Outlook

In the US today, we get the Jan trade balance, consumer credit and the Baker Hughes rig count, newly of interest again now that oil prices are so high. We may get the Senate vote over the weekend on the Biden stimulus bill.

But the headline today is nonfarm payrolls, forecast up by 210,000 in Feb by the WSJ panel. New jobs were a measly 49,000 in Jan, so this would be an improvement, if not making much of a dent in the 22 million lost last March and April. Again, note that the number is seasonally adjusted, which inflates it.

Like so many other reports, the WSJ rushes from the data itself straight to other indicators like consumer spending and retail sales, obviously on the upswing and thus pushing job creation sometime soon. It veers off into backlogs at ports as far as the eye can see and port jobs paying $45,000/year. This is slanted reporting, to say the least. Hidden in the weeds is the Congressional Budget Office estimate that it will take until 2024 to get all the lost jobs back.

This is important. The Fed has made it perfectly clear that job recovery is its top priority, with inflation running second. When important news outlets like the WSJ chose to emphasize other components of the economic recovery that influence inflation, they are disrespecting the Fed as well as giving bad hidden advice to readers. The end result is likely to be the same old divergence between the market (“Inflation is coming! Inflation is coming!”) and the central bank (“Let it come, we care about jobs”). We see talk these days about “influencers” in things like fashion and music. We can’t forget there are influencers in finance, too.

Here’s another one, far less subtle” Bloomberg says “The Fed appears to be treating the stock market as its measure of whether bond yields have risen too much. If rising yields spark a significant equity selloff, as happened at the end of 2018, it’s fair to expect that the Fed will respond with extra support for the bond market. But not before that.”

We say not only is this wrong, it sets up the wrong expectations. The Fed’s mandates have nothing whatever to do with the stock market. If the Fed takes some action that ends up having a stock market effect, it’s critical to pick apart cause and effect. The events at end-2018 may have appeared to be the Fed responding to the stock market, but there were other factors in the contextual picture, including an unruly and disorderly guy posing as president. That is not to imply the Fed’s conduct was politically motivated, either. What was really happening was something else rare–”the Fed admitting it had made a mistake and was recalibrating. At the time we were copying and pasting the CME Fed funds futures table every day, displaying the divergence between the market and the Fed.

Might this be another case of the Fed having made a mistake? The Feds including Powell are admitting they see the bond market action–”it has “caught their attention.” The question now is how much do yields have to rise before the Fed would concede again it has been in error? Well, it’s surely a lot more than 1.55%.

If we consider the anatomy of the panic last week and this week, we get a high of 1.525% last week and 1.556 this week. Last Friday, Market Watch reported in the evening that the yield had retreated to 1.388% and by Monday and Tuesday of this week, the high was 1.405%.

Now fast-forward to yesterday, which started with the 10-year yield at 1.465%, rising to 1.496% by 9:15 am. Then Powell’s finding nothing special by the moves, it surged to 1.550% by the close.

This is actually a pretty small change. It’sa bigger change only if you look back to (say) the fall. It’s not enough to trigger Fed intervention or anything else except “some attention.” The bond boys would have to go a lot further to trigger “concern.” It’s not the Fed’s job to meddle in the bond market. Or the stock market, for that matter. Yes, the Fed has that third mandate so seldom mentioned, to maintain financial market stability, but there’s nothing unstable or disorderly about free market traders going a little wild and then correcting themselves.

In the grand scheme of things, we had the 10-year yield at 1.35-1.50% for most of two weeks. A rout to 1.55% is not a big deal. Granted, it’s wildly higher than over the past year and it got to 1.50% fairly fast, but so what? See the yield curve chart from Market Watch. Do you see anything unstable or disorderly? The Fed can easily stick to its script that the rise in the yield curve is a normal and natural response to economic recovery.

In fact, the biggest response to dissatisfaction with the Powell message seems to be in the FX market. The stock market can come back a lot faster than the currencies now that we have had such a dramatic reversal. This may imply that FX players think the Fed can be bent to the bond market’s will, or at the least that the bond market will push the Fed to the point of expressing “concern” over disorderly price moves. Okay, what’s the number–”1.75%? 2.25%?

We don’t trust the latest currency moves. They fly in the face of conventional economics and have some confusing and contradictory inputs, especially the peso and CAD. Plenty of FX advisors say stay out of the market on payrolls day because it makes prices far choppier than the usual actual vs. expected can account for. We agree. We need to see what has happened to yields by next Wednesday before we can judge what’s happening today. Nobody wants to wait that long! But it’s the wise course of action.

A Note on Crypto: It’s not just fuddy-duddies who scorn crypto but whippersnappers with some common sense. Sure, you can make money trading crypto. You can make money trading baseball cards, too, and at least the baseball cards are real. Crypto is not real. Critics may say money is not real, either, and that’s true, but money is legal tender and officially issued and approved by the government.

And therein lies the rub–”crypto has the appeal of sticking it to The Man, not only eschewing his money but achieving total privacy away from the prying eyes of the guv’mint, including and especially the IRS. As soon as governments start issuing their own crypto, as all the major central banks have announced (including the Fed), that virtue goes away. The government farthest ahead in developing state-sponsored crypto is China, the country that dismisses the rights of the individual, including and especially the right to privacy. That’s telling us something.

The US and ECB say crypto can be a more efficient medium for transactions. Really? If you borrow it, as you do when you use a credit card to fill up your gas tank, who is the lender and what is the lender’s compensation for making that loan? It’s going to take quite a while for crypto to achieve one of the top three characteristics of real money–”transactional capability. You can buy a Tesla with it but try using crypto to buy your morning doughnut and coffee. Banks are starting to evaluate how they will issue and use crypto. They are not doing it because crypto will be efficient or cheaper for the customer. As a 20-year veteran of the banking industry, we can assure you that no venture in undertaken that does not promise a bigger return. We saw bundling of credit card, auto and mortgage loans into Assets in the late 1980’s. The people doing that had no concern whatever for the customer, just the bonuses they would get for inventing something new.

Crypto is little more than a big fat opportunity for fraudsters and scammers to steal your money and your identity. Even big-shot crypto insiders have been robbed and scammed, and even top crypto computer geniuses have lost their passwords. Then there is that volatile asset price. Seventeen dollars one day and seventeen hundred the next and seventeen thousand a month later, back to seventeen hundred within six months. Does anyone really think the Fed would allow purchasing power to vary by so much? It would be intervening all day, every day.

Go ahead and trade crypto. Trade baseball cards, too. (Don’t try fine art or antiques; and we speak from experience.)


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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