The Narrative Shatter(ed)

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For months data just did not matter
Twas oil that drove all the chatter
But Friday that changed
As NFP ranged
So high that the narrative shatter(ed)

Now suddenly, eyes have all turned
To data, with many concerned
Their previous views
Will naught but confuse
All efforts, more cash, to be earned

Since the Iran conflict began on the 1st of March, pretty much the only key variable in financial markets has been the price of oil.  As you can see in the chart below, the price gapped higher that Monday morning and has been the major topic of conversation ever since.

Source: tradingeconomics.com

There continues to be a large contingent of analysts who, once the Strait of Hormuz was closed, have been calling for a substantial rise in the price of the stuff, but here we are this morning, back below $90/bbl and lower by -2.3% on the day.  Stories about declining reserves, floating reserves, demand destruction and new production are all available on any given day, and all certainly have facts to support them.  But the big picture, at least so far, has been that the market has found a clearing price between the release of strategic reserves and some amount of demand destruction, which has kept prices in check.

The greatest irony to me is that all the discussion regarding the long-term damage high oil prices are going to inflict on the economy seems to ignore the cardinal rule of commodities; the cure for high prices is high prices.  Last week I highlighted comments from an Exxon SVP about the coming crisis.  If that is Exxon’s corporate belief, they will be drilling like there is no tomorrow as their costs are far below current price levels, let alone the mooted rise to $150/bbl.  However, if we look at the one source of data that discusses drilling, the Baker Hughes oil rig count, you can see in the below chart that while it is a few rigs off its recent lows, there is still limited oil industry belief that the price is going to remain this high for any extended length of time.

Source: tradingeconomics.com

I think what last Friday’s very surprising employment report has done is to change some of the thinking of investors, turning their attention from exclusively oil to the rest of the economy and, now that we are 3+ months into this adventure, to how the rest of the economy is behaving.

This brings us to the two key pieces of information that are upcoming in the US, tomorrow’s CPI report and then next Wednesday’s FOMC meeting.  But it also has market participants going back to their more regular processes with discussion of market technicals, earnings, and global policy decisions.  So, let’s look in those areas this morning.

On the policy front, a few things happened overnight.  First, Bank Indonesia raised their base rate 25bps, to 5.50%, in an emergency meeting as the rupiah continues to decline to record lows, although in the wake of the rate hike, it rebounded some 0.8% as per the below chart.  Another data point is the fact that their FX reserves have fallen by >$1 billion in the past month indicating that they are actively intervening to prevent a further decline.  Too, this comes after a 50bp hike just two weeks ago.

Source: tradingeconomics.com

Elsewhere on the central bank front, Nikkei news reported that the BOJ will be raising its base rate by 25bps, to 1.00%, the highest level since 1995, when it meets next Monday night (recall, Nikkei has a perfect track record when calling these moves).  This has been widely expected in the market, and so there was no reaction in the FX market, although with USDJPY hovering just above 160.15 this morning, I imagine there is a bit of nervousness at the Ministry of Finance there.  Interestingly, the word from Nikkei is also that they may end the tapering of the balance sheet next year, which certainly detracts from the hawkishness of the rate move.

Moving on to data, the noteworthy datapoint overnight was the Chinese Trade Balance ($105.4B), which while somewhat larger than expected is right in line with recent activity as per the below chart.  It seems that demand for semiconductors has been significant and while trade with the US continues to remain moderate, the rest of the world is getting inundated with Chinese stuff.

Source: tradingeconomics.com

The one other major topic of conversation is the SpaceX IPO set for Thursday and the fact that OpenAI filed to go public as well.  I expect that those discussions are going to be a large part of the equity market narrative for a while yet, but that is well outside the purview of this note.

So, let’s look at market behavior and then see what is on tap for the week data wise.  Friday’s equity declines in the US were like a bad dream, they felt terrible but now it seems everybody has awakened and the world did not end.  Yesterday saw a steady climb from opening lows all day with the NASDAQ closing higher by +0.9%.  The upshot is that Asian markets broadly followed that movement with Japan (+2.2%), China (+1.9%), Korea (+8.2%!), Taiwan (+2.8%) and Indonesia (+7.6%!) all shaking off fears and rebounding sharply.  While HK (-0.4%) and Australia (-0.2%) both lagged, the other regional markets were broadly positive.  I continue to be amazed at the idea that Asia is in the worst energy shape and yet its equity markets are screaming higher.

In Europe, there is also a positive vibe with Spain (+1.2%), France (+0.9%) and Germany (+0.7%) all having solid sessions.  In fact, only the UK (-0.2%) is lagging this morning and not based on any data, but it seems more like some idiosyncratic stories regarding pharma companies there.  As to US futures, at this hour (7:20), they are firmer by 0.5% or so across the board.

In the bond market, yields, which have been moving higher for the past week, have backed off a bit with Treasury yields down -2bps while European sovereign yields have also slipped, mostly by -1bp or -2bps.  Last night, JGB yields (-4bps) fell after the story about the rate hike.  Perhaps investors believe Ueda-san is going to be more hawkish.  But it seems they missed the story about ending QT.

In the commodity space, with oil lower, as discussed above, it is no surprise that gold (+0.5%), silver (+0.6%) and copper (+1.7%) are all higher.  In the gold market, much has been made of the fact that technically, gold closed below its 200-day moving average Friday and has stayed there so far.  If this continues, it will be seen as a negative medium-term signal.  (my chart is showing the 40-week as I cannot get a long-term chart of the 200-day, but it is essentially the same thing.)

Source: tradingeconomics.com

Finally, in the currency markets, the dollar has backed off its recent highs this morning with the DXY (-0.3%) back below 100 and its decline a pretty good proxy for most of the G10 currency’s movements.  This is in no way a rout, but a correction after a strong move higher over the past month as you can see in the below chart.

Source: tradingeconomics.com

On the data front, we see the following this week.

TodayTrade Balance-$56.1B
 Existing Home Sales4.07M
WednesdayCPI0.5% (4.2.% Y/Y)
 Ex-food & energy0.3% (2.9% Y/Y)
ThursdayInitial Claims219K
 Continuing Claims1780K
 PPI0.7% (6.4% Y/Y)
 Ex-food & energy0.4$ (5.3% Y/Y)
FridayMichigan Sentiment46.0

Source: tradingeconomics.com

So, all eyes will be on CPI tomorrow as Fed speakers are now in their quiet period ahead of next week’s meeting.  Certainly, there is very little I have seen that is going to moderate inflation in the near term, but perhaps, if we do see an end to the Iran conflict, that will remove a key price support, although I imagine it will take time to feed through.  But inflation is highly dependent on how much money is around, and that is what makes the FOMC next week so critical.  Until then, it feels like a limited price action day today as we all await CPI tomorrow.

Good luck

Adf

Changing the Fate

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With things in the Gulf getting hotter
And risk assets heading to slaughter
The question on lips
Can stocks e’er eclipse
Their highs, or ‘stead sink ‘neath the water
 
But really, the question I’d ask
Is Chairman Warsh up to the task
Of changing the fate
Of the Fed funds rate
And if so, what will he unmask?

It is very difficult to focus on the Gulf situation as not only is it fluid, but there is also no direction of travel whatsoever.  So, this morning I want to have a different conversation.  Let me start by explaining this isn’t my idea, per se, although the analysis is solely mine.  Listening to the Macro Voices podcast Sunday morning while walking the dog, (he’s the one on the left)

Michael Every was on and expressed a very interesting thought, one that I had not considered, nor heard anywhere else.  What if the Fed, as Chairman Warsh seeks to adjust how it works, decides that they are going to put their fingers on the scale with respect to the interest rates paid by different industries, not merely by differently rated credits.  The idea is that in conjunction with the Treasury, Warsh and Bessent would decide which industries needed to have the most cost-effective funding for the nation to be able to maintain and develop the industries necessary for national defense reasons.

Now, I know this is anathema to almost all of us having been raised on the idea(l) of free markets and that markets are better at allocating, well everything, but in this case credit, than any cabal of central bankers.  And in a world where markets were truly free and where everyone competed on a level playing field, I am 100% in agreement with that view.  Alas, I’m not sure if you noticed, but that is not the world in which we live.

