Venting Spleen

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It used to be data was seen
As noncontroversial and clean
But politics, lately
Has damaged it greatly
With both D’s and R’s venting spleen
 
So, it ought not be a surprise
That yesterday’s NFP rise
Was claimed by the left
To lack any heft
While R’s crowed out loud to the skies

By now, you are well aware that the NFP number was released much higher than the forecasts, printing at 130K vs a consensus forecast of 70K.  The previous two months were revised lower by 17K, so still a huge number, and it was the main topic of conversation in the markets all day. 

To me, the big news was that private sector jobs rose 172K, while government jobs declined by 42K.  In fact, the Federal civilian workforce is back to its smallest count since 1966!  That is an unalloyed positive in my view.  Too, manufacturing jobs increased by 5K, which is the first time we have seen a rise since November 2024.  In fact, if you look at the chart below of manufacturing jobs for the past 5 years, it is easy to see what President Trump is trying to achieve.  One month does not indicate success, but it’s a start.

Source: tradingeconomics.com

The last positive was that the Unemployment Rate fell to 4.3%, so overall, this seems like a pretty good report.  But as with everything these days, it depends on the lens through which you view it.  As with most national data in an economy as large and varied as the US, there were real and perceived negatives.  The BLS made their annual benchmark revisions to the data which removed 403K jobs from 2025’s numbers.  These revisions come as they adjust their birth-death model as well as get updated population statistics.  But for those who seek bad news for this administration, that reduction of 403K jobs is proof that the president’s policies are failing.  Another complaint has been that the bulk of the increase in NFP was in the health care sector, although given the ongoing aging of the population, that cannot be very surprising.

Nonetheless, just like every other piece of data these days, NFP was a Rorschach test of your underlying political beliefs and not so much a description of the economy.  My question is, if the employed population is ~159 million, is an adjustment of 400K really meaningful?  After all. It’s about 0.25% of the working population in a measurement of a dynamic statistic amid people changing jobs and the economy growing.  Perhaps the politics are the signal, and the data is the noise.

Given that there were two very different takes on the data, it ought be no surprise that the S&P 500 finished the day exactly unchanged which is a pretty rare occurrence, happening less than 2% of the time in the past 10 years.  In fact, that lack of movement was the norm with both the NASDAQ and DJIA slipping -0.1%.  Net, I don’t think we learned much new and now markets and the algorithms will focus on tomorrow’s CPI data.

However, the narrative writers had their work cut out for them.  All those who were seeking to pan the government had to change their tune and now they are focused on the fact that there don’t need to be rate cuts if the employment situation is better.  Again, through a political lens this is good if you are anti-Trump because it prevents him getting the rate cuts he has been demanding.  I guess we cannot be surprised that Stephen Miran, in comments yesterday, continues to explain rate cuts make sense, which simply confirms the view that everything is political these days.

So, do we know anything new this morning?  Alas, I don’t think we learned anything to change the big picture yesterday, so let’s see how the data was received around the world.  Tokyo followed the S&P’s lead and was unchanged overnight with China (+0.1%) also doing little.  HK (-0.9%) lagged as traders prepare for the Chinese New Year holiday that runs all next week and took profits.  Korea (+3.1%) continues to perform well while India (-0.7%) continues to waver as the trade deal with the US impacts different parts of the economy very differently there.  Net, a mixed session.  In Europe, Germany (+1.3%) is the leader this morning on the strength of solid earnings reports by key companies as there has been no data released.  France (+0.75%) too is having a good day on earnings although Spain (-0.2%) is lagging.  The UK (+0.1%) is the only place where data made an appearance and it showed that GDP growth has fallen to 1.0% Y/Y there, another problem for the embattled PM Starmer.  It appears his time in office will be ending soon as literally every policy decision he has made has had a negative outcome.  As to US futures, at this hour (7:30) they are firmer by about 0.3%.

Bond markets saw the biggest move yesterday, with Treasury yields rising 4bps, although they have slipped back -1bp this morning and continue to trade in their range of 4.0% – 4.2%.  while we did spend some time above that range, it appears that fears of a bond market meltdown, or that China was going to sell their bonds or something else have faded somewhat.  In fact, globally, 10-year yields this morning are essentially unchanged.

Source: tradingeconomics.com

In the commodity space, the Iran situation continues to be top of mind for oil traders although WTI (-0.3%) is not really moving much this morning.  There was no announcement from the White House regarding the meeting between President Trump and Israeli PM Netanyahu which indicates, to me at least, that nothing was decided.  While a second US aircraft carrier steams toward the Persian Gulf, we are all on tenterhooks as to how this plays out.  Right now, it doesn’t appear that discussions between the US and Iran are leading anywhere.  Meanwhile, metals (Au -0.4%, Ag -1.6%, Pt -1.3%) are giving back some of yesterday’s strong gains with gold firmly back above the $5000/oz level again.  There is much talk of a major shortage on the COMEX for deliveries for March, but we shall see how that plays out.  Certainly, there has been no change in the demand structure for silver, but we just don’t know how much silverware has been sold for scrap to help alleviate the shortage at this point.  

Finally, the dollar is little changed vs most major counterparts with the two outliers KRW (+0.6%) on the back of strong equity market inflows and CHF (+0.4%) which appears to be the one haven that is behaving like one this morning.  JPY (-0.2%) has strengthened several percent over the past week, and comments from the latest Mr Yen, Atsushi Mimura, make clear they continue to watch the market closely, but for right now, there seems little concern, or likelihood, that intervention is coming soon.

One thing the NFP data did achieve was to alter the Fed funds futures market which now is pricing just a 6% probability of a rate cut at the March meeting with two cuts priced for the year.  I have to say that based on the comments from Logan and Hammack, as well as the NFP data, it certainly doesn’t appear likely that the Fed is going to cut again soon.  Tomorrow’s CPI data may change some opinions there, but we will have to wait to find out.

But riddle me this, if the Fed has finished its loosening cycle, and Kevin Warsh is seen as someone who is keen to reduce the size of the Fed’s balance sheet, why would we think the dollar is going to decline sharply from here?  For now, the buck remains rangebound, but as I watch what is going on elsewhere around the world regarding economic activity, the US continues to lead the way.  I still don’t see the dollar collapse theory making sense, although frankly, I think the administration would be fine with it.  Let me leave you with the entire history of the EURUSD exchange rate since its inception in 1999 and you tell me if you think the dollar is exceptionally weak or strong here.  Remember, a weak dollar is a strong euro, so higher numbers.  Frankly, it feels like we are close to the middle of the range, or if anything, stronger rather than weaker.

Source: data FRED, graph @fx_poet

Good luck

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Havoc He’s Wreaking

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The focus has turned to the data
And whether it’s good or it’s bad-a
We all want to see
Today’s NFP
Then listen to punditry chat-a
 
It’s funny, cause generally speaking
Most pundits are strongly critiquing
The numbers released
Declaring they’re greased
To help Trump and havoc he’s wreaking

It’s NFP day today, which given it is Wednesday is a bit odd, but that’s what happens when the government shuts down for a few days.  At any rate, this is the biggest data week we’ve had in a while as not only did we see Retail Sales yesterday, which disappointed at 0.0% despite showing the largest actual jump, $80 billion, ever between November and December, although that was completely removed by the largest seasonal adjustment ever, (Read about it here at WolfStreet.com) we also get CPI on Friday.  For good order’s sake, here are the current consensus forecasts for NFP:

Nonfarm Payrolls70K
Private Payrolls70K
Manufacturing Payrolls-5K
Unemployment Rate4.4%
Average Hourly Earnings0.3% (3.6% Y/Y)
Average Weekly Hours34.2
Participation Rate62.3%

Source: tradingeconmomics.com

As the market continues to adjust to the recent gyrations, there is hope that the data will lead to unequivocal conclusions about the economy, which could drive Fed decisions and then coalesce around a clear direction of travel.  I’m not holding my breath.  

The first thing to remember is that the data is revised virtually every month, and when the economy is at an inflection point, or even when it is showing more pronounced activity in one sector than another, those revisions can tell a very different story than the original print.  But even beyond that, while the algorithms are clearly programmed to respond to the data, longer term investors have a much tougher time discerning what is happening.  All that is a long way of saying, nobody still has any idea where things are headed!

