Outlook

The market-moving data this week comes from everywhere other than the US. We get inflation from the UK, Canada, and Japan, possibly shifting central bank outlooks. Australia holds an RBA meeting. The Fed releases FOMC minutes on Wednesday.

And we get a slew of PMI’s on Thursday. Europe is expected to do better than the US. The US S&P manufacturing flash for May on Thursday is expected at 49.9 from  50.0 in April, ho hum. Services is forecast up 51.4, leaving the composite unchanged  at 51.3. We don’t get the more respected ISM version until the first week of June. PMI’s are (arguably) the top metric for comparison these days.

Also in the US, April existing home sales are expected up 0.6% m/m after the disastrous

-4.3% in March. New home sales, a far smaller percentage of total sales, are expected at -2.1% m/m from 8.8% in March.

Weirdly, the Japanese 10-year JGB rose to the highest in over a decade, tracking the auction of inflation-linked 10-year JGBs. But the dollar/yen barely burped, perhaps indicating that Friday’s lower CPI is expected to defy rate hike ideas and leave the government with too few tools to support the yen.

Potentially the biggie could be Canada’s April CPI tomorrow. The headline is expected to fall two ticks to 2.7% y/y, the lowest since March 202. Core is also expected to dip. Analysts remember Gov Macklem saying “we are getting closer” to rate cuts. June is possible and July seems fully priced in, but then you have to wonder whether the BoC would move before the Fed and if not, what happens to the CAD.

We get many, many Fed speakers with week with the message from doves and hawks the same—caution and patience. This arises from fear of premature easing. One analyst notes the probability of a cut in June is 10%, July gets 33%, and September, 80%.

Forecast: Inflation is supposed to be the guiding light for central banks, but other factors count, too, including output and wages. You’d think rising PMI’s in Europe, for example, would offset the expectation of a cut in June along with sticky inflation as a headwind—but no, June it is. You’d think that expectations of a rate cut in June would start to hit the euro in late May, too, but no, not yet. The week is stuffed full of “maybe, but not yet.” That implies range-trading and a ton of uncertainty. When the week is over and we face the US 3-day holiday (or 4, counting Friday), we can expect major covering of dollar shorts.

Tidbit: Bridgewater’s Dalio has been out again warning of doom arising from the US deficit. Old-timey conservatives have not lost their minds, like the new guys, even if they stay mum about their new leader, Trump, who promises bigger deficits. Remember that the Republicans always pretend they want to tame deficits, but never do—the only president who cut the federal deficit was Clinton.

Now we have some new data from something named the  Bipartisan Policy Organization. Courtesy of MishTalk, here are some key points.

“The government is running a cumulative deficit of $1.1 trillion so far in FY2024 ($46 billion more than the same period in the prior fiscal year when adjusted for timing shifts)

“Revenues were $2.2 trillion through February. Outlays were $3.3 trillion through March. Those numbers do not include a $95 billion aid bill for Ukraine and Israel that recently passed Congress.

The projections look worse. “As spending continues to outpace revenues, deficits will exceed $1.5 trillion (an average of 5.6% of GDP) in each of the next ten years. In comparison to May 2023’s budget outlook, deficits are projected to be a cumulative $1.4 trillion less over FY2024-2033.”

Mish reports “The key points are the Fed assumes no recessions and the Fed assumes no matter what Congress does that it will hold inflation to two percent over the long term. In other words, the Fed assumes that it is in control when history suggests that it isn’t. The Fed has never forecast a recession, nor has the Fed spotted one in real time.

“The deficit is now over $34 trillion with debt held by the public at $27 trillion. Interest on the national debt is over $1 trillion. Money that would go for investment instead goes to bondholders. Neither party will fix deficit spending. Nor will the Fed.”

So, yes, the deficit situation is indeed dire and getting worse. As a practical financial matter, the “So What?” question is whether the FX market gives a hoot. If it were any country other than the hegemon and any other currency than the numeraire (chosen by merchants), yes. But the US is the hegemon and the dollar is the numeraire, so no. Or at least, not yet.

Separately, Statistica summarizes SWIFT’s transactions by currency as of March 2024. The graphics are not easy to copy and paste, alas, but it’s an interactive chart and you can play with it without a subscription, (which costs almost $4000). The important data: the US dollar accounts for 59.5% of transactions. This is what makes it the numeraire. The euro has a share of 12.13%, the yen, 5.9%, the pound, 4.72% and the Chinese yuan, 3.18%.

“The euro and U.S. dollar made up more than seven of 10 SWIFT payments worldwide in 2024, outperforming many other currencies. This is according to a monthly report meant to track the market share of China's yuan renminbi within the international bank transfer system SWIFT. Although China holds the largest forex reserves in the world, the yuan ranked as the eighth-used currency in international payments. The figures concern customer-initiated and institutional payments and exclude trade.”

As a side note, the US became the hegemon in the first place because of WWII, which broke the financial back of the former holder of the title, the UK. After the war, the UK was impoverished and in debt. The US grabbed the reins—with the approval of all the others at the Bretton Woods conference, mostly because there was no other even remotely probable candidate. Can the same thing happen in the US? You bet. Can the EU take over from the US at some point? It has some things going for it, including treaties that limit debt. But as unions go, it leaves a lot to be desired, including a single true leader, a single bond market, a single defense entity, and a single meaningful budget, despite Mr. Draghi’s best efforts. 

Reasons for the Fed to Cut rates

Avoid embarrassment from getting inflation wrong twice.

Normalize the yield curve.

Head off any recessionary tendencies.

Help housing via mortgage rates.

Help banks rollover commercial property loans.

Help the stock market.

Synchronize with the ECB (and Riksbank and SNB).

(Help the current White House).


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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This morning FX briefing is an information service, not a trading system. All trade recommendations are included in the afternoon report.

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