Notes From Underground: Fischer and Cohn, Out; Draghi In (the Spotlight)

In keeping this note as short as possible, let’s start with Vice Chairman Stanley Fischer’s resignation. I am posting snippets from the August 20 entry, in which I noted the great piece in the Weekend Financial Times with its Stanley Fischer interview. The article noted the one open disagreement with Chair Yellen in which he was miffed about not being consulted about an FOMC decision. We don’t know if Stanley Fischer is resigning because of health reasons, personal issues or over policy disputes. But this I am sure: Lael Brainard has been elevated within the group of Fed Governors as she is the confidant of Chair Yellen, thus the FED takes a dovish stance. In her dovish speech she maintains that while desiring to keep FED FUNDS steady there is room to initiate some of the balance sheet unwind. This was also her stance in June when she presented arguments for QT versus raising the fed funds rate. The impact from the initiation of Boockvar’s QT would not be as great on the U.S. dollar.

Wednesday, the Bank of Canada raised its interest rate by 25 basis points, catching the market off-balance as the Canadian dollar RALLIED over one percent. This gives credibility to the Governor Brainard view of the greater impact of interest rate increases. If my thesis is correct, the FOMC meeting on September 19-20 should see a balance sheet tapering announcement and a delay to any increase in the fed funds rate. In regards to the possibility of QT, I would expect the U.S. 2/10 curve to stop flattening — it’s approaching the important level of 73 basis points (see below). This is a very difficult trade because of the impact on global interest rates due to the ECB and BOJ’s QE policies, let alone the machinations of the Swiss National Bank. But the critical level for me remains 73 basis point and will be more important if it can make it a weekly close.

Thursday is an IF, THEN scenario: The ECB releases its statement at 6:45 a.m. CST with a President Draghi’s press conference at 7:30. The Draghi presser is the main event as the media delves deeper in to the actual release and the ECB president’s prepared statement. I DON’T BELIEVE THE ECB WILL CHANGE ITS CURRENT QE PROGRAM 60 BILLION EUROS PER MONTH. The EURO OUGHT to DECLINE on that statement. IF Mario Draghi does talk about the EURO CURRENCY, it will be about how he is NOT CONCERNED about the EURO‘s recent strength for it is A REFLECTION OF THE FINE JOB THE ECB IS DOING. Such a headline will result in a EURO rally as the market will see it as diminished concerns.

I AM HOPING THAT the no lessening in QE comes first and the positive view about the EURO is the later discussion because it will allow a much better trade level for the EURO. However, I view this only as a trade and I will be patient and wait for the algos to drive the market volatility based on KEY WORDS IN HEADLINES. This is my IF/THEN trade. The EUROPEAN BOND MARKETS will also be important as the September futures contracts expire tomorrow so the European BONDS stand to be very volatile as the ECB intervenes following its decision. If the ECB were to SURPRISE with an announcement about quantitative tightening, the EURO would RALLY, The ITALIAN BOND FUTURES WILL GET SLAMMED and the GOLD AND SILVER WILL FALL SHARPLY. I make this a low-probability event, but as usual I will remain patient and allow the algos to act in their efforts to be predatory to the headlines.

Another reason any QT move is a low-probability event is because the German elections are less than three weeks away. A greater probability will be President Draghi referring to the recent bout of EURO STRENGTH as a VALIDATION of the splendid work of the ECB. Nothing placates the Germans as a relatively stronger currency in the face of negative interest rates. Also, if the ECB were to announce a surprise QT I would look for the U.S. curve to steepen as it would make the FOMC‘s QT policy even more significant. Be patient and have your desired low entry-level risk points at hand to avail yourself of any severe market dislocation. Patience!

***The Wall Street Journal and others have reported that President Trump is unlikely to appoint Gary Cohn as Fed chairman. That’s a possible victory for Main Street, especially if President Trump were to attain wisdom and appoint Sheila Bair, who is by far the most capable of people for her work as the head of the FDIC during the global financial crisis. Enough said!

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21 Responses to “Notes From Underground: Fischer and Cohn, Out; Draghi In (the Spotlight)”

  1. Publius Says:

    Is it dawning on Cabinet, staff, they work for a POTUS that panders to a racist, anti-Semitic section of America that is emboldened to raise it’s ugly head?

    • David Richards (@djwrichards) Says:

      This is not a political blog and mine is not a political comment. As a distant observer, I think Cohn appears to be an issue of “loyalty” with Trump, not racism. Mr Trump said that both sides were at fault in the Virginia incident, which in my view was a politically dumb but not unreasonable assessment that his enemies have spun as racist. Come here to Asia to see racist and it’s legal – in job ads for example.

  2. Stephanie Says:

    I second that motion -Sheila Bair is brilliant!

  3. David Richards (@djwrichards) Says:

    In US, Europe and now Canada, we have seen that, paradoxically perhaps, dovish monetary policy precedes economic weakness while more hawkish monetary policy precedes economic strength. Not suggesting it’s causal, just correlated. But empirically, capital and investment appears to be drawn like a magnet to monetary strength and repelled by monetary weakness.

