Beware

Posted on by 
While news from Iran shows the war
Continues apace, like before
On Wall Street it seems
It’s over, with dreams
Of stock market rallies galore

Now, I realize stocks look ahead
And discount the future instead
But wars tend to last
They don’t end so fast
Beware in which markets you tread

As March and Q1 ended, it appears that there have been some changes in opinions in the investment community.  At least that is what I glean from the following Bloomberg screenshot of major global equity markets including yesterday’s US session and the overnight activity.

As far as I can tell, missiles are still flying in the Middle East, the US and Israel continue to attack specific targets with B-52’s dropping significant amounts of precision guided bombs, the Strait of Hormuz continues to have extremely restricted movement and the UAE, according to the WSJ, is now ready to join the war directly.  None of that seems like de-escalation of fighting, but then I am not a military strategist, so perhaps I don’t understand the concept of de-escalation well.

One take I saw this morning was that equity markets are pricing in the increased likelihood that the US will be leaving the conflict.  On the surface, I liked that idea, and that would certainly explain some of the US rally yesterday, but that doesn’t explain why Asia soared and Europe has rallied as well, given they would have to deal with the rest of the process.  This evening at 9:00 President Trump will be addressing the nation, so I presume we will have a better understanding of things after that.  

One other thing to remember is that the president uses his Truth Social posts to add to the fog of war and create strategic uncertainty for all parties involved.  I read this morning that the administration has been speaking (not directly) with some Iranians and creating a plan for the future, but it is not clear if those people have sufficient power to unite the country there yet.  All in all, while anything is possible, it strikes this poet that things in Iran have not ended, nor will they until the Strait of Hormuz is back to full operational capacity regardless of the President expressing the view that the US (and Israel) have done the hard part and Europe and Asia can deal with the Strait themselves.

But that is where we stand this morning, with risk back in vogue across the board as oil (-1.5% and back below $100/bbl) slipping while gold (+1.5%) continues its rebound.  Bonds (-3bps this morning and down by 20bps from their peak on Friday) continue to rally and have taken European sovereigns along for the ride with most of Europe seeing yields slide between -7bps and -9bps although German bunds, which have held up the best, are only lower by -4bps.  Happy Days are here again!

With all that good news, let’s consider what else is going on, away from Iran, that may impact markets.  At this point, we know the Fed is on hold this month, and likely through the autumn, at least, given the short-term inflation impacts of the oil situation.  

Source: cmegroup.com

As an aside, there have been a number of analysts who are calling for a significant rise in food inflation but be careful on that front.  As @inflation_guy, Mike Ashton points out, [emphasis added]

“…secondary knock-on effects that will be felt eventually in CPI. One that has gotten a lot of press recently is that less oil means less fertilizer and less fertilizer means less crop production and less crop production means higher prices for food. I actually think that’s probably overblown in terms of what the consumer will see, because most of the cost of consumer food items is in the packaging and delivery and not the raw goods, and so as raw food commodity prices go up it will likely be partially offset by transportation prices declining.” 

In fact, I expect that most central banks are terrified of the current situation as they understand, intellectually, that the oil price shock will be temporary, but will feel significant pressure when inflation starts to rise to “do something about it”.  Australia already hiked rates, but that was assumed prior to the onset of the war.  The calculation they are all trying to make is will the negative impacts on growth outweigh the rising pressure on inflation and what will the timeline be like.  In the end, my take is very few will hike in response to this event, especially if the military activity ends before the end of April.  And that is why they get paid the big bucks, to get those decisions right.  Alas, their collective track record is not great.

And beyond that, I don’t see much news directly driving the narrative.  It is still the war, and all the individual takes there, and a much lesser role to the Fed and other central banks.  Economic data is decidedly not part of the current discussion in any meaningful way and given the impact the war is going to have on data for a while going forward, it will be very difficult to suss out underlying trends from headline numbers.  

I’ve already discussed most market segments, leaving just currencies untouched at this point.  Given the reversal in views, we cannot be surprised that the dollar, which has been a major beneficiary of the war, has reversed its recent price action as well.  In fact, using the euro as our proxy, we can see in the below chart that the reversal started at 7:00am yesterday morning and the single currency has rebounded by 1.25% since then.

Source: tradingeconomics.com

And while the euro (+0.5% today) has rallied this morning, it mostly lags other currencies with the pound (+0.7%), AUD (+0.8%), CHF (+1.0%) and SEK (+1.0%) all having very strong sessions.  As well, the yen (+0.2%) has backed away from the 160 level and even CAD (+0.2%) and NOK (+0.5%) are stronger despite the decline in oil prices.  It should be no surprise that the EMG bloc is also showing strength with CLP (+1.1%) leading the way followed by HUF (+1.0%) and ZAR (+0.9%). One disappointment is KRW (+0.2%) which has been one of the worst performers for the past month (-4.0%) and is barely rebounding.  Chile is intricately bound to the price of copper, which has rallied slightly (+1.0%) in the past week, but continues to lag the precious metals.  However, there is a story about the major copper company there, Codelco, which is supporting the currency this morning.  Net, the dollar is giving back some of its recent gains today and will likely continue to do so if risk appetite remains robust.

While data hasn’t had much impact, this morning we see ADP Employment (exp 40K) as well as Retail Sales (+0.5%, +0.3% ex autos) and then ISM Manufacturing (52.5) and Prices Paid (73.0).  Yesterday’s data was in line with expectations and did nothing to alter any perceptions about the economy or path of interest rates.

And that’s all we have.  US futures are rising this morning (+1.0% across the board at 8:00) and for now, risk is the way.  I guess we will have to hear what the President says this evening to consider changing views.

Good luck

Adf

Simply No Need

Posted on by 
Said Powell, there’s simply no need
To hike rates, we all have agreed
But likewise, no case
To cut, lest we face
An outcome where, jobs, we impede

Said Trump ‘bout the Strait of Hormuz
Be careful and do not confuse
Our aims in this war
As more than before
Which has been, Iran, to defuse

Just like every other day, this morning shows we really have no idea what to believe regarding the war anymore.  The headline in the WSJ is that President Trump may consider the job finished even if the Strait of Hormuz remains closed.  That has certainly gotten the Europeans up in arms as they are the ones relying on its reopening to source much of their oil and LNG.  But consider it from the US perspective, where we source only about 2.5% of our oil related products from nations on the wrong side of the Strait, which means virtually none of our overall import roster (source Grok). 

Now, the one thing I will say about President Trump is that strategic ambiguity is one of his strengths, as he continues to make so many seemingly contradictory statements, nobody knows what he is working to achieve.  Based on the framework that Secretary Rubio laid out again yesterday:

  1. Destruction of Iran’s Navy
  2. Destruction of Iran’s Air Force
  3. Severe diminishment of their missile launching capability
  4. Destruction of their armaments factories

It is not hard to believe the US and Israel are close to their goals.  However, none of this discusses Iran’s nuclear weapons program, which has clearly been a goal, nor the 440Kg of 60% enriched U308 that they retain.  

Again, I wouldn’t dare claim to have any idea when this will end, but the political calculus indicates it is unlikely to go on for very much longer.  However, it is not just the political calculus that implies that, but also market pricing of certain things.  For instance, one of the things that initially surprised me was that Brent crude (+0.6% today) did not initially rise more rapidly than WTI (+2.0% today).  After all, zero WTI transits the Strait and it is not a pricing benchmark for anything that happens over there, while Brent is the basis for all Middle Eastern oil.  As the Strait of Hormuz has been effectively closed since March 4th, a look at the below chart shows that Brent did not separate itself from WTI until 2 weeks later.  But last night, that spread collapsed back to its current $3/bbl, similar to the levels that preceded the onset of the war.

