It’s Been Hell

Posted on by 
Despite all the angst ‘round the earth
The one thing of which there’s no dearth
Is risk appetite
As both left and right
All want to increase their net worth

However, at times it’s been hell
To choose what to buy or to sell
The dollar is strong
So, best to be long
But what if yields here quickly fell

And what about stocks, can they rise
From their now historic new highs?
And let’s not forget
The government debt
Or ‘bout a November surprise

It is very confusing these days, as if you read or listen to the news, the sky is falling.  But if you look at market prices of so many assets, things look pretty good.  Now, I understand the iron rule of media is, if it bleeds, it leads, and so in a world where getting clicks is far more important that recounting a coherent story about what is happening in the world, there is little, if any, effort to produce the latter.  Alas, while sentiment is clearly an important part of all markets, I remain enough of a curmudgeon to continue to believe that the fundamentals still matter.

So, what are those fundamentals?  Well, if we look at the economy writ large, even after a weak payroll report last week, the Atlanta Fed’s GDPNow estimate remains at 3.7% for Q3 as per the below chart.

And interestingly, despite all the positive data, notably things like the ISM Surveys, Retail Sales and Personal Spending, we continue to read headlines about problems in the economy.  A great example was yesterday’s Trade deficit which printed at a higher than expected -$105.6B, which was the worst reading since the month before President Trump’s tariffs were inaugurated last year.  But ask yourself, why is our trade deficit growing?  The answer is because the US is growing far faster than other nations and so not only are we sucking in more imports, but export markets are weak.  As it has been said before, if you want to close the trade gap, send the country into a depression, then we won’t buy any imports, although that seems like an extreme solution.

But that US economic strength shows itself in various ways.  For instance, Treasury yields continue to rise, up 5bps this morning, although that is dwarfed by moves in Europe (France +16bps, Italy +13bps, Greece +12bps, UK +10bps).  The question to ask here is, why are yields rising?  While the most recent generation of traders and economists continue to believe this is a sign of fears over inflation, or perhaps excess government debt, given the lack of movement in TIPS breakevens, it very much appears this is all about higher real rates.  Demand for capital in a growing economy seems to be driving yields higher.  Again, I harken back to my youth in markets when the strong belief was that 10-year yields should trade right around nominal GDP growth.  At 5.33%, we remain far below that level.

Investors are buying the US writ large.  You can see that in the dollar, where the euro (-0.8%) has fallen to its lowest level since May 2025 as per the below chart.

Source: tradingeconomics.com

But look at this chart.  The euro is nowhere near its lows of the past 2 years, let alone historic lows, so the idea that the dollar is overly strong remains laughable.  In fact, if the US continues to grow its economy the way it has been doing, and if investment keeps flowing into the US like it has been, the dollar can get much stronger.  While the yen has been depreciating for a long time, the same has not been the case with the euro or other G10 currencies, and I see no appetite for any official action to stem the dollar’s strength here.  If I consider the insanity of European energy policy leading to its ongoing deindustrialization, I see no reason that parity in the euro is not a real target.  Not right away, but by sometime next year for sure.  And this is especially so if the Republicans hold the House and Senate next month.

In fact, there are only two currencies that have shown any strength vs. the dollar, the BRL, which I discussed yesterday and is rallying on the back of a positive view of a Bolsonaro presidential victory in two weeks’ time, and the KRW, which has been the beneficiary of consistent inflows for investment into its semiconductor sector.  And while the euro has been the worst performer today in the G10, virtually every currency is weaker vs. the dollar this morning as the news flow continues to point to problems overseas rather than in the US.

Which takes us to equity markets and the fact that both the S&P 500 and NASDAQ made new all-time highs yesterday, although futures this morning are pointing a bit lower.  

Source: tradingeconomics.com

In fact, I think we can look at the US performance relative to that in Europe and Asia and learn the same lesson, capital continues to flow into the US.  A look at the below Bloomberg screenshot tells the story well.

Which takes us to commodity markets.  While oil is off its recent lows, it remains well below the 
$100/bbl level that sets hair on fire as you can see below.

