Today the only news is the Fed decision

Outlook

Today the only news is the Fed decision. Once some Big Shots and trusted analysts had jumped on board (we picked Sahm, Authers, Dudley but plenty of others), we capitulated.

The convincing argument is the Fed can do 50 because it can—the data allows it. Never mind that employment s almost certainly going to pick up in Q4—the chart is discouraging, and Powell had said the labor market is the new top dog. Frankly, this is more an interpretive choice than a clarion call, but never mind.

Yesterday traders started getting cautious and it was visible on the hourly FX charts. By 9 am in New York, we already saw some sell signals. This always happens ahead of the Fed, if a bit early this time and indicative of Auther’s roulette metaphor. 

Then a bombshell—the Atlanta Fed GDPNow, calling for Q3 growth at 3.0%, from 2.5% last week. Growth implies inflation by definition and while the Atlanta Fed usually overshoots, a 3% nowcast for GDP has to give Main Fed cause to think again. This comes on top of quite good retail sales and industrial production earlier in the day.

The futures bettors don’t care about a few bits of economic data. The CME FedWatch tool shows 63% expect a 50 bp cut when that was 14% a week ago.

We say the political stuff has zero effect on the Fed. That means Sen Warren and pals calling for 75 bp and Trump threatening mayhem and warning the Fed off any cut at all.

A final factor is the new dot-plot, expected to show decent growth, including the labor market, and inflation under control, so that by the end of next year, actual Fed funds are a whole lot closer to what the futures market is saying. Right now the discrepancy is pretty big, with futures as much as 2% below the current dot—plot expectation.

We can add as a footnote that some reporters is sure to ask Powell at the press conference whether he planted the 50 bp story at the WSJ/FT, or at least approved it, but it’s a silly question—no Fed chief would ever admit such a thing.

Now that we have talked this subject to death, we need to consider lifer after the Fed. In the nick of time, we get the ECR Research essay on just that subject. Here are some ideas: “Relatively high US productivity growth, declining commodity prices, uncertainty about the US election and deflation in China are factors that are keeping inflation under downward pressure. This basically gives central banks considerable scope for rate cuts. However, this has been largely priced in by the markets. In addition, loose monetary conditions, rising house prices and an improvement in purchasing power are factors that could result in ongoing economic growth.

“As long as this is the case, long-term interest rates are unlikely to decline much further and, on balance, they will rise in the coming months.” We are excluding the US recession scenario forecast.

“Long-term interest rates are already pricing in a sharp decline in interest rates (a decline of 2.25-2.5 percentage points in total through the end of next year). As long as the economy continues to grow at its current pace - which the data suggest - we will likely see a correction to this, and two-year and 10-year government bond yields could easily rise to 4% in this case.

Two-year German government bond yields will probably fluctuate in a range of 2-2.75% in the coming weeks or months before ultimately declining to 1.5% or lower. 10-year German yields will probably fluctuate in a range of 1.75-2.5% over the next few months, after which they will decline towards 1.75% once recession fears intensify.”

There’s another twelve pages but we think the important point is a classical financial one—US yields may drop more into year-end and then rise again to around 4%, while the German Bund will be headed for 1.75% in Q1. This would give the US a yield differential advantage of 2.25% and that should be dollar-supportive. 

See the ECR table of rate forecasts by 60 economists. The US 10 year could go as high at 5%. The highest the Bund gets is 2.60%. We have not seen these tables before and they are much appreciated. ECR warns they get updated every month, meaning not written in stone. Economists are allowed to change their minds.

Forecast

The dollar is going to jump around in both directions no matter what decision the Fed announces. You can dream up a dozen potential outcomes and series of responses, and none of them will be right.

We think the dollar falls on the announcement and approaches recent lows, but then profit-taking sets in, along with acknowledgement the dollar is oversold and, given the new dot-plot, in better shape economically than any other economy. The country with the best GDP growth gets the stronger currency—in the long run. Keynes points out that in the long run we are all dead.

This is only one idea and we can’t assign a probability to it. Again, economists and poker players have a different approach to probability. 

Political Tidbit: Trump is claiming the assassination attempt last weekend was the fault of the Dems. No. The guy was motivated by an obsession with Ukraine winning the war against Russia. He tried to get anti-Taliban Afghani soldiers into the fray, among many other efforts, including a book, “Ukraine’s Unwinnable War.” He flew to Ukraine but was rejected from the army there because of his age. Was also motivated by Jan 6. 

This is a patriotic guy with a strong conscience who is trying to think outside the box, and only a little nuts. We know some top-drawer analysts only a whisker less crazy.

Separately, a new blockbuster book is out about Trump’s performance before entering politics. It’s titled Lucky Loser and a bombshell. At military school, one step from reform school, Trump was mean, violent and at one point demoted from a leadership position for lack of management ability. He was on the baseball team. “The results show Donald hit safely only once in eighteen at bats, a stunningly poor batting average of 0.055. Donald would later claim to have been the best high school baseball player in the state.”

Trump’s father paid to have him lead the school in the St. Patrick’s Day parade, offensive to the real top guys. His claim to have “elite” status was disputed by all the other students. He borrowed another cadets’ jacket for a photo in order to pretend he had won those medals. At graduation, of hundreds of medals awarded, Trump got none. Trump later claimed he had all the military training it’s possible to get and faked bone spurs, validated by a doctor renting space from Trump Senior, to dodge the draft.

Another disclosure: Trump was paid to host the Apprentice TV show and was paid a salary, but he got rich by sharing 50% of the ad placement prices paid by big advertisers once the show took off. He made millions from that alone, a good thing since he was bankrupt at the time (one of six bankruptcies…).

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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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