A Great Deal of Sorrow

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With Warsh set to speak on the morrow
The rate at which we all can borrow
Has been creeping higher
Which for some is dire
And causing a great deal of sorrow

The question is what will he say
Inflation'ry fears, to allay
Seems most want to hear
That during this year
Fed funds will rise without delay

Arguably, the biggest story this morning is that Nvidia’s earnings beat handily and Jensen’s forecasts were even more bullish.  The upshot is NASDAQ futures are rallying (+0.7%) and we saw strength in the tech sectors in equity markets overnight (Korea +1.5%, Taiwan +0.3%, China +0.9%), although it was not as euphoric as might have been expected.  I read this morning that price targets for Nvidia have been raised dramatically now, so there doesn’t seem to be any slowing of that thought process.

But otherwise, bond markets remain the focus as the combination of Secretary Bessent’s efforts to hold down long-term yields and anticipation of Fed Chair Warsh’s speech tomorrow are the main topics of conversation.  Interestingly, as much as the punditry loves to hate the US for its fiscal profligacy and the story of US yields rising has been top of mind, this morning the WSJ reminded its readers that the story in the US is not quite as bad as that in other major nations like France, Italy, the UK and Japan.  The below chart leads the story on the subject and is worth seeing.

The point is that virtually every Western nation is in the same boat and is likely to stay there for the foreseeable future.  The global regime that had been in place for upwards of 40 years; globalization leading to outsourcing manufacturing and financialization of major corporations is changing before our eyes.  Covid awakened many to the fact that the G10 had become dangerously reliant on China as a supplier for too many critical inputs which led to serious strategic concerns and weakness.  As that perceived weakness is being addressed by nations around the world, it turns out it costs a lot of money to do so, and nations are struggling to figure out how to pay for it.  Promises made when those nations could apply all their tax revenue to social causes are hard to keep when those resources are now being called upon to address strategic and security needs.  Hence the massive borrowing we have seen throughout the G10 and the corresponding rise in government bond yields.

But one of the interesting things about this process is that despite government yields rising, corporate bond yields have been quite well behaved, with credit spreads remaining near their tightest levels ever.  I saw this chart this morning which helps explain that seeming anomaly and it helped clarify my thinking.

Basically, it is explaining that US corporates during Covid refinanced their debt at the rock-bottom levels of the time and reduced their interest expense dramatically.  Meanwhile, due to arguably the single greatest fiscal policy error of all time by then Secretary Janet Yellen, the US didn’t term out its debt, instead going the other way, issuing more T-bills when yields were low, thus government interest payments, as we hear on a daily basis, have climbed dramatically. I’m still waiting for some news organization to ask her about this boneheaded decision, but I won’t hold my breath.

At any rate, the bond market story is the one currently with legs and I assume that will be true at least until Chairman Warsh speaks tomorrow.  While speeches of this nature are often quite dry, I am truly looking forward to hearing what he has to say.

In the meantime, let’s see how other markets are behaving this morning.  After yesterday’s very modest declines in the US, the rest of Asia was mixed as Tokyo (-0.25%) slid alongside HK (-0.3%), neither being a major concern.  Australia (-1.0%) was the worst performer out there after stronger Household spending data bolstered the case for an RBA hike next month raising the probability to 54%.

Europe, however, is having a tougher time this morning led by Paris (-1.1%) where concerns are rising based on both a Fitch credit review of the country (last year they were downgraded one notch to A+) as well as growing uncertainty over the presidential election next year as the main candidates describe their policies to business leaders in a debate format.  But both Spain (-0.5%) and the UK (-0.5%) are also under pressure with only Germany (+0.2%) bucking the trend after a slightly better than expected GfK Consumer Confidence reading of -26.6.  I think it is worthwhile, though, to get a better idea of the situation in Germany, and by extension all of Europe, to look at that confidence measure’s history below.

Source: tradingeconomics.com

Sure, the reading was better, but how awful must confidence be in Germany.  I guess this is the way people respond to their suicidal energy policies.

While I discussed bonds in general above, I didn’t mention the overnight movement which has seen yields continue to edge back higher led by Treasuries (+2bps) with European sovereigns right there, rising between 1bp and 2bps.

In the commodity markets, oil (+0.3%) has been trading around unchanged all night as it was slightly lower when I first sat down.  We continue to hear conflicting stories about the situation in Iran and the Gulf and whether tankers are transiting the Strait, but we have still not seen any blowout in prices.  EIA inventories yesterday showed a small net draw in gasoline and distillates, but crude remains available and Cushing inventories are being rebuilt.  As to metals, gold is flat this morning with silver (+0.6%) edging higher.  There continues to be real support for the precious metals as both grind slowly higher.

Finally, the dollar continues to languish, doing very little overall.  Despite much excitement several weeks ago about the dollar breaking out higher, the fact remains that the DXY is basically in exactly the same place it was in April 2025 as you can see below.  As I have repeatedly explained, at some point the dollar will matter again to markets, but I’m not sure what will drive that change.

Source: tradingeconomics.com

As it is Thursday, we see the weekly Initial (exp 208K) and Continuing (1790K) Claims data.  We also see the Goods Trade Balance (-$99.0B) and then some tertiary data.  Today has all the hallmarks of a sleeper as we await Chairman Warsh tomorrow.   

Good luck

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Run-Of-The-Mill

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The funniest thing that I read
Was Bloomberg, in which someone said
That Bessent's bond buys
Have seen prices rise
So maybe, he's not a blockhead

Meanwhile, today brings PCE
Which pundits are anxious to see
If it comes out hot
They'll claim Warsh has wrought
Disaster and sip their Chablis

But if PCE remains chill
The pundits, when ink meets their quill,
Will pivot to stories
In new categories
And claim it was run-of-the-mill

As we await this morning’s PCE data (exp 0.1%, 3.6% Headline; 0.2%, 3.3% Core), as well as a bunch of other stuff like Personal Income (0.2%), Personal Spending (0.1%) and GDP (1.5%), many in the market continue to discuss the pros and cons of Treasury Secretary Bessent’s efforts to push down longer dated Treasury yields.  Before this morning, it was widely reported, or perhaps loudly reported is more accurate, that this was a desperate act and demonstrated that he didn’t know what he was doing and was simply a Trump puppet.  But the top story in Bloomberg this morning is titled “Bessent Bounce Starts to Emerge in Long Bond Market Metrics”.  In the story, they describe that despite all the controversy and certainty it would fail, it seems to be working for now.

Certainly, based on yesterday’s bond market price action, where 10-year yields slid -6bps, that may be the case.  And remember, the increased buybacks aren’t going to take place for another two weeks, so we still don’t know how much the Treasury is going to buy.  Personally, I like the idea of Treasury buying bond futures, where there is a massive speculative short position, and squeezing them all badly.  Remember, he was a hedge fund manager and knows exactly how that process works.  (As an aside, I have a feeling that Druckenmiller’s op/ed was him talking his book because he is short futures as well.)

At any rate, now that complaining about Bessent is not in tune with today’s market, the punditocracy has pivoted back to Chairman Warsh trying to anticipate what he is going to say Friday morning.  As Warsh remains tight-lipped about everything, it is much easier for the pundits to make claims without being proven instantly wrong.  And whatever Warsh says, you can be sure the pundits will claim they knew it all along!

Meanwhile, in the markets, I believe oil (-2.6% today, -5.0% in the past week) continues to slide and is back at levels seen earlier this month around $80/bbl as per the below chart. 

Source: tradingeconomics.com

I am continually amazed at the commentary regarding oil and Iran and potential peace talks as the response to virtually every statement by the Trump administration about the situation, whether about the ability to traverse the Strait, or the status of talks with Iran, is to dismiss it out of hand by many commenters on X, but when Iranian propaganda media makes claims, it is taken as gospel.  Yesterday I recall Iran claiming economic sanctions won’t matter, they are prepared, and yet today there are stories of how Iran and Oman are furiously trying to come to some type of agreement.  I do not know the situation on the ground there but after 6 months of bombardment and embargos on their oil exports, my sense is the IRGC is feeling a lot of pressure.  I guess we shall see, but in the meantime, oil inventories remain robust with no shortages seen.

