Great article FX Hedge! I agree with pretty much everything you said. But let me add another element to why rate cuts are coming, and h/t to Luke Gromen @ FFTT for educating me on the following....
In mid-October, the MOVE index hit 140, indicating acute US Treasury market dysfunction (5th time in four years: Sep. 2019, Mar. 2020, Sep. 2022, Mar. 2023) had returned as there were several weak auctions. Fed speakers immediately started talking the USD down in the following weeks, then the QRA came out telling us Yellen is going to push the huge supply of bonds to the front end of the curve. What happened then?
November saw the most significant easing in financial conditions in any single month in the past four decades, and US bonds had their best month since May 1985. Yellen running down the TGA by $100-$150 in November certainly helped, and it was no surprise everything went up (gold, BTC, equities, & bonds) except the dollar (and oil, which is another story).
But what else happened in November? November US True Interest Expense (Social Security + Medicare + Medicaid + Interest Expense) was $345 billion vs. tax receipts of $275 billion. Fiscal Dominance has arrived (https://thexproject.substack.com/p/fiscal-dominance).
US fiscal position is forcing the Fed to stop hiking (weakening the dollar) and forcing the Fed to cut rates before inflation is back down to its targets. So I agree there are political and self-preservation angles to the Fed pivoting to cutting rates. But this is really a desperate effort the keep the financial house of cards from crashing by weakening the US dollar significantly in order to drive US asset prices and inflation significantly higher, which will allow US tax receipts and GDP growth to rise significantly, which they hope will reduce deficits and therefore US Treasury issuance.
But, all that will at some point (maybe past the election they hope) once again weigh on the US Treasury market, and then what? I fear the end-game is near as the road on which they've been kicking the can down appears to be a dead-end with a brick wall ahead and bond vigilantes from behind fast approaching.
Even with government spending at high levels GDI is in contraction and when combined with other indicators is showing that recession is near. This leads me to believe that tax revenues are set to decline and substantial borrowing will be needed to make up the difference as election year spending kicks in. I think the $6T guess should not be completely discounted. Any attempt by the Fed to soak this up could easily set up an inflationary spiral with all sorts of ugly consequences. As an aside, IMO the TGA should be counted in the money supply as the Fed is acting in the role of a commercial bank.
I'll never understand why no one is talking about this. Powell will get fired if he doesn't slash rates to goose the economy and stocks to prop up his pal Biden. End of story.
I’ve heard it suggested that they’ve told outlets this is not to be reported on, and seeing how controlled the media has become, that could be why. This will enhance the surprise factor and the anger.
First, excellent description of things and certainly you make viable points. But consider the following: Is Powell really beholden to Biden? I would make the case that Powell, who doesn't need the job or headache as he is a centimillionaire, is far more concerned with his legacy than whether he gets reappointed. if we all recognize that easing at this point will reignite inflation, and it will, especially in the housing market, then he is as well. and the last thing he wants is to have to answer questions as to why he was so quick to pivot before inflation reached their target on a sustainable basis. PCE at 4% again is going to be a massive problem for him, and we need only see a bit more escalation from the Middle East, where Iranian proxies are upping their level of attacks and working to shut the sea lanes there. and inflation will prove far stickier than the equity bulls and Fed doves currently believe. I would contend that the fear of being labeled the second Arthur Burns is quite real for him and that is going to prevent too much further policy ease.
Nixon and crew thought removing gold peg would fix things. Money should be scarce. The globe has never been in so much debt and derivatives during non world war. America in the pre King Bush era had adequate manufacturing to work its way thru tough times. Not so today. Foreign-owned NA manufacturing might create a bit of a buffer but the owner may use complex FX to repatriate.
Great article FX Hedge! I agree with pretty much everything you said. But let me add another element to why rate cuts are coming, and h/t to Luke Gromen @ FFTT for educating me on the following....
In mid-October, the MOVE index hit 140, indicating acute US Treasury market dysfunction (5th time in four years: Sep. 2019, Mar. 2020, Sep. 2022, Mar. 2023) had returned as there were several weak auctions. Fed speakers immediately started talking the USD down in the following weeks, then the QRA came out telling us Yellen is going to push the huge supply of bonds to the front end of the curve. What happened then?
November saw the most significant easing in financial conditions in any single month in the past four decades, and US bonds had their best month since May 1985. Yellen running down the TGA by $100-$150 in November certainly helped, and it was no surprise everything went up (gold, BTC, equities, & bonds) except the dollar (and oil, which is another story).
But what else happened in November? November US True Interest Expense (Social Security + Medicare + Medicaid + Interest Expense) was $345 billion vs. tax receipts of $275 billion. Fiscal Dominance has arrived (https://thexproject.substack.com/p/fiscal-dominance).
US fiscal position is forcing the Fed to stop hiking (weakening the dollar) and forcing the Fed to cut rates before inflation is back down to its targets. So I agree there are political and self-preservation angles to the Fed pivoting to cutting rates. But this is really a desperate effort the keep the financial house of cards from crashing by weakening the US dollar significantly in order to drive US asset prices and inflation significantly higher, which will allow US tax receipts and GDP growth to rise significantly, which they hope will reduce deficits and therefore US Treasury issuance.
But, all that will at some point (maybe past the election they hope) once again weigh on the US Treasury market, and then what? I fear the end-game is near as the road on which they've been kicking the can down appears to be a dead-end with a brick wall ahead and bond vigilantes from behind fast approaching.
Even with government spending at high levels GDI is in contraction and when combined with other indicators is showing that recession is near. This leads me to believe that tax revenues are set to decline and substantial borrowing will be needed to make up the difference as election year spending kicks in. I think the $6T guess should not be completely discounted. Any attempt by the Fed to soak this up could easily set up an inflationary spiral with all sorts of ugly consequences. As an aside, IMO the TGA should be counted in the money supply as the Fed is acting in the role of a commercial bank.
I'll never understand why no one is talking about this. Powell will get fired if he doesn't slash rates to goose the economy and stocks to prop up his pal Biden. End of story.
I’ve heard it suggested that they’ve told outlets this is not to be reported on, and seeing how controlled the media has become, that could be why. This will enhance the surprise factor and the anger.
First, excellent description of things and certainly you make viable points. But consider the following: Is Powell really beholden to Biden? I would make the case that Powell, who doesn't need the job or headache as he is a centimillionaire, is far more concerned with his legacy than whether he gets reappointed. if we all recognize that easing at this point will reignite inflation, and it will, especially in the housing market, then he is as well. and the last thing he wants is to have to answer questions as to why he was so quick to pivot before inflation reached their target on a sustainable basis. PCE at 4% again is going to be a massive problem for him, and we need only see a bit more escalation from the Middle East, where Iranian proxies are upping their level of attacks and working to shut the sea lanes there. and inflation will prove far stickier than the equity bulls and Fed doves currently believe. I would contend that the fear of being labeled the second Arthur Burns is quite real for him and that is going to prevent too much further policy ease.
Nixon and crew thought removing gold peg would fix things. Money should be scarce. The globe has never been in so much debt and derivatives during non world war. America in the pre King Bush era had adequate manufacturing to work its way thru tough times. Not so today. Foreign-owned NA manufacturing might create a bit of a buffer but the owner may use complex FX to repatriate.