If Covid taught us nothing else, it was that 40 years of globalization and creating the most efficient processes for manufacturing resulted in significant fragility in those very processes.  It turns out that while economists in the US, Europe, Japan, the World Bank and IMF all explained that this was a great outcome (the US prints paper notes and gets lots of stuff for it), that only works when there is peace on earth.  During this period, China chose to play by a different set of rules, explaining they were just a poor country so didn’t need to play by the G10’s rules, and massively subsidized numerous industries while essentially ignoring all environmental issues.  That tilted the playing field pretty aggressively, and while President Trump has been adamant about that very issue for a decade, he was largely ridiculed, right up until Europe recently figured out that China was eating their lunch too, and now they are looking to impose tariffs on China’s excessive exports.  There is an excellent Substack that comes out Sunday mornings called The Brawl Street Journal,written by an analyst in Germany.  This week’s, linked here, explains that very issue extremely well.

So, I’ve set the table here, and the key to understand is the table is tilted horribly, with China getting the benefit of the doubt for almost everything.

Now, let’s consider what Mr Every’s idea would mean.  Below is a chart showing current 10-year yields for Treasuries and a series of corporate bonds delineated by their credit ratings.

Data: streetstats.finance

Makes sense, less creditworthy names pay more.  That is how things have always been within a market system as the worse the credit rating, the higher the perceived risk of the investor and therefore the higher yield they demand.

But what if that were to change?  What if the Fed and Treasury decided that companies that manufactured products, be they semiconductors, automobiles, tractors, airplanes or flat panel screens, and mining companies that mined in the US (and Canada) and energy extraction companies that drilled in the US (and Canada) needed a lower cost of capital to be more competitive globally as those companies were the ones necessary for the US to maintain its global hegemon status.  But media companies, and retailers, non-bank financial institutions and home health services companies, for example, were not deemed as critical.  Perhaps the new “credit” curve might look like this instead (all hypothetical)

The point is, China has been subsidizing numerous manufacturing industries for decades with the goal of excess production designed to drive other nations’ competitors out of business and gain a strategic advantage in all those industries.  It is why President Trump’s tariffs were a problem for them, and the rest of the world, as the US had been the dumping ground for much excess Chinese production in the past, and now that stuff is going elsewhere.  

The world we once knew is no longer the world in which we live.  Mr Every’s term, economic statecraft, is much more applicable today than any time in the past 40 years, probably longer, since the end of WWII.  Statecraft implies nations will use all the power they have, economic, military and diplomatic, to achieve their desired goals.  For more than 70 years, the US did not play by those rules under the assumption that if they created a level playing field, and even tilted it in favor of weaker allies, peace would reign.  China doesn’t play by those rules, and that is how we have arrived where we are.  

This is all hypothetical, but remember, Chairman Warsh has talked about restructuring the Fed.  All the economists think he is talking about shrinking the balance sheet.  But what if he is talking about completely changing credit markets with Fed support?  I would argue that is not on many bingo cards.

So, briefly, let’s consider how markets would respond to this action by the ‘new’ Fed.  Here are my conclusions, I would love to hear yours.

  • Stocks – broadly lower, although clearly favored sectors would continue to perform well.  But overall leverage would shrink and that has been a huge part of this rally.
  • Bonds – a steeper Treasury yield curve seems certain as subsidies for those favored industries will weigh on the US budget.  Meanwhile, non-favored industries would find themselves with real difficulties in terms of financing.
  • Commodities – offsetting forces here as industrial metals would see increased demand, and getting supply on line takes years if not a decade, but energy may result in a glut sooner as drilling takes much less time to get going.  Precious metals would soar, I believe, on the basis of investors and central banks, seeking an asset with no counterpart.
  • FX – this is the toughest call as different nations will be impacted in very different manners.  Commodity producing nations (e.g., Chile, Norway, US) should see relative strength.  Consuming nations would likely suffer somewhat, although Japan and Korea, for instance, could essentially fall within the US umbrella as their key industries are the US focus.

Again, this is all hypothetical but is probably worth some thought.  In the meantime, a brief tour of markets overnight after Friday’s sharp declines in the US shows nobody is very happy this morning.  The tradingeconomics.com screenshot below shows futures as of 6:10am.

What sticks out to me is Italian equities are bucking the trend, although there has been no data and I cannot find a specific catalyst there.  Also, it is interesting that US futures are broadly higher this morning despite growing concerns that the situation in the Gulf is going to heat up again.  But Asia had a rough session and most of Europe is feeling a little pain as well.

In the bond market, after climbing on Friday, yields continue higher this morning across the board.  The below Bloomberg screenshot explains things well.  Recognize that Canadian and Mexican markets haven’t opened yet and Australian markets were closed last night for the King’s Birthday.  But net, there is growing concern over inflation on a worldwide basis it appears.  

Turning to the commodity markets, oil (+3.8%) is higher again, after falling on Friday as there were missile attacks by Iran on Israel in response for Israel’s ongoing attacks on Hezbollah in Lebanon. This situation remains fraught and frankly nobody has any idea when it will settle down into something a bit less volatile.  If we look at a chart of the past six months of oil price movement, I have drawn a line at $95/bbl, which to my eye offers a pretty good estimate of the average since things began.  There are still many doomsayers who believe $200/bbl oil is coming soon, but that has been their forecast since March.  Something to remember about commodity markets is that they do not forecast the future, they are the prices at which physical stuff clears, so it appears that so far, there is ample inventory available.

Source: tradingeconomics.com

Not surprisingly, given the recent relationship between gold and oil, the barbarous relic is lower this morning by -0.7% while silver, though unchanged on the day, suffered dramatically on Friday, falling $6/oz or about 8%.

Finally, the dollar is little changed this morning, but that is after a sharp rally on Friday in the wake of the much better than expected NFP data (+172K with revisions higher in the previous two months of +93K) which helped push yields higher as a rate hike this year has now been priced by the futures market as per the below CME table.

But more than just the futures market is thinking that way.  The below chart showing the 2-year Treasury vs. Fed Funds shows that not only have 2-year yields moved above Fed funds, but they are accelerating higher.  This is seen as another harbinger of a higher Fed funds rate.

Source: tradingeconomics.com

So, the DXY is back over 100.00, USDJPY breeched 160.00, and is right on that number as I type at 6:50am, and generally, the dollar is pushing the top of its recent ranges.  The one exception here is KRW (+1.6%) where the central bank and Finance Ministry both were actively jawboning the currency higher after it traded to yet another new low (dollar high).

As there is no data of note this morning, I will go through that tomorrow given how long things got today.  The world is changing rapidly and the most important thing, I think, is to recognize that old relationships may no longer be valid.  Nimbleness is critical, whether investing or hedging.

Good luck

Adf

In Secret, Would Toil

Posted on by 
Since March, traders focused on oil
Where every explosion could roil
The bulls and the bears
In bonds and in shares
While data, in secret, would toil

Today, though, the payroll report
Is taking bows on center court
For those who are long
The buck, they need strong
Results, while a weak one helps short(s)

For a change of pace today, the market truly seems to be looking at the data release rather than the latest zig or zag in Iran.  It has been at least four months, since before the first bombs dropped in March, that this data point has had any real import for the narrative, so it is a welcome return to what we used to consider normal.  With that in mind, let’s look at what the current expectations are:

Nonfarm Payrolls85K
Private Payrolls85K
Manufacturing Payrolls2K
Unemployment Rate4.3%
Average Hourly Earnings0.3% (3.4% Y/Y)
Average Weekly Hours34.3
Participation Rate61.7%

Source: tradingeconomics.com

While 85K is much lower than the pre-Trump 2.0 level deemed necessary to maintain a strong labor market, it is abundantly clear that between the closure of the borders and the deportations, that is no longer the situation.  Estimates I have seen to achieve labor stability have been between 0 and 50K, and that includes comments from former Fed Chair Powell.  While an outturn at the forecast level would be lower than last month, it would still indicate the labor market is in decent condition.  Of course, one of the hardest things is to see through the revision noise as the BLS birth/death model describing new companies is clearly not representative of the current economy.  Below is a look at the past five years of monthly reports which is showing a clear trend lower, but as per the above, that may not be a problem.

