The Michigan and Conference Board consumer sentiment surveys impressed the bond market

Outlook

For the dollar to get a respite against the majors because Congress is passing a budget that is both cost-cutting and tax-cutting “stimulative” is ironic and sure to be short-lived. That’s because it’s so badly designed, and overriding that is the inconvenient fact that uncertainty is rising so high that firms are suspending expansion plans and investors are suspending investment plans. This is not good for the future of overall activity, including jobs. It’s definitely not good for the stock market.

Trump’s mismanagement leads to alternating fatigue and terror. Right now tariff fatigue is giving way to terror ahead of March 4, when the 30-days are up and Canada and Mexico face a crash. Lest we become complacent, yesterday Trump added a new tariff, or the idea of one, specifically on copper (literally the latest shiny thing).

At the same time, it’s starting to dawn on everyone that falling yields on expectations of recession are very bad for the stock market. Trump thinks the stock market reflects his power and abilities, so falling equity indices are inherently a bad thing for him personally. He does not, of course, understand macroeconomics.

The Michigan and Conference Board consumer sentiment surveys impressed the bond market. Weirdly, the 5-year and 7-year note yields went to under the rate on the 3-momth T-bill. The 10-year fell a full 10 points, also below the 3-month bill rate. And the long bond fell from 4.66% to 4.55%.

This is the bond gang saying forget about inflation—now we worry about recession. Bloomberg reports that it may be an overreaction—the most recent five regional Fed surveys have been positive. But a true yield inversion may well be forming, and that cements the recession idea. See the chart.

Something else worrying everybody is the hypothetical Mar-a-Lago Accord modelled on the Plaza Accord (1985), which succeeded so well it had to be reversed a few years alter by the Louvre Accord. The whole thing was considered an ill-conceived attempt to manage markets and the markets responded with a kick in the teeth. Bloomberg brings it up again because apparently it’s being discussed in the inner circles and leaking out to the Wall Street big-wigs.

In essence, the Mar-a-Lago accord would get foreign trade partners to goose domestic consumption to reduce exports to the US. As we wrote in recent weeks, this ignores the concept of comparative advantage that is central to the benefits of trade. The accord would also calls for FX market intervention, which would be a stupid waste of money (ask the BoJ) and coordination of central banks to minimize rate differences, which ignores the idea that gee, central banks are supposed to be independent and to make policy to maximize their own economies, not the US economy.

Then there is a goofy idea about restructuring the US debt by issuing zero-coupon “century bonds” and anyone not buying would lose any security arrangement with the US. This is a cousin to leaving the WTO and NATO, and would drastically reduce confidence in the US bond market, which is the single biggest market in the world. Trump has no idea what his minions are telling him to bite off. Luckily, like all bullies, Trump is a coward. His sense of self-preservation may keep the idea on the back burner. Maybe he remembers Bush trying to privatize Social Security. 

Forecast

It’s the job of the financial press to exaggerate big moves into “crises.” It’s possible the stock and bond markets are overreacting to the confidence surveys and growing sense that Trump is botching it. It’s also possible that equity prices had become a bubble and need a big, fat correction. Whether it becomes a bear market remains to be seen.  The connection between the stock market and FX market is strange. We went through a long period when they were inversely correlated (accompanied by not-credible “explanations”). Then they got into sync as the dollar and equities rose together.

Now they seem to be falling in sync, but beware! It ain’t necessarily so. If and when the Fed starts dovish talk on the seemingly looming recession, equities can thrive again while the dollar slides downhill. That’s to assume the top and overriding factor is the rate of return, and as we are seeing already in the Trump administration, mismanagement, inconsistency, irrationality, overall shambolic nonsense are factors feeding risk aversion. Risk aversion is bad for equities but good for the dollar.

On the whole, we expect yesterday’s events to lose their freak-out muscle and a move the other way to emerge. This still leaves the dollar creeping lower against the euro if higher against the CAD and a few others. “The dollar” doesn’t exist as a specific entity, anyway.  The best advice is to trim amounts at risk.

Tidbit: James Carville has a killer op-ed in the NYT saying the Dems should stage a strategic retreat and give the Republicans the rope they need to hang themselves. Their incompetence and mismanagement, including firing hundreds of thousands of government employees, will come home to roost.

