Held At Bay

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

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

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

Source: tradingeconomics.com

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

Source: tradingeconomics.com

The dollar:

Source: tradingeconomics.com

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

Source: tradingeconomics.com

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Good luck and good weekend

Adf

Beguiled

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

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

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

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

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

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

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

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

Source: tradingeconomics.com

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

Source: tradingeconomics.com

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

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

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

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

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

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

Good luck

Adf

Feeling Quite Fraught

Posted on by 
The data of late offers nought
To help decide what should be bought
Or sold, so we wait
For CPI’s rate
With risk takers feeling quite fraught

Despite NFP being weak
Some Fed members, when they do speak
Are pining to hike
Into the crude spike
I fear much more havoc they’ll wreak

The below chart from cmegroup.com describing Fed fund futures probability pricing for a rate hike at the September meeting is an excellent description of many markets right now, nobody knows nothin’.  It has been pretty rare of late, really in the past 15 years, that market participants were so uncertain about the future path of short-term interest rates.  And frankly, I think this is exactly what Chairman Warsh wants to see.  If uncertainty is high, then risk-taking recedes and that offers a more robust market framework.

If pressed, I think he would be happy if this were the situation going into every meeting, although obviously, there is no meeting imminent, this is a response to today’s CPI data.  

Current consensus expectations are as follows:

  • CPI M/M: 0.1%
  • CPI Y/Y: 3.4%
  • Core CPI M/M: 0.2%
  • Core CPI Y/Y 2.5%

I have no model nor framework to anticipate whether the outcome will be seen as either hot or cold, but since this is for July, we can look at the price of gasoline during the month and see how much it changed.  I apologize for the chart below but it is the only way I could determine how to show the movement from month end to month end where on June 30, RBOB futures closed at $2.8949/gal and on July 31 they closed at $3.1142/gal so a gain of 7.5%, but if you look at the chart, it does seem like it spent a lot more time above the month end close than below it.  In fact, my best estimate of the average price during the month is ~$3.18/gal, higher still, so energy prices were certainly firmer during the month.

Source: tradingeconomics.com

Of course, the question the market is asking is, will this change the Fed’s generic viewpoint on inflation?  The current downside of Chairman Warsh’s attempts to adjust the way the Fed works is that neither traders nor analysts have a good idea of their current reaction function when it comes to data.  We know that there are a group of FOMC members who are itching to hike, but with a relatively soft NFP report last week, if today’s number is also soft, will that change attitudes?  It is this conundrum that neatly defines why the analyst community is so up in arms, since they seem no longer able to think for themselves, they don’t know what to think!

But that’s where we stand for now, a major data release upcoming and a market that has, arguably, pulled in its risk-taking wings to make sure they can fly afterwards.  As this is the biggest story for the day, let’s take a twirl around markets overnight to see what they did in anticipation of the release.

While yesterday’s US session was lackluster, with all three major indices slipping a bit, overnight saw more winners than losers.  So, Tokyo (+0.8%), China (+0.6%), Korea (+3.7%) and Taiwan (+0.9%) all continue to perform well on the back of the tech story although HK (-0.8%) and Australia (-0.5%) lagged.  As to the smaller, regional exchanges, it was a mixed picture, although certainly not an extremely negative one.  It appears that risk appetite remains reasonable if not gigantic.  Certainly, if we look at the Fear & Greed Index, it demonstrates that point exactly.

Meanwhile, in Europe, equity markets are generally a bit firmer led by the DAX (+0.5%) and Spain’s IBEX (+0.2%) while both France and the UK are essentially unchanged although there has been no data to drive things in either direction.  It appears like these markets are awaiting the CPI data just like US markets.  Speaking of which, futures at this hour (7:10) are pointing slightly higher with the NASDAQ (+0.5%) leading the charge.

In the bond market, despite all the angst, Treasury yields are lower by -2bps this morning and this is dragging the entire bond market down with European sovereign yields all lower between -2bps and -3bps as well.  Is that an indication that a soft number is expected?  The outlier here is Japan where JGB yields (+4bps) rose last night and are now just 5bps below the recent 30-year high level reached in early July.  

Source: tradingeconomics.com

Bloomberg had numerous articles this morning about Japan and the issues they have with the yen, their monetary policy, their relationship with the US and were generally of the opinion that Japan is making all the wrong moves, hence the weakness in the currency.

In the commodity markets, oil (+0.3%) is back above $83/bbl now having gained 11% in the past week.  The ongoing tit for tat comments from both Iran and President Trump have become just background noise to most of the market these days.  Later this morning we get the EIA inventory data with a small draw expected, although that was expected last week and there was a build in inventories.  It has been nearly 6 months since the war started and the Strait became compromised and there is still seemingly plenty of oil and products available to users.  As to the metals markets, this morning they are quite shiny (Au +0.9%, Ag +2.4%, Cu +0.7%).

Finally, the dollar is…well nobody seems to care much about it these days.  It is virtually unchanged vs. almost all its G10 counterparts with NZD (-0.3%) the lone exception.  The best explanation I can see is that employment data last week may be weighing on the belief the RBNZ is going to hike rates at their next meeting, but that is fishing.  It is quite likely there was an order that went through to drive the price.

In the EMG bloc, there is also little to discuss overall as FX markets are generally quiet.  But I want to mention CNY as I read something this morning about which I was unaware.  Mike Nicoletos, a very solid analyst, made the point that banks in China are paying up for USD deposits there, as high as 4% vs. 1% for CNY deposits.  This has been occurring despite the fact that the renminbi has been strengthening steadily all year as per the chart below.

Source: tradingeconomics.com

Now, the renminbi is arguably at least 30% undervalued, even after its recent relative strength, which is one reason that China’s exports continue to grow.  The undervalued currency is a key reason China finds itself the subject of tariffs and trade restrictions all around the world.  But recall, there is a narrative that nobody wants dollars and China is de-dollarizing as they try to move to more local currency trade and settlement.  The very fact that banks in China are paying up so much for USD deposits may tell a different story.  Perhaps there is a significant need for dollars, even in China, and banks have no funding.  Remember, there is no Fed swap line with the PBOC so they have to source their dollars the old-fashioned way, pay up for them.  It is interesting that the renminbi continues to strengthen despite this dollar demand, but I suspect this will continue for a while.  Maybe the de-dollarization narrative has some flaws in it after all.

And that’s really it for today.  A hot CPI number will probably see higher yields and some dollar strength and equity weakness with the opposite true for a soft number.  We shall see.

Good luck

Adf

They Mostly Confuse

Posted on by 
We’re back to the Strait of Hormuz
As driver to all traders’ views
Both Trump and Iran
Have proffered a plan
But really, they mostly confuse

The, otherwise, story of note
Is coming as CPI’s quote
If hot, Chairman Warsh
Will field comments, harsh
If cool, he’ll be able to gloat

Oil prices (+1.5%) are higher again this morning and have now been up five consecutive sessions, rising 10% in that run as you can see in the chart below.

