Unless Yellen surprises, keep your powder dry

Outlook:

We get a lot of US data today, including durables and the Markit service sector PMI, plus the usual unemployment claims and one of the Feds, this time the Kansas City manufacturing survey. We also have to digest yesterday's housing data—after all, housing was one of the few bright spots in the economy and a major cause of the slump in existing home sales is—price inflation.

But rationality is in short supply these days. Look at oil. Nobody believes the output-freeze camp meeting on the sidelines of the International Energy Forum (Sept. 26-28) will go anywhere. Output from OPEC names including Saudi Arabia is at record highs. And even if the discontented got a freeze, so what? Other non-OPEC producers would just get the windfall. So why did prices spike on the output freeze story? Nobody knows. What they do know is that oil at $100 (2014) is wrong and oil at $28 (2015) is wrong, too. Many are struggling to come up with the right "rebalancing" number.

We see the same kind of disconnect in various market prices, including stock markets, falling on the expectation that Fed chief Yellen will promise a Sept rate hike tomorrow at Jackson Hole. Nobody believes for a second that she will do any such thing. Some analysts think she will sound vaguely hawkish on the basis that two top Feds (Fischer and Dudley) were hawkish recently, but it would be smarter to worry about how deep into the economics soup Yellen will try to carry us, confusing everyone with talk of the "neutral rate," not to mention "reform" of central banking more broadly.

Nobody is worried one whit that she might mention the possibility of negative rates in the US. This is probably a mistake—we should be as worried about that as about a hint of a Sept hike. After all, her topic is the Fed's "toolkit" and negative rates are presumably in there somewhere. Just wait—by Friday night somebody will be talking about negative rates. Either Yellen neglects to mention the subject, which will be news in its own right, or she does and observers don't like it.

In the absence of a hawkish stance from Yellen, does that mean equities will rally after Jackson Hole? Probably not. Linking stock market moves to Yellen is silly when we should expect nothing remotely affecting equities from her talk of Fed tools. There might be some more profit-taking to go, not to mention a re-think of P/E's, dividend yield and the like. One thing is for sure—everyone will be glued to Bloomberg TV tomorrow at 10 am. A cute tidbit—the Feds including Yellen are meeting with Reform-the-Fed activists, who seem to have entirely unrealistic and uneducated views of what the Fed is intended to achieve.

And here's another disconnect—the dollar is down while the odds of a rate hike this year are up. According to Bloomberg, the odds of a rate rise by the end of the year are 53% today, up a tad from 51% on Monday. Bloomberg says this is the equivalent of a coin flip, disclosing its bias. We say 50% is the coin flip number, not 53%.

It's not exactly a silly season, but close. We continue to be gob-smacked by Japan and Germany having a 10-year yield of about the same. Germany has -0.078 and Japan, -0.085%. We can't wrap our minds around Japan and Germany having the same or nearly the same 10-year yield when their economies and prospects are so divergent. To make matters worse, analysts are fairly confident the ECB will goose activity a little more in the fall, perhaps late September, while nobody has a clue what Japan will do. One theory is that all Japan will do is change its inflation target. Both currencies "should" be far lower than they are against currencies with an actual yield. Does "blame the carry-traders" suffice? We don't know.

Tomorrow's Jackson Hole speech is the major risk event on the horizon, but we are reading far too much into it. And as we wrote on Monday, we have to wait for after Labor Day (Sept 5) to start getting the real action. In the meanwhile, unless Yellen surprises, keep your powder dry.

Tidbit: In one of the strangest political developments we have ever seen, disgraced Independent Party leader Nigel Farage has crossed the Atlantic to join the Trump campaign, having previously become a writer at the invented-facts Breitbart website. Farage joins the disgraced ex-Fox misogynist Roger Ailes, kicked out for nasty and illegal behavior to women.

Farage succeeded in getting Brexit in large part by scaring voters with the thought of masses of darkskinned refugees entering Britain. If it were masses of white-skinned refugees from (say) Canada or even the US, it would not have worked. So three guesses which of Trump's "policy" planks he will be emphasizing? The strangest thing of all is that Trump rolled Farage out in Mississippi.

Okay, so we have Trump's murky links to Russia, hiring a woman-harrasser and using a foreign racist, plus an utterly unjustified withholding of tax returns, and these are on top of an incoherent immigration and tax "policy" stance that changes literally every day. Why on earth are we so afraid of this guy perhaps actually winning? Because we have more ignorant red-necks than we acknowledge and a majority of voters really do not like Clinton.