Traders aren't convinced the worst from equities is over – They want some guidance from the Fed and from data

Outlook

FX price moves are mostly abnormally small, implying traders are not convinced the worst from equities is over. They also want some guidance, from the Fed and from data. So far the Fed is sticking to the script, with Boston Fed Pres Collins saying it will be appropriate to ease if the data comes in as expected. This is not new. Richmond Fed  Barkin said “I think you have got some time in a healthy economy to figure out whether this is an economy that is gently moving into a normalizing state that will allow you in a steady, deliberate way to normalize rates. Or is this one where you really do have to lean into it.”

Also, firms are “managing headcount through attrition, or they're slowing their hiring, but they're not firing. They aren't laying people off, businesses are just being cautious."

We will probably have to wait for July CPI to be released next week to get a decent FX move. Logically, if the data does confirm the Fed can cut, that should be dollar-negative—even though it should already be fully priced in. What could favor the dollar would be a bigger share of the betting population giving up the 50 bp in Sept narrative.

The CME Fedwatch tool shows 45.5% of bettors expect a 25 bp rate cut in Sept while 54.5% expect 50 bp, meaning a majority. If that reverses and/or the idea of 50 bp in Sept really fades way down, it “should” be dollar favorable.

Blather about an emergency rate cut and as many as 100 points to be cut this year has mostly faded—but not entirely. Again, the reality check indicates this is not how the Fed behaves.

Bloomberg reports “A large majority of economists surveyed see only a quarter-point decrease in interest rates coming in September — a finding that’s at odds with calls from some large Wall Street banks for a jumbo cut at the next meeting.

“Nearly four-fifths of economists surveyed by Bloomberg predict the Federal Reserve will trim rates to a range of 5% to 5.25% at its September 17-18 meeting, with most of the rest predicting a larger reduction. The median forecast shows just 10% odds for a rare move to adjust rates prior to the scheduled gathering.”

So there. But economists are not always right…

Forecast

The charts indicate several pending signal reversals but we are suspicious of them and want confirmation because nerves are still on edge and we are vulnerable to spikes if a Surprise were to come along.

The dollar is under pressure in part because of the exaggerated rate cut narrative. If that abates to normalcy, the dollar “should” get a boost against the euro and pound, if not the yen. The yen is still a work in progress. It took only one comment and not from the BoJ or MoF chief to deliver the shocking reversal. Are we expecting a hold and silence forever now? Seems improbable.

Political Tidbit:  The Trump campaign is foundering and fans now hope for a recession so that he can boast that he knows how to fix it (and only he). This is not to say the gloomsters are biassed, but it does mean the Dems have to talk about what they can and cannot do to fix inflation, with food prices still up in the stratosphere.

The latest IPSO poll has Harris ahead by 42 to 37. The Silver Bulletin has a combined poll outcome of 46.4 Harris, Trump 44.3. He also has a scary piece on conditional probabilities that will set your hair on fire.

Trump gave a largely incoherent and lie-ridden “press conference” in which he said his rally crowds are far bigger than Harris’ and his Jan 6 speech even bigger than Martin Luther King’s “I have a dream” speech. Well, recently Harris had 35,000 and Trump had 15,000 in the same venue, and MLK had 57,000 while Trump had a little over 26,000. Apparently Trump never heard of fact-checking.

Trump also said the US is headed for a 1929-style depression (he means 1930’s) and dangerously close to world war. The economy is as bad as it has ever been.

This is the guy who thinks he knows better than the Fed and the president should have a say in Fed decisions. “"I made a lot of money, I was very successful, and I think I have a better instinct than in many cases, people that would be on the Federal Reserve or the chairman." Well, no. He declared bankruptcy how many times?

We can’t wait for the Sept 10 debate.

Note to Readers: If some things seem strange about the reports, it’s because the malfunctioning of Office 365 was becoming severe, so switched to Windows 11 and the New Outlook. Microsoft forces you to accept their new versions by making the old version work badly and become intolerably frustrating. It’s a sucky way of manipulating the consumer and we hate MS for it. As usual, the changes are not improvements, just confusing and not the seamless structure/format they promise, especially in Outlook. It took 20 minutes to find how to do “bcc” and the Settings gear icon is nowhere where the website says it will be.  It may take a while to get back to normal. Advice welcome. 

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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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