The main event today is the Fed decision and whatever Mr. Powell says

Outlook

The main event today is the Fed decision and whatever Mr. Powell says at the press conference. The Fed is expected to stay on hold and Mr. Powell is expected to say more progress on taming inflation needs to be seen. You’d think this would be already priced in, but Bloomberg reports equity index futures and options trading point to a stock market meltdown today.

It may be too obvious to put into words, but some reporters are surprised that any hope of returning to zero rates is now vanquished.  We take it as a given that this was always the case for the simple reason that an unspoken goal of the Fed with the end of quantitative easing is to return the yield curve to its normal configuration. Normalizing the yield curve is probably more important than avoiding embarrassment over having gotten the inflation forecast wrong—twice—putting “transitory” and “soft landing” into the scrap heap of Fed history.

A second unwritten goal is to avoid recession. The Fed mandates call for managing rates to get low unemployment and low inflation. The original mandates included “maintain market stability.” Recession by definition is accompanied by rising unemployment, and so it’s okay for the Fed to respond to slowing growth, if it’s dire enough. We don’t have that yet, although some glimmerings might be visible and some big shots like Jamie Dimon think it’s a real possibility.

We will get a new Atlanta Fed GDPNow for Q2 today. Last week the first forecast called for a whopping 3.9%. Holy cow! So much for the recession idea.

The Atlanta Fed had Q1 at 2.7% but the BEA reported a mere 1.6%. It will get revised any number of times and the guessing is that the official number will creep upward toward Atlanta. 

While the Atlanta Fed tends to overshoot, the point here is that recession is the farthest thing from the Fed’s mind. So is stagflation, with the first part, stagnation, belied by the hot growth numbers. In fact, if the housing market were to get hotter (on a rate cut, say), the Fed would have to worry about raising rates.

As things stand now, though, a rate hike has a low probability. As of 9:15 am ET yesterday, the CME Fed watch tool doesn’t even show a probability for a hike by the Dec 2024 meeting. It also shows only a 40.8% probability of single cut by then. Oh, dear.

Forecast: Everyone expects a hawkish hold message from the Fed today with perhaps a reduction in TE to reinforce the new norm of higher for longer. Apparently, the expectation was not fully priced in, after all, judging from a belated reaction in equities. The holiday in parts of Asia and Europe today (akin to the US’ Labor Day) means price outcomes are mostly American and it will take until after payrolls on Friday to get a realistic grip on the fate of the dollar.

So far it looks like the yield differential is not shooting the moon, a curious outcome. And nobody is asking whether the 2-year note, already at a little over 5%, can go higher than Fed funds. Really? Somehow it feels as though the end is nigh and something is going to break. 

Intervention Saga: Reports are popping up all over about how the yen is in a crisis that could go so far as to take the dollar/yen to 200 and trigger a formal devaluation of the Chinese yuan. So far today we see the dollar/yen at 157.99, closing in on the presumed line in the sand at 160.

As we wrote yesterday, hysteria like this is poppycock. One report (in the FT) went so far as to assert the hourly pattern of the big move Monday as “looking like” the real deal—BoJ intervention. Even The Economist magazine offers a self-important, ponderous opinion (the MoF will fail).

We have seen actual BoJ intervention multiple times over the years and it looks different every time. The BoJ enjoys tricking the traders and sometimes letting the price go past the line in the sand and letting it stay there until the traders scare themselves into an exit.

We do not know now nor will we know until the formal report whether the MoF ordered intervention and the BoJ carried it out. Today Bloomberg reports “While the authorities in Tokyo are refusing to confirm they stepped in to buy the yen two days ago when it dropped to the lowest since 1990, the Bank of Japan’s accounts suggest some 5.5 trillion yen ($35.1 billion) was spent to support the currency.”

What “BoJ accounts”? The story goes on: “If they did they will likely have to do it all over again unless deep structural issues are resolved” and the MoF will have to “pick its moments carefully.”

All the same, an incident like this demonstrates only that as in all mankind, the trading crowd has its own fair share of nitwits, the gullible, and those prone to conspiracy theories.

The excellent Brent Donnelly is among the doubters. He shows his own chart of the USD/JPY against the yield differential. Here is the same thing from www.kshitij.com . Current variation away from a perfect correlation is not abnormal. The equally excellent Marc Chandler is a skeptic, too, pointing out that the timing (big US data and Fed) would have made the MoF think twice about the risk of a failed intervention.

This is not to say the MoF/BoJ did not intervene. It is to say that blowing a price event out of proportion and trading on imaginary events is not smart. Of course we need to watch the approach to 160. 

Weird Tidbit: Bloomberg reported overnight that Denmark’s Novo Nordisk is the most valuable company in Europe. It has capitalization bigger than Denmark’s GDP and its charity is bigger than Gates’. It gets credit for lifting the Danish economy by 2%, 4 times the EU average. And why is this? It has the top drug for diabetes (Ozempic) and weight loss (Wegovy). We just wish the TV ads would stop.

Political Tidbit: The Trump trial continues to obsess the liberal press, which sees proof of wrong-doing under every rock, while the right says “no crime” and if a crime, just bookkeeping and the paper-pushers did it.

The divisiveness is scarier than the lies and exaggerations. Would the 2016 election have turned out differently if the voting public knew about the girls immediately after the Access Hollywood tape? Maybe, but maybe not, not after the FBI director announced Clinton had an email problem. Funny, Hillary was accused of having classified docs but Trump looks like skating on far worse incidence of the same thing.

The judge is leaning over backwards to favor Trump. He will suspend the trial so Donald can attend his son’s high school graduation. A bank robber doesn’t get that. The judge is fining Donald for violating the gag order but any hint of jail is far down the road.

We may believe that no one is above the law, but this guy is above the law in the sense that the consequences of treating him the same as any other charged felon are so politically dangerous. Trump wants to ramp up his martyr status by going to jail, so depriving him of jail is a remedy. In other words, the justice system is no match for the publicity system. It’s ad that Trump supporters are so uninformed/misinformed/disinformed and downright stupid as to believe his gumpf.

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