Some quick hitters before getting to work on the implications of Friday’s employment report.
***Before the Brexit vote, Monty Python member John Cleese opined in the Daily Mail that he was voting to leave because Britain was swimming upstream in its efforts at reforming the EU. He suggested the best way to foster change in Brussels was to kill Jean-Claude Juncker. This is a harsh assessment, but I suppose Kevin Klein would be up for the job.
***On July 1, CNBC’s Sara Eisen interviewed Fed Vice Chair Stanley Fischer. It was a milquetoast interview in which the questions were bland and the “answers” even less insightful. Ms. Eisen did ask Mr. Fischer if the “DOLLAR IS A CONSIDERATION RIGHT NOW IN TERMS OF RAISING RATES INTO WHAT IS A GLOBAL PERIOD OF UNCERTAINTY AND STABILITY AND GLOBAL EASING?” Fischer’s answer was probably a faux pas:
“You know, we have to take a whole host of things into account. The dollar is actually weaker than it was at the beginning of the year. It has–it strengthened remarkably. Well not even remarkably. It strengthened after the Brexit vote and it’s coming–it’s come back a bit and its very hard to predict the exchange rate, THOUGH WE TAKE IT INTO ACCOUNT.”
The emphasis is mine and it is something that we should watch for because it is not the FED‘s bailiwick to be concerned about the dollar. Post Brexit, the DOLLAR HAS RALLIED ALMOST 4% versus a basket of currencies so this will keep the FED cautious even with a strong JOBS report on Friday. The current 200-day moving average on the Dollar Index is 96.52 with today’s close at 96.06. More importantly, the DOLLAR has rallied against most foreign currencies but has weakened versus the YEN, indicating the significant rally against the POUND and EURO. With interest rates on sovereign debt being pushed to record lows in all the developed economies, positive yield on U.S. debt is pushing global pension funds and insurance companies into U.S. stocks and bonds. In the land of the blind, the one-eyed man is king.
***The yield curves in the U.S. debt market are approaching critical levels. I have written for two years that the 2/10 U.S. curve would need to hold a positive 75 basis points or the FED would be in a difficult situation. Flattening curves are indicative of money being too tight and danger ahead. How will the FED react to a flat curve during a ZIRP period? There is little room to cut rates if the U.S. economy begins to slow and the question for us will be about the FOMC‘s urge to panic. The ECB has certainly created an anomalous global debt situation in which its negative interest rate policy has created a demand for anything liquid and a positive yield. The free flow of global capital results in the crush of interest rates regardless of a nation’s monetary policy. The U.S. curve is certainly flattening in response to the ECB‘s massive stimulus program. What is the FED to do? This will be the question as we confront the paradox of lower long-term rates in the strongest growing developed economy. Back to the Yellen conundrum.
***There was blog post by Larry Summers after the Brexit vote titled, “Why Brexit is Worse For Europe Than Britain.” The post was directed toward the global elites who have failed to comprehend the great angst from citizens of many nations suffering under the wage pressure of globalization. In a clarion call to the Davos crowd is to:
“… develop a ‘RESPONSIBLE NATIONALISM‘. It is clear there is a hunger on the part of electorates, if not the Davos set within countries, for approaches to policy that privilege local interests and local people over more cosmopolitan concerns. Channeling this hunger constructively rather than destructively is the challenge for the next decade. We now know that neither denying the hunger, or explaining that it is based on fallacy is a viable strategy.”
This is important for it lays the intellectual rational for embarking a massive fiscal stimulus. The operative phrase for promoting massive government infrastructure projects is “responsible nationalism.” Summers is pushing for a major position in the coming new administration. Our job will be to discern the best ways to play a global public investment era (h/t Chris M. and Kevin M.).