Source: tradingeconomics.com

One interpretation of that price action is that there is a growing belief that the Strait will reopen for transit soon.  Of course, it could simply be that neither Brent nor WTI are representative of the oil grades that are impacted, and thus the large premium no longer makes sense, but given the totality of the news, I’m inclined to lean toward the former idea.  Of course, both benchmarks are currently solidly above $100/bbl so still causing great pain.

However, on this topic, as most of us live and think in a nominal world, we consider $100/bbl as extremely expensive.  But if we take a moment to consider the real (inflation adjusted) price of oil, we can see in the chart below that energy remains pretty cheap, and well below levels seen ahead of the GFC or even in the wake of the Russian invasion of Ukraine.

Source: data FRED, calculations and chart, @fx_poet

My point is that over time, energy has become less of a cost in the economy, and even with the current situation, my take is the US, and frankly global, economy is quite resilient and will get through this.  I’m not suggesting there won’t be some pain, just that this is not going to lead to economic Armageddon.

The other interesting story from yesterday came from Chairman Powell, who in a speech at Harvard explained there was a great deal of uncertainty currently, while admitting that the tariffs were likely a one-off modest inflation pressure.  He indicated rate cuts were likely over, although hikes were possible, and then the man who printed $5 trillion to pay for every one of President Biden’s Covid and ESG bills, explained that debt is growing too fast and could be a problem going forward.   And you wonder why there are those who are skeptical of his concerns over politicization of the Fed.

Ok, let’s turn to markets.  Yesterday’s morning positivity faded all day and both the NASDAQ and S&P 500 closed lower on the session.  That mostly followed in Asia with Tokyo (-1.6%), China (-0.9%), Korea (-4.3%) and Taiwan (-2.5%) all under real pressure, although HK (+0.2%) and Australia (+0.25%) managed some gains.  Other regional exchanges were mixed as investors around the world are trying to figure out the next steps.  At this hour (7:00), US futures are pointing solidly higher, +0.8% or so.  Turnaround Tuesday?  Certainly, that is the case in Europe where despite widely expected higher Flash inflation data for March, green is today’s color with gains ranging from 0.2% (CAC) to 0.5% (FTSE 100) with others somewhere in between.

Bond investors have seemingly turned their views from inflation concerns to growth concerns, at least based on the fact that yields around the world are lower this morning than yesterday.  In fact, since Friday morning, 10-year Treasury yields have fallen -14bps, including -2bps this morning.  in Europe, yields did slide somewhat yesterday, about half that in the US, and this morning they are little changed throughout the continent.  But we did see JGB yields slip -2bps overnight as well.

On the growth side, the Atlanta Fed’s GDPNow is running at 2.0% for Q1, well below its first readings from before the Iran activity, although still in decent shape.  The next update comes tomorrow, so will be interesting to see.  And, of course, the payroll report on Friday will be critical for that reading.  It is, though, still well above the Blue Chip Consensus readings.

We’ve discussed oil, but a quick peek at precious metals shows they are regaining their luster, with gold (+0.8%) and silver (+3.6%) both nicely higher this morning.  As this price action continues, with the current price more than 10% above the spike low from March 23rd, I believe whatever was driving things during the first part of the war, may now have passed.

Finally, the dollar is little changed this morning, but sitting on its recent highs with the DXY at 100.53 as I type.  Here’s the thing about the current level.  As you can see from the long-term chart below, while during the first 4 months of 2025, the dollar did decline sharply, about 10%, the longer history shows that the current level has acted as support for a very long time.  As well, if you take the really long view, we are within spitting distance of the DXY’s average since the 1970’s.

Source: tradingeconomics.com

All I’m saying is the dollar is neither strong nor weak right now, it just is.  It is, though, worth looking at the yen (0.0%) which pushed back to just below 160 during yesterday’s session and got more jawboning from Mimura-san, the Vice Finance Minister for International Affairs (aka Mr Yen) who explained they are ready to take “decisive action” against speculative moves.  But otherwise, this morning’s session is unremarkable with only KRW (-0.6%) continuing to suffer from the energy issues there.

On the data front, we get Case Shiller Home Prices (exp +1.3%) and then Chicago PMI (55.0) and perhaps most importantly, the JOLTs Job Openings (6.92M) report at 10:00.  There are two more Fed speakers, Goolsbee and Barr, but with Powell just having confirmed no moves are coming soon, what can they possibly add to the story?

The war and its headlines remain the key drivers and I don’t see anything changing that dynamic for now.  I wonder if markets are prepared for an announcement that it is ending and Iran has come to terms.  I’m not suggesting that is the likely outcome, just that it would be the biggest surprise, I believe.  In the meantime, there are precious few reasons to sell the dollar outright, that’s for sure.

Good luck

Adf

No Death Knell

Posted on by 
While Friday, the world was on edge
And everyone wanted to hedge
This morning it seems
That Trump and his schemes
Have backed us away from the ledge

So, while Asian stocks mostly fell
In Europe, there’s been no death knell
And futures at home
Though not quite with foam
Are bubbling up, doing well

The bond market, though, is confused
With some analysts quite enthused
Recession is near
So, bond buys they cheer
Though holders, so far, have been bruised

The counter to this contestation
Is, soon we will feel more inflation
So, bonds are a sale
As Jay can’t curtail
That outcome, so short long-duration

Let me start by saying, we are still in a situation where nobody knows exactly what is happening in Iran and the Persian Gulf, although we continue to hear lots of propaganda from both sides.  It does appear that Iran’s military has absorbed a significant beating, but they continue to fire missiles in retaliation, albeit at a reduced pace.  It seems there are the beginnings of some discussions regarding ending the conflict, ostensibly with Pakistan taking the lead in speaking to both sides, but there have been no direct talks yet.  Time is still a critical issue as every day the Strait of Hormuz is closed, that adds further pressure to the global economy, especially in Asia and Europe which are the two areas most reliant on energy flowing through the Strait.

As I was considering the implications of oil prices at $100/bbl in the US, I realized that every fracking well in the US is going to be pumping at maximum capacity, and given how quickly DUC (drilled but uncompleted) wells can be brought on line, I expect that we will see US oil production rise from its recent 13.7 million bbls/day.  But alongside that, many, if not most, of these wells will be producing associated gas, i.e. natural gas that comes up with the oil, which is one reason, I believe, that Natural Gas prices in the US (-2.5% today) are essentially unchanged since the war began a month ago (green line).  Meanwhile, as you can see with the blue line on the chart, European Natural Gas prices have exploded higher.  In fact, this morning, US prices are just below $3.00/MMBtu while European prices are about $18.65/MMBtu.  (European gas is quoted in EUR/MWh, which is why the price looks so different.). Europe needs this war to end a lot sooner than the US from a pure economic perspective.

Source: tradingeconomics.com

Away from that stray thought, if we look at equity markets, you can see there has been a real turn.  Friday felt dreadful with every index falling and closing on its lows.  And Asia followed through with that thesis as virtually all bourses there were under real pressure.  Japan (-2.8%), Korea (-3.0%), India (-2.2%) and Taiwan (-1.8%) all fell sharply following the US lower.  Both China (-0.25%) and HK (-0.8%) also slipped, but not quite as aggressively.  The issue here is all these nations rely on energy transiting the Strait and are suffering accordingly.  My take is that not only will these equity markets have issues, but so, too, will their currencies until things in the Gulf are settled.

As to European equities, the story there is less dramatic this morning with a mixed picture as the UK (+0.5%) is higher along with Spain (+0.3%) and Italy (+0.3%), although Germany (-0.2%) and France (-0.1%) are slipping.  The big winner here, not surprisingly, is Norway (+2.0%).  We also saw the first March inflation data from anywhere in the world this morning from Germany, and not surprisingly, it was higher.  While the nationwide number has not yet been released, the individual Landers all show something between 2.5% and 2.9%, generally higher by 0.7% or more.  The market is looking for a 2.7% national reading, up from 1.9% February print.  US futures, meanwhile, are higher by 0.6% across the board at this hour (7:15).

