No Real Distaste

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The rally in stocks was amazing
And bonds, they as well, came out blazing
The dollar was smoked
As oil bulls choked
While metals are now upward gazing

Does this mean the markets embraced
The outcome with no real distaste?
Or were traders short
And forced to abort
Those views in a manner posthaste?

My sense is t’was more of the latter
Though there is a fair bit of chatter
That gridlock implies
New lawmaking dies
As Congress, the Prez, wants to shatter

We do live in interesting times as the discrepancy between what the data implies and how the population responds is the widest I can ever remember.  In the past, this level of popular angst was only really visible during serious recessions, going back to the 1970’s, and certainly the twin recessions of 1981 and 82.  But more recently, the GFC was a major blow to both the economy and the markets and everybody was miserable and scared together.  However, since then, things have changed.  I guess I should have seen Tuesday’s outcome because ahead of the 2016 election, my thesis was that the recovery from the GFC was only felt by the political insiders with the rest of the country feeling left behind, and that was evidence of the change that was coming.  And all the discussion of the K-shaped economy should have been the clue that this was also going to be a change election, and it certainly was.  I guess the question is, where do we go from here?

Perhaps no chart better describes the change in tone than the below of the DJIA (blue line) and the NASDAQ (green line).

Source: tradingeconomics.com

This is the very embodiment of the rotation trade as blue chip companies have benefitted from the perception of what the Democratic majority is going to do compared to the previous leaders, the AI and semiconductor sectors.  This effect has also been seen internationally as in Asia, Tokyo (-1.8%), Korea (-5.3%) and Taiwan (-3.2%) all suffered greatly last night while the rest of the region saw solid gains (India +2.6%, Australia +2.6%, New Zealand +2.2%). You will have noticed I left out China (+0.3%) and HK (+3.7%) as their performance was more a result of official Chinese support than a sentiment indicator, with the plunge protection team actively buying a series of ETFs in the session.

In Europe, the Bloomberg screenshot below tells the story eloquently.  As there are vanishingly few tech firms on the continent, when tech is under pressure and other companies are performing well, you can bet Europe will shine.

As to the US this morning, the thesis continues to play out with NASDAQ futures -0.6% while DJIA futures are +0.6% at this hour (6:45).

Bond markets are a bit more confusing to me as they are supposed to be the ‘smart’ money and yet they appear to be simply responding to lower oil prices with no thoughts of the future.  Certainly, oil prices have declined a bunch, although they rebounded 1.0% this morning, but are still under $90/bbl.  However, it seems that the strong belief is that oil prices are going to remain lower, and drag product prices with them, as suddenly, peace in Iran (and Ukraine?) are becoming an assumption.  However, if we think through the Democratic platform, with their ongoing efforts to kill the oil and gas industry and support wind and solar as the future of energy, it is virtually designed to raise prices, and by extension, feed into inflation.  But for now, the strong belief that lower energy prices are coming is the narrative.  So, yields continue to slide.  As you can see in the below Bloomberg screenshot, over the past month there is just one market that has seen higher yields, Brazil, which is election related.  But otherwise, although yields remain higher than one year ago, they are lower everywhere else in the world over the past month.

In fact, it was just one month ago when the peak concern over Treasury yields was reached with forecasts for 6% and 7% 10-year yields becoming common.  I wonder where those guys are now.

We discussed oil already, but the precious metals markets have been amongst the biggest beneficiaries of this new thesis with gold (+1.7%) having rallied $238/oz since its month-end spike low, a more than 6% rise.

Source: tradingeconomics.com

Silver, too, has seen a massive bounce off those month end lows, as per the below, more than $4.00/oz or more than 8%.

Source: tradingeconomics.com

Now, the story here is all about lower oil prices leading to lower yields along with a lower dollar and thus a benefit for metals prices.  And that is certainly true.  But I wonder, is there something else driving this movement?  There had been a significant amount of short-selling in these markets as traders who were all-in on the higher yields play were sure metals had lost their luster.  Clearly, some part of this recent jump is short covering.  And what of the long-term thesis that the debasement of all fiat currencies will result in higher metals, and all commodities, prices?  I haven’t heard about the debasement trade lately at all, but do not be surprised if that starts to come back into vogue going forward.  After all, as I wrote yesterday, there is zero indication that a Democratic congress is going to consider austerity.

And lastly, the dollar, which fell sharply yesterday, is little changed this morning, or maybe slightly higher on net.  The BOE hiked rates by 25bps as universally expected and the pound has not responded although there was a Bloomberg article this morning describing how on a trade weighted basis, the pound is back to its highest level in a decade on the back of resilient growth and expectations for more rate hikes going forward.

Here’s the thing about the FX markets, they are relative plays pitting one currency vs. another.  Now, if you look at the yield table above, with a couple of exceptions, Brazil, France and Switzerland, yields have slipped between 30bps and 40bps across the board.  Is a 10bp differential really enough to get traders excited?  I don’t think so.  Rather, the dollar remains a flow driven product and the biggest risk to the dollar, in my view, is if the inward investment that we have been seeing for the past two years, declines, let alone reverses.

Regardless of the government, the US remains the most dynamic economy in the world, and investment is going to come this way, but any slowdown will certainly weigh on the greenback.  It remains to be seen how this plays out going forward once the new Congress is in place in January.  Interestingly, I think the best thing about this is my suspicion that the new majorities are going to spend all their time trying to ‘get’ Trump and his administration and ignore legislation of consequence.  A perfect example of gridlock being a benefit.

Remember, tomorrow we see the payroll report, but ahead of that we have a bunch of stuff this morning including: Initial Claims (exp 196K), Continuing Claims (1710K), Nonfarm Productivity (2.8%) and Unit Labor Costs (0.6%).  We also hear from three Fed speakers, Hammack the hawk, Logan the hawk and Barkin, a moderate.  Yesterday’s ADP Employment number was stronger than expected at 86K while the Trade Deficit was slightly smaller at -$105.0B.  ISM Services was a touch light at a, still strong, 54.5 and there was a small net draw in EIA inventories.  Net, if you look at the data, there is no evidence the economy is doing poorly.  But that is certainly the zeitgeist.

Investors are comfortable with the new rotation narrative and the idea that oil prices are going to fall and bring inflation lower.  Along with that idea is the dollar will retreat.  Maybe, but I am not that confident that is the way things play out for very long.

Good luck

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A Plus or a Mess?

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This poet was totally wrong
Expecting a ‘publican throng
At polls yesterday
But one can’t downplay
The message delivered was strong

The question we now must address
Is, is this a plus or a mess?
The early returns
Show few new concerns
And nothing approaching distress

The election results are very clear and now we move on to the more difficult stage, governing.  Certainly, this was a rejection of President Trump’s agenda, or at least some of his actions, with the Iran war resulting in much higher energy costs a significant issue for the electorate.  However, in many ways, this is the best possible outcome for markets as political gridlock has historically been a net positive for the economy.  If Congress cannot pass new laws, that is generally a good thing.  And this was made clear last night as you can see in the chart below of the S&P 500, which saw losses early in the evening and then a complete reversal to where futures are now higher by 1.1% as of 6:10 this morning.

Source: tradingeconomics.com

The other statistic I keep reading is that in the year following a midterm election, equities have been higher for the past 18 midterms.  Of course, the breakdown of which industries and market sectors improve is unclear, and the past is not prolog, but it has certainly been a highlight amongst the early commentators.

At any rate, as this is not a political discussion, let’s turn our focus to things economic and financial.  On the economy, the US data continues to be solid as per yesterday’s JOLTs data which showed more job openings, but perhaps just as importantly, more Quits, which implies that there is a greater willingness for people to leave their job as they believe their prospects of finding a new, better one are improving.  That has historically been a sign of a strong labor market.  If we look at the below chart from FRED of the Quits data this century, it is not hard to make the case that we have bottomed after the Covid induced market disruptions and beginning to trend back higher.  Given the slowing population growth and the ongoing illegal immigration crackdown, it is easy to believe that job prospects are improving for those in the workforce.

This morning we get the ADP Employment number (exp 69K) and, of course, Friday brings the latest NFP data.  Again, the US data continues to demonstrate an economy that is growing in many areas.  When I compare this with the economic data elsewhere in the world, I continue to have difficulty seeing the appeal elsewhere.  With that in mind, though, it will be interesting to see just how much of the inward investment promised over the past two years will pan out given the changes in Washington.