As to other markets, let’s tour around to see what’s happening.  Completing the commodity group, metals are consolidating weekly gains with gold (-0.8%) and silver (-0.2%) slipping a bit although both remain higher by more than 2% this week and about 15% in the past month.  Copper is little changed.

In the bond market, after yesterday’s sharp decline in yields, where European sovereigns followed Treasuries, albeit not quite as far, this morning has seen yields back up 1bp across both the treasury and European markets.  As I have been saying, I believe this market is waiting for Chairman Warsh to speak before deciding its next move.

In the equity markets, US markets all rallied yesterday afternoon and closed near their highs with that price action following across most of Asia.  Tokyo (+0.6%), HK (+0.6%) and China (+0.85%) all had good sessions as did Korea (+1.0%) and Taiwan (+1.5%) as all those tech related markets await Nvidia’s earnings to be reported after today’s US close.  The exception here was Australia (-0.4%) which slipped after higher than forecast inflation readings were released and markets have increased the probability of a rate hike by the RBA at their September meeting to 45% from about 25% prior to the release as you can see in the chart below from rateprobability.com.

In Europe, equity markets are fairly quiet overall with modest gains of 0.2% to 0.4% everywhere except the UK which has seen a decline of -0.2%.  Ironically, despite the problems the UK is having with energy prices, two key members of the FTSE 100, Shell and BP are lower on the lower oil price and that is dragging down the index.  As to US futures, at this hour (7:40), NASDAQ (-0.5%) futures are softer, but the other major indices are little changed.

Finally, the dollar is slightly firmer this morning but continues to be an afterthought in markets.  The DXY is exactly where it was yesterday when I wrote and the only true outlier today is AUD (+0.25%) which is benefitting from higher interest rate expectations.  Otherwise, the dollar is modestly firmer against most every counterparty of note.  At some point, the dollar will get interesting again, I just don’t know when that will be.

And that is really it today.  Perhaps there will be a deal from Iran although I doubt it.  

Instead, a tribute to one of the true superstars of our time, and by all accounts one of the finest human beings ever, Ms Dolly Parton.

Good luck

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A Desperate Act

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A key market story yesterday was that the Treasury buyback operations, you know the ones that would be “at least” doubled to $4 billion per event, could grow much larger as secretary Bessent would tap the Treasury General Account (TGA) for this purpose.  Now the TGA is the federal government’s checking account.  It is where your taxes get paid into, along with the receipts from bond sales and tariffs.  It is also the account that pays all the federal government’s obligations like salaries and purchases of defense and other equipment.  The current balance (a/o Aug 21st) is about $936 billion according to the Treasury website.  Obviously, that is a huge amount of money, but then the federal government has a huge amount of payment obligations.  I bet it is a hard checking account to balance!

Now, technically, I presume that all their operations are paid by the TGA.  The mechanics would work that Treasury would issue T-bills, receive the cash in the TGA and use that cash to buy back bonds.  But the implication was that he would just spend the money that was already there.  Personally, I doubt that will be the outcome, and frankly, it almost sounded more like a threat than a future course of action.  But it did get tongues wagging.  

According to Grok, these comments came in an interview on CNBC at a bit after 9:00 yesterday morning.  The chart below shows the bond market price action from that point onward, which tells me that while there was a modest initial response, it completely disappeared until another catalyst (lower oil prices I believe) helped push yields down early this morning.

Source: tradingeconomics.com

But this clearly struck a nerve as in this morning’s WSJ, Stan Druckenmiller, Bessent’s mentor at the old Soros hedge fund, wrote an op/ed decrying the move.  As I survey all that I have learned thus far, it seems clear that Bessent is looking to remove duration from the market in an effort to drive longer dated yields lower.  But his tools are limited compared to the Fed’s abilities and, at least right now, it does not appear the Fed is going to cooperate.  The first operations aren’t scheduled until September 7th, so until then, it is all just speculation, and I’m not even going to try.

The other thing that Secretary Bessent did yesterday, that may have a larger impact on things, was announce sweeping new sanctions on Iran and countries that do any residual business with Iran in an effort to add further pressure on the regime.  It is possible, but not clear to me, that this is part of the rationale for this morning’s decline in the price of oil (-3.0%).  However, if you look at the chart of oil for the past 24 hours, it is remarkably similar to that of the 10-year Treasury above.

Source: tradingeconomics.com

Ostensibly, the news here, which of course would impact bond yields, is that the Pakistani army chief was intermediating between the US and Iran in an effort to find a solution and reduce tensions in the Gulf.  That would certainly be a welcome outcome for all, but I’m not holding my breath.  However, this price action has set the tone for risk markets this morning, so let’s take a look.

While Asia was mixed overnight (Tokyo +0.5%, China -0.3%, HK 0.0%) following the mixed US session, with pressure still evident on the tech sector, Europe is firmer this morning across the board (Germany +0.8%, Spain +0.4%, France +0.4%, UK +0.25%) with all those rallies timed almost exactly alongside the oil and bond moves.  As you can see in the chart below, the same is true in the US where futures at this hour (7:25) are also higher and moved right alongside other equity markets.  As to specific stories here, I think there is a great deal of breath holding for the Nvidia earnings report tomorrow after the close.

Source: tradingeconomics.com

In the bond market, as mentioned above, yields are lower across both Treasuries (-3bps) and all European sovereigns with the entire bloc seeing yields decline by between -3bps and -4bps.  It appears this all revolves on the same story driving oil and equities.

In the metals markets, gold (-0.2%) is edging lower but basically consolidating another strong day yesterday.  It is reasonable to conclude that market participants are growing cautious regarding US debt given there is no indication of spending restraint.  But the reality is that markets are growing cautious of all G10 debt given that statement regarding spending restraint is universally true in that bloc.  I continue to believe we are going to see governments around the world try to ‘run it hot’ with nominal GDP growth rising faster than government spending, thus reducing the real burden.  However, running it hot generally means higher inflation, and that is something that is a political problem.  As to the other metals, silver (-1.2%) is under pressure, although still far higher over the past week and month, while copper (+0.5%) is a bit firmer this morning.

Finally, the dollar is still sleeping this morning, virtually unchanged on the DXY at 99.00 and virtually unchanged vs. almost every major counterpart.  The biggest mover is INR (+0.35%) a major beneficiary of lower oil prices and not surprisingly, NOK (-0.2%) is suffering on the same catalyst.  But otherwise, everything is +/- 0.1% from yesterday’s close.

On the data front, there is not a ton this week, although PCE comes tomorrow, but really all eyes remain on Chairman Warsh’s speech Friday morning.

TodayCase-Shiller Home Prices1.7%
 New Home Sales620K
 Consumer Confidence90.2
WednesdayPCE0.1% (3.7% Y/Y)
 Core PCE0.2% )3.3% Y/Y)
 Q2 GDP1.5%
 Durable Goods0.7%
 -ex Transport0.5%
 Personal Income0.3%
 Personal Spending0.2%
ThursdayGoods Trade Balance-$99.0B
 Initial Claims208K
 Continuing Claims1811K
FridayChicago PMI57.0
 Warsh Speech 
 Michigan Sentiment51.0

Source: tradingeconomics.com

In addition, the EIA oil inventories are expected to see another build as there remains ample supply, at least so it seems.  While PCE is important, I think it will be less so given the pending Warsh comments.  To me, tomorrow’s Nvidia earnings and then Warsh are the keys for the rest of the week, absent a major change in Iran, and alas, I don’t see that.