    In FX land, charts show the lead baton might get passed to Aussie. Dollar weakness will continue. Brainard cannot leave soon enough.

    But on the plus, Brainard has helped to make trading easier – with a predictably plunging dollar and strong carry trades.

  4. David Richards (@djwrichards) Says:

    Mr Harris, what you write about intra Fed relationships makes sense and plausibly explains Mr Fischer’s resignation. Bravo work! But sad because I imagine Fischer might have been a better Fed Chair than Cohn or whoever else Trump might nominate like NIRP advocate Marvin Goodfriend. Negative rates for the reserve currency. God help America and the world. Bitcoin $10,000 ahead? Got gold?…Good.

  5. Ronald Ferrill Says:

    Sheila Bair would be GREAT! While I believe Mr. Trump has done a really good job with appointments, this might not be one in his wheelhouse, and could lead to a miscalculation. That said Mnuchin makes me a liar/fool. He seems grounded.

    Cohn – seems unlikely he would be the choice, but again, the Trumpster does like to move pieces in ways that aren’t legal chess. Why would Cohn be interested? It is likely that my desire to NEVER have that notoriety influences my thinking for others. They run in different circles of incredible wealth, so what I think is really inconsequential.

    Since late 2009 I’ve wondered if (and when) we might see an interest rate inversion, and the interesting times that it might bring? Can more knuckleheaded auctions provide that sort of entertainment?

  6. Rob Syp Says:

    Go KEVIN WARSH….

    • David Richards (@djwrichards) Says:

      While WARSH gets best betting odds currently, Macro Tourist Kevin Muir argues he has no real chance because he is way too hawkish for debt king Trump. Unfortunately, he instead expects (brace yourself) Neel Kashkari.

      • yra harris Says:

        Kashkari–would be a MAJOR mistake–not like Cohn but Warsh would be far better for if you read his speeches he has in depth knowledge on monetary policy–Cash and carry is far too political

  7. Chicken Says:

    Sheesh, will 10yr rate drop under 2%?

    • David Richards (@djwrichards) Says:

      A few months ago when it was near 2.6%, Mr Raoul Pal forecast a final target of 0.5%!!

      With both the US bond yields and dollar crashing, it appears the market currently expects the Fed’s QT in three weeks will be very meek.

      • David Richards (@djwrichards) Says:

        Or maybe the crashing dollar & yields reflects Washington gridlock/dysfunction, or the prospect of an uber-dovish Fed ahead (see, for example, my post above two minutes ago – yikes!)

      • Rob Syp Says:

        If we put Warsh and Kashkari in the ring are there more differences or similarities between them?

        Yra if it comes down to these 2 who do you like or don’t like and why? Or do you have another fighter to throw in the ring?

      • Chicken Says:

        Seems too simplistic but wondering if these low rates relate to the LIBOR fraud somehow. Every rate was connected to this metric for decades, now the new normal is far from the old normal.

  8. David Richards (@djwrichards) Says:

    Today in Asia, DXY finally filled the gap-up from the opening of 2015 at 91.08. If DXY doesn’t turn up from here, then US weakness is morphing from a phase (months) to an environment (years) and my next target for DXY would be 79.

    At what point does the common man or Trump realize that a plunging dollar ultimately hurts folks through a falling standard of living, while enriching the rich like CEOs (who get big bonuses on the mirage of rising profits in a collapsing currency) and Wall Street (which can hedge & prosper with carry trades etc), while Main Street gets ever-weaker buying power and soon-to-be-rising prices for life’s essentials.

    If currency devaluation was the path to prosperity, Zimbabwe would be the richest nation today.

    To lead the Fed they need a sound money person with a trading background who understands markets, rather than another theoretical academic who never worked a day or another Wall Street crony.

    • Rob Syp Says:

      DXY closed 98.29 around election time….now were 91.19 last in Sept futures how quickly things have turned south in 11 months

      https://www.barchart.com/futures/quotes/DXU17/interactive-chart

      Thank you David for your posts and re: Irma God help us

    • David Richards (@djwrichards) Says:

      > rather than another theoretical academic who never worked a day

      An apology to any academic who I might have offended with my emotional tirade against the Fed. In fact, during my university days, which were the best days of my life, I had the honor of being in the presence of many dedicated, intelligent, hard-working academics who no doubt contributed to our society in ways I can’t comprehend. As I’m too dumb to qualify for academia.

  9. yra harris Says:

    To all–great flow of thoughts and hopefully clear some of the noise—my internet was down last night so didn’t get a blog out on Draghi but it will be released by Sunday–hopefully–keep up the constructive conversation

  10. Chicken Says:

    Will grain prices run if Roundup application just prior to harvest, is banned?

    • yra harris Says:

      Chicken–i don’t think so.But my knowledge of such things is limited.I am watching the grains here in relation to the Chinese Yuan and Brazilian Real—-for the Chinese U.S. grain prices are very low.

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