Daily Commentary

MarketMinder’s View: According to the European Commission’s Economic Sentiment Indicator, economic and consumer confidence fell sharply this month: “The figures, measuring economic sentiment across five key sectors of the European economy, also reveal employment expectations are under pressure across the EU and euro zone. Employers in the retail trade, services and industry sectors are all adjusting their employment plans against a backdrop of ongoing war in the Middle East.” This, alongside weakness in recent eurozone business surveys, has sparked fears of “looming ‘stagflation.’” The rest of the article speculates about how the situation in Iran may evolve from here, which we don’t offer an opinion on—our interest is more on the economic and market implications. While we don’t dismiss the possibility of an escalation in the conflict, it is critical to think in terms of probabilities when it comes to investing. History suggests war in the Middle East may spook markets in the short term, but over the long term, stocks recognize the broader economic fallout is limited. That sentiment surveys already reflect worst-case scenarios indicate to us that it won’t take much to positively surprise to the upside.

MarketMinder’s View: While we have a few small quibbles, this is a great takedown of the Fed’s economic forecasting and forward guidance—two attempts at transparency that tend to hurt the Fed’s credibility. Once upon a time, the Fed was opaque by design, with former Chair Alan Greenspan perfecting the art of Fed speak—noncommittal jargon-laced muttering that didn’t make much sense so that policymakers wouldn’t back themselves into a corner. For the past 20 years, the Fed has pursued the opposite, transparency, signaling clearly its expected economic and monetary policy outcomes. Even though the fine print says none of this stuff is airtight and all decisions are data-dependent, it often gives the impression of the Fed saying one thing and doing another. “The Fed’s quarterly forecasting exercise is bad for the Fed’s credibility. The most conspicuous feature of the SEPs [Summary of Economic Projections] in recent years is how wrong they’ve been. Officials since 2022 have chronically goofed in predicting the pace at which they’d pull inflation down to their 2% target rate, exposing the technocrats’ faulty grasp of how the economy works. Beyond an economic embarrassment, this is a political-economy nightmare. The rationale for vesting awesome powers in a politically insulated central bank is that sage technocrats will make wise decisions. The Fed undermines this premise four times a year by giving the public ample grounds to question officials’ sagacity.” Yuuuuuup. Now, where we think this goes a little far is in arguing Fed guidance steers markets, obliterating “important price signals” policymakers should otherwise follow. Yet fed-funds futures and Treasury markets often shift before the Fed talks, and the Fed often ends up being a rate follower rather than a rate setter. Yes, forward guidance can affect sentiment, but markets price it quickly and move on.

MarketMinder’s View: The dollar losing its reserve currency status is an age-old false fear—not just because it isn’t in decline, but because the US doesn’t really get anything from the dollar’s role in international trade or currency reserves. None of this props up the greenback or US debt, contrary to popular myth. Nevertheless, when the fear flares, as it did this week when Iran reportedly allowed tankers to pass through the Strait of Hormuz if they paid a toll in Chinese yuan instead of US dollars, it can hit sentiment. So this piece comes in handy, explaining why the dollar’s status isn’t threatened. “Most monetary economists agree that a reserve currency must be three things: stable, supported by deep and liquid markets and underpinned by the rule of law. The euro satisfies much of this, but lacks depth, and its bond market remains fragmented and cumbersome. The yuan, meanwhile, is stable but constrained by capital controls, a state-driven rulebook, and a reluctance to issue on the scale that safe assets demand from global investors.” The rest of the article goes on to explore this in detail, contrasting the US Fed’s willingness to support liquidity globally with China’s tight controls. “The deeper problem is that because of capital controls, these funds do not circulate freely enough to allow genuine price discovery. It means what emerges is not a market, but an allocation. The beauty of dollar markets is that their depth and reach mean they can be raised almost anywhere, moved freely, and find a price rather than be directed to one.” For more, see one of our many articles on the subject, like 2023’s “The Dollar’s Reserve Currency Status Is No Sure Privilege.”