Notes From Underground: What Turned the Markets On Friday?

The U.S. and Canadian unemployment data both were somewhat stronger than expected. The markets were trading in focus with the robust U.S. data — equities higher, DOLLAR firm, and bonds trying to adjust in the face of the FOMC‘s tapering plans.

Things took a turn around 11 a.m. eastern time. The precious metals began a ferocious rally, bonds rallied, and all the currencies began to rally actually closed higher on the day even as European interest rates moved similar to the U.S. and equities dropped from their all-time highs. What could’ve been responsible for the moves on a day of good data and, more importantly, the prevailing sense that the Biden White House was FINALLY going to get its infrastructure bill.

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In the middle of all of this, the Twitterverse was abuzz on Thursday amid the news that Federal Reserve Governor Lael Brainard visited the White House (as did Jerome Powell). My sense is that President Biden will pick Brainard as the new FED Chair, which is why the precious metals, bonds and currencies staged such action late Friday. The markets intuit that a Brainard-led Fed would be much more reticent to tighten monetary conditions until all sectors of the economy have experienced the benefits of the recovery from the pandemic.

Before the 2020 Jackson Hole symposium, it was Brainard’s three speeches on YIELD CURVE CONTROL that had captured the markets’ attention. Then the chatter YCC abruptly stopped as Powell seemed to believe it was not the correct path. Everything that Brainard has put forward in her years as a governor could be construed as leaning DOVISH, even when the conditions seemed to have warranted a change in policy. If it is Brainard — a statement I make based on market action and not the latest tweet — then the DOLLAR will reflect such an outcome.

ECB President Christine Lagarde created yet again a reason to sell EUROS with her comments the previous week. Remember, she said it is ODIOUS to compare economies in an effort to taper. Well, that gave the Bank of England Governor Andrew Bailey room to surprise the markets on Thursday as he abstained from raising interest rates. That sent the POUND 2% lower versus the euro on the week. Again, watch the DOLLAR to see what investors think about Brainard becoming FED Chair.

The case for Brainard was strongly presented in a Project Syndicate article on Nov. 1 by the MIT macro economist Simon Johnson. In the piece titled, “Reshuffle the Fed Board Now,” Johnson lays out a strong case for Brainard:

“The obvious alternative as Fed Chair is Brainard, a democrat, who is a long -time Fed governor and was previously a Treasury official with decades of experience in the trenches of macroeconomic policy making. She also cares deeply about better worker outcomes, sensible financial regulation, and addressing climate change and helped save the Community Reinvestment Act, which supports lending to low-income communities. On all of these issues, her values are fully aligned with Biden’s.”

Besides Johnson’s argument for Brainard, recall that Senator Elizabeth Warren has already voiced her support and we await Senator Sharrod Brown’s opinion. The final support for Brainard stems from her husband’s role in the Biden White House as National Security Council Coordinator for the Indo-Pacific, Kurt Campbell. Something definitely turned several markets on Friday. If my conjecture is correct get prepared for increased volatility, especially in the U.S. DOLLAR and precious metals, but be patient as this story will unfold in the wake of Congress finally passing an infrastructure bill.

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