Powell tap-danced around some difficult questions

We watched nearly all of Powell’s testimony. It’s interesting to see what the journalists have selected to report. You hear what you expect to hear, or something. Powell said the Fed expects inflation to rear its ugly head soon and the Fed is not in any hurry to cut rates before the data comes in. The probability of a July 30 rate cut at the CME FedWatch tool didn’t move an inch and remains about 20%. The probability of a Sept cut, however, rose, to 68.8% from 47.7% a month ago. 

To be fair, Powell tap-danced around some difficult questions and did a splendid job rebutting the Congresswoman complaining about mortgage rates and the housing shortage. Powell pointed out that the inflationary effects on building materials and infrastructure are far bigger components of the housing shortage than the mortgage rate. 

Powell also said neither inflation nor unemployment has priority in the decision-making. Let’s point out that while we have to wait to see inflation, the jobs market is much clearer—we have a labor shortage and it can only get worse with the immigration crackdown. The NYT points out that there are 400,000 open jobs in manufacturing and one manufacturing CEO says for every 20 positions, there’s one qualified candidate. The implication is that inflation will go up while unemployment will not, removing the rate cut excuse.

Bottom line, if we do get as many as three higher inflation readings by the Sept 17 meeting, as seems likely, the Sept rate cut bet is off.

Forecast

The Israel-Iran war trade got unwound faster than anyone imagined was possible. Experts say it’s not actually over but markets don’t like to trade on vague warnings like that.

While hardly anyone mentions it, the budget bill means bigger deficits and while the current account deficit was less bad in Q3, it’s still pretty high. Nobody much remembers “twin deficits” but it’s hardly a dead issue. And it’s strongly anti-dollar.

The US has been getting away with twin deficits because of “exceptionalism” but as we are seeing, that extraordinary privilege is being eaten away by Trump. Trust in the US is visibly fading. If the US applies a tax to earnings on foreign-held USA assets, it will drive more outflow. 

As usual we get squaring up at month-end, quarter-end and half-year end. Weirdly, this could be dollar-favorable considering it is already oversold. 

We need to worry that the downtrend may be petering out. That means a prolonged sideways move. The initial euro dip could go to (say) 1.1450. The last touch of the red support line was 1.1210, but hitting that number again would break the line, and we don’t expect that. 

Tidbit: We like the notion that the US economy is huge. It can take a beating.

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