The bond brouhaha is much ado about nothing I believe as it will not change the trajectory of Federal spending, and that is what is necessary to have a long-term impact.  Unfortunately, that usually takes a crisis, and those are unpleasant.  They also take a VERY long time to develop, after all Argentina imploded for nearly 100 years before electing Javier Milei who promised to do something about it.  It has only been 25 years here since we last ran a budget surplus.  I fear it could be much longer before things really change.

Good luck

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Things Are Bleak

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The one thing on which you can rely is that there is a large segment of the punditry who will complain about every action taken by financial authorities, often offering ad hominem comments to make their case while demonstrating their own ignorance.  The benefit you have here is that I know there are many things I don’t know and don’t pretend otherwise.

Of course, I am referring to the Treasury Secretary’s recent announcement to ‘at least’ double the activity in their bond purchase program.  Once again, let me remind everyone that Secretary Bessent did not unilaterally pass laws to enact spending, that was Congress’s doing and the dramatic increase in spending has been ongoing for at least 25 years.  Just like every treasurer in every company, Bessent’s primary job is to ensure there is sufficient funding, and that is what he is doing.  Machinations as to the tenor of the debt are left to his discretion and fortunately, he is a man with an extraordinarily broad and deep understanding of financial markets.

The claims that he is panicking now are ridiculous, although I’m sure he isn’t thrilled with the situation.  But he inherited the situation, he didn’t create it.  For every doomster out there explaining the bond market is going to collapse, or the government is going to be forced to change their ways, my response is, don’t hold your breath.  

While yields have certainly risen over the past several years, that was from the extremes of Covid policy.  If you take a longer look, as per the chart below from FRED, the current level of 10-year yields is hardly dramatic, and actually, as I have written before, remains well below the long-term average.

Now, I understand that the amount of debt outstanding is much larger, on both an absolute and relative to GDP basis, but I also know that there is literally a 0.0% probability that the US will not repay that debt.  The question is what the real value of the dollars you receive will be when they are returned, and there, the picture is less bright.  Of course, as you can see from the below chart, also from FRED, this is hardly a new concept either.  In fact, ever since the Federal Reserve was created in 1913, the value of the dollar has declined by about 97%.  This is not a new phenomenon.

Which brings us to Chairman Warsh.  I find it interesting that the punditry believes that Bessent’s activities were completely independent of Warsh.  The two are BFF’s for god’s sake, and speak every week, if not every day.  Each has a job to do, and each is working to achieve it.  Inherently, Warsh’s job is made more difficult because of the US fiscal situation, not because Bessent is tweaking the Treasury’s maturity ladder.

And here’s the thing, both men are working to make institutional changes in hidebound institutions that are fighting things tooth and nail.  Frankly, I sincerely hope both are successful.  Back to Warsh.  Friday, he will speak at the KC Fed’s annual Jackson Hole Symposium, this year titled “Financial Innovation: Implications for Payments and Policy.”  Now, that is a bit afield from the details of monetary policy, as I suspect the policy part of the title refers more to the stablecoin question rather than the size of the Fed’s balance sheet.  But I am confident he will discuss current monetary policy in some manner.  I am also confident he will not offer suggestions as to the next rate move.  

The current narrative has morphed into, the problem for markets/analysts is not the lack of forward guidance, it is those people don’t understand the Fed’s reaction function.  This, too, is disingenuous in my mind as Chairman Warsh has made clear, his function is to reduce inflation to the 2% target, and he has clear ideas how to do that.  The problem is his ideas are different than the neo-Keynesian views that dominate the Fed (and every other central bank), and so are making people uncomfortable.  He has made very clear he is happy to allow the bond market to do the Fed’s work, tightening policy.  He is also very politically astute and clearly understands Bessent’s actions.  I would contend that of all the dysfunction in the government, the least concern should be afforded to the Fed/Treasury nexus.

And finally, it appears that the latest trade talks with Canada have broken down and both sides will be imposing tariffs on the other side.  My personal view is this is a mistake, only because there is no predatory relationship between the two nations, but politics is politics and PM Carney has called on national pride as his rationale.  The thing for the US is, it isn’t going to matter that much. According to Grok, Canadian imports represent ~10% of total US imports and ~1.5% of GDP, so higher tariffs on that relatively small amount is not going to change much.  For Canada, though, exports to the US represent ~20% of GDP, so interruption there is going to hurt a lot more.  Something tells me we will get a deal here pretty soon though as both sides will benefit.

The market’s initial reaction in USDCAD was a slight hit to the Loonie (-0.6%) as you can see in the chart below.  But the CAD has been appreciating over the past month like every other currency vs. the dollar, and this move is hardly breathtaking.  My take is USDCAD remains far more beholden to the broad dollar story with this simply a blip.

Source: tradingeconomics.com

Sticking with the currency theme, the dollar more broadly is a touch higher this morning, with the DXY up 0.2% and modest gains vs. most of its G10 and EMG counterparts.  With the dollar back in the middle of its broader long-term range, it is hard to get excited in either direction at this point.  Certainly, a case can be made that we will see a significant decline going forward if the worst-case scenarios play out, but that is not my base case.  Rather, I have a sense that we are going to remain somnolent in the dollar for a while to come, at least until policies are clearer and that is anybody’s guess as to the timing.

Looking at commodity markets, oil (-2.2%) which spent most of last week rising on increased concerns over Iran and the situation there, has reversed course this morning on two stories.  First, it appears that flows through the Strait of Hormuz have been picking up again as per this article, although it remains very uncertain as to the full amounts.  However, oil is moving.  The second story is the latest set of sanctions that the US is set to impose on Iran and secondary nations that trade with Iran as a means to effectively starve the regime there.  Regardless, lower oil prices are certainly better than higher from a global perspective.

Meanwhile, despite the dollar’s modest strength this morning, the barbarous relic (+1.1%) is higher by 15% since the beginning of August and really appears to be building strength in the move.  Is this related to concerns over fiat currency debasement in the US and elsewhere?  Probably as that 5000-year history of holding value in all times is starting to seem quite attractive.  Not surprisingly, this has helped silver (+0.5%) and copper (+0.1%).

Source: tradingeconomics.com (that green bar on the right appears to be a misprint)

In the bond market, yields are edging lower this morning with Treasuries (-3bps) leading the way and most European sovereigns, as well as JGBs seeing -1bp declines.  Nothing has changed the big picture here with too much government debt being issued around the world, but I have a feeling everyone is waiting for Chairman Warsh on Friday before taking their next steps.

Finally, equity markets which had a decent session in the US on Friday, are more mixed.  In Asia, the big markets all fell (Tokyo (-0.75%, HK -1.9%, China -1.2%, Korea -3.1%, Taiwan -1.0%) with only Australia (+0.5%) bucking the trend on stronger commodity prices.  In Europe, it has been a very quiet session, no surprise at the end of August, with bourses there within 0.2% of Friday’s close.  US futures, though, are being dragged down by tech and the NASDAQ (-0.8%) at this hour (8:05) although the other indices are only marginally softer.

As I’ve run on too long as it is, I will cover data this week tomorrow given there is nothing to be released today.  The oil story and anecdotes about tech are the keys for now absent a major White House surprise, something you can never rule out.

Good luck

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In Tears

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As I wrote yesterday, “at least” did a lot of work in the Treasury announcement as it opened the door for significantly larger purchases of longer dated bonds, enough to truly have a market impact.  Most of the initial analysis on the announcement focused on the extra $2 billion to be purchased in each operation.  But what if, instead of $2 billion, they purchase $50 billion each time?  Suddenly, that is a significant reduction in long bonds outstanding, and the program will have a much greater price impact.  Which leads to this Bloomberg headline and story, Bessent Says He’s Ready to Expand Treasury Buybacks.  I believe it would be a mistake to dismiss the Treasury’s ability to achieve their goals as, after all, they do make the rules.

The upshot is that after a one-day rally in bonds, yields retraced those early declines (see chart below) and stocks fell sharply yesterday, clearly not the desired outcome.  