So, let’s see how the rest of the world responded to the US elections, assuming that was the driver.  In equity markets, Europe is virtually giddy over the outcome with all the major bourses much higher led by Spain (+2.8%) but with large gains across the board (France +1.5%, Germany +1.5%, UK +1.25%).  And US futures, as mentioned above are stronger with both the NASDAQ (+0.9%) and DJIA (+1.5%) also doing well.  Asia, though, saw things a little less positively.  Japan (-1.4%) slipped along with Taiwan (-0.8%) and Australia (-0.6%) although there were positives as well.  For instance, the Chinese plunge protection team was active last night increasing both loans and direct support as the CSI 300 rose 2.3% dragging the Hang Seng (+1.7%) along for the ride.  Too, Korea (+0.6%) benefitted from yesterday’s relief in the tech space.  But overall, equity markets are nonplussed this morning, if not genuinely happy.

In the bond market, yields are lower this morning and I must admit, I don’t understand the logic.  Now, if you look at the chart below of the past 24 hours, you can see that this has not been a straight-line process, but here we are with 10-year yields lower by -3bps as I write.

Source: tradingeconomics.com

I read one blurb explaining the market was anticipating lower deficits going forward but I fail to understand how that will work.  There is zero evidence that a Democrat led congress will pass an austerity budget, and I expect that President Trump would veto any bills that raise taxes, so I am at a loss as to the source of that deficit reduction, at least on the surface.  Perhaps the ongoing crackdown on fraud will be sufficient to reduce the deficit, but that seems a stretch.  And if everything becomes a continuing resolution, that is not going to reduce expenditures.  However, yields around the world are largely lower with Europe benefitting from the Treasury market’s lead as the weaker European credits (France, Italy, Spain, UK, Greece) all enjoy bond rallies with yields slipping -4bps or so across the board.  As it happens, German bund yields are unchanged this morning.

In the commodity space, oil (-1.0%) continues to slide although I have seen nothing indicating that a deal to end the war in Iran was imminent.  In fact, the WSJ this morning had an article about how Iran was desperately trying to stop the flow of oil and using guerilla tactics but having limited success doing so.  Iran’s bigger problem is now that the election is past, President Trump has a pretty free hand in doing what he wants there, and the evidence continues to show that the blockade is really hurting the Iranians.  As I said yesterday, my sense is this is going to end before long.

With oil continuing its recent decline, and yields lower, it should be no surprise that metals markets have benefitted, but the magnitude is surprising.  Gold (+2.8%) and silver (+4.4%) have recouped all of their declines of the past week, as per the below chart.

Source: tradingeconomics.com

Will this rally hold going forward?  Much depends on the dollar’s performance, which today is much lower, and how the interest rate structure evolves.  If lower yields are on the horizon, perhaps this is just the beginning.

And yet, if we look at the CME Fed funds futures market, the probability of a hike in December rose in the wake of the election, which seems at odds with that narrative.

So, let’s look at the dollar this morning.  It is lower across the board, and by a decent amount virtually everywhere.  if you look at the table below from tradingeconomics.com, you can see that the only exceptions are RUB, which isn’t really a tradable currency, CNY, which didn’t move and BRL, which despite the dollar weakness can find no strength as investors continue to exit the economy there.  Otherwise, it’s pretty unanimous, nobody wants dollars today.

Will this continue?  Positioning in the dollar heading into the election was net long, so I expect much of this movement is simply the beginnings of unwinding those positions.  But as I frequently highlight, the dollar is merely in the middle of its long-term range, neither especially rich nor cheap here, so its future will depend on the fundamentals.  Perhaps today’s Eurozone inflation data, which printed at 4.0%, has traders looking for a more hawkish ECB but there is no evidence of that based on implied probabilities from futures and swaps markets as you can see below in the chart from rateprobability.com.

While the BOE is set to hike rates tomorrow, other than the RBA, which looks like it is done, the trajectory of future rate hikes appears pretty similar across the board.

I see no reason for the dollar to collapse, although it is possible that inward investment will diminish, which will slow any significant rise in the greenback.

On the data front, along with ADP Employment mentioned above, we see the Trade Balance (exp -$108B) and ISM Services (54.8) as well as the EIA oil inventories with a small build expected.  I expect that we are setting up for more range trading in the dollar with the chance of a strong trend in either direction vanishingly small right now.

Good luck

Adf

A Sneak Peek

Posted on by 
As awful as things seemed last week
On Monday we got a sneak peek
Of how things might play
When we see the day
The mullahs and Trump finally speak

At this point, it’s not very clear
If talks have brought settlement near
But I have a sense
That there’s no pretense
And things will be settled this year

When I wrote yesterday morning, oil had only moved half of its ultimate decline as stories about more successful peace talks regarding Iran made the rounds as per the below chart.

Source: tradingeconomics.com

You can see the large red candle shortly after 8:30 yesterday morning when positive news about the Ayatollah expanding negotiating room for the civilian government came out.  One of the noteworthy market moves was the fact that prompt prices for physical delivery, which had been trading as much as $30/bbl above the futures prices we see, collapsed back to a di minimis premium.  That indicates a belief that oil is going to flow again through the Strait, and soon.  Word is Iran has offered to reopen the Strait if the US ends the blockade.  This tells me the blockade has been extremely effective and that Iran is really running out of cash.  After all, why would they consider a deal ahead of the election?  Of course, they may believe their heartfelt endorsement for Democrats has done its job and they will win today.  The only thing I know about today is I cannot wait for the political ads to end on TV!

But it was not just oil that moved, we saw bond yields slip another -2bps yesterday, now down to their lowest level since mid-September.

Source: tradingeconomics.com

The Treasury’s borrowing estimates were within effective pennies of expectations, and I don’t think will have a major impact.  Of more importance is the refunding estimates to see how much Secretary Bessent will be borrowing in longer dates going forward.  There is talk of eliminating the 20-year bond, which never seemed to find a home, and a reduction in 30-year bond issuance, both of which would serve to reduce supply and support prices/reduce yields.  We shall see on Wednesday.

Precious metals soared on the decline in yields, the slipping of the probability of a Fed hike in December, now down to 73%, and the slipping dollar.  But stocks, which started the morning in a great mood, did give back a bunch on the tech side.  And that was yesterday.

The booths open early this morning
And both sides, the other, are scorning
Meanwhile, China tweaks
And wartime still wreaks
More havoc, it should be a warning

Which brings us to this morning and the beginning of Election Day.  You already know my views and that I am well outside the mainstream of opinion.  We shall learn more this evening and I suspect that the question of control of both Houses will be determined before we go to bed, certainly that will be the case in the Senate.

Elsewhere, the PBOC adjusted the RRR for foreign exchange at local banks, increasing the ratio from 4% to 6% to slow the too rapid strengthening of the renminbi.  We have discussed here before that CNY remains significantly weaker than its fundamentals and that is a policy stance China maintains to support its export-led mercantilist economy.  But under significant pressure from around the world, the renminbi had been appreciating steadily.  However, it seems that the PBOC decided the pace was too quick, which is odd given they were the ones in charge, but nonetheless, the change yesterday resulted in a sharp reversal in CNY (-0.4%) which while not extreme, counts as sharp in that currency.

Source: tradingeconomics.com

I am confident that CNY will resume its appreciation over time, but perhaps at a much slower pace.

The other noteworthy news item this morning was the report that there was limited military activity on Qeshm Island in the mouth of the Strait of Hormuz.  The report is the Iranians fired a surface-to-air missile at a US fighter jet and the US responded by attacking the missile installation.  Ostensibly this has not derailed the alleged ongoing negotiations although oil (+2.1%) has rebounded off the lows seen yesterday.  A not surprising consequence of the move in oil is that metals prices have sold off aggressively again (Au -1.0%, Ag -3.2%, Cu -3.0%) as that relationship remains fully intact.  Reading about the metals markets, the best explanation I have seen regarding their recent price declines has been a discussion of the reduction in overall liquidity that is available amid ongoing expansion of debt issuance by both public and private sectors.  Consider, the more debt that is sold to investors, the less they have to buy other things, with commodities being the first thing tossed aside.

In this vein, the most likely event to change this ongoing situation will be the resumption of QE as central banks will eventually be forced to, once again, buy sovereign debt to support their own debt markets.  I know this is diametrically opposed to what Chairman Warsh has indicated he would like to do, but I struggle to find an alternative solution to a lack of funds available for investors.  We are already seeing specific sectors of the economy feel that strain, notably the worst credits as CCC credit spreads have exploded relative to the rest of the risk curve.  Rotation in the equity markets does not solve this problem, so metals, which have had a tremendous run over the past several years, remain the current asset to unload.

