The important mover and shaker will be how many Fed side with the doves tomorrow

Outlook

We get a ton of releases today, some expected to be quite grim (housing) and some others probably pretty good (JOLTS). We suspect consumer confidence will rebound some more, which is dollar-favorable. We had a lot of Chicken Littles saying “the sky is falling, the sky is falling.” Well, it’s not, and despite most consumers knowing nothing about the real economy, they have been showing they are not afraid. This is something the Fed notices.

But it’s likely the important mover and shaker will be how many Feds side with the doves tomorrow. The market suspects at least two will want a cut right now. If it turns out to be three or more, the markets will be upset. The equity gang will like the idea of a cut but not that there is dissent at the Fed.

Not to make a mountain out of a molehill, but the US stock indices following the Europeans yesterday is highly unusual. It also suggests Wall Street knows perfectly well that total relief is not realistic. Even if Trump leaves tariffs at 15% for Europe, this is still a blow to the gut for Europe and nothing for anyone to celebrate.

Besides, none of these trade “deals” are actually done in the legal sense.  Trump is free to feel aggrieved and punish the offender with a different number. In fact, he can be counted on to make changes. So, as noted yesterday, the relief rally is understandable but the relief is not full and complete. We won’t be rid of impulsive changes until the guy leaves office. 

A factor favoring the dollar is the Treasury auction results. Yesterday the 2-year was “well-bid” with 90% of the buyers non-dealers, meaning institutional and retail demand. The Mace News bond analysts writes “Last week, 89% of the competitive bid on the reopened 20Y auction went to non-dealers. This especially noteworthy given less sexy maturity and the fact it was a reopening,” which typically get less attention than the new issues. All this points to foreigners not shunning the top US assets, as the nay-sayers have been expecting. Again, it’s superior supply, liquidity, variety that some remnant of “full faith and credit” over everybody else.

Forecast: The dollar comeback is due to what Reuters names the “tariff risk premium” going down and by a lot. We say it only looks that way and the seeming drop in uncertainty is not real. But on the surface, the tariff war does seem to be ending and that was the primary source of anxiety. The true source is the nature of the president, but never mind. Crisis mentality has been soothed. This suggests that a pushback against the 8-10% drop in the dollar is just beginning. We suspect that this will not be a short-lived relief rally but rather an extended one.

If we draw a classic Fibonacci retracement from the low on Jan 10 to the high on July 1, the 38% retracement lies at 1.1202. The 50% retracement lies at 1.1007. If we take the midpoint, it lies at about 1.1090. Fib retracements are superstitious hooey, but so many traders believe in the idea that it often becomes self-confirming.

We therefore expect a big drop in the euro. The Europeans will like it as an offset to tariffs in export sales to the US. Trump won’t like it because he prefers a weak dollar. Just remember, tigers and stripes, although it’s hard to imagine what Trump can do that would be worse than the tariff war.

Tidbit: Check out the new high in the Nikkei—35 years later.

Tidbit: Check out the new high in the Nikkei—35 years later.

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