The FX market is floppy and sloppy and lacking momentum

Outlook: The FX market is floppy and sloppy and lacking momentum, even if we have no hard evidence the dollar is about to make a recovery of any sort. Traders are willing to shrug off pretty bad economic data and near-crisis property/shadow banking situations in China, although many stock markets are not happy.

It's a little interesting that the euro failed to gain on ECB chief Lagarde’s comment yesterday that rates are not going to fall anytime soon and job growth “may lose momentum” towards the end of the year. It’s not clear if this is lack of credibility or stubbornness and wishful thinking.

We are stuck with the same old song—rate cuts are coming, rate cuts are coming. As the WSJ reports, “Interest-rate futures indicated Monday a 52% chance the Fed will lower rates by at least a quarter-of-a-percentage point by its May 2024 policy meeting, up from 29% at the end of October, according to CME Group data. The same data pointed to four cuts by the end of the year.”

Actually, you don’t have to believe in rate cuts at all to justify the stock market rally or growth resilience. Yield curve inversion suffices. “Investors say there are reasons why stocks can thrive when growth is slowing and even when the chances of a moderate downturn are rising.

“All else equal, lower long-term Treasury yields can boost stocks by reducing the incentive for investors to shift their money into bonds. Investors had also feared that a 10-year Treasury yield approaching 5% could trigger a recession by pushing up borrowing costs for businesses and consumers, even if those fears weren’t showing up in bond yields themselves.

“Adding to those concerns, many worried that yields were being driven higher by a surge in new Treasurys needed to fund a growing federal budget deficit, not just by a strong economy and bets on higher-for-longer rates.

“This month’s bond rally, which has pulled the 10-year yield below 4.5%, got its start on Nov. 1 when the Treasury Department boosted auction sizes of longer-term bond sales by less than most investors were expecting. That bolstered the case that yields had climbed more than was justified by economic fundamentals, making their decline especially welcome.”

If you can see a connection between the two things on this chart, please write. We get a fresh Atlanta Fed GDPNow forecast on Thursday (after 2.1% last week). It might be helpful to get comments from Fed govs today, although Powell is the main event on Friday. Scheduled are Waller, Bowman, Barr, and Goolsbee.

Meanwhile, we get US consumer confidence today. We don’t usually bother to report consumer confidence surveys because consumers are notoriously bad at forecasting economic developments, not understanding the first thing about economics to begin with. At a guess, a high percentage of outcomes is determined in advance by the way the questions are asked…. We prefer the proof in the pudding, which is retail sales. Revisions to Black Friday and Cyber Monday are starting to come in and it looks like Christmas for retailers. Reuters reports cyber sales are already above the forecast and early results at $12.2 billion.

Two questions: are the overbuilt inventories gone by now? And if the US is spending its head off, why are Chinese exports faltering? You can’t buy much of anything not made in China.

Another FX mystery is the AUD. Overnight, retail sales were deeply disappointing, down 0.2% in Oct for a gain of only 1.2% y/y. One report has it that on the per capita basis, real retail sales are down 1.6% year-over-year. This information runs contrary to the idea another hike might be on the RBA’s mind. And the AUD, while faltering so far today, has a way to go to the 62% retracement of the move down off the double top, and while overbought, shows little sign of faltering. Not to be silly, but the Other Dollar, the CAD, is also on a tear.

Forecast: The FX market is at a stand-off with a continuing bias against the dollar. Commentators are not focusing on the US excessive debt problem for the moment, but we wonder if it’s not lurking in the shrubbery. Maybe the pause in momentum is just caution ahead of genuinely important data later this week, mostly the PCE price index but also GDP and then Mr. Powell. This gives a little room for our customary counsel—when in doubt, head for the cross rates and stay away from the US dollar altogether. 

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