The Fed hike is all over except for the shouting

Outlook:

The minutes of the Nov Fed policy meeting will be released this afternoon. By now they are irrelevant—the Fed hike is all over except for the shouting. We also get a slew of economic reports today, including durables, new home sales, the Markit flash manufacturing index and the Michigan consumer confidence index, including inflation expectations. Of these, the flash PMI is the one that might move markets.

We also get a new Q4 GDP estimate from the Atlanta Fed GDPNow tracker. It was 3.6% at the last reading on Nov 17—wow. The Atlanta Fed website notes that its forecast of Q4 real residential growth was already upgraded from 4.5% to 10.8% on yesterday's existing home sales, implying today's forecast will be a barn-burner. Europe may be doing better than before but nothing like this.

Assuming this week ends with a whimper and not a bang, everyone will be re-trenching ahead of next week's referendum in Italy on Dec 4, to be followed only a few days later by the ECB policy meeting (Dec 8). We still don't know if Renzi will resign if he loses the referendum, which seems likely.

Yesterday the deputy secretary of Renzi's Democratic Party told Bloomberg Renzi will remain the party leader and will seek early elections next summer if the No vote prevails. Bloomberg writes "Both the euro and Italian bonds have fallen this month amid concern that a rising populist mood will derail Renzi's plans for reform and put another crack in the European project. The insurgent Five Star Movement is aiming to capitalize on a ‘No' vote to force Renzi out and wants another referendum, this time on Italy's membership of the euro area." We wouldn't say the euro has fallen because of the Italian referendum or populist movements in the eurozone generally, but it is true that Italian asset prices are lower, especially bank stocks.

The next item on the calendar is the ECB policy meeting Dec 8. The current consensus is that the ECB will announce extending QE past the end-March ending date, probably by six months, but analysts note that the softer euro plus better economic data, including today's flash PMI, may justify talk of tapering. This would mean the ECB somehow sees inflation rising from 0.5% now to 2% in those few months, not a realistic scenario. All the same, watch out for more taper talk leading up to the meeting.

Rising inflation is a more realistic scenario in the US. Market News reports Capital Economics has revised its forecasts to show both headline and core CPI over 3% by the end of next year, vs. the preelection forecast of 2.8%. By 2018, inflation will hit 3.5%. GDP will be 2.7% next year, vs. the preelection forecast of 2%. Accordingly, Capital Economics see four rate hikes next year for as much as 1.75% by year-end 2017. By year-end 2018, Fed funds could be 2.50%-2.75%. And again accordingly, 10-year yields may hit 3% by end-2017 and 3.25% by end-2018.

Hmm, inflation at 3.5% by end-2018 and the 10-year yield less than that at 3.25%? We would have thought yields would price in inflation more efficiently.

With all due respect to Capital Economics and economists everywhere, we are all blowing smoke. We do not have enough evidence on which to base forecasts, "evidence" consisting of concrete proposals. A case in point: all that new infrastructure building that Trump is going to sponsor is no such thing. What we have so far is the idea that construction and energy companies will get a giant tax break, amounting to a subsidy, for new projects, whether those projects would have gone forward anyway.

This is not to say a tax-break plan won't work, just that in its current stage, it's not designed to give us bridges and airports at a higher standard. As every traveler knows, the New York airports are a disgrace. Trump may be on to something with incentivizing private companies to provide better infrastructure, but there is a reason most infrastructure is government-funded—the financial return is too small and takes too long to realize. Would private companies have built the interstate highway system or the Hoover Dam for tax benefits alone? We don't know how that could have been designed and neither does Trump. Having said that, Trump did build the Central Park skating rink after years of public sector failure.

The important point about this observation is that traders, analysts and even economists (who should know better) are still in the grip of Trump mania. What happens when the smoke clears? Depression. We probably have several more months before reality-checking sets in, perhaps as long as the famous first 100 days. Until then, happy days are here.

A central issue for the economic outlook is the outcome of the OPEC meeting at month-end. As noted before, the output cap is not enough, especially given the usual cheating, to steer the oil price higher in a sustainable way. Besides, the US is going to rush in with new supply. But never mind—one of the goals of the output agreement is simply to obtain agreement after years of OPEC having lost its moxie. It's as much a struggle for Saudi Arabia to find its new place in the grand scheme of things as anything else. It's not clear whether the Saudis accept their leadership of OPEC is a thing of the past. Fractious parties like Iran, Iraq and Nigeria have to be given their voice. Only when OPEC as a group demonstrates it is a coherent group will Russia join the freeze.

You have to feel a little sorry for Russia, trying to juggle too many historical and geopolitical balls in the air all at once. Still, as some analysts pointed out at the beginning of this saga, just getting an agreement at all is a major accomplishment. We should probably assume the West in general and the US in particular, not to mention the Chinese, want to see it fail. Heaven only knows what any of these freeze opponents are doing behind the scenes.

Until something else comes along, our baseline picture is the US growing robustly, perhaps too exuberantly and with too much inflation, while the Fed keeps pace with a faster rate-hike schedule in the coming year. Unless the ECB decides to taper, this will give the US a rising yield advantage that supports a stronger dollar. Barring a shock from Italy or a surprise from Mr. Draghi, the euro should resume its downmove.

Politics: The top FT headline r eads "Tr ump r ever ses cour se on key campaign pledges," which is as much anti-Trump bias as putting the key facts in proper context. One backtrack is declining to pursue a case against Hillary Clinton. Trump has stopped talking about the wall along the Mexican border, too. This is probably an effort to appear "presidential." Trump also disavowed the alt-right white supremacists who used a Nazi salute with "Hail Trump" in a meeting last weekend, only three days late and after multiple tweets and a You-Tube video. But in the end, he did it.

The WSJ reports Pres Obama warned Trump about North Korea. "President-elect Trump could have to confront the North Korean problem early in his term. Pyongyang often takes provocative action during U.S. political transitions to get attention and see how the Americans will respond. North Korea tested its second device in the early months of President Obama's first term." The N. Korea problems is covered in thorns. Trump fanned some flames during the campaign by saying Japan may be on its own and should go ahead and build its own nuclear capability. This is a dangerous stance and everyone wants to teach Trump that unhappy lesson.

And it looks like Trump is learning. After naming a pro-energy sector lobbyist as Energy Secretary, now Trump says he is still considering the climate change issue. Yesterday Trump reached out to the New York Times, which he has been reviling for what he sees as lies about him, to give a long interview with dozens of reporters and editors. He praised the NYT as a jewel and clearly seeks its approval. According to reporters present, he also came across as deeply impressed and maybe a little rattled by what the job of president entails. He seems to be taking himself down a peg or two now that he has had to settle the Trump University case at a cost of $25 million and his foundation admits "selfdealing" to the IRS—exactly as he had accused the Clinton Foundation. We don't yet have a final decision of the self-interest problem, however.

Note to Readers: Tomor r ow, Thur sday, Nov 24, is a national holiday in the US, Thanksgiving Day. Markets are closed and there will be no reports. Also, the following Wednesday, Nov 30, there will be no morning report due to an early court date.