While I dismiss the FOMC speaking circuit, yesterday’s two speakers, Logan and Hammack, who are both voting members this year, said that they felt the current rate is at neutral.  Remember, right now Fed funds are 3.75%, which is a far cry from the Longer run neutral rate they have been feeding us in the Dot Plot!

In fact, their median expectation is 3.0%, so the fact that two voting members think 3.75% is neutral is somewhat confusing especially as both indicated they expected inflation to continue to decline and exhibited concern over the employment situation.  My views of where things are headed don’t matter nearly as much as theirs do, but there seems to be a little inconsistency involved here.  As it happens, the current Fed funds futures market pricing shows that there is a 22% probability of a rate cut in March and then it’s 50:50 in April as per the below chart fromcmegroup.com.

At this point, I suspect we will need to see negative NFP numbers along with continuing declines in CPI/PCE for the Fed to cut as I think Chairman Powell is so miffed at President Trump, he doesn’t want to do anything that Trump wants.  It would also not surprise me if that attitude has suffused the bulk of the FOMC.  The irony remains that Governors Cook and Jefferson are raging doves but would rather keep policy tight to stymy Trump rather than act as they otherwise would.  At least that’s my take.

Anyway, that’s what we have to look forward to this morning.  So, how have things behaved overnight?  Let’s look.  Tokyo (+2.3%) continues to be the star of the show, continuing to rally on excitement and optimism that PM Takaichi is going to solve Japan’s problems.  Maybe she will, but they have a lot of them, so it will take time.  But the tech story is strong there and it appears that foreign buying is picking up, which has been one of the drivers of the JPY (+0.5%) lately.  In fact, this week, the yen is leading all currencies having gained more than 2.3% so far.

Source: tradingeconomics.com

As to the rest of Asia, China (-0.2%) and HK (+0.3%) did little although the tech-based Korean (+1.0%) and Taiwanese (+1.6%) exchanges did well, as did Australia (+1.6%) on the back of stronger metals prices.  One other interesting note is Indonesia (+2.0%) where the government just restricted mining of Nickel (+1.7%) in order to raise the price of their largest export!

Europe is a lot less interesting with the continent under some pressure (France -0.2%, Spain -0.3%, Germany -0.2%) although the UK (+0.7%) is performing well on the back of strength in mining and natural resource shares.  US futures at this hour (7:35) are pointing slightly higher, about 0.15%.

In the bond market, things have gone back to sleep with 10-year yields lower by -1bp pretty much throughout the US and Europe.  JGB yields also did nothing last night, and it appears that despite the massive debt that continues to grow around the world, bond investors are comfortable right now.  Perhaps they see deflation in our future, but that doesn’t feel right to me.

Turning to the markets that continue to show the most volatility, commodities, let’s start with oil (+2.1%) which is demonstrating concern over re-escalating tensions regarding Iran, the negotiations and the potential for military activity there.  There are reports that the US may intercept Iranian tankers and if you look at the chart below, a pretty good uptrend has developed over the past two months.  You won’t be surprised that NOK (+0.6%) has benefitted from today’s move either.

Source: tradingeconomics.com

As to the precious metals, after yesterday’s modest decline, we are back on the rise with gold (+0.85%), silver (+5.5%), copper (+2.1%) and platinum (+3.3%) all nicely higher.  The silver story is about declining inventories in Shanghai, which was the last place that can afford it since both the COMEX and London are already light on available ounces.  While we saw a dramatic decline nearly two weeks ago, I have to say things appear to be shaping up to recoup all those losses and then some!

Finally, the dollar is back under pressure this morning across the board.  I’ve already mentioned the two biggest movers and AUD (+0.5%) joins the list on the back of commodity strength.  Otherwise, the movements are not terribly large here, with the euro (+0.1%), pound (+0.3%), KRW (+0.3%), and ZAR (+0.2%) indicative of the situation.  I expect that the dollar will be responsive to today’s NFP data with a strong print helping the dollar and a weak one pushing it down a bit further.  However, remember that it remains within its trading range, albeit nearer the bottom than the top of that range as per the below.

Source: tradingeconomics.com

And that’s really it for today.  The NFP should drive the first movement and after that, there is still White House bingo for fun and surprises.  While the dollar is soft, I don’t see a collapse coming, and in the end, the more I read about EU energy policy, I can only expect that any collapse will be that of the euro, not the dollar.  But that is a ways into the future I think.

Good luck

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Up and Down

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The only things that really matter
Are stock prices frequently shatter
Their previous high
And rise to the sky
Like too much yeast got in the batter
 
And though prices move up and down
While traders both grin and they frown
The long term has shown
The ‘conomy’s grown
Though lately, tis gold’s worn the crown

As I wrote last week, markets have a difficult time maintaining excessively high levels of volatility for any extended period of time as traders simply get tired and effectively check out.  Now, we have had some impressive volatility lately, whether in stocks, silver or natural gas, to name three and as can be seen in the chart below.

Source: tradingeconomics.com

But a closer look at the chart tells an interesting story, despite a huge amount of movement in the past month, the net movement for the S&P 500, Silver, Natural Gas and the 10-year Treasury, has been essentially zero.  If you dig through this chart, the only net movement has been the dollar’s roughly 2% decline.

That is an interesting tale, I think.  Perhaps Macbeth said it best though, “It is a tale told by an idiot, full of sound and fury, signifying nothing.”  What exactly is the significance of the remarkable volatility we have seen over the past month across numerous markets?

If we review the past month’s activities, the most notable market event was the announcement of Kevin Warsh as the next Fed chair, and the initial assumption that he is much more hawkish than market participants had previously anticipated.  It remains to be seen if that is the case, especially since we are still months away from any confirmation hearings and his eventual swearing in, but that was certainly the initial narrative.  It was blamed for a sharp decline in equities as well as precious metals, although both are essentially unchanged over the past 30 days. 

At least NatGas made sense given the significant cold and winter storms that hit much of the US and northern Europe, but those, too, have passed, and prices are back to where they were prior to the more extreme weather.

Maybe the most interesting thing is that bond yields are basically unchanged despite the Warsh announcement.  It would not have been surprising to see a significant move there given Warsh’s ostensible hawkishness, but that was not the case.

My point is that markets move for many reasons.  Occasionally, there is a clear catalyst (Japan’s Nikkei responding positively to PM Takaichi’s landslide victory comes to mind), but more often than not, the narrative writers seek to explain price action after the fact while covering up their previous forecasting mistakes.  I, too, am guilty of this at times, which is the reason I try to step back and take a broader, longer-term view of market movement to get underlying causes.  As I no longer sit on a trading desk, I am not privy to the day-to-day tick activity, and frankly, even then, unless it was happening at my bank, I would still be in the dark.

To conclude, the strongest trends, which remain the precious metals, continue, although prices are back closer to the long-term trend than the parabolic heights seen 10 days ago as you can see in the below chart.  In fact, I don’t think we have had any changes in the underlying story, but the extreme market volatility is likely to be done for a while going forward.

Source: tradingeconomics.com

Which takes us to overnight market behavior.  While Tokyo (+2.3%) is still ripping higher on the Takaichi election news, only Taiwan (+2.1%) and the Philippines (+2.0%) are keeping pace with the rest of the region much less impressed, (China +0.1%, HK +0.6%, Australia 0.0%).  To my point, nothing has changed.  In Europe, too, price activity is fairly muted (France +0.4%, Germany +0.1%, Spain +0.2%, UK -0.2%) as there has been no news of note either economically or politically.  The most interesting data point was Norwegian inflation which came in much hotter than expected at 3.6% and has traders thinking the Norgesbank may be set to tighten again.  This has helped NOK (+0.6%) which is the leading gainer in the FX markets this morning.  As to US futures, at this hour (7:20), they are very modestly higher, just 0.15% or so across the board.

