The key word so far is relief

Today it’s the Dallas Fed, not a market mover, but after that we get a deluge. Jared Bernstein reposts the Bloomberg calendar for this week—a giant week for fresh data. See his comments. We mostly agree. He neglected to insert the ADP private payrolls (Wednesday). In addition, we also have the Aug 1 tariff deadline and a slew of Treasury refunding auctions of 3, 10 and 30 years. Policy meetings by the Banks of Japan and Canada are forecast to deliver no change.

The key word so far is relief. Relief that the economy is not showing signs of inflation or recession. The Atlanta Fed on Friday delivered a Q2 GDP forecast of 2.4%, the same as the week before. Recession? What recession? Okay, so GDP will slide toward 2% by year-end, according to many forecasts. That’s not nice but not recession, either.  See the Bloomberg chart. It has GDP at only about 1.5% by year-end and higher in 2026, meaning the economy is so big and resilient it can overcome tariffs. For the world, not so good. Bloomberg has a podcast saying the hit to the global economy will be $2 trillion.

Expect relief on the PCE and payrolls data, too. Not great, probably, but not scary, either. The loss of immigrant labor will not be visible until year-end, aside from crops rotting in the fields. And the Fed will stand pat this week, so relief on getting that out of the way.

Finally, relief that the tariff problem is mostly over.  We know most of the big numbers for the big names, with China pending. Companies will feel relief that now they can plan. Consumers will feel relief that they know prices will rise, so can stock up and hunker down for the worse to come. Even the government can feel relief now that courts are allowing firings and cost cutting. Yes, government workers now know they must go look for a new job and reconfigure their home budgets.

And nobody likes relief more than the stock market. Sure, earnings are going to suffer but that’s later. Now that everyone knows more or less where they stand and what they are facing, equity indices should rally.

Here’s the problem: everyone is so anxious for relief that they are neglecting to notice hardly any of is true. We do not have tariff deals. We have frameworks for deals and a lot more talks to come. It’s a relief that we got a US-EU deal but actually, it’s not a done deal but a framework for a deal, and the French don’t like it.

Off on the side is what Europe is going to do, including what it’s going to do with China. The EC wants China to break ties with Russia (on whom it just imposed the 18th new sanctions rules, none of which has yet worked). But without new capital of its own, Europe wouldn’t mind some inflows. As for the US-EU relationship, Europe can still start a full-core trade war with its retaliation measures if there is enough pushback against the framework. This is uncertainty in spades and trade relief is not justified.

A big uncertainty still remaining is whether the Fed is right to wait-and-see if inflation appears in Q3 or maybe not until Q4. How about Q1 2026? If the economy is still fairly hot (consumption, wage increases), why cut? If we have actual evidence of a slowdown, why not cut and get it over with? The Fed appears to be dithering. We’d like to see the data forecasts for critical numbers from the Fed’s PhD’s and hear the pro-and-con arguments. The Fed doesn’t disclose those things for fear of stoking a fire off one or two points, and rightly so. The press likes one-phrase headlines. Maybe disclose only to a few top economists at a few big news outlets? Ah, but freedom of the press.

The other big uncertainty still remaining is what destructive nonsense Trump is going to pull next. He needs the spotlight. He needs to distract attention from Epstein and from cruelty to immigrants. He will do something awful, probably illegal, corrupt and upsetting--tigers and stripes. But financial markets are practiced at ignoring politics.

Forecast: The dollar is managing a comeback of sorts, having already tanked by about 10% year-to-date. This is based on the relief mentioned above plus unloading overbought positions in other currencies, notably the pound. Relief is the key. It should drive the dollar up. See the key levels for the euro in the Euro Chart section above.

It will take a Shock to change things. Short-run, we don’t know what that might be.  Failure of the trade deal framework with the EU, maybe. We don’t expect China to walk away. After all, it paid tribute to the barbarians hordes of the steppes thousands of years ago and avoided outright war for centuries.

Longer run, like Q4, we expect crises to emerge. Earnings forecasts will be falling. Some will declare bankruptcy, with the potential for some small bank or two to fail and the government screw up fixing it, unlike the competent and efficient FDIC rescues of the past. The stock market will show signs of stress, which some see already because the only real gainers are the high-tech names. Inflation will be higher, even if it hasn’t hit consumer spending by year-end. And uncertainty returns. That means the dollar falls and gold goes up. When, we can’t say.

Tidbit: Tom McClellan is a long-time chartist with original ideas and lots of street cred (his parents invented the McClellan oscillator). Here is his fascinating chart of the 2-year yield vs. Fed funds. He says the Fed’s PhDs are behind the curve but in the end, the Fed takes direction the 2-year tells them to take.

Now it’s saying “As of July 25, the Fed Funds target rate of 4.375% is 0.44 percentage points too high, according to the 2-year yield.  So the FOMC at its July 30-31 meeting could make a quarter point cut, and they would still be "tight".

“We have seen other times like early 2022 when the Fed was slow to hike rates, and had to scramble to catch up to where the 2-year yields had already gone.

“Chairman Jerome Powell likes to assert that the FOMC is "data dependent" in terms of setting its interest rate policy.  That may be true, but they are depending on the wrong data.  They need to start inviting Professor Two to the Jackson Hole Conference, and listen more closely to its messages.”

Tidbit: The Economist (July 26 issue) has a story on the dollar that points out the correlation of the dollar with interest rates fell apart, then returned, but not in full. The safe-haven aspect took a hit, too. It reports Steven Kamin at the American Enterprise Institute proposes a link between the VIX and the dollar index as the measure of dollar vulnerability.

The AEI is a climate change denier, among other crimes, but it’s true that we lack a way to measure safe-haven status. It’s not true that the stock market measures foreign appetite or revulsion to the US. There was no measurable exodus from the S&P simultaneous with stomach-turning Trump announcements. We get some inflow/outflow data, but not daily. Instead, safe haven status is visible in the form of the Treasury yields and auctions.

Fun Tidbit: Refusing to be bullied or impressed: the Scots diss Trump. 

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