The FX Poet will be in Nashville at the AFP Conference October 21-22, speaking about effective ways to use FX options in a hedging program.  Please come to the presentation on Monday at 1:45 in Grand Ballroom C2 if you are there.  I would love to meet and speak.
 
The great thing about recent data
Is nobody thinks it will matta
It’s open and shut
The Fed’s gonna cut
As ‘flation ambitions they shatta
 
In Jay’s mind, the risk tradeoff’s clear
As stocks work to find a new gear
However, for debt
They’re making the bet
The problems won’t hit til next year

On this Columbus Day holiday, US cash markets are closed although futures are trading, so no stock or bond market activity today.  The FX market will be open, as always, although I suspect liquidity will be less than usual, especially once Europe goes home at noon so hopefully, you don’t have much to do today in the way of hedging.

As it happens, there was not a lot of news overnight to discuss, although China did manage to once again disappoint with respect to their fiscal support announcement on Saturday, not offering up even a big picture number, let alone specific programs, that they are considering.  Interestingly, this did not deter the new China stock bulls, with the CSI 300 (+1.9%) rallying sharply, but this is becoming a sentiment story, not a data driven one.  Someone on X asked the question about why Xi was not doing more, and my view has become that he recognizes to truly get the economy going again he will need to cede some of the power he has spent the past 10 years amassing.  I sincerely doubt he is willing to do that, and since his life won’t change regardless of the amount of stimulus, in the end, holding power is far more important to him.

But let’s go back to the data driven approach and its pluses and minuses.  This morning’s WSJ had an articleby James Mackintosh titled, “The Fed Has a Dependency Problem That Needs Fixing”, and it is his view that data dependence is the current Achilles Heel for Powell and friends.  Now, I won’t dispute that the market’s tendency to extrapolate one data point out to infinity can have market consequences, but I think the point Mr Mackintosh misses is that this is a problem entirely of the Fed’s own making.  Nobody instructed them to offer their views, other than the semi-annual testimony before Congress.  Nobody is forcing FOMC members to be out blathering virtually every day (in fact, two of them, Waller and Kashkari, will be speaking today despite markets being closed).  Forward Guidance was Benny the Beard’s brainstorm, it is not a Congressional mandate, it is not in the Fed’s charter, it is entirely their own.

So, if too much forward guidance is a problem, the Fed can simply stop it.  There is no doubt the recent data releases have been somewhat confusing, with more strength than most economists and analysts have forecast, and there is no doubt that any given month’s data point is subject to certain random fluctuations and revisions.  However, consider if the Fed was not trying to guide the market to whatever their preferred outcome may be.

If there was no Forward Guidance, then each individual investor would have to analyze the current situation themselves, get their best estimate of how they anticipated the future to evolve, and position themselves accordingly.  In today’s world, there is a lot of data pointing in different directions.  Absent the Fed trying to sway opinion, position sizes would be greatly reduced, and the large reversals in markets like we saw in the wake of the recent rate cut and subsequent NFP and CPI releases, would likely be far less significant.  

When the Fed explains that they are going to keep rates lower for longer (as they did in the wake of the GFC and again post covid) that is a clear signal to investors to load up on assets that perform well in a low-rate environment (i.e. stocks).  When they change that view…oops!  That is what we saw in 2022 when they flipped the script and went from transitory inflation to persistent inflation.  Everybody who was long both stocks and bonds suffered.  

But let’s run a thought experiment.  If the Fed gave no Forward Guidance, and merely adjusted rates as they saw fit, investors would have had significantly less confidence that regardless of what had clearly become an inflation problem, the Fed was going to maintain low interest rates.  There would have been a much more gradual move out of risk assets as investors determined inflation was a problem, and the Fed wouldn’t have had all that egg on their face when they had to admit they made a mistake about inflation.

In the end, I disagree with Mackintosh that the Fed should essentially ignore the data, but I agree that they shouldn’t talk about it at all.  In fact, I think we would all be far better off if none of them ever said a word!

Enough of my diatribe.  Let’s see how the rest of the world’s markets behaved overnight.  While mainland Chinese stocks performed well, Hong Kong (-0.75%) did not.  Japan was closed for National Sports Day, although the broad Asia look was that markets there followed Friday’s US rally as well.  However, this morning in Europe, the picture is mixed with some gainers (DAX, IBEX) and some laggards (CAC, FTSE 100) and none of the moves more than 0.3%.  The only data overnight was Chinese Trade (reduced Trade surplus of $81.7B) and Chinese financing which was modestly disappointing despite the recent efforts at goosing things there.  US futures are trading this morning and at this hour (7:00) they are mixed with modest gains and losses of ~0.25%.

With Japan closed along with the US, it should be no surprise that bond market activity is extremely limited with yields essentially unchanged this morning from where they were at Friday’s close.  However, remember that 10-year Treasury yields are higher by nearly 50bps since the day before the FOMC meeting.  This is an important signal that market participants are far more concerned about inflation than the Fed.  On this subject, I think the market is correct.

In the commodity markets, oil (-2.4%) continues its recent decline as the long awaited and feared Israeli response to Iran’s missile attacks seems to have been postponed further.  The absence of that supply concern alongside the lack of Chinese stimulus, and by extension demand, has weighed heavily on the market.  Gold is unchanged this morning although we are seeing some softness in the industrial metals with both silver and copper softer today.

Part of that metals weakness is due to the fact that the dollar continues to rise against all forecasts.  This weekend there was a meeting of the old Soviet nations, the CIS (absent Ukraine of course) and they pledged to stop using dollars in their trade.  This is in the lead-up to the BRICS conference to be held next week in Kazan, Russia, where once again many claim that this group of nations will create their own currency in their efforts to get away from the dollar’s hegemony.  Whether or not they formally do so, I have yet to see a path that includes a cogent rationale for anyone to use this currency, especially if it is backed by a series of nonconvertible currencies like the CNY, BRL and INR.  But it does generate clicks in the doomporn sphere.  

But back in the real world, the dollar is just grinding higher vs everything this morning with NOK (-0.8%) suffering on oil’s weakness and AUD (-0.5%) and NZD (-0.5%) under pressure because of metals weakness and lack of Chinese stimulus.  ZAR (-0.8%) is also feeling the metals weakness but JPY (-0.4%) and CNY (-0.35%) are all softer this morning.  In other words, it is business as usual.  In fact, for those of you with a market technical bias, a quick look at the euro chart seems to define the concept of a double top.

Source: tradingeconomics.com

On the data front, aside from loads more Fedspeak this week, and the ECB monetary meeting on Thursday, the big data print in the US is Retail Sales, also on Thursday.

Tuesday	Empire State Manufacturing	2.3
Thursday	ECB Rate Decision	3.25% (current 3.5%)
	Initial Claims	255K
	Continuing Claims	1870K
	Retail Sales	0.3%
	-ex Autos	0.2%
	Philly Fed	3.0
	IP	-0.1%
	Capacity Utilization	77.8%
Friday	Housing Starts	1.35M
	Building Permits	1.45M

Source: tradingeconomics.com

Adding to today’s Fedspeak, we hear from eight more speakers this week. With the Fed funds futures market pricing a 14% probability of no cut at all in November, which would be remarkable given the 50bp cut they made last month, it strikes me that there will be very little new from the speakers.  Rather, if the data this week comes in hotter than forecast, that is going to be the market driver.  I think it is fair to say the Fed has made a hash of things lately.  As long as the data continues to look good, though, I have to believe that fears of renewed inflation and higher rates are going to support the dollar.

Good luck

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