“At this rate, the Trump honeymoon will be over best case by Memorial Day but more likely in the next 30 days. And in November 2025, we start turning the tide with what will be remembered as one of the most important elections in recent years: The Virginia governor’s race. From tax enforcers, to rocket scientists, bank regulators or essential workers — the Trump Administration is hellbent on drastically firing the federal work force despite the fact that federal civilian employees represent just 3 percent of the federal budget. These workers are highly concentrated in the state of Virginia, home to around 144,000 civilian federal employees.”

Separately, we got forwarded an essay from a Wall Street veteran who characterizes the Orange Menace as “a serial, liar, cheater, thief, sadist, and a generally Bad Person.”

Tidbit: We await PCE and core PCE on Friday, Feb 28. The last reading was 2.8% y/y with the forecast for Friday at 2.6%. But as we showed earlier this week, some components are really, really bad, like shelter up 7.9% y/y in Jan, with food up 10.1% and the overall net up 6.4% due to the drop in energy. A little perversely, with recession now at the top of everyone’s mind, a drop in inflation can be interpreted as falling demand, regardless of what supply is doing.

A good case is housing, where potential buyers are on strike, as Wolf Street puts it, because prices are too high (mortgage rates, too). The correct way to judge the supply and demand for housing would be by cost tranches. We know the rich can and do buy whatever the hell they please. It’s the lower priced housing that should be examined to  determine whether demand has really dried up.

Then there is the idea of consumers stocking up on basics like canned food and toilet paper. Judging from the empty shelves in the local supermarkets and dollar stores in central Virginia, not exactl well-known for economics savvy, this is already happening. Assuming supply the same, this added demand should result in higher prices, if not everywhere because store managers are not always the brightest bulbs. 

The unsettling bottom line is that a good number of Friday (like a drop from 2.8% to 2.6%) can be interpreted as “bad” because of stocking up ahead of time, while a rise (such as 2.8% to 3.0%) is also bad because it means the Fed can’t really say inflation is being tamed enough to justify a cut.

What does justify a cut? The Fed cannot point to faltering GDP because GDP is not named in its mandate. It will have to be unemployment. Nobody knows, yet, how the DOGE firings will affect the unemployment rate, but job loss is spreading in the private sector, too. This week the big name is Starbucks.

A “mass” layoff is defined as 50 or more jobs, and the list of names includes WalMart, Wells Fargo, Cargill, Boeing, Marriott, FMD, Volkswagen, Paramount, CVS, et al., plus some tech giants like Amazon, Google, Intel, and Microsoft (and eBay and Facebook). To that must be added employees of the bankrupt, like Red Lobster (last year) and Joann’s. The site doesn’t add up the jobs lost so it’s hard to know what effect this has had and will have on the unemployment rate.

The labor market remains in shortage. That could be evening out. But the unemployment rate can’t rise enough in a month or two to scare the Fed—can it? 

Federal workers are only about 1.4% of the workforce so Musk’s firings will not much affect the unemployment rate. But add in the contractors, and according to a Reuters report, “with a ‘consensus’ estimate of ultimately 300,000 DOGE-related federal job cuts, the total employment reduction could be closer to 1 million.” But not everyone is eligible for unemployment benefits, including contractor employees, and plenty wait to file. We won’t see the effect for several months.

As we all know by now, the unemployment rate is a fiction. The BLS statisticians do the best they can, but the economy is so vast and the reporting so skimpy that the final numbers are not accurate. As Trading Economics reports, “The US unemployment rate dipped by 0.1 percentage point to 4.0% in January 2025, marking its lowest level since May and coming in just below market expectations of 4.1%.

“The number of unemployed individuals declined by 37,000 to 6.85 million, while employment edged up by 2,234 to 163.9 million. Additionally, the labor force participation rate rose to 62.6%, and the employment-population ratio increased to 60.1%. Finally, the U-6 unemployment rate, which accounts for the officially unemployed along with marginally attached workers and those involuntarily working part-time for economic reasons, held steady at 7.5%.”

The unemployment rate measures only those unemployed actively looking for a job. It does not include those who have given up or who had jobs for such a short amount of time that they don’t qualify for benefits. It used to be that economists preferred the U6 rate, because while it still excluded the gray and black labor market, it more realistically reveals stress among the lower one-third of the blue-collar cohort.

Despite all the shortcomings, the unemployment rate is sure to be rising up beyond the forecasts of 4-4.3%. And once the rock starts rolling downhill, it can happen fast, giving the Fed the excuse it needs.

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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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