As to the rest of the markets, Treasury yields have backed up 2bps this morning while European sovereign yields are higher by between 4bps (Germany, Netherlands) and 7bps (Italy) amid growing concern over both the rebound in oil prices and the ongoing fiscal profligacy that is evident throughout Europe.  While US yields have fallen back sharply from their October highs, European yields remain much closer to those levels as debt/GDP ratios remain a major concern for investors there.

In the stock market, Asian markets were mixed as the Nikkei (-2.2%), China (-1.4%) and HK (-0.7%) all suffered on the ongoing angst over tech stocks and the rotation out of that sector although Korea (+4.6%) which is the poster child for tech stock dominance, had a remarkably strong session.  Taiwan (-2.5%) was in the gutter as was Indonesia (-2.0%), which continues to suffer from concerns over transparency and its potential removal from the MSCI frontier markets category.  Other regional bourses moved far less, with a mix of gainers and laggards.

European markets, though, are all under pressure this morning, with all but Paris (-0.25%) down by -0.6% or more.  There has been no data released this morning here except Swiss Inflation which rose to 1.5%!  Maybe that’s why there is rioting in Zurich.  As to US futures, they are mixed this morning with the DJIA (-0.9%) suffering while the other two major markets are either side of unchanged at this hour (7:15).

Finally, the dollar is broadly firmer this morning with one glaring exception, NOK (+0.8%) which is obviously responding to the bounce in oil prices.  BRL (-1.1%) is a currency we haven’t discussed much lately but as you can see from the below chart, there has been no recovery, whatsoever, from the electoral surprise last weekend.  Too, you can see the BOVESPA stock market also remains under pressure.

Source: tradingeconomics.com

But the major currencies aren’t doing much today, perhaps biding their time for election results.  In fact, I suspect that will be much of the story during today’s session although I would be careful of early announcements from exit polls declaring victories on either side.

On the data front, yesterday’s ISM data was strong, 55.5, with Prices Paid softer than expected at 75.2.  This morning we see the JOLTs Job Openings data (exp 7.10M) and Factory Orders (1.2%) but neither will matter to markets today.  Last night, the RBA hiked their base rate by 25bps, as expected, although the decision was split and AUD (-0.3%) lost a little luster as expectations of future hikes were reduced.

Unless the Iran situation comes completely unstuck today, it is all about the elections and for that, we need to wait until this evening at the earliest.  Hedged and close to the vest remains the way, I believe.

Good luck

Adf

Still Burning

Posted on by 
On Friday, it certainly seemed,
As equity markets got creamed,
The end of the world
Had slowly unfurled
Just like the bears worldwide had dreamed

This morning, though, screens are all green
‘Cept crude whose price has lost its sheen
But Europe’s still burning
And that’s quite concerning
So, what, from this mess, can we glean?

I am going to stop listening to podcasts on my weekend morning walks with Marvel as they have become increasingly apocalyptic and, frankly, if the world is going to end, perhaps it’s better not to know ahead of time, it will save so much angst!  One of the podcasts that I periodically listen to is Palisades Radio, which this week had an interview with Simon Hunt, a pretty well-known macroeconomist and analyst.  I have the link above, but I can only recommend listening if you are seeking a reason to commit suicide as he basically explained that the world we know is over, specifically that the House of Saud was going to collapse, the US was going to lose in Iran and with that China and Russia would become the new global hegemons.  Now, maybe that is exactly what is going to happen, I certainly don’t know.  But that feels like an outlier position to me.  Of course, Simon sounds so intellectual with his gravelly British accent, that it gets a great deal of respect.

However, I constantly go back to the idea that predictions are hard, especially about the future.  The other thing about pronouncements like this are they are impossible to verify given his timeline is measured in years, so in 2032 or 2034, if what he forecasts doesn’t pan out, nobody will remember, but if it does, he will be screaming it from the hills.  Of course, if it does pan out, no matter how loud he screams, nobody will be listening as the new global hegemons will not be interested in economic analysis.

My weekend perambulations aside, Friday certainly had an apocalyptic tone to it as earnings releases during the week mostly failed to meet expectations and equity markets fell sharply.  Meanwhile, the number of articles discussing the increasing likelihood that the US was going to resume its military campaign in Iran when the election was over, egged on by President Trump himself, grew and there was an overall negative vibe.  This was clearly expressed in the equity markets as you can see in the below chart with Friday’s large red candle portending doom and gloom.

Source: tradingeconomics.com

Of course, there is another potential explanation for Friday’s price action, it was month end, and there could well have been rebalancing flows driving the trade.  And this morning, the entire vibe in the US, at least, has changed.  It starts with oil, as most markets do these days, and as you can see in the below chart, WTI has fallen sharply today, down -4.5% on news that a diplomatic solution to Iran may be coming together.

Source: tradingeconomics.com

Now, I have no idea if that is true or not, and I suspect neither does anybody else, but it does appear that there has been an increase in diplomatic efforts by the Qataris, Turks and Omanis as the election comes near.  And despite Iran’s claims they are prepared for anything and will inflict significant damage if they are attacked, I imagine they really don’t want to sustain another intense wave of bombing.

But it’s not just the Iran situation that is on the markets’ collective mind, but US elections.  Now, I am on record as forecasting the Republicans maintain both houses of Congress, but I am in the minority.  However, the surprise endorsement of Republican Mike Rogers by Democrat Haley Stevens, the woman who lost the Democratic primary to Abdul El-Sayed, has certainly gotten tongues wagging and it appears there is a growing sentiment that some of the Senate Races that the MSM had confidently called for Democratic victories may not be so sure after all, notably Texas and Michigan.  If I am correct in my political prognostications, I believe much equity market angst will dissipate quickly.

Turning to Europe, there was a coup in Poland, or not, I am not sure what is going on, and based on the articles I have read, I don’t think anybody is sure.  Perhaps the most surprising thing I saw was that there are riots in Zurich and Basel.  Of all the places on the planet, perhaps only Antarctica would be a less likely spot for a riot than Zurich.  But one must question what would cause the people of Zurich to riot.  The idea that Europe is burning spontaneously is suspect.

If we sum it all up, what do we know?  The universal truth in media is, if it bleeds, it leads.  Given that as well as the fact that media has evolved into a 24/7/365 festival (nightmare?) on social media, perhaps we should not be surprised that every terrible event is highlighted and anything positive is dismissed because it doesn’t get enough engagement.  My experience over time, though, is that rarely do we see either the best or worst cases come about, but some middle ground instead.  I expect that is what we are going to see ahead as well.  Companies are still doing business and earning profits, people are still going to work, earning and spending money and living their lives, and that is the majority of activity.  We need to be careful as to how much of the news we consume as gospel given the potential for excessive pessimism, mostly, to become entrenched.

Enough life lessons.  Let’s review markets.  As I said, equities are having a better day than Friday with more strength (China +0.8%, HK +0.4%, Korea +2.2%, India +1.7%) than weakness (Tokyo -0.3%, Australia -0.6%, Taiwan -0.6%) in Asia as word from China was that they would be increasing their support for stock markets there as per this X summary.  As to Europe, while Spain (+0.9%) is having a solid session, the rest of the major bourses are +/-0.2% or less after PMI Manufacturing data was pretty decent (weak in France and Italy, not surprisingly) but Retail sales data was soft in both Germany and Switzerland. (I guess if the rioters are going to steal stuff, they won’t be buying much.) US futures, though, are firmer at this hour (7:30), up by 0.5% or so across the board.

In the bond market, Treasury yields (-2bps) continue to slide and are dragging European sovereign yields down as well.  I think it is worth remembering that less than a month ago, 10-year yields were 45bps higher than today and the consensus view was that owning bonds was a disastrous idea as the government would never close the deficit and other central banks would stop buying Treasuries.  But markets are funny like that, and the chart below shows just how big this reversal has been.  Are yields low?  Absolutely not, but for now, at least, fears of the bond market collapsing have gone away.

Source: tradingeconomics.com

This week also brings the Treasury refunding announcement for next quarter and there is some intrigue over how Secretary Bessent is going to present things and his strategy to reduce yields.  Of course, you remember when he talked about repurchasing off-the-run bonds at a discount it was all poo-poohed as a waste of time with no impact, and yet here we are 45bps lower.  Maybe he really is ‘The House’!

We cannot be surprised that metals markets have rebounded with the sharp decline in oil, so gold (+0.6%), silver (+2.3%) and copper (+0.4%) are all higher on the day.  However, that said, Friday’s declines were sharp enough to take gold below $4000/oz and silver below $50/oz, levels that had been seen as key supports for the long-term bulls.

