While the Fed is sure to cut this week, it’s not at all clear that the Bank of Japan will hike

This is a busy week. We have the Fed meeting plus meetings by the Bank of Canada and Bank of Japan, also on Wednesday and the ECB on Thursday. Trump visits Japan and some other Asian countries plus a sidelines talk with Chinese Pres Xi in Seoul on Thursday. Friday is the end of the tariff pause for China and tariffs resume the next day…  Nov 2 is when the US changes the clocks back (Europe does it today). Next week (Nov 6), it’s the Bank of England.

Despite the potential for fireworks, it could be very calm. It’s not in Trump’s best interests to do anything other than make a deal with China, the biggest trade issue of all. Several analysts believe China had been setting the rare earths trap for a very long time and Trump has walked right into it. See the Tidbit below (courtesy of a Reader).

While the Fed is sure to cut this week, it’s not at all clear that the Bank of Japan will hike, at least not this time, and what about the Bank of Canada? Theoretically, a new 10% Trump tariff is not relevant to a central bank. On the chart, the USD/CAD is wobbling between a buy and a sell. MACD points to a sell and the close is under the short-term moving average, but the short-term moving average remains above the longer one. Friday had a dollar spike higher on the Trump temper tantrum and the close is over the open, but so far it looks like the dollar is sliding downhill on the assumption Trump will TACO. This is the market voting.

Trump resents the TACO term and may delay changing his mind. The Canadian economy really does need a US trade deal but as far as we know, Trump cannot override any treaty and the USMCA treaty is still in place. Does delay change the BoC’s mind? Maybe. But remember, PM Carney is far smarter than Trump and economically literate vs. Trumpian total ignorance. We put our ten dollars on Carney and it looks like the market is doing it, too. The market consensus seems to be the BoC will cut, but the currency is not reflecting that, although perhaps we will get “sell the news.”

China Trade Tidbit: “What makes Trump’s miscalculation more remarkable is that Beijing has never made much secret of what it was trying to achieve. As far back as 1992, Deng Xiaoping had identified the global strategic advantage that China’s bountiful rare earths deposits might confer on the country, famously declaring on a visit to Inner Mongolia: ‘the Middle East has oil, China has rare earths.’”

It's a longish article but worth the time. Here’s the last para: “But no amount of bravado on the part of Trump and Bessent can hide the fact that it will be years - perhaps a decade - before the West can fully wean itself off its reliance on China’s rare earths. That gives Beijing powerful leverage which it clearly intends to exploit as it seeks to extend its lead in technologies of the future and to prevent other countries joining an anti-China coalition. No wonder Trump is rattled. What a tragedy that he did not see where his coercive tactics were likely to lead before he launched the world’s dumbest trade war.”

Forecast

To the extent the dollar tracks the 10-year—and it has been a rocky road this year—the seeming steady inflation rate favors a soft yield, perhaps even back below the 4% it has been flirting with. This means a softer dollar, too, with a push from risk-on sentiment arising from the seeming trade war fixes. Risk on favors equities, too, and disfavors gold. We shall see how long it lasts.

Tidbit: Remember we will get a revised Atlanta Fed GDPNow on Monday, Oct 27. The last one (Oct 17) had Q3 at 3.9%. This robustness has been the primary justification for dollar -buying, even if usually a strong GDP suggests no rate cuts, while this time we expect two. Go figure.

Tidbit: Mish has a terrific chart showing that “For an entire year the Fed has been above its 2.0 percent inflation target in nine of nine inflation measures.”

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