Source: tradingeconomics.com

There is a theory that the rhetoric in Iran increases when they have oil to sell so need higher prices, but once those cargoes have been sold, they talk peace again.  I don’t think you can rule out that hypothesis although I certainly have no corroborating evidence it’s true.  The one thing I did note yesterday is an Iranian comment that as long as sanctions remain, diplomacy cannot happen which tells me that economic sanctions are biting harder.  Whatever, the situation on the ground (or water) is over there, I have no insight per se. 

Much has been made over the fact that the SPR is at its lowest level since 1983 and has fallen below 300 million barrels with all the attendant pearl clutching while simply ignoring the fact that the SPR releases have been oil swaps with the back ends starting to come back in the next several months in greater amounts than have been released.  Maybe the end is nigh regarding oil, and the doomsters will get their $200/bbl outcome, but I would still take the under there.

In sync with the oil price rise we have seen yields rise, as well (see chart below), around the world.  But here, it appears that Chairman Warsh is the favored scapegoat for all the world’s inflation problems.  To hear his critics explain, if only he would give us forward guidance, everything would be fantastic.  Hedge funds could load up on leverage and increase their profits, real money investors would be comfortable that future real returns would be acceptable and, most importantly, the punditry would be able to explain all this to us plebes and burnish their beliefs in their own brilliance.

Source: tradingeconomics.com

But I wonder if there is not another explanation for rising yields that has nothing to do with the Fed, the idea that debt issuance, from both government and private sources, is growing dramatically and all that supply is weighing on prices, hence driving up yields.  We already know that governments around the world continue to issue debt willy-nilly, so there is nothing to discuss there.  But now the AI hyper scalers are issuing massive amounts of debt to pay for all the GPUs and data centers and power as the race to “win” in AI continues at an increasing pace.  

It is, of course, this last issue which has many pundits explaining that QE will soon reemerge as the only viable way for all that debt to get bought.  If central banks buy government debt that will leave funds for private investors to buy AI related debt.  And maybe that is the way it will work out although Chairman Warsh has thus far only discussed shrinking the balance sheet, not expanding it.

Please understand I am not ignoring the many serious problems that exist within the current fiscal and monetary frameworks around the world.  Government spending remains excessive as evidenced by the fact that virtually every nation in the world is running significant budget deficits as per the below table from tradingeconmics.com (notice China, a country that seems to get a pass on this score from the punditry).

All I am saying is that the idea that all of this is going to fall apart quickly is highly improbable.  As much as purists would like for there to be consequences for bad policy decisions, governments everywhere have an enormous number of tools to delay the pain, and they use them all the time.  Whether that is subsidies or tax cuts or regulations prohibiting competition, all these things substitute short-term gains for long-term problems.  But they will still be used regularly.

So, to recap, increasingly hawkish rhetoric on the Iran situation has driven oil prices higher which is increasing inflation concerns.  Adding to that is the ongoing fiscal profligacy of virtually every major government which is also weighing on bond prices and driving yields higher in sync.  And basically, the punditry has decided it’s all Kevin Warsh’s fault.  Too much will be made of tomorrow’s CPI report, whether it is hot or cool, that is the one things of which I am certain.

Ok, yesterday’s lackluster US session with all three major indices slipping a bit was followed by weakness in China (-0.8%) and HK (-1.1%) but elsewhere in Asia, things were mixed with Korea (+0.7%) gaining and the other regional bourses generally +/-0.5% or so.  Tokyo was closed for Mountain Day and the only other news of note from the region was the RBA left rates on hold at 4.35%, as expected, but expressed concerns about both slowing growth and future inflation.  Interestingly, Australian stocks were slightly higher despite that news, +0.2%.

In Europe, Spanish stocks (+0.5%) are the leader on the strength of Banco Santander’s share repurchase announcement while the rest of the continent and the UK are little changed.  As to US futures, at this hour (7:35) they are little changed.

While we have broadly discussed bond yields rising, and yesterday they were higher by 4bps-5bps in the US and Europe, this morning they are unchanged across the board.  Now, they were higher again this morning when I started to write, but it seems there was just a comment from Pakistan that the US and Iran are close to an agreement which has turned things around.  Oil prices, too have slipped back to unchanged on the day from an hour ago.

In the metals markets, gold (-0.2%) and silver (-0.9%) are backing off solid sessions yesterday and copper (+0.8%) continues to march higher.

Finally, the dollar is, net, little changed this morning, although we cannot ignore the fact that the yen fell -1.0% during yesterday’s session.  In fact, a look at the yen chart continues to show the market response to intervention, an immediate rally and a gradual decline resuming.

Source: tradingeconomics.com

As to the rest of the space, KRW (+0.3%) is the actual largest mover today, and that is not enough of a move to spin any story.  The DXY remains just below 100 and firmly within its yearlong trading range and some pundits are saying the fact that it is not rallying during the current conditions, with yields rising and fear all about, is an indication that the dollar is losing its status.  However, I am confident if you offered those same pundits payment in dollars, they would grab them as greedily as possible!

On the data front, this is inflation week plus a few more things as follows:

TodayExisting Home Sales4.05M
WednesdayCPI0.1% (3.4% Y/Y)
 Ex food & energy0.2% (2.5% y/Y)
ThursdayInitial Claims202K
 Continuing Claims1800K
 PPI0.2% (4.9% Y/Y)
 Ex food & energy0.3% (4.2% Y/Y)
FridayRetail Sales0.1%
 -ex autos0.2%
 Michigan Sentiment54.5

Source: tradingeconomics.com

Obviously, all eyes will be on CPI tomorrow as investors and analysts look for clues as to how the Fed may behave going forward.  Speaking of the Fed, Cleveland Fed president Hammack said in an interview yesterday that she thought the Fed needed to raise rates more than 25bps to get inflation under control.  But as I think about the Fed and its dual mandate, of maximum employment and stable prices, I cannot help but wonder what they consider maximum employment.  While they have defined stable prices (incorrectly in my view) as Core PCE rising 2.0% per annum, they have never tied themselves to a number on employment.  So, here’s a thought.  Look at the Labor Force participation rate, which as per the data last Friday fell to 61.4%, that is the lowest level since 1975 (excepting Covid) as per the below chart from FRED.

That hardly seems maximal, but then, I’m just an FX guy, not a Fed PhD.  After all, if we take the plain meaning of the word maximum, as per the American Heritage Dictionary, I cannot look at the chart above and conclude they have achieved that part of their mandate either.

