The one economic factor most on everyone’s mind is inflation

Outlook

We want to avoid politics here but every top story of every press outlet is about the multiple crises fully expected to arise from the Trump selection of hardliners and semi-fanatics for top offices. The new environmental guy plans to slash regulation (buy a home water filtration system). The new State Dept guy is virulently anti-China. The new national security guy is a hawk and may have an itchy trigger finger. The plans for the border and snatching up illegals to deport is reported to get started on day one. Homeland Security will be headed by the lady who shot a puppy she couldn’t train.

The one top thing about Trump is that the rest of the world knows, or thinks it knows, that he is not competent, not well-advised, and not a little unhinged. They fear him, or at least are taking steps to avoid showdowns with a guy prone to childish temper tantrums. A top oil exec says Trump should not withdraw from the Paris Accord. The incoming administration made no response. 

The one aspect of the incoming administration that should matter to FX is those tariffs. When it looked like fruitcake Lighthizer was getting the trade rep job, the dollar rose mightily, most prominently against the yen and the yuan. The parties with the most intractable problem include Japan, which can’t justify rate hikes on the data grounds and will likely avoid poking the Trump bear with intervention. China is making plans, so far pertaining mostly to domestic conditions but make no mistake, China is no coward.

The one economic factor most on everyone’s mind, apart from civil rights and geopolitical, is inflation. Today we get the New York Fed survey of inflation expectations, not usually a market-mover and mostly taken before the election. We don’t like these surveys of people who know little, but the NY Fed has done a good job on this front so far and will likely get attention today. 

Tomorrow it’s US CPI, forecast not to decline nicely. Headline is expected at 2.6% from 2.4% and core the same at 3.5%. The Fed allows for bumpy data like this and it shouldn’t affect the Dec FOMC outcome unless the Fed chooses to make a federal case out of it. Despite Mr. Powell’s “try it” stance, the Fed is likely to keep saying the same old usual things.

Tidbit: A real expert on inflation and the Fed is Claudia Sahm, and yesterday she gave it to us with both barrels. The Dems losing the election because of inflation might be correct, but not the way it’s being presented, including by former Fed chair Bernanke (wow).

“The real lesson is that leaving inflation to the Fed alone was not good enough. Also, the simple Phillips curve trade-off between inflation and unemployment is not a thing, and leaning on it would have led to worse outcomes in people’s lives and at the ballot box.”

The supply chain problems arose in multiple places and ways—Ukraine, the pandemic. We could have used a “reserve fund,” as we have for oil, to mitigate price rises. The whole essay is on Substack and worth a read.

Forecast

Yesterday the euro fell below old support and today is homing in on the next one at about 1.0600. We usually expect a bounce right about now, especially because it’s Tuesday, but not this time. That’s because headlines are relentless pertaining to how Trump is going to wreck the US and global economy and because Germany has a big fat political mess to fix. Remember that in recent years some European countries have gone without a government for months (Netherlands). But Germany is the powerhouse and it’s shooting itself in the right foot, China having short it in the left one. 

Forecasts of doom for the euro abound. Capital Economics sees the euro under parity by the end of next year on the tariff story and the likelihood of the ECB cutting rates more than we now expect. We say it won’t take as long as a year to get parity. The FX market doesn’t move that slowly. If we are getting parity, it will come long before year-end 2025.

See the monthly chart of the euro. The linear regression channel bottom lies at .8973 on Jan 1, 2025. The channel is not a reliable forecasting tool—check 2012 when we had Grexit--but does show a range of possible outcomes. (On the upside, the channel top for Jan  1 is 1.1740. Try to imagine how that could come about.) 

 

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