Source: tradingeconomics.com

In fact, I couldn’t help but notice the announcement from the IRGC that they would be closing the “illegal” routes through the Strait of Hormuz shortly, of course implying the Strait is, in fact, basically open.  While President Trump has been saying this for several weeks, the media doesn’t like that outcome so has tried to refute it.  I wonder what they will say now.  Meanwhile, gold (-2.2%) continues in its funk and has been dragging silver (-3.5%) down with it.  Frankly, with real yields at 2.9%ish in the 10-year and 3.5% in the 30-year, those are pretty attractive alternatives to the barbarous relic.  While I still think they have room to rise (metals, that is) I guess now is not the time.  Copper (-0.3%) however, continues to hover just below its recent all-time highs on ongoing fundamental demand in the growing US economy.

In the end, the world is not ending, and in fact I’m positive going forward.  But then, I’m just a poet.  On the data front, on the calendar today we see EIA oil inventories with a small build expected and the FOMC Minutes at 2:00pm.  I imagine a lot of effort will go into parsing those Minutes, but the market has already decided there is no hike coming this month although they still see December as quite likely.  A backing off from equity highs is no surprise, and I do not see this as the beginning of a new trend lower.  In fact, until the election results, I think we are more likely to rally risk assets then sell them.

Good luck

Adf

Back to his Pen

Posted on by 
The poet is back to his pen
And thinking ‘bout euros and yen
And oil and gold
As bonds all get sold
While indices rise yet again

Remarkably, o’er the past week
Though headlines, to havoc, did speak
The movement of note
Showed oil got smote
While dollars have reached a new peak

I have not been keeping close tabs on markets overall during my road trip, although am back to focusing again.  But first, the news from Topeka was that, while Marvel showed beautifully, we did not get placed amid very stiff competition.

Plus, as in every judged event, there is a measure of politics involved, and I am just not politically correct!

One other issue is that today is the first day I’ve had viable Wi-Fi to work with as the previous places I stayed just didn’t have it.

So, with all that in mind, I will be brief this morning.  Prior to leaving, I left myself records of where markets closed on September 25th so I could see how much things changed.  And the truth is, not all that much, at least on net since I last wrote.

In the equity markets, while the NASDAQ made new all-time highs, it is just 2% higher than when I left.  The S&P managed a much smaller gain, 0.7% and the DJIA actually slipped a bit during the period.   Elsewhere in the equity space, Japan (+7%) was the big winner while France (-2.5%) cannot keep up as the student riots and the fiscal problems, which are bad enough to garner a top WSJ story this morning, are obviously weighing on things there.  

Of course, all the equity moves are happening within the context of the bond market, which continues to see yields climb around the world.  US yields (+11bps) are the talk of the market, but Japanese yields (+3bps and up to yet more 30+nyear highs) are also still climbing.  But arguably, the biggest news is Brazil, which in the wake of the surprising first round lead in the presidential election by Flavio Bolsonaro (son of previous president Jair Bolsonaro) where we have seen Brazilian yields collapse (-115bps) while the Brazilian stock market rocketed 7.7% in the wake of the election results

Source: tradingeconomics.com

Elsewhere, both oil (-5.1%) and gold (-2.9%) have slipped as the former continues to seesaw based on comments about the amount of oil coming out of the Strait of Hormuz, although it is clear product prices are not falling, while the latter has just lost its appeal.  Gold is a funny thing, it is a wonderful long-term store of value and has been so for millennia, but it cares not a whit about day-to-day movements in prices.  Arguably, gold has done its job as that store of value as many holders have utilized their reserves to shore up their own financial situation, thus selling the barbarous relic.  However, it remains difficult for me to look at the fiscal policies extant around the world and think that fiat currencies are going to be embraced.  

Speaking of fiat currencies, while the dollar is just that, fiat, it is also the currency of the strongest current economy around, so despite all its flaws, and all the questions about the Fed and whether they will be hiking again and what that means, and despite all the angst over the selloff in Treasuries, the dollar continues to be the safest play around.  For instance, the euro, saddled with French misery and Germany fiscal and energy incompetence (as well As Spanish insanity regarding housing policy) has slipped -1.3% over the past week while the DXY has rallied a similar amount.  Despite the Nikkei’s rally, the yen (-0.6%) has slipped as well.  In fact, the only currency of note that has performed well is, not surprisingly, BRL (+3.5%) as money is flowing to the country in anticipation of a Bolsonaro win in the runoff election at the end of the month.  That, my friends, is a serious gap opening!