Source: tradingeconomics.com

However, the other data we have seen lately, notably the strong ADP number, the solid employment subindices from the ISM data and the fact that claims data, although a touch higher yesterday, remains very contained, tells me that we are going to see a better number than forecast, something around 115K like last month.

Perhaps the real question is why this matters now.  Well, as the war fades into the background, and remarkably that is what is happening, investors are back to looking for clues as to how the economy is performing and how the Fed is likely to behave going forward.  Several times this week I have highlighted the importance of capital flows, and a key part of that story is central bank liquidity being available to flow.  Thus, if the Fed sees this data and leans more toward tightening, that is likely to have a negative impact on those markets that require easy money like stocks, high-yield debt and private markets.  Interestingly, if bond traders sense that the Fed is going to pay closer attention to inflation, that should help the long end of the bond market, and we could see a bull flattener result.  Nothing has changed in the Fed funds futures market, but that is something that could really move on an outlier number here.  We will learn soon enough.

Away from that, though, the most interesting thing I have seen is the below tweet although the commentary was strongly of the opinion that this is fake news.  If it is real, that is a major breakthrough in leading to the end of the war, however, based on the fact that oil prices are essentially unchanged (-0.15%), the market does not appear to believe the story.

Ok, let’s see what else is happening in other markets.  Not surprisingly, gold (-0.25%) is also not doing much but both silver (-1.7%) and copper (-1.6%) are softer despite the fact oil’s little changed.  Metals appear to have lost some of their luster for now, but I do believe that their long-term prospects remain strong.

In the stock markets, yesterday saw the DJIA take the lead for a change, rallying to a new all-time high although the NASDAQ went nowhere as questions about the AI story are beginning to be raised.  Too, semiconductor stocks, which have been extraordinarily strong, are beginning to be questioned given the highly cyclical nature of that business.  Yesterday Harris Kupperman wrote a very interesting piece on semiconductors which I think is worth reading.

In the meantime, Asian markets followed the tech lead from NASDAQ and were virtually all lower, some extremely so.  The worst case was Korea (-5.5%) followed by Indonesia (-4.2%) but the major indices all fell as well (Tokyo -1.3%, HK -1.15%, China -1.8%).  Tech took a beating.  Of course, for Europe, since they basically have no tech, markets are having a much better day with Spain (+1.1%) leading the way followed by France (+0.5%), the UK (+0.4%) and Germany (+0.2%).  Perhaps the fact that Eurozone GDP for Q1 was revised down to -0.2% Q/Q and +0.3% Y/Y has some thinking the ECB may not (stupidly) raise rates due to the oil shock.  But if that’s the case, you cannot tell by the interest rate markets which show the current probabilities as per the ECB itself.

At this hour (7:40) US futures are mixed with the NASDAQ (-0.9%) still suffering while the DJIA (+0.2%) continues to smile.

Apparently, global bond markets are collectively holding their breath ahead of the data point as yields are essentially unchanged in the US, Europe and were unchanged last night in Asia.

Finally, the dollar is slightly softer this morning, although remains above 99 on the DXY and is merely chopping back and forth within the extremely tight range of the past 3 weeks I show, once again, below.

Source: tradingeconomics.com

Most movement today across both the G10 and EMG blocs is +/-0.25% or less, hardly the sign of a trend.  The one exception is INR (+0.8%) after the RBI left rates on hold, as expected, but instituted several measures to try to attract foreign capital such as easing investment rules for foreigners.  We shall see if that has a long-term benefit, but at least the rupee has put a little space between the current level and the bottom (dollar top) seen two weeks ago.

Source: tradingeconomics.com

And that’s really all for today.  So, absent news about real movement toward the end of the Iran conflict, it’s payrolls then a summer Friday where many will be seeking to leave early.  If I am correct and we see a stronger number, I see the dollar benefitting which should hurt the metals, although oil is independent of this news.  Since this would imply more chance of a Fed rate hike, I expect stocks would not be pleased, nor will bonds.  We shall see.

Good luck and good weekend

Adf

There’ll Be Chagrin

Posted on by 
Since April, the story has been
The stock market’s yang with no yin
But yesterday’s fall
Reminds one and all
Be wary or there’ll be chagrin

Since the beginning of April, as you can see in the below chart of the S&P 500, stocks have risen sharply (~18%) as up days outnumbered down days 33 to 12, including yesterday’s drop.  That’s a pretty good definition of a raging bull market.

Source: tradingeconomics.com

Here’s the thing; nothing really changed yesterday.  Certainly, there has been no change in the status with the Iran conflict, and therefore no change in the prospects for oil prices going forward.  If anything, the data we have been getting has been demonstrating that the US economy is performing better than expected with yesterday’s ISM and Factory Orders data stronger than forecast as was the ADP Employment Report.  If you add that to the JOLTs data from Tuesday, it appears that the overall jobs situation in the US is diverging from the narrative that AI is going to take all the jobs and there is nothing left for people to do.  In fact, a look at the Citi Surprise Index, designed to show the difference between actual economic releases and the forecasts ahead of those releases shows it has risen to its highest level since mid-2023 as per the below chart.

This is a strong signal that the economy, despite a lot of negative talk, is doing pretty well.  Of course, by now we have all learned that the stock market and the economy are very different things.  While historically, the relationship between equity markets and the economy was clearer, with equity markets a reasonable estimator of future economic activities, with somewhere between a 6 month and 1 year lag, ever since the GFC and the financialization of the economy, that relationship has lost much of its luster.  Rather, akin to my discussion of the yen being dependent on capital flows, not economic activity, that is also the story of stocks right now.

This brings us to the story that really seems to be percolating around the market, and that is the imminent IPO’s of SpaceX, Anthropic and OpenAI, as well as Google’s $80 billion share sale.  For the last 30ish years, between share repurchases by companies and the growth of Private Equity which gobbled up public companies, the number of publicly listed company equities has been shrinking, with the number falling roughly in half during that period.  According to Grok, at the end of 2025 there were just 3,657 domestic companies listed on US exchanges, not even enough to fill out the Russell 5000!  With that in mind, and remembering the laws of supply and demand, it ought not be a surprise that prices rose while supply fell.

But is that getting set to change?  While headline companies like SpaceX will get all the press, it seems likely that PE firms are going to be looking to IPO many of their holdings given current overall valuations.  Remember, many of these companies were bought during the era of ZIRP, so debt financing made lots of sense, but once the Fed tightened policy, it has been a problem.  Retail investors have been hoovering up equities for a while now, and I suspect we are going to see a lot more equities come available to meet that demand.  In fact, this is the best story I have heard about what can halt the rally.

But this can also highlight the difference between the economy and the stock market.  Consider the ramifications of the mega names issuing stock and using the funding to continue to build out the AI infrastructure including data centers, power production, turbines, semiconductor fabs, etc., that is all going to result in significant economic activity as people get hired to do the work and all the benefits that accrue from investment lead to real growth in GDP.  We could easily see equity markets stall, or stumble while the economy powers ahead.  Something to consider for the medium-term view here.

But in the short-term, let’s turn to markets and see how yesterday’s US declines played out overnight.  Asia had a generally miserable session with every major and most other regional exchanges sliding.  This included Tokyo (-1.4%), HK (-1.5%), China (-0.7%), Korea (1.8%), Taiwan (-1.7%) and Australia (-1.1%).  And the smaller markets were no better as India (0.0%) was the top performer.  In Europe, though, the picture is not so dire as only the UK (-0.9%) is under real pressure with the continent (France +0.6%, Germany +0.35% and Spain +0.25%) all managing small gains.  Perhaps the driver here has been inflation data which showed that it has not risen as fast as feared and therefore there is a bit less concern about more aggressive ECB tightening.  As to US futures, they are mixed this morning with NASDAQ (-1.35%) falling sharply on poor Broadcomm earnings although the DJIA (+0.7%) are rebounding from yesterday’s losses as investors rotate a bit from tech to industrials while oil prices have slipped aiding things.

