We had to get back home
And when we opened up the door
We had to get back home
And when we opened up the door
The main story for the next two days will be Japanese Prime Minister Abe’s visit to the U.S. to meet with President Trump. Abe is coming to mend relations after Trump officially ended the Trans Pacific Partnership (TPP) agreement before Congress could even debate the trade treaty. The Japanese prime minister had expended a great deal of political capital in Japan to get various parties to accept a massive Pacific-based trade agreement. In an effort to forestall any discussion of Japan as a currency manipulator, the Japanese are offering all sorts of investment ideas in the context of getting Trump the negotiator to soften his stance on tariffs for Japanese goods, or sourced material from Asia for assembly in the U.S. Japan is a paramount promoter of the global supply chain paradigm.
Janet Yellen and the FED take center stage tomorrow and the consensus is for NO CHANGE. The market believes the FED will be on hold until March. BUT I OFFER THIS: If I was the FED chair I WOULD RAISE RATES 50 BASIS POINTS to take some of the risk out of the U.S. equity markets. The S&Ps are virtually unchanged since the December FOMC meeting but the market’s enthusiasm for anticipated tax cuts, regulatory relief, and possible currency intervention means the FED cannot wait to let the economy run “hotter for longer,” especially because of the 4.7% U3 unemployment level. If Chair Yellen wishes to burst the TRUMP exuberance it is time to move aggressively to stem the rise of a potential inflationary threat.
Let’s be clear about the unfolding political and economic landscape: It is the desire of the Trumpians and the anti-Trumps to control the political dialogue. The media is putting President trump and his appointees under a microscope, which is what the press should always be doing. (My apolitical belief for the fourth estate is that a free press should be responsible in pursuit of the “facts,” but if they have a bias it should be “to afflict the comforted and comfort the afflicted.”) In my opinion, during the past 20 years the U.S. press has devolved into a sycophantic mob as everything becomes about access to those with the greatest celebrity status, which usually means wealthy. The financial media especially bows to the rich because if you are a billionaire your views go unchallenged for fear of being shunned as it undermines the concept of, “if you’re rich, they think you really know.”
Was today risk on or risk off? The U.S. dollar continued its recent weakness as the world’s major currencies all rallied against the “safe haven” greenback. The Reserve Bank of Australia cut its interest rate last night but even the Aussie dollar gained against its sister fiat currency. Global equity markets were down as the Japanese Nikkei was weak as the inverse correlated Yen was higher by one-and-a-half percent. Yes, equity markets failed to send the U.S. currency higher.
On Wednesday, the FOMC left its interest rate policy in tact as it awaits more data before deciding to change interest rates. The FOMC statement wanted to reflect some underlying hawkishness but the market is reticent to accept the veracity of Fed releases. The DOLLAR initially rallied as the algo deemed the “hawkish” language a positive for the dollar and bearish for the precious metals but upon a very quick review the market reversed and now demands that the Fed reveal its Missouri lineage and “SHOW ME.” The yield curve gave the FED some credence by flattening in response to a change in some of the rhetoric, “near-term risks to the economic outlook have diminished.” This provides the FED the flexibility to respond to self-diagnosed headwinds in an effort to keep rates at present levels for as long as the DOVE can fly. The FED is pinned not by U.S. data but by the actions of the ECB and the BOJ.
Over the weekend there was a new and improved G-20 communique, which was supposed to offer reassurance that the primary economic decision makers have things under control. It is disconcerting that so much time was spent discussing the global uncertainty posed by BREXIT for the global equity markets have deemed the British vote to Leave the EU as non-event (at least for now) and maybe even a positive for the Davos elite to adjust previous policy decisions. It appears that some G-20 members look forward to dealing with the U.K. on trade issues outside an EU establishment that is reticent to foster trade agreements because of German and French elections scheduled for 2017.
Just some summary points as this year the summer doldrums will prove to be anything but:
While we’re waiting for the outcome of the Spanish election, I am setting the stage for a larger piece on the market reaction to a high frequency political event. There is a continuing rebuff to the global elites that only reside in their own echo chamber, much of it promoted by the established media. It’s amazing how the policy makers want to believe that the people cannot see behind the curtain. BREXIT was first and foremost a Dorothy/Wizard of Oz result.
In a bow to acronym manufacturing, I placed the idea of TAPER ON, TAPER OFF (TOTO). We got a taper but it was offset by the Fed’s forward guidance on the unemployment threshold.In the FOMC statement the FED clearly said, “The Committee now anticipates, based on the assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well PAST THE TIME that the unemployment rate declines below 6.5 percent, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal.” The emphasis on the phrase PAST THE TIME is to highlight that the Fed will keep moving the threshold on what will constitute an acceptable level of employment, if not in words but in deeds.