Outlook: We are seeing risk appetite/risk aversion seesaw and whipsaw and every other kind of saw, sometimes more than once in a single day. Nobody has a good grip on where sentiment lies at any one moment and where it might be going. You’d think, for example, that the energy price news would have popped the CAD balloon. But no, after the briefest of dips, the CAD kept rising. Does this mean traders think the price respite from Russia and perhaps the US is just hot air? Well, the additional supply from Gazprom will be only 15% of total supply used in Western Europe, so maybe. Or maybe it’s not the CAD but the USD, which fell because riskiness is lessened by the prospect of kicking the debt ceiling problem down the road. Or perhaps it’s something else entirely. Beware analysts who are certain about risk on/risk off.
Yesterday’s big data fed ideas about today’s jobless claims and tomorrow’s payrolls. The ADP forecast of private sector jobs growth is 568,000 for Sept when 430,000 was the consensus forecast. The ADP news goes a long way to paring the “pending slowdown/maybe recession” narrative. Today’s jobless claims may fall after rising for the previous three weeks, and Friday’s payrolls is now seen at 450,000 to 500,000. As for those claims (at 8:30 am today), the FT reports a drop to 348,000 from a near two-month high of 362,000 the previous week.” Claims continue to hover well above pre-pandemic levels of about 200,000 a week.”
In addition to jobs data today and tomorrow, don’t forget China comes back from Golden Week tomorrow with no fresh news about the restructuring of Evergrande. That story is over only if we get a “solution” that doesn’t hose the foreign investors. If it drags on, we have to imagine risk-off persists.
Hysteria over energy prices may have gotten a punch in the jaw, but is hardly down for the count. The FT reports some analysts see the cost of household energy in the UK rising by at least 30% and perhaps 40% next year. As noted above, Brent has surged more than 50% this year, while natural gas and coal are hitting record highs. Not only does this push inflation pressure, it also discourages household spending when any surplus cash is going to the gasman instead of clothes, restaurants & pubs, vacations, etc.
Bottom line—the recovery from Covid hit a fat speed-bump with Delta and now it’s hitting another one in the form of energy prices. It doesn’t mean recovery will halt, but it sure looks like slowing down. It’s not just Europe. The US is not dependent on an erratic supplier like Russia, but still vulnerable to the Slowdown Blues. The drop in consumer spending and capital investment has driven the Atlanta Fed to revise its forecast for Q3 GDP to a terrible, awful 1.3% from over 7% only in June. See the chart. The Blue Chip consensus hasn’t caught up and still sees 6% plus.
Add political uncertainty and there’s little reason to suppose risk-off should be the dominant sentiment. Somebody wrote the Dems are taking a knife to the Republicans’ gunfight, but so far the Plubs are holstering the gun for a couple of months. Confidence that they will become reasonable by December is one of the biggest flaws in the Dem playbook. The Republicans always scam the Dems with promises of compromise only to pull back the football at the last moment. Pres Biden wants the Senate to be the collegial gathering he served for decades. After Obama and Trump, those days are gone. The Dems already have the Wuss Problem—so many interests under one tent that whipping the group into a single position is super-hard and sometimes impossible. The Republicans have always been more disciplined in that respect and are now united in hypocrisy—“See, the Dems are overspending (and never mind our own overspending).”
Pundits are pointing out that all Congressmen and indeed, all government employees, swear an oath to the Constitution, whose 14th Amendment says nobody can do anything that would jeopardize the good faith and credit of the US government. Refusing to raise the debt ceiling, a holdover from WW 1, certainly qualifies. This brinkmanship is not only dirty politics but also, technically, illegal.
We may get a postponement of the debt ceiling issue to December as early as this morning. Again, this will look like risk-off but consider that Atlanta Fed GDP slowdown forecast. Bloomberg editor Weisenthal is persisting with promotion of the trillion-dolalr platinum coin, which maybe outlandish but no more than Republican senators violating their oath of office. He has an essay that is worth reading and includes a fair history lesson, too. Here’s a bit of it:
“The U.S. officially went entirely off the gold standard in 1971 under Richard Nixon. Dollars are officially backed by nothing. You’re not entitled to redeem anything for them. Money is created out of thin air now. And yet in many respects, particularly in our language and in our politics, the gold standard still haunts us. We still talk about quantities of money and we still fret about “going broke” and balancing the books, and “paying for” spending books. All of these ideas made some sense perhaps, when money had to be backed by some physical thing for it to retain its value. But now all of these comments are simply vestigial, and lead to us not really understanding the nature of fiat currency.
“Ironically, the one thing that could really get people to appreciate the sort of arbitrariness of fiat currency would be minting the trillion dollar coin out of platinum to avert a debt ceiling crisis. All it would take to do that would be to take a mold for an existing $100 platinum coin, and then add a bunch of zeroes to it, mint that and it would be worth $1,000,000,000,000.
“I have a new piece out this morning arguing that if we went and did that, not only would we end the crisis, we would effectively bury gold standard thinking for good. It might take the platinum standard to defeat the gold standard.”
Risk-off is not dead, only sleeping or maybe napping. We expect roiling and boiling. Any guesses on US data can get overwhelmed by other News. Cut FX positions to the bone.
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