In the bond market, yields are backing off everywhere, with Treasury yields lower by -3bps, and European sovereigns lower by -1bp to -2bps across the board.  The exception, of course, is Norway (+8bps).  Perhaps, more interestingly JGB yields (-5bps) are slipping despite (because of?) Takaichi’s landslide victory.  Recall, heading into the election, expectations were for aggressive fiscal expansion and borrowing to pay for it.  However, Katayama-san, the FinMin has been explicit that they were going to be borrowing at the short end of the market, 1yr to 5yrs, so perhaps it is no surprise that the 10yr yield is slipping.  With that in mind, though 5yr JGB yields also fell last night, down -3bps, although shorter dated paper was unchanged.  I have not read of any analysts complaining that Japan is turning into an emerging market because they are funding themselves with short-dated paper, although when the US does it, apparently it is the end of the world.

Turning to commodities, oil (0.0%) continues to get tossed around on the Iran story, with no certainty as to whether a deal will be done or the US will attack.  Apparently, Israeli PM Netanyahu is meeting with President Trump tomorrow to register his opinions on the subject.  The interesting thing in this market is that the ‘peak oil demand’ narrative, which has been pushed by the climate set as occurring in the next year or two, has been pushed back to 2050 by the IEA as they take reality into account.  That may encourage more drilling, but that’s just my guess and as I’m an FX guy, what do I really know?

As to the precious metals, after a couple of days rebounding, this morning, the sector is modestly softer (Au -0.3%, Ag -1.6%, Pt -1.2%) although as per the chart above, the trend remains higher across all these metals.

Finally, the dollar, which has fallen the past two days, has stabilized and is mostly higher (save for NOK mentioned above) with most currencies softer by about -0.15 or -0.2%.  The other exception of note here is JPY (+0.5%) as there has been a lot of jawboning by the MOF there to prevent a rash of weakness.  However, it is difficult for me to look at the JPY chart below and discern a major reversal is coming.  I believe that the MOF wants to keep that 160 level as a dollar ceiling without spending any money if they can, but the problem with jawboning is that it loses its efficacy fairly quickly.  However, if they drive yields higher on shorter dated paper, perhaps that will attract more inflows, although given how low they currently are (2yr 1.29%, 5yr 1.69%) I think they have a long way to go before they become attractive to international investors.

Source: tradingeconomics.com

On the data front, NFIB Small Business Optimism fell to 99.3, a bit disappointing, and now we await the following: Retail Sales (exp 0.4%, 0.3% -ex autos) and the Employment Cost Index (0.8%).  We also hear from two more Fed speakers, Logan and Hammack, but I don’t see the Fed, other than Warsh, being that critical right now.  

And that’s really it for today.  My take is we are unlikely to see dramatic movement in any market so hedgers should take advantage of the reduced price volatility.  But otherwise, sometimes, there is just not that much to do.

Good luck

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Sanae Lightning

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It has been two weeks
Since she rolled the dice. Sunday
It came up hard eight!
 
Leaders round the world
Would sell their soul to obtain
The Sanae lightning

Source: asia.nikkei.com

Japanese PM Takaichi scored a resounding victory yesterday, capturing more than 76% of the seats with her coalition partners, and she now commands a super-majority, enabling her to control the dialog completely, pass any legislation and even change the constitution.  As I said, every other elected leader in the world pines for that type of power and approval, even Xi!  

The immediate market response was a 5.0% rally in the Nikkei as expectations for an aggressive fiscal policy expansion to the economy gets priced in.  Add to this more defense spending and the mooted tax cuts on food, and it is easy to understand the response.  

Interestingly, the yen, which had been under pressure from fears of unfunded spending, after declining at first, reversed course and strengthened nearly 1% from its worst levels early in the Tokyo session as per the below chart.  It certainly seems logical that yen weakness would be coming on this basis, but perhaps, what we are going to see is the Japanese use some of their FX reserves, which total about $1.3 trillion, to help fund the ¥5 trillion (~$32 billion) that the tax cuts will cost.  That would mean selling Treasuries to sell USD and buy JPY, helping to support the yen while allowing the BOJ to leave rates on hold.  In truth, it makes a lot of sense.  We shall have to see how things progress from here.

Source: tradingeconomics.com

Some pundits, when looking ahead
Are worried that Warsh at the Fed
With Bessent, will try,
To Treasury, tie
Their efforts, some assets to shed

The other big story this morning is a growing concern about a potential accord between the Fed and the Treasury once Kevin Warsh is confirmed and takes his seat as Fed chair.  Bloomberg has a big article on the subject, but it is around all over.  When combined with another article on China recommending its banks to reduce their Treasury holdings, it has helped create a narrative that the US is going to have major fiscal problems going forward which will result in massive money printing and much higher inflation.

Of course, the thing about this that I don’t understand is that Warsh is on record, repeatedly, for saying he wants the Fed’s balance sheet to shrink, and that its expansion has been one of the major economic issues in the US since QE2 back in 2012.  I also find it interesting that Warsh’s apparent desire to see the Fed’s balance sheet hold almost exclusively short-dated Treasuries, 3-years and under, is seen as a concern given that has been the Fed’s stated goal since they started shrinking the balance sheet back in April 2022.

Recall, Chairman Powell explained that in order to maintain the ample reserves framework they are currently using, the balance sheet needs to grow alongside the economy.  However, this is completely at odds with Warsh’s stated beliefs that the ample reserves framework is no longer effective and needs to be replaced eventually.  Of course, if I look at 10-year Treasury yields (+2bps today) over the past 5 years, as per the below chart, it is hard to get overly excited that things have changed much since the end of the Covid adjustments.  

Source: tradingeconomics.com

Perhaps Chinese selling will drive yields higher, or perhaps others will sell because they are concerned that the Fed and Treasury working together is inherently bad for the economy and will lead to higher inflation but so far, that is not the case.  As to inflation, while CPI and PCE remain higher than the Fed’s target, it does not appear to be galloping away at this stage.  In fact, there is much discussion on X that Truflation is now running at 0.68% and that the Fed will soon need to cut rates aggressively!  Of course, if inflation is running at 0.68%, can someone please explain the ‘affordability’ crisis that has gotten so much press?  PS, I don’t see Truflation as being an accurate representation of the world, but it sure is good for narrative writers sometimes!

And that is how we have started the week.  The Super Bowl was pretty dull overall, with defensive excellence, but nothing spectacular.  Someone made the point that this was the AI Super Bowl for advertising and the last two times we saw something dominate the advertising (dot.com in 2000 and crypto in 2022), within a year, both sectors had been decimated in the equity markets.  In the meantime, a quick tour of the overnight session shows the following:

Stocks – Asia was strong across the board with Japan (+3.9%) giving back some of the early gains but still rocketing to new highs.  The rest of the region was similarly strong, especially Korea (+4.1%) but gains of between 1.5% and 2.0% were the norm.  I guess everybody is positive on Takaichi-san!  Europe, however, has not been as robust although there are mostly gains there led by Spain (+0.6%) and Germany (+0.3%).  The laggard here is the UK (-0.1%) which is struggling as PM Starmer appears to be coming to the end of his disastrous term.  His appointment of Ambassador to the US looks to be the final straw as Peter Mandelson is widely mentioned in the Epstein files and now Starmer has lost his chief of staff because of that.  The UK will be better off, I believe, if Starmer is pushed out, although if they put in Ed Miliband, it could actually get worse given his personal insanity regarding energy.  But I would buy a Starmer removal.  As to US futures, at this hour (7:20), they are modestly lower, -0.15% or so.

Bonds – European sovereign yields are edging higher this morning, around 1bp across the board as there has been no data to change opinions and the bond markets, worldwide (Japan excepted) remain the dullest of places to play.  Japan (+6bps) did see a response to the Takaichi victory, which is what one would have expected.  We will have to watch this yield closely as if it truly does start to break out, there will be ramifications worldwide.  However, if we look at the chart below of 10-year and 30-year JGBs, they remain below the peak seen several weeks ago and, surprisingly, the overnight move was more pronounced in the 10-year than the 30-year.  Watch this space.

