Outlook: The CPI data today is a massive Risk Event. If you think CPI and core will both slide downward even a little, it’s dollar-negative and the euro in particular can rally to as high at 1.0517 (the 50% retracement of the downmove from Feb 9, a somewhat arbitrary choice of starting points). The 50% target would be 1.0942 if we start at the Jan 2021 high. That’s if headline CPI falls to 7.9% from 8.2% y/y as expected.
But the consensus expectation of a drop in the headline or both measures is by no means a sure thing. The Cleveland Fed CPI Nowcast sees the Oct headline number at 8.1% instead of the consensus 7.9%. Core CPI will stay the same at 6.6%, not the marginally better 6.5% of the consensus. But Trading Economics expects 6.7%, higher than last time, not lower, and it can be argued that core is the critical number.
So, if core is higher, then what? The conventional reasoning would go like this: the Fed will do 50 bp in December, as all but promised, but the absence of happy data make the journey a longer one. Instead of hiking ending in Q1, it can’t end until Q2, if then. That puts some starch back into the dollar’s spine.
Here is where we bring up the old hobbyhorse, Lag. The conventional wisdom has it that it takes 12-18 months for monetary policy to have a true, visible, credible effect on inflation. It’s silly to imagine hikes that began only in April/May will get the job done in that one year. We can easily start hearing about hikes persisting into Q3 next year, or how about Q4? The critical charge will be that this is “fine-tuning” something that is rough and intractable.
To add to the messy situation, Bloomberg points out that inflation expectations the next day could be as important to the Fed as the CPI data (which theoretically it doesn’t use anyway, preferring the PCE version). “While an expected fall in CPI will likely be welcomed by investors, Friday’s University of Michigan 5-10 year inflation expectations will resonate with Federal Reserve officials fearful of price rises becoming entrenched. The index rebounded to 2.9% in October and a further increase may put further pressure on them to raise rates even higher than expected, weighing on assets from stocks to bonds.”
Richmond Fed Barkin said the “slow return to normal levels of inflation could threaten the stability of inflation expectations.” That use of the word “slow” may well be a clue (or just his usual cautiousness).
Bottom line, it’s a fool’s game to trade the CPI numbers. An unhappy surprise can easily make prices leap right over your stop or target, just as in payrolls. It might be fun to micromanage a position, but then that’s playing and gambling. We feel Miss Grundy about it. Besides, the crypto fallout hasn’t come down on us yet, nor the equity market’s response. Trading FX today is like playing blackjack with 100 decks instead of the conventional one or two.
Supply Chain News: The chart is the Statistica global supply chain index to September. The comment notes that we got an upward blip in April because of the Chinese lockdowns but we think the chart looks simply wonderful.
But don’t get too happy. Bloomberg reports the inventory of diesel fuel remains dangerously skimpy, and also that the falling Mississippi River is so dire it can affect global food supplies.
Fun Tidbit: We don’t follow crypto for a dozen reasons, the first of which is that we wouldn’t trust nerdy guys with a 14-year old mentality with our money, nor money-grubbing scamsters, for which crypto was custom-designed. Sure enough, the latest contretemps is the failure of Bahamas-based (clue) FTX, founded by a guy who uses three names and has 1960’s hair. The FTX token lost nearly 100% of its value in two days, taking bitcoin and others along with it.
Wolf Street writes “Bankman-Fried also founded crypto-trading firm Alameda Research, and the whole mess became public a few days ago when CoinDesk reported that a quarter of the holdings of Alameda Research may be made up of the FTX token, which entered free-fall, which triggered the solvency crisis. The website of Alameda Research has now been taken down. The SEC and CFTC are investigating FTX.”
“The SEC and CFTC (Commodity Futures Trading Commission) are investigating whether crypto-exchange FTX.com mishandled customer funds, following the disclosures of a solvency crisis, according to Bloomberg, citing three people familiar with the matter.” In fact, Bloomberg goes one, the regulators had the two companies on their radar long before this “liquidity” problem.
