The Fed’s forward guidance is meaningless

Outlook

We wrote yesterday that jobless claims could be the market-mover, but the disappointing result caused barely a ripple. We got a rise in initial claims by 51,000 instead of a drop by 10,000, a discrepancy that in more normal times would have upset the apple cart. It’s possible that the drop in continuing claims by 1.3 million to 12.6 million, the lowest since March 2020, was a sufficient offset. But notice that continuing claims are deeply affected by state programs now ended or ending, and the federal programs coming to a close in September, too. The absence of claims is not the presence of employment.

We could get the same kind of distorted perception from the preliminary PMI today, forecast to show almost no change from June but the eurozone getting a 21-year high, as though the pandemic was just a blip. What does this mean? Nobody knows, and that’s a problem when PMI’s are at the top of the high-frequency data releases.

But a 21-year high in the eurozone is fully offset by the ECB’s average inflation over 2% before a hike can be contemplated. Since inflation may go over 2% next year, when that time comes we may hear hawkish rumblings from the commentators, but the duration of inflation over 2% is likely 12-18 months, the equivalent of the Fed’s “for some time.” That’s not going to happen, so the ECB is effectively on hold for years and years and the “new” forward guidance is meaningless.

To be fair, the Fed’s forward guidance is meaningless, too, or almost so, again due to the refusal to name how long inflation can post over 2% before the Fed acts. We already have inflation well over 2%, considered transitory. Can it be transitory for 12-18 months? We had better get a falling average by sometime in Q1 or all hell will break loose, meaning a bond market crisis and worse, a crisis of confidence in the Fed.

FX traders are trying to sort out their perceptions of growth (via PMIs) and inflation vs. central bank policy. If no central bank is doing anything and everybody is getting similar economic outcomes, how do you judge whether a currency should be rising or falling? That leaves only the squishy risk perception, on or off. Now that the Delta Panic is proving itself a one-day wonder, we see risk-on rising again and that removes support for the dollar. Except US growth is outpacing everyone—and we get the first Q2 GDP numbers next week. The Atlanta Fed has 7.6%, but adjustable by PMI’s, and the new revision is not due until next Tuesday.  Maybe we are back to plain, old-fashioned growth and nothing but growth as a currency decider, and on those grounds, the dollar wins.

As an aside, note that the Canadian dollar is not getting credit for excellent vaccination rates or oil price recovery. While fresh data is due today and next week, like retail sales, apparently the CAD is stuck in a down move inspired by the BoC and unfeeling toward other factors. It got a boost on a dollar correction, but that’s positioning, not fundamentals, and seeming to run out of steam already. ‘Tis a puzzle.

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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