The geopolitical situation is a tub of mud

Outlook

The geopolitical situation is a tub of mud. Nobody knows much of anything. Here is Reuters’ Dolan: “ … crude oil prices are building a head of steam, coming within a whisker of the year's highs after a more than 4% jump on Wednesday amid U.S.-Iran tensions and U.S.-mediated talks between Ukraine and Russia.

“In Geneva, parallel talks on both fronts have been underway this week. Those between Ukraine and Russia ended on Wednesday without a concrete breakthrough. Meantime, despite some optimism around the U.S.-Iran standoff, both sides have since stepped up military activity and maneuvers.”

This is not a brush-off, but it’s not food for hysteria, either.

The mirror-image central bank situation is not much clearer. In the US, it’s not clear incoming Fed chief Warsh will deliver for Trump with rate cuts or will stick to his anti-inflation stance. In Europe, the prospect of Lagarde leaving early to give French Pres Macron the opportunity to have a say also has a tangle of possible outcomes. The Bundesbank perhaps thinks it is its turn.

At the beginning of the ECB, according to Reuters, the BBK pulled back from having its guys at the head of the ECB. “Nothing was codified, but it was seen as a quid pro quo compromise wherein other member states agreed to Germany's insistence on strict fiscal rules embedded in euro treaties. That was then and this is now - and a lot has changed in the intervening decades. Two ECB presidents have come from France, one from Italy and one from the Netherlands. Now Germany may reasonably feel it has the right to take the role at last.”

We remember it a bit differently. The BBK did press for its candidates for the ECB top job. But never mind. While the Europeans squabble as much or more as the Americans, they have all the same conflicts and problems interpreting data and getting to the right decisions. Current candidates include some serious hawks, including the BBK’s Nagel and former Dutch central bank gov Knot. 

As for the Fed, the cat is among the pigeons now with the Fed likely to dig in its heels at pressure to cut rates.

Somewhat strangely, the CME Fed Watch tool doesn’t reflect bettors are buying it. The probability of a single cut at the July meeting is 45.7%, from 45.3% a week ago. Going out to December, the probability of no cut is 5.3%. One cut gets 20.9%, two gets 32.8 so combined, 53.7%. Adding a third with a 25.2% probability adds up to 80.10%. Is this the same thing as betting Trump will win over the Fed? Yes, probably.

Today we could get the Supreme Court decision on the “emergency” basis for the tariffs. The ruling will not affect much except its own credibility and reputation. We also get the Philly Fed, the usual jobless claims and the Dec trade balance. There are also a 30-year TIPS auction, Walmart earnings and three Fed speakers.

Forecast

On Wednesday we could see some early signs of the dollar upmove ending—currencies oversold, MACD and RSI flattening out, some sideways movement. Then yesterday the Lagarde story and Fed minutes hit and the mini-reversal died aborning.  Anything resembling support got broken.

The dollar was already gaining steam during the New York morning on favorable economic data, long before the Fed minutes at 2 pm. This revives the theme “Even Trump can’t hurt the US economy.” It’s likely, however, that a fight for the top job at the ECB can harm the euro.

Overnight and before the US open, traders continued to sell euros and others. New York might take the euro back up a bit only to emulate the rest of the world and continues the sell-off. Excuses abound—Iran, LaGarde, Warsh, the US economy. Personal sentiment will get pushed aside (sell dollars because of Trump) and traders will go with the flow. Don’t fight the tape.

Tidbit

White House econ advisor Hassett was upset by the NY Fed’s paper on US consumers paying over 90% of tariff costs—an “embarrassment”--and said those economists should be “disciplined.” We often see private sector criticism of the Fed, including the regionals, but never before such a pathetic and ridiculous statement from the White House, which normally expresses any dissatisfaction and pressure behind the scenes.

Food for thought

Everybody zero’d in on the extreme equity market bullishness of the BoA Fund Managers report. Bloomberg’s Authers say something else—a forecast of higher yields. See the chart. He sees “Ways to hedge against a screeching halt next year, while taking advantage of continuing stock market growth, include rotating into non-US stocks (also aided by a falling dollar), into value (the leading AI over-investors are all emphatically growth stocks), out of the Magnificent Seven tech platforms, and into bonds rather than stocks. All of these things are [already] happening…”

Well, if folks are going into bonds, rising demand with stable supply would imply falling yields, right? The offset would have to be additional supply that more than offsets the fresh demand, and that in turn suggests bigger fiscal deficits. Bigger deficits are, on the whole and generally, a currency negative. It tends not to happen to the dollar because of the reserve currency status, but that is being eroded all the time now.