Today the main data will be the ISM and S&P manufacturing PMI

Outlook

Today the main data will be the ISM and S&P manufacturing PMI. We also get earnings from a big crowd that includes Apple and Amazon, after Meta did well yesterday.

The first headlines after a Fed meeting and press conference are always interesting. This time they came down 75% in favor of the deduction, “yes, September” and 25% in favor of “maybe not September if data is not right.”

The minority opinion is just contrariness. Powell clearly said “A reduction in the policy rate could be on the table as soon as the next meeting in September. We’re getting closer to the point at which it’ll be appropriate to reduce our policy rate, but we’re not quite at that point.”

There’s more: “The committee is attentive to both sides of its dual mandate,” which the WSJ says “retires” the language of the last two years that called it “highly attentive” to inflation risks. That is interpreted as meaning the payrolls report counts more than usual this time. With unemployment at only 4.1%, we doubt it, but never mind.

And to be fair, Powell also said the labor market is not seen as a source of inflation risk.  “I would not like to see material further cooling in the labor market.” This is the umpteenth time the Fed has admitted wage-push inflation might be a big issue in Europe, but not the US.

Today we get another Atlanta Fed GDPNow update for Q2. The last one (July 26) had 2.8%. Golly, what if we can have decent growth like 2.8% and falling inflation at the same time? Leaves the eurozone in the dust and presumably the euro, too.

Friday Payrolls: It’s interesting that so much is happening that the ADP private sector jobs report got squished down to the bottom of the news. Trading Economics reports new jobs of only  122,000 workers in July, the least in 6 months, from 155K in June (revised) and forecasts of 150K. “… pay gains continued to slow. For  job-stayers, to 4.8%, the slowest in three years. “Pay gains for job-changers slowed to 7.2% from 7.7%. ‘If inflation goes back up, it won't be because of labor’, said Nela Richardson, chief economist, ADP.”

The forecast for nonfarm payrolls is not bright. Reuters has 185,000, the smallest jobs gain since April. Bloomberg has 190,000, not significantly below June at 206,000, although there will be hand-wringing. Equally important is the unemployment rate, probably the same 4.1%.

The labor market is cooling but the post-pandemic surge was so extraordinary that a grain of salt is advised. The average payrolls in Q2 were up 177,000, quite a retreat from 267,000 in Q1. It’s not clear we know how to interpret the drop.

Forecast

The drop in US yields is due not only to the interest rate outlook, but also the tamer Treasury issuance schedule already announced and the composition of tenors. In fact, everybody’s yields are down. This takes some of the pressure ff the dollar to fall on the expected rate cut and we should say cuts plural. The combined Fed funds futures betting has a 70% chance of three cuts by year-end, according to the financial press. 

In addition, economic conditions elsewhere (PMI’s, growth, reversal of disinflation) are less favorable than in the US. So, while it seems odd to say the dollar is not toast yet, it may survive the usual rate cut fate. Having said that, see the dollar index—clearly a downtrend. Just don’t bet on it yet.

Reasons for the Fed to cut rates

Avoid embarrassment from getting inflation wrong twice.

Normalize the yield curve.

Head off any recessionary tendencies.

Help housing via mortgage rates.

Help banks rollover commercial property loans.

Help the stock market, especially smaller companies (with debt).

Synchronize with the ECB (and Riksbank and SNB).

Help the current White House and/or avoid accusations of political bias if delayed to after the Nov election.

Avoid “higher for longer” morphing into “higher for too long”.

Reduce the carrying cost of the national debt.

Former Fed Sahm goes straight to the economic reasons for the Fed to cut, in case we have lost sight…

1. “The progress already made on inflation justifies a first cut. Personal Consumption Expenditure (PCE) inflation is within ½ percentage point of its target, while the federal funds rate remains more than three percentage points higher than before the pandemic.”

2. Shelter prices are decelerating.

3. Wage growth (average hourly earnings) is moderating.

4. Consumers are more price sensitive and sellers/suppliers see it--and are responding.

Political Tidbit:  Just about fatal: in an interview with black journalists, Trump said Harris always presented herself as Indian, not black. She decided to “become a black person” now that she is running for president. “Somebody should look into that.” This is, of course, not true and deeply offensive to everyone of every color. We thought Big Bush was out of touch when he didn’t know about grocery store price scanners but this takes the cake.