Source: tradingeconomics.com 

And that’s really all I have this morning, but I will be back going forward, most days, I believe.

On the calendar, there is not a ton this week after last week’s disappointing payroll report.

TodayTrade Balance-$102B
ThursdayInitial Claims200K
 Continuing Claims1710K
FridayMichigan Sentiment47.6

Source: tradingeconomics.com

The payroll report served to reduce the probability of a Fed hike this month dramatically and it is now down to 21% from above 60% when I left.  I still don’t think they need to hike more, although the market remains convinced they will do so in December.  But December is a long time from now and much can happen in the interim.  As to the dollar, it remains the cleanest dirty shirt around.

Good luck

Adf

Doomed

Posted on by 
Is civilization now doomed
As bond yields, o’er 5%, bloomed?
Or are those who say
The end’s any day
Just hoping their clicks will have boomed?

I ask because it’s hard to square
The stock market with yields up there
The pundits explain
High yields are a bane
Investors, though, don’t seem to care

A PSA to start.  For the next several weeks FX Poetry is going to be sporadic, if it shows up at all as I will be embarking on a road trip to the Doberman Pinscher Club of America National dog show in Topeka, Kansas and following that visiting family in Texas.  We have been told that Marvel has a good chance to do well there, although the competition will be stiff.  Nonetheless, here he is.

When I have time, I will try to write, but I am confident that the markets will continue to function while I am gone.  And more importantly, I am confident that the world will not end, even if bond yields head a little higher from here.

Let’s start with bonds since that is the topic du jour.  Below is the history of 10-year Treasury prices since 1953 from the FRED database.  I have taken the month-end data and drawn both the average and median lines in as well.

Once again, I ask you is 5% on the 10-year the anomaly?  Or was 1% on the 10-year the anomaly?  Throughout this entire time, the US economy managed to get by.  Certainly, there were difficult times as rampant inflation in the 1970’s led to Paul Volcker’s dramatic efforts to withdraw liquidity from the system, thus driving rates higher which resulted in the twin recessions of the early 1980’s.  Now, to my eye, the current level of 5.18% (-2bps on the day) does not look like it is unusual.  In fact, it is firmly between the median (4.79%) and average (5.52%) levels on the chart.

And as I wrote yesterday, economic activity continues apace, in fact I would argue faster than apace.  The Trump administration is all-in on the run it hot thesis and with inflation at 3.4% and real GDP at 5.1%, that implies nominal GDP is rising at 8.5% annualized.  Even with the excessive government spending, and it is excessive, nominal GDP growth at that pace will result in a reduction in the debt/GDP ratio over time.  Remember, the budget deficit is running at 6% or so, far lower than that GDP figure.

This is by no means an ideal situation, however, it is a sustainable one.  And consider this as well, all that interest getting paid is part of the income streams for all the holders, many of whom are domestic.  Recall, a major angst among the doomporn writers is that foreigners stopped buying Treasuries.  That means domestic accounts own more and get paid more interest to recycle into the economy.  Again, not ideal but certainly sustainable.  The end is not nigh.

What about the rest of the world?  Well, while their yields are rising as well as you can see in the below chart from tradingeconomics.com, their growth rates are not keeping pace with the US.

As you can see in the below table from tradingeconomics.com, the rest of the world has a much bigger problem with rising yields than does the US.  

Our economy can clearly sustain them far better than any other economy which is one of the reasons that the equity markets in the US continue to perform so well and the primary reason that the dollar continues to perform so well.  After all, the consistent drumbeat of announcements of new factories to be built in the US from Honda and Hyundai to TSMC and Samsung and every defense and pharma company in between, not to mention Nippon Steel’s expansion of the old US Steel facilities, is driving demand for dollars.

Again, doom may get clicks, but reality is far better than they make it out to be.  And we know this because equity investors continue to be willing to hold US equities in record numbers.  Earnings in the US continue to grow, in fact fast enough to reduce some of the overvalued multiples that we have seen over the past several years.  So, while yesterday was a nonevent in US equity markets, the fact that was the outcome despite another sharp rise in yields tells you all you need to know.  Overnight, China and Taiwan were closed, but we saw gains in Tokyo (+1.3%), Korea (+0.9%), India (+0.4%) and most of the region although HK (-1.0%) and Australia (-0.4%) lagged.  

