When everyone is shorting Dollars like there is no tomorrow, there always is a tomorrow

Outlook

Equities, gold, bitcoin, and most currencies are higher, meaning the dollar is lower against every blessed thing. Even emerging market currencies are higher. China set the yuan reference rate at the lowest since last November.

The BLS “benchmark” revision of labor market data due this morning should be already priced in, but we can’t count on it. It’s probably pretty grim and if the data has been tampered with, the eagle-eyed will spot it. Having said that, about a third of the top jobs at the BLS are unfilled. Errors are understandable.

The revision last year subtracted 818,000 jobs. The revision is to correct for sampling and modelling errors. A recent Reuters story estimated another 800k downward revision.

Is it really that serious? Yes, probably. Year-to-date, payrolls are averaging 75,000 per month, about half of the number in the same period the year before. In just the four months through August, job growth slipped to a mere 27,000 per month, the worst 4-momnth period since 2010.

A second revision of about 800,000 implies recession. Then we get US PPI (Wednesday) and CPI (Thursday), which will suggest inflation. So, stagflation is upon us, exactlly as so many economists said last spring when tariffs came along.

It’s possible the job growth will get revised down by only half that. But this fails to pass the “so what?” test. Panic is still in the cards.

The NY Fed released its survey of inflation expectations, up a measly 0.1 point to 3.2% for one year ahead. The 4-year is unchanged at 3.0% and the 5-year is 2.9%. We can interpret this information as (1) the public is ignorant or (2) the public trusts the Fed, or maybe both.

At the same time, the chance of finding a job is harder (at a 10-year low) and expectation of unemployment are higher as well as the probability the unemployment rate will be higher a year from now. Inconsistently, the family income is okay and spending is likely to rise. We are not wild about this survey and more than one economist sneers at it.

Forecast

The dollar is already lower on the expectation of more bad jobs news and the prospect of a 50 bp cut, whether all at once in Sept or including Sept plus Oct. The probability of 50 bp by Halloween is 72.2%, according to the CME.

Sept is fully baked in. The excellent Authers writes “At this point, only a shockingly bad inflation number on Thursday could possibly avert a cut. The current consensus forecast, according to Bloomberg, calls for core CPI of 3.1%, so traders assume — probably correctly — that the Fed will ease even if inflation stays this high.”

We have worries. When everyone is shorting dollars like there is no tomorrow, there always is a tomorrow. At some point the dollar becomes vastly oversold and it has to bounce as sellers cover. And don’t forget, we roll over the futures contract this week, which is precisely what covering shorts means and regardless of the same position being put on in the Dec contract. (Fun story: a hundred years ago while on the trading desk at a bank, we tried to arbitrage the futures/spot, including around rollover dates. The outcome was dismal. It can be done, but not by us.) 

Then there is the strange case of the Bank of Japan. Today Bloomberg has a story suggesting some BoJ officials are hinting a rate hike is still a possibility. “The US-Japan trade deal has removed a key source of uncertainty, but the BOJ is likely to keep its rate unchanged at 0.5% when it next sets policy on Sept. 19, as officials are still assessing the economic impact of US tariffs both at home and abroad, according to the people. The bank’s policy board will also meet in October and December.

“The yen extended gains and rose by 0.6% to 146.58 per dollar after this report, its strongest level since Aug. 22. Money markets now assign a 64% probability that the BOJ hikes rates by December, compared to 44% on Monday.”

In a way, this is intervention by whispers. But it’s a lot more complicated than in the West. “BOJ officials will be monitoring signals from the new government, particularly what sort of economic measures it might promise and then how those steps might affect economic growth, inflation and financial markets, the people said. Inflationary pressures could rise depending on the amount of fresh spending, possibly affecting the timing of the next rate hike, they said.”

Expect fishtailing prices over the next few days. Reduce bets.

Tidbit: The WSJ reports “Trump’s Auto Tariffs Starts to Bite: Border taxes in July hit 80% of cars and parts from Mexico and Canada.”

“Anderson Economic Group reports that tariffs on Canadian and Mexican cars and parts totalled $1.4 billion in July alone, about two and a half times the monthly average through June. Tariff costs jumped even as imports of some product categories fell....

“The biggest victims are U.S. auto makers because they rely heavily on North American supply chains. Mr. Trump’s recent trade deals with South Korea and Japan cut their border taxes on autos to 15%. Ford this summer forecasted a $2 billion tariff hit to its bottom line this year, and General Motors expects a $5 billion profit dent.”

Sales of parts and services are up while sales of new autos are down. People are keeping their cars until they become jalopies.

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.

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