Outlook

This week’s pivotal data for the market comes from sources outside of the United States. The UK, Canada, and Japan all report inflation, which could change central banks’ outlooks. The RBA meets in Australia. On Wednesday, the Fed released the FOMC minutes.

On Thursday, a tonne of PMIs will be released. It is anticipated that Europe will outperform the US. On Thursday, the US S&P manufacturing flash for May is anticipated to be 49.9, down from 50.0 in April, hehe. The composite is expected to remain at 51.3, with services expected to increase to 51.4. The more reputable ISM version isn’t delivered to us until the first week of June. These days, PMIs are (perhaps) the best indicator for comparison.

April existing-home sales in the US are predicted to increase 0.6% month over month following the catastrophic

March saw a 4.3% decrease. Sales of new homes, which make up a far smaller portion of all sales, are predicted to decline to 2.1% m/m from 8.8% in March.

Strangely, the sale of inflation-linked 10-year JGBs caused the Japanese 10-year JGB to surge to its highest level in more than ten years. However, the dollar/yen hardly moved, maybe suggesting that Friday’s lower CPI will likely defy expectations of a rate hike and give the government insufficient means to prop up the yen.

The April CPI for Canada could be the big deal tomorrow. Expectedly, the headline will decline by two-tenths to 2.7% y/y, the lowest since March 2022. The core should also decline. Analysts recall Governor Macklem stating that rate cuts were “getting closer.” Though July is fully priced in and June is still feasible, it remains to be seen if the BoC would move before the Fed and, if not, what would happen to the CAD.

Every week, hawks and doves alike advise us to exercise patience and caution. We hear this from a plethora of Fed speakers. This is a result of being afraid to ease too soon. According to one economist, there is an 80% chance of a cut in September, 33% in July, and 10% in June.

Forecast: While output and wages are important determinants, central banks should also base their decisions on inflation. You’d think that improving PMIs in Europe, for instance, would counteract the headwind of sticky inflation and the expectation of a cut in June, but no, June it is. You would imagine that the euro would begin to feel the effects of forecasts of a June rate decrease in late May as well, but not quite. There is a lot of “maybe, but not yet” this week. That suggests trading ranges and a great deal of uncertainty. Dollar shorts will likely be heavily covered after the week is done and we face the US 3-day vacation (or 4-day holiday, if Friday is included).

Interesting fact: Bridgewater’s Dalio has once more issued dire predictions regarding the US deficit. Old-timey conservatives have not lost their minds, like the new guys, even if they stay mum about their new leader, Trump, who promises bigger deficits. Recall that while the Republicans often claim to care about budget deficits, they never actually do so; Clinton was the only president to reduce the national debt.

We now have updated information from an organization called the Bipartisan Policy Organisation. Here are some important details, courtesy of MishTalk.

“As adjusted for timing shifts, the government’s cumulative deficit in FY2024 is $1.1 trillion, which is $46 billion more than it was during the same period in the previous fiscal year.”

Revenues up to February totaled $2.2 trillion. Spending reached $3.3 trillion as of March. A $95 billion aid measure approved by Congress recently for Israel and Ukraine is not included in those figures.

The forecasts appear more bleak. “Deficits will surpass $1.5 trillion (an average of 5.6% of GDP) in each of the following ten years as expenditure keeps rising faster than revenue. Deficits for FY2024–2033 are expected to be cumulatively $1.4 trillion lower than the budget outlook for May 2023.

Mish notes The two most important assumptions made by the Fed are that there won’t be any recessions and that, in the long run, inflation will be kept under two percent regardless of what Congress does. Put another way, the Fed believes it is in charge even if history indicates otherwise. The Federal Reserve has never predicted or identified a recession in real-time.

With $27 trillion in public debt, the deficit currently stands at almost $34 trillion. Over $1 trillion is owed in interest on the national debt. Bondholders receive money that would have been allocated for investments. Debt expenditure cannot be fixed by any party. The Fed won’t either.

Therefore, it is true that the deficit situation is grave and getting worse. The “So What?” question is whether the FX market cares as a matter of practical finance. Yes, if it were any other nation except the hegemon and any other currency besides the numeraire (decided upon by traders). No, since the dollar is the numeraire and the US is the hegemon. or not yet, at any rate.

Statistica presents a breakdown of SWIFT transactions by currency as of March 2024 separately. Unfortunately, the images are difficult to copy and paste, but the chart is interactive and may be used without a subscription, which comes at a cost of about $4000. The crucial information is that 59.5% of transactions are made in US dollars. It is the numeraire because of this. The euro is at 12.13%, the yen is worth 5.9%, the pound is worth 4.72%, and the Chinese yuan is worth 3.18%.

In 2024, the euro and US dollar accounted for about seven out of ten SWIFT payments globally, outpacing several other currencies. This is in line with a monthly report created to monitor China’s yuan renminbi’s market share within the SWIFT international bank transfer system. Despite having the world’s greatest foreign exchange reserves, the yuan is just the ninth most widely utilized currency for international payments. The data do not include trade and only pertain to payments initiated by customers or institutions.

As an aside, WWII broke the financial back of the previous hegemon, the UK, and led to the US becoming the hegemon in the first place. The UK was in debt and poverty after the war. With the support of all the other participants in the Bretton Woods conference, the US seized control, mostly because there was not a single other candidate who was even remotely likely to win. Could the US experience a similar situation? Indeed. Is it possible for the EU to replace the US at some point? It has certain advantages, such as debt-limitation treaties. However, several things about unions are lacking, such as a single genuine leader, a single bond market, and a single defense organization.

Reasons for the Fed to Cut rates

Don’t make the mistake of miscalculating inflation twice. Normalize the yield curve. Stop any signs of a recession. Mortgage rates can aid in housing. assist banks with commercial real estate loan rollovers. Assist the financial market.

Keep in sync with the ECB (as well as SNB and Riksbank).

(Aid the White House today).

This is a small sample from the much longer “The Rockefeller Morning Briefing,” which has roughly ten pages. The Briefing is a daily publication that has been providing knowledgeable analysis and insight for more than 25 years. The paper provides extensive background information and is not meant to advise FX trading. For trading reasons, Rockefeller generates additional reports (in spot and futures).