The question is whether the crowd

The ECB meets today with a universal viewpoint that it sits on its hands. It will revise its forecasts which some people think is useful. Some analysts are holding their breath for the Fitch announcement tomorrow on France’s creditworthiness. It’s currently AA- with a negative outlook and no matter whether the new PM is a good guy or not, France is still deep in debt. It’s not obvious that a credit rating downgrade will do much harm to the euro.

We also get US CPI today. Headline CPI is forecast to 2.9% from 2.7%, the most since Feb. Core CPI is expected at 3.1%. The question is whether the crowd will brush it off as already baked in.  The main effect will be on the 50 bp question for Sept (a low number promotes) or 25 in Sept and 25 in Oct, too (same effect). But does a high number mean we get only one 25 bp and that’s it? It’s possible that the baked-in theory and unimpressive PPI took one of the cuts off the table, allowing the dollar to stop falling.

Reuters has an interesting take on the real rate (after inflation). “If the Fed pulls the rate cut trigger next week, as expected, it will be doing so with inflation around 3% - a percentage point above the central bank's 2% target. Further easing amid sticky prices means the gap between the U.S.'s inflation-adjusted or 'real' interest rate and those of its developed market peers should narrow – bad news for the dollar.” See the chart.

Forecast

It may not be that simple, but the sentiment seems to be “weak inflation, room for two rate cuts” vs. “high inflation, only one rate cut.”

If today’s CPI is deemed soft, the expectation of two rates cuts or 50 bp next week should tank the dollar. The CME FedWatch has a 70.8% probability of two cuts for after the Oct meeting. This will pile onto sellers already upset over tariffs, the deficit, and those foreigners finally shifting away from US assets, although no real sign of that yet. And don’t forget those who think the inflation will show up eventually.

If today’s CPI is deemed hot, the probability of two rate cuts diminishes and we should get only one. If the dollar had been preemptively sold ahead of time, that means a bounce to the upside. That bounce “should” be brief.

Tidbit: A Trump influencer of young people was assassinated in Utah and dominates the news. This was a guy who thought white people superior to brown and black, men superior to women and Christianity superior to any other. He denied Trump lost the 2020 election and told almost as many lies as his hero. Note that it is the Trump party that refuses to consider gun restriction like the one that just shot their guy. It’s one thing to decry the assassination of anyone, even a jerk, but the hypocrisy is overwhelming.

Tidbit: Reuters reports “Protesters across France obstructed highways, burned barricades and clashed sporadically with police on Wednesday in a show of anger against President Emmanuel Macron, the political elite and planned spending cuts.” As we thought all the way back to the 1968, we say this degree of public participation in political affairs highlights the success of French democracy. We may not appreciate the violence, but you must admit the commitment to being heard is impressive.

Food for Thought: It’s the anniversary of the 9/11 terrorist attacks on the World Trade Center. 

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