In Europe, though, the week is ending on a positive note with gains across the board (Spain +1.0%, Germany +0.7%, UK +0.3%, France +0.1%) and US futures are also higher at this hour, +0.4% or so.  And Germany managed this despite a terrible reading from the GfK Consumer Confidence survey of -30.6, far worse than last month or forecasts.

In the commodity markets, oil (-2.4%) is sliding this morning as there appear to be ongoing talks to both reopen the Strait of Hormuz and end the US naval blockade, an outcome that would likely see oil prices, and the products as well, fall sharply.  Meanwhile, gold (+0.7%) and silver (+1.6%) are bouncing a bit this morning as the chain of thought appears to be lower oil prices => lower interest rates => more attractive gold, or something like that.  Nothing has changed my long-term view on the precious metals nor on copper, which if the US economy continues to grow like it has been will see significant demand going forward.

Finally, the dollar, after a two-week run is backing off this morning on two things.  First, apparently when PM Takaichi and President Trump met, the yen was part of the discussion and last night we heard verbal intervention from FinMin Katayama taking the yen higher by 0.75%.  As to the rest of the G10, smaller gains, on the order of 0.1% to 0.2% are the order of the day.  In the EMG bloc, we are also seeing strength with KRW (+0.95%) the leader although ZAR (+0.8%) is also having a fine day as gold rebounds while the rest of the bloc, whether LATAM, CEE or APAC has seen much smaller gains, 0.3% or less.  Again, the dollar is not going to disappear or be replaced.  And frankly, I think we remain in the range of the past year for a while still.

On the data front, this morning brings Durable Goods (exp -0.4%, +0.6% -ex Transport) and then Michigan Sentiment (47.6).  We also hear from a few more Fed speakers which will almost certainly serve to reinforce the idea that they are going to tighten policy further.  Currently, the futures market is pricing a 2/3 probability of an October hike.  Personally, I wish they would stop expanding the balance sheet before hiking again, but Keynesianism won’t allow them to think that way it seems.

Wrapping up, I see more good than bad on the horizon which should be positive for risk assets.  At the same time, at 5.2%, 10-year yields are very attractive for a lot of people as an alternative to equities.  After all, the hype about the highest yields in more than 20 years means that those on a fixed income have not been able to get these yields in more than 20 years.  Historically, 5% was seen as a pretty fair return for bonds.  Maybe this is the new equilibrium.

Good luck and good weekend

Adf

Death For the Trend

Posted on by 
The five-year sale went terrib-ly
So, doomsters are all filled with glee
There was a long tail
Though not quite a fail
They claim, now, the future they see

In fact, they claim, this is the end
That bonds will have nary a friend
And stocks will get smoked
As strong growth evoked
The specter of death for the trend

Well, everybody who has been crowing about the end of the US bond market is feeling their oats today, that’s for sure after yesterday’s terrible 5-year Treasury auction that wound up with a 3.1 basis point tail, extremely long for such a short duration instrument.  (The tail is the difference between the actual outcome and the when-issued trading that takes place in the market prior to the auction.  A long tail implies that demand was weaker than expected.)  The upshot is that Treasuries sold off hard, with yields climbing upwards of 15bps in the 2-year and 11bps in the 10-year as you can see in the below chart.

Source: tradingeconomics.com

The starting point was the release of the much better than expected Flash PMI data where both Manufacturing and Services beat handily with 58.0 handles, but the price pressures indicated got the inflation story back as the key narrative.  The yield peak came at 1:00 when the auction results were announced although they slipped a few bps before the close.  And this morning, the 10-year yield is another 3bps higher along with European sovereign yields where we see France (+5bps) having the worst day but the rest of the continent, and the UK all showing yields climb 2bp to 3bps.  Neither was Japan immune to this price action with 10yr JGBs jumping 9bps overnight.  

It’s funny, for a very long time, the idea that good news was bad would have been ridiculous as a concept.  Strong growth would indicate increased profit opportunities and higher equity values.  But it started with Greenspan, when he first cut rates to, and left them at, 1.0%, for far too long and equity markets decided they liked low interest rates more than company fundamentals.  The GFC and ZIRP increased the intensity of that reaction function, and we are still feeling that pain as higher rates, especially caused by strong economic growth, are now seen as a negative for stocks.  The world is upside down.  It is, however, the world in which we live.