In the bond market, though, inflation fears, which were all the rage on Friday, have abated somewhat with Treasuries (-4bps) seeing demand and European sovereign yields all softer by between -1bps and -3bps.  Even JGB yields (-2bps) have slipped, although the latter appears to be on the back of stories the BOJ is getting ready to hike rates in April and the question is how much, not if.  So, despite oil prices continuing to rise, and adding inflation pressure around the world, bond investors are relatively sanguine this morning.

In the FX markets, the story has been more mixed this morning with the dollar broadly firmer, but not universally so.  In the G10, the yen (+0.5%) is the outlier as having traded above the 160.00 level Friday, we heard more from Japanese authorities, specifically, the current Mr Yen, Mimura-san, that they did not welcome speculative trading and would address it if they believed that was driving the yen weaker than it should be.  Given the dollar is firmer vs. all its other G10 counterparts over the past month, it is surprising that is the case they are trying to make, but I guess they need to say something.  Otherwise, this bloc is mostly softer by about -0.2% or so across the board.  In the EMG bloc, INR had a little hiccup last night as per the chart below.

Source: tradingeconomics.com

It seems that the RBI reduced the size of positions that Indian banks are allowed to hold regarding short rupees every day, which forced a serious appreciation of the currency.  However, as you can see, it was relatively short lived and compared to Friday’s close, the rupee is weaker by -0.2% despite the new regulations.  Otherwise, ZAR (-0.3%) and KRW (-0.6%) are the weakest in the bloc with one outlier, MXN (+0.3%) rallying back from its close on Friday as it closed then at its lowest level since December.  In fact, this morning’s price action seems more like a trading reaction than a fundamental shift.

Finishing with commodities, oil (+1.1%) is back above $100/bbl in the US (above $115/bbl in Brent) although it is not really running away.  Traders are clearly uncertain what to believe with respect to the potential opening of the Strait.  We do get a lot of conflicting news from both sides, I must admit, and I find that reading either all the headlines or none of the headlines leaves you in exactly the same place, no idea what is reality.  The biggest change in the commodity space is in gold (+1.7%) and silver (+2.6%) as the past two days they have both risen alongside oil, rather than their behavior during the first month of the conflict.  It is easy to believe that the major downdraft in the precious metals was a result of liquidation during stress rather than gold’s loss of its haven status and I tend toward that view.  While I am no market technician, the little I do know is that the blow-off low last Monday at $4100/oz may well have defined the bottom of this move.

Source: tradingeconomics.com

Again, 5000 years of history tell me that people will still want to hold the stuff in times of crisis as a way to retain the value of their assets.

Turning to the data this week, while we start slow today (although Chairman Powell speaks at 10:30), we finish the week, on Good Friday, with NFP.

TuesdayCase Shiller Home Prices1.3%
 Chicago PMI55.8
 JOLTs Job Openings6.897M
 Consumer Confidence88
WednesdayADP Employment40K
 Retail Sales0.4%
 -ex autos0.2%
 ISM Manufacturing52.3
 ISM Prices Paid73.5
ThursdayTrade Balance-$59.2B
 Initial Claims212K
 Continuing Claims1825K
FridayNonfarm Payrolls55K
 Private Payrolls55K
 Manufacturing Payrolls0K
 Unemployment Rate4.4%
 Average Hourly Earnings0.3% (3.8% Y/Y)
 Average Weekly Hours34.3
 Participation Rate62.3%

Source: tradingeconomics.com

So, plenty of information this week, but with a holiday weekend coming up next weekend as US equity markets will be closed Friday and European ones on Monday as well, it remains unclear just how important the data is these days.  We are still headline driven although as the Marines make their way to the Persian Gulf, it has the potential to be a relatively quiet week ahead of any increase in military activity, maybe next weekend.  We shall see.  For now, the dollar continues to hold its own, and risk appetite is not collapsing in any meaningful way, yet.  We have to see how long that can last if the war continues to drag on.

Good luck

Adf

No Longer Benign

Posted on by 
The war in the Gulf shows no sign
Of ending by any deadline
Some victims now bleeding
Are bonds, with yields speeding
To levels no longer benign

Already we’ve seen, efforts, great
By nations, impacts, to abate
So, price caps on gas
Worldwide came to pass
But will central banks raise their rate(s)?

Nothing of note has changed in the Iran war as the US continues to refrain from further attacks while negotiations to end the conflict ostensibly continue.  Both sides have made their demands, but from what I have read about them, neither side can accept the others wishes.  If pressed, my take is the ongoing US pause is simply allowing the Marines and 82ndAirborne to get into place for their attempt to take over and control Kharg Island and the other small islands in the Strait.  Frankly, I would not bet against their tactical success in that endeavor.  However, it is not clear how Iran will respond in that situation.  After all, if the US does control Kharg Island, that means Iran no longer controls their own revenue stream, and that is truly existential for the regime.  However, I could be completely wrong about this, which is why I am not a military strategist.

But I think it is worthwhile taking a peek at the bond market this morning.  For the first few weeks of the war, while yields edged higher, there was no indication that investors were getting terribly nervous about the longer-term impacts of the war.  However, that no longer seems to be the case.  I have several charts below showing US, UK and German 10-year yields over the past six months, and then a longer-term perspective showing those same yields over the past 20 years. 

Six months of yields

Source: tradingeconomics.com

Long-term charts (source marketwatch.com)

UK Gilts

German bunds

US Treasuries

As you can see from the first chart, yields across all three of these nations have risen sharply now in the past month.  In fact, the numbers are US (+52bps), UK (+83bps) and Germany (+47bps).  It is very clear that fixed income investors are getting worried, and reasonably so given the idea that inflation readings, at least in the short-term, are going to be much higher.  As to the longer-term view, though there is certainly a similarity amongst the movement of yields of all three nations, UK yields are currently at their highest level since the GFC, July 2008; German yields are at their highest level since the Eurozone bond crisis in 2011, but Treasury yields were higher at the beginning of this year, and 25bps higher in late 2023.  

This is not to dismiss the potential problems that may arise if government bond yields continue to rise, especially given the already extraordinarily high debt/GDP ratios that exist throughout the G10.  However, I am not prepared to concede that the US is going to collapse because 10-year yields are back at 4.50%.

What we have seen, though, almost everywhere in the world, is government attempts to cap prices on energy, whether gasoline, diesel or even electricity, to help moderate some of the obvious pain that higher energy prices are inflicting on their populations.  We have also heard a great deal from central bankers about needing to tighten monetary policy to combat the rising inflation, despite the fact that inflation is coming from a supply shock in energy rather than either excess demand or money supply.  I fear that will not work out that well if they do so, but as is often the case, central banks (and governments in general) feel they must “do something” when an exogenous event, out of their control, occurs.  Ultimately, history has shown that is when policy mistakes are made.  Here’s hoping the hostilities end quickly enough so nations don’t make those mistakes.

Away from bonds, with yields higher this morning across the board (US +5bps, Germany +5bps, UK +11bps, Japan +11bps) and the rest of the European sovereigns somewhere in between, if we turn to oil (+2.7%), WTI is pushing back up to $100/bbl this morning, which I take as an indication market participants are getting nervous things will last longer than they thought a few days ago.  You can see the chart below that oil has rallied steadily all week since the Tweet that things were going to be ending soon back on Monday.