Source: tradingeconomics.com

Commodities – oil (+0.3%) has been chopping around either side of unchanged all evening as questions about Iran remain unanswered.  There was a story in the WSJ about the US holding back on any military action because Iran has so many medium range ballistic missiles and any reprisal could be devastating to the Middle East overall.  But if I have learned anything from observing President Trump and his negotiating style, it is impossible to know what the next move will be.  I would not rule out either a successful deal or a military strike at this point, with the former resulting in lower oil prices while the latter would see a sharp rally.  In the metals, gold (+0.9%) and silver (+2.7%) are both continuing their volatile rebound from last week’s sharp selloff, while copper is unchanged this morning.  As I have said, nothing has changed this supply demand balance in physical metals, although the paper, futures market, can still do many remarkable things that don’t necessarily make sense.

FX – the dollar is softer across the board this morning, slipping against both G10 (EUR +0.5%, GBP +0.3%, JPY +0.4%, CHF +0.7%) and EMG (MXN and BRL +0.25%, PLN +0.65%, ZAR +0.25%, CNY +0.15%) with little in the way of data as a driver anywhere.  While I have not specifically seen a reboot of the dollar is collapsing narrative, I presume the concerns over a potential Fed-Treasury accord are an underlying thesis today.

On the data front, we see both NFP and CPI this week as they come a few days late due to the short government shutdown.

TuesdayNFIB Small Biz Optimism99.9
 Retail Sales0.4%
 -ex autos0.3%
 Employment Cost Index0.8%
WednesdayNonfarm Payrolls70K
 Private Payrolls70K
 Manufacturing Payrolls-5K
 Unemployment Rate4.4%
 Average Hourly Earnings0.3% (3.6% Y/Y)
 Average Weekly Hours34.2
 Participation Rate62.3%
ThursdayInitial Claims218K
 Continuing Claims1850K
 Existing Home Sales4.15M
FridayCPI0.3% (2.5% Y/Y)
 Ex food & energy0.3% (2.5% Y/Y)

Source: tradingeconomics.com

In addition, we hear from seven more Fed speakers, with Governor Miran making three appearances as he seeks to make his case for cutting rates.

Nothing has changed my view that Warsh and Bessent are the two most important voices now, with the rest of the Fed relegated to biding their time until Warsh shows up.  As to the data, the Citi surprise index continues to show that data is better than most forecasts which speaks well of the economic situation.

Source: cbonds.com

I am not a proponent of the world ending, the Treasury market collapsing or the dollar dying despite a lot of doom porn that this is the near future.  I would contend the dollar remains rangebound for now, and we need a definitive policy adjustment to see that situation change.  Until then…choppy is the way.

Good luck

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Changing Fast

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At this point most traders are thrilled
It’s Friday, ‘cause throughout that guild
Exhaustion is rife
From bulls’ and bears’ strife
O’er whether their dreams be fulfilled
 
As well, all the narrative writers
Are stuck pulling college all-nighters
With facts changing fast
Their latest forecasts
Do naught but encourage backbiters

It has certainly been an interesting week in financial markets, at least most of them, with significant moves throughout the commodity, equity and cryptocurrency spaces.  We even saw a jump in bond prices yesterday after a really lousy JOLTS Jobs number (6.54M compared to 7.2M expected) and a higher-than-expected Initial Claims number of 231K.  Suddenly, questions about the labor market are front of mind, and prospects for a March Fed Funds cut rose to 23% for a time, although have slipped back to 17% as of this morning.  But one need only look at a few charts (all from tradingeconomics.com) showing the daily movement in some popular trading vehicles to understand why traders are thankful the week is ending.  For instance, 

Silver (+4.75%), which had a 34% range last Friday and has fallen 39% since its high 8 days ago:

Gold (+2.1%), which showed the same pattern, albeit not quite as dramatically:

Natural Gas (+3.4%), which rose $2.65 and reversed $2.00 on a $3.00 base over the past two weeks:

And Bitcoin (+5.8%), which has fallen nearly 50% since its highs in early October and 22% in the past week:

Now, it must be remembered that Bitcoin has a long history of massive drawdowns, with a 50% drawdown in spring of 2021 and a 75% drawdown from November 2021 through October 2022. We shouldn’t be surprised as Bitcoin is essentially a pure risk asset, so is completely narrative driven.  And as the narrative writers try to keep up with the facts on the ground, they are trying to figure out how to sell the story that Bitcoin, which was ostensibly designed to be an alternative to the fiat currency system, has become so tightly linked to the fiat financial system.

In the end, though, the commodity markets are beholden to the marginal demand/supply of the last molecule available.  I have not seen anything change with respect to demand for power to drive the economy, the demand for silver to build out electronics or the demand for gold by central banks.  To me, while prices for these commodities can whipsaw aggressively as the global regime changes, ultimately, I remain confident demand will continue to be the story.  (Bitcoin is an entirely different beast and one I will not discuss in depth other than to highlight its volatility along with the rest of these markets.)

Anyway, you can understand why traders are exhausted.  In fact, my forecast for next week is that we are highly unlikely to see the same size movements, although choppiness will still be the rule.

You may have noticed I missed oil (-0.4%) which has also seen some volatility as per the below chart, but not quite at the same level as the others.  Part of that is the oil market is much larger and more liquid and part of that is that the whole Iran/US discussions question has provided fodder for both bulls and bears in short intervals resulting in no net movement over the past week.

From what I can piece together, the situation in Iran is coming to a head regarding the regime there.  The talks today are ongoing, but there is other information that appears to indicate preparations are being made for a transitional government, and the State Department just warned all US citizens to leave Iran.  Something is up which will certainly drive more oil volatility.

If we look at bonds, Treasury yields fell -8bps yesterday and have rebounded by 2bps this morning.  That was the largest single day move we’ve seen since October, and basically took the market right back to that 4.20% level that had been home for weeks.

There continues to be a lot of confusing data and information regarding the economy as yesterday’s weak jobs data conflict with the broader idea that the hyperscalers are spending 2% of GDP on capex this year and forecasts for the budget deficit continue to run around 2%.  It seems like it will be difficult for a recession to come about with that much new spending in the economy, but as we have seen over the past decades, the beneficiaries of that spending are not necessarily the population cohort that is currently upset.  I guess the question is, is economic growth real if the population doesn’t feel it?  That will certainly be the political question come November.

As to European yields, they all followed Treasuries lower, especially after the BOE 5-4 vote to leave rates on hold offered a much more dovish signal than anticipated, and the ECB harped on the strength of the euro and how that could bring down their inflation forecasts, hinting at lower rates going forward.

In the equity markets, yesterday saw a tough day in the US as the tech/AI story continues to get beaten up right now, and that was more than enough to offset strength in things like defensives and staples.  But this morning, US futures are higher by about 0.5% as I type (8:00).  In Asia, Japan (+0.8%) bucked the US trend on the back of excitement about the upcoming election where Takaichi-san is expected to gain a mandate.  However, China (-0.6%), HK (-1.2%), Korea (-1.4%) and Australia (-2.0%) all had the same fate as the US.  Given the weight of technology companies in Asian indices, I suspect we are going to see more volatility here as different narratives come about on AI and investment and the social/political impacts.  As to Europe, modest gains are the story with the DAX (+0.5%) and IBEX (+0.9%) leading the way higher with the former benefitting from yesterday’s surge in Factory orders as well as a better-than-expected trade balance today.  As to Spain, it has been trending higher and nothing has come out to change that view for now.

Finally, the dollar is giving back some of yesterday’s gains but remains within that longer term trading range.  Using the dollar index (DXY) as our proxy, you can see just how little things have changed.  All the talk last week of the breakdown in the dollar has been forgotten for now, although I continue to read about China building a digital currency backed by gold.  I discussed that earlier this week and why I continue to believe that is unrealistic at this time.

But the weird thing about the DXY is it doesn’t seem to reflect what is happening in individual currencies.  For instance, AUD (+0.85%), GBP (+0.45%) and NOK (+0.9%) are all much stronger although the euro (+0.15%) and JPY (0.0%) not so much.  In the EMG bloc, MXN (+0.8%), ZAR (+1.1%), HUF (+0.8%) and KRW (+0.3%) are all having a very good session despite no specific news that would seem to drive that.  Historically, I never paid attention to the DXY because nobody who actually trades FX pays it any mind.  However, as a trading vehicle, it has gained many adherents which is why I mention it.  So, as we look across the currency universe, the dollar is having a tough day.

