The news that is actually important is economists starting to buy into the September rate cut story

Euro chart

The euro is putting in a lower low, the lowest in 6 days, and may well be heading for the B band bottom, which is a whisker from the cloud bottom, at 1.1449.

Outlook

The supposedly big news today will be the Fed minutes of the July meeting at 2 pm, with everyone looking under every rock for additional members willing to join Waller and Bowman with justifications for a rate cut.

As an offset, perhaps, is the expectation at Bloomberg that the central bankers and finance ministers meeting at Jackson Hole are going to come out favoring Fed independence. Well, of course they are. Bundesbank chief Nagel said “Independence is part of the DNA of central banks. It would be more than desirable if this were recognized everywhere.” Bloomberg notes that the BIS Sintra meeting in July “was the world of central bankers rallying around Jay and the Fed, publicly backing Fed independence,” said the Peterson Institute’s Posen. 

We say stories like this are useless fluff. Economists and financiers already know the value of independent central banks and the 98% reminder don’t know and don’t care and won’t notice.

The news that is actually important is economists starting to buy into the September rate cut story. They have been beaten over the head with tariff-induced inflation expectations for so long, the betting on a cut appeared ridiculous and irrational. But there is a way to square the circle. Economist Jared Bernstein has a piece in Substack that reviews the labor situation and comes up with a forecast:

“… The Fed still has numerous key reports on prices and jobs to see before their next meeting in mid-Sept. But if conditions are roughly similar to where they are now, a 25 bps rate cut at the Sept meeting makes sense to me. Circling back to the top of this post, keep that tight correlation in mind: the virtuous cycle of a full-employment labor market supporting solid real consumer spending which in turn supports strong labor demand—wash, rinse, repeat—has been foundational in this expansion.

“Yes, the Fed and the rest of us have to watch inflation carefully, and the Trumpies are playing with fire in that regard. But I think I’m seeing cracks in the job market, and if that’s right, the sooner the Fed addresses them, the better.”

Forecast

We have been seeing some unhappy developments for dollar bears, but not evenly. The Swiss franc is an inch from a buy USD signal, but the bars are abnormally small, so it’s hard to feel confident. The NZD is on the cusp of a sell signal and probably tipped over with the RBNZ tone overnight. The USD/CAD is nearly at the 200-day, which is itself meaningless but something a lot of traders will notice.

See the comparison of the US-German yields vs. the euro/dollar. It’s clear the euro got too strong, too fast and the divergence of the exchange rate and the yield differential got too wide. If we are entering a correction, this is as good a reason as any.

We have seen the dollar surge before and need to prepare for another one. The dollar weakness is entirely justified on the political environment, but can be erased in a minute if there is a hawkish surprise from Mr. Powell in Jackson Hole, as Bloomberg suggests. We say we don’t need any hints from Powell. The sheer persistence of the rate-cut crowd is starting to make market analysts seek reasons (excuses), whether Powell uses them or not.

Tidbit: Bloomberg notes that option bets on the Secured Overnight Financing Rate (SOFR) has been surging. “Currently, a position of around 325,000 options, costing roughly $10 million, stands to profit by as much as $100 million should investors price in the Fed lowering rates by a half-point at the September policy meeting, a Bloomberg analysis shows.” We have no idea how to judge $10 million (sounds small in the grand scheme of things), but the chart is compelling. Is Bloomberg rabble-rousing or onto something?

Tidbit: Reuters columnist McGeever has some smart things to say about US equities: “Investors appear to believe that markets can ultimately stop Trump from pushing the envelope too far on tariffs or other policies. But as a result, investors are not over-reacting – or reacting at all – to the latest controversies around the Bureau of Labor Statistics firing, his attacks on Fed Chair Jerome Powell, his pressure on Intel's CEO to resign, or the outsized tariffs slapped on Brazil and India.

“This, in turn, has powered the markets to new record highs, emboldening Trump to push the envelope even further.

“So even though the market has the power to rein in the president's economic policy excesses, it's not using it. Why hasn't the market pushed back?”

As the cliche goes, equity investors are paid to be optimistic. It's in their interest to keep the train hurtling along provided there aren't any immediate obstacles to derail it.

“By under-reacting to Trump's unorthodox policies, markets may be not only delaying the day of reckoning but amplifying the potential impact.

“Why? Genuine economic and geopolitical paradigm shifts are underway, and investors are not pricing in the attendant risk. Nobody knows what the ultimate impact of these shifts will be, but we do know that with greater uncertainty comes greater downside risk.

“Yet equity volatility is currently the lowest it has been this year, and even in the bond market – not known for its optimism – volatility is the lowest in three and a half years, while U.S. corporate bond spreads are the tightest since 1998.

“Ultimately, the market is unlikely to call Trump's bluff until something truly unexpected or extreme hits. In the meantime, investors can justify this nonchalance by saying that corporate earnings growth is solid, AI enthusiasm is high, economic growth remains decent, unemployment is low, and consumers are still spending.

“Wall Street is choosing not to put on the brakes, meaning this train will continue rolling on. Whether it's heading for a collision is an open question.”

This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

To get a two-week trial of the full reports plus traders advice for only $3.95. Click here!