Source: tradingeconomics.com

The more interesting price action to me, this morning, is that gold (+0.7%) is also higher this morning, which may be the first session since the first day of the attacks, where both have risen in sync.  There is a story around that Turkey sold 58 tons of gold right when things began, but even at $5000/oz, that is only about $9 billion of gold compared to average daily trading volumes of between $200 billon and $300 billion (according to Grok).  My point is that would not be enough to move markets like we have seen in gold, but it could well be a harbinger of what other nations did as well.  Again, there is no sense that the long history of gold’s role is changing here.

As to equity markets, yesterday’s weakness in the US has been followed across Europe (DAX -1.6%, CAC -1.1%, FTSE 100 -0.75%, IBEX -1.4%) but the picture in Asia was more nuanced.  While the Nikkei (-0.4%) slipped a bit, both China (+0.6%) and HK (+0.4%) managed to rally as did Malaysia, Singapore and Thailand albeit not very much.  On the downside, though, India (-2.2%) made up for the fact it was closed on Thursday, while Korea (-0.4%) and Taiwan (-0.7%) both slipped and the rest of the region edged lower by lesser amounts.  As to US futures, at this hour (7:30) they are lower by about -0.35%.

Finally, the dollar continues to be a major beneficiary of the war as the DXY is back above 100 this morning with several EMG currencies coming under greater pressure today.  We see CLP (-1.1%) feeling the pain of copper’s inability to rally at all, as well as INR (-0.6%) and MXN (-0.5%) suffering this morning.  NOK (+0.2%) continues to benefit from oil’s recent strength, and CAD (+0.1%) is holding its own on the same basis, but both the euro (-0.15%) and pound (-0.2%) are struggling as the energy problem there is a major detriment to their economies.

The only US data this morning is Michigan Sentiment (exp 54.0) while yesterday’s Jobs data continues to show that layoffs are not increasing in any meaningful way, which I believe is a result of the dramatic change in immigration policy as well as deportations.  Like so much of what is ongoing these days, old models regarding the labor market are no longer representative of the new reality on the ground.  I suspect this is true across large segments of the economy which just means that relying on econometric models will be a fraught exercise going forward.  Here is a reason to pity the central bank community as they are truly flying blind now.

And that’s all there is today.  To me, we are biding our time until the Marines land on Kharg Island and then we will see a new phase of the war.  It is a high risk, high reward venture as success would certainly reopen the Strait of Hormuz and oil prices would plummet quickly.  Failure, however, would leave Iran with greater control over that key chokepoint and potentially cause greater difficulties elsewhere in the world, not least because it would call into question the US ability to project power.  War is not only hell, but also incredibly risky.

Good luck and good weekend

Adf

The Beating War Drum

Posted on by 
Each day it gets tougher and tougher
To figure out things that can buffer
Portfolios from
The beating war drum
And so, we are all set to suffer

Remember, too, I’m just a poet
And I do my best not to show it
But my Spidey sense
Says come some days hence
The end will be nigh and we’ll know it

Basically, as Herbert Stein explained back in 1986, “If it can’t go on forever, it will stop.”  The pressures on the global economy are increasing dramatically as not only markets in oil and natural gas, but also fertilizer and helium (critical for semiconductor manufacturing) markets are being significantly impacted.  And frankly, the world as we know it now cannot exist without a healthy supply, and supply chain, in all those things.  It is this pressure, which is building up on both sides of this war, that will ultimately push both sides to some resolution.  Iran cannot live without the oil and its revenues, but it can certainly destroy a lot of other nations in its death throes.  That is not the outcome we want to see.

And frankly, it appears to me that markets are pricing an off-ramp, because otherwise, I would expect the inelasticity of demand for oil would have driven oil prices much higher than we have seen.  But, while that may be the medium term (next several weeks) view, on a day-to-day basis, one never knows what’s going to happen.  Yesterday, there was a sense that things were going to deescalate.  But overnight, that sentiment changed and now risk is under pressure as oil heads higher once again.

Here’s the problem, if you read all the headlines about the situation in the Persian Gulf, you are no more well-informed than if you ignore them all.  We continue to be bathed in opinions and propaganda from both sides, and it is certainly not within my ability to determine what is truth, assuming any of it is.  Which takes us back to markets as our best indicator, because as it has been said, opinions are like a$$holes, everybody has one and they all stink.

So, let’s go to the tape.  Yesterday saw a positive outcome, but as you look at the chart of the S&P 500 below, you can count that from the beginning of March, when this all began, there have been 19 trading sessions including today.  Nine of those sessions saw green candles (higher) and 10 saw red candles (lower).  This does not strike me as a market where investors have capitulated in any serious manner.  As I mentioned earlier in the week, despite all the angst, right now the S&P 500 is lower by just 6.5% from its all-time high from late January.  That’s not even a correction by most definitions, let alone a war footing.

Source: tradingeconomics.com

As it happens, today is a down day, with US futures sitting lower by about -0.5% across the board as of 7:00.  And that is consistent with what we observed overnight with both major Asian (Tokyo -0.3%, HK -1.9%, China -1.3%) and minor Asian (Korea -3.2%, Taiwan -0.3%, Indonesia -1.9%, Australia -0.2%) markets all lower in the session.  Clearly, rising oil prices continue to weigh heavily on every nation in Asia as they are the primary recipient of Middle East oil and, as oil prices rise once again, it hurts all those nations.  I assure you that as much as we dislike rising gasoline prices, it is nothing compared to what those nations are feeling.

Europe, too, is lower across the board this morning led by Germany (-1.4%) which is not only suffering from general risk-off sentiment but has the added disincentive of declining consumer confidence as measured by the GfK indicator falling to -28.0, its lowest level in two years.  a quick peak at the chart of this indicator shows that while things have rebounded since the darkest days of the 2022 inflation problems, the downward trend is strengthening again.

Source: tradingeconomics.com

But the rest of European bourses are also under pressure with the UK (-1.1%), France (-0.9%), Spain (-0.9%) and Italy (-1.1%) all falling sharply.

As has been the case on days like this, bond prices are under pressure as well, with yields correspondingly rising.  So, after a 6bps decline in the 10-year Treasury yield yesterday this morning it has backed up by 4bps.  As to European sovereign yields, the picture is quite ugly as you can see in the below Bloomberg screenshot.

‘Nuff said.

Which takes us to the driving force in all markets these days, oil (+2.6%) which is rebounding with WTI back above $90/bbl and Brent above $100/bbl.  The one consistent thing I have seen on X this morning is that the propagandists on both sides seem to be preparing for a final outcome soon.  Whether it is the idea that the US is going to run away with its tail between its legs, or the Iranians are going to collapse, the timeline definitely seems to be shortening.  Hence my view that this will not be ongoing very much longer.

Turning to precious metals, as has been the case for the entire war, with oil rising, both gold (-2.0%) and silver (-4.2%) are under pressure.  I must admit the consistency with which this price action holds; oil up, gold down, is somewhat baffling to me.  My initial thesis was that we were seeing central banks liquidate gold to help pay bills, but why would they only do that on days when oil rose?  Something else is going on here and I have not yet been able to figure it out.  I do not believe that gold, after 5000 years as the safest of moneys, has suddenly lost that mojo.  I also know that the premium for physical metal in Shanghai remains substantial.  With this in mind, it is not hard to conclude that the futures market, where the price action is most visible, has seen a great deal of manipulation by someone trying to keep prices low, although to what end I cannot tell.  We need to watch closely.

Finally, the dollar, as has been its wont, is higher this morning alongside oil, albeit not dramatically so.  There are still numerous analysts who are calling for the dollar to decline sharply going forward, once the war premium is gone, but then they have been expecting that for a year and have not been able to explain its stability since early last year.  

Like the CME’s futures page, the ECB publishes its own market-implied probabilities for the deposit rate there as per the below from ecb-watch.eu

Now, I grant that if I look at the table at the bottom of the screenshot and compare it to the CME futures probabilities below, the market is pricing in more rate hikes in Europe than the US.

