US’ political turmoil and woes have nothing to do with the dollar

Outlook:

This week we got the new EU tariffs. Next week the trade talks start up again with China. (NAFTA 2.0 seems to be snagged in the bushes). Then comes jobless claims, the service sector ISM and PMI today and payrolls on Friday, likely to be on the low side and set off a stampede of doom-and-gloom about the US following the rest of the world into recession. The WSJ reports the Markit services index for September is expected to be unchanged from a preliminary reading of 50.9, while the ISM nonmanufacturing index is expected to fall to 55.3 from 56.4 a month earlier. Oh, yeah ,we also get factory orders, expected unchanged on the month.

It’s possible none of this data today and tomorrow has much meaning. We think the only important thing is the probability of another rate cut at end-October. Yesterday’s ADP report and the ISM report from the day before conspired to drive the CME FedWatch probability of another rate cut at the Oct 30 meeting to 76.4% from 49.2% on the week before. That leaves the probability of no change at 23.6%.

The US may still have a yield advantage when all is said and done, but as we saw at the last two rate cuts, the dollar falters. This would be the third cut in a row and over a short timespan. The effect could be far bigger this time. The upside is that stock markets adore rate cuts. Equity traders believe rate cuts reduce the debt burden and thus contribute to earnings, and earnings are supposedly the core of valuation. But when cuts are necessitated by a flailing global economy that may well start reaching into domestic demand, cuts are a sadly insufficient offset. This gets confusing and pinballs around, but on the whole, an economy headed for recession is not favorable for stock markets.

Two things: first, Trump sees the stock market as his personal ratings machine. He is going to hector the Fed for that rate cut at end-October, and “hector” may be too charitable a word. Secondly, for some mysterious reason, a falling stock market tends to coincide with a rising dollar. This inverse correlation makes no sense we can identify, but there it is.  Maybe it’s a safe-haven effect. Maybe it’s something else. Maybe it’s even just a coincidence and to be fair, it’s not a reliable and consistent correlation.

But we do have to worry when the buy-dollar signal against emerging market currencies like the real and peso starts to falter. When daily charts show a big move like the one we saw yesterday, it’s time to feel alarm about the big-picture outlook. So far it seems that the US’ political turmoil and woes have nothing to do with the dollar, either, but since just about everything about the Trump administration is abnormal and unprecedented, maybe this impeachment process will have an unprecedented effect on currencies, too.

Tidbits: Trump ran entirely off the rails over the impeachment story, ranting that Congressman Schiff helped write the whistleblower letter and has committed treason, the impeachment is a coup, etc. The press is noting that he implicates VP Pence, who was given all the information and should have known better but is not terribly bright.

Some folks take Trump’s threat of civil war as more than just the usual bombast; if he does run in 2020 and loses, he can claim the election was rigged and refuse to leave the White House. The normally spineless Congress is going to have to grow one and PDQ. Oh, and Trump repeated that he is a “stable genius.” You can’t take your eyes off this trainwreck. Nor could the president of Finland, who sat through a lot of it on TV yesterday. We really owe him something for his suffering, poor guy.

Meanwhile, Dem candidate Bernie Sanders needed heart surgery (at 78). He’s too old to be president. So is Biden (74), who had a burst blood vessel in his eye last week. Michael Moore, who is not the prettiest face on TV and is wildly wrong about capitalism, is still an astute political commentator. He is getting a lot of responses from his prediction that the Dem base is 70% women, blacks and Latinos, and young—18 to 35. They want someone young, too. We suspect he is right. Moore also says the Dems better not tarry getting the impeachment done. If it drags on like the Mueller thing, it will fail. We suspect he is right about that, too. Momentum counts.

Meanwhile, some Trump defenders say hey, the DoJ cleared Trump and who are we to disagree with AG Barr? We the people who read the Mueller report and are offended that Barr lied about the report, saying it exonerated Trump. It did no such thing. Barr lost all credibility (and may be up on charges himself after the Plubs leave office).

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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