We wonder if the central issue isn’t the economies, but rather the US rate outlook

Outlook

Today we get the balance of trade, the final S&P PMI’s and the ISM services PMI. All morning it will be PMI’s from the UK, eurozone, France and Germany.

We wonder if the central issue isn’t the economies, but rather the US rate outlook, forewarned by the bond yields. As noted yesterday, the probability of a Sept rate cut is well over 90%--unless the incoming inflation data squashes that. The majority still thinks the Fed will chicken out. We now have a regional Fed (San Francisco) wondering if the soft labor market doesn’t call for a cut.

A second issue is how long the stock market can go along with the charade that tariffs don’t matter. Well, as long as earnings keep coming in gangbusters.

Probably the upshot of both quandaries is that market responses to bad news always take a while to grab investors and traders by the throat. It doesn’t mean the crisis trigger was on an unloaded gun. The gun is indeed loaded.

Forecast

We have yet to see the follow-though on the dollar reversal as the big traders and big institutions fiddle with their outright positions and hedges. There might even be some contrarians in the mix, those who think the Fed will stand pat in Sept. But the near-universal rate cut expectation removes dollar support and we expect the euro and others to resume their upmove. Exceptions may be Canada/Mexico and the UK. 

Tidbit: Canadian economist Romanchuk (Substack):

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