But that’s just me.  Anyway, if there is going to be movement on the Iran story, that will drive the immediate market movements, but you can be sure that in the current environment, it will all come back to the Fed and whatever they may do going forward.

Good luck

Adf

Doomsters to Press

Posted on by 
The Payrolls report was a mess
But job losses added no stress
And so, once again
We’re back to the yen
As reason for doomsters to press

The claims being made are dramatic
Describing T-bonds as asthmatic
Explaining that Scott
Has now lost the plot
While calling his viewpoint erratic

So, what’s really happening here?
Is it true the end point is near?
I’m happy to say
Those fears I’d allay
At least through the end of next year

Once upon a time, a very smart economist, Larry Kantor, explained to me that the best signal for the economy to follow over time was the Unemployment Rate.  When it was falling, it was a strong indication that economic activity was increasing and vice versa.  But I think that is a world which no longer exists.  I make that point because Friday’s NFP report showed that the Unemployment Rate fell to 4.1% despite the fact the payrolls shrank.  Below is a chart of the Unemployment Rate since 1947 along with the average (5.7%) during that period.  The data comes from FRED although I calculated the average

Arguably, the first thing you notice is that the current Unemployment Rate is quite low relative to history, in fact it is in the bottom quintile.  But Mr Kantor’s observation was based on the then prevailing, and historical thesis of steady population growth, a thesis that has been called into question lately.  Between the aging of the population and the significant changes in immigration activity (i.e. the 2 million or so deportations recently), it is not clear that a declining Unemployment Rate is indicative of strong economic activity.  It could simply be a signal that the population is falling more quickly than job growth.

But looking at the report as a whole, it was quite confusing.  While Payrolls decline by -23K, Private Payrolls rose 30K and Manufacturing Payrolls rose 5k.  A shrinkage in government jobs seems quite positive to me.  However, Earnings data was a bit soft falling to 3.2% Y/Y, lower than the inflation rate.  Net, it is hard to draw many conclusions from the report although we did see the Fed fund futures market reduce the probability of a September hike to 56% from 66% prior.  Certainly, on the surface it hardly strikes that this is encouraging a rate hike.  And the stock market was non-plussed, rallying across the board.

Which takes us to the other story that continues to garner huge amounts of attention, the yen and the rationale behind the US joining Japan to intervene as well as what that will mean going forward.

I will try to boil this down.  The angst is attached to the carry trade, which, neatly defined, is borrowing JPY and paying a very low interest rate, converting the yen into another currency, typically USD, although AUD, MXN and BRL are also popular, and then earning the higher interest rate in those currencies.  It can be a highly profitable trade when currency volatility is low as the trader simply earns the difference between the interest rates each day.  The risk is there is a sudden move in the FX rate which can wipe out weeks or months of carry.  Hence the concern over intervention when we see the FX rate move 5% in a day like the end of July.

Estimates of its size run from $500 billion to $1.5 trillion, although nobody really knows.  I would err on the high side.  But there is another piece that is rarely discussed but I think must be considered in this conversation, and that is the outward investment flows from Japanese investors around the world, again largely to the US, but elsewhere as well.  I asked Grok to create a chart of net investment outflows from Japan from 2000 to present and got this:

Other than 2022, when the Fed started hiking rates aggressively and bond prices fell sharply, it has been pretty consistent.  The net amount of outflow over this time period is approximately ¥347.5 Trillion (again according to Grok) which at the average FX rate over the period of 112.40 works out to about $3.1 Trillion, arguably much more than the ‘pure’ carry trade.  But I don’t believe you can ignore that as if the Japanese are going to bring money home, it will be there as well.

Of course, there is no indication that is what they are doing at this point, despite all the hypotheticals about that being the major risk.  The Fiscal situation in both the US and Japan is awful, with both nations running huge budget deficits and showing no signs of changing that.  Inflation has been rising in both nations and a key prescription by many is that both central banks should be raising interest rates.  Of course, if the Fed raises and the BOJ waits, that widens the differential and will theoretically put more pressure on the yen.

The key concern and the favored story as to why the US helped Japan is that they didn’t want the BOJ to have to sell Treasuries to fund their USD sales.  Much has been made of the fact that the US sold EUR, not USD, but that is because the Treasury doesn’t keep USD in the Exchange Stabilization Fund, just EUR and JPY and a bit of some others like GBP, so they sold what they had.

The big fear is that the US cannot afford for Treasury yields to go higher (although it seems these same folks are clamoring for the Fed to hike rates) and so will do all they can to prevent that.  Now, the funny thing is that if you are Japanese and you own USD assets, you are thrilled with the weak yen as it enhances your return.  While Takaichi-san doesn’t like the weak yen as it exacerbates inflation, I don’t think Japan’s asset holders are clamoring for a strong yen. Remember this, too, that the long-term average yield on US 10-year Treasuries is 5.81%, more than 100bps above where we are today.  It is fair to say that recent lower yields are the exception, not the rule.

To my eye, the harder needle to thread in this process is for Japan, which really doesn’t want to see its massive foreign investment decline in value, although they are concerned about inflation.  For the US, while the fiscal situation is a major problem, it remains a problem for the future.  I’m pretty confident everybody in the world will still accept dollars for payment if they are offered.  The dollar is not going to collapse, nor is the bond market.  While pressure continues to build over time, it is going to take a LONG time.  Mark my words.  The end is not nigh!

In the meantime, JPY (-0.7%) looks like it is repeating the pattern after the last intervention attempts as per the below chart.  As I have maintained, unless there are policy changes, a strong yen is not coming soon.

Source: tradingeconomics.com

Speaking of the FX market writ large, this morning has seen very little net movement across almost all counterparts with KRW (-0.7%) the only other currency moving more than 0.1% in either direction.  We have discussed the won several times recently and while the alleged proximate cause for this decline is increased uncertainty over the Strait of Hormuz, given the huge gains seen in the past 6 weeks, this is nothing more than a blip in a strong trend.

In fact, lack of movement aptly describes the bond market as well with yields on Treasuries and across all European sovereigns within 1bp of Friday’s closing levels.  Apparently, fears of the apocalypse have been put on hold for the moment.

In the equity market, Friday’s US rally has seen a general follow-on by both Asia and Europe.  Overnight saw modest gains in almost every Asian market (Tokyo +2.1%, China +0.2%, HK +1.1%, Korea +0.7%, Taiwan +1.6%, etc.) although Australia (-0.3%) managed to buck the trend.  Given the resource focus of the Australian economy, and the recent gains in metals prices, that is a bit of a surprise.  As to Europe, Germany (+0.4%) is the leader of the pack with both France and Spain basically unchanged while the UK (-0.3%) lags slightly, albeit lacking any new news.  US futures are essentially unchanged at this hour (6:45).

