The biggest factor tends to be the “institutional” and that usually means central banks

We have Russia threatening nuclear—risk off. We have two important communications cables in northern Europe being severed, apparently by mistake, not sabotage but still, risk off. The TICS report reveals China and Japan cut Treasury holdings by $112 billion in Sept, only partly offset by Europe adding $20 billion=risk off.

Today the US data consists mostly of housing starts and permits, giving room to contemplate the risk factors. We have Russia threatening nuclear—risk off. We have two important communications cables in northern Europe being severed, apparently by mistake, not sabotage but still, risk off. The TICS report reveals China and Japan cut Treasury holdings by $112 billion in Sept, only partly offset by Europe adding $20 billion=risk off.

We have Trump and his ridiculous choices for the cabinet—risk off. But one of them might be a qualified guy, Warsh—risk on, at least a little. Big banks are forecasting continuing gains in the S&P next year—risk on.

There’s more, no doubt, on each list, but we find it hard to swallow that sentiment has switched wholesale from risk off to risk on. In FX, we are inclined to include at the top of the list that the big players were overloaded with dollars and need a position adjustment. At the 4 pm “close” in the US yesterday, we saw that in every major currency. Note also that in the Chart Package, the euro was sprightly in the crosses, too.

Besides, the biggest factor tends to be the “institutional” and that usually means central banks. We do not have anything wild and wonderfully new to see on that front.

Today the CME FedWatch tool shows a rising majority betting on a rate cut in Dec—29 days away—and no longer falling. The probability of a cut as of this morning is 61.9% from 58.4%, yesterday and 76.8% a month ago. This seems to have nothing to do with the next PCE release and more, perhaps, to the prospect of Warsh at Treasury. Since the guy has not even been selected for sure, this is pure speculation. 

Central bank meetings

ECB December 12.

Fed December 18.

BoE December 19.

Bank of Japan Dec 19.

Forecast

We were right to smell consolidation and also right to note that panic can come at any time. We failed to expect the yields to reverse quite so much and deliver an inverted curve, however short-lived. Are we getting a breathing spell from the Trump trade? Maybe, but Trump is certain to pull another stunt. We will likely get some revived consolidation, but it may not grow the number of centipede legs we expected yesterday. 

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