Speaking of oil (-2.3%), it appears to be responding to comments that the US will not resume an all-out war absent the death of US troops.  At least that’s one rationale, although the idea of the price heading back to its recent average is viable as well.  However, this has helped metals markets (Au +1.25%, Ag +1.8%, Cu +0.5%) as that relationship remains quite solid.

In the bond market, yields are also responding as would be expected with Treasuries (-3bps) leading the way as European sovereign yields all slip between -1bp and -2bps.

Finally, the dollar is giving up some of its recent gains but as you can see in the chart below for the DXY, during the past 3 weeks, the index has traded between 98.85 and 99.55, a very tight range and indicative of the general lack of movement in the dollar.

Source: tradingeconomics.com

However, that is the dollar writ large vs. major currencies.  Against several Asian currencies, the story is not the same.  The below chart shows the Korean won, Indonesian rupiah and Philippine peso, all of which are trading at their lowest levels since the GFC as the pressure from higher oil prices and reduced supplies has really impacted their economies and currencies by extension.

Source: tradingeconomics.com

As to the JPY, it managed to trade through 160.00 yesterday, but only just, and this morning sits just below that level with no sign of the BOJ/MOF.  The Japan story remains the same, but the changes required there will be politically fraught.  However, for the smaller Asian nations, much is out of their hands, and my sense is that while they will all seek to mitigate the pace of decline, there is very little they can do to stop it on their own.  That will require the Iran situation to end and oil prices to head back lower with supplies rebuilding.

On the data front, this morning brings the weekly Initial (exp 213K) and Continuing (1780K) Claims data as well as Nonfarm Productivity (0.5%) and Unit Labor Costs (2.5%.  Too, we hear from several more Fed speakers but given all the other things that are ongoing, their words don’t seem to move markets.  For instance, yesterday Dallas Fed president Logan said she thought inflation pressures indicated rates may need to rise.  But she is a known hawk, one of the hawkish dissents at the last meeting, and thus this is not new news.  Below is the CME’s futures probability page for the December meeting which shows a slightly more than 50% chance of a hike by then.  However, if you look at the table at the bottom, you can see that the probability has been creeping higher in the past month, although that is just as likely on the back of the better data than any Fedspeak.  Certainly, next week’s first Warsh chaired meeting will get a great deal of attention.

And that’s really it for the day.  In the FX market, as well as bonds frankly, I don’t expect anything of note.  Oil looks to be drifting lower while metals drift higher and the real wild card is equities, which have been showing inordinate strength.  My thoughts above reflect my views for potential later in the year, not today.

Good luck

Adf

One Sixty

Posted on by 
The asymptote nears
Will they act at One Sixty?
Can they afford to?

Yesterday saw the yen edge ever closer to the 160 level, the point at which the MOF/BOJ acted in April.  Frankly, looking at the chart, it reminds me of an asymptotic limit from calculus, but the one thing we know is there is no natural limit, only whatever artificial one is imposed (or tried to be imposed) by the Japanese government.

Source: tradingeconomics.com

The market continues to price a high probability, ~86% according to the OIS market, of a 25bp hike by the BOJ next week, and I’m confident they will do that.  But to me, the question is, will it matter to the FX markets?  Here’s the thing about FX, typically there are two separate, but related, drivers of the relative value of one currency vs. another.  The most common discussion is about short-term interest rate differentials, typically proxied by central bank base rates.  Below is a chart of the past ten years of data for Fed funds (grey line), BOJ base rate (blue line) and USDJPY (brown line).

Source: tradingeconomics.com

It is abundantly clear that there is a strong relationship here, as US rates shot higher in the post-Covid inflation bout and USDJPY shot higher as well.  Now, since the Fed started cutting rates back in September 2024, while Japanese rates have edged higher over the same time frame, it would be reasonable to assume that USDJPY should retreat somewhat.  However, as you can see in the first chart, that is just not happening.  In fact, the pressures are the other way, with far more weakness than strength.

Why, one might ask, is this the case?  This takes us to the other major factor in FX rates, relative capital flows.  Nations that see substantial inflows in capital will typically see their currencies appreciate.  Now, ask yourself, which nation sees the biggest inflows of capital in the world?  Yes, the US, as the capital account surplus is the mirror image of the massive current account deficit that we run.  In fact, if you look at the below chart, it shows the relative current accounts of Japan (grey bars) and the US (blue bars) in percentage of GDP which most recently showed -3.6% for the US and +4.7% for Japan.

Source: tradingeconomics.com

Now, let’s do the math.  US GDP is ~$28.8 trillion while Japanese GDP is ~$4.4 trillion.  3.6% of $28.8 trillion = ~$1.037 trillion of capital inflows.  4.7% of $4.4 trillion = $202 billion of capital outflows.  Of course, we know that everybody in the world is piling into US technology stocks, and that is where the capital is mostly flowing, but in order to do so, they are buying USD.  This is true of Japanese investors as well as others around the world.  

There is a narrative that is developing that claims as the Japanese raise interest rates, the massive, short yen positions that exist to fund many speculative trades will unwind, and with that, the yen will strengthen dramatically as well as we will see many other markets sell off sharply as those positions unwind.  But the NASDAQ is up 21% YTD and 40% in the past year.  If you are an investor and you are funding a speculative position at 0.75% annually that rises to 1.00% while you are returning 40% on the other side, do you really care?

To my eye, for the yen to change course, intervention is irrelevant, and so is a 25bp rate hike.  We need to see a wholesale change in the combination of Japanese fiscal and monetary policies as well as changes in those policies in the US.  Historically, a tight monetary and loose fiscal policy combination will strengthen a currency (something that the US currently has), but can Japan afford to tighten monetary policy that much?  My money is on no, and while 25bps seems pretty certain next week, I would not be looking for USDJPY fall very far, if at all.  And remember, the market is pricing a 50% chance of a Fed hike by the end of the year.  Don’t be taken in by this story in my view.

Away from this issue, it is difficult to find other critical news.  Yes, there was another skirmish in Iran straining the concept of a ceasefire, but all-out war has not resumed.  The elections in California and LA will take several weeks to determine who will be on the ballot in November, which, when you think about it, sums up the incompetence of California governance writ large.  

So, oil is higher along with the dollar and yields, but so are stocks, while metals slip.  Let’s look at the overnight activity.  Another set of equity records in the US was followed in Asia by broad based strength as Tokyo (+2.5%), China (+0.5%), Korea (+0.2%) and Taiwan (+2.0%) all continued to climb. Both HK (-1.6%) and India (-0.4%) were not as robust with the former seeing profit taking after a few strong sessions while the latter felt pressure from those rising oil prices.  One outlier here was Indonesia (-4.5%) which suffered after weaker than expected trade data, higher than expected inflation data, and a weakening rupiah which set another record low (dollar high), touching 18,000.

European bourses, meanwhile, are mostly under pressure after President Trump has devised a new way to impose tariffs on nations that allow “forced labor” which is defined as “all work or service which is exacted from any person under the menace of any penalty for its nonperformance and for which the worker does not offer himself voluntarily.”  One must give the president props for his continuous efforts to impose tariffs, if nothing else.  At any rate, Germany (-0.9%) is leading the way lower, followed by Italy (-0.3%), France (-0.2%) and the UK (-0.2%) although Spain (+0.5%) is bucking that trend on the strength of the earnings for Inditex (Zara clothing parent) which is one of the largest companies in the nation.  US futures, at this hour (6:40) are mixed.

In the bond market, yields are rising again on the back of the oil price rise with Treasury yields (+4bps) gaining alongside the entire European sovereign market, all of which have risen a similar amount.  Last night, JGB yields also rose 6bps, as they respond to the oil market as well as pending rate hikes by the BOJ.

In the commodity market, if you think back to late May, you may recall an announcement that a deal with Iran was close which prompted a gap lower in oil prices as you can see in the chart below.  Well, that gap has now been filled.

