The all-important data this week is core PCE
Outlook
This week we get US durables, German CPI and eurozone harmonized CPI, and the biggie, US PCE inflation, along with another Q2 GDP revision.
The all-important data is core PCE, even though technically the Fed’s official position is to care the most about headline PCE, not the core. Never mind—the market settled on core, so core it is. See the chart from Trading Economics. The site points out that core rose 0.2% in July when 0.1% had been forecast and on the year-over-year basis, core was unchanged at 2.6%. The current consensus forecast is for no change, so still 2.6%.
We see nothing here to justify Mr. Powell’s sudden new embrace of rate cuts. A single cut in September, okay. But to forecast multiple cuts off this data seems unjustified.
Ahead of his speech at Jackson Hole on Friday, Fed chief Powell said “the time has come,” a phrase now heard around the world’s financial capitals.
Mr. Powell changed his tune dramatically and gave a speech that nobody expected (and the 100-point crowd adored). The title was “Reassessing the Effectiveness and Transmission of Monetary Policy” and an opportunity for Powell to congratulate the Fed for bringing down inflation without crashing the economy. It was a sop to the stock market, among other things. Some said the tone was self-serving. We say the content was self-serving, especially the part about inflation falling because people have faith in the Fed. Poppycock.
One of the biggest issues was Powell blaming supply chains and the cost of energy as inflation causes, without mentioning QE. And that QE was the most money ever pumped into an economy in a short time, ever.
He also said inflation moderated because people saw the Fed as credible. Yeah, sure, and that‘s why gold and bitcoin did so well. In practice, surveys show the average citizen has the least amount of confidence in government today than in years past. Maybe Powell doesn’t think of the Fed as being part of the government. Citizen surveys on inflation expectations are not useful because citizens do not understand econmics, but do believe whatever they last read on social media, so famous for accuracy and context.
We are appalled. This speech is not consistent with normal Fed behavior. The last time we were so shocked by the Fed, Greenspan was the chief (“if you understood me, I must have misspoken” and there’s no point in raising margin requirements because the big traders can so easily comply.
The day before, the dollar regained ground against all the other currencies and by enough to indicate a decent probability of Powell’s usual caution, while affirming September. That turned out to be head-fake and it’s cold comfort that we are not alone in having gotten it wrong.
Is it really true that employment is now the primary focus over inflation? We recall several comments from past Fed minutes and speeches indicating little to no worry about jobs. Now Powell says jobs are back to pre-pandemic levels and he won’t let them fall anymore. Well, sort of true but not relevant since we still don’t have the final shake-out from the pandemic and the gigantic demographic changes (chiefly baby boomers still retiring and dying).
We never subscribe to conspiracy theories but we can bet the right will see this as a thumb on the scales to favor the Dems. Powell professed himself a Republican before being appointed, by the way.
The biggest worry is whether the last mile is going to be contaminated with sticky prices or some other misery from left field, and that includes the presidential election on Nov 5. Looking ahead to 2025 when we have a new president and new policies, the Fed remains the same under Harris but Trump has already said the president can tamper with the Fed however he likes, including replacing everyone with his lackeys.
Forecast: Mr. Powell’s remarks did not rein in the 100-pointers, and that was a big, fat dollar-negative, as feared.
The fact remains that 99% of FX traders use technical indicators and they can all see that the dollar is deeply oversold and the other currencies are overbought. At some point this is going to scare them and they will back off. Backing off can be slow and gradual, or it can be fast and hard—a true rout. We guess rout is more likely.
The traders who are betting on 50 bp in September are failing to notice that the stock market could easily misinterpret such a big move as meaning the Fed is scared of a hard landing. Stock markets wouldn’t like that. The Fed has no mandate to keep the stock market happy, but good messaging is one of its top by-laws. We expect some fresh talk about data-dependency and caution once the Sept hike is fully baked in
Political Tidbit: The show-biz part is never really over until all the votes are in, but entertainer Trump can’t get a grip on being sidelined by a woman, and a black one, at that. His ad hominem attacks must turn off some independents. The Washington Post reports Trump may back out of the September debate.
The latest Silver Bulletin has Harris ahead nationally at 48.8 vs. 44.8 for Trump, a hair outside the margin of error. The only states of the big nine where Trump leads are Georgia and Florida.
As always, polls do not reliably predict election outcomes. Trump had less than a 30% probability of winning in 2016, but win he did. The best thing about polls these days is that they drive Trump nuts. We also do not know exactly what he will do to try to overcome a loss, starting with front-loading cheaters in local vote counting rooms, claiming voter fraud all over the place and taking claims to court, and perhaps literally trying for a civil war. It’s not clear that the same militias and white supremacists will be on hand—they can see the nearly one thousand in jail for the last insurrection.
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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