Source: tradingeconomics.com

Much hay has been made regarding the total US debt surpassing $40 trillion the other day, although I see that as merely a reaction to a big round number, not dissimilar to a trading situation in, for example USDJPY, where the market is focused on 160.00 and a break is seen as significant from a trading perspective, but less so from a policy perspective.  I am not seeking to downplay the problems that exist in the US regarding fiscal policy.  I am, after all, a hard money guy (it’s why I am working on USDi, the only inflation tracking cryptocurrency) and a proponent of a much smaller government with much reduced spending.  And that is what is necessary to address the problems at the root.  But that takes Congress and, alas, seems highly unlikely anytime soon.  Personally, I will not bet against Bessent, but that seems to be a popular idea right now.  It is certainly a popular thesis on X.

This saga is only beginning, and I expect that it will be a key topic of conversation for a while, at least until we see a substantial move in yields from the current level.  It is interesting to note, however, the difference in attitude from Chairman Warsh, who explained the market was doing the Fed’s job for them by pushing up yields thus tightening policy, and Secretary Bessent who continues to say that yields don’t represent fundamentals.  Of course, both sides are talking their respective books, so say what they need to say.  Part of me thinks they have dinner together and laugh over how they are confusing markets.

Let’s start our market descriptions with gold (+1.7%) this morning as it is extending its rally of the past two weeks.  A look at the chart below shows the trend line lower from the peak in late January (the date Kevin Warsh was named Fed Chair) was broken on August 6th and has been driving higher since, up 8% since that day and more than 15% since the low print on June 30th.

Source: tradingeconomics.com

Silver (+2.3%) and copper (+2.1%) are also rallying here as there is a growing skepticism about financial assets and it appears investors are looking for things that are not reliant on government promises to retain value.  While I rarely discuss Bitcoin, that has rallied nearly 25% this week on largely the same story, although it has also benefitted from additional Treasury regulations being promulgated as part of the GENIUS Act and hopes for the CLARITY Act to pass soon as well.  Interestingly, BTC bottomed on June 30th as well.

Source: tradingeconomics.com

As to oil prices (+0.35%) they are creeping higher this morning as the ongoing Iran situation remains unresolved with no end in sight.  A key piece of news, that hasn’t gotten that much attention, is that the UAE has completely shut off all trade with Iran after two of its ships were attacked in the Gulf.  This matters hugely for Iran as the UAE was a significant trade conduit in things like machinery and equipment, as well as food and other necessities.  This will help the US sanctions regime significantly.  In fact, yesterday, Iranian Minister Ghalibaf, in a meeting in Baghdad explained that if the economy suffers further, that will be a major problem for the military and the nation.  Maybe this is going to end sooner than later after all.

If we turn to the bond market, while Wednesday saw a sharp decline in yields, yesterday saw that reverse, as per the chart at the top of the note and this morning, yields are unchanged from yesterday’s close.  That is true in the US and across every European market.  It feels like investors are waiting for the next piece of information.  The exception here is JGBs (+4bps) where yields rose after inflation data was released at 1.9% (1.8% core) as expected, but trending higher again as government efforts to mitigate the impact of higher energy prices are starting to falter.  As you can see in the chart below, though, the inflation regime in Japan has changed dramatically from the previous decades.

Source: tradingeconomics.com

In the stock markets, yesterday’s US performance was pretty crummy (a technical term), with declines on the order of -1% across all major indices.  But that did not follow through so much in Asia (China +0.6%, HK +1.2%, Korea +0.9%, Taiwan +0.65%) although the Nikkei (-0.3%) did lag.  Nor did it have an impact in Europe, although other than Spain (+0.7%), the other major markets are higher by about 0.1% only.  And US futures this morning are in the green, +0.5% across the board, at this hour (7:30).  A key part of yesterday’s US declines was a disappointing earnings report for Walmart, where although they beat earnings, their forecasts going forward were softer.

Finally, the dollar is under further pressure this morning, falling against almost every major counterpart with some substantial declines.  For instance, commodity currencies (AUD, NZD, NOK, ZAR) are all firmer by about +0.7% this morning following their local commodity strengths higher, although CLP (-0.1%) is an outlier here.  But we are also seeing strength in the EUR (+0.25%), GBP (+0.2%), JPY (+0.3%) and CAD (+0.35%) from the G10 bloc and similar gains from EMG currencies (MXN +0.3%, PLN (+0.4%), HUF (+0.6%) and the biggest gainer, KRW (+0.7%) which continues to benefit from capital inflows as well as repatriation by SK Hynix after the US IPO.  If we use the DXY (-0.25%) as our proxy the recent downtrend also started at the end of June as per the below chart.

Source: tradingeconomics.com

Two things here.  First, despite this decline, the dollar remains right in the middle of its longer-term range and until we break below 96.50 on the DXY, I do not believe the day-to-day movement indicates much.  Second, though, and more importantly, the FX markets are typically the release valve for pressures in a given economy, as no government can control capital flows, the exchange rate and monetary policy simultaneously, as pointed out by Robert Mundell in 1960 and 1963 (the so-called impossible trinity).  In this case, if the US continues to struggle with the debt situation, or else decides to head down the YCC road for real (meaning the Fed caps yields and buys whatever bonds necessary to do so), the dollar will suffer dramatically and likely boost inflation.  But we are a long way from that situation I believe, and it will take time to get there, if that is the direction.

On the data front, I would be remiss if I didn’t mention the Philly Fed’s blowout number of 47.4 yesterday with the manufacturing sector the biggest beneficiary.  This morning all we see is Flash PMI data (exp 53.9 Mfg, 54.0 Services) although with both the Philly and Empire State readings so strong, I wouldn’t be surprised to see a much stronger read here as well.

And that’s it for the week.  Certainly, it was more exciting than anticipated given the Treasury/Bessent announcement, but until we see just how many bonds they buy in a few weeks, we really don’t know how things will play out.  In the meantime, earnings have continued to be strong generally, and I see no reason for risk assets to decline for now.  The dollar, however, is starting to look a little shaky, and if we see a bit more of a fall, I might get concerned.

Good luck and good weekend

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Just a Ruse

Posted on by 
Said Scottie, since Congress keeps spending
And frankly, it seems never-ending
We’re going to buy
More bonds as we try
To stop yields from keeping ascending

The market response to this news
Was instant, as it did infuse
A bid to all risk
With movement quite brisk
Though skeptics claim it’s just a ruse

Boy, I leave you alone for one day and look what happens!

At 8:33 yesterday morning, the following announcement hit the US Treasury website [emphasis added]:

Treasury Announces Increased Sizes of Nominal Long-End Liquidity Support Buybacks Beginning September 9

WASHINGTON, D.C. —The U.S. Department of the Treasury is increasing, by at least double, the size of liquidity support buyback operations for longer-dated nominal coupon securities (the 10-year to 20-year sector and the 20-year to 30-year sector).  The current maximum size of $2 billion per operation will be at least $4 billion per operation. 

This change is effective September 9, 2026 and will be in effect for the remainder of this refunding quarter (through November 4, 2026).  Treasury will provide more information about future buyback sizes at the next Quarterly Refunding, scheduled for November 4, 2026. 

This increase in buyback operation sizes reflects Treasury’s desire to provide greater liquidity support in longer-dated nominal sectors where there is consistent strong sponsorship from market participants, as evidenced by the significant volume of high-quality offers Treasury routinely receives in longer-dated buyback operations.

An updated tentative Treasury buyback schedule will be released at a later date.

First, here is a picture of the market reaction in the DXY and gold, the two things that responded most aggressively.  (I inverted the scale for the DXY, so it fell on the news.)

Source: tradingeconomics.com

And here is the bond market response with that gap occurring between 8:30 and 8:35.

