What’s the problem if the fed funds rate goes from 0% to 0.8%?
Outlook: The nameplate is lean today, just UI claims and PPI. Someone sure is trying to cash in on UI claims. The PPI is going to undergo the same scrutiny as the CPI, but we already know its inputs, especially energy and weird things like rare earths and specialty ingredients (fertilizers), which drive prices. The market expects the PPI to drop, but even if we get it, we won’t believe it, and rightly so.
After the PPI, important data will be available. But instead of all the data to come, what we have to worry about is sentiment towards risk, and that’s becoming a turtle with a pulled head. As Bloomberg editor Joe Wiesenthal puts it, “Now the Fed is raising rates, and the meme and crypto and growth stuff is being crushed the hardest. But the question is why? What’s the problem if the Fed Funds rate goes from 0% to 0.8% or whatever? How does this change the value of Terra or a digital monkey? Of course, the Fed Funds rate alone doesn’t matter. What matters is that the big risk-taking cycle is making a 180, and rate hikes, while significant, are only part of it.
The current retreat from risk taking can be blamed on youth and inexperience – a whole generation of traders in all markets who don’t understand inflation. They disrespected institutions, especially the Fed, without understanding their true importance. They fuss confusing personal belief (crypto is a viable alternative to sovereign money) with fairy tales. They got screwed over the crypto fable and now their feelings are hurt, like the 4-year-old who realizes fairies don’t really exist and hasn’t put this quarter under the pillow. The whole thing has a Peter Pan quality to it.
It’s not the crypto or even the S&P that should scare people away, it’s China and its critical place in the supply chain for all those specialty metals and other goods. Those who trade the Australian dollar see it more clearly than anyone. We always joke that the AUD is the canary in the coal mine for growth. When the AUD falls as dramatically as we see it, we have to look to China. Remember that old phrase “China sneezes and the rest of the world catches cold?” We are here.
Another long-standing joke is that if anyone can snatch defeat from the jaws of victory, it’s Britain. Indeed, the whole Brexit saga has been mishandled from the start and no government, even pro-Brexit Boris, has shown the slightest whiff of managerial skill. Everyone loves Sunak because he comes across as competent, but it’s hard to see how he can overcome the latest batch of data, which is awful on every level.
Then there is Europe. We think EBC chief Lagarde is joining the Falcons, but realistically she’s still on the fence. That’s because the universal forecast is for recession later this year and in 2023, and they don’t want to have to reverse a “premature” uptick.
In an interview with the FT, CIO Mortier of Europe’s largest asset manager, Amundi, predicts that the euro will fall to parity with the US dollar this year. It is not only the threat of recession, but also the priority of maintaining the ceiling on government borrowing costs that in itself helps to preserve the integrity of the Eurozoin. “Such a move would leave the Eurozone central bank even further behind the US Federal Reserve in the fight against inflation and would take the euro down to $1 for the first time since 2002…”
Exactly as we have been saying for a few weeks, Mortier points out that if the ECB raises rates twice in 25bp increments from the record low of =0.50, it is simply back to zero. The market sees three rises this year and a rise to 1.5% by mid-2024, but it’s too late contrary to the aggressiveness of the Fed.
“We think they will come to zero on the [ECB] deposit rate and that’s it,” Mortier said. “In the meantime, the Fed will have done a lot more. If the ECB focused only on inflation, then 1.5% would be very likely. But it’s not.”
Here’s the kicker: “Losing sight of the euro-dollar exchange rate is a big mistake when your inflation comes mostly from imported goods,” Mortier said.
The safe-haven flow into the dollar comes and goes, with an inevitable pullback as some people regain their footing. It’s kind of funny that the peculiar behavior of the dollar/yen is also reversing. Absolutely no one can explain why the dollar/yen is on the back and the yen is rising so strongly. A refuge flow, perhaps. Recognition that the economy is actually doing better than expected. Well, no one knows, but we imagine it can’t last, not when relative real yield favors the dollar.
The best news ever: Readers know that we reject crypto for many reasons, the main one being that it is not “money” in any sense of the word. We have Schadenfreude when we read things like this summary from Bloomberg:
“Crypto’s current volatility, which saw Bitcoin fall as low as 10.5% this morning before recovering, continues amid uncertainty over the fate of stablecoins. Terra, one of the most exotics, fell 99.95% from the 1:1 peg to the dollar last week.The much more widely used stablecoin Tether, which claims to be backed by real assets, including the US dollar, has also seen its peg under pressure.Bitcoin’s decline coming amid a much broader global de-risking movement again calls into question the cryptocurrency’s function as an inflation hedge.
Treat: The FT has a great new feature called a global inflation tracker. You type in the name of a country and its inflation rate and GDP are displayed with the overall number also displayed for comparison. We generally prefer graphs that show changes over time and a comparison like this cannot incorporate a historical perspective by definition. A 1% rise in inflation means something very different in Japan than in the US, UK or Europe. The UK stagflation chart is not a bad summary of why the pound is so abnormally weak.
The FT also offers inflation data on a map where a resized country with a darker color signifies higher inflation. The biggest and darkest – India and Pakistan. The FT also offers inflation by country by sector, by specific categories (the price of breakfast) and 2022 forecasts at breakeven over 5 years as well as economists’ guesses. All in all, a tour de force that (almost) makes up for the FT’s ridiculously high subscription cost.
This is an excerpt from “The Rockefeller Morning Briefing”, which is much larger (about 10 pages). The Briefing has been published daily for over 25 years and represents experienced analysis and insight. The report offers in-depth information and is not intended to guide FX trading. Rockefeller produces other reports (spot and forward) for trading purposes.
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