The fly in the ointment causes the yields to drop


We wrote yesterday that Fed chief Powell is unlikely to say anything different, and it was the right move. We have to wait for a cutback announcement for at least one more meeting and probably two, and then the rollback implementation in the second, third, or fourth meeting that follows. That takes us through November or maybe December. This is not a new story. Why has it not already been evaluated in various markets? Well it was – the fall in the 10 year yield, the rise in the euro / dollar.

Today is another big problem, the GDP. As we wrote earlier, the estimates are everywhere. Today, the WSJ is proposing its survey, 8.4% annualized, past pre-pandemic levels. Bloomberg has 8.5%, but we are dismayed that the Atlanta Fed only has 6.4%, based on a decline in private investment. The Atlanta Fed almost always overshoots, so an undershoot is odd.

We also get the usual Thursday jobless claims, which is arguably more important as this is the primary focus of the Fed. Trading Economics has a succinct (albeit somewhat formal) report: “Initial jobless claims probably fell last week to 380,000, not far from a 16-month low of 368,000 reached at the end of June, underscoring a recovery rapid growth in the US economy. . Yet the level of claims is still more than double the pre-pandemic average, despite record job openings and increased attempts by many companies to add staff. The total number of claimants is expected to decline further in the coming weeks, due to the phasing out of enhanced federal unemployment benefits in many states ahead of the official September expiration date, and as schools reopen and the demand during the summer resumes. “

What if GDP disappoints the Atlanta Fed’s 6.4% drop (remember Morgan Stanley’s 11 +%) but initial jobless claims collapse well below of the 350.00 expected approximately? Logically, traders should incorporate an early cut, which is favorable to the dollar. Or how about the reverse, a gigantic GDP at 10-12% but claiming the same or more? It’s hard to see this as not promising more jobs in the very near future which we have been anticipating from the start for September / October. Always favorable to the dollar.

The fly in the ointment is falling returns, including real returns, while inflation expectations rise, compounding negative real returns. We just don’t understand how yields can plummet – meaning buyers are plentiful – when GDP could hit 11%. Growth of this magnitude, even if it is a one-time shock, always suggests inflation due to both too much demand and too little supply. Even Powell said inflation may be bigger and longer than expected last time around. So why are inflation expectations sidelined in favor of a fear trade? Perhaps this is a marginal discourse on a more lasting recession to come.

Then we have to consider that it is almost the end of the month and we have to expect some positional adjustments. This probably means reducing long positions in the dollar, which may have helped the dollar fall. At first glance, the dollar is in a bad spot, but longer term (by what we mean Jackson Hole / September) sentiment will return to the United States pulling the world out of the pandemic-induced recession. Yields should pick up, if not for a really interesting real return. The one scary thing, and not easy to explain, is the dropping yields so badly. Various efforts don’t really make a compelling case. We see from time to time that yields and the dollar have largely decoupled a few years ago, but it looks like the coupling is back. Perhaps the new calming noises from China overnight will reduce anxiety.

Until the anxiety (from whatever source) is reduced, we are stuck in a correction.

Funny little info: The purchasing power parity theory argues that currencies should move to balance prices among economies. This does not work, of course, for a dozen reasons, including choosing a representative basket of products, the difference in taste, etc. But decades ago, The Economist crafted what it calls a “tongue-in-cheek” comparison of Big Mac prices around the world. Sometimes it also has predictive value. The table this time shows the Swiss franc overvalued (it always has been), the euro and the pound a little undervalued, and the yen more undervalued. Just as the Treasury has judged, the Vietnamese dong is undervalued, and the ruble even more.


This is an excerpt from “The Rockefeller Morning Briefing”, which is much larger (about 10 pages). The Briefing has been published daily for over 25 years and represents experienced analysis and insight. The report offers in-depth information and is not intended to guide FX trading. Rockefeller produces other reports (spot and forward) for trading purposes.

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