Source: tradingeconomics.com

Just as nature abhors a vacuum, markets abhor a gap and seek to fill it whenever possible.  My take here, though, is now that the gap is filled, there is less reason to see oil rally much further and a consolidation before a slow decline is in the cards.  As to metals markets, gold (-0.8%), silver (-1.2%) and copper (-1.1%) are all softer on the day, with their negative correlation to oil intact.

Finally, the dollar is firmer this morning, keeping in line with its recent relationship with other markets.  However, the movement remains relatively muted with most G10 currencies softer by -0.2% or so as only SEK (-0.6%) and NOK (+0.1%) really buck that trend.  NOK is clearly benefitting from the oil price rise while SEK seems to be suffering from a slightly higher beta to the broad dollar move.  In the EMG bloc, KRW (-0.9%) is the laggard as it continues under pressure and trading to its lowest levels (highest dollar) since 2009.

Source: tradingeconomics.com

But otherwise, most of these currencies are slipping a similar amount to the G10 bloc, on the order of -0.2% or so.

On the data front, this morning brings ISM Services (exp 53.8) as well as Factory Orders (4.6%, 0.8% ex-Transport) and then the EIA crude oil inventories with another sizable draw anticipated.  At 2:00, the Fed’s Beige Book is released which should make for some interesting reading.  Yesterday’s JOLTs data was surprising in that it showed a significant jump in job openings, 700K more than expected which does not portray a weakening labor market.

Overall, equity markets seem to be disconnected from the impact of oil prices, something that very few analysts would have forecast in February.  But the dollar remains closely linked to those prices for now.  As we all sit here, waiting for the next headline, I cannot help but look at the US data and consider that the economy continues to tick over pretty well.  Ultimately, I believe that bodes well for the dollar over time, or at least until some other major economy shows it can perform well.

Good luck

Adf

No Black Swan

Posted on by 
For all of the angst that Iran
Has ended the talks and moved on
The market for oil
Has come off the boil
As risk takers see no black swan

So, stocks keep on making new highs
And it cannot be a surprise
That bond yields have slipped
While in today’s script
Elections will garner all eyes

Once again, I am having a hard time reconciling the narrative and the price action.  Yesterday saw a sharp rally in oil as the talks between the US and whoever is representing Iran apparently collapsed.  Yet, as you can see from the below chart, while that was worth nearly $5/bbl early in yesterday’s session, those gains dissipated over time and this morning, oil (-1.2%) continues that slide.

Source: tradingeconomics.com

One thing I saw on X this morning claimed Iran was done talking, had received a nuclear bomb from a third party (Pakistan? North Korea?) and was going to detonate it somewhere.  Another was that the talks are still ongoing.  I do find it interesting that so many are willing to take statements from the Iranian news agency, TASNIM, a body that has lied repeatedly for 47 years, and assume their claims are gospel.  Propaganda is always an ongoing project on both sides (in truth from every government everywhere) and thus every claim must be seen for what it is, speaking to a specific audience to achieve a response, not an unbiased description of reality.  Thus, it seems many folks see what they want to see to confirm their prior beliefs.  I come back to the market as the most unbiased arbiter, and it continues to point to an end to the conflict on a relatively short timeline.

Which takes us to the other story today, US primary elections, notably in California where there is a gubernatorial primary and a mayoral one in LA that has garnered the most attention based on the seeming outstanding performance of former reality-TV star (?) Spencer Pratt running against the incumbent Karen Bass.  This race seems like it may be quite important nationally as it would offer the possibility that the deepest blue of cities may finally have had enough incompetence in the mayor’s office and wants to change directions, at least a little bit.  Of course, NY just elected an incompetent mayor, as did Seattle and Chicago before them, so maybe the people in these cities like the situation.  I’m hopeful that is not the case.

But otherwise, it is hard to get too excited about much this morning.  equity markets in the US made yet another set of new highs yesterday across the major indices as no matter the news, it appears there is a bullish spin.  So, let’s turn to markets this morning.  Asian equity markets were mixed overnight with Tokyo (-0.3%) slipping slightly although HK (+2.5%) and China (+1.5%) both rallied nicely on the back of the US tech rally.  Net, there were far more winners in the region (Korea, India, Taiwan, Philippines, Thailand, Singapore, Indonesia), than laggards (Australia, New Zealand, Malaysia) with the laggards barely slipping at all.  So, despite all the angst over Asian nations running out of oil and oil products, equity investors are all in there!

In Europe, it’s happy days as well as per the below Bloomberg screenshot.

This is despite Eurozone inflation rising to 3.2%, its highest level since September 2023, and, as per the below chart, certainly looking like it is beginning to trend higher on the back of 3+ months of higher oil prices feeding through the entire economy.

Source: tradingeconomics.com

Of course, given Eurozone GDP is indistinguishable from zero (see below chart), and has been for 3 years, it is fair to wonder if this is setting up to be a particularly egregious central banking error by Madame Lagarde.  

Source: tradingeconomics.com

Too, while short-term inflation expectations have unsurprisingly risen, a look at the 5-year result shows limited concern by consumers.  As an aside, there is good reason to believe that inflation expectations are irrelevant in future inflation readings, at least according to the academic literature, but it is a driving force in current central banking models, so needs to be considered.

In the end, though, the ECB is going to hike rates next week, on that you can depend, and if when economic activity declines, they will blame Putin or Trump or Elon or anything but their own failed policies.

As to US futures at this hour (7:10), they are modestly lower, maybe -0.2% or so across the board.

In the bond market, Treasury yields have fallen back -3bps this morning after round-tripping 5bps higher yesterday and finishing the day unchanged.  European sovereign yields are having a better day, with declines of -6bps to -7bps across the continent and JGB yields (-11bps) are really falling.  My conclusion is that investor concerns over runaway inflation simply do not exist despite the narrative pushing that story.  The ostensible crises in May apparently never arrived, at least not yet.

In the commodity market, it can be no surprise that metals prices (Au +1.0%, Ag +1.8%, Cu +1.0%) are higher this morning given the overall risk environment.  The negative correlation between metals and oil remains largely intact for now.  The interesting thing to note, though, is that despite the daily gyrations, in reality, neither oil nor the precious metals have gone anywhere in a while.  The same is not true for copper which is at new all-time highs.

Finally, the dollar is modestly softer this morning, on the order of 0.1% against its G10 counterparts with AUD (+0.3%) the best performer.  In the EMG bloc, ZAR (+0.6%) is responding to the combination of lower oil and higher gold prices and MXN (+0.4%) is also having a pretty good session, but that seems more like beta vs. the dollar than anything else.  I would be remiss if I didn’t spotlight JPY (0.0%) which continues to edge closer to the 160.00 level as per the below chart, but was also the subject of much discussion as FinMin Katayama was out explaining that, “As for foreign exchange, we continue to maintain our stance that we stand ready to take appropriate action at any time, as needed.”  However, while the market expects a 25bp rate hike in two weeks, that is already in the price.  In order to stop the yen’s slide, they will need to really change policy, something which I maintain is not in the cards for now.

Source: tradingeconomics.com

On the data front, this morning brings only the JOLTs Job Openings (exp 6.88M), essentially unchanged from last month.  Yesterday’s ISM Manufacturing data was quite solid across the board except for the employment subindex, which remains lackluster as companies expand with more automation.

I think it is fair to say nobody knows what will happen in the Iran conflict nor the timing.  While markets can be completely wrong, and forced to reprice suddenly, that is an extremely rare occurrence.  Too, the one thing on which we can count is if something hugely negative occurs, central banks around the world will step in, add liquidity and cut rates, to ameliorate the slide.  My point is, I will not bet against the market view that this will end sooner rather than later.

Good luck

Adf

Tough Call

Posted on by 
The peace talks have yet to conclude
And yesterday, both sides pursued
A little more fighting
Despite the gaslighting
Which helped push the price up in crude

But it still remains far below
The levels where it needs to go
To foster more drilling
And help in refilling
The buffers from which barrels flow

As we start the week, oil prices have rebounded from last week’s close (as per the below chart) as progress on the peace talks remains slow, at best, and there was another series of military attacks by both sides, with each side claiming defensive maneuvers. 