Finally, oil prices (+1.4%) are firmer this morning as the ongoing saga over the Strait remains cluttered with confusion as to if a deal is coming close, or not and what role, if any, the US is going to play.  Personally, I’m ready for the US to exit the area, but they don’t ask me.  As to the metals markets, gold (-0.1%) is consolidating after a very strong performance last week, rising 7%, and silver (+0.8%) is continuing last week’s gains.  But to me, copper (+0.5%) is the metal with the most upside as the supply/demand characteristics of the market, (not enough is mined to satisfy annual needs and the timeline to bring a new mine up to speed exceeds a decade), imply higher prices still despite the fact we are already at record levels.

And that’s all.  We have no data today although CPI comes Wednesday.  I will look at data tomorrow as I have already gone too long this morning.

Good luck

Adf

Investors Are Troth

Posted on by 
The doom mongers are up in arms
As though they raise many alarms
Investors don’t care
And add risk with flair
Ignoring the much-mooted harms

So, war is no longer concerning
And though hyperscalers are burning
Through all of their cash
Amid much backlash
Investors, their shares, are still yearning

And what about data and growth?
Investors care naught about both
Concerns about yen?
Not that trope again!
To stocks most investors are troth

As I read through my X feeds in the morning, as well as the WSJ and Bloomberg, the overriding theme appears to be the end is nigh.  Whether discussing Iran and the oil price and the future of the Strait of Hormuz, AI and the bubble or the potential for massive job losses and the creation of Skynet, the economic data and the incipient recession coming because people cannot afford to continue their consumption habits, or the idea that we are on the precipice of a Treasury bond market collapse because the Japanese yen is weak, the dominant theme is disaster is around the corner.  It is really tiresome, I have to say.

Now, you might say that I simply follow the wrong people, and that may be true, but my feed hasn’t changed, and I never look at the algorithm’s selections for me, I only look at my followings.  So, I cannot tell if people have become that much more bearish on the overall situation, or if they simply write these things because they believe they will get more engagement.  I fear it is the latter, but that simply devalues anything useful they may have to say.  Mostly, it’s frustrating to try to get an unbiased sense of what is happening in the world these days.  After all, while I understand that governments put out propaganda constantly, I thought the idea behind X and Substack was you could avoid that.  I think I am going to go back to reading books!

So, as we await this morning’s payroll report, I’ll try to touch on the key issues I believe matter.  Starting with the yen, which continues to garner attention, or more accurately, the joint intervention garners attention, I first have to laugh at the following Bloomberg headline, “Yen Surrenders Nearly Half Its Gains From US-Japan Intervention”.  This was written by Mia Glass, and I don’t know anything about her except her grasp of arithmetic is tenuous.  Here is the chart of USDJPY and while the yen has been weakening steadily since the intervention last week, half?  Even taking the spike low into account, we are nowhere near a 50% retracement and on a closing basis, it is a ridiculous claim.

Source: tradingeconomics.com

There continues to be much fodder made about Secretary Bessent trying to prevent a meltdown in the Treasury market but Occam’s Razor tells me that it is far more likely that a too-weak yen is bad for Japan because of its inflationary impact and the US because it impedes US exports so joint intervention made sense.  And as I have maintained all along, unless underlying fiscal and monetary policies change, the yen is going to continue to weaken.

Turning to Hormuz, the press continues to write with glee about President Trump’s miscalculation and the US losing the war and whether Iran and Oman are going to come to some agreement on the Strait, but oil prices, while they rallied a bit yesterday, are lower this morning by -0.6% and -9.25% in the past week.  Looking at the chart below, despite all the discussion of inventory depletion, which are real, but obviously not as important to the price as many previously believed, the trend remains downward and we are well below the trend.  Frankly, at $75/bbl, it appears the world works fairly well.

Source: tradingeconomics.com

Look, I would rather pay less for my diesel, and I know you would all like to pay less for your gasoline, but here’s a 20-year history of the RBOB (NYMEX gasoline) contract.  We are hardly in unprecedented territory having spent a lot of time around here from 2011 through 2015 as well as the beginning of the Russia/Ukraine war.

I have no idea how things will end up in Iran, nor does any other commentator.  I know I am happier if Iran does not have a nuclear weapon and ballistic missiles that can reach Europe, let alone the US.  But I would say the market has almost lost interest in the war.

As to the hyperscalers and the AI bubble, in truth, it seems much of the animosity has been turned toward SpaceX as everyone loves to hate Elon almost as much as they love to hate Trump.  But it appears by many metrics that equity markets continue to benefit across the board from strong earnings results, with ~85% of companies (depending on your source) beating estimates which is well above the average of 77%.  So, the economy continues to grow pretty strongly, and companies continue to make money, and investors continue to want to buy shares.  The hyperscalers aren’t leading the pack anymore, but they have not collapsed either.  There are many who continue to explain this cannot go on forever and there will be a reckoning, and they may well be correct, but in this case, being early and being wrong are the same thing.

Ok, enough of that.  Let’s see if anything noteworthy has happened overnight.  The truth is, not especially.  Asian shares were mixed with Chinese shares doing well after solid trade data, but the rest of the region drifted lower.  European shares are firmer across the board after broadly positive data (German IP and Trade, French Trade) although the French Unemployment Rate ticked higher to 8.3%.  And US futures are higher this morning as well ahead of the NFP report.  Despite the doom and gloom, equity markets are doing fine.

Bond markets have barely moved overnight, although we did see Treasury yields back up 5bps yesterday.  That appears to have been on the back of the oil price rise, although as I look at probabilities of central bank rate hikes, there is a growing belief that the Fed, ECB and BOJ are all going to raise rates next month as hiking rates into an energy shock seems to be their MO.

Source: rateprobability.com

We discussed oil but gold (+2.0%) and silver (+4.1%) are the real story in commodities as both are extending their recent rallies from the consolidation lows.  For instance, silver is higher by 11% this week and $9/oz since July 17th.

Source: tradingeconomics.com

Finally, the dollar, despite all the anxiety about the yen, remains quiet overall.  The DXY is below 100, back in its range and showing no inclination to move in either direction.  This morning ZAR (+0.7%) is the king of the hill on the rally in gold while MXN (+0.3%) is a touch higher after Banxico left rates on hold.  But remember, peso rates are still high and economic growth continues apace so investment opportunities abound.  The peso has strengthened more than 17% since the beginning of 2025, shaking off any tariff concerns easily.

Source: tradingeconomics.com

As to the data, here are consensus forecasts:

Nonfarm Payrolls80K
Private Payrolls78K
Manufacturing Payrolls4K
Unemployment Rate4.2%
Average Hourly Earnings 0.3% (3.5% Y/Y)
Average Weekly Hours34.3
Participation Rate61.6%

Source: tradingeconomics.com

We also see Canadian employment data (exp 6.5% Unemployment Rate) and hear from Thomas Barkin, the Richmond Fed president.  But it is a summer Friday and typically, about an hour after the NFP release, traders are gone for the weekend so don’t expect too much today.