Source: tradingeconomics.com

Finally, the dollar is softer this morning, notably against the euro (+0.5%) and Swiss franc (+0.7%) although given the ongoing rioting in both places I am a bit confused by the price action.  Too, the economic data was not encouraging, but the best I can distill is traders are forecasting a Democratic sweep in tomorrow’s elections.  The yen (-0.2%) is not partaking, neither is Aussie (-0.3%) although we have seen real strength in CZK (+1.0%) and HUF (+1.0).  Weirdly, PLN (+0.1%) is not doing very much despite both the wide range of today’s trading and the news about the coup/not coup.

As this is the first week of the month, there is a lot to see.

TodayISM Manufacturing54.6
 ISM Prices Paid77.0
 RBA Interest Rate Decision4.85% (+25bps)
TuesdayJOLTs Job Openings7.13M
 Factory Orders1.2%
WednesdayADP Employment65K
 Trade Balance-$108.0B
 ISM Services54.8
ThursdayBOE Interest Rate Decision4.0% (+25bps)
 Initial Claims195K
 Continuing Claims1710K
 Unit Labor Costs0.6%
FridayNonfarm Payrolls65K
 Private Payrolls58K
 Manufacturing Payrolls4K
 Unemployment Rate4.2%
 Average Hourly Earnings0.3% (2.9% Y/Y)
 Average Weekly Hours34.4
 Participation Rate61.9%
 Michigan Sentiment48.2
 Consumer Credit$11.8B

Source: tradingeconomics.com

So, plenty to digest along with the election results.  Certainly, too much to describe at once.  As I have been saying, I think the elections are the fulcrum and once we see how they play out, we will have a better chance to make sense of other things as depending on who wins, different things may be important.  In the meantime, close to the vest and hedged remains the best thing you can be.

Good luck

Adf

In a Trance

Posted on by 
The BOJ held
As widely expected, but
December looks live


“Medium- to long-term inflation expectations are at around 2 percent. Regarding the
outlook, inflation expectations are likely to remain broadly around their current level, as
firms' active wage- and price-setting behavior is expected to be maintained on the back of
factors such as the tightening of labor market conditions.”

The above is the key phrase from the BOJ last night after they left the base rate unchanged at 1.25%.  The key is that they now acknowledge that their 13-year quest to overcome deflation, as part of their deal with the government at the beginning of Abenomics, has been achieved.  Hooray! Prices are rising and I’m sure all the good folks in Japan are excited about that.  After all, I know all my readers are always heartened when they see prices rising 🙃.

At any rate, that is seen as the signal that the BOJ will be raising rates in December and as you can see in the below chart from rateprobability.com, further hikes are expected consistently in the future as the BOJ attempts to normalize their interest rate structure, or at least have it more closely resemble the rest of the G10 world.

One of the things I have noticed lately, although I think it has been this way for a little while, is that the major central banks all meet on roughly the same schedule, with eight meetings per year, so roughly every 6 weeks.  The BOE and BOJ both used to meet monthly but adjusted their schedules to align more closely with the Fed, while the ECB has always maintained that timing.

But now, the Fed is changing things by removing one rate setting meeting in 2027 and two in 2028.  So, to me the question going forward is, will the other major central banks adjust their schedules as well?  I have long been a proponent of less is more when it comes to central bankers speaking and meeting, but there was a great deal of demand for more ‘transparency’ after Paul Volcker basically ignored Congress completely.  Alan Greenspan went out of his way to obfuscate everything he said with this quote perhaps his most famous line, “I know you believe you understand what you think I said, but I am not sure you realize that what you heard is not what I meant.”

Of course, it was Ben Bernanke who really opened the kimono by having press conferences after initiating QE and changing the Fed’s process from one of scarce reserves to abundant reserves, and that is where all the problems accelerated.  But I digress.

One other thing that I continue to see highlighted by many pundits as a negative, which I personally believe is a positive, is that Chairman Warsh’s attempts to end forward guidance has already, and will going forward, result in more market volatility across all markets.

To me, and I imagine Chairman Warsh, that is a feature, not a bug of this process.  The great economist Hyman Minsky is the one who observed that stability leads to instability, i.e. when things are quiet for a long time, market volatility declines and position sizes increase, generally with leverage.  Then, when something changes, those much larger positions must be unwound quickly and significant market downturns can, and do, occur.  One need only remember back to Covid and the market volatility there as the most recent major occurrence.  When central banks offer guidance like rates are likely to stay low for a long time into the future, traders assume that they can lever up positions and generate significant profits easily.  Ask Silicon Valley Bank how that worked out.

When viewing the US and France
I don’t think it’s really by chance
The US is growing
While France keeps on slowing
As though business there’s in a trance

This takes us to the other story of note, the dramatic difference between US and European economic activity.  I’m picking on France because they reported this morning, and as the second largest economy in the Eurozone are, I believe, representative of the situation there.  If you look at the table below from tradingeconomics.com of relative GDP growth rates, you can see the dramatic difference between the US and Europe these days.

While on any given day, markets will behave as they do based on both recent news and positioning and rumor, the longer-term trends tend to hold up with bigger picture items, and this is a bigger picture item.  Economic activity in the US has been significantly greater than anywhere in Europe, and most of the world, as the US policy of ‘run it hot’ continues to show what it can do.  Investment into the US continues apace and as someone noted regarding the recent trade data, only 17% of the deficit was due to consumer goods, the rest was capital goods being imported to help expand production in the US.  That speaks well of future economic activity here.

Also, quickly touching on yesterday’s US GDP number, which was a better than expected 3.4%, the corresponding PCE data from that report was just 2.1%, meaning nominal GDP was 5.5% with the exact split that the administration would like to see.  Here is further proof that strong growth does not necessarily lead to inflation.

Ok, let’s turn to markets now.  It wasn’t very pretty in the US yesterday, especially the tech sector and US futures are continuing down that path (NASDAQ -2.4%, SPX -1.1%) at this hour (7:00) after more earnings misses last night from Amazon and Intel as the AI boom / semiconductor boom / tech bubble narrative has run into a few bumps.  So, Tokyo (-2.1%), China (-1.4%), Korea (-3.5%) and Taiwan (-2.5%) were all under great pressure to end the week.  Weirdly, HK (+1.5%) went the other way although that was by overcoming tech concerns.  Elsewhere in Asia, there were more laggards than winners, which given the overall sentiment is not that surprising.

European shares are mixed today with Spain (-0.6%) and Germany (-0.6%) both under pressure while France (+0.1%) and the UK (+0.2%) are both edging higher.  Given France’s disappointing GDP results, this is a bit surprising, but remember, Europe’s almost complete lack of tech companies means when tech crashes, Europe is fine.

In the bond markets, yesterday saw US yields fall sharply, ~10bps in the 10-year and similar elsewhere, and they are continuing to slide this morning, down another -2bps.  As you can see from the chart below, we are back to levels not seen since mid-September.

Source: tradingeconomics.com

I suppose part of this is a haven trade as equity markets have been under pressure around the world, and I find that quite interesting.  For instance, I have been assured by the Twitterati that US bond yields are going to 6% or higher as the dollar loses its reserve status because of the US spending problems.  And yet, many still see Treasuries as a haven.  Go figure.  I must admit that if I look into my personal crystal ball, which is both cracked and cloudy, I anticipate that both growth and inflation in the US are going to be around 3% going forward, but that implies real yields would slip to 1.9%, not terribly high and probably in line with the long-term average.  In that situation, I expect bonds will find plenty of investors.

European sovereign yields slipped yesterday as well, although not like Treasuries and they, too, are lower by between -1bp and -2bps this morning.

In the commodity markets, oil (+2.1%) is rallying again and at $104/bbl, is back to levels last seen in mid-September.  Concerns over a resumption of US military activity in Iran after the election next week are the proximate cause but I must admit, I don’t really understand all the talk and threats by the president on this subject.  It is here I would take the Teddy Roosevelt thesis of speak softly and carry a big stick to extremes.  But the negative correlation between oil and metals is back this morning with a real attack on silver (-3.3%) while both gold and copper are lower by -1.25% or so.

Finally, the dollar is a touch softer this morning, not behaving in a haven manner, although that may be a result of the sharp decline in yields yesterday.  But through all this, for those who look at the DXY, it is slightly softer today (-0.35%) but still sitting right at its breakout level from the beginning of the month.  Since February, as you can see in the chart below, it has been broadly trending higher, but the overall movement this year, about 6%, is hardly dramatic.

Source: tradingeconomics.com

As I have written lately, I think the FX markets are decoupling from the broader macro theses for the time being.