On the data front, we only see Michigan Sentiment (exp 55.0) and Consumer Credit ($8.0B).  We also hear from Governor Jefferson, but nobody seems to be listening to any Fed speakers right now, Secretary Bessent is a far more important voice for the markets.

We have seen massive moves across many markets lately, with excessive moves correcting, but I remain stubbornly of the view that while things got ahead of themselves, the underlying trends are still in place, at least in commodities.  As to the dollar, it’s not dead yet, but its future will depend on the administration’s ability to achieve their goals regarding the economic adjustments and inward investment.  

Good luck and good weekend

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Gone Astray

Posted on by

Though Friday will lack NFP
We still will have something to see
The States and Iran
Will meet in Oman
To talk about nuke strategy
 
But til they, in fact, do sit down
Be careful as crude moves around
And what if talks fail
To find holy grail
Beware oil shorts and their frowns
 
With that as the background today
The narrative has gone astray
’Cause all kinds of tech
Resemble a wreck
While metals are fading away

Sometimes it’s hard to determine which stories are really driving markets as there are so many that have potential conflicts between them.  With that in mind, I will start with oil this morning, which has seen a bit of choppiness during the past week on the back of on-again, off-again, on-again talks due to be held between the US and Iran.  See if you can guess where the worries about a US military strike gained ground, were quashed by news of potential talks, saw a military skirmish in the Strait of Hormuz and then when talks were reconfirmed.

Source: tradingeconomics.com

Net, there is still an underlying concern about the situation, which is why, I believe, the price of crude (-1.1%) is still above $64/bbl.  Remember, it was not that long ago when it had seemed to find a comfort zone below $60/bbl.  It strikes me that if some type of accommodation is reached at these talks, where Iran gives up its nuclear weapon dreams and stops funding terrorism (I believe these are the administration’s goals) then there is plenty of room for oil prices to slide back below $60/bbl and continue what had been a longer term down trend as per the below chart.  

Source: tradingeconomics.com

After all, given the fact that Venezuelan oil is going to be returning to the market, the continued expansion of production in Guyana, Brazil and Argentina, and now the idea of welcoming Iran back into the good graces of nations, that is a lot of potential supply that is currently not available.  My concern is if Iran agrees to those terms, it may be an existential threat to the theocracy, so I guess they need to weigh that risk vs. the risk that the US does escalate militarily, which could also be an existential risk to the theocracy.  Net, choppiness seems to be the likely road ahead.

Finishing commodities, precious metals have reversed the reversal and are down sharply this morning (Au -1.7%, Ag -11.0%, Pt -4.4%).  Volatility remains extremely high and given the competing narratives of a) it was a bubble, and b) the fundamentals remain in place, I expect we will continue to see price action like this for a while yet.  Although remember my strong belief that markets can only maintain volatility of this nature for a few weeks as at some point, all the participants simply become too tired to trade.  There was a very interesting chart I saw on X this morning that showed the price action in gold during the German hyperinflation of the Weimar Republic a bit over 100 years ago.  

I’m not implying we are heading to a hyperinflation, just that gold (and silver and platinum) prices can move very far in short order, as we’ve seen.  In the end, nothing has changed the fundamentals with demand for gold still price insensitive, demand for silver still greater than mining supply with the same true for platinum.  But it will be a rough ride for a little while yet.

So, let’s turn to the equity markets, where there are far more plugged-in analysts than me, but I want to take a higher-level look.  While yesterday’s price action was mixed (NASDAQ and S&P lower, DJIA higher) it seems to indicate that there is an ongoing rotation out of tech stocks into other areas, amongst them consumer staples, energy and defensives.  What I find so interesting about this, though, is that if I look at a chart of the three major US indices, they are all the same chart.

Source: tradingeconomics.com

Granted, the NASDAQ had the highest high back in November, but, in reality, they all move very much in sync.  This begs the question, what can we expect going forward?  At the end of the day, I still believe that stocks represent the value created in the economy.  As such, if the Trump administration’s plans to reduce regulations and encourage banks to lend more to the real economy, rather than purchase financial assets, can be implemented effectively, that is a very real positive for equity markets over time.  However, that probably means a much less steady climb, especially if the Fed is not explicitly supporting assets as the new Chair, Warsh, tries to shrink the balance sheet.  It is going to be messy and there are going to be a lot of cross narratives and claims, so at any given time, the only reality will be increased volatility.  But at least there’s a plan.

As to the rest of the world’s equity markets, it does appear as the bifurcation between those nations that are willing to work closely with the US and those working closely with China is likely to continue.  It remains to be seen which bloc will outperform, although I like the US odds given the legal structure and the demographics.  

With all that in mind, let’s look at the overnight price action.  Asia had a tough go of it given the high proportion of tech names there.  While Tokyo (-0.9%) slipped along with China (-0.6%) the real laggards were Korea (-3.9%) and Taiwan (-1.5%) and there were far more laggards (India, Australia, Malaysia, Indonesia) than gainers (Singapore, HK).  This is the tech story writ large.  In Europe, even though they largely lack tech, weakness is the norm (Spain -1.1%, Germany -0.2%, UK -0.3%) although the French (+0.3%) have managed to buck the trend.  It is not clear why Spain is lagging so badly, although perhaps PM Sanchez’s efforts to import 500K new people while unemployment remains at 10%, the highest in the EU, has some concerned.  As to US futures, at this hour (7:15), they are pointing higher by about 0.2%.

In the bond market, once again there is nothing going on.  Treasury yields are almost exactly unchanged since early Friday morning, although we did see a dip and rebound after the Warsh announcement.

Source: tradingeconomics.com

The US yield curve is steepening as 30-year yields edge higher although those remain below 5.0%, a level that many are watching closely as a signal of a bondmageddon.  On the continent, European sovereign yields have edged higher by 1bp to 2bps, but activity is muted ahead of the ECB meeting announcement (exp no change) scheduled later this morning.  UK yields have edged lower by -1bp after the BOE left rates on hold, as expected, with a 5/4 vote, the 4 looking for a cut.  I continue to believe that the odds are for the ECB to cut rates again far sooner than the market is pricing.  And JGB yields slipped -2bps overnight as market participants await Sunday’s election results.  Given PM Takaichi is forecast to win with an increased majority, it is hard for me to believe that if she does, JGB’s will sell off sharply on the idea she has promised more unfunded spending, they already know that.

Lastly, the dollar is firmer this morning, continuing to defy all the calls for its demise.  The pound (-0.8%) is the laggard after the BOE sounded a bit more dovish than expected, but we are seeing losses across the entire G10 bloc.  As to the EMG bloc, ZAR (-0.7%) is the laggard, but given the dramatic reversal in precious metals, that is no surprise.  Otherwise, losses on the order of -0.3% or so are the norm.

On the data front, Initial (exp 212K) and Continuing (1850K) Claims lead the way and later we see the JOLTs Job Openings Report (7.2M).  The word is that the NFP report will be released next Wednesday with CPI next Friday.  Atlanta Fed president Bostic speaks later this morning, but I continue to believe that until we hear from Mr Warsh, the Fed’s words have very little impact.  Arguably, the neutering of the Fed is why the bond market remains so quiet.  Traders have lost their cues.

Risk attitudes are getting revisited around the world as the seeming permanence of increased risk appetite is starting to be called into question.  There is no better signal of this than Bitcoin, which has broken back below $70K this morning to its lowest level since October 2024.  

Source: tradingeconomics.com

It was January 2024 when the ETF, IBIT, started trading and BTC was about $43K at that time.  As BTC is a pure risk asset/vehicle, it’s recent decline may well be the biggest signal that risk-off is coming.  That could well impede the Trump efforts to rebuild the US manufacturing base, but perhaps, it could also encourage it, as business risks are easier to understand than market risks.  The volatility is not over.

