We get the Fed rate cut today

Outlook

We get the Fed rate cut today, which will outshine the other releases (jobless claims, productivity). The consensus is for a cut in December, too, but then fewer cuts next year than expected pre-election because everyone expects Trump policies to be inflationary.

Mr. Powell’s press conference will be as anodyne and say as little as possible about the future. The press is going to torture him asking for foreword guidance he won’t—and can’t—give.

The most important thing about the election that the press is declining to mention is the Dems not turning out. In the 2020 election, those voting Republican were 74 million. This year, those voting Republican were 72 million, so a drop.

In 2020, those voting Dem were 81 million—but this year, those voting Dem were 67 million. Be clear: a total of 14 million fewer people voted Dem.  They just stayed home.

The total vote in 2020 was 155 million but this year, 137 million. The missing millions were the Dems, 14 of the 16 million lower count. Some smart social media person asked “Where are the 14 million Dems?”

Make no mistake, the Trump election is a catastrophe. No reputable economist thinks otherwise. The WSJ tried its hand at some mild criticism, saying the dollar went up because of the prospect of tariffs. No. The dollar went up because RISK just went through the roof and the dollar is the top safe-haven, even when the cause of the risk is American. We had this is spades during the last Trump administration and we have no reason to expect anything else this time.

We will try to avoid discussion of Trump except when strictly relevant to the work at hand, which is forecasting the dollar. This is to maintain sanity as well as to spare you, Dear Reader, from feeling the shame and disgust the election brings. 

Besides, we think we know what awful things are going to happen—but not yet. The new president is not validated until Jan 6 and not sworn in for another couple of weeks after that. A lot can happen in almost three months.

And while traders like to take positions in advance of expected news, this is probably too long a time for a wholesale slaughter of every other currency. We expect blowback. It will be mitigated by the Fed’s rate cuts, but Trump is not the only thing happening in the world. Of course there can be any number of announcement effects before the handover in January, so Be On The Lookout. 

We should pity Mr. Powell. The Fed wants to cut rates and has justification—see the chart—but it can read the election as well as anyone else. The incoming policies will be inflationary. But we have that thing called Lag, so inflationary effects may not show up until June (or later).

Let’s say the Fed cuts as expected, including 50 bp this year and another 50 bp next year. But by summer or fall, we see inflation smashing upwards. The Fed wants to tighten but if it does, Trump will fire them. If he hasn’t already. Does this influence the Fed not to cut in December or Q1? Time will tell, but we doubt it It will want to give the US economy a running start before everything comes crashing down..

Another top facto: what is China going to do? China knows it is the primary target of Trumpian wrath. Press reports indicate it had predicted the Trump win all along and is devising plans in various back rooms, including the Party’s. 

Forecast

Today we are getting the usual pushback against an exaggerated move the day before. Nobody ever knows how big a blowback will be or how long it will last, but this one is likely pretty short-lived and will form a dead-cat bounce. After that, the dollar will resume its rally, but it will be fits and starts, depending on announcement effects. Go back and look at the weekly chart.

While US conditions, including the political, dominate, other places have important factors to contribute. As Reuters notes, the reason the Geran FinMin was fired was because he argued against raising the budget and deficit. “The prospect of a loosening of Germany's tight budget rules sent German and euro zone sovereign debt yields surging more than 10 basis points on Thursday to near four-month highs. And that's helped the euro bounce from four-month lows, too.” The Bund is not going to catch up to the US yields, but a narrowing is euro-friendly.

Political tidbit

Many of us are ashamed of America. We thought we, as a people, were better than to vote for the incompetent and criminal Trump, crude and vulgar, a man so obviously unfit for office. But we are not better. We are racist, misogynist, greedy, easy chumps for cons and lies, and horribly ignorant. And we didn’t turn out to vote.

To be a little fair, other countries have elected jackasses like Trump. Boris comes to mind, as well as Berlusconi. And who was that French guy who raped a maid (Strauss-Kahn, IMF). The Germans had a probable Russian spy (Gerhard Schröder). There are, no doubt, more public officials who have disgraced their countries. Try to get the song “Don’t Cry for Me, Argentina” out of your head. It’s sticky.

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