The world is not ending, the dollar is not collapsing, the Treasury market is not collapsing, and equity markets are not about to implode.  My take is the big stories from the past months have lost their luster and I suspect after a lull, we are going to start to focus on the politics of the midterm elections in November.  But until then, have a cold one and relax.

Good luck and good weekend

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Does It Matter?

Posted on by 
Much ink has been spilled
Describing intervention
But does it matter?

It is still early days since the joint intervention in USDJPY by the US and Japan, and we know they spent a lot of money, but the question at this point is, has it really changed anything?  It is pretty easy to look at the chart below and see the pattern following previous interventions repeating already.  Major dollar decline followed by very gradual dollar strength.

Source: tradingeconomics.com

But as I said it is early days.  Now, I have made the point that unless more fundamental changes are made in Japan, whether that is reining in spending (which seems highly unlikely) to reduce the budget deficit and ongoing increases in debt issuance, or tightening monetary policy by raising interest rates more aggressively, it strikes me that despite all the headlines, this won’t change the situation that much.  

If we use CME JPY futures positions as a proxy for the carry trade, as you can see in the below chart from cotsignal.com, that while we are not at record short positions in the large spec community, we are awfully close.

In fact, it is difficult to see at this point, although the data to be released tomorrow could well show it, much change in the short JPY positioning amongst the speculative set.  In fact, I would expect that would be the case to some extent.  And yet, as in the first chart, the yen appears to have begun to grind lower again.

Much has been made of the potential ramifications of the fact that the Foreign and International Monetary Authority (FIMA) swap lines were used to fund this intervention rather than Japan simply selling some of its Treasury holdings (remember, it holds some $1.13 trillion), and what it means.  Some analysts are claiming Secretary Bessent is concerned over the reaction in the Treasury market if the Japanese sell their bonds and so was trying to prevent any additional pressure there.  And perhaps that is correct.  We will never really know as Bessent will certainly never admit that.  

But let me offer a different, simpler explanation.  The BOJ didn’t want to take the losses on their bonds which are probably quite large given where US yields have been.  Remember Silicon Valley Bank?  So, if the BOJ used a repo facility, they get the cash and don’t take the loss.  After all, that is not really a new idea.  Yet I haven’t heard a single analyst mention it.  I guess it’s not sexy enough.  Time will tell if things have really changed, but to my eyes, not yet.

Let’s turn now to Friday’s release
Of Payrolls, where there’s an increase
Expected and if
It comes, folks will sniff
A hike ere the summer does cease

On a subject that has not gotten a lot of press so far this week, tomorrow brings the NFP report where a solid growth in NFP is expected (80K) although yesterday’s ADP Employment number disappointed at just 44K.  Remember, since the change in immigration policy and the deportation of several million foreigners, it is becoming dogma that a stable Unemployment Rate can be achieved by simply not losing jobs as opposed to having to keep creating new ones. 

In this light, 80K indicates a still solid labor situation.  Now, the question at hand is how the market will absorb the data.  We continue to see equity market participants focused entirely on the earnings data being released, with macro concerns a distant third place on their worry list.  (I imagine oil is second). But for the fixed income market and the newly created Fed watchers, this is a critical piece of information.  

The few Fed speakers we have heard this week have all discussed how they are now very focused on inflation (where were they in 2022?) and may need to raise rates if it continues to rise although a look at the Fed funds futures market shows that the probability of a rate hike next month has declined to 55% from two-thirds earlier this week.  And while a second hike is still priced in the curve, it has been delayed until next spring from the earlier January expectations.

I find this quite interesting as all the Fed commentary has been hawkish and the data we have seen, notably ISM, continues to show economic strength.  So, too, does the corporate earnings data and forecasts, with strength as far as the eye can see.  I have no explanation for this change, and, in fairness, it is a bit subtle, but the futures market appears to be pricing in a different outcome than the punditry or at least starting to.  We will need to watch this carefully as it may be a harbinger for more substantive changes in the narrative and future price action.

Ok, let’s quickly look at markets.  The outstanding performer yesterday was clearly the precious metals space with gold (+4.1% yesterday, +0.3% this morning) having its largest gain since the late March bounce.  Whether I draw a trend line or look at the 50-day moving average, it seems like a clear break higher after six weeks of consolidation around the $4000/oz level.

Source: tradingeconomics.com

Silver (-0.5%) had a similar move yesterday while copper (+0.9%) is in the process of making yet more new highs this morning although this move has been far steadier.  I’ve seen explanations about how yesterday, the market suddenly realized that inflation was a problem or other such nonsense, but my experience tells me this is more likely a positioning event with new money entering after the markets demonstrated a more certain bottom.  In other words, since it couldn’t go down despite bad news, the only direction left was up.

Oil (+1.0%) is almost an afterthought these days, remarkably.  There is a lot of discussion about an imminent deal between Oman and Iran on the Strait of Hormuz, but my impression is that the market has pretty much moved beyond that story.  EIA inventories rose, inventories at Cushing rose and there is no evidence of shortages anywhere in the West.  

In the equity markets, yesterday’s mixed US session was followed by a generally weaker one in Asia (Japan -0.9%, China -0.2%, HK -1.5%, Korea -4.6%) although there were some gainers as well (India +0.5%, Australia +0.5%, Singapore +1.0%, Thailand +0.7%).  The tech story continues to be the driver and yesterday was a clear demonstration of tech concerns compared to basic materials bullishness.  Europe, though, is firmer this morning led by Spain (+1.1%) and France (+0.6%) after some positive data was released (Spanish IP, French Construction PMI, German Factory Orders) although the DAX (+0.25%) is lagging the group.  As to US futures, at this hour (7:40) while the NASDAQ (-0.4%) is lower, the other two indices are firmer by 0.2%.

In the bond market, yields are edging higher this morning with Treasuries (+2bps) leading the way and most European sovereign yields higher by 1bp.  While yields across the board are at the high end of their recent ranges (see chart below), they do not appear to be breaking out  Although for now, the trend across the board does seem to be modestly higher.

Source: tradingeconmics.com

Finally, the dollar is a bit firmer this morning, but only just.  In fact, there is really no currency movement of note to discuss.  Brazil cut its SELIC rate to 14.0% as expected and the BRL (+0.3%) is a touch firmer, but really, other than that, 0.1% is today’s story and that is not much of a story.