The only data point today is the Employment Cost index (exp +0.8%) and we hear from three Fed speakers, Daly, Barkin and Musalem, a dove, a moderate and a hawk respectively.  The market is pricing only a 70% probability of a hike in December, and now only one more hike after that sometime next year.  That’s a pretty big change from views just a few weeks ago when multiple hikes in 2027 were assumed.

Source: cmegroup.com

In fact, unless we see dramatically strong inflation data ahead of the next meeting, one more PCE and two CPI reports, I would not be surprised for the Fed to stay on hold then as well.

Heading into the weekend, while tech is under pressure, the election continues to hang over the market and will do so until we find out next Tuesday night how things go.  Again, close to the vest and hedged are my preferred positions.

Good luck and good weekend

Adf

The What’s What

Posted on by 
The Chairman’s idea is to shrink
Two things, but one’s not what you think
The balance sheet? Sure
But here’s the allure
A calendar showing less ink

So next year they’re planning to cut
One meeting, as eight is a glut
The following year
The Chairman made clear
Six meetings will be the what’s what

To absolutely nobody’s surprise, the Fed left policy on hold today, with the only possible wrinkle that the vote was 10-2 with Governor Cook and Cleveland President Hammack voting for a hike.  Now, Hammack has been a vocal hawk for a while, so no real surprise there but Cook?  Below is an interesting graphic from centralbank.watch which shows their estimate of the relative hawkishness or dovishness of the different FOMC members.  Up at the (hawkish) top you see Ms. Hammack.  But Governor Cook, who was put on the FOMC as a reliable dove and to the extent she has ever had serious thoughts about monetary policy has always been dovish is suddenly a hawk.  My best estimate is that given the ongoing legal issues she is having with the administration as they continue to try to get her removed for mortgage fraud, this was a purely political vote with the idea that since President Trump wants rates to fall, she wants them to go higher to hurt him.  I’m open to other explanations, but if Neel Kashkari, who dissented in August didn’t want a hike, explain the Cook vote otherwise.

But that’s not the interesting thing about this meeting.  Rather, Chairman Warsh has indicated that they will be reducing the number of rate decision meetings to seven next year and then down to six in 2028, with no statements released and the committee simply getting together to discuss the economy and the situation.  You will not be surprised that I believe this is a step in the right direction as the Chairman continues to try to wean markets from focusing on the Fed and forcing them to focus on the economy.  But it is a process.  He also indicated that he expected the task force reports to be submitted by year end, mostly, but then there would be time taken to discuss the results and see how they proceed going forward.

I continue to have great respect for him and his ability to navigate a clearly hostile environment as he is attacking the workings of an institution that has become hidebound and needing to get the agreement of the institution itself to change things.

As to the market response to the Statement and press conference…stocks did nothing, the yield curve steepened a bit with 2yr yields falling while 10yr yields edged higher as you can see below

source: tradingeconomics.com

And the dollar fell slightly as per the DXY chart below:

Source: tradingeconomics.com

These were my first thoughts on the FOMC and frankly, nothing has changed in my view this morning.  However, I am always amused at the definitive tone taken by some regarding events like the Fed press conference and what was intended beyond what was said.  This was my favorite this morning.  I don’t know James Thorne, and he is probably an excellent analyst in a position of importance, but to put his opinion out there like a fact, as though Warsh confided in him, is remarkable!

Perhaps he is correct, but my take is between now and the December meeting, there is an awful lot more information coming our way, starting with today’s PCE and GDP data.  Remember, too, Chairman Warsh was explicit in his view that stronger economic growth does not necessarily lead to inflation, it is only when there is an imbalance between the supply and demand sides when inflation arises.

Ok, let’s turn to market behavior in the wake of the FOMC as well as the two big earnings reports last night where Alphabet missed estimates and called into question the AI trade while Microsoft beat estimates demonstrating the AI trade is alive and well.

The Asian equity markets were mixed overall.  China (-1.0%), HK (-0.6%), Korea (-1.2%) and Taiwan (-1.4%) all followed Google, sinking amid concerns that the AI trade was hurting.  Tokyo (+0.15%) and India (+1.2%) saw no such problems nor did Australia (+0.5%) or the Philippines (+0.9%).  The Australian outcome was interesting as there has been further very hawkish talk from the RBA after inflation Down Under refuses to fall.  And our favorite whipping boy, Indonesia (-3.5%) continues to see significant outflows as international investors flee the market while losing hope the securities regulators can address the MSCI concerns about liquidity and market transparency.

In Europe, it is a mixed picture with Germany (+0.8%) and France (+0.9%) both having solid sessions while Spain (-0.9%) suffers again.  My initial thought on Spain was a response to the tragic train crash yesterday, but I think it is more a reflection of the weak Retail Sales data released this morning.  if you look at the recent trend in Retail Sales there, as per the below chart, the trend is not very positive!

Source: tradingeconomics.com

Meanwhile, US futures at this hour (7:00) are generally pointing lower led by the NASDAQ (-0.9%) with the Alphabet news obviously more important than the Microsoft news.  However, the other two indices are little changed.

The Madame is leaving her Chair
Next year, now those nations prepare
To choose someone new
Ere LePen can screw
Their choice with her typical flair

In the bond market, Treasury yields (-2bps) have edged lower this morning and continue to trade right at the 5.0% level.  European sovereign yields, which had been lower earlier in the day, have backed up to unchanged, perhaps on the news that Madame Lagarde has announced she will step down from the role of ECB president as of February 7 next year.  This is not that surprising to me, although I admit I thought she would be leaving for a different reason.  My take, now, is that she wants to step aside to allow Macron to be part of the decision process since it appears that Marine LePen is going to be the next French president and her views do not align with Lagarde’s at all.  My previous thought was she was going to step down early to run for French president, but that seems to be off the table for now, although I do not rule it out!

Turning to the commodity markets, oil prices (-1.5%) are falling this morning as there are sporadic stories about talks starting up again between the US and Iran, but weirdly, metals are also under pressure this morning (Au -0.7%, Ag -1.6%, Cu -1.1%), a break with the more recent negative correlatoin of oil up, metals down and vice versa.

Finally, the dollar is ever so slightly higher on the day as the euro (-0.1%) slips toward its lowest level in nearly 18 months as per the below chart.

Source: tradingeconomics.com

You may remember the beginning of last year when the dollar slid about 10% over the course of 6 months and the punditry was breathlessly explaining the end was nigh as this was an unprecedented move.  Of course that was all BS, it was merely a quirk of the calendar, but those were the headlines.  At any rate, the euro is back to levels not seen since the end of that run. Here’s the thing, there are so many problems extant in the Eurozone, it is hard to make a positive case for the single currency, at least for me to do so.  There is a distinct lack of leadership, a growing energy crisis and ongoing rioting as at least some folks there are displaying their anger more aggressively.  More worryingly, there is nothing obvious that is going to change these issues, and if they follow through and cut off LNG imports from Russia at the end of this year, I fear the entire experiment can disintegrate.

Elsewhere, remember when there was all that angst about the yen, and whether it was going to collapse, or whether the interventions would be effective?  Me neither!  Basically, as you can see in the below chart, we remain exactly where we were the day after the intervention.  There has been no massive repatriation of yen by Japanese investors and for now, it is hard to get excited in either direction.  So far, Secretary Bessent’s actions in both the FX and bond markets are holding up despite initial criticism.

Source: tradingeconomics.com

Otherwise, FX remains dull with nothing to discuss.

On the data front, we do get a bunch of stuff this morning as follows:

Initial Claims199K
Continuing Claims1720K
Q3 GDP (1st look)3.2%
Personal Income0.3%
Personal Spending0.6%
PCE0.5% (3.6% Y/Y)
Core PCE0.35 (3.1% Y/Y)

Source: tradingeconmics.com

We also hear from the ECB at 9:15 this morning but no change is expected.  I imagine all the excitement from the ECB is already out there with Lagarde’s announcement.

Did the Fed change anything?  I don’t think so, and as I have maintained for a while, I think we need to get through the election before we can make a definitive move in any of these markets.

Good luck

Adf

His Quixotic Quest

Posted on by 
While passing time ere comes the Fed
And after predictions misled
Most traders are waiting
For Warsh advocating
Some view as they all look ahead

But that seems unlikely, at best
As Kevin, each time he’s been pressed
Refuses to say,
Lest his words might sway,
His views in his Quixotic quest

With the midterm elections now less than a week away, and after the bruising that many traders and investors absorbed from the Brazilian election results, it is not surprising that markets are fairly quiet.  After all, it is very hard to explain to your manager why you not only got crushed once, but twice, on unexpected election results.