On top of the markets’ hard beating
Both Xi and Trump soon will be meeting
The talks are on trade
While AI is weighed
It’s doubtful, though, deals are completing

In China the ‘conomy’s split
Twixt exports of plenty of sh*t
And people at home
Who live in the gloam
And can’t change their lives e’en one bit

While here in the US the sitch
Is talk of the poor and the rich
Election day’s nearing
And though some are cheering
For Trump it could be a real bitch

While the bond market has taken up most of the space of the financial market analysis, the meeting between Presidents Trump and Xi is clearly of great importance.  Both nations have significant issues they are trying to address although in many ways they are mirror images of each other.  On a macroeconomic scale, given the Chinese mercantilist model and the excess investment into productive capacity there, they build an enormous amount of stuff for export and starve the local economy of consumption.  The result is extremely low inflation, if not deflation, while indicators like Retail Sales turn negative.  Recall, consumption represents just over 50% of the Chinese economy compared to about 70% in the US.

For instance, the below chart shows a comparison between US (gray bars) and Chinese (blue bars) retail sales over the past 3 years.  you can see just how soft Chinese activity has been domestically compared to the US.

Source: tradingeconomics.com

I have long maintained that the biggest weakness China has is that they rely on the US as the buyer of last resort and President Trump (and lately followed by many other nations) has been pushing back by imposing tariffs on much of what China sells, thus reducing those sales.  If China lacks export growth, given the domestic weakness, that becomes a huge problem for Xi.

Meanwhile, the US spends far too much, at least the government does, and while there has been a dramatic increase in investment into the US, that has brought along significant demand for credit, hence higher yields, and demand for things that are scarce, like electricity, where power increases cannot keep up with industrial demand.  The upshot here is that inflationary pressures are rising even without the impact of the large rise in oil prices since March and the Iran war began.  

Of course, Xi’s greatest advantage is he doesn’t have to face the electorate, as there is none over there, while in six weeks, Election Day may prove monumental to President Trump’s plans.  We need to watch more than markets right now as both the wars in Ukraine and Iran along with the politics are going to have major impacts for a while longer, I believe.

Turning to markets beyond the bonds, yesterday saw weakness in the US, although not quite as bad as might have been feared with losses of about -1.0%.  To keep that in perspective, even with this morning’s pre-market futures lower by -0.5%, the S&P 500 is less than 2% from its all-time high set last month as you can see in the chart below.  It’s not Armageddon quite yet!

Source: tradingeconomics.com

But the follow on in Asia was filled with red numbers as although the Nikkei (+0.8%) managed a gain, virtually every other index in the time zone fell including: China (-1.7%), HK (-0.3%), India (-1.7%), Australia (-0.7%) and all of the smaller exchanges as well.  South Korea was on holiday, so no trading there.  Meanwhile, in Europe, the picture is not so dour, although most markets there slid yesterday as well.  This morning, the DAX (-0.5%) and CAC (-0.4%) are the laggards while the other major markets are flat to slightly higher, 0.1%.  And as mentioned above, US futures are under pressure again this morning.

In the commodity markets, oil (+1.0%) is continuing its rebound off the lows from earlier this week as President Trump’s threats of annihilation of Iran has some on edge, although I have read that talks continue to find a way to end the conflict.  But precious metals have no friends right now (gold -0.6%, silver -1.25%) as between higher yields and a rising dollar, fear over debasement has given way to greed for the last basis point of yield.  Copper (+0.4%) though is starting to trade on its own terms as the strength in the US economy continues to underpin demand for the red metal.  In fact, to highlight that economic strength, a look at the Atlanta Fed’s GDPNow estimate for Q3 shows that the data supports a positive view.  It currently sits at 5.1%, far above analyst estimates as per the below chart.

Finally, turning to the dollar, as I mentioned earlier this week, a move to the top of the trading range was quite possible and we are on the way to getting there as you can see in the below chart.  The peak is 101.80, so still 0.5% away from where we are, but the recent trend is strong.