Source: tradingeconomics.com

Now, I am not a military scholar, but firing missiles at another nation doesn’t sound defensive, rather I would use the word retaliatory.  And there is no way we can know who initiated what during the latest exchange, as both sides claim the other did and there is no neutral arbiter.  But my take is that there is still a way to go before this is over.  Certainly, the IRGC seems committed to the last man, at least for now, and President Trump has indicated he is in no hurry.  Personally, I am still thinking a July 4th resolution timeline.

I did, however, see an increase in the discussion about the imminent collapse of supplies and the estimates that oil prices will finally (?) head up to the $150-$200/bbl level that a number of pundits have forecast.  But looking through these X posts, they are retweeting the comments I posted on Friday from the Exxon SVP Neil Chapman.  Time will tell if they are correct and the changes in the system have not been sufficient, at least not yet, to address the reduction of available oil from the Gulf.  But so far, whatever calculations have been made regarding demand destruction and additional production elsewhere, plus the rerouting of oil away from the Strait has been sufficient to prevent the worst-case scenarios that have been painted since this began back in March.  Plus, the one thing of which I am highly confident is that going forward, the Strait of Hormuz will not be nearly as strategic as it currently seems.  Production elsewhere and pipelines will reduce its importance dramatically.

The BOJ meets
In two weeks’ time.  Do rate hikes
Still matter? Tough call.

Two weeks from tomorrow, the BOJ meets to discuss monetary policy with the backdrop that the yen is essentially back to the levels seen in April just before the most recent bout of intervention.

Source: tradingeconomics.com

The swaps market is pricing in a 78% probability of a 25bp rate hike, which would take the base rate to 1.00%, still amongst the lowest in the world, but its highest level since September 1995 as you can see below in the chart from tradingview.com

Think about that for a moment, interest rates in Japan have been below 1.0% for more than 30 years.  That is an extraordinary situation.  Consider the bubble that was blown in the US by having rates that low for ‘only’ a decade following the GFC, or for an even shorter time post-Covid.  I guess we need to ask why Japanese equities never inflated the same way.  Perhaps that is the best evidence of the financialization of the US economy vs. that of Japan.  Liquidity in Japan didn’t lead to FOMO of the latest investment thesis.

Nonetheless, my take is there is a modest fear about the yen weakening much further and so the BOJ will hike rates.  Alas, since the market is already priced for that outcome, it is not clear it will do much to moderate the yen’s weakness, at least if they only go 25bps.  Now, if they hike 50bps and explain more hikes are on the way, that will matter.  The problem with that theory is that the latest CPI reading in Japan was 1.4%, well below their 2.0% target, and it has been that way since January as per the below chart.  It seems it could be tricky for Ueda-san to explain a very aggressive rate hike with the current inflation reading.

Source: tradingeconomics.com

Ok, I think those are the stories of note so let’s review market activity overnight.  let’s finish with commodities where oil’s gains (+3.6%) are not having the typical response in the metals markets with gold ‘only’ lower by -0.8% and silver (+0.6%) and copper (+2.5%) higher.  I don’t believe we are at the point where these markets are truly independent, but perhaps some of this negative correlation has been overdone.

In the FX markets, the dollar is modestly higher vs. most of its G10 counterparts with NZD (-0.6%) the laggard, but the rest of the group mostly softer by between -0.1% and -0.2%.  In other words, not too significant, and this includes the yen (-0.1%).  I believe all the yen talk is based on the idea that the BOJ meeting is close enough that it is a topic of conversation in a dull market.  Now, if the yen were to weaken dramatically ahead of the meeting, that would certainly change some views.  As to the EMG bloc, it is a bit more mixed although movement, overall, remains muted.  BRL (+0.4%) is the biggest winner with no particular newsworthy events to note, but when looking at the chart, it really hasn’t done too much since the middle of last month when the news about Lula’s competition broke with Bolsonaro fils suddenly less likely to compete for president.

Source: tradingeconomics.com

But otherwise, it is a mix of gainers and laggards on the order of 0.1% to 0.3% in either direction.

In the bond market, yields have ticked higher everywhere following oil’s rebound with Treasury yields higher by 2bps and most of Europe higher by 4bps.  US yields continue to drive the global situation, certainly directionally, if not in magnitude.  

Finally, equity markets appear quite sanguine regarding the oil price rise as Asian markets saw a mix of gainers (Tokyo +0.9%, HK +0.9%, Korea +3.7%! Taiwan +1.4%, Singapore +1.0%) and laggards (China -1.0%, India -0.7%) although clearly far more positive than negative.  Meanwhile, in Europe, the picture is mixed but with much less movement as Germany (+0.4%) and France (+0.1%) edge higher while Spain (-0.2%) and the UK (-0.2%) both slipped.  The news here was the PMI data which largely declined from last month, but not quite as far as forecast.  At this hour (7:30) US futures are all pointing higher between 0.2% and 0.6%.

On the data front, as it is the beginning of a new month, we get plenty including the NFP report on Friday.

TodayISM Manufacturing53.0
 ISM Prices Paid85.5
TuesdayJOLTs Job Openings6.82M
WednesdayADP Employment110K
 ISM Services53.7
 Factory Orders4.6%
 -ex Transport0.8%
ThursdayInitial Claims213K
 Continuing Claims1790K
 Nonfarm Productivity0.8%
 Unit Labor Costs2.3%
FridayNonfarm Payrolls85K
 Private Payrolls78K
 Manufacturing Payrolls0K
 Unemployment Rate4.3%
 Average Hourly Earnings0.3% (3.4% Y/Y)
 Average Weekly Hours34.3
 Participation Rate61.7%
 Consumer Credit$16.0B

Source: tradingeconomics.com

The labor market is certainly confusing compared to what many of us have known throughout our careers.  It is obvious the change in immigration stance by this administration has had a major impact, but so, too, has AI and company responses to that.  I continue to read bifurcated takes on AI either destroying everybody’s jobs or creating many new ones with both sides absolutely certain of the outcome.  One thing I will note is that while the BLS NFP numbers have been subject to major revisions given the inadequacies of the birth/death model for small businesses, I wonder about the ADP data, which I understand is a count of all the paychecks they distribute.  But that data also gets revised, so there is no perfect solution.  What I do think is clear is that less new jobs are necessary to maintain the Unemployment Rate at levels which, in the past, would have been deemed a huge success for the Fed and government.

As to today, headline bingo remains the biggest risk, but there is an awful lot of belief that the equity train rolls on and with it, so too with the dollar’s broad strength in my view as funds flow into the US to hop on board.

Good luck

Adf

Close to a Deal

Posted on by 
Said Bessent, we’re close to a deal
Though not yet the President’s seal
Both sides have agreed
That two months they’ll need
To see if this outcome is real

It can, though, not be too surprising
That stock markets have resumed rising
While oil has slipped
And bond yields, down, dipped
All told, risk is quite appetizing

The major story, although it has been questioned by many, is that there is positive movement toward a deal to end the conflict in Iran.  While I’m sure you will have seen the terms, a quick recap shows that there is to be a 60-day ceasefire to work out the final details.  One of the things I saw this morning was that Iran would send its nuclear material to China, rather than the US, as a compromise, and frankly, that seems like a fine solution.  After all, China enriches the stuff all the time, has many nukes and has never used one.  While we may have disagreements with China on a geopolitical basis, Xi Jinping is not a religious fanatic.  While Treasury Secretary Bessent made the announcement yesterday, he cautioned that President Trump has not yet agreed the details, but it is certainly a hopeful situation.  

Of course, you know who saw it as a hopeful situation?  Risk takers.  The Bloomberg screenshot below is indicative of how things are going, with gains everywhere except China, where it appears that concerns over China-EU trade tensions are weighing on companies there.  With the US having dramatically reduced its market for Chinese exports, Europe had effectively become the major dumping ground, and now that Europe is starting to push back, the question is what will become of all the stuff they continue to produce.  Beggar thy neighbor policies are tougher to inflict on nations that also utilize those same policies.  Just sayin’.

