We get January jobs report on Wednesday, and inflation data on Friday. Both are going the direction that supports lower rates.
But as we know, that's the direction of travel, it's a matter of whether Jerome Powell's Fed makes another move before his term ends, or if he leaves it to the Kevin Warsh Fed to clean up.
On the latter, we've talked about the prospects for the new Fed regime (which officially arrives in May) to strike a 1951-like "accord" with the Treasury (a Treasury-Fed Accord 2.0).
Bloomberg has picked up on this idea, and led the week with a piece on it this morning.
They position such an accord as a Fed-Treasury marriage (implying a cozier, if possible, relationship between the Fed and government).
That's the exact opposite of what the 1951 Fed-Treasury Accord was about.
This is about divorce.
It's about getting the Fed out of the government debt-financing business.
That forces the Treasury (the government) to be more disciplined. It stops the distortion in markets and outcomes, and preserves the value and reserve currency status of the dollar.
And the divorce, if it happens, should meaningfully reduce the risk premium in the bond market. That would immediately bring longer-term rates and consumer rates down. Then, Fed rate cuts would (as they are supposed to) be the anchor that drags longer term rates lower.
With the above in mind, let's continue our discussion on Europe, from my last note.
As we discussed, just days after the Warsh nomination, the European Central Bank said they are working on a new "liquidity framework."
Why?
Because they know the Fed backstop is at risk, under the incoming Trump-appointed Fed Chair. The 15-year era of global central bank coordination — where the Fed implicitly backstopped the ECB via unlimited access to U.S. dollar liquidity — is likely over.
So, Europe is scrambling. They've got three months. And EU leaders on meeting on Thursday, and will try to convince the world that they can self-fund their own fiscal spending needs, and access liquidity — both without restarting the European sovereign debt crisis of 15-years ago.