Source: tradingeconomics.com

Obviously, this was a big deal, right?  Well, that’s a good question and one worth discussing.  As a baseline, the size of the current program that they are doubling is a maximum of $2 billion per operation, which means that the new limit is at least $4 billion per operation.  Now, while an extra $2 billion of demand is nothing to sneeze at, we must consider how much of that debt is currently outstanding.  According to Claude, which took the data from the Treasury website, there is about $3.7 trillion of debt that currently has between 10 and 30 years left to maturity, held by private investors.  When adding the intragovernmental holdings and the Fed, that number appears to be about $5.4 trillion.  

There are seven more of these operations planned before the November deadline, so they will be purchasing an additional $14 billion of notional value, probably paying about $8 billion in cash given it all has much lower coupons so trades at a steep discount to par (and funding it by issuing T-bills).  And if we do the math, that means they will have absorbed (assuming the smaller outstanding of privately held debt) 0.38% of the notional.  

The caveat here is the ‘at least’.  Arguably they could buy any amount and stay within the confines of the announcement and that would certainly have a much larger impact.  But everything I have read is focused on the extra $2 billion.

With that in mind, and while I’m just an FX poet, my long experience in markets tells me that removing 38 basis points worth of some security or asset from a market is unlikely to have a major long-term impact on the supply/demand balance given there is real elasticity here.

So, while yesterday’s moves were certainly impressive (gold +4.3%! as an example) I might contend that the movement was based on the narrative rather than the actual market impact.  But the one thing we have learned of late is that the narrative matters.

Many in the market have immediately claimed that this is an act of desperation as Secretary Bessent seeks to drive longer end yields lower.  Others have claimed that this is the beginning of Yield Curve Control (YCC), although the fact they are issuing more T-bills to buy the bonds makes it a lot more like Operation Twist, when the Fed did the same thing, sold the front of the curve to buy the back, thus maintaining the same size balance sheet but removing duration from the market.  If this were YCC, they would need to print more money to buy those bonds, and the Treasury cannot do that, only the Fed can and they are not part of the process.

Here’s what I know, Scott Bessent is a very smart guy, and somebody who understands markets better than any Treasury Secretary since Bob Rubin and maybe better, certainly better than you or I.  I also know he has been dealt a very bad hand; 2,3,5,7,8, off-suit in poker terms, so doesn’t have many good options.  And I know that he has zero control over spending amounts which falls to Congress and the President, with him merely implementing the spending, not deciding how much to spend.  I don’t know if this will be effective beyond yesterday’s market movement, but if he is able to get the narrative moving in the right direction, (i.e. there is a reduction in duration available to the market so prices there should rise and yields concomitantly fall), it may offer some more breathing room.  The fact that he is using the tools available to manage the government’s balance sheet is a huge positive.  I can only say, good luck Scott.

While there are probably other stories of some import, this was the one that got the most engagement, and I think the one with the potential longest-term impacts on things.  So, let’s see how other markets responded.  It was interesting to me that the equity markets did not wholly embrace this action, although there was an initial rally, much of it faded by the end of the session with very modest gains at the end of the day.  Asian markets, however, fared very well with Tokyo (+1.4%), China (+0.1%), HK (+0.8%) and Korea (+5.9%!) all rallying and taking almost the entire region higher.  I think it is worth showing a chart of Korea’s KOSPI to demonstrate the increase in volatility we have seen on a regular basis there since the Iran war began.  Just look at the expansion of the daily ranges, especially since May, compared to the size of those bars for the prior six months.  This is another indication that the way things were is no longer the way they are.

Source: finance.yahoo.com

In Europe, though, equity price action is desultory this morning, with modest declines of about -0.4% or so across all major markets with Spain (-0.1%) the outlier.  As to US futures, at this hour (7:15), they are edging lower led by the NASDAQ (-0.5).

In the bond market this morning, yesterday’s euphoria is being tempered with Treasury yields backing up 3bps.  European sovereigns, though, are little changed to +1bp, although they didn’t respond to the Treasury market in any real sense yesterday.  That makes sense since Bessent’s announcement was highly US specific.  As to JGB yields, they did slip -4bps overnight, and there are many who draw a direct link to Treasuries and USDJPY, with official efforts by the US to cap both of those things.

Speaking of the yen (-0.3%), it was one of the largest beneficiaries of the announcement, rallying nearly 1% as you can see in the chart below.  However, this morning it is slipping a bit, and frankly, the post-intervention pattern has not been altered by yesterday’s move.

Source: tradingeconomics.com

In fact, most currencies rallied yesterday on the news but this morning, the picture is more mixed as we see both gainers (GBP +0.2%, EUR +0.15%, NOK +0.15%) and laggards (INR -0.25%, SEK -0.3%, ZAR -0.35%).  In essence, while yesterday’s moves were large and broadly dollar lower, this morning there is more nuance.  As it happens, the DXY (-0.1%) is edging lower today, but remains directly in the middle of that long-erm 96.50 / 100.50 range at 98.71.

Source: tradingeconomics.com

Finally, commodity prices show oil (+3.1%) continuing its recent rebound and back to its highest level in about a month.  But if I look at the chart below, it remains in the middle of its much wider range as well, if anything somewhat closer to the bottom than the top.  At this point, it is impossible to know what is happening in the Gulf war and frankly, I think market participants who don’t trade oil directly, have moved on to other drivers.  

Source: tradingeconomics.com

As to the metals markets, after yesterday’s remarkable rallies, it ought not be that surprising that they are consolidating this morning (Au -0.7%, Ag -0.3%. Cu -1.1%).  There are some analysts who believe that copper is getting set to roll over and decline in price as the narrative about shortages of supply for ever increasing data center and power production demand grow long in the tooth and may already be priced in.

On the data front, yesterday’s Minutes showed that there were non-voters who also would have been inclined to raise interest rates back in July, but we know that we have seen softer data since that meeting, so it is unclear if that is still the case.  As well, EIA oil inventories rose again, >4 million barrels, so tank bottoms are still covered!  This morning we get the weekly Initial (exp 210K) and Continuing (1790K) Claims as well as Philly Fed (25.0) and Leading Indicators (+0.1%).  There are still no Fed speakers, and I continue to believe that Chairman Warsh’s speech next week is the most important thing on the horizon.

Until then, I imagine yesterday’s surprise announcement is the biggest news we will get for a while and that we are likely to see markets return to their somnolence.  But there is a new narrative forming, the US is going to ignore inflation and push rates lower, which if it is followed implies higher commodity and equity prices and a falling dollar.

Good luck

Adf

Some Despair

Posted on by 
The story of late is the Bond
Where holders are now all despond
As governments spend
On infinite end
And traders are now far less fond

One question is, what will they buy?
With funds that, to bonds, don’t apply
Are stocks on their list?
With gold, will they tryst?
Or keep it in cash til they die?

As well, one must ask if the Chair
Is comfy or has some despair
Perhaps in his speech
Next Friday he’ll preach
He’ll offer more than laissez-faire

The bond market is where the narrative has turned as yields have broken above multi-year highs and apocalyptic scenarios are a dime a dozen.  As you can see from the chart below from Yahoo Finance, the last time the 30-year yield touched its current yield of 5.31% was June 2007 and the last time it closed at this level or higher was June 2004.  That’s a pretty long time.

So, is this the aberration or is this the norm?  I guess the answer to that question is; how do you define the norm?  If you look at the very left edge of the chart above, in February 1985, the 30-year yield reached 11.9%, and in truth, was higher than that before then.   This was the legacy of Paul Volcker’s attack on the rampant inflation he inherited when he sat down in the Fed Chair.  While many of you will not remember, I’m sure you have all heard of his willingness to drive interest rates higher (which he did by withdrawing bank reserves from the market, not unilaterally raising interest rates like the Fed does today) until such time as inflation cracked.  This resulted in the twin recessions early in the 1980’s and made life very difficult for small businesses around the country.  But it was effective.  As you can see in the chart below I constructed from FRED data, the average CPI during Volcker’s term was 6.17%, and although it did briefly dip below 2%, it finished right around 4%.  