The world’s biggest crypto exchange, Binance, pulled out of a rescue operation at the last possible moment. Bloomberg reports Binance found a $6 billion discrepancy on the balance sheet.
Wolf Street writes “Turns out that the fundamental principal in Decentralized Finance (DeFi) is that every firm must be deeply interconnected with other firms, each holding the other’s token, and lending to the other, and bidding up each other’s tokens, so that if one firm goes to heaven, they all go to heaven together – which they did – and when one firm goes to heck, they all go to heck together – which they’re now doing. Makes for very smooth and efficient contagion.
“This was tested successfully by Voyager Digital, a crypto platform, crypto lender, and crypto broker, which filed for bankruptcy on July 6, after crypto hedge fund Three Arrows Capital went to heck amid huge leverage when cryptos plunged. Voyager had lent 15,250 bitcoins and 350 million USD Coins to Three Arrows ($650 million at the time), and Three Arrows went to heck and defaulted on that loan, and Voyager went to heck, and whoever had fiat or crypto in an account at Voyager is now an unsecured creditor in a bankruptcy case.
“Celsius Network, one of the largest crypto lenders, also went to heck in July because it traded other cryptos that it had borrowed from its users – similar to a bank but without any safeguards – and then the cryptos it had bought plunged after terraUSD and luna had gone to heck, and Celsius could no longer pay back the loans to its users, and Celsius went to heck, and its users are now unsecured creditors in the bankruptcy proceedings.
“They all hold each other’s tokens, and they all bid up each other’s tokens to mind-boggling levels amid gobbledygook theories of the new financial world, called DeFi, but now they want to sell each other these tokens, and prices collapse and exchanges, trading firms, and lenders go to heck?” The Wolf Street newsletter is free. Letters from readers are sometimes as trenchant as the essays. One notes that the initial goal of bitcoin and its cousins was to avoid regulation (but nobody needs it more). Also, remember when bitcoin was going to be the ideal hedge against inflation? That was when it was priced at $65,000. It’s $16,158 now. We especially like “Never buy something when the seller tells you that you are too dumb to understand to product.”
Politics: The Republican failure to win much in the mid-term election had Trump irate–furious, in fact–according to insiders. To add insult to injury, Florida Gov DeSantis turned the state fully red in every office for the first time, stealing the limelight–and this is the guy who will likely run against Trump for the presidential nomination. Vanity Fair writes that adding insult to injury, “Rupert Murdoch’s media empire has all but crowned the Florida governor the new de facto leader of the Republican Party.” Trump calls him “DeSanctimonious.” The Economist calls him Trump’s nemesis.
Vanity Fair writes “According to multiple reports, Donald Trump is in the midst of an hours-long meltdown, given the number of candidates he endorsed who have lost, and the fact that a GOP sweep would have positioned him well to announce a 2024 run for the White House. ‘Trump is livid’ and ‘screaming at everyone,’ an adviser to the ex-president told CNN’s Jim Acosta Wednesday morning, with the adviser adding that his boss only had himself to blame for backing ‘bad candidates.’” He blames Melania, too, for going along with the Oz choice.
Florida aside, and Florida is by far the weirdest state in the union, we’d guess the excellent outcome for the Dems is due to a combination of serious dislike of Trump, anger at the Roe v. Wade decision and commitment to reversing it by law, and a show of faith in democracy over sore losers jiggering the results. The Dems won chiefly because women and blacks showed up. We don’t have the final turnout yet, but it’s enormous and far more than we usually get in a midterm election.
52% of voters nationwide in CNN exit polls said they dislike Trump. The Trumpy extremists have alienated the regular Joe, who just want the circus to stop, as one analyst put it. This is a reversal of the 2016 election when voters disliked the woke, holier-than-thou, cancel culture, identity politics of the Dems so much that they rebelled and took a chance on the outlier. They won’t do that again for a while.
In the end, the Republicans may win both houses, although we think they can hold the Senate. Never mind. The Dems won something more valuable and lasting.
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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