Of course, you won’t be surprised that oil prices have fallen further this morning on the news, down another -1.6% and firmly below $90/bbl, actually below $88/bbl as I type as per the chart below.

Source: tradingeconomics.com

Now, clearly, prices are still substantially above levels seen prior to the Iran conflict, but as of now, the most apocalyptic predictions have simply not materialized.  I saw two interesting comments on this subject this morning with very opposite takes.  First, Javier Blas, the Bloomberg energy analyst/reporter, posted the following chart for jet fuel in Europe.  You may recall that early on, there were many forecasting Europe would run out of fuel and planes would stop flying.

The price action does not indicate a market concerned by imminent shortages of the stuff.  In fact, my understanding is that refineries are cracking so much oil to make jet fuel, that there is actually “excess” gasoline being produced, which would help explain my point yesterday about falling gasoline prices as you can see in the below chart.  Since May 18, wholesale prices have slipped 19%.

Source: tradingeconomics.com

However, there is another side to the argument, the apocalyptic side, which was recently made by Neil Chapman, an Exxon SVP at a conference as per the below X post.

Here’s the thing about comments like this.  First, I have no doubt that Mr Chapman is highly competent and explaining what he sees happening.  I would never suggest he has any motive other than conveying information he believes is important.  But I also have learned, over many years of experience, that arguing with the market is a very painful thing to do.  As Mr Keynes reputedly said almost 100 years ago, “markets can remain irrational a lot longer than you and I can remain solvent.”

So, what to think?  No matter the pedigree of the individual calling for a significantly different outcome than is current, it is very difficult for me to side with the apocalypse if the market disagrees.  And clearly the market disagrees with this thesis.  My understanding is refineries are running flat out right now, which means they have plenty of oil to process.  If, and it’s a big if, the Iran conflict is truly coming to an end, $70/bbl oil and $3.50/gallon gasoline will be with us by Labor Day.  At least that’s my view, and I’m pretty positive on it.

Looking elsewhere, it can be no surprise that bond yields around the world are slipping with Treasuries sliding -4bps yesterday, although they are unchanged this morning.  European sovereign yields were also softer yesterday but are now struggling between the positive idea of the end of the Iran conflict and the negative reality that inflation in Europe continues to rise as reported this morning (Italy 3.3%, Germany 2.6%, Spain 3.6%, France 2.8%), which has the ECB set to hike rates at their meeting as per their own market watch tool.

The problem with this is that economic activity across the continent continues to slow (GDP in Italy 0.8% Y/Y, France 0.9% Y/Y), and hiking rates on the back of a supply shock, especially one that has a fair chance of ending soon, would seem to be a catastrophic error in the making.  Of course, Madame Lagarde is no stranger to catastrophic errors, so, we should assume they will, indeed, hike rates in two weeks’ time.  Even the Fed, no stranger to catastrophic errors, is not prepared to hike rates, although cuts appear to be off the table for now.

Elsewhere, precious metals (Au +0.8%, Ag +0.1%) appear to have put in a short-term bottom while copper (-0.5%) is consolidating after its continued remarkable run.  

And finally, the dollar is stronger this morning, not aggressively so, and not universally, but on net I would say.  NZD (+0.5%) is bucking that trend as further hawkish comments from the RBNZ Governor have traders looking for a rate hike there while INR (+0.9%) has been the biggest beneficiary from the decline in oil prices as India has been one of the most severely impacted nations from the conflict.  Lastly, a note about the yen, where the MOF disclosed that they spent ¥11.73 trillion (~$73.6 billion) intervening in the FX markets last month, a larger amount than had been assumed by the market.  Here’s the problem, as evidenced by the chart below, it didn’t do much good, from the peak print of 160.72 on April 30th(the wick of the huge red candle), the yen is not even 1% stronger as of this morning.  As well, looking at the chart, you can see their subsequent minor interventions as the spikes down.  As I have repeatedly said, if they don’t change policy, the currency will continue to weaken.

Source: tradingeconomics.com

Otherwise, FX is dull and boring today.

Turning to the data, this morning brings the Goods Trade Balance (exp -$86.5B) and then Chicago PMI (50.5).  We also hear from 3 more Fed speakers, but it is hard to believe there is any change in viewpoint there.  Yesterday’s data was, on the whole, better than expected, I would say.  While GDP was a touch soft, Durable Goods was quite robust at 7.9% headline, 1.1% ex Transports.  PCE was as expected to a tick softer, although remains well above 3%, let alone the Fed’s alleged 2% target.  The biggest concern was Personal Income was flat, although Spending (+0.5%) continues apace.  Much has been made by analysts about how the savings rate is collapsing and this presages an economic collapse.  But these are the same folks who keep telling us that oil prices are going to explode as inventories collapse.  Maybe they are right, but as of now, there is no evidence that is the case, at least based on the data.

What to make of it all?  The idea that the Iran conflict is on course to end is clearly the top issue for the market and the economy.  I expect that if this is the case, things will get back to “normal” far more quickly than the pessimists insist as the one thing we have learned is that the ability to resume economic activity is quite robust.  If risk is warmly embraced, then one would assume that yields will decline and the dollar with them, at least for now.  But that also implies that funds will continue to flow into the US markets, which will prevent any significant decline.  And I cannot help but look at Europe with the prospect of hiking rates into an economic slowdown and wonder, again, why anybody wants to hold the euro.

Good luck and good weekend

Adf

Inciting

Posted on by 
It’s true that I may seem passe
But when I heard words people say
I truly expected
The words I detected
To mean what they did yesterday

So, words like cease-fire depict
A time when two sides don’t inflict
The other with fighting
Or, likewise, inciting
An outcome the words contradict

I have always been a plain meaning of the words sort of fellow, using words in their most common form unless there is some extraordinary opportunity for a pun.  And I don’t get many of those.  But these days, government spokespeople sound more like Humpty Dumpty than Walter Cronkite, that’s for sure.

“When I use a word,’ Humpty Dumpty said in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.’
’The question is,’ said Alice, ‘whether you can make words mean so many different things.’
’The question is,’ said Humpty Dumpty, ‘which is to be master — that’s all.”

Lewis Carroll, Through the Looking Glass

Frankly, Humpty Dumpty had nothing on either the Iranians or the US in this regard.  After all, ostensibly there is a cease-fire underway, and yet two days in a row we have had Iran attack ships in the Strait of Hormuz and the US respond.  I’m sorry, that doesn’t sound much like a cease-fire to me, but then, I’m just a poet.

While Tuesday’s activities had virtually no impact on the oil markets, with crude slipping further, and equities continuing their ride higher, last night, there was a modest bounce although so far, WTI is still trading around $90/bbl, hardly a signal that the end is nigh.  But net, risk aversion is more evident this morning.  I guess one day’s worth of skirmishes were believed to be limited, but now, two days in a row, people have concerns.

And that’s where things stand this morning, uncertainty over whether the cease-fire is going to remain in place and uncertainty as to whether talks are going to continue.  My take is that, like every conflict, whether military or commercial or even governmental, the question is which side is feeling the pain more deeply such that they must alter their strategies.  There was an interesting article in the WSJ describing that exact tradeoff as the blockade is successfully hurting the Iranian economy more than the closure of Hormuz is hurting the US economy.  But given the lack of coherent leadership in Iran, with both IRGC hardliners and elected officials tending to be more pragmatic, it remains unclear who blinks first.

So, let’s see how markets are responding this morning.  Yesterday’s lackluster US equity session, where miniscule gains were seen was followed by a somewhat negative picture in Asia as the second attacks made headlines.  Tokyo (-0.5%) and HK (-1.3%) were under pressure as were Korea (-0.5%), Taiwan (-1.4%) and Australia (-1.4%).  In fact, almost every market in the region was lower except China (+0.1%) which managed a tiny gain.  European bourses are all lower this morning as well, with the UK (-0.8%) leading the way down while Spain (-0.4%), France (-0.3%) and Germany (-0.2%) slip less dramatically.  The little data we saw showed weak Spanish Retail Sales and negative Eurozone Confidence indicators (Consumer (gray bars) -19, Industrial (blue bars) -8).