He also said he doesn’t know whether Harris was a DEI hire, claiming not to know what DEI means (even after a moderator defined it). It’s “diversity, equity, and inclusion” and used by companies and governments to hire a higher proportion of people who are not white-bread white. The Trump campaign has been charging it all along, meaning Harris is an unqualified token. Trump declined to say he would order his campaign to stop saying it.

The interview was a trainwreck. Trump pretended he couldn’t hear one of the reporters and insulted a moderator for having bad equipment. He complained about the interview starting 35 minutes late. He was rude and insulting to the panel, which was all female, demonstrating his sexism as well as racism. Ahe refused to answer a question about his past racist comments by attacking the moderator for being rude.

After gaining some small ground among black voters until Harris came along, he may have lost them all plus a few more. No one can imagine why he accepted the invitation by an organization named the National Association of Black Journalists in the first place. 

Then there are the usual lies—crime is up (it’s not). Inflation is the worst in 100 years (it’s not) and inflation is up 60% (it’s not) and drilling for more oil will fix all inflation (it won’t).  Illegal immigrants are taking black people’s jobs. When asked what are black people’s jobs, he weaseled out by saying “everyone’s jobs.” He claimed to have done more for black people than anyone since  Abraham Lincoln, to which a reporters asked “Better than President Johnson, who signed the Voting Rights Act?”

He cited a fake story about some states allowing abortion at the 9th month (no state allows over 24 weeks except Virginia, which has 26 weeks and 6 days but takes three doctors agreeing it’s for the life of the mother).

And as usual, Trump claimed the Dems rigged the 2020 election. But more than 60 court cases decided no fraud could be found, reminding everyone of the time Giuliani told an  Arizona official the campaign has a theory but no facts. And there’s a lot more. The mainstream press, including the Washington Post, has the list of lies. It’s a very long list. The point of mentioning all this—every politician lies at least a little, but Trump’s lies are outrageous and can so easily be fact-checked and uncovered. He must think voters are all illiterate nitwits. We deserve better. And that is precisely what Harris says. We are looking forward to the next poll, lousy though polling may be. 

Crypto: Don’t laugh, but the cryptocurrency issue could become a giant disruption in the global financial system and thus upset the dollar applecart.  The story starts with Trump calling crypto a scam doomed to fail but changing his stance after the Silicon Valley crypto bros donated a ton of money. Now he wants a bitcoin strategic reserve.

As Bloomberg’s Authers puts it, “Their original libertarian concept was that the currency would break the hold of banks on the financial system, and of the government over the currency. The notion of benign anarchy had already seemed to be dying; official embrace now could bury it once and for all…. Therefore, an endorsement from a potential US president must raise the question of whether this is a bona fide marriage or one at variance to the tenets of libertarianism. Rather than strengthening Bitcoin, might not a big government stake instead subvert it?”

A Senator is actually preparing a bill proposing the reserve. It could be used to pay down the debt. “Rather than replace the dollar, then, it appears Bitcoin is now intended rescue it.”

“If the US began shifting its interest toward self-custodied cash, the concept of a central bank would drastically change, if it remained an idea at all. Governments would see their ability to censor political opponents drastically decrease, and we’d simply be entering a paradigm with an asset that is much more free-market oriented at its center. This was in effect the plan. “Hyper-Bitcoinization,” which is the final boss of Bitcoin adoption, sees it at the center of the global financial system, which necessitates moments like these and figures like Trump shifting their viewpoint.”

The Senator “argues that the reserve would “supercharge” the dollar and bolster the US economy. On that basis, Trump’s love for Bitcoin is hard to reconcile with his oft-stated preference for a weak currency that helps US exporters. And Bitcoin can, of course, like all risky investments, go down as well as up.

“A detailed version of the bill might provide more clarity. Undeniably, a nascent asset like Bitcoin could benefit from additional legitimacy through increased government holdings. Those who already hold Bitcoin or run crypto-related businesses would also stand to make a lot of money from taxpayers’ largesse. It’s understandable that the news has boosted the price — but whether the idea is a win-win for Trump remains to be seen. His immediate task is to get past a surging Kamala Harris.”

Weirdly, we wonder if this does not become as central to the election as misogyny, racism, voting rights and criminal records. If Trump wins the election and goes forward with the bitcoin strategic reserve, it’s hard to see how it affects the dollar. Maybe it doesn’t affect the dollar at all.

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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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