We wonder if a whole lot of people simply do not understand the US economy

Outlook

The message in yesterday’s data is “50 bp not needed.” 25 bp is nice and will suffice.

The dollar sprang upward against nearly everything, which could be a real problem in the case of the Japanese yen. The yen fell against everything else, too, and several reports have it the carry trade is coming back into favor again. The yen tends to overshoot. The MoF tends to wait until it can wait no longer and then pounce with intervention.

The pound spiked down but then recovered, but the euro spiked down and stayed there, giving the EUR/GDP a nervous breakdown. That it is coming back today is probably just a normal rebound and not a denial that the next move is down; time will tell.

The Australian dollar was especially interesting, putting in the lower low but then rebounding defiantly. The NZD followed the crowd, which probably says something about the difference between the two economies and their central banks (but we leave it to the experts). The dollar even gained against the Chinese yuan and on an opening gap, to boot.

We hardly ever see so few data points have such a big effect, so fast. Does willingness to dump the 50 bp/100 bp narrative disclose that supporters were not true believers in the first place?

Retail sales were better than forecast. Unemployment refused to rise as the gloomsters feared and then wanted. The Atlanta Fed delivered an excellent 2.4% Q3 growth estimate.  Despite a dip in industrial output, the combination of favorable factors caused a flood of  sentiment contrary to the conventional story.

We wonder if a whole lot of people simply do not understand the US economy, meaning the consumer. 

Case in point: Home Depot was complaining about sub-par sales, saying buyers are putting off big renovation projects. Last year it was Target missing sales forecasts. But maybe consumers are just shifting preferences to stores with lower prices, the Walmart story, or other goods. Art, maybe. The point is that the consumer is resilient—and Americans are endlessly materialistic. And surely online sales are not fully represented. Our Amazon bill would set your socks on fire. 

Capital Economics says it well: "There was almost nothing in the July retail sales report for the perma-bears to latch on to, with the rebound in retail sales led by a recovery in vehicle sales, but encouragingly broad-based with control group sales rising even further."

On Wednesday, the CME FedWatcher tool had only 36.5% of bettors expecting a 50 bp rate cut at the Sept meeting. Yesterday at around the same hour that had fallen to 23.5% from 55% the week before.

This seems like lightning speed. It’s gratifying to be right but the pace of change is unsettling and perhaps not to be trusted. It took months for the recession scenario to get squashed and all it took was one lousy payrolls report to bring it all back in a nonce. What if the markets are now attuned to single-data-point panic attacks?

So while we are no longer alone in saying a 50 bp rate cut in September is not needed, we need to keep an eagle eye out for the next bad data that brings it all back. As one Reader wrote yesterday, the Fed will cut in September “because they kind of have to, but after that is far less certain.” What if September payrolls are really bad, or some surprise stickiness tanks the PCE/CPI? A worry from left field is the newest Covid variant getting a grip and the vaccine for that one not due until later in the fall, and mpox starting to scare the pants off public health officials in Europe.

Let’s avoid getting cocky about this. And a nagging worry is that markets are not as stable as they should be, not if they jump around by vast amounts on what is obviously insufficient information.

Tidbit: For what it’s worth, September is the worst performing month since 1950 for the Dow and S&P, and the worst for the Nasdaq since 1971. We guess the Fed won’t much care in its bones, but if it’s a shocker of a drop, it could set off more of the gloom talk. If you like statistical analysis, you can get a free trial of the Stock Traders Almanac at the website.

Tidbit:  The US economy may be okay but warning signs of global problems abound. Blomberg reports the Chinese steel industry is in deep trouble, while in London, stockpiles of iron ore, zinc and lead are super-high.

Tidbit: The Jackson Hole central bank shindig in next week and Fed chief Powell will speak. We couldn’t find a title them but Powell will talk about the economic outlook, with analysts parsing every sentence just as with Fed minutes.

Forecast

We never know when a pullback is going to transform into a reversal. When we get such a rapid move, we get suspicious and demand confirmation. How long does that take? Sorry, but at least five days and one or more of those could go the wrong way and confuse the hell out of everybody. This is when the chart indicators are the most useful. By definition, they all lag (no matter what anyone says about some having leading properties). Patience is a virtue, even in trading.

Political Tidbit: The polling keeps going in Harris’ favor. The latest Silver curated combo of polls has Harris at 46.9% and Trump, 44.1%. In an “intellectual” speech by Trump, he offered nothing by way of a policy change that would help the middle class, while Harris gets credit for having an actual plan, plus a spillover benefit from the Biden deal to cut drug prices from Big Pharma.

Today Harris will announce a plan to subsidize down payments for first-time home buyers and a ban on price gouging for food. Corporates gobbling up houses will be limited in rent increases and tax breaks. All this is sure to be popular and even if a bit pinko, contrasts favorably with no plan at all from Trump. The Harris policy announcement will come at a rally in North Carolina, a potential swing state whose current Lt. Gov said a few years ago that he would like to return to the days when women couldn’t vote. He is running for governor.

Some analysts note that diehards aside, the top of the ticket can influence the entire slate, so a Harris win in N.Carolina would affect all the other candidates down ticket. And it goes the other way, too. If voters reject the many nutcases the Republican party has running this time (as they did in the ’22 midterms), the benefits could fall to Harris. This is a good thing because a president of one party and a House and/or Senate of the other party is just plain gridlock and no policy initiatives get done.

The US election is important this time for two big reasons—first, to defeat the unfit-for-office Trump and end the toxic Trump grip on the Republican party. Second, the change in spirit is remarkable and perhaps stronger even than the last big political engagement, Reagan. 

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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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