Source: tradingeconomics.com

This strength is broad based and entirely on the back of the US rate structure and growth story as markets price in a greater likelihood of a rate hike next month, now 70%, and an additional hike next year as you can see in the below cmegroup.com table.

While the movement today has been pretty uniform across both G10 and EMG currencies, we do need to start to watch USDJPY again as it is heading back to the 160 level.  Now, if the dollar is strong against all currencies, there is far less reason for intervention in the yen, but that doesn’t mean it won’t happen.

On the data front, this morning brings the weekly Initial (exp 201K) and Continuing (1750K) Claims data as well as New Home Sales (620K).  Yesterday’s data also included oil inventories, which remain more than adequate.  Something else to remember is that the SPR releases were all executed via swaps, so starting November 1, the SPR is going to get refilled over the ensuing several years and my guess is we will not hear a word about that in the future.  The diesel export ban is a terrible idea, and hopefully cooler heads will prevail.  Diesel prices are high because Ukraine continues to destroy Russian refining capacity, not because the US exports the excess over what we use.

It’s an odd thing this morning.  I have seen many stories about the imminent collapse of the stock market now that bonds are under pressure and maybe that is exactly what will happen.  But I am not getting the same level of fear from the current situation so while a correction is completely viable, I think we need a much bigger disruption to force a major downturn in risk assets.

Good luck

Adf

No Red Line

Posted on by 
Said Trump at the UN, ‘I’m great
And all of you should really fete
The things I have done
So, we’re number one
And you all are now second rate’

Meanwhile, it’s the market for crude
That shows if we’re OK or screwed
Right now, things seem fine
But there’s no red line
Here’s hoping that peace is pursued

I was reading a new novel, prepublication, and I realized what it is I like about poetry so much, especially something like a limerick or haiku.  It is the economy of words used to tell a story.  Each of those forms of poetry have strict syllabic counts, so if an author is to get his point across, he often must work hard to fit the ideas into the correct syllable count as well as rhyme and meter.  Of course, the greater irony is I recognize that in the rest of my morning discussion, I talk too much and often add too much flourish, but that is the way I write.  Sorry.

Anyway, getting on to the stories of the day, arguably, President Trump’s speech at the UN was the most noteworthy thing, although it didn’t really move markets.  Once again, he offered a choice, negotiate an end to the Iran conflict or obliterate them.  In the end, I suspect it will come down to negotiations, but I won’t rule out a step up in destruction there.  Oil markets, though, are clearly not fretting about that this morning as WTI (-0.7%) continues its recent decline.  Of course, the problem is the price of products, specifically diesel, which is getting all the press as it hits record highs despite the decline in crude prices.  Apparently, Ukraine’s attacks on Russia’s refineries are being felt most acutely in diesel.  The below chart shows how crude (blue line) has been separating from products over the past week, especially.

Source: tradingeconomics.com

But in truth, away from that story, and the recent backdrop of the hysteria about AI’s ability to kill us all, there is not much happening.  Equity markets were mixed yesterday, bond markets barely moved and the dollar continues to edge higher.  Discussion about the Fed and what they are going to do at the next several meetings is back page news with the probability of a move at the October meeting right at 50/50 so not driving the discussion at all.  There is an increasing focus on the midterm elections, but they are still about 6 weeks away, so not quite imminent.  Even X is relatively quiet these days with a distinct lack of anxiety about any specific thing.

So, until there is more excitement somewhere, I’ll just recap markets.  After yesterday’s mixed US session, mixed also describes Asia well.  Japan was closed again last night, third night running as they had to fit in Old Age Day alongside Autumnal Equinox Day, but while China (-0.6%) and HK (-1.0%) both slipped, Korea (+0.9%) and India (+0.5%) rallied along with Taiwan (+0.75%) and Indonesia (+1.6%).  It seems yesterday’s strong US tech performance carried over into Korea and Taiwan and Indonesia responded to the central bank leaving rates on hold in a bit of a surprise.  The narrative regarding HK/China is anxiousness ahead of tomorrow’s Trump-Xi meeting for whatever that is worth, which in my opinion is not much, as sometimes markets just go lower.

