The US economy is in fine fettle, a Dollar tailwind

About the Yen: TreasSec Bessent said he⁠will do "whatever it takes" to support Japan defending the yen. This is a replay of Mr. Draghi’s “whatever it takes” a decade ago to defend the euro. Bessent is working on increasing the repo facility to let Japan borrow more.

See the chart insert of dollar/yen in the 60 minute timeframe. On 7/29, the high was 163.56. By Sunday, 8/2, it had fallen to 155.22. But then it rose—carefully, slowly--to a high so far of 157.96 yesterday. It may be aiming to match and surpass that today. 

We have no reason to suppose Bessent will take a hit from dollar buyers, not when he has a bazooka as well as the usual hedgie ego. So, cat-and-mouse. How far will he let it go before firing again? A 38% move up lies at 158.58  and the 50% at 159.59. We doubt this is what Bessent is looking at… but the point is a rebound is happening to some higher price level. He will squash the move at some point.

Outlook

Today the US data is mostly ADP private sector payrolls and the ISM non-manufacturing PMI. Good to know but not FX determinants, leaving the Iran war to rule the waves. 

As everyone was quick to discern, markets don’t care about soft power or anything other than re-opening the Strait. They seem to be getting that wish and took the stock indices up in a blast of heat.

Meanwhile, Warsh likes the spotlight, too. This time he floats the idea that the Fed should not meet as often as 8 times per year, but maybe 6. This is supposed to force traders to make their own judgments on where rates and yields should be Die-hard pro-capitalists are cheering—they agree with Warsh that the Fed “interferes” with the pricing of totally free markets. He has forgotten that Adam Smith back in 1776 said that the one sector that needs regulation is banking and finance.

The US economy is in fine fettle, a dollar tailwind. The market wants to believe in an Iran deal, a dollar headwind. Conditions are unsettled, to say the least. We have a record number of spike highs and lows even when the closes are tame. Bottom line, conditions are dangerous.

Forecast

The FT headlines that Trump is trapped between escalation and a deal on Iran’s terms. This is the right perspective.

Are we about to be tricked, misled and cheated by Trump—again? We have no doubt he sincerely wants the Strait open, not as a sign of his power and prowess but because it’s what the stock market wants. He thinks his words and actions alone determine the US indices.

We doubt that any deal will favor anyone other than Iran, even after the Strait is opened. The US will not get the nuclear deal that was supposed to be the reason for the war in the first place. Iran will get tolls. It may also get sanctions lifted and some of its frozen money. By day 59, it will be the same mess it was on Day 29 the last time out.

This verdict is mostly because Trump is a very bad manager, and apart from ego, one reason for that is that he hires people on the grounds of their boot-licking rather than qualifications. This seems pretty basic. It’s why we have more cases and deaths from measles in the past two years than in the previous 30 combined. It’s why Trump has lost over 70% of the court cases. Incompetence permeates this administration and it’s silly to think the outcome of the Iran war will be different.