Remember when Yellen was Chair
And wouldn’t raise rates on a dare?
Well now she’s complaining
They should be constraining
Growth lest prices rise everywhere

Former Fed Chair, Janet Yellen, was interviewed by the Wall Street Journal yesterday and was substantially more plainspoken than during her policymaking years. (Perhaps Chairman Powell’s new style has rubbed off on her). At any rate, she closed ranks with every other central bank chief in the world decrying President Trump’s criticism of the Fed and demanding that central banks remain independent. But more interestingly, she seemed to indicate that higher rates were appropriate, so much so that she was willing to dismiss the shape of the yield curve as being important. When asked about that, her response was, “this time is different.” While that sentiment is understandable given the structural changes of the Fed’s balance sheet and its impact on long term yields, history has shown that ‘this time is never different’! In the end, though, the woman who never saw a bad reason to delay normalizing policy has suddenly turned hawkish. And while this will have no impact on markets, it does speak to the politics involved in central banking, independence be damned. Every government wants to see low rates to help support their economy. Yellen apparently was more than happy to accommodate the Obama Administration’s desires, but suddenly sees the economic rationalization for higher rates today. Go figure!

In the meantime, the dollar is doing little this morning, edging lower in mixed fashion. In the G10 bloc the biggest mover has been the pound, rising 0.5% after wage data showed growth of 3.1% excluding bonuses, the highest pace since January 2009. However, despite this rise, there was no change in the market pricing for the next BOE rate hike. Instead, it is clear that the BOE will remain on the sidelines until the Brexit situation becomes clearer. There is no way Governor Carney can consider raising rates ahead of a possible hard Brexit given the economic uncertainty that would surround that outcome. However, FX traders seem willing to bet that higher rates are eventually in store. That said, there has been no new movement on the negotiations and now all eyes will be focused on the EU meeting tomorrow and Thursday to see if something new is proposed.

Meanwhile, the Italians passed a budget last night, maintaining their 2.4% deficit projection and the EU is duly unhappy. There is now a two-week period where the EU will scrutinize the budget and either accept it or send it back for revision. If the latter, that would be the first time in history it occurred, despite the fact that the French ran budget deficits greater than the 3.0% explicit ceiling for more than a decade. Italian markets are responding favorably this morning, with both bond and stocks there rallying a bit, but there is certainly potential for further discord. Consider the fact that if the EU backs down after their recent declarations that the Italian budget was unacceptable, its ability to persuade any other nation going forward will be dramatically reduced. On the other hand, by acting they may foster a market crisis if the Italian government fights back, which based on their actions to date, they almost certainly will. As this is Europe, I expect there will be some fudge ultimately agreed, but that does not mean there won’t be more damage first. As to the euro, it is little changed on the day, and actually on the month as it has recouped its losses from the first week and seems pretty comfortable trading either side of 1.1600.

Versus the emerging market bloc, however, the dollar is somewhat softer today, falling against virtually all its main counterparts here. While the year-to-date numbers for most of this group show dollar strength, recent price action has been consolidative rather than extensive. This morning’s numbers show strength in ZAR (0.7%), KRW (0.75%), MXN (0.25%) and even CNY (0.2%), with very few decliners. As global equity markets (China excepted) seem to have found a temporary floor this morning, this FX movement appears to be of the relief variety, as investors and traders start to dip their respective toes back into risky markets. If equity markets truly find their footing, then these currencies have room to rebound further. However, another leg lower in stocks will almost certainly be followed by the EMG bloc feeling more pressure.

Turning to the US data picture, yesterday’s Retail Sales numbers were disappointing, with the headline rising only 0.1% (had been expected 0.6%) and the ex-auto number falling -0.1%. Unfortunately, it is unclear what impact Hurricane Florence had on the data, so these numbers may be quite misleading…or not. We just don’t know yet. This morning’s data brings IP (exp 0.2%) and Capacity Utilization (78.2%) along with the JOLT’s Job Openings number (6.945M). However, these numbers are not usually market movers in their own right, but rather form part of a larger pattern. As such, there is every reason to believe that the dollar will be driven by equity markets today, and with futures pointing higher in the US, it seems that risk is being embraced for now. Based on recent activity, that should actually help the dollar, although that is the opposite of what we have known for the past decade.

Good luck
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