Good luck

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Dissension

Posted on by

It seems that there’s still quite some tension
As metals and stocks show dissension
Though Friday both puked
Of late, metals juked
Much higher, to stocks contravention
 
So, what can we learn from this split?
That tech stocks all now trade like sh*t
While silver and gold
Are what folks will hold
And bonds? No one just gives a whit

It seems the government shutdown has ended, just as quickly as it began and the only people impacted are traders who were looking forward to the NFP data on Friday.  Given the shutdown was only for a few days, and that apparently, all the data was already collected, it was the compilation that was being delayed, I presume we will get the numbers next week.  Of course, this is a government bureaucracy, so it may take a bit longer.  Nonetheless, this morning we see the ADP Employment number (exp 48K) and analysts will have to work from that, plus the reports like the ISM hiring data, to give their views of the economy.  It really all does seem like theater, I must admit.

Anyway, away from that, the only other news of note that is impacting markets has been an increase in tensions in Iran after the US shot down an Iranian drone heading toward the US aircraft carrier, Abraham Lincoln.  However, it appears that talks are still scheduled for Friday, so oil (+0.2% today, +1.4% since yesterday morning) is creeping back higher, although remains well below the levels seen last week when concerns over a US attack there were mounting.

Source: tradingeconomics.com

Which takes us to markets and what appear to be the key internal drivers.  Starting today with stocks, the narrative revolves around concern that AI is going to destroy software companies and SaaS models since their user base will no longer need those companies.  As well, there are the lingering concerns about the AI investment bubble and the circular dealing between Nvidia and its customers being an indication of the end of the era.  This is akin to what happened during the tech bubble in 2000-01 and has been highlighted by numerous analysts for several months, although is gaining more traction of late.  Finally, the Business Development Companies (BDC’s) and PE firms are under increasing pressure as their portfolio of loans and positions, many of which are being hurt by AI, are starting to hemorrhage cash.  This trifecta has been weighing on the NASDAQ, preventing any significant strength, although other sectors, notably energy and materials, have been doing pretty well.

The funny thing is, while the NASDAQ (-1.4%) fell yesterday amid widespread US equity weakness, if I look at the chart (below from tradingeconomics.com) it doesn’t seem that negative, rather it seems to be consolidating ahead of another leg higher.  But then, I am no technician, so don’t pay attention to me.

However, the narrative is strong here that the world is about to end because Nvidia hasn’t made a new high in the past three months.  I am no tech stock expert, but my take from the cheap seats is that future equity market outcomes are going to continue to be reliant on the success of the Trump administration’s plans regarding reshoring and changing the nature of trade.  It is likely to be bumpy, especially if the Fed does not cut rates to support equity markets, especially since that has been the MO for the past 40 years.  But I remain positive overall.

Looking around the rest of the world, last night saw a mixed picture, although definitely more green than red.  While Tokyo (-0.8%) slid along with Malaysia and the Philippines, the rest of the region had a nice session led by Korea (+1.6%), China (+0.8%) and Australia (+0.8%).  It appears the tech fears were less concerning there, either that or PE and BDC companies aren’t yet so prevalent.  In Europe, meanwhile, despite mixed PMI Services data, there are more gainers than laggards led by the UK (+1.0%), which does have miners, benefitting from the rebound in metals prices.  But France (+0.9%) and Spain (+0.15%) are also higher although Germany (-0.2%) is lagging after a modest miss in the PMI data. As to US futures, at this hour (7:15), they are pointing higher by about 0.25%.

Back to metals, which continue to be THE story these days, gold (+2.0%) has reclaimed the $5000/oz level and while it is lower in the past week, remains nearly 17% higher YTD.  Silver (+6.0%) is also rebounding nicely along with platinum (+3.8%) as more and more discussions have ascribed last Friday’s rout to month end delivery and position issues amongst a few very large players who were able to prevent some major damage to their own balance sheets.  However, as I have maintained all along, the fundamentals are unchanged; there is a shortage of silver for industrial use and has been for several years.  As to gold, there is no indication that central banks have stopped buying.  These continue to be long-term plays and will likely drag the entire metals sector along for the ride.

What about bonds, you may ask?  Well actually, nobody is asking about bonds!  They remain mired in a tight range with dueling narratives about the long-term view.  On the one hand, there are those who continue to look at the US debt load, and the expectation of fiscal deficits as far as the eye (or the CBO) can see, and expect supply issues to dominate, forcing the government to seek inflation to create the soft default necessary to pay back the debt.  They will point to the long-term trend, which saw yields decline for 40 years and then reverse back in 2020 (see chart below from finance.yahoo.com) as evidence that yields are going to trend higher for the next decades.

On the other side, you have those who believe the future is deflationary, with AI driving massive increases in productivity and driving down prices, while focusing on Truflation’s recent readings of 1.0% and claiming that is the way.  Personally, I have more sympathy for the former view than the latter, as it is increasingly difficult for me to understand the view that AI will be able to achieve all its currently stated desires without sufficient energy and materials, whose increasing prices are going to limit any downside in inflation.  As well, while a Warsh Fed chairmanship may strive to change the current central bank model of QE whenever needed, there is zero evidence any other central banks are going to follow suit.  

In the meantime, the tension between those two views has kept yields in a very tight range for a while, and we need an exogenous catalyst to break that range.  Peace in Ukraine?  War in Iran?  I’m not sure.

Finally, the dollar is a touch firmer this morning, notably against the yen (-0.6%), which continues to give back its gains from two Friday’s ago when the Fed ‘checked rates’ in the NY session as seen in the chart below.

Source: tradingeconomics.com

However, the point was made this morning, and it is a good one, that while Japanese 10-year yields are at 2.24%, 10-year yields, 10-years forward are about 4.10%, which would be a devastating yield for the Japanese government given its debt/GDP ratio remains above 230%.  It is difficult to get excited about owning the yen with that backdrop, especially given the demographic implosion of population that is ongoing there.  As to the rest of the currency market, Zzzzz.  Aside from the narrative of the dollar is dead, which gets recycled by somebody every day, it is very hard to look at recent price action and think something remarkable is going to happen.  We will need major monetary and fiscal policy changes, which while they may arrive, are going to take quite some time to get here.

And that’s really it this morning.  Aside from ADP, we get the ISM Services (exp 53.5) and we get the Quarterly Treasury refunding announcement, which will garner a great deal of attention only if Secretary Bessent explains he is going to issue more bonds and less bills, which seems unlikely.  Monday’s ISM data was quite strong.  Strength today could well portend that the US economy has a bright future ahead, in the near term, and that should support stocks and the dollar, while commodities will benefit from the increased demand.  Bonds?  Well, we’ll see which side of that argument is correct.  And what happens if the deficits are smaller than expected?  That is the question nobody is asking because the ‘smart’ folks don’t believe it is possible.  Remember, the dollar is still king.

Good luck

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Bane and Hellfire

Posted on by

Though not getting near as much press
A shutdown, once more’s, added stress
To labor releases
And so, we’ll miss pieces
Of data.  For Wall Street, a mess
 
But once again, I need inquire
Are shutdowns a bane and hellfire?
Or are they instead
A way to spearhead
More funding cuts we should desire?

It seems that once again, the government shut down, at least partially, on Saturday night because the Senate refuses to pass the required funding legislation.  At this point, 6 of the 12 funding bills are already signed into law, so the shutdown is not as extensive.  But more interestingly, it is not garnering nearly the headlines that this situation did last autumn.  

In fact, I only mention it because the most direct impact we are likely to see is that, once again, the BLS will not be releasing data on time, notably today’s JOLTS Job Openings report and Friday’s NFP data.  So, while Ken Griffin will miss more opportunities to make money via his HFT algorithms front running retail traders, the rest of us probably don’t care all that much.

Which brings me to the question of the size of the federal government.  Stick with me here.  Along these lines, I want to highlight a very interesting piece written by Michael Nicoletos which is well worth reading on the subject of naming Kevin Warsh as the next Fed chair.  Prior to reading this article, I had come to the view that while Warsh would not technically be joining the Cabinet (Fed independence and all that), he is going to be working shoulder to shoulder with Treasury Secretary Bessent (they have worked together before and are close friends apparently) to achieve their goal of restructuring the way the US economy functions.  