But I can never get over the actual interest rate involved as an important part of the interest rate parity decision process and mechanics.  Sure, if the ECB hikes 50bps over the next three months and the Fed only hikes 25bps, that is a marginal advantage to the euro but owning euros after that is still a negative carry trade.  Ultimately, the question is exactly how aggressively will central banks around the world address the initial bout of higher inflation that is coming alongside the higher oil prices.  In truth, I think the US has far more leeway to raise rates as the underlying economy is in far better shape than that of the Eurozone, but as we heard yesterday, Madame Lagarde will not be “paralyzed” by events, i.e. she will hike rates if someone whispers in her ear to do so.  I sincerely hope none of the central banks go down that road.

Elsewhere in the FX world, it is worth noting that USDJPY is pushing back toward the 160 level, although is unchanged this morning.  As to today’s trading, NOK (+0.5%) is the big winner on oil’s strength, with BRL (+0.2%) the only other currency showing strength vs. the greenback.  Otherwise, modest weakness (GBP -0.1%, AUD -0.2%, CNY -0.25, MXN -0.2%, ZAR -0.4%) is the order of the day.

On the data front, yesterday had some surprising outcomes with the Current Account ($-190.7B) falling to its lowest deficit in five years.  meanwhile, oil inventories showed a much large build of crude and even distillates, while only gasoline saw an inventory draw.  Perhaps that helped yesterday’s oil price decline.  This morning, Initial (exp 210K) and Continuing (1850K) Claims are on the docket and that’s really it.  There was an interesting article in the WSJ this morning describing how many cities are actually shrinking because of the change in immigration patterns we have seen since the border was closed.  The importance of this is that old expectations of how much job growth defines economic strength need to adjust to the new population realities and frankly, nobody knows the adjustments yet.  But the old idea that we need to see 200K new jobs each month seems to way overstate how to stabilize the Unemployment Rate.

And that’s really it.  Today is a risk-off session and likely to remain so unless we get a new headline about a potential end to the conflict.  But based on the recent pattern, tomorrow seems just as likely to be a risk-on session, although with the weekend coming, and the propensity for military action to start on the weekend, perhaps not.  As to the dollar, it ain’t dead yet!

Good luck

Adf

The End of the Scare?

Posted on by 
Though words from both sides are confusing
The markets are clearly enthusing
The war will soon end
Which may well portend
The bears are all in for a bruising

With stocks round the world on a tear
And yields falling down everywhere
Plus, oil is lower
And gold’s a fast grower
Have we seen the end of the scare?

Will there be peace talks soon?  President Trump claims things are happening in that direction.  Comments from some in Iran say that is not the case.  Clearly, both sides are incented to make those claims regardless of the reality.  At the same time, US Marines and the 82nd Airborne division are on their way to the Gulf.  It is easy to conclude that this is the prelude to a US intensification and effort at physical control of the Strait of Hormuz.  Word is that the Saudis and Emiratis are also pleading with President Trump to finish the job and remove the Iranian theocracy to enable a more peaceful Middle East in the long run.  But as always, sitting here in the US, and frankly if you are sitting in Europe or China or Japan or Australia, or pretty much anywhere but the Middle East or the White House, we don’t really know the facts on the ground, and we certainly don’t know the next steps.  We are just guessing.

However, the best clues we have come from the markets, which admittedly respond to the same news flows we do, although I’m certain that large institutions have better insight than reading Bloomberg or the WSJ or listening to al-Jazeera.   But, if we look at the markets this morning, the future is a lot brighter than it was on Monday.

While equity markets in the US were lower yesterday, it was certainly not a rout.  Rather, after a weak opening, they rallied back to positive territory as this new dialog appeared, although closed off the highs.  This morning, though, as you can see from the screen shot from tradingeconomics.com of equity futures markets, green remains the dominant color.  In this table, only Toronto (TSX), Mexico (IPC) and Brazil (IBOVESPA) are not open right now, but otherwise, risk is back in vogue.

As we have seen over the past weeks, economic data has lost its importance, as have the words of central bankers around the world with the only words that matter coming from President Trump or whoever may be a spokesman for Iran these days.  It is entirely possible that the global equity markets have gotten this situation completely wrong, and that over the next several weeks, the situation in the Middle East is going to deteriorate, but I am going to lean to the side that has trillions of dollars at risk and go with them for now.  After all, given all the talk about rampant insider trading, somebody’s buying a lot of equities!

Meanwhile, bond yields around the world are sliding as well.  the Bloomberg screen shot below shows that while yields around the world have risen over the past month, today investors are starting to accept that, perhaps, oil prices may not be $100/bbl for a very long time.

We did see February UK inflation data this morning, which printed unchanged and as expected at 3.0%.  We also heard from Madame Lagarde, who explained that the ECB would act decisively and swiftly, if necessary, given their absolute commitment to a 2.0% inflation run rate.  “We will not act before we have sufficient information on the size and persistence of the shock and its propagation. But we will not be paralyzed by hesitation: our commitment to delivering 2% inflation over the medium term is unconditional.”  

The interesting thing about this, to me, is how little the FX market seemed to care about her comments.  A look at the chart below of intraday price action with 5-minute candles, shows that her comments were enough to push the euro higher by…20 pips!  And that lasted for about 90 minutes.

Source: tradingeconomics.com

As I have been saying, central bank speakers have lost their ability to move markets, something I personally believe is quite healthy.  Alas, I am sure that when the hostilities end, or at least become more background noise (see e.g., Russia/Ukraine), they will flood the airwaves with their views in order to reclaim part of the narrative.

As to the FX market overall, movement has been pretty limited with both the euro and pound unchanged on the day, although AUD (-0.4%) is under a bit of pressure, ostensibly on slightly softer than expected inflation figures there.  Elsewhere in the G10, the two laggards are CAD (-0.2%) and NOK (-0.4%) as the oil price decline weighs there.  In the EMG bloc, ZAR (+0.5%) is benefitting from gold’s rebound with commodity discussions below, and otherwise, FX remains the least interesting market around.

Finally, oil (-6.0%) has fallen back below $90/bbl in the US and $100/bbl in London although the price for crude in the gulf on the correct side of the Hormuz Strait is as high as $150/bbl I’ve seen.  Asia is still desperate for more barrels of oil and willing to pay up for them.  It certainly seems likely that if the Strait remains effectively closed for much longer, the economic damage will grow apace, but right now, oil traders, at least futures traders, are of the belief the end of this stoppage is nigh.

Source: tradingeconomics.com

At this point, oil has retraced a bit over 50% of its initial spike.  Market technicians will be looking at the $84.95 level as the next key Fibonacci retracement level, with a break below there likely to convince some that lower prices are the future.

As to the precious metals, gold (+2.1%), silver (+2.7%) and platinum (+3.9%) are all rebounding sharply on the news as is copper (+1.7%).  This simply completes the positive viewpoint that has swept over markets this morning.

On the data front, German Ifo Expectations fell to 86.0, as expected, but it’s not clear that had much impact on anything.  From the US this morning we see only the Current Account (exp -$211B) a number that is never discussed, and then EIA oil inventories with a small crude build expected, although a more sizable draw of gasoline and products.

Governor Miran speaks and will certainly explain why rate cuts are appropriate, but nobody is listening to him right now.  And that’s all we have.  As has been the case for the past three plus weeks, Iran headlines will continue to drive market action with oil the first mover.  Close to the vest remains the best call in my view.