As such, I feel like most markets have put broad themes on hold and are, instead, looking at more specific potential catalysts for movement.  Of course, the FOMC meeting falls into that category, as does every central bank meeting along with corporate earnings. So, let’s turn out attention to the central banks.  As an example of how things can behave, last night, the RBNZ left rates on hold at 2.75%, surprising the market which was nearly fully priced for a 25bp rate hike. You can see the market response in the chart below.

Source: tradingeconomics.com

Now, according to the BIS data, average daily volume in NZD is about $118 billion, of which $43 billion is in the spot market.  While that may sound like a lot, keep in mind the total FX market trades something on the order of $9.5 trillion per day, of which ~$3 trillion is spot, so NZD represents a bit over 1.2% of the market, hardly a harbinger of the future.  However, it is instructive as to what can happen when outcomes surprise markets.  We just saw what happened in Brazil, which was arguably a much larger surprise than a potential 25bp rate hike.  (This goes back to why I have protection for my portfolio expiring after the election next week.)

But let’s focus on today’s meetings where first, the BOC is forecast to hike their base rate by 25bps, to 2.50%.  Now, if we look at the history of USDCAD over the past year and add interest rate decisions and GDP reports, there is no obvious relationship between those data points and the currency’s movement as per the below.

Source: tradingeconomics.com

First off, their base rate has been on hold for quite a while.  Secondly, GDP has generally risen over the period, although the currency has weakened as well.  In fact, it is hard to discern any strong pattern.  Now, if the BOC stands pat, I suspect that the Loonie will fall initially, but I don’t believe it would head back to its lows (USD highs) more than 2% away. There is just not enough interest to drive that in my view.  And, with the Fed still on deck at that time, with the futures market pricing just a 10% probability of a hike, and Kalshi a 5% probability, a surprise there would be of much greater magnitude.

So, is there a possibility that the Fed hikes?  Of course, there is always a possibility but based on the last comments from other Fed speakers and the fact that the data since they have been in their quiet period has not shown dramatic changes from when they were still speaking, I agree with the odds.  The combination of the political questions of the Fed acting immediately ahead of an election, and the lack of compelling data that things have changed argues for no movement.  (The fact that raising interest rates is not obviously going to do anything about inflation anyway is not even part of their discussion, although is something we should all understand.  As The Inflation Guy highlighted yesterday, Keynesians see higher rates as impacting the demand side of the economy, which they clearly do, but never discuss the supply side of the economy, which is also directly impacted.  Which one matters more is the question.)

What I will say is, if they do hike, it will have a dramatic impact on all markets with equities likely to suffer significantly, the dollar likely to rally and long-dated bonds likely to rally (yields decline) as investors would take that as a sign that the Fed is more serious about inflation.  But I just don’t see it.  In the meantime, let’s look at how other markets are behaving.

Yesterday’s tech led US rally in stocks was followed by a more mixed session in Asia, with the obvious winners (Korea +6.6% after SK Hynix earnings were phenomenal and Taiwan +2.0%) along with Tokyo (+1.1%) and China (+0.9%) as official support showed up again.  But elsewhere in the region, things were far less interesting except that in New Zealand, despite the surprise rate move, equities could not rally.  In Europe, red is today’s tale with Spain (-1.3%) the laggard after Santander’s earnings, though strong, disappointed and its stock dragged the whole index lower.  As to the rest of the continent and the UK, indices are softer by between -0.1% and -0.3%, representing indifference ahead of the Fed.  And US futures?  At this hour (7:30) they are mixed, with DJIA a touch lower while both the S&P and NASDAQ are higher by a bit.

In the bond markets, yields are largely unchanged this morning across Treasuries and most European sovereigns with only Italian BTPs (+4bps) showing any movement of note.  While two smaller agencies reaffirmed Italy’s BBB+ rating, the broad trend in rates and concerns over the Meloni government’s ability to rein in spending have some investors nervous.  As well, the ECB meets tomorrow, and while no change is expected, everything I have heard from ECB speakers has leaned toward hawkishness, so while markets are pricing just a 3% probability of a hike, I guess we cannot rule it out. (see Brazil elections!)

In the commodity markets, oil (+1.7%) is bouncing again although as you can see in the below chart, has remained in a $98/$104 range for the past several weeks.  Now, while that is pretty wide, given oil’s volatility this year, I might argue it’s actually pretty narrow.

Source: tradingeconomics.com

Here, too, the election is everything as more and more analysts and commentators are expecting an increase in hostilities when the election is past, something I discussed several weeks ago.  But we cannot ignore that there are ongoing efforts to negotiate a settlement between the US and Iran, although I have a hard time seeing that outcome in the near term.

Meanwhile, the metals markets have largely maintained their negative correlation with oil and both gold (-0.3%) and silver (-1.0%) are softer this morning.  However, it is worthwhile noting that the barbarous relic continues to find support at the $4000/oz level and has since it first broke through there last November.  Remember, central banks around the world continue to buy gold, although it has lost its speculative shine.

Source: tradingeconomics.com

Finally, the dollar is little changed today but is consolidating its recent marginal strength.  The DXY is back above 102, although has not yet reached its spike high from two weeks ago near 103 as you can see below.

Source: tradingeconomics.com

One thing I would highlight is that yesterday’s Consumer Confidence number was MUCH stronger than forecast, printing at 91.7 more than 10 points above expectations.  However, the long-term downtrend there remains intact.  I imagine this cannot have hurt the dollar.  The one true outlier this morning is CLP (+0.8%) which seems to be benefitting from the central bank’s recent affirmation that inflation risks remain too high and future hikes are still on the table.

And that’s really it.  The only other news today is EIA oil inventory data with no net change expected and then the FOMC.  Microsoft reports earnings after the bell, but the world can be a very different place by then depending on what Chairman Warsh does, or doesn’t, say at the press conference.

Close to the vest with protection seems the best way to be positioned right now.

Good luck

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Great Derision

Posted on by 
The markets have made their decision
For Lula, they have great derision
It seems the divide
Twixt left and right sides
Is wider than most can envision

If you wondered why I bought put protection for my portfolio as I mentioned last week to cover the mid-term elections next week, look no further than Brazil’s market this morning after Lula surprised almost everyone by winning.  It seems that investors look at his policy objectives and don’t really like what they see.  Not surprisingly, as you can see in the chart below, the BRL also suffered dramatically with both stocks and the currency now weaker than prior to Bolsonaro’s surprise first round lead.

Source: tradingeconomics.com

For good order’s sake, the BOVESPA Stock Index fell -13.85% while the BRL fell -8.65%.  Now, if you don’t think that can happen in the US should the Democrats win both the House and the Senate next week, you are mistaken.  I am old enough to have seen several moves of that magnitude during my career.  And given the extraordinary amount of leverage that exists within the system, when margin calls start to come, there is no stopping things.  Again, I continue to believe that the Republicans hold the Senate for sure and the House as well, but I put on protection!

Despite the results from Brazil
The rest of the markets were chill
The stock market rallied
While bonds dilly-dallied
And FX remains a buzzkill

The Brazilian market movements were the very definition of isolated events.  While those in the trade were scrambling to adjust their positions and, mostly, licking their wounds, the spillover to other markets was essentially nil.  US markets continue to perform generally well, with all three major indices higher yesterday and that followed through into Asia with Tokyo (+1.7%) and Korea (+3.2%) both benefitting from renewed positivity regarding the AI trade after Anthropic filed to go public.  But elsewhere in Asia things were less sanguine as China (-1.3%) and HK (-0.7%) found limited support as official buying was absent last night.  It tells us a great deal, I believe, that without the Plunge Protection Team, Chinese stocks remain in a sharp downtrend.  In fact, from its recent high in late June, that market, as defined by the CSI 300, has fallen -20%.

Source: tradingeconomics.com

It’s a very interesting conundrum, I think, the fact that the Chinese equity markets are declining so sharply and steadily.  After all, equity markets are deemed to be forward looking indicators, anticipating economic activity 6-9 months in the future.  At least that’s what I was taught all those years ago and have heard repeated consistently since then.  If that is the case, what does it say about the future of the Chinese economy?  It doesn’t seem to me that it portends great strength, but then, I’m just an FX poet.  Is it possible, and I’m just spit balling here, that socialism and communism are not coincident with economic growth?  Inquiring minds want to know!

As to the rest of Asia, the other big loser was Indonesia, which continues to suffer based on the fears that MSCI is going to remove their Frontier Market designation and institutional investors will be forced to exit.  Whatever signs they have shown regarding making changes have not been deemed sufficient, at least by the market.  As you can see below, that massive gap remains wide open, and the initial bounce seems to be reversing.  Absent concrete moves by the securities regulators there, I believe we could see another sharp leg lower.

