Today is a big data day in the US

Outlook

Today is a big data day in the US—we get durables, the Thursday jobless claims and PCE. PCE is expected to be a gain that has already been priced in. Jobless claims are blah but perhaps more interesting because next week we get nonfarm payrolls on Thursday—Friday is the day before the July 4 holiday and everyone will be off having a picnic.

The war news seems to be good across the board. Iran will allow inspectors if and when the deal gets done. The Omanis are not planning a toll. Oil is leaving the Strait, if still in smallish amounts but enough to send the price of oil to pre-war levels. We sneered at trading on wishful thinking but some of the wishes are coming true, or at least it seems that way now.

From a chart perspective, this is an odd market. Not unprecedented, but usually a long series on one-way moves is inspired by a major Event. This time the major event is, apparently. … Warsh. The US has the growth. It has innovation and capital investment. It has the high yield. It has a boomy/bubbly stock market. And now it has a hawkish Fed chief who says there is no doubt the Fed will tackle inflation. The Japanese MoF is wise enough not to fight a tidal wave like this.

The oil price story is decidedly weird. We are back to pre-war pricing, reversing a rise of about 70%, as Reuters’ Dolan notes. But “rate-hike expectations have barely moved.” Yields are not retreating, either. One possible explanation is from Apollo chief economist Slok, who points out “the market narrative has flipped from seeing oil prices as a ​direct inflation driver to one where lower energy costs could fuel demand in an already hot economy. ‘The market narrative now suggests that the reopening ​of the Strait of Hormuz will further overheat the economy.’"

We already had overheating before the war, prominently in certain tech-related areas, some of which were showering down higher utility prices on consumers. Tomorrow we get PCE data and the inflation that goes with it. Core is expected up to 3.4%. Dolan points out this data from before the Iran deal so can’t reflect that.

Bottom line, this narrative means a happy investment environment “But whether it shifts the dial back 180 degrees for central banks is a different question.

“Looking at the Fed, ​the added complication for markets ⁠will be Warsh's wish to reduce guidance and signaling on future policy direction - something that may make markets more jumpy as the remainder of the year unfolds and require some risk premium. Morgan Stanley's team, for one, expects this will mean higher market sensitivity to incoming economic data surprises, which argues for higher short-dated fixed income volatility ahead.

“More clarity on energy prices may just be replaced by fog around everything else.”

Consumers may still be spending like drunken sailors, but keep in mind that it’s the richest quartile doing the spending. The lower groups are struggling. Food prices are still rising and not going to retreat any time soon.

Forecast

Under the circumstances, it’s too soon to say the dollar rally is about to end. The dollar is seriously overbought and the move will end, but not just yet.

We are nearing month-end and the big July 4 weekend in the US. We have seen big moves from abroad on this holiday at least once before… MoF intervention, maybe, while market is thin. The biggest oversold currency may well be the pound, although there is nothing in history to say it’s the most oversold that triggers a wider consolidation.

The consensus seems to be we need to wait for September to see if the Fed might want to cut rather than hike. The CME betting still favors hikes and in the absence of forward guidance, the guessing game is just beginning. Sentiment shifting to a cut is about the only thing that would have a lasting effect on the dollar, and nobody is forecasting that, even the Warsh critics. It’s a long time to September and we expect some kind of dollar retreat long before then—no straight lines in FX—but we lack ideas on what would trigger it. Caution is called for.