Warsh prefers ‘trimmed averages”
Outlook
Today we get the minutes of the Sept Fed policy meeting. It was unanimous for a hike but now that NY Fed Williams has doubts and infected others, not useful for the upcoming meeting in 21 days. The CME probability of a hike is a mere 21.6%.
A few weeks ago, The Economist had an article about Fed chair Burns not liking inflation numbers in the early 1970’s and chopping out those he didn’t like. That led to “core,” which we always thought was stupid. Then there are other measures of “underlying” inflation. New Fed chief Warsh prefers ‘trimmed averages.”
The best is from the Cleveland Fed, whose medians for both CPI and PCE are not bad at forecasting. Warsh wants more fiddling…. Here are the tables from yesterday. We see the PCE nowcast rising to 3.69% in Oct from 3.56% in Sept. On the quarterly basis, PCE goes from 1.92% in Q3 to 3.84% in Q4. Eeek.
So much for the elephant in the room touted by the administration (3-month PCE core at only 2.05% in August). Rear-view mirror. The bond market is not nuts.
The NY Fed has an estimate for the 10-year "term premium" at 96 bp, the highest in12 years. To be rough, you take inflation and add the premium, so 3.69 + 0.96 = 4.65%. Or 3.84 + 0.96 = 4.70%. Instead we have over 5.3%. No, we don’t understand it either.
Forecast
Just when the dollar was getting overdue for a correction, along came France and its hairy politics and ended that. We admire the French for public participation—remember 1968 and 1972—but it has an outsized effect on markets. We see no reason for it not to do that again. It will help the dollar—and gold.
Meanwhile, the war is going on as before. The US took more damage than reported at first, but it’s a side story. We have a genuine shortage of true news and perspective—instead we are getting little but polls and analysis of the midterms, now less than a month away. Realistically, the election is not going to change war or Trump, just more loudly.
The key point to remember when the dollar looks so stretched—the bond market is not nuts.
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Author
Barbara Rockefeller
Rockefeller Treasury Services, Inc.
Experience Before founding Rockefeller Treasury, Barbara worked at Citibank and other banks as a risk manager, new product developer (Cititrend), FX trader, advisor and loan officer. Miss Rockefeller is engaged to perform FX-relat
