The Fed meeting as the driver of the day today

Outlook:

As we argue above, the Saudi situation is not likely to turn into outright war. Repairs can be made and the Saudis churning out oil again in weeks or months. Considering the consensus that there is a glut, anyway, talk of this being the biggest one-time supply loss ever is pretty much irrelevant.

We can still feel beset with anxiety and a sense of uncertainty is not unfounded. If not managed correctly—and when did Trump ever manage anything in the Harvard B School sense of "management?—events could escalate and conditions deteriorate. But Trump has a vested interest in avoiding war and in reducing the probability of a recession, and oil price spikes do have an unhappy way of preceding several recent recessions. We can embrace panic as well as the next guy, but panic is not warranted. In fact, this attack is only the latest in a series of attacks on Saudi Arabia. We need to expect more.

By late Monday, this point of view was already becoming the conventional interpretation. Even so, a rise in uncertainty favors the dollar. To get it back down, Trump will have to move on the China trade deal next, or maybe invent a good lie about it. Do events come in threes? The third thing, if there is one, could be something big and shocking from one of the many impeachment investigations, raising the need for Trump to devise even more distractions and disruptions. The head of the House Justice Committee that would be the one to bring articles of impeachment, Jerry Nadler, is now (finally!) admitting that is what is going to happen, having waffled up to now.

Today we get industrial production, expected to rise in Aug by 0.2%, and late in the day we get the TICS report, which hardly anyone looks at anymore.

That leaves the Fed meeting as the driver of the day today and into tomorrow. The consensus is universal that the Fed will cut rates again after the cut in July, and possibly try to suggest that no more will be needed until the data says so. Trump calls for zero or negative rates almost daily now, but the Fed is likely to hew to the line that giving forward guidance of more cuts is self-defeating and can cause the very recession the cuts are supposed to prevent. We are likely to over-interpret whatever Mr. Powell says, poor guy.

The conventional wisdom holds that when a central bank cuts rates, its currency falls on the loss of relative interest rate advantage. Well, that argument has been outdated for some time now. We used to try to calibrate relative advantage in terms of the rate of change as opposed to the outright numerical data, but honestly, that didn't work very well, even before Trump and his uncertainty came along. But then as risk-on/risk-off got elevated by an increasing unhinged White House, the final screws were removed by the China trade war. That left raw uncertainty as the key factor, and that's where we stand today. It's a sad commentary that not even the mighty Fed can hold back the unhinging process. But we expect Powell to give it a good try.

At a guess, Powell knows perfectly well that this is his job. See the latest CME FedWatch probabilities. As of today, the likelihood of a 25 bp cut tomorrow is 65.8%. But it was 92.3% a week ago! We have no idea what this means except possibly that the players in this market appreciate that inflation is awakening and the Fed cannot justify more cuts on the deflation story. In other words, the market actually believes the Fed is data-driven and will resist political pressure. Sweet naivete? We may expect the dollar to dip a little on the rate cut but maybe not—it depends on what new uncertainty the White House inflicts.

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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