Nobody is facing the elephant in the room: Energy prices

Outlook:  We get PPI in the US today and apparently some folks are looking forward to a nice bump down. We also get the usual Thursday jobless claims, not likely an FX factor.

A slow news day offers the opportunity to imagine big-picture scenarios. They would have to include that the UK avoided recession because the government stepped up with massive spending, even if it was managed sometimes in a cack-handed way (those subsidies for energy costs). The eurozone has a hawkish ECB chief (“we’re not done yet”) but doves keep stealing headlines.

And nobody is facing the elephant in the room, energy prices. We got one sad set of comments from a German energy company saying the crisis is not over and higher prices are all too likely later this year and into next winter, but only Bloomberg reported it and that as almost an aside. We need to acknowledge that falling inflation now depends entirely on energy prices staying down.

It might be short-sighted, but it seems the major problems all lie on this side fo the Atlantic. It’s a little weird for the dollar to be correcting upward when inflation is still more than double the Fed target, a credit crunch is coming and the US faces default because of unbelievably stupid people in Congress. But inflation’s decent trend down does foster what the press names “investor confidence,” presumably in the Fed, even if those investors are betting against the Fed’s “higher for longer” assessment.

The CME FedWatch tool shows a 90.4% probability of the same Fed funds rate of 5-5.25% by the time of the June meeting. That falls to 56.3% by July, 23.8% by Sept and 0.1% by the December meeting. On those later dates, the bettors expect the Fed to cut.

The US has other problems not directly related to finance but still things that should cut sharply into the US reputation, including a hideous crisis at the Mexican border with armed Texas National Guards lining the US bank of the Rio Grande to face down and turn back migrants. We also have 200 mass shootings so far this year but Republican politicians refusing to entertain legislation to control guns, despite over 85% of voters in both parties saying it’s what they want. And that’s on a par with the 85% or so who favor allowing women to control their own reproductive health care. In short, politicians who are disregarding the will of the people and not just politicians—the Supreme Court, too. At least this time we are not fighting an unpopular war.

The key issue remains the debt ceiling problem. We’d love to hear what the G7 finance ministers and central bank chiefs are talking about at the G7 meeting today. There are solutions, ranging from the 14th Amendment, the last-ditch Dem bill in the house, and the trillion-dollar platinum coin gimmick, all considered second-rate by TreasSec Yellen. The 1-month T-bill return remains wildly elevated.

It's hard not to see the dollar gains as a function of rising anxiety and risk aversion, ironic when the risks are mostly US-generated. We can throw in the election in Turkey, US-China tension and the mysterious oil/Russia situation, too. We had the same market response when the former president was doing irrational and unfounded things.

Forecast: The dollar is the beneficiary of anxiety and uncertainty, so that it can go up alongside short-term rates even as the longer yields like the 10-year go down. We have to expect that when the debt ceiling issue is resolved—and it’s unthinkable that the US will default—the dollar loses some shine. In other words, this is probably not a cyclical dollar corrective recovery but an event-driven one. The euro dip is still a dip, not a reversal. The rising yen is still not all that impressive and at about 134.45, far from the previous dollar/yen high at 137.70 from early May or the low at 130 from March 24. If we have a sell euro signal and a sell dollar/yen signal, it might seem logical to head for the euro/yen cross. Yes. The B band bottom lies at 144.64 and the channel bottom at 144.05 vs. the quote at 6:30 am at 147.04. 

Inflation Details: The New York Fed’s “underlying inflation gauge” (UIG) comes in under the headline and seems a lot more friendly. Instead of 4.9%, it gets 4.0% with the “prices-only version” at a lovely 3.4%. Trend inflation is in a range of 3.4% to 4%.

The Cleveland Fed has core PCE, supposedly what the Fed cares the most about, at 4.65% and not changing in May at all. It’s the second table that contains the goodies. For Q2, CPI will be 3.11% with core at 5.16%. PCE will be even better, 2.8% with core at 4.25%. If we like headline numbers and to hell with core, by end-June the crowds will be agitating for that pivot.

US Politics: Cable news channel CNN ran a “town hall” that wasn’t—the audience was carefully picked to favor Maga stances—for Trump to answer questions. It was a screaming disaster, with no one challenging ridiculous lies (Dems favor killing babies the minute they are born) and obnoxious remarks (Carroll lied, when it’s Trump who was convicted of defamation just a few days before). Trump also claimed the US has run out of ammunition, having sent it all to Ukraine.

Sane people had to turn it off fairly quickly, but not before hearing Trump say the US is going to default sooner or later, so we might as well do it now. He doesn’t read and knows nothing about the Constitution, which says the full faith and credit of the US will never be questioned. It’s rich for him to call for massive budget cuts when a good 25% of the total current deficit occurred on his watch.

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