The Feds are singing the same song: No need to hurry on that first rate cut

Outlook: The dollar retreat yesterday was across the board and seemingly more than the normal Tuesday pullback. This is likely more a case of profit-taking and re-positioning on risk sentiment than any date-driven move. As for risk, the woes of banks with tanking commercial real estate portfolios is easy to toss aside when happier stories abound. We are not seeing a banking sector contagion, even if a couple of European banks are getting slapped.

Today in the US we have the 10-year auction, the trade deficit (likely a tad better) and another slew of Fed speakers. So far the Feds are singing the same song—no need to hurry on that first rate cut.

Sorry, but we have to return to the inflation story. On Friday we get revisions to CPI for the Jan month and the 2023 year. If we throw out the overly favorable 3 and 6-month data, this is what could shift market sentiment. It may not affect the Fed all that much, since it prefers the PCE version, but if CPI continues to slide downhill, any stubborn hawkishness arising from the hot payrolls number would be shaved. And consider that following the giant Jan payrolls we could easily get a disappointing Feb number. Maybe those hiring were front-loading.

Bottom line, everything points to an economy on fire and that, of course, holds the Fed back. But “on fire” is not normal and it’s only sensible to imagine yields and the dollar retreating as less elevated numbers start appearing. Ah, but when? Nobody knows. To make matters worse, the US T-note and Bund have been moving in lockstep for a long time now. If we get an equivalent move down in the Bund yield as the US 10-year backslides, there is no currency market consequence. Note that the 2-year yield comparison is even tighter to the exchange rate.

Forecast: The overall trajectory of the dollar remains to the upside, supported by strong yields that reflect a central bank willing to wait and wait some more, plus mostly hot data (the exception being the regional Fed indices). The current pullback is normal and not likely to get too far but will be tricky to navigate. We also have some weird stuff, like the high-yielding EM’s doing well and then crashing and then doing well again. Trend followers like us are flummoxed by carry-traders who occupy a world of their own.

Keep the faith.

Tidbit: The FT has an interview with ECB board member and economist Isabel Schnabel, who says inflation can still flare up again, so the “last mile” can be especially tough. She defends monetary policy as having worked and also for anchoring expectations. It wasn’t just fixing the supply chain. Now we need to manage second-round effects.

Tidbit: Yesterday the 11th Circuit Court of Appeals decided ex-Pres Trump is Citizen Trump and not above the law, as he argued. He has until Monday to appeal to the Supreme Court, which may take the case only to push itself to the top of the list as the deciding voice. A delay is possible but as of today, the stay on the big Jan 6 trial looks like being lifted. That means it can proceed before the Nov general election.

We also get the Supreme Court decision on whether Colorado can exclude Trump from the state ballot. Many say it’s better for Trump to lose the election by the voting and not the courts, but that is to forget two things—the electoral college and the near certainty that he will try to steal the election again, including the possibility of inciting civil war.   

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