Much has been made of how it will be impossible for Warsh to cut rates (as Trump desires) while reducing the Fed’s balance sheet, which is something for which Warsh has repeatedly called.  The missing piece of the puzzle, which I have rarely seen mentioned other than in this article, is regulations, specifically bank regulations.  If the Fed reduces the need for banks to hold Treasuries for safety/liquidity reasons, it allows them to lend more money to the real economy which will support actual economic activity.  The result can be that instead of Fed primed monetary stimulus, the nation could see business investment (consider the amount of promised inward investment to the US on the back of the trade deals) which can result in sustainable growth with less monetary support.  This is a completely different framework than we have seen since, arguably, Paul Volcker, as it was Alan Greenspan who first created the Fed put.  Frankly, it is the most bullish prospect I have seen in a long time.  Read the article!

One other thing Warsh is keen to do is near and dear to my heart, reduce the size of the Fed and the Fed’s transparency of thought.  Less press conferences, less interviews, ending forward guidance, and less Fedspeak overall would be a blessing for us all!

Ok, on to markets.  Precious metals continue to be the major mover and shaker across all markets with the last several days declines being sharply reversed this morning.  I think gold (+5.3%) and silver (+8.3%) deserve their own charts (from tradingeconomics.com) given the extraordinary nature of the recent price action.  While the volatility here has been extreme, as I have repeatedly said throughout this move, the fundamentals have not changed, so demand for metals, especially silver into a deficient market, remains the ultimate driver.

Obviously, both metals remain far below their recent peaks, seen just last Thursday, but recall, parabolic tops always see retracements of this nature.  My expectation going forward is that both these metals, and copper (+3.2%) and platinum (+6.2%) will be heading higher again, albeit not quite as quickly as we saw during January.  One other thing adding to the bullishness is the announcement of Project Vault, a US stockpile of strategic minerals including copper and silver as well as a long list of rare earth elements.  Remember what happens when a price insensitive buyer enters the market.  You want to be long!

As to energy markets, oil (+0.35%) and NatGas (-1.2%) are both a bit less active this morning as the latter, which tumbled 25% yesterday on the end of the cold wave, is finding a new home while oil continues to soften based on the upcoming talks between the US and Iran which has reduced concerns of a military intervention there.

Compared to the commodities space, the rest of the markets are quite dull, indeed.  Turning to the stock market, yesterday saw solid gains in the US after much stronger than expected ISM Manufacturing data (52.6 vs expected 48.5) which was the strongest reading since August 2022.  As you can see from the below chart of this statistic, the US manufacturing sector has suffered greatly for more than 3 years, and that is true in the employment statistics there as well.  Is this the beginning of the great reshoring?  It is too early to tell, but if we see this for the next several months, you can be sure the narrative is going to change.

Source: tradingecommics.com

In Asia, Tokyo (+3.9% and a new all-time high) rallied on the stronger US market, the ISM data and the weaker yen supporting profitability of Japanese exporters.  Korea (+6.8%) saw a huge move on the back of semiconductor makers Samsung and SK Hynix, while the government there seeks to get investors to bring money home to support the currency. India (+2.5%) rallied on the news of a trade deal with the US that reduces tariffs to 18% and gets them to stop purchasing Russian oil, buying from the US instead and generally, there were gains everywhere in the region, even Australia despite the RBA hiking their base rate (as expected) but sounding more hawkish than traders assumed.

In Europe, the picture is more mixed and far less impressive with gains and losses on the order of +/-0.2% across the board.  While earnings data has been solid generally, there is ongoing concern about the outcome of Russia/Ukraine talks and a mix of data with French inflation falling to 0.3% Y/Y and Spanish Unemployment rising although the ECB, which meets Thursday is not expected to adjust policy.  As to US futures, at this hour (7:10) they are higher by 0.25% or so.

In the bond market, the strong ISM data saw 10-year yields back up 4bps yesterday, and they have edged a further 1bp higher this morning.  European sovereign yields are higher by 2bps across the board, as are JGB yields.  It seems we may be seeing the initial pricing of stronger economic activity.  However, if we take a longer-term perspective of bond yields, as per the below chart, it shows us that, frankly, while there have certainly been some ups and downs, yields are little changed overall in the past 2 ½ to 3 years on a net basis.  

Source: tradingeconomics.com

As I wrote in the beginning, there are changes afoot in policy making circles, certainly in the US which drives the entire global financial markets, so it remains to be seen how this all plays out.  While I think there is scope for a period of higher rates in the short term, if the administration is successful in their playbook, that would likely indicate lower yields over time.

Finally, the dollar continues to defy every call for its demise.  This morning, the DXY is unchanged and back toward the middle of its trading range.  The big mover overnight was AUD (+0.8%) which dragged NZD (+0.6%) along for the ride.  As well, LATAM currencies (MXN +0.4%, BRL +0.4%, CLP +1.0%) continue to perform well, as they have over the past year.  Of course, real interest rates in Mexico (+3.3%) and Brazil (+10.75%) are far higher than in the US and that has been drawing in a great deal of investment while CLP continues to track copper prices.  Again, I am confident that President Trump is unconcerned that the dollar is declining vs. Mexico and Brazil as it helps US export competitiveness.  As to the euro, remember that when it pressed 1.20, the first thing we heard was how the ECB may need to respond if the euro becomes too strong.  My money is still on the next ECB move being a cut.

And that’s all there is today.  Data has gone missing and I cannot believe that anybody cares what Richmond Fed president Barkin has to say at this stage of the game.  That means we are back to headline bingo to drive movement.  Through all this, nothing has changed my view that the dollar is still the cleanest dirty shirt in the laundry.  And if Bessent and Warsh can get things done as they perceive, it will simply be the only clean shirt around.

Good luck

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Memory-Holed

Posted on by

Since Thursday, the world has adjusted
Its views about what can be trusted
The safety of gold
Is memory-holed
As retail becomes more disgusted
 
Perhaps we should not be surprised
That China has now advertised
A latent desire
The yuan should move higher
As status, reserve’s, emphasized
 
And one last thing, can it be true
That markets have taken their cue
From Fed Chair-select
I am circumspect
I guess, though, that’s what traders do

Wow!  It has been a remarkable couple of trading sessions, that’s for sure.  As we start this morning, precious metals remain the story, with both gold (-2.25%) and silver (-1.25%) still sliding, although both have rebounded from their worst levels of the overnight session as you can see in the chart below.

Source: tradingeconomics.com

Certainly, the debasement trade had gotten awfully crowded, but ask yourself, do you believe that people suddenly decided fiat currencies are great again?  Me neither.  As we have learned many times in the past, markets overshoot in both directions when something changes sentiment.  Which brings me to my second question, is this really all about Kevin Warsh?  If so, what a harsh introduction to his new role.  I understand the idea that Warsh’s perceived hawkish bias runs contra to how the narrative had evolved, but my experience is that it is rarely a single catalyst that causes a market adjustment of the type we have just seen.  The one time that comes to mind was the Plaza Accord, but at that time, the G7 nations all came out and declared they were adjusting monetary policy toward a particular goal.  Assuming a new Fed chair is going to make changes of that nature seems aggressive.

Nonetheless, this is where we are.  Thursday’s narratives have all been destroyed and new ones have yet to be written.  So, for now, I anticipate choppy trading, although nothing has changed the underlying fundamentals for metals, the dollar or the economy, at least not yet.

Which brings me to another interesting development over the weekend.  Apparently, back in 2024, Chinese President Xi Jinping made a speech to a group of provincial officials, that had heretofore not been publicized, where he declared his ambition to have the yuan become a reserve currency.  This is an interesting idea, but one that I believe will be very difficult for him to achieve, at least given his apparent desire to control every aspect of the Chinese economy.  After all, for other nations to hold a currency as part of their reserves, they will want complete, unfettered access to convert it at any time they desire.  Otherwise, as a reserve manager, why would you even consider holding it as part of your national wealth.  

One thesis is that China is going to back the CNY with gold, but I challenge that thesis.  Let’s do a little thought experiment here.  

  1. China claims CNY is gold backed, so it is safer than USD which is backed only by the full faith and credit of the US government.
  2. Saudi Arabia sells China lots of oil and gets paid in CNY
  3. Since the Saudis can’t really do anything with their CNY, they go to the PBOC and say, here’s your CNY, give me gold.
  4. China says
    1. no problem, or
    1. no way

Which do you think is more likely, a) or b)?

