The Fed wants two things – A soft landing and not to have the Fed seen as behind the curve

Outlook: We get information overload today, including personal spending and spending with its associated deflator, the final PMI and ISM PMI, and the usual weekly jobless claims.  

While the PCE core deflator is the biggie–forecast at 5.0%, down a hair–personal spending is still likely up 0.8% vs. a rise of half that, 0.4%, in income. This is quite apart from labor market and payrolls numbers, and probably a nagging number at the Fed.  

The ISM manufacturing PMI, considered more accurate than the S&P version for forecasting purposes, is likely 49.7 from 50.2 in October, but with new orders (and prices paid) likely down. Note that just about every country except Australia has PMIs under the boom-bust line of 50.  

Amid the flood of fresh stories (including auto sales and construction spending), attention will remain on Powell’s comments. Critics say he “diluted” the Fed’s resolve and seemed wishy-washy when saying “we don’t want to overtighten” and “we don’t want to crash the economy through rate hikes.” We see these remarks as sane and reasonable, and countering the angst of those who see a hideous recession.  

The Fed wants two things–a soft landing and not to have the Fed seen as behind the curve. Powell was probably trying to say the Fed is alert and sensitive to the market, which is why the Fed has been signaling a pullback from 75 bp for well over a month now. To criticize him for doing exactly what the Fed was suggesting all along seems unfair. It’s also unfair to blame the Fed for not having a firm forecast on inflation or anything else.  

Of course they don’t have one. Nobody has one. They have probabilities, and the Fed’s economists seem to be saying that peak inflation has indeed passed–but Powell and other Feds are not sure they can trust it, nor any downward trajectory. This is good economics, if not good public relations. Still, the bottom line for the dollar is continuing weakness as risk appetite comes back, however silly that seems from several perspectives. It seems clear that Europe is going to have a much harder landing than the US, and in the long run, currencies are correlated with growth. The UK and Germany are probably already in recession and while inflation may have moderated somewhat, remains over 10% in both places. And they face severe distress over energy costs, not to mention potential blackouts and other hardships. But currencies don’t respond to that until they happen and even then, perhaps not until central banks respond with policy changes. We already have expectations of the ECB pulling in its horns at the next meeting and it’s not harming the euro. Now is when the charts rule, not the comparative fundamentals.

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.

To get a two-week trial of the full reports plus traders advice for only $3.95. Click here!