Source: tradingeconomics.com

In Europe, UK stocks (-0.9%) are under pressure this morning after weak earnings from HSBC dragged the FTSE 100 down, but the rest of Europe is doing little.  Surprisingly, Paris (0.0%) is unchanged despite the lowest Consumer Confidence reading (80) since June 2013.

Source: tradingeconomics.com

As to US futures, at this hour (7:00), they are pointing slightly higher, 0.3% or so.

Treasury yields (-1bp) have been rangebound for the past several sessions as traders and investors await tomorrow’s FOMC statement, and perhaps more importantly, to hear what Chairman Warsh has to say.

Source: tradingeconomics.com

It should be no surprise that other bond markets are also doing little right now as the Treasury market remains the driver of global investment.  The one exception to that rule is France, where OATs (+5bps) are back under pressure as market participants try to determine what comes next there.  Calls for increased protests have been coming from various groups involved while Marine LePen offers herself as a voice of calm in the chaos as she campaigns for the presidency.  However, both sides of the campaign are claiming they will lower the retirement age from the current 62 down to 60, a move the nation simply cannot afford.  Perhaps they will and simultaneously pull themselves from the euro so they can print worthless French francs to pay those increased pensions.

As an aside, I neglected to mention two other central bank meetings this week with the BOC expected to announce a 25bp hike Wednesday morning before the Fed stands pat, and then the ECB expected to sit on its hands on Thursday, although recent commentary has them considering another hike before the end of the year as they are trying to entrench a recessionprevent inflation from becoming entrenched.

In the commodity space, oil (-1.0%) continues to bide its time ahead of the US election as there is a great deal of uncertainty regarding President Trump’s decision about renewed attacks going forward after the election.  Certainly, there have been threats going back and forth but it is very difficult to try to ascertain what will happen as I don’t believe even he knows what he will do yet.

While timing is everything in life, I think it remains abundantly clear that the long-term prospects are for more oil coming from more places outside the Middle East and a diminution of the importance of the Gulf and OPEC.  But until then, things can remain spicy.  Also, you cannot help but look at the price of NatGas (-1.5% today, -17.9% in the past month) and recognize just how much of the stuff is being produced as associated gas given the uptick in oil production.  One other thing to note is that the energy value of oil vs. natural gas and the arbitrage that exists right now.  At current prices, the same amount of energy from one barrel of oil at $100 can be had for <$15.50 in natural gas, at least in the US.  I suspect that conversions of oil to gas are going to continue apace for a long time until that gap is closed, but so far, demand for gas continues to lag.

Source: tradingeconomics.com

Finally, the FX markets are generally dull outside the Brazilian real.  Net, this morning is showing modest USD strength, with the euro (-0.2%) under some pressure but both AUD (+0.2%) and NZD (+0.4%) are firmer, and that is the extent of the movement away from Brazil.  It remains difficult to get excited about FX for now and I continue to believe it is segregating itself from other markets.

On the data front, we see Durable Goods (exp 1.5%, 0.6% ex-Transport) along with Case-Shiller Home Prices (2.5%), Consumer Confidence (81.0) and New Home Sales (650K).  Speaking of Consumer Confidence, and comparing to the French data this morning, things here are also back at their lowest level since 2013 as per the below chart from conference-board.org.  And that was rebounding from the GFC.

Certainly, if the old adage is correct that people vote their pocketbooks, things are not looking good for the Republicans based on this.

And that’s all there is, I think.  I continue to believe that markets remain constrained ahead of the elections and I continue to look at the dollar and find vanishingly few alternatives in the current world.

Good luck

Adf

Lie and Cheat

Posted on by 
Said Lula, it might be confusing
But there is no way that I’m losing
So, I’ll lie and cheat 
In order to beat
The other guy you could be choosing

Meanwhile it’s a central bank week
With Warsh, come this Wednesday, to speak
So, what will he say?
Are hikes still in play?
Or have Fed funds climbed to their peak?

In the biggest surprise of the weekend, Lula da Silva won the Brazilian presidential election.  It seems that right as the polls were due to close, a single member of the Brazilian Supreme Court, Christiano Zanin (who happened to be Lula’s personal attorney before being put on the Court) extended voting by 2 hours despite the rest of the court voting against that action.  I do not know if that changed the outcome, nor do I imagine we will ever really get the story, but the result stands for now.  I suspect the Senor Bolsonaro will sue for a recount or something, but the market has spoken, at least the equity market has as you can see from the following quote for the Brazil stock ETF, EWZ, before the market opens this morning.  That’s a 26% decline!

You may remember after the first round of the election three weeks ago, the market rallied sharply on the idea that Bolsonaro would be unwinding many of Lula’s policies as per the below chart.

Source: tradingeconomics.com

But perhaps the most interesting thing is the fact that the prediction markets, the new “fount of truth” was also completely wrong on this outcome.  Going into the weekend, there was a more than 80% probability of a Bolsonaro victory.  It just goes to show that there are no guarantees when it comes to events.

It is still too early to tell what will happen in the FX markets as BRL is a restricted currency and won’t start trading until Brazilian markets open in a few hours, but I suspect that the real will fall pretty sharply as well.  After all, it mirrored the stock market rally on the first-round news.

Away from that story, and the ongoing riots in France, which seem to have been absorbed by markets now as there has not been much movement overall, at least not in government bond markets, focus is turning to the FOMC meeting that begins tomorrow with the statement and press conference on Wednesday afternoon.  As of this morning, futures markets are pricing less than a 10% probability of a hike, which as you can see is a substantial change from a month ago when there was nearly a 2/3 probability priced in.

Source: cmegroup.com

This is an important lesson, I believe, regarding markets.  I always refer to market pricing as the best descriptor of current information.  However, information changes, situations change and so prices do change.  Just because a future event seems to be priced in at some point in time doesn’t offer certainty, it is simply a reflection of the sum of knowledge at that time.  In this case, in the weeks since that pricing existed, a number of Fed speakers explained they were in no hurry to raise rates again and given the timing of the Fed meeting relative to the mid-term elections, the market has discounted the idea of a Fed move as it could be seen as political.  (LOL, as though all their moves aren’t political!). Nonetheless, at the moment, all the fears of Treasury yields exploding higher to 6% and beyond and the Fed turning more hawkish have faded away.  In fact, I suspect that this meeting will pass uneventfully.  The one thing of which I am confident is that at the press conference, Chairman Warsh will not offer any guidance but will instead reiterate that they will achieve their inflation goals, dammit!

And that’s how things are shaping up this morning, so let’s see how other markets look.  Friday’s weakness in US equity markets has not been the norm either overnight or in Europe this morning.  While Tokyo (-0.8%), Korea (-1.5%) and Taiwan (-1.8%) all fell on the same tech sell-off story, India (+0.7%), HK (+0.5%) and Thailand (+1.1%) all rallied while China’s Plunge Protection team was able to stabilize markets there with a basically unchanged session.  There is much discussion about how neocloud firms are going to run out of funding and how this is the beginning of the end of the AI trade which is clearly weighing on certain companies and markets, but as we saw this weekend, surprises are quite possible.

In Europe, only Spain (-0.2%) is lagging, and it is only slightly lower.  Otherwise, the major nations are all seeing gains (UK +0.5%, Germany +0.9%, France +0.75%, Italy +0.6%) with the only news of note the German Ifo reports which showed current conditions sagging but hope for the future as the Expectations reading was 91.6, higher than expected, but as you can see from the chart below, still well below the pre-Covid readings and the long-term average of 95.1.

Source: tradingeconomics.com

But it’s better than nothing!  As to US futures, they are little changed to slightly higher this morning.

In the bond market, Treasury yields are little changed from Friday’s close at 4.99%.  The real movement today has been in the Bund-OAT spread, which you may recall blew out above 175bps last week, but has now fallen back to 160bps with German yields edging higher by 3bps while French yields have slipped -4bps.  The thing about this movement is there is nothing I can see to drive a change in the concern over France’s fiscal future.  Riots continue there and are spreading to Barcelona and Italy in Milan I understand, and the Macron government can do nothing to change the fiscal accounting as it does not have the strength to pass legislation to address the issues.  This seems much more like a trading move with some profit taking than anything fundamental.

In the commodity markets, oil (-2.1%) is slipping as reports are coming through that more oil is transiting the Strait of Hormuz than before the Iran war began!  I cannot confirm that, but it is a widely read story this morning.  Remaining in the energy sphere, the dichotomy between US NatGas and TTF is extraordinary with the divergence accelerating as per the below chart from tradingeconomics.com.