Today’s data releases include Initial (exp 202K) and Continuing (1790K) Claims as well as Nonfarm Productivity (0.6%) and Unit Labor Costs (2.1%) and that’s really it.  There is another speech by St Louis Fed president Alberto Musalem, but we already know he is a hawk, so there will be nothing new there.

While we need to keep our eye on how things play out in the yen, there seem to be fewer stories of interest right now, at least marketwise.  Perhaps we are finally in the summer doldrums.

Good luck

Adf

Why People Screech

Posted on by 
Investors enamored with risk
Are active, some might e’en say brisk
In buying up stocks
In very large blocks
And feeling, right now, very frisk-y

But this simply highlights the breach
Twixt markets and why people screech
The ‘conomy’s ailing
And policy’s failing
To help, so for more, they beseech

If you ever wanted to see the definition of the K-shaped economy, there is no more accurate representation than the fact that equity markets are making all-time highs at the same time Socialists are winning elections.  Now, I don’t know many voters in Michigan, but I’m pretty sure the ones who have an equity portfolio are not voting for the candidate who wants to abolish the Senate, the Supreme court and the Presidency as well as the police and the Department of War.  But here we are, with both the DJIA and the S&P 500 trading to another new all-time high yesterday, although as you can see in the chart below, the NASDAQ is still a few percentage points away from its recent highs and the DSA candidate poised to win the Democratic primary election for US Senator in Michigan.  Strange times indeed.

Source: tradingeconomics.com

While there is no doubt that earnings continue to be quite strong, and that is the proximate cause for the equity market rally, earnings are a function of economic activity, so it is highly unlikely they would be so strong without underlying economic strength.  The upshot is that we continue to ‘reap’ the benefits of the original Portfolio Balance channel defined by then Fed Chair Ben Bernanke as he began the process of inflating the Fed’s balance sheet and all that liquidity spilled into financial markets rather than the real economy.  At this point, we have seen money moving back toward production (I saw that a new steel mill was being built in California, the first new mill there in over 50 years) but it remains the case that more money flows to markets than to production. And that, I would argue, is the crux of the dichotomy that we are currently observing, fabulous wealth being created but an extremely uneven distribution.

Can it, or will it change?  It took a long time to create the problem, and I fear it will take a long time to unwind it, although I believe that politicians on both sides of the aisle recognize the problem.  And this is the classic case where they have very different solutions.  Arguably, the fate of the nation rests on which solutions are implemented, reshoring American industrial capacity, or a state takeover of the means of production and redistribution.  You know which side I’m hoping wins out.

But in the meantime, equity markets here are strong as is economic activity, at least as measured by the government, and that has been sufficient to drive market behavior.  And that, my friends, is why Wall Street is happy.  Well, that and the following headline:

Wall Street bankers’ bonuses set for significant rise

With that in mind, let’s see how markets are behaving.  That US strength was followed almost universally in Asia with every major market rallying except Singapore (-0.55%) and Thailand (-0.5%).  Otherwise, the gains ranged from +3.7% (Tokyo and Korea) down to +0.25% (HK) with more strong gains above 1.0% than below that level.  Tech stocks remain the story and that has been helped along by the latest Hormuz story that indicates a deal is coming soon.  Frankly, writing about Hormuz at this point seems absurd given the numerous claims and counterclaims with very little ability for most of us to discern truth from propaganda.

The interesting thing about a tech-led rally is how completely it ignores European bourses with France, Germany and the UK all unchanged on the day, although Spain has managed a modest gain of 0.4%.  But I think that gain is a function of the better-than-expected PMI Services number from Spain, 58.3, which is its highest reading in more than 3 years while the rest of Europe managed to basically meet expectations at lower levels.  As to US futures, as we await the ISM Services data today (exp 54.5) you will not be surprised that they are higher at this hour (7:45).

Perhaps the bigger story has been bond yields as they have slipped -13bps in the past two sessions and are down -1bp this morning as per the chart below.  European sovereign yields have also backed off a bit although this morning they are basically unchanged while JGB yields (-3bps) continue to trade near their recent multi-decade highs.  So far, the US-Japanese joint yen intervention has not been enough to change that story.

Source: tradingeconomics.com

In the commodity space, it is the metals markets that are the most interesting this morning with gold (+2.7%) and silver (+4.1%) leading the way as hopes for the Hormuz reopening and the end of the Iran conflict percolate.  Either that or people have begun to realize that the demand for metals remains impervious to other stories.  Now, I am not a market technician, but frankly, the fact that the gold price is breaking above its 50-day moving average as per the below chart, and the general price action is telling me that we have put in a bottom and seem poised to break higher.

Source: tradingeconomics.com

Copper (+0.4%) continues to trade near its all-time highs and I suspect a move higher in gold and silver will take it along for the ride.  As to oil (+0.4%), the fact remains it is lower by -10.0% this week, which has been a key driver of sentiment in markets overall.

Finally, the dollar is a bit softer this morning, but not too much.  The euro and pound are both firmer by 0.2% while the yen is little changed along with CHF, CAD and AUD.  NZD (-0.4%) is an outlier after weaker than expected jobs data undermined the idea of another rate hike by the RBNZ.  In the EMG bloc, most currencies are a bit stronger as well, 0.1% to 0.3% or so with KRW (+0.4%) and CLP (+0.8%) the outliers, with the former continuing its recent trend as you can see from the chart below, while the latter is benefitting from the overall strength of copper.

Source: tradingeconomics.com

And that’s really it for the day.  In addition to the ISM data, we do see EIA oil inventories later this morning and we get the Treasury Refunding Announcement at 8:30, although there is no expectation for a massive change in the current issuance schedule.  Late this afternoon, the central bank of Brazil is expected to cut the SELIC rate by 25bps to 14.0%, which is arguably why BRL has been such a strong performer all year, very high real interest rates.

As to the dollar writ large, it is on its heels right now and I don’t think Secretary Bessent minds that very much.  Using the DXY as the proxy, do not be surprised to see it trade to 97 by the end of summer.

Good luck

Adf

Smart or Insane

Posted on by 
While pundits all like to complain
About everything, smart or insane
When stock markets rise
It’s no real surprise
That few people care what they’re sayin’

As penance for yesterday’s overly long diatribe, I will keep this morning’s much shorter, especially since there is not nearly so much interesting to discuss.  There are still many discussions on the whys and wherefores of the US joining with Japan in intervening in the FX markets, with a pretty even mix of those saying it won’t matter and those saying it is a game changer.  As you can see from the chart below, this morning the beleaguered JPY (-0.45%) is slipping a little, but hardly enough to matter in the context of last week’s gains.