Good luck

Adf

Banish Conceit

Posted on by 
The back story of every war
Is nobody knows what’s in store
Especially now
As Trump’s sacred cow
Is changing his message once more

So, yesterday morning, his Tweet
Led many to think a retreat
Was on the horizon
But Trump is surprisin’
With him, one must banish conceit

This morning the story is talks
Twixt both sides are unorthodox
As leaders o’er there
Are fighting since there’s
Nobody in charge, doves nor hawks

Obviously, the Iran situation remains the key driver of all market activity at this point and the stories about negotiations are the lead.  From what I can gather, and there is no definitive source I trust completely, a number of nations including Russia, Egypt, Turkey and Saudi Arabia have been trying to get conversations going.  Of course, the biggest problem is determining who speaks for Iran as the bulk of their previous leadership has been decapitated.  My take is there are different factions, some really hard line apocalyptics who would rather the entire world burn down, especially the US and Israel, than end the hostilities, and there are others who are more pragmatic and want the fighting to end, while perhaps being willing to give up some previous goals, like nuclear weapons ownership.

Everything that I have read about the Iranian leadership structure is that there are many military group leaders who have preset plans if there is no central leadership, and I assume that is why headlines from this morning about ongoing Iranian missile attacks continue.  While I am no military strategist, just a poet, from what I have read, if the USMC does, in fact, take over Kharg Island, it is defensible militarily and would essentially end Iranian funding completely.  Trump’s comments about the US and Iran running the facility together would imply the US can determine how much oil is shipped while Iran earns the proceeds.  In that scenario, it would be possible for the US to starve Iran of the money they need to continue their reign of terror and support for proxy groups.  That could well be a very satisfactory outcome for everybody but the mullahs who continue to seek the destruction of Israel and the US.  It would also reopen the Strait of Hormuz and we would see dramatic reversals in the price of oil and inflation fears.  In fact, I bet rate cuts by central banks would be back on the table immediately!

Ok, enough prognostication from someone in the peanut gallery.  Let’s see how markets have responded some 24 hours after Trump’s tweet yesterday morning.  volatility remains the primary feature of every financial market led by oil futures.  As you can see in the chart below of the last week of WTI price action, there has been a nearly $18 trading range, about 20% of movement in that timeline.

Source: tradingeconomics.com

With the black sticky stuff higher by 2.2% this morning, I would argue that there will be no sense of calm in the markets until oil heads back toward its pre-war levels of $60/bbl or so.  If you recall, we discussed the support at $55/bbl in December and questioned what was driving the rise from there.  The daily chart for the past six months below offers a better sense of what I believe the market will find reassuring.  

Source: tradingeconomics.com

One other thing to remember is that the futures market remains in steep backwardation.  A look at the table below shows that prices for future delivery remain upwards of $20/bbl less than prompt prices.  All the evidence indicates that this war will be over soon.

Source: barchart.com

Sticking with commodities, precious metals have found some support with gold (+0.5%) and silver (+1.1%) both hanging on this morning.  

Turning to equity markets, yesterday’s solid rallies in the US, with all three major indices rising more than 1% was followed by broad strength in Asia (Tokyo +1.4%, HK +2.8%, China +1.3%) with more gainers (Korea, India Australia, Indonesia) than laggards (Taiwan, Malaysia, New Zealand) elsewhere in the region.  Two newsworthy items here were that Australia and the EU have signed a free trade agreement reducing tariffs between the two substantially, while RBNZ governor Breman talked about hiking interest rates if inflation picks up because of oil’s rise.  (As an aside, that would be a catastrophic error for the nation if she did it.)

Meanwhile, in Europe, it is a far less exciting session as they were able to respond to the Trump tweet during yesterday’s trading.  So, this morning, the DAX (-0.35%) is the laggard while the rest of the continent is +/-0.2% or less on the day.  This morning’s Flash PMI releases were broadly negative in tone as while Manufacturing readings were a touch better than expected Services in Germany, France, the UK and the EU overall, all showed substantial weakness.  I guess the prospect of another energy crisis in Europe is taking its toll.  As to US futures, at this hour (7:00) they are basically unchanged.

In the bond market, after a reversal yesterday, where Treasury yields slipped nearly -5bps, this morning they have backed up 3bps.  Bond investors remain caught between the idea that inflation is going to be a problem because of higher energy prices and the idea that the economy is going to slip into a recession because of higher energy prices.  Remember, too, there is an underlying dynamic where many analysts believe the US is going to hit a financing wall and yields are going to explode much higher.  But that story has been with us for quite a while, so I don’t put great stock in it for now.  

European sovereign yields also slipped yesterday and this morning they are little changed to slightly higher, with both France and Italy (+2bps) the worst performers and all other continental bonds, along with Gilts, essentially unchanged.  As to JGBs, last night yields slipped -5bps on both the prospects of the war ending and lower oil prices as well as a better-than-expected inflation reading where headline fell to 1.3% and core to 1.6%, down from 2% in January and a tick below expectations.

A funny thing about Japanese inflation is that if I look at a chart over the past 5 years, it is not hard to make the case that the BOJ has things moving in the right direction, and of course a reading of 1.6% is below their target.  In fact, if you look at the chart below comparing Japanese (blue bars) and US (gray space) core inflation, I expect Chairman Powell would give anything to have the Japanese chart!

Source: tradingeconomics.com

Finally, the dollar, while firmer this morning (DXY +0.3%) has traded right back into its long-term trading range of 96/100.  Again, I cannot look at the chart below and conclude that the dollar is going anywhere anytime soon.  If skyrocketing oil prices and a war in Iran cannot get a real breakout, I think we will have to go back to interest rate differentials as the driver!

Source: tradingeconomics.com

As to specific currencies, ZAR (-1.35%) is the day’s laggard as the recent sharp decline in both gold and platinum weigh on the nation’s accounts, as well as their status as a major energy importer.  We’ve also seen weakness in PLN (-0.5%), HUF (-0.6%), INR (-0.5%) and, interestingly, AUD (-0.5%) despite the latter’s deal with the EU.  I think ongoing high energy prices remain the issue here.  For the majors, -0.2% is the order of the day for the euro, pound, yen and Swiss franc.

On the data front, there’s not a ton of data this week.

TodayNonfarm Productivity Q42.0%
 Unit Labor Costs Q43.5%
 Flash Manufacturing PMI51.3
 Flash Services PMI51.5
ThursdayInitial Claims210K
 Continuing Claims1860K
FridayMichigan Sentiment53.8
 Michigan Inflation Expected3.2%

Source: tradingeconomics.com

In addition to the modest data releases, we hear from 5 Fed speakers over 7 venues this week, but it is very hard for me to believe that anything they say will matter while the war hogs the headlines.

Prognostication is silly here as headlines drive everything.  My sense is playing it close to the vest remains the best strategy.  But remember this, despite all the pearl clutching and teeth gnashing, the S&P 500 is just 6% from its high print back in January.  This has not even achieved what is typically considered a correction.  The lesson here is that history shows we can decline much further, but also that there is a lot of resilience in the market right now, hence, close to the vest.

Good luck

Adf

Wound-Licking

Posted on by 
The clock to the deadline is ticking
And right now, most traders are kicking
All risk to the curb
But they won’t disturb
The hodlers who spend time wound-licking

The market focus right now is on the deadline that President Trump has imposed for Iran to reopen the Strait of Hormuz, which is at 7:45pm EDT this evening.  I have read several takes on the likely impact of a destruction of Iran’s power grid, all explaining the consequences would be calamitous for the nation and its people.  Within a week or two, the humanitarian crisis would be unprecedented.  And that is only on the Iranian side.  Almost certainly the Iranians would retaliate and seek to destroy as much Gulf and Israeli infrastructure as possible to inflict the same pain there.  Ultimately, I cannot believe anybody really wants to see this happen.  Alas, it is out of all of our hands.

We remain extremely fortunate that we live thousands of miles from the action and although there will be economic consequences, those are easier to adapt to then the destruction of your home and nation.  Beyond that, I have nothing to offer regarding the situation there and since I discussed the end of last week in my note last evening, let’s see how things are going this morning (spoiler alert, it ain’t pretty!)

