Notes From Underground: Draghi and Trump Are Putting Powell In a Difficult Position

On Tuesday asset classes around the world got a sharp boost when ECB President Draghi delivered the ultimate dovish speech from the annual conclave in Sintra, Portugal. The ECB has set up this annual meeting in an effort to mirror the Kansas City Fed gathering in Jackson Hole, Wyoming. What did Draghi discuss? The failure of Euorpean inflation to reach the self-imposed target of 2% set by the central bank.

The market response was very apparent European sovereign bonds as the yield on Italian debt dropped 20 basis points, the French 10-year yield went to ZERO and the yield on German bunds went to a negative 33 basis points. Insanity does not come close to defining the present values of so many sovereign bonds. It is the continued efforts by several of the world’s central banks to keep pressure on their interest rates even as global unemployment levels remain near historic lows.

There will be those who point at extremely low inflation levels as a justification to push rates even lower. But these efforts have played into the narrative established by President Trump that the move to push for lower rates is an effort to gain a competitive advantage versus the U.S. as the Federal Reserve tightens policy to address its dual mandate. But I maintain — as does Richard Clarida — that it is a triple mandate because of the demand for dollars in the global financial system.

President Trump countered Draghi’s remarks with thoughts of his own. The president tweeted, “German Dax way up due to stimulus remarks from Mario Draghi. Very unfair to the United States!” So now the president is now fighting a two-front war on central banks.

As I wrote last week, Trump is weaponizing the dollar, especially as he got a tweet response from President Draghi: “WE are not Targeting Specific FX Rate.” This is not what Trump accused Draghi of. He just said a weaker currency, not a specific rate. Regardless, the GOLD/euro, gold/Swiss and other gold crosses have made new highs as investors continue to be leery of central bank desires to keep downward pressure on interest rates. Can Chairman Powell remain sanguine and patient in a world where Draghi and others are so dovish? Draghi was totally ill-advised to make this speech ahead of the FOMC and G-20 next week. If the FED does nothing on Wednesday then look for a very dovish statement and press conference.

Watch for the price action on an initial no change and see what happens to all asset classes after the press conference. The yield curve flattening over the past couple of sessions suggests no change for the FOMC. The bottom line is POWELL STUCK BETWEEN A ROCK AND HAND PLACE. Jerome, what about that ECB printing press now?

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22 Responses to “Notes From Underground: Draghi and Trump Are Putting Powell In a Difficult Position”

  1. ShockedToFindGambling Says:

    IMO, these Central Bankers are a few fries short of a Happy Meal. They are creating a bond/stock bubble of such size, that when it pops, there will be nothing anyone can do to prevent a Depression.

    Add in the Federal deficits, and we are looking at something much worse than 2008…’s only a matter of when.

    This is so obvious, that even I can see it coming.

    • yraharris Says:

      Shocked—well stated as this game of engage in the rage against deflation is the continued gift of Ben Bernanke et al and will be enhanced by the coming MMT or supply side economics on steroids—deficits don’t matter when they can be funded by the unlimited printing of money for as we know deficits and debt don’t matter when you have your own currency

      • ShockedToFindGambling Says:

        I’m pretty sure the FED cuts in July, regardless of a trade deal progressing.

        They are afraid of what the markets will do if they don’t get their Soma.

  2. Don H Says:

    While you certainly had to wait for it, the Gold trade has begun to bear fruit (no pun intended). /GC Buyers will need to regain a bid above 1375ish for any continuation, IF not, then anticipate another Southbound rotation.
    My .02

  3. Rohr (Alan Rohrbach) (@MacroMeister) Says:

    Hi Yra-
    Excellent comments and agree with ‘Shocked’ that the central bankers must be lacking some cognitive component. Yet it goes way beyond the size of the bubble and its possible risks… this stuff just doesn’t work!!
    As I noted in this morning’s Rohr-Blog research note (, Ben Bernanke was stuck in the same circumstance in 2012. That phase (through 2015) proved unequivocally that the size of the balance sheet and monetary base are meaningless without business incentives for capital investment (generally the Velocity of the Monetary Base.) That means deregulation and tax cuts.
    What are the chances the controlling EU members (i.e. parsimonious Germans) are actually going to pursue any of that while they are trying to make the point to the Brits that the UK is foolish for leaving such an excellent system?
    Rhetorical question of course, and the further slide into negative rates might just tip over too many weak European banks to keep the canard going much longer. I’d very much like to see an NFU post with your always incisive thoughts in that area sometime soon.

  4. Asherz Says:

    Water seeks its own level. Rocks pile up.

    As the whir of the ECB printing presses in Frankfurt resumes, when China injects liquidity into its crumbling banking system, with inverted yields here, with all indications of a slowing global economy, where is this flow of new money going to go? New factories? Investment in R&D? Paying down debt?
    Nope, more ASSET INFLATION. And here additionally in the USofA, a continuation of stock buybacks to make those management stock options guarantee a comfortable retirement. Is it any surprise that the S&Ps are near historic highs while debt levels including corporate debt are also levitating? Is it surprising that Bitcoin has doubled in the last few months? Only precious metals in the US are being suppressed as they have been for eight years but even here there are signs of a breakout.
    The cracks in this dam are becoming more visible and will soon not prevent the water pressure from seeking it’s proper level as physical PM will have the rock of paper PM wear down. And if you are downstream, you better find high ground.