Source: tradingeconomics.com

Of course, we won’t really know how effective this bout of intervention has been for at least a few weeks/months, as the history, clearly shown on the chart is a big move higher followed by a gradual depreciation in the yen.  Will that play out again?  My suspicion is that absent a policy change by the BOJ (i.e. a more aggressive rate hike schedule) or the Japanese government (i.e. less fiscal stimulus) the answer is no.  This is especially true if the Fed raises rates, although I still do not believe that is coming soon.  

However, it is important to remember that the Fed funds futures market is confident of a hike by October, with a two-thirds probability of one next month as per the below cmegroup.com table.

Turning to the other major discussion from yesterday, the ongoing feedback/blowback from the Fed’s no movement, and more importantly from Warsh’s behavior during the press conference, that too remains a topic of discussion with pundits on both sides adamant that he was either right or wrong on both measures.  The only thing I am sure about is that he doesn’t care much about what the pundits are saying.  Rather, he is very likely focusing on getting his points across to the rest of the committee, and that will be a tough job.

In 2025, FOMC members gave, on average, one speech a day which added to the forward guidance which was a key tool in their toolbox.  You know I often railed against the ongoing verbal diarrhea from these folks as from the best I could tell, nothing said was ever designed to sway opinion, merely to burnish each speaker’s credentials.  And they clearly loved the quasi fame that came with it.  In fact, I suspect it is that very quasi fame the committee is most reluctant to cede.  Chairman Warsh has his work cut out for him.

As to today’s new stories, there are none, at least none of note.  There are more conflicting comments from President Trump and the Iranians about negotiations or not.  Yesterday’s ISM data was quite positive, coming in at 55.6 vs 54.0 expected, just another indication that the US economy continues to tick along quite nicely.  After that, the news heads towards the political with several key primary elections to be held today with DSA candidates picked to win and run in the general elections in November.

But what has everybody happy is the fact that equity markets are showing strength once again.  I read that of the S&P companies that have already reported, 85% have beaten estimates, a much higher than normal percentage (76% is the norm), and another positive for market bulls.  

So, let’s take a look at how markets behaved overnight with that theme.  The strong US performance was followed by a more mixed session in Asia, although there were more gainers (Tokyo, China, Korea, Australia, Indonesia, New Zealand) than laggards (HK, India, Philippines).  The tech story remains the major story since the oil story has become so confusing on a daily basis, I feel like most investors have moved on.  Meanwhile, in Europe, it is a broadly positive session as well led by Germany (+0.6%) and the UK (+0.35%) while France (+0.1%) and Spain (0.0%) are not quite as happy.  Arguably, the biggest news in Europe continues to be the unprecedented flood of illegal immigrants into Ceuta, Spain and the punditocracy is actively expressing their opinions on the issue, although whether there is a direct impact on the equity market in Madrid is unclear.  Lastly, US futures at this hour (7:20), are all pointing higher again as the market awaits earnings from SpaceX this afternoon after the close.

In the bond market, there continues to be a great deal of garment rending and teeth gnashing amongst the financial illuminati as yields hold the bulk of their recent gains.  This morning Treasury yields have backed up 1bp after yesterday’s -5bp decline, although European sovereign yields are generally lower by -1bp this morning.  As of now, there is no answer to the question of is the bond market focused on inflation or excess issuance although it could well be a little of both.

Remember when oil (-0.8%) was the only market that mattered, and all other trading looked there first.  We heard stories about $200/bbl coming soon and tank bottoms as reserves emptied and a growing concern about future economic activity.  Well, that never really happened.  As I type, WTI is back below $80/bbl and I particularly like this chart that calculates the mean price over the past 6 months ($86/bbl) and shows no trend whatsoever.  

Source: tradingeconomics.com

To me, this implies there is a new equilibrium although I suspect that when the hostilities cease, and I believe they will at some point this year, we will see sharply lower prices for crude and products.  As to metals markets, they remain relatively uninteresting with modest gains today (Au +0.2%, Ag +2.4%, Cu +1.7%).

Finally, in the FX markets, away from the yen the dollar is under a bit of pressure this morning.  First, for all of you who follow the DXY and were excited by the ostensible breakout above 100.50, as you can see in the below chart, that story appears to have ended for now.

Source: tradingeconomics.com

But away from the yen this morning, the rest of the G10 have all shown modest gains led by AUD (+0.5%) after some positive household spending data.  Otherwise, 0.1% to 0.2% is the state of the day.  In the EMG bloc, ZAR (+0.4%) is the leader of the pack on the combination of softer oil prices and stronger metals prices.  Too, BRL (+0.25%) and MXN (+0.25%) seem to be benefitting on the same basis.  Otherwise, it’s hard to get excited here.  Perhaps another bout of intervention will perk things up, but I doubt that will happen soon.

On the data front, there’s quite a bit to be released this week culminating in the Friday NFP report.

TodayTrade Balance-$73.0B
 JOLTs Job Openings7.4M
 Factory Orders0.2%
 -ex Transport0.5%
WednesdayASP Employment70K
 ISM Services54.5
ThursdayInitial Claims202K
 Continuing Claims1790K
 Nonfarm Productivity0.6%
 Unit Labor Costs2.1%
FridayNonfarm Payrolls80K
 Private Payrolls79K
 Manufacturing Payrolls4K
 Unemployment Rate4.2%
 Average Hourly Earnings0.3% (3.5% Y/Y)
 Average Weekly Hours34.3
 Participation Rate61.6%
 Consumer Credit$10.85B

Source: tradingeconomics.com

In addition, there are three Fed speakers, and I wonder (and am hopeful) that we hear less and less from them going forward.  Obviously, all eyes will be on the payrolls on Friday, and we can dive into that later in the week.  But today, it is hard to get excited about anything.

Good luck

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Pundits and Bores

Posted on by 
The fallout from Warsh’s decision
To leave rates without a revision
Has opened the doors
For pundits and bores
With hawks and doves set for collision

For some, Warsh has failed from the start
As they felt a rate hike was smart
But others explain
That under his reign
It’s markets that play the main part

For a no action outcome by the Fed last week, it certainly is interesting how much digital ink has been spilled discussing the outcome of that meeting and, depending on which side of the argument you fall, whether it was the right move or an error.  You know I have been of the belief that there will be zero rate hikes this year and nothing has changed that opinion yet.

There is a great deal of conversation regarding the Fed’s credibility and how despite Warsh’s tough talk about achieving their 2% inflation goal at his first meeting, by doing nothing last week, he has trashed that credibility.  My first thought here is, given the Fed has failed in its key objective for more than 5 straight years on its own terms, it is difficult for me to accept they had a lot of credibility left to trash.  But my second thought is to listen to the Chairman’s words about allowing the market to do its job, and not simply watch the Fed, and I realize there are an awful lot of analysts and pundits who don’t know how to do that and therefore are extremely uncomfortable now.  As I wrote last week, these folks get paid a lot of money by Wall Street and now they have to earn it.  So perhaps that explains the ongoing diatribes.

