If Q1 US GDP disappoints, Fed rate cut this year becomes realistic

Outlook:

We may get some noise in FX from the equity market—with Amazon, Facebook, Twitter, Microsoft (and Tesla) all reporting earnings this week. Bloomberg also names European banks (Deutsche Bank, UBS, Barclays, Credit Suisse and Swedbank). Everyone smells hubris in Elon Musk, who picked a fight with his chipmaker and claims a million self-driving Teslas will be on the road next year. Geniuses get a lot of latitude but a big crash sometimes, too.

So far today the US equity index futures point to a lower opening. In London, the energy-heavy FTSE 100 is okay because of developments in the oil price (but it’s the only European index that is higher). Again we can comment that the inverse relationship between the dollar and the stock market is illogical as well as unreliable, but tension is high. Low volatility is no solace, either—that’s what always precedes a breakout. Zooming oil prices are unsettling global equity markets, challenging the shiny appeal of IPOs of goofy products.

Today doesn’t contain a lot of fresh data. We get US new home sales and the European consumer confidence. In March, the confidence indicator was less bad at -7.10 from -7.20 in Feb. See the chart. It has a long way to go before we can spot green shoots.

This evening we get Australian CPI for Q1, with forecasters seeing a drop from 0.5% in Q4 to 0.2% in Q1 for a year-over-year of 1.5% from 1.8%. In addition, after Bloomberg reported yesterday China is getting too big a response to stimulus and may be pulling in its horns, the outlook for Australia softened somewhat. It remains to be seen whether this is a double whammy. 

We went from watching paint dry last week to watching a burning fuse approach the bomb. Which bomb is that? Take your pick—Iran closes the Strait of Hormuz. Japan walks out of the meeting with Trump, symbolically (they are too polite to do it in place). British PM May walks out and leaves Britain to the fate of the likes of Boris Johnson, Corbyn—or Farage. Both Canada and Australian central banks signal a rate cut. Not to be a gloomster, but the number of things that can go wrong is higher than the number of likely things going right. As usual, unhappiness and risk aversion favor the dollar.

On Friday we get the Q1 GDP and don’t feel alone if you feel you are not getting good guidance from the regional Feds. Yesterday we reported the Atlanta Fed has a jolly 2.8%. The New York Fed has a gloomy 1.37%. Let’s add the St. Louis Fed, which has 1.87%, about the same as the overall Fed outlook. If the NY or St. Louis Feds are right that Q1 will be a big disappointment, the outlook for a cut this year gets stronger, even if it’s not actually realistic. The one thing we can say about that is emerging markets might still have a chance.

Tidbits: The wildly unqualified and repulsive Cain withdrew his nomination for the Fed board, saying the salary was too low. Yeah, sure. Cable TV commentators are busily exploring the probability of impeachment with more vigor and attention to detail than members of Congress. So far House Speaker Pelosi projects opposition, saying we don’t have enough hard evidence to make the case “beyond a reasonable doubt.”

That may be true but more useful is historical precedent—we need public demand for impeachment as arose in the Watergate case, and that public participation was a direct function of the hearings being televised. If we get all three relevant House committees airing their hearings on TV and if they are entertaining enough, public demand for impeachment may rise hand-in-hand with that hard evidence. As strategies go, it’s pretty good.

Unfortunately, it still leaves the Senate as the courtroom and the Senate Plubs think they need Trump to get re-elected (and to avoid being challenged in primaries, the thing that spelled doom for AZ GOP Senator Flake). Pointing out that the Republicans are killing their own party with loyalty to a bum like Trump is not working so far. O’Donnell tried the moralistic approach—“We cannot escape history,” the Lincoln comment repeated by the one Republican in the House who voted for impeachment in the Nixon case. But the American public is tired of political correctness and mistakes moralism and defense of ethics as the same thing. 

We may think impeachment woes have nothing to do with international finance, but Trump is wildly different from Nixon, who could spell the word “ethics.” It’s Trump who gave us the trade war with China, emboldens Russia by weakening NATO, delivered a giant tax cut for the rich, may be starting a war with Iran, did something weird and inexplicable with N. Korea, threatens the independence of the Fed, and thinks he is above the law. Most of all, he ignores entirely that Russia interfered in the 2016 election and is taking no action—zero, zilch—against it. He thinks it’s self-serving but it can be positioned as stupid and unpatriotic if the Dems could get out of their own way. 

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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