The Fed hike next week

Outlook:

We get a big plate of data today, including jobless claims, the Philly Fed, and existing home sales. Home sales have been sliding for four months and will likely slide again, given a lack of supply in the face of rising mortgage rates.

In the “Worry” section above, we note that the bond market is not as impressed as it should be by robust growth and the Fed hike next week, tending to focus instead on the negative consequences of the tariff war on the economy long-term.

Yesterday the bond boys got another arrow in their quiver in the form of the report on corporate repatriation, only $169.5 billion in Q2 after $294.9 billion in Q1 (revised). Considering that the amount of profits stashed offshore is on the order of $1-2 trillion, this is pretty small potatoes and may signal that the corporate pooh-bahs do not trust the current growth surge to continue or do not see good places to put the after-tax capital. We have yet to see press interviews to explain why companies are keeping their powder dry offshore instead of repatriating. This perhaps deepens the suspicion on the bond trading floor that all is not so rosy, after all. This is not to say bond traders are a gloomy bunch. They just have the most penetrating analysis.

We never pretend to understand the thinking in the bond market, which doesn’t have a single mindset, anyway. But it appears that the seeming breakout in the 10-year yield to above 3% might be short-lived or at least not extend as far as it “should” given the excellent economy and a hawkish Fed. We have been blaming capital inflow from safe-haven seekers and foreigners, but the bond market itself is suspicious of the trade war, believing (correctly) that the trade war is bad for the economy and a tax on the consumer while in the longer run, throwing sand into the wheels of progress and eventually causing a slowdown that is anti-inflationary, if not a return to deflationary conditions. Thus, counter-intuitively, rising trade war fears are dollar-favorable on rising yields and ebbing fears are dollar-negative. This is an occasion when news that is dollar-favorable is actually really Bad News.

The strange implication is that the dollar can correct downward when trade fears are reduced by something happening in Washington. Today that might be resumption of talks with Canada, for example. Let’s call it pretzel thinking. 

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