As has been the case for the past several weeks, screens everywhere are red this morning and it is easier to show a screenshot than list them all here.

Source: tradingeconomics.com

This picture was taken of futures markets at 6:55 this morning but you can see that Asian markets and European markets are all meaningfully lower.  As has been the case since the beginning of the conflict, the rise in oil prices and its knock-on effects have been the driver.  It appears that there are two broad groups of investors right now, the leveraged ones who are being forced out of positions rapidly as every decline brings further margin calls, and the cash investors who are trying to stick it out, at least in the areas they feel will rebound.  But the pain is real, at least on a mark-to-market basis, if one is marking to market every day.

History has shown that declines of this nature tend to offer tremendous buying opportunities for those who have the means to do so.  Consider the chart below showing the S&P 500 from the year 2000 on.  

Source: finance.yahoo.com

It is easy to see the sharp decline from the GFC, as well as the Covid dip and then 2022, which was a particularly difficult year for both stocks and bonds.  But the direction of travel remains up and to the right and this dip will almost certainly be followed by significant gains going forward.  Of course, the timing of those gains remains uncertain, but absent a complete collapse of the economy, this seems the most likely outcome.  That doesn’t, however, mean it will be a painless trip.

Turning to bonds, yields everywhere are higher as inflation fears remain the feature topic throughout the world.  Here, too, a Bloomberg screenshot does all the work for me.  

However, I think it is worth stepping back and looking at how bonds have behaved over the past five years.  the chart below shows the percentage change in 10-year bond yields in the US and Japan since early 2021.  While I am using Treasuries, despite the rise in yields everywhere in Europe, the charts there would be similar.

Source: tradingeconomics.com

My point is that while there is great angst daily regarding each basis point of movement in yields, US yields have been pretty stable for a long time.  Of course, we all know the story of JGB yields, which had been stable at extremely low levels for a decade, and have now moved much higher.  The thing is JGB yields moved much higher long before the Iran events, so while at the margin, that is having an impact, there was a strong trend already.

Once again, I believe perspective on markets is important as unless you are a professional trader, the day-to-day can drive you crazy and there is little you can do to change it.  Long-term investors need to understand that reality.

Turning to commodities, I have to wait as things have changed dramatically based on the following post by President Trump.

You will not be surprised that the worst-case declines in both stocks and bonds have reversed as per the below screen shot taken at 7:34

Source: tradingeconomics.com

And bonds from Bloomberg:

Back to commodities, below is oil’s response to the Truth Social post, falling sharply from relatively unchanged prior to the comments.

Source: tradingeconomics.com

And while gold is still lower on the day, you can see how much it, too, has adjusted based on the post.

Source: tradingeconomics.com

You won’t be surprised that the dollar, which had been much stronger earlier this morning has reversed course and is slightly lower now.

It is extremely difficult to keep up sometimes and I apologize for the numerous charts, but they truly are worth thousands of words in this situation.

I would talk about data, but I cannot believe that will really matter right now.  The growing consensus was that central banks around the world were preparing to tighten policy as oil driven inflation was going to need to be addressed, even if history showed this to be a categorical error.   And the first inkling from the Fed funds futures markets is that the probability of a rate hike is being reduced somewhat compared to the end of last week.

Frankly, nobody knows how things are going to evolve from here.  Many will say that Trump TACO’d but it is not hard to believe that whatever Iranian leadership remains has looked around and decided they couldn’t take it anymore either.  

As I have maintained for a while, play it close to the vest for now, but I expect that there are many value opportunities around, just in tiny bites.

Said Trump, we have had some good talks
And so, we will set back the clocks
On when we attack
Iran’s power stack
As doves take the lead, not the hawks.

Good luck
Adf

The Abyss

Posted on by 
This month has seen traders dismiss
The idea that risk led to bliss
Stocks worldwide have fallen
And those who were all in
With leverage now face the abyss

But it’s not just war in Iran
That’s scrambled most everyone’s plan
The data, as well
Are heading to hell
With no central banking wise man

As I didn’t write on Friday, and it seems some things happened while I was away, I thought I might offer my views of where things stand as we enter the new week.

🤯🤯 😱😱 🤮🤮

I think that sums it up nicely.

Recapping the end of last week quickly, all the central banks left policy on hold, as was expected with all showing a more hawkish lean given the dramatic rise in energy prices, so far, and fears that food will follow shortly.  The BOE was the most obvious as rather than a 5/4 vote with 4 votes for a cut, it was 9/0 for no movement.  Adding the Thursday decisions to the previous ones from the week, and looking at the Fed funds futures market, the two tables below from cmegroup.com show the change over the past month from modest expectations of a cut at the next meeting to modest expectations of a hike, first:

Then, if we look at the aggregated probabilities, you can see that the market has priced out any cuts for 2026 at this stage, with nothing, really, until the end of 2027.

Now, here’s the thing about this pricing.  It is a current estimation based on the Fed funds futures curve and certainly is subject to massive change going forward.  However, other markets that rely on interest rate cues see this and respond accordingly.

For instance, the 2-yr Treasury note (gray line) also has seen a major yield rally as you can see in the chart below and now sits above Fed funds effective (blue line) for the first time since late 2022 when the Fed finally caught up in its race against the raging inflation of the time.

Source: tradingeconomics.com

So, inflation is once again a major worry of the markets, and investors have come to believe that central banks are not going to be coming to the rescue for their risk assets as their hands will be tied by higher energy prices driving headline inflation higher.  Of course, we all know that central banks raising rates will not adjust short term price inelasticity for energy products, although it could well cause a deep recession which would likely have an inflation impact.  But my take is, that is not their goal either.

And that is why everyone is so unsettled.  The idea that the central banks are going to come to the rescue of risk assets has been killed and now the pricing of those assets needs to rely on their own fundamentals, a much tougher task historically.  

This is especially so given the data from Thursday showed PPI much hotter than expected, which adds to the narrative that the Fed, and other central banks, are on hold, at best, if not getting itchy to hike rates.

With this in mind, we cannot be surprised that equity markets suffered greatly on Friday, as did bond markets and precious metals.  However, I believe the drivers of equities are different than those of the traditional havens of bonds and gold.  In the case of equities, high valuations, which have existed for a long time, and significant leverage, with margin debt at record highs, although as you can see from the chart below, I created from FINRA data, it turned down ever so slightly in February have started to take their toll.

And in fact, that toll on margin debt is being played out in both bonds and gold as both are clearly feeling the effects of massive deleveraging as hedge funds and CTAs all scramble to make their margin calls.  In this case, they sell what they can that is liquid, not what they want to sell, so bonds and gold fit the bill.  My take is if the war continues very much longer, we will see the margin selling diminish and soon, both gold and bonds are going to seem like pretty good places to hide.  (Now, if you want to keep up with inflation, USDi, the fully-backed inflation tracking crypto currency available at www.usdicoin.com) is going to do so far better than short-term interest rates which are almost certainly going to lag inflation for a while going forward!  Ask me about this and I am happy to discuss.)

And that’s all I have this evening.  There is a great deal of back and forth with threats from both sides in the war, and whether or not the Iranian electricity infrastructure is hit, or if their nuclear power plant at Bushwehr is hit and if so, how they retaliate remains unknown and fodder for the narrative writers.  I have no opinion other than I hope none of that happens.

In the meantime, risk reduction is likely to continue as equities suffer while the dollar maintains its value and oil is the real risk, as any indication that the military action is ending is likely to see a major downdraft there.  Unless you are a professional trader, with real capital behind you and a great market and news feed, this is not a time to play in my view. However, if I look at things and where they currently sit as Sunday night opens, gold seems to be too cheap.  For millennia it has served as the last recourse of safety, and I do not believe this war will be any different than any of the countless wars in the past.  This doesn’t mean it cannot go lower, just that it probably is approaching a place of ‘value’ especially as you can be sure that at some point later this year, every central bank will be printing as fast as they can if economies start to stutter.  One poet’s thought.