Turning to Europe, equity markets there are under modest pressure (Germany -0.5%, Spain -0.3%, France -0.2%) despite what I would have called better than expected Flash PMI data released this morning.  Or perhaps that is the driver as there might be a growing concern the ECB will feel the need to hike further.  That was the view of Joachim Nagel from the Bundesbank, as he indicated the ECB may need to move to “mild restrictive territory” from the current neutral stance.  However, the probability of a rate hike at the next meeting is also 50/50 there.  As to US futures, at this hour (7:10) they are basically unchanged.

In the bond market, it appears the entire market is following Japan’s lead and doing absolutely nothing with yields within 1bp of yesterday’s levels in Treasuries and across all of Europe.  Nothing to see here.

Metals markets appear to be responding to the dollar’s ongoing strength, which I will discuss momentarily.  But this morning gold (-1.1%), silver (-2.7%) and copper (-0.3%) are all under pressure, although the copper shortage story seems to still have some legs.

Finally, you can’t keep a good dollar down.  I have been using the DXY as proxy and as you can see from the below chart, for the past two weeks this has basically been a one way trade, with the greenback rising more than 2%.

Source: tradingeconomics.com

The narrative appears to be that the market is pricing in more FOMC tightening than ECB tightening, although in the short-term, both are priced at a coin toss to hike next month.  The thing that still confuses me is the discrepancy between the futures market, where traders are pricing three more hikes by next June as per the below table from cmegroup.com

And the Fed’s dot plot, which, as you can see below, prices in one more hike and then a steady decline thereafter.

One of these two is wrong, but as of now, we have no way of knowing which one.  I will say this, the longer that there is pressure on the products markets, the more likely we see persistent inflationary pressures as diesel costs do feed into virtually everything.  If that is the future, then I lean toward the CME.  Perhaps, despite President Trump’s well known desire for lower interest rates (he is a real estate guy after all, and they always think rates should be lower), the fact that the US economy continues to show resilience and strength may well lead to tighter policy.  Certainly, that is the Keynesian view.

But back to the FX markets where the dollar is firmer across the board, and this morning by some pretty substantial amounts.  In the G10, AUD (-0.7%) and NZD (-0.65%) are the laggards but the pound (-0.5%) and euro (-0.4%) are also under pressure.  In the EMG bloc, KRW (-0.8%), MXN (-0.9%) and PLN (-0.9%) show just how widespread dollar strength is today.   Is this the beginning of a serious move higher in the dollar?  While you can never rule anything out, I suspect that is not the case.  But can we get back to the top of the DXY range we saw during the summer, so another 1.5%?  Sure, easy peasy and nothing fundamental has to change for that to happen.

On the data front, Flash PMI’s are on the calendar (exp Mfg 53.6, Services 56.0) as well as the EIA Oil inventories where a small draw is expected.  South Africa’s SARB is expected to raise its base rate to 7.25% this morning and we hear from Fed Governor Barr later this morning as well.  It is interesting to me that despite the talk about Fed funds, I rarely hear or see much about what Fed speakers have to say.  Perhaps the narratives are already written and if they don’t match up, they are ignored!

I still wouldn’t bet against the dollar here.

Good luck

Adf

To Be Agamemnon

Posted on by 
Apparently inside Tehran
The pressure that Trump has brought on
By blockading ships
Is set to eclipse
Their goal to be Agamemnon

At least with respect to his win
In Troy, though much to their chagrin
They may meet his fate
Because of a Strait
And views they should be its kingpin

One week ago today, oil traded above $106/bbl as concerns about Iran’s ability to inflict further damage on Gulf capacity along with their Houthi allies reached a peak.  The punditry was going all-in on the idea that as oil prices rose, and especially as product prices rose, that President Trump would have to back off his pressure campaign because rising diesel prices would collapse the Republican hopes for retaining the Senate, let alone the House, in the upcoming midterm elections.

What a difference a week makes, 168 little hours (my apologies to Dinah Shore) as the news this morning is that Iran has just pledged to reopen the Strait of Hormuz if the US ends the blockade.  Oil prices (-2.6% today, -15.5% in the past week) are responding as one would expect.

Source: tradingeconomics.com

According to Kyodo news, Iran is really feeling the pain now and discussing reopening negotiations as per the below report.