Much has been made of the fact that between the June and July FOMC meetings, US Treasury yields rose substantially as you can see from the below chart.

Source” tradingeconomics.com

At the close on Friday, they had risen 34bps in the 30-year and 28bps in the 10-year), although this morning, with oil prices (-5.6%) falling on the back of a renewed diplomatic initiative in Iran, both of those bonds have seen yields back off by 5bps. 

Now, one of the things that Warsh specifically explained in the press conference was that the market had raised rates already, effectively doing the Fed’s job for them.  And here is the point of departure, I believe, regarding the punditry viewpoint and the Warsh viewpoint.  Warsh has been explicit in saying he wants the Fed’s footprint in the markets to shrink.  He wants market participants to, “play the ball, not the referee”.  However, the pundits claim that the only reason rates rose was in anticipation of the Fed hiking rates.  

So, let’s try a little thought experiment.  Assume there was no Fed, instead that money supply was mechanically increased by 2% per year and that all interest rates were determined by the market.  Do you believe that in this scenario, a government running consistent extremely large deficits would not drive interest rates higher than they otherwise would be, without a central bank to officially do so?  I know I do.  Is that any different than the market pushing yields higher because they are concerned with excess supply of Treasuries and other inflation concerns?  

The Fed has had a major, and in Warsh’s (and my) view, too large impact on markets for a long time, since Black Monday in 1987.  Change is hard and the punditry does not like the fact that they are going to have to actually think and pay attention to many variables in order to have a viable view on things, so they are all crying and claiming Warsh is making a huge mistake.  While not surprising, I think they are completely wrong.  

It is also important to understand that the current yields in the bond market are anything but ordinary. Below is a chart I created with FRED data and included the long-term average 10-year yield since 1962, which happens to be 5.81%, more than 100bps above current levels.  For a very long time, a good rule of thumb for the 10-year yield was it should be approximate the nominal GDP growth rate, but we have gone through such a long period of financial repression, that idea faded away.  Perhaps that is coming back into vogue, so at the long-term average, we could see 3.8% GDP growth and 2.0% inflation.  And even today, it could represent 2.7% GDP growth and 2.0% inflation.  I don’t think anybody would be unhappy with that outcome.

My understanding is the task forces will not be reporting until early next year.  At the same time, I am convinced that Mr Warsh is very serious about making significant changes at the Fed going forward, and I applaud that.  But it is going to require him to convince 18 other people who have been inculcated in a process that has proven to be a failure but offers comfort to those people because they know how it works.  Change is very hard, and this will be harder than most.  One last thing, the biggest change is going to be the balance sheet.  The Fed continues to buy T-bills and expand the balance sheet as they continue to seek to maintain “ample” reserves, so banks have liquidity.  I would not be surprised if when we hear from Chairman Warsh at the Jackson Hole meeting at the end of the month, he indicates the Fed will stop buying bills at the next meeting moving further down the path of change.

Surprising comments
Bessent admitted the Fed
Joined the Japanese

The following statement released by Japan’s MOF is quite a surprise, at least the fact that they admitted to the action, something that has rarely been the case in the past.  

Some have made the point that given Japan is the largest holder of Treasury securities in the world (other than the Fed) and that they would need to sell their Treasuries to fund intervention, this was the driving force.  Certainly, the US is not keen to have holders sell their bonds at this point.  As you can see in the chart below, this intervention has had a larger impact than the previous bouts which were solo Japanese efforts.

Source: tradingeconomics.com

At the dollar’s low, the yen appreciated about 5% in the past two sessions, certainly a very large move.  One of the other things that was interesting was that ostensibly, the Treasury sold EURJPY, not USDJPY.  Perhaps they had extra euros lying around they no longer wanted.  According to BOJ data, it appears the Japanese spent something like $33 billion on the intervention, but I have no indication as to the US effort.

Joint intervention is pretty rare, with the last time being in the wake of the earthquake/tsunami at Fukushima in 2011 when the yen strengthened dramatically.  But it also has a better track record than solo intervention, although absent significant fiscal changes, on both sides of this equation, I suspect that within a few months, the yen will weaken again.

Ok, I feel like that’s enough for one morning.  The oil story, as I mentioned, is that the President has called off the mooted weekend attacks and diplomacy is back on the table.  Interestingly, the metals markets are not as excited by that with gold (+0.15%), silver (+0.6%) and copper (+0.75%) all higher, but not by very much, especially given the size of the decline in crude prices.  And product prices (gasoline -3.4%, heating oil -3.0%) are also sharply lower.

As also mentioned above, bond yields have backed off with European sovereigns sliding far more than Treasuries, between -6bps (Germany, Netherlands) and -9bps (UK, Italy, Greece).  However, JGB yields (+3bps) did not get the memo although I suppose that has more to do with the belief that the BOJ is going to be forced to hike rates as part of the joint US-Japanese currency efforts.

As to the equity markets, after Friday’s US rally, the picture in Asia was mixed, despite the oil price decline, although for Japan, a stronger yen is often a problem for Japanese equities.  The worst performers were Korea (-5.1%), Tokyo (-0.9%) and China (-1.0%) while much of the rest of the region followed the US higher (HK +0.5%, India +0.7%, Taiwan +0.6%, Australia +0.5%) with the smaller exchanges mostly higher as well.

In Europe, things are generally bright with Germany (+1.4%), France (+1.3%) and Spain (+0.75%) all nicely higher despite (because of) modestly weaker PMI data although the UK (0.0%) has not been able to overcome its PMI weakness.  Now, in fairness to the UK, its 51.9 reading, while weaker than last month and forecast, is still about the best in Europe.  As to US futures, they are all in the green, led by the DJIA (+0.8%) at this hour (7:00).

Finally, the dollar is kind of confused overall.  The big winner today is KRW (+1.0%) although that trade has been ongoing for more than a month and is approaching an 8% gain over that period.  The yen (+0.4%) continues to climb, albeit less aggressively, although the other G10 currencies are generally under pressure (GBP -0.15%, AUD -0.3%, CAD -0.2%, NOK -0.6%).

However, I must mention something that Alyosha wrote this morning in Market Vibes that is worth considering; two of the major positions in markets were short bonds and short yen.  Joint intervention by the US and Japan to sell EURJPY has likely forced a lot of covering in both of those markets and it would not be surprising to see more activity like that and further short covering.  Japan is the largest holder of French bonds as well as Treasuries and could easily sell those without a peep from the US.  

Ok, I have gone way over my daily quota this morning, although there were a couple of really big, and complex stories to discuss.  On the data front, today brings ISM Manufacturing (exp 54.0) and I will delve into the rest of the week’s data, including Friday’s payroll report tomorrow.

Good luck

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