But what his actions did was create the prerequisite for a 40-year bond market rally, where prices rose and yields declined.  That bottomed in 2020 during Covid and has since reversed course.  Now, I think it is fair to say that the Covid year was an aberration as the Fed executed QE on steroids, pumping up their balance sheet by about $4 trillion.  Of course, in the wake of the GFC, the Fed quadrupled their balance sheet from ~$1 trillion to ~$4 trillion prior to Covid as you can see in the below chart from FRED.

During the pre-Covid period, measured inflation never rose very high at all, in fact many Fed members, including Chairs Bernanke, Yellen and Powell, all expressed concern about “too low” inflation!  The answer to this seeming conundrum was that all that money flowed into financial markets thus inflating asset prices, not consumable prices.  But when the government handed out stimulus checks, three times, during Covid and the aftermath, as well as PPP loans and increased jobless benefits, the more recent $4 trillion of QE came rushing into the real economy and we experienced too much money chasing too few goods and services, which drove the dramatic rise in CPI in 2021-2022, something which we all still experience.

But the question remains, are 4% bond yields the norm?  5%? 6%?  A rule of thumb from my early days in the markets, which was back in the mid 1980’s, was that the 10-year yield should approximate the nominal GDP growth rate, which given a ‘normal’ yield curve, would imply that the 30-year yield should be somewhere between 50bps and 100bps above that level.  In the current ‘run it hot’ paradigm, where virtually every Western country is borrowing and spending money aggressively, and where nominal GDP just printed at 7.9% in Q2 (it was 5.8% in Q1), it is not hard to make the case that the 30-year bond yield remains ‘cheap’.

Of course, it has been a long time since that heuristic was widely known, and almost all market participants today have never lived in that world.  In fact, most traders on major bank and fund desks, started their careers after the GFC so have no experience with the previous monetary regime.  

Let’s cut to the chase.  Is this the end of the world?  Absolutely not, as I have shown, it’s not even an unusual place for yields.  Are financial markets going to benefit from this?  Probably not too much, at least not universally.  There will be sectors that do well and others that suffer under a higher rate regime.  Will the economy suffer?  So far, it has shown impressive resilience, but that is a consequence of the ‘run it hot’ thesis.  If that stops or even slows down if Congress reduces its spending (as if!), then I imagine we will see equity markets suffer pretty significantly alongside bonds.  The current situation remains fragile, and while Chairman Warsh is trying to instill some antifragility to the market by forcing traders and investors to think for themselves, thus reducing their risk profiles, it is likely to get pretty bumpy if he succeeds.

So, how is this impacting markets around the world?  Let’s take a tour.  Yesterday’s modest weakness in the US was followed by a generally weak session in Asia (Tokyo -2.5%, China -0.3%, Korea -1.5%, India -0.6%, Taiwan -1.2%) with Tech obviously under pressure, although HK managed to stay unchanged and New Zealand (+1.0%) saw fit to rally on stronger commodity prices.  In Europe this morning, bourses are lackluster with Germany, France and Italy all lower while Spain has edged higher and the UK is little changed after GDP data  met expectations.  US futures, though, are under pressure this morning led by the NASDAQ (-1.3%) at this hour (7:55).

In the bond market, yields are higher around the world with Treasuries (+2bps) performing slightly better than European sovereigns (+4bps across the board) although Gilts and JGBs are also only higher by 2bps.  It does appear that bond investors are starting to get antsy about things, but history tells us things will need to get MUCH worse on the spending/deficit side before governments are forced to change their ways.  Certainly, given the concerns over a Democratic sweep in Congress in November, there is no reason to believe that spending will slow.

In the commodity space, oil (+0.6%) is following on yesterday’s gains as uncertainty over the Hormuz situation and increased concern over Ukraine’s attacks on Russian oil infrastructure continue to drive fear in markets.  I cannot opine on these things as despite the fact there are voluminous reports, it is nearly impossible to tell signal from noise.  As to the metals markets, after a pretty solid session yesterday, they are softer this morning (au -0.5%, Ag -1.0%, Cu -1.0%) although trends continue to develop higher here.

Finally, the dollar continues to be a sleeper overall, with the DXY unchanged on the day and most major currencies doing very little.  One aberration is KRW (+0.4%) which has seen some significant investment inflow from real money accounts, part of the reason it has performed so well lately.  But spare a moment for the yen (-0.2%) which refuses to strengthen no matter how hard Ueda, Takaichi or Bessent wish it to be so.  As you can see from the chart below, the aftermath of the most recent intervention is remarkably similar to the previous bout, (and every bout before that).

Source: tradingeconomics.com

My take is we will continue to see a gradual depreciation in the yen until the BOJ acts decisively (don’t hold your breath for that) or the Fed reverses course and starts cutting.  As of this morning, the probability of a September hike in the US is 34% and in Japan it is 79%.  We shall see.

On the data front, we get Housing Starts (exp 1.35M), Building Permits (1.37M), IP (0.3%) and Capacity Utilization (76.3%), none of which I expect to move markets.  Despite the growing concerns in the bond market, the movement has been quite contained and amid lighter than normal staffing through the summer, I still don’t anticipate a lot of movement.  I still think we are waiting for Warsh next Friday before anything big happens.

Good luck

Adf

Literally Dying

Posted on by 
In China the people ain’t buying
Despite all the stuff their supplying
To nations worldwide
Seems Xi sits astride
A country that’s literally dying

Let’s start this morning with a quick look at the economic situation in China, where things are continuing to slide much to President Xi’s chagrin.

Source: tradingeconomics.com

As you can see from the listing above, every one of the key monthly statistics underperformed both last month and market expectations with Retail Sales continuing to shrink and the trend lower remaining steady as you can see in the chart below.

Source: tradingeconomics.com

To put a finer point on it, prior to Covid, the monthly gains were running in the 10% range compared to July’s 0.6% rise.  The ongoing implosion of the property market bubble there (see the Fixed Asset Investment outcome above) continues to weigh on the economy across the board and shows no sign of ending soon.  

The US has many issues in its economy including excessive debt and stickily high inflation, but from an economic activity perspective, the US is in far better shape.  Inward investment continues apace as reshoring of manufacturing and expansion in technology keep growing which will provide opportunities going forward.  That is not the case in China, and while they remain a manufacturing and export powerhouse, their future, especially given the demographic catastrophe that was Deng’s “One-child policy” results in a shrinking population.  After all, Xi has no problems policing his borders as nobody wants to go there, they all want to leave.

Keep in mind that according to the World Bank, the PPP for the Chinese yuan is approximately 3.46 as of 2025 compared to the current market rate of just below 6.74.  Sure, the dollar’s value has been declining steadily vs. the CNY all year, as per the below chart, but ask yourself how much China’s exports would be reduced if the currency traded at 3.50?  I’m guessing their trade surplus would disappear pretty quickly.

Source: tradingeconomics.com

Veering into geopolitics here, it is difficult to believe that China is ever going to make a military incursion into Taiwan, despite all the rhetoric.  I’m confident Xi has learned the lesson of drones being extremely effective defensive weapons, and Taiwan is armed to the teeth.  While Taiwan may decide to reunite on their own, it will not be conquered as China simply doesn’t have the ability to do it.  Especially given the problems Xi has at home.  

And remember, there are strict capital controls in China preventing citizens from getting money out of the country.  Ironically, if they opened that up, the CNY would fall sharply as money fled, even from current levels.  For all the talk of China’s long-term thinking and strategy, never forget they made the largest demographic blunder in history.

Japanese data
Turned up weak as a kitten
Can Ueda hike?

It seems that slowing growth in Asia is not confined to China as Japanese data last night was also softer than expected as you can see below:

Source: tradingeconomics.com

This begs the question regarding the BOJ’s potential rate hike come next month.  After all, if the economy is slowing while inflation remains sticky, will the BOJ be willing to raise rates?  Takaichi-san’s approval ratings are already slipping because of the ongoing inflation there, but if another hike pushes Japan toward recession, that would be a bigger problem, I believe.  