Now, as I have maintained all along, there is no way for any of us to really know what is going on in Iran as the propaganda from all sides runs fast and heavy.  And it is entirely possible that this is another head fake that will precede another series of attacks on vessels in the Strait, or on the Saudi East-West pipeline.  But markets are certainly buying it right now, hence the oil price decline as well as the continuation lower in bond yields with Treasuries and European sovereigns all lower by -2bps, except for French OATs (+1bp) as investors continue to look at French finances and worry further.

Seemingly, adding to the good vibe is the word that Iranian President Pezeshkian may meet with President Trump this week in a side meeting during the UN General Assembly thus priming views that something real may come of this.  I certainly hope that is the case, but I would not bet the farm on that outcome.  Until IRGC leadership feels significant pressure, it is hard to believe much will change.  But that, too, could be in our future.  If all 8+ million people in Tehran march in defiance of their rules, will the IRGC shoot them all?  Seems hard to believe, but the stories that have gotten out of Tehran paint a terrible picture there and a larger popular uprising cannot be ruled out in my view.

In the meantime, this is the best news we have seen in a while, and at least it has diverted attention from the AI death throes that are promised soon.

So, was this the driver behind yesterday’s equity rally?  It doesn’t seem so as that was very tech focused with the Mag7 all having strong sessions although I continue to read the dire stories of terrible market breadth.  That is a measure of the relative performance of different parts of the market and the concern is that somewhere around 50% of companies are below their 200-day moving average, a bearish signal, while the market indices are making new highs.  Some say this is a sign of a weak rally while others explain the index can work to drag all stocks higher.  But, as with everything else, both sides are certain they are correct!

Let’s look at how things have behaved overnight away from oil and bonds.  After the strong US equity performance, Asia was generally more subdued as Japan remained on holiday (they are back tonight) while China (+0.1%), HK (+0.2%) and even Korea (+0.15%) all saw minor gains only.  Korea is the most surprising given the tech led nature of the US markets.  Elsewhere in the region I see many markets having risen something like 0.3% with one major outlier on the downside, Indonesia (-1.7%) as concerns over a pending rate hike and higher fiscal deficits has international investors fleeing.

In Europe, though, things are a bit greener with gains nearly across the board (Spain +0.7%, France +0.5%, Germany +0.45, UK +0.15%) although Italy (-0.15%) is bucking that trend.  The confusing thing to me is France, where concerns reign regarding their fiscal picture in the bond market, but the equity markets are non-plussed on the subject.  And at this hour (7:00), US futures are pointing slightly higher, +0.1% or so.

Quickly in the metals markets, while gold (-0.5%) and silver (-0.7%) continue to struggle despite the decline in oil prices, copper (+1.3%) is back to within pennies of its all-time high set two weeks ago.  Certainly, the trend here is higher and, once again, I will remind you that current production is insufficient to meet demand and the timeline to bring new production online is measured in decades.  In my view, this metal could go much higher over time.

Source: tradingeconmics.com

Finally, the dollar refuses to collapse despite so much wishin’ and hopin’ by a large part of the punditry.  While it has not risen substantially of late, it has not fallen either.  In fact, the DXY (0.0%) sits above 100 currently which is clearly near the top of its trading range for the past year as per the below.

Source: tradingeconomics.com

Perhaps the biggest news here today is that the ECB has begun its experimentation with a CBDC, a terrible sign for the people of Europe, I believe, but a typical European response to US activity.  While private sector stablecoins are seen as a key part of the future for the US, Europe went the government route.  Now, they make the laws and can certainly force some uptake, but my money is on USD stablecoins dominating electronic payments going forward.  As to major movers here, there is only one, KRW (+1.35%) which has seen increasing volatility, but is really just back on the track it has been since early July as per the below.  I guess the rebound was just corrective in nature.

Source: tradingeconomics.com

On the data front, there is nothing of note on the calendar although we get plenty more Fedspeak with Williams, Jefferson and Barkin all on the calendar.  Yesterday, not only did Goolsbee say rates would need to rise further, but so did St Louis Fed President Musalem.  The interesting thing to me is they all talk about the oil price shock and then still say we must hike rates.  This is quite odd to me given the inherent dovishness of almost every central banker.  I cannot tell whether this is a result of their virtually religious belief in Keynesianism or if it is all TDS.  It is, however, a mistake for them to raise rates further.

And that’s all there is today.  Potential Iranian-US