The idea that the tightening cycle is about is end arises from some marginal US data

Outlook: The idea that the tightening cycle is about is end arises from some marginal US data and the Reserve Bank of Australia pulling in its horns a little. These set off a storm of wild optimism that is 99% wishful thinking, including the idea that the pound deserves a second chance and a level from pre-crisis days (1.1496 at the high). Sterling has now fallen back close to 1.1370, just as the euro has fallen back from near-parity to as low as 9811.

It’s risky to say so, but as the US yield starts to recover, so does the dollar. As we so often complain about, the causal relationship is sometimes a hard correlation and sometimes missing in action altogether–but it’s always there, whether upfront or in the background.

The drop in job openings yesterday is hardly sufficient to push the Fed toward lesser or slower rate hikes. It’s premature to imagine what size and combination of data it will take to achieve that end, and even if every single indicator is on the downside, the Fed will still be waiting for the core PCE to dip to an acceptable level.

Fed chief Powell has admitted the labor market is influential in the Fed’s decision-making, but tricky. To propose the Fed will follow the RBA is silly. Yesterday Fed Daly said something unusual–the usual same-old, same-old that high inflation “will require that we follow through on our commitments to bring inflation down, which does mean further rate hikes and holding those restrictive policies in place until we are truly done with bringing inflation back to target.” But then she added “I really see us being able to slow the economy, slow growth, slow the labor market. Yes, there will be an increase in unemployment, but I think the 4.5% range is the right range.”

We assume she is referring to the year-end Fed funds rate. The pending pivot idea is also disrespected in the Fed funds futures, where the expectation of 75 bp at the Nov meeting remains nicely above 75%. Most sources persist in seeing the year-end rate at 4.50-4.75%.

Today we get the ADP private sector jobs report, the trade deficit, and the S&P and ISM service sector indices. ADP and the services PMI’s can be drivers. The services PMI is expected at 56.0 from 56.9 in August, which was the highest since April. Unless it’s a dud, it may offset the weaker manufacturing PMI. As for the ADP private sector job change, ADP claims the re-working of its model is accompanied by the warning that it’s not trying to mirror nonfarm payrolls (so please stop doing that). Frankly, nobody believes ADP,

The ADP forecast is jobs up 200,000 from 132,000 in August. For Friday’s nonfarm payrolls, the consensus calls for a gain of 263,000 vs. 315,000 in August. The unemployment rate will be steady at 3.7% and average hourly earnings gain will fall a little to 5.0% y/y.

There is nothing here to suggest the recession is just around the next corner and the Fed will chicken out. That doesn’t mean the dollar sellers and equity index buyers are a small minority, but it does suggest they are delusional. Remember they did something similar last summer.

And let’s apply the same principle–nothing has really changed–to sterling in particular. PM Truss is speaking to the Tory party and while we await a full report, it looks like the Kwarteng retraction of the high-earner tax cut was the anomaly and Truss is not actually retreating on any of the Reagan/Thatcher supply side ideas. In short, this is going to come back to bite the Tories on the backside, even without a financial sector problem, and that includes biting the pound.

Tidbit: Presidents Xi and Biden meet next month for G20 in Indonesia. Henry Kissinger, speaking at the Asia Society, says Xi may decide to distance himself from pariah Russia lest disgust and isolationism rub off on him–forbidden chips and tariffs notwithstanding.

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