Let’s see what happens overnight and I will be back again tomorrow.

Good luck

Adf

Dire Straits

Posted on by 
Said Jay, I will not be ignored
And so, I ain’t leaving the board
When my time as Chair
Is up, and I swear
I will see the president gored

So first off, we ain’t cutting rates
‘Cause here in the United States
Inflation’s a worry
And I’m in no hurry
To help Trump escape dire straits

I guess we cannot be surprised that Chairman Powell was combative during his press conference yesterday after the Fed left rates on hold, as expected.  There was only one dissent this month, Governor Miran, still looking to cut rates.  However, while standing pat given the high level of uncertainty that exists from the war situation makes sense, compare the dot plot from this meeting to the December meeting below it.  The dispersion of views on the committee has really tightened up a lot.  While the median for 2026 continues to point to one cut, it appears that the Fed now believes we are near r*, although they didn’t say that exactly.

March 2026 dot plot

December 2025 dot plot

The other noteworthy comment from the Chair was when he explained he had “no intention of leaving” the Fed until the Justice Department investigation is completed.  And, if Kevin Warsh is not confirmed by the Senate by the end of Powell’s term as Chair on May 15th, he will remain as Chairman pro tempore, the same situation as his previous nomination when the Senate delayed his confirmation.  

The market response to both the combative tone and the hawkish rhetoric overall was a further 1% decline in the S&P 500 from an already weak place as per the below chart where I highlighted the time of the Statement release.  You can see how things behaved thereafter.

Source: tradingeconomics.com

But that wasn’t all that happened yesterday, PPI came out MUCH hotter than forecast with headline at 0.7% (3.4% Y/Y) and core at 0.5% (3.9% Y/Y) as inflation concerns rose to the fore.  If you look at the PPI chart below showing both headline (blue bars) and core (gray bars), it is very difficult to discern a pattern of declining producer prices.

Source: tradingeconomics.com

In fact, it is hard to look at this data and reconcile it with the Fed’s SEP forecasts describing the view that inflation, even their measure of core PCE, is going to smoothly return to their 2% target over any particular timeline.  

One last event of note was the Iranian response to an attack on its main Natural Gas field, South Pars, where they inflicted serious damage to the Ras Laffan LNG facility in Qatar, which happens to be the largest in the world and is on the wrong side of the Strait of Hormuz to boot.  The result has been a significant rise in the price of European (and UK) natural gas, with both soaring more than 20% this morning while, Brent crude has jumped 7.2% as opposed to WTI’s unchanged status today.  This has taken European NatGas to ~$22.MMBtu compared with the US price of $3.15.  Ask yourself how long Europe can afford to pay 7x US prices for NatGas and maintain any competitive ability to manufacture anything.  (As an aside, this remains a key reason that I see long-term prospects for the euro so dimly.)  But if we look at the longer-term chart of European NatGas, despite the dramatic increase since the Iran conflict began, it is nothing compared to what we saw in the wake of Russia’s invasion of Ukraine.

Source: tradingeconomics.com

Summarizing yesterday’s session in one word, I would say, Aaaaaaggggghhhhhh!

I assume I have depressed you enough with yesterday’s activities, but I will run through market responses overnight.  You won’t be surprised to learn they have not been positive.

In fact, I guess I will start with bonds this morning, which I didn’t discuss above, but not surprisingly given the high PPI readings and the sharp rise in oil and gas prices, have suffered a lot.  Yesterday, Treasury yields reversed their early declines and closed higher on the day by 6bps.  They have edged up another 1bp this morning and are back above that 4.20% range I have focused on.  Meanwhile, European sovereign markets were all closed when the FOMC meeting concluded, which added to the pressure on bond yields which started with the US PPI data.  Net, yesterday, German bunds rose 4bps and this morning they are higher by a further 3bps.  But as you can see from the below Bloomberg screenshot, they are the champs in Europe today.

JGB yields also rose sharply, up 6bps and we saw similar rises throughout Asian bonds.  Right now, it is very clear that inflation is a bondholder’s concern, not recession.

As to equity markets, you will not be surprised to know that every market in Asia declined, most by more than -1.0% with the Nikkei (-3.4%) the worst performer followed closely by India’s Sensex (-3.1%), but there was no place to hide in Asia.  In Europe, the damage is equally broad, although there is one outlier, Norway (+0.5%) which is obviously benefitting from the sharp rise in oil prices.  But otherwise, -1.5% to -2.5% is today’s story across the board there.  Interestingly, at this hour (6:45) US futures are little changed to slightly lower, just -0.1%.  Perhaps this is a sign that all is not lost.  Or maybe the algorithms just haven’t started their day yet.  One noteworthy decline is South African shares (-4.0%) which is suffering from gold getting sold off yet again yesterday and today.

Since we already touched on energy, a quick trip through metals markets sees a major rout ongoing with gold (-2.75%) and silver (-5.2%) both suffering greatly, as is copper (-2.5%) and platinum (-6.1%).  I continue to believe that gold is being liquidated to pay for other losses as the primary attraction of the barbarous relic remains.  One thesis is that Middle Eastern central banks are liquidating their holdings as, given the dramatic decline in their oil revenues, they need money for continuing operations, and arguably, that’s what the gold is for.  Essentially, gold is the rainy-day fund.  As to the other three metals, those hint more at slowing economic activity rather than forced liquidation.  After all, there was a lot of euphoria on the way up, so if the narrative is changing, as that dissipates, so will demand.

Finally, the dollar has given back a small portion of yesterday’s solid gains but remains at the top of its 96.00 / 100.00 trading range as defined by the DXY and shown in the chart below.

Source: tradingeconomics.com

Again, considering energy policies and availability around the world, the US, which is the largest energy producer in the world and a net exporter of energy products, seems better positioned than any of its competitors to weather the current economic gyrations.  However, if we look across specific currency pairs this morning, we see relative strength elsewhere on the order of 0.2% to 0.3%.  Frankly, it is a bit surprising to see ZAR (+0.4%) rally given what is happening in both gold and the South African equity market, but stepping back slightly, given the rand’s weakness since the end of January, I guess we cannot be that surprised that there is consolidation.  Certainly, there is nothing about the chart for the last month that indicates the rand is about to reverse course and strengthen dramatically.

Source: tradingeconomics.com

The big picture here remains, in my view, that the US has more pluses than minuses vs almost all its counterparts.

On the data front, I didn’t even mention last night’s BOJ meeting, where they left policy on hold, as it didn’t seem to have a major impact.  Perhaps, Ueda’s mildly hawkish comments have helped the yen a bit this morning.  As well, the Swedish Riksbank left policy on hold and in a short while we expect both the BOE and ECB to leave policy rates on hold.  The one which might move is the UK, where last time they voted 7/2 to leave policy unchanged but analysts think 4 members could vote for a cut.  However, my sense is that cutting rates at this time, before there is evidence that the economy is truly suffering from the war, would be a surprise.  Otherwise, we get the weekly Initial (exp 215K) and Continuing (1850K) Claims as well as the Philly Fed (10.0) and then at 10:00 we see New Home Sales (720K).  One other thing to note is that yesterday’s EIA data showed a substantial build in crude inventories, but a large draw in gasoline and distillates.  It is this activity that helps explain the rise in crack spreads, and why the refiners should be having a very good quarter.

And that’s it for today.  Quite frankly, that’s enough for me.  As it happens, there will be no poetry tomorrow, so I will get to recap today and tomorrow on Monday and see what has changed in the Persian Gulf as well as any other new news.

Good luck and good weekend

Adf