Source: tradingeconomics.com

But let’s face it, looking at this chart, things have been pretty dire in Europe for a while now.  One wonders how long they can continue their current path of energy insanity and over regulation, although the current crop of leaders is clearly committed!  As to US futures, at this hour (6:30) they, too, are pointing lower led by the NASDAQ (-0.8%) with the other indices just barely down in the session.

In the bond market, the fears of runaway inflation and yields from earlier this month have clearly abated and the 10-year is back around 4.50%.  I am sure Secretary Bessent would like to see it somewhat lower, but this is hardly an apocalyptic level.  One of the things that appears to be underlying the recent rise in yields has been foreign central bank sales since the beginning of the war.  Not surprisingly, as the dollar rallied on its haven status, as well as the need for dollars to pay higher prices for oil, nations around the world needed to dip into their reserves to support their own currencies (recall, we have seen intervention from Japan, India and Indonesia for certain) and they sell Treasuries as part of that process.  Bloomberg had a nice explanation this morning.  But that takes me back to the idea that US yields are not running away, and if the Iran conflict ends soon, we will see yields head lower again.  As to today’s price action, most markets have seen yields edge higher by 1bp or 2bps, not really demonstrating much.

In the commodity space, oil (+2.5%) has rebounded from the lows yesterday, but as you can see in the chart below, remains right in the middle of its wartime trading range.

Source: tradingeconomics.com

However, something that hits much closer to home, I would suggest, is gasoline, and you can see how that has behaved over the past month.  While it has tracked oil higher today, we have seen a dramatic decline in the price there in the past week as you can see below.  I imagine that will begin to filter through to your local gas station pretty soon.

Source: tradingeconomics.com

Turning to the precious metals, they have been absolute dogs of late with both gold (-1.5%) and silver (-1.5%) finding no traction whatsoever.  One of the theories has been higher yields are weighing on them, and there is certainly truth there, but I must admit, there seems to be a glitch in the long-term story, a story I have long believed, regarding their ultimate value.  Now, remember, markets have a habit of finding the most painful outcome for the most participants, and long gold and silver has been a favorite trade for a while, so perhaps we are simply watching the weakest hands get forced out.  But whatever the case, it is certainly uncomfortable if you are long.

Finally, the dollar is modestly firmer again this morning, but looking at the DXY (+0.2%), it remains well within its trading range of 96.50 – 100.00, this morning trading at 99.38.  It is very difficult to get too excited about very much here as all the major currencies in both the G10 and EMG blocs are trading in lockstep this morning with one exception, BRL (+0.3%) which has managed a modest gain although it is hard to find a direct rationale for that movement.  After all, interest rates haven’t moved enough to change the carry characteristics.  My best bet is that this is simply a reflexive move after several days of weakness.

On the data front, it is a busy morning with Personal Income (exp 0.4%), Personal Spending (0.5%), Q2 GDP (2.0%), PCE (0.5%, 3.8% Y/Y), Core PCE (0.3%, 3.3% Y/Y), Initial Claims (211K), Continuing Claims (1780K) all at 8:30 and then New Home Sales (670K) at 10:00.  We also get the EIA oil inventory data today, with more draws expected.  Adding to that we get NY Fed president Williams speaking this morning.  Yesterday, Governor Cook explained that she was very focused on inflation and thought rate hikes may be needed if things don’t change.  However, that has been the basic understanding since the last FOMC meeting.  I don’t believe they will be hiking rates anytime soon, personally, although cuts are unlikely as well.

And that’s what we have today.  The war and oil remain the key drivers, but there will be keen interest in today’s PCE data to see if there need to be further worries about the Fed moving.  It is difficult to look at the current situation and think the dollar is going to decline soon, and frankly, my take is we are not going to see much movement at all with price consolidation the theme for the next several weeks.

Good luck

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The Great Denouement

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While talks in Qatar carry on
No outcome, as yet, is foregone
Thus, traders are waiting
Before speculating
As all seek the great denouement

Range trading remains the norm, except for the S&P 500 which continues to make new highs almost every day.  At least that is true in US markets.  The KOSPI in Korea is also rocketing higher.  In fact, when comparing the percentage movement over the past 5 years, the S&P looks quite ordinary, but that is because the KOSPI has been insane!

Source: Bloomberg.com

But away from a few select equity markets, it is getting increasingly difficult to find markets that are doing much more than chopping back and forth.  This is especially true if we take a step back and look at movement over the past several years.  

For instance, if we look at the 10-year Treasury, where we saw all sorts of angst last week when it traded to its highest level, near 4.70%, in a year, realistically, we have been rangebound for more than two years as per the chart below.  And prior to that we were in the massive abnormality of ZIRP.  So, if we go back over a longer time frame, the current 10-year yield is right around the long-term average as per the second chart.  It is really hard to get excited about this movement.

Source: tradingeconomics.com

Source: finance.yahoo.com

Perhaps we ought not be surprised that bond market volatility is heading lower again as per the below chart of the MOVE Index from Hedgeye

The same story exists in currencies, where major currencies have been in a range for more than a year as per the below chart of the DXY from tradingeconomics.com.

Now, there are currencies that have seen substantial movement over the past year, in both directions.  For instance, both KRW and INR have been weakening consistently for the past five years, and this is despite a massive equity rally in both nations, although, in fairness, India’s market has not kept up over the past few months.

Source: tradingecoomics.com

At the same time, BRL has been broadly rallying vs. the dollar for almost 18 months, as per the below chart, as it remains a favorite in the hedge fund community for its high interest rates.  And the fact that they continue to find more oil offshore is only helping things.

Source: tradingeconomics.com

But these currencies are secondary in the FX market, which has generally been dull.

Meanwhile, the oil story appears to be one of increasing belief that a deal is going to be done soon.  This morning, WTI (-3.7%) is falling again and back to $90/bbl.  Obviously, this is higher than where things were before this all started, but if there really was a shortage of the stuff, I expect prices would be much higher.  From what I have read this morning, the two sides continue to talk with Iran looking for a release of frozen financial assets while the US still wants the nuclear material.  

To me, the interesting thing is the tone of the comments from both sides.  President Trump continues to highlight the positive view of a deal coming, although assuring us he won’t make a bad deal.  Iran, though, continues with its apocalyptic rhetoric, threatening extremely painful revenge for every US action, although not really doing much at this point.  It appears to me that both sides are speaking to the domestic audience, not each other.  Trump needs to show progress and a victory, however defined, is near.  Iran needs to show they are strong and will not be beaten by their sworn enemies.  But at this point, I think both sides really need this to end.  The fact that Iran is now talking about money is the tell.  They know they are just about broke, and if there is no money to pay their armies, will their armies fight for the leadership?  I maintain my July 4th deal timeline. 

And that’s really today’s market story; oil’s slide is supporting other markets as we all await the end game.  Elsewhere in the news, there is far more excitement over the NY Knicks winning the NBA’s Eastern Conference than there is over the political stories of primary elections which are ongoing around the country.  While the mid-term elections are coming up in less than six months, the fields are not yet set, so it is difficult to handicap.  

On the data front, there is little of note today in the US although we do hear from several more Fed speakers.  But I maintain that their comments, today it is Governors Cook and Jefferson, are largely irrelevant and that can best be seen by the fact that the WSJ barely mentions any of their speeches anymore.  They are no longer newsworthy.  These two, though, will be an interesting case as both are avowed doves, but also hate President Trump, so will they vote with their belief set (rates should always go lower) or with their politics (Trump wants lower rates so they cannot vote that way)?  I guess we’ll find out in a few weeks at the next FOMC meeting.

One aside on central banking was last night the RBNZ met, left rates on hold at 2.25%, but were more hawkish than anticipated in their comments indicating rate hikes were coming.  This did help NZD to rally nearly 1%, an outlier in today’s market.

And that’s really it, I think.  Until the next headline on Iran, I cannot see a reason to trade in anything.

Good luck

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