This week we need to watch the response of the bond market to the labor market statistics

Outlook

Aside from war news, this week we need to watch the response of the bond market to the labor market statistics. Today it’s JOLTS and tomorrow, the ADP private sector job count. Bloomberg notes the 10-year is down a bit, having “slid a cumulative 25 basis points in the past two weeks as signs of progress in resolving the Iran-US conflict raised hopes that oil prices would fall lower, easing inflation expectations.”

The slew of jobs data could “sway traders’ bets on Fed policy. Swaps currently imply 17 basis points of rate hikes by year-end, equivalent to around a 70% chance of a quarter-point rise. A full increase is priced by March 2027.”

Again, this would place the Fed far, far behind the curve, as the bond gang has tended to judge for decades. An offset may well be the start of contracting the Fed’s ridiculously vast balance sheet, at $6.7 trillion. This is going to be tricky—stay tuned.

It’s a bit silly, but the robust economy in the face of a Fed dithering demonstrates to the far right fringe that we don’t need a central bank. It’s not true, of course, and Warsh wants to restore the Fed to its central job, thank goodness. 

About Japan: There is only one question: is there anyone left who would still want to short the yen? We are at or near an extreme of tension—we had jawboning and intervention and neither worked. And yet no one has the guts to break the red line at 160. This is an unstable situation and to be avoided. Something will break—or not.  

Forecast

Commentators think Trump is “desperate” for a deal with Iran, hence his throw-away comments that he’s in no hurry. We are not so sure, because he is surrounded by nutso hawks as well as more moderate advisors, and those hawks are telling him to bomb the hell out of Iran and display US power. Trump loves to exercise power. The probability favors TACO instead of resumption of all-out war, but nobody knows the exact odds.

Iran already got Trump to chicken out on trying to “manage” Israel, but that worked for only a few hours. All the same, Iran has the upper hand by withdrawing from talks if Israel remains recalcitrant. Apparently Netanyahu tried for years to get all the presidents to go along with this war and they were all smart enough to refuse, until Trump. Their advisors pointed out these exact consequences—closing the Strait, managing Israel, keeping their proxies like Hezbollah. Trump has lousy advisors.

It’s becoming harder to believe a deal is going to get made any time soon. It will get made, and it will most likely get made at the expense of Trump’s ego. It’s going to take some time for him to realize he has lost. While this is going on, we can get the periodic dollar rally-ette as we saw yesterday, but unless the full-bore war starts up again, the die is cast—dollar down.

One more thing: the ECB is expected to raise rates next week. Others have already done it, mostly EM’s, or talked about it (NZ). Meanwhile, the US is dragging its heels. This is also a dollar-negative.