    • yraharris Says:

      Asherz–well stated and it is indeed happening before the eyes of the world but the levitating equity markets blind those who concentrate their liquidity in the world’s stock markets.The move by FB to launch an alternative currency backed by a basket of fiat currencies is stop one in the high ground downstream–if 0% on French ten years don’t make you begin to seek higher ground you must be in full acceptance of the ravings and narrative creation emanating from the Davos and Brussels elite —Gold may have zero return but it makes one at least question the insanity of wisdom of those leaders of the world’s central banks

  5. Rob Syp Says:

    It seems like yesterday late 90’s (20 years ago) Euro began trading. If my memory serves it opened at par may have traded to 107 and proceeded to 83. Then began a multi year rally to 160 area all time high. Past 10 years high 145ish low 105ish.

    Question with all the issues plaguing facing EU why isn’t the euro at least par to the dollar or below? If things are so bad there how can it trade to premium to the greenback? if the news continues can it or does it mean we’re looking at 1 to 1 in the future?

  6. Chicken Says:

    “This is not what Trump accused Draghi of. He just said a weaker currency, not a specific rate. ”

    Interesting point, Yra.

  7. Arthur Says:

    STANLEY DRUCKENMILLER: “When I got into the business, it became clear to me that macroeconomic statistics are not great in terms of predicting the economy, but they are really great in terms of telling where you are and where you have been…By far the best economic indicator I have ever met is the insight of the stock market…That is looking at cyclical companies in the stock market. I tend to look at trucking, retail, the Russell 2000, that kind of stuff. The retail index is down 20% since the start of August, the Russell 2000 is down 15%, the S&P metal is down 20%. It has been very clear that all those stuff are on a 52-week relative lows…The insight of the stock market right now is not saying we are in a recession, but you better be careful and keep your eyes open.”

  8. Financial Repression Authority Says:

    […] link here to Yra’s blog […]

  9. Rob Syp Says:

    7.4 million tons Venezuelan gold vanishes in Uganda

    There’s no end to the devastation there what a 20 or 30 year slide

  10. Michael Aaron Temple Says:

    Gold? What does it know?

    As stated, it knows that French OATs at 0% yield is fool’s gold.

    The real McCoy has stepped out tonight with a breathtaking
    blitzkrieg through the Maginot line of $1375ish.

    To me, the message is LOUD and CLEAR.

    Powell finally was “broken” by the markets. Now that he is “on board” with a July cut, watch for a collapse towards ZIRP very quickly (in my view, by Xmas).

    Markets will soon begin to discount QE once we are far along towards ZIRP.

    Gold is the logical extension of negative yielding bonds, especially
    as the UST market begins to flirt with ZIRPish yields in the front end.

    Gold is in the process TONIGHT of breaking out of a 6-yr resistance top. Tonight’s action is also first sign, imo, of FOMO.

    Stocks may continue higher in this dove-fest.

    But, it is unmistakeable how powerful the trend is in RED EDs, and now, finally, in gold.

    Hang onto your hats, boys and girls. It’s going to be a hot hot summer in the Comex pits.



  11. asherz Says:

    Ambrose Evans-Pritchard wrote this important piece after Draghi remarks. Must read link below re currency war.
    Gold market breakout last night reflects what is happening.
    Seat belts in order.

    • yraharris Says:

      Ambrose Evans Pritchard —highly regarded by those who look for discourse but not given a thought by the FT readers as I have learned.He is disdained for writing for the Telegraph—–the narrative of the euro elite is always to be read but discarded

    • David Richards Says:

      Great link thank you, especially because the Telegraph (where he writes) is behind a paywall now. Currency war is on and US is locked and loaded with ammo to crash the dollar even more.

      It’s taken longer than I’d like, but the technical setup for USD had been very bearish and is now technically confirmed; will there be follow thru? Probably sooner or later. Hordes of dollar bulls are trapped on the wrong side of a sinking Titanic. Mr Market loves to administer the pain trade which, given how most are positioned, means lower dollar (and current data shows retail traders keep longing the greenback, omg!). I still want to short dollar rallies and buy dips in gold, silver, bitcoin and currencies. DXY is likely headed for the 80’s.

      AEP made one fundamental case in that link for why EURUSD can rise; another might be that the US has among the most rapidly decelerating economies in the world now, as for example, US PMI printed a 10-year low today. Of course, sometime after the Euro reaches toward and/or breaks 1.20, then EU can take back the dubious distinction of having the world’s fastest falling economy.

  12. Chicken Says:

    And there we go, sinking yet deeper into Crazy-Eddie rates territory. The crowd cheers.

  13. David Richards Says:

    Rather surreal how the Fed Chair stated at his conference that the President doesn’t have the legal authority to remove him (remember Powell is a lawyer), and who Trump tweeted about as his choice to replace Powell:

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