Now according to the OIS swap market, there continues to be a strong belief that Ueda-san will hike next month.  In fact, as you can see from the chart below from rateprobability.com, the market is increasingly sure this will be the outcome despite last night’s data releases.  And maybe that is the case.  But given the probability of a US hike continues to ebb, now down to 30% after Friday’s weaker than expected Retail Sales data (the 4th consecutive weak data point), I’m not so sure a hike is coming.  There continues to be much intrigue in the USDJPY exchange rate.

So, how did equity markets in Asia respond to this?  And elsewhere?  Better than you might have expected with Tokyo (+0.7%) and China (+1.6%) and HK (+1.3%) all showing nice gains.  To my eye, this response seems unusual as the combination of weaker growth and higher rates is typically a bad one for equities, but perhaps this is a new paradigm.  Tech shares led the way in all three markets, and we saw that in Korea (+2.4%) as well.  In fact, generally in Asia equity markets were solid (Indonesia, Thailand, Singapore) although there were a few laggards (Australia, New Zealand, India) though none of the losses were dramatic.

Europe, though, is deeply in the summer doldrums with tiny gains and losses across all the major markets, +/-0.2% or less.  And US futures, if you squint, are slightly higher at this hour (6:40).

In the bond markets, the outlier move was in JGB’s overnight, jumping 6bps to new multi-decadal highs at 2.91%, despite the weak economic data.  Arguably, this is why the probability of a rate hike has been climbing, although it seems to me that the back end of the yield curve can climb without the BOJ hiking.  This story goes back to the carry trade question and whether Japanese investors are bringing money home now that real yields in Japan, at least out the curve, have turned positive.   Alas, a look at USDJPY shows no indication that the post intervention price action has changed.

Source: tradingeconomics.com

As to the rest of the world’s government bonds, yields are basically lower by -1bp across the board this morning.

Despite the latest scare stories in the press, the oil markets remain nonplussed by everything with WTI (+0.5%) edging higher this morning but hanging out in the middle of the range, actually the lower half of that range, since the war began.  I continue to see stories about how soon we will see an escalation in fighting and oil inventories run down, but I keep looking at the price action, as well as the increased production from places like Venezuela, Guyana, Canada, Brazil and Argentina, and have a hard time seeing that outcome.

As to the metals markets, they are rallying further this morning with gold (+0.5%), silver (+1.5%) and copper (+1.2%) all firmly in the green.  Nothing has changed my views about the long-term prospects for these to go higher.

Finally, the dollar is softer this morning overall with the DXY (-0.2%) firmly back in its previous trading range.  Do you remember last year when the dollar happened to decline about 15% during the first six months of the year and the punditry was making a big deal about the decline as a tell on the US simply because of when it happened on the calendar?  If you look at the long-term chart of the DXY below, you can see that in the post-Covid world, the dollar exploded higher and then retraced much of those gains in two relatively short periods in late 2022 and early 2025.  But we have gone nowhere in more than a year and, frankly, at 99.50, the DXY is within 1SD of its long-term average.

Source: tradingeconomics.com

As to individual currencies, the dollar’s weakness is broad based and consistent in the 0.2% to 0.3% range with AUD (+0.6%) the outlier of note, taking advantage of the gains in metals prices.

On the data front, it’s a very slow weak for primary releases:

TodayEmpire State Manufacturing11.0
TuesdayHousing Starts1.35M
 Building Permits1.37M
 IP0.3%
 Capacity Utilization76.3%
WednesdayFOMC Minutes 
ThursdayInitial Claims212K
 Continuing Claims1808K
 Philly Fed25.0
 Leading Indicators0.1%
FridayFlash Mfg PMI53.8
 Flash Services PMI54.0

Source: tradingeconomics.com

The interesting thing to me is that there is not a single Fed speaker on the docket.  Perhaps Chairman Warsh is getting his point across, or perhaps they are all on summer vacation.  Whatever the case, I think that is a benefit, let the data speak.

While analysts will parse the Minutes with a fine-tooth comb, I don’t think anything is going to matter until Warsh speaks at the end of the month.  Until then, absent a major escalation in Iran, I don’t expect very much to happen although nothing seems set to derail the equity rally.

Good luck

Adf

Held At Bay

Posted on by 
The doldrums have finally arrived
As interest in markets nosedived
While stocks still creep higher
The marginal buyer
Is sleeping and must be revived

But it seems unlikely today
Is going to show us the way
I think, til Warsh speaks, 
And that’s in two weeks,
Excitement will be held at bay

While not every market is completely stagnating, for the past seven sessions, despite NFP, CPI and many stories about oil and war, market price action has been extremely dull.  Whether we look at stocks:

Source: tradingeconomics.com

Or bonds, which in fairness have been a little choppier but still gone nowhere:

Source: tradingeconomics.com

The dollar:

Source: tradingeconomics.com

Or even oil, which in the past week has barely moved on net:

Source: tradingeconomics.com

We are very clearly in the summer doldrums.  I think even the narrative writers have gone on summer holiday as there is precious little to discuss.  Yes, we’ve seen a soft NFP report and softer than expected CPI and PPI data, but that has not generated much excitement.  While the Iran situation can always find something for people to discuss, certainly based on the recent EIA oil inventory data, the ‘running out of oil’ story has been put to bed.

Frankly, there is very little to discuss, and I have a feeling it is going to stay that way until we hear from Chairman Warsh at the Jackson Hole summer confab in exactly two weeks.  As it’s August, we already knew that Europe was on vacation, but other than some primary elections in the US, where the effort to generate excitement ahead of the midterms in November has not yet gained traction, what is really new?  Arguably, the most interesting story is Enes Kanter Freedom, the ex-NBA player declaring for the WNBA draft as the WNBA cannot seem to figure out how to define a woman.

So, to keep things brief, I will give a quick rundown now and send you on your way.  Yesterday’s modest gains in US equities were followed by a mixed session in Asia with Tokyo (+0.6%), Korea (+2.4%, which these days is a modest movement here) and Indonesia (+1.6%) all gaining while China was flat and HK (-1.1%), Australia (-0.8%) and Taiwan (-0.5%) all slipped a little.  It is hard to tell a story about this outcome.  

In Europe, only Germany (+0.7%) is showing any life, reaching another record high on the back of some more strong earnings reports, mostly from German defense manufacturers.  But the rest of the continent is little changed, +/- 0.1%.  And at this hour (7:10), US futures are also +/-0.1%, in other words flat.

In the bond market, Treasury yields, which slipped -5bps yesterday as both PPI and oil prices were softer, have edged higher by 1bp.  However, European sovereign yields are all higher by between 3bps and 4bps this morning, although it is not clear what is driving this movement.  In truth, if I use bunds as my example, while like Treasuries, the price action has been choppy, as you can see in the below chart from tradingeconomics.com, we haven’t gone anywhere in weeks.

As to JGB yields, this morning they are unchanged, hanging on just below the recently achieved multi-decade highs.  

But speaking of Japan, while the yen (+0.2%) is slightly stronger this morning, as you can see in the chart below, the post intervention pattern remains in force.  In fact, Bloomberg had an article about how speculators used the intervention to reload on short JPY positions.  But the more interesting thing I saw this morning was the following Tweet:

Now, I don’t know how they arrived at that number, and while I always thought the trade was in excess of $3 trillion, $20 trillion is much larger than I expected, but if this is true, it certainly adds a certain stress level to the global economy.  I have maintained that outward Japanese investment in financial products, so purchases of non-Japanese bonds and stocks buy Japanese institutions is a part of this process and adds to the number.  I assume that is part of the calculation Deutsche has made, but I could be wrong, I have not seen the actual report.  But along those lines, in the most recent week, Japanese investors purchased >¥1.6 trillion (~$10 billion) in foreign bonds, keeping up the flow.