China claiming that CNY is backed by gold because they have bought a bunch lately is no different than the US claiming the USD is backed by gold because we hold a bigger bunch in Ft Knox.  It is meaningless unless those who hold bank notes, or their digital form, can convert it.  Even at the government level, and I find it difficult to believe that China will ever permit that type of transaction.  But it sure makes for good headlines to offset the debasement trade debacle that just played out!

As we have observed over the past months, things do change quickly these days, so who knows what tomorrow will bring.  But for now, let’s look at how the rest of the markets behaved overnight.

I’m going to start with bonds because they are the easiest.  Virtually nothing has happened for weeks.  Treasury yields (-1bp) have slipped slightly, as have JGB yields (-1bp) while European sovereign yields have edged higher by 1bp across the board.  I would think if risk views had really changed, there would be more activity here.  Perhaps the biggest surprise is JGB’s where the most recent poll for the election coming Sunday has her LDP coalition winning a landslide 300 seats.  If that is the case, based on the earlier concerns of her apparent willingness to increase unfunded spending, I would have thought JGB’s would suffer.  But not today.

Turning to stocks, while Friday’s US performance was lackluster, it was a virtual star relative to the metals space.  As to Asia last night, it was ugly with Japan (-1.25%), China (-2.1%), HK (-2.2%) and Australia (-1.0%) all under pressure as it appears a combination of fears over changing global dynamics mixed with weakness in mining company shares after the metals rout.  Korea (-5.3%) meanwhile, really took it on the chin with a sharp reversal of recent gains that had outpaced almost all other major markets.  Indonesia (-4.9%) also got crushed, but then they have had problems since the threat of reduced status.  India (+1.2%) was the only market gainer of note.

Europe, though, has neither tech nor mining companies of note and so is higher across the board this morning, led by Spain (+0.8%) and Germany (+0.6%) after very slightly better than expected PMI data this morning. As to US futures, at this hour (7:30) they are slightly softer with the NASDAQ (-0.5%) the laggard.

Oil (-4.75%) is backing off significantly this morning as there appears to have been a reduction in the rhetoric between President Trump and Iran, with negotiations mooted for some time this week or next, ostensibly in Turkey.  Nat Gas (-17.1%) is giving back some of its recent gains as US temperatures exit the polar vortex and come back to more normal winter temps.

Finally, the dollar is doing little this morning.  Friday saw a solid rebound across the board, about 1%, but today, the biggest movers are ZAR (+0.8%) which is shocking given the move in gold, MXN (+0.5%), where traders believe the Banco de Mexico is likely to be a bit more hawkish than previously thought and CNY (+0.25%) I guess on the reserve currency story.  But the G10 are all little changed and the one other thing of note is that Secretary Bessent ruled out US intervention in the yen, although it remains little changed on the session near 155.00.

On the data front, as it is the first week of the month, we finish off with NFP.  Here’s what else is coming:

TodayISM Manufacturing48.5
 ISM Prices Paid60.5
TuesdayJOLYs Job Openings7.1M
 Economic Optimism Index47.9
WednesdayADP Employment40K
 ISM Services53.5
ThursdayInitial Claims210K
 Continuing Claims1825K
FridayNonfarm Payrolls70K
 Private Payrolls60K
 Manufacturing Payrolls-10K
 Unemployment Rate4.4%
 Average Hourly Earnings0.3% (3.6% Y/Y)
 Average Weekly Hours34..2
 Participation Rate62.3%
 Michigan Sentiment55.8

Source: tradingeconomics.com

In addition, we hear from 5 more Fed speakers, but quite frankly, I expect that the only Fed voice that is going to matter for a while is Warsh, and he is not on the slate that I can see.  

We have seen a dramatic change in market mindset since Thursday, but we have not seen any change at all in policy or economics.  At this point, it is clear the market was overdone (remember, trees don’t grow to the sky), but that doesn’t mean the underlying thesis was wrong.  I still think that the need for commodities is substantial, and we will see prices go higher.  As to the dollar, there is no indication it is about to collapse, nor would I expect it.  Until such time as other nations are clamoring to own CNY, the dollar remains the only game in town.  Big picture, I still like it vs. other fiat currencies.

Good luck

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Kurtosis

Posted on by

Get ready to hear ‘bout kurtosis
An idea what very few knows is
In this case they’ll say
Fat tails did hold sway
Be careful, though, ere there’s psychosis

This definition from slideserve.com is probably the most comprehensible one that I have seen around, so thought it would be useful to understand.  And below, is a chart that shows the shape of distributions of outcomes.  Markets live on the blue line below.

The reason this is important was made evident on Friday given the extraordinary movement seen in markets.  It is important to understand that both commodity and financial markets have always demonstrated leptokurtosis in their behavior.  This means that the tails are fatter than a normal distribution’s tails.  In other words, there are far more large movement events than a normal probability distribution would expect or predict.  So, while I have read that Friday’s decline in gold and silver prices were anywhere between a 5SD and 12SD move (it doesn’t really matter for our purposes, just suffice it to say it was quite large), there is nothing to say it cannot happen again tomorrow.  You will undoubtedly read from some that this movement shouldn’t have occurred during the life of the universe it was so statistically improbable, but that is based on a normal distribution.

Understand, too, that market makers, especially in options markets which rely on the basic math of the normal distribution, are well aware that tails are fat.  It is why volatility curves in all markets have smiles or smirks, as these are an effort to take account of those fat tails.  It turns out the math for fat tail distributions is incredibly complex, so traders are happy with the smile approximations.

Which brings us to the question of what really happened and why did it happen on Friday?  The answer is, nobody really knows.  I have seen several writeups that certainly make sense, and are likely to have been part of the process, but in markets, given the millions of variables that are part of the market process (consider how many individuals trade the stuff in addition to things like economic variables and supply/demand information for commodities), it is difficult to pinpoint an exact catalyst. 

Many are pointing to the naming of Kevin Warsh as Fed Chair, on the surface a more hawkish pick than had been expected earlier in the week, although on Thursday, his Kalshi odds were already above 90%, so would seem to have been priced.

What we do know is that leverage was high and that prices were massively extended on technical indicators.  Parabolic moves tend to crash in the same way they rise.  Certainly, once things got going, margin calls were rampant and there was a great deal of forced selling.  The chart below shows just how extensive the move was, and I highlighted the opening of the NY session.

Source: tradingeconomics.com

The great thing about moves like this are the conspiracy theories that arise as an explanation.  Here’s the thing about conspiracy theories, once there are more than two people involved, it tends towards a leak. 

So, what do we know?  Comex futures prices when Asia opens tonight are going to be a lot lower than when they went home on Friday.  But…Chinese licensing restrictions remain in place; no new silver mines have been discovered let alone gone into production; both individuals and central banks in Asia continue to buy the stuff; and the premium for physical metal in Shanghai remains steep.  The fundamentals have not changed with regard to the metals themselves.

How about the financing questions?  Is Warsh a hawk?  My take is he is going to work hand in glove with Scott Bessent to address the economic issues in the nation.  So, I would look for support (i.e. QE) for issuance, although it is entirely realistic that when (if) Warsh sits down in the chair, there will be fewer Fed fund rate cuts than might have been seen with another choice.  Warsh is going to essentially join the Cabinet, as they work to implement their vision of how to overcome the debt and deficit issues.

Is this, more hawkish view, the rationale behind the moves on Friday?  It probably played a role, but it is difficult to ascribe movement of that nature, especially given its self-generated response to positioning, to a single data point.

One other thing to note was that the dollar, which was set to collapse according to so many, rebounded sharply alongside the precious metals’ declines, albeit not quite as far.

Source: tradingeconomics.com

I never looked at the screens on Friday because I know that when moves like that happen, it’s easy to regret the trades you make.  But the underlying thesis remains unchanged.  I was not counting on the dollar’s decline to drive precious metals’ prices higher, and that relationship has broken down to a large extent anyway.  It is not clear to me that having a perfect understanding of the drivers of Friday’s markets is critical.  If I hearken back to Black Monday in October 1987, when the S&P 500 fell 22%, Ace Greenberg, then chairman at Bear Stearns, said it best when asked about what happened.  His reply was, “Markets move, next question.”

Remember that, markets move.

Good luck

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