At its current level, TTF is priced at ~$31/MMBtu, more than 12X US Henry Hub gas, and apparently, Asia is outbidding Europe for US LNG cargoes even though European storage is far below targeted levels.  If it is a cold winter in Europe, it could be quite problematic as their energy policy insufficiencies will make themselves very clear.    As to the metals markets, gold (+0.5%) is bouncing a bit as it trades either side of $4000/oz and silver and copper are little changed this morning.  There has been a story going round that gold has been successfully synthesized which is a reason that it cannot go higher, however, asking Grok, it is estimated to cost $1,000,000,000,000,000/oz to make it this way, so perhaps it is not an immediate threat.

Finally, the dollar is modestly higher this morning with the most exciting prospects remaining in Brazil when that opens in a bit.  The BOVESPA stock market doesn’t open until 9:00 EDT but I think the FX markets there will open an hour earlier than that, so pretty soon.  I suspect the BRL will weaken on the opening.

On the data front, there is plenty to digest this week as follows:

TodayChicago Fed National Activity-0.1
TuesdayDurable Goods1.5%
 -ex Transport0.6%
 Case Shiller Home Prices2.5%
 Consumer Confidence81.0
 New Home Sales650K
WednesdayGoods Trade Balance-$130B
 FOMC Rate Decision4.0% (unchanged)
ThursdayQ3 GDP3.2%
 Personal Income0.3%
 Personal Spending0.5%
 Initial Claims200K
 Continuing Claims1730K
 PCE0.5% (3.6% Y/Y)
 Core PCE0.3% (3.1% Y/Y)
FridayBOJ Rate Decision1.25% (Unchanged)
 Employment Cost Index0.8%
 Chicago PMI55.5

Source: tradingeconomics.com

So, while two major central banks meet, no action is anticipated.  I have maintained that things would remain range bound ahead of the elections here next week and nothing has changed that view.  I also believe that if the Democrats sweep both House and Senate, equities will suffer greatly, although I don’t believe that is going to be the outcome.  However, as we just learned yesterday, we won’t know until the votes are counted.  In the end, nothing has changed to make the dollar the least worst alternative, that’s for sure.

Good luck

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Ruining Our Dream

Posted on by 
Most days there’s a singular theme
To energize which reigns supreme
But sometimes the news
Does naught but accuse
All parties of ruining our dream

So, French Revolution is back
And Houthis keep up their attack
While AI gets smashed
And metals all crashed
It’s Friday so let’s all step back

Yesterday was a pretty clear risk-off session although to my eye, it seemed an accumulation of issues rather than a singular concept driving the bus.  Under the guise of, if it bleeds, it leads, we continue to see graphic video of the ongoing rioting in France and there is ongoing discussion amongst the analyst community about just how much further French bond yields can rise before the ECB needs to step in.  However, this situation is different than the Eurozone crisis of 2011-12 as back then, Germany was still an economic powerhouse while today, they are enfeebled by their own energy policies.  The point is made very clearly below by one of the smarter folks I follow on X, Michael Arouet.

The point is that while the post WWII history has been Germany saves the continent because of its healthy economy, that may not be an option anymore.  Again, another reason to dislike the euro over time.

Adding to the French Revolution, part deux, is the growing concern about an increase in military action in Iran and the Persian Gulf.  The WSJ headline, “Iran Threatens Retaliation on Economic and Civilian Targets if US Attacks” says it all with the article highlighting the specifics and trying to prognosticate on the likelihood of the outcome.  Oil prices (+1.7%) are higher again this morning and back above $100/bbl, although I read that prompt prices for physical delivery have been slipping as it appears the US Navy has been successful in escorting a significant number of ships through the Strait and flow are back above 80% of the pre-war level.

Turning to the equity markets, yesterday’s downdraft (S&P 500 -1.2%, NASDAQ -2.6%) was blamed on further concerns over the AI story.  During the summer, it was all AI, all the time and the idea was that there was going to be a nonstop inflow of capital to the sector.  But as interest rates globally rose, financing those dreams became more difficult and then the naysayers were able to get their message out that AI was a bubble.  Adding to the sectors problems has been the anti data center movement and all the controversy surrounding the impact data centers have on retail electricity prices.  Of course, this fits nicely with the ‘crisis of affordability’ that gets so much airtime as well.

Now, yesterday was the 21st time the S&P 500 fell more than 1% this year.  That may seem like a lot but the average number of days that has occurred over time is…29 days.  In other words, this is hardly new ground.  And remember, it is still higher by nearly 14% YTD.  The world is not ending, just look at the chart below, but it would not be surprising to have a period of range trading before the next major catalyst arrives.

Source: tradingeconomics.com

Looking at the metals markets, I believe the idea of a picture is worth 1000 words is very clear here.

Source: tradingeconomics.com

I cannot tell if this is long liquidation or short initiation, we will know more after the Commitment of Traders report is released this afternoon, but there are clearly more aggressive sellers than buyers here.  However, a look at the history of metals markets, especially precious metals, is one of long periods of stagnation followed by significant rises over time.  There are those who believe we are entering a deflationary economy, but I disagree with that view.  While productivity enhancements are very likely to be a result of AI adoption, the biggest deflationary force over the past 25 years has been globalization and the movement of so much manufacturing to China.  As more and more production gets returned to other nations, that price pressure will decrease and inflation will rise.  Personally, I have not observed much in the way of deflation, or even disinflation.  I’d be interested in hearing if you have.

One last thing about yesterday, which perhaps should have been at the top, is US Treasury yields.  While this morning they have edged higher by 4bps, that is after a 16bp decline yesterday as per the below chart.

Source: tradingeconomcis.com

If ever there was a clear sign of flight to quality/safety, yesterday’s bond market activity is Exhibit A.  Perhaps the more interesting feature of this was that the dollar did not rally in sync with the bond market.  In fact, it slipped a bit yesterday, although is higher by 0.2% this morning.  again, history has shown that in a significant risk-off session, the dollar typically rises sharply if for no other reason than international buyers of Treasury bonds need to buy dollars.  So, either they already had those dollars, or all the movement was domestic.  At least those are the two best theories I can come up with for now.  The yen did rally 0.9% yesterday, showing its haven status while the Swiss franc rallied 0.5%, although that has given it all back this morning.  It appears that many long-standing relationships are coming under pressure lately.

OK, let’s look at how other markets behaved overnight and what they are doing this morning.  in the equity markets, Tokyo (-0.3%) slipped a bit and we saw weakness throughout many of the other regional bourses (India -0.2%, Taiwan -1.8%, Philippines -0.9%), but China (+1.7%) and HK (+0.7%) were the beneficiaries of the Plunge Protection China National Team buying aggressively as they try to halt the months’ long slide that had really accelerated over the past month as per the below.  Since its high in late June, the CSI 300 had fallen more than 20% before last night’s official action.

Source: tradingeconomics.com

Alas for the Europeans, they don’t have enough money to support their own stock markets, and every major bourse is lower there this morning ranging from the DAX (-0.7%) to Spain’s IBEX (-0.2%).  The news of note was that the Flash PMI data was released at weaker than last month, and weaker than expected levels, notably France was very weak, not surprisingly.  As to US futures, they are somewhat softer this morning, with the DJIA (-0.6%) the laggard although yesterday that was unchanged.  The other two major indices are only slightly lower.

In the bond markets, European bonds are little changed to 1bp higher this morning and only some of them benefitted from that haven trade yesterday.  But JGBs (-7bps) and AGBs (-9bps) both saw real demand.  Again, the bond market story appears to be a growing willingness to own with the current yield structure.

We discussed commodities already and the dollar remains lackluster at best.  While it is slightly higher against other G10 currencies this morning, we are talking about 0.2%, nothing to get excited about.  In the EMG space, ZAR (-0.7%) is today’s laggard as it continues to suffer from weak gold prices and high oil prices, a deadly combination for that country, and it has its own internal fiscal issues as well.  However, my observation is that the FX market, which for the past decade, at least, had become tightly intertwined with other markets, seems to be breaking away to its prior status as a very large, liquid place but living on its own stories rather than broad market themes.  Perhaps this is just a short stint of this, but we will need to watch closely going forward.

On the data front, this morning brings Flash PMI here (exp Mfg 55.5, Services 58.0) and then Michigan Confidence (46.3).  As next week is central bank week, we will touch on those things then, but for now, the market assumption is no Fed action next week.

And that’s really it.  My portfolio hedge did its job yesterday, but I do not anticipate a wipeout today, rather a fairly dull market seems the most likely outcome.  It’s a beautiful weekend in NY, don’t be surprised if markets slow down early as traders look to get out for a late season break ahead of the coming winter.

Good luck

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