If we look at just the G-SIB banks, the major players in international finance, according to Grok, their total combined balance sheets summed to about $78.4 trillion at the end of 2025.  Of course, assuming the carry trade makes heavy use of derivatives for financing, much of that alleged $20 trillion may not show up on their balance sheets, but perhaps it represents as much as 15% of bank assets.  This is quite a concern, especially as, again according to Grok, those same banks have only ~$4.7 trillion in Tier 1 capital.  

So, if these numbers are even in the ballpark, it tells a tale of a highly leveraged banking system that is subject to major convulsions if a certain series of events unfold, notably, the carry trade loses its luster.  (if you ever wondered why goldbugs are goldbugs, this is exhibit A).  The thing to remember is it has taken decades for this trade to accumulate, and it will not decumulate in weeks, or even months, but will take years to do so.  As well, if things start to turn, you can be certain that central banks will do their best to prevent a runaway train, and they have enormous power, specifically the power to print money, to slow things down.  But that doesn’t mean things won’t get ugly if this is the future.  I hark back to my comments regarding the end of forward guidance and how that will enhance markets’ collective anti-fragility.  It feels like the global financial system, if this is true, is seriously fragile!

Ok, let’s wrap up.  In FX, the dollar is softer this morning across the board, with the DXY (-0.4%) quite representative of the movement across both G10 and EMG currencies.  However, the thing to remember here is that we are still rangebound overall for the past year in G10 currencies, although we have seen broad based strength in a number of EMG currencies like MXN, BRL and ZAR , all of which have much higher real rates than the US.

Lastly, oil (+0.3%) is a touch higher, while metals prices (Au +0.3%, Ag +0.8%) are also firming up on the softer dollar.  But there is little to discuss here.  News that the US is sending another aircraft carrier to the Persian Gulf area got oil to rise earlier, but that is fading already.

On the data front, this morning brings Retails Sales (+0.1%, +0.2% -ex autos) and then Michigan Sentiment (54.5) at 10:00.  There is one Fed speaker, an Atlanta Fed VP and acting President as they seek a new President.  However, given her acting status and the fact Atlanta is not a voter, I don’t think anybody will even listen!

So, absent a seriously strong Retail Sales report, the die is cast for another slow day in my view. 

Good luck and good weekend

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Beguiled

Posted on by 
It turns out, inflation of late
Did not start to accelerate
Instead, it was mild
With doves now beguiled
But not yet declaring checkmate

The odds of a hike keep on sliding
But ere the Committee’s deciding
In two weeks, we’ll hear
Chair Warsh try to steer
The narrative with gentle (?) chiding

The fears over rising inflation have been allayed for the moment after yesterday’s CPI data was released right on expectations with monthly increases of 0.1% headline and 0.2% core and Y/Y results of 3.4% and 2.5% respectively.  For all those who have been pining for that rate hike ASAP, this was unwelcome news.  The below table from cmegroup.com shows how things have changed over the past month.

On July 13, markets were pricing a 75% probability of a hike in September with thoughts of a 50bp hike a reality.  This morning, the probability of that September rate hike has fallen to just 36%.  You may recall that I have been consistent in my views that there would be no rate hikes this year, and that continues to be my view.  If we look at the entire Fed funds futures curve, as per the next table, we now have one hike priced for December only, compared with two plus hikes several months ago.

This is not to say I believe that inflation is dead, just that it is not accelerating away.  As my friend The Inflation Guy points out in his piece on yesterday’s CPI, the data was boring, “Boring, right on expectations. The bad news is that it is boring and right on expectations…at 3%.”  This is still a far cry from the Fed’s self-defined 2% target, but fears of “Amerizuela” type outcomes are vastly overblown.  (However, you still want to protect you purchasing power and one effective way to do that is via USDi, the only inflation tracking cryptocurrency.)

Now, we still have a bunch more data before the next FOMC meeting, including today’s PPI, PCE at the end of the month and another NFP and CPI reading in September.  As well, we cannot forget that Chairman Warsh will have the opportunity to clarify his thinking at the Jackson Hole soiree on Friday morning, August 28th.

So, has anything really changed that much after the CPI report?  While the reality hasn’t shifted, it does appear that market participants are beginning to adjust their views a bit.  One number does not a trend make, nor will it have bolstered Warsh’s credibility, assuming that is in question, either.  This is a saga that will continue to play out over time.  It seems to me that if the Fed really wanted to fight inflation effectively, they would be digging much deeper into why they continue to hold >$1.9 trillion in MBS on their balance sheet and run an ample reserves framework.  Going back to scarce reserves allows the market to drive interest rates, something clearly on Chairman Warsh’s wish list.  But that will have to wait for the task force reports.

Ok, let’s see how markets other than Fed funds have responded to this news and data.  Since we are on the rates subject, let’s start there this morning with bonds which have seen yields slip -2bps in Treasuries and between -1bp and -3bps in Europe.  Oil prices (-2.1%) are slipping this morning so that appears to be the proximate cause of the yield move, a bit less concern over inflation.  Yesterday, after the CPI data, we also saw Treasury yields drop -2bps, so for now, fears of an imminent test of 5.0% on 10-year Treasuries seem overblown.  JGB yields, though, continue to creep higher, another 2bps overnight and are now just 3bps below their multi-decade high of 2.90% as per the chart below.

Source: tradingeconomics.com

Speaking of Japanese rates, Bloomberg has an article this morning explaining that the Takaichi administration is ok with the BOJ raising rates sooner, a change in the market’s perspective if not an outright change of view there.  Alas for those looking for a stronger yen and the end of the carry trade, the impact of the report was essentially nil as you can see in the chart below.  The three large, red candles just to the right of center represent the immediate aftermath of the release of the report.  Net, USDJPY is virtually unchanged on the day and the trend since the intervention remains for the dollar to move higher.  My sense is perceptions of Fed rate activity is going to have a bigger impact than the BOJ for now.

Source: tradingeconomics.com

As to the rest of the FX market, +/- 0.2% covers the gamut for both G10 and EMG blocs.  It wasn’t just the CPI report that was boring, so are FX markets overall.

Turning to equities, yesterday’s US market response was benign with only the NASDAQ showing much life, gaining 0.5%.  In Asia, though we did see Tokyo (+1.1%) rise despite talk of the BOJ being more aggressive.  Of course, the real price action remains in Korea (+3.6%), which is redefining what equity index volatility actually means.  Otherwise, there were some gainers (Taiwan, New Zealand, India) and more laggards (China, HK, Australia, Malaysia, Indonesia) but none of these moves topped 1% in either direction.  

European bourses, however, are feeling a bit better this morning led by Spain (+0.7%) and Germany (+0.5%) as earnings seem to be the driver here helping Spanish shares despite the tick higher in inflation there.  UK shares (-0.2%) are lagging after GDP and production data was on the disappointing side while the Trade Deficit expanded further.  And at this hour (7:30) US futures are little changed to slightly higher.

Finally, turning to commodities, oil’s decline seems to be attributable to the IEA reducing its global oil demand outlook (although they have been wrong about this for several years as they try to push a peak oil, transition to wind/solar narrative that is just not happening) as well as the fact that yesterday’s EIA data showed a 17+mm barrel build, a far cry from the slight draw expected and another blow to the tank bottoms story.  As to the precious metals, the luster is gone (Au -0.5%, Ag -0.6%, Cu -0.5%) although copper remains quite close to its all-time highs, and both gold and silver remain in short-term uptrends after seemingly having bottomed back in July.

On the data front, this morning brings the weekly Initial (exp 202K) and Continuing (1800K) Claims data along with PPI (0.2%, 4.9% Y/Y) and core PPI (0.3%, 4.2% Y/Y).  It strikes me that neither of these releases are going to be major market movers.

It is summer, and I assure you trading desk vacation schedules are far more important than secondary economic data releases.  I suspect another boring day overall here.  In fact, I suspect that until Warsh speaks in two weeks, we may see very little activity across most markets.

Good luck

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