe’s 2nd largest supplier, also dipped due to a compressor failure.”

As EC Commissioner Timmermans (Netherlands) puts it, Putin has “weaponised gas” in an attempt to “disrupt our societies.” This is the biggest challenge in the world today with economic and financial market consequences. (The second biggest, albeit without econ/fin consequences, is whether and for what crimes the US Justice Dept charges Trump. The wheels of justice grind exceedingly slow.)

Bottom line, the looming energy crisis “should” be debilitating the pound and euro. We can’t mention the peso because Mexico holds a central bank meeting today and being an oil producer seems not to run the show there, anyway, apparently due to decades of mismanagement of Pemex. Also affecting the pound should be the weakening effects of Brexit. That tends to happen rarely these days but must be a background factor.

We admit to not having a handle on risk appetite these days, mostly for lack of validating price moves in a world of ranginess. We saw risk assets sell off yesterday, but can’t count on it favoring the dollar. You’d think that Powell not dismissing the idea of a 100-point hike is wildly hawkish, but instead bong prices rose and yields fell. Go figure. The only explanation is the prosect of recession that should or might stay its hand down the road. We fail to understand this reasoning. It’s perverse. The man just said “tamp inflation back to normal whatever the cost” and the market doesn’t believe him? Accordingly, we recommend caution. This time the short-term trend is not your friend. 

Tidbit: A bloodhound named Trumpet won best in show at Westminister. A bloodhound. Really, a bloodhound. Next will be the blend of hound and poodle, since everyone knows the poodle is the best dog ever but a colossal pain to groom in any way other than that stupid French cut. The bloodle (houndle?) will take over from the labradoodle, schnoodle, bidoodle, cavapoo, yorkipoo and all the rest—more than for any other dog breed, ever. 


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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This morning FX briefing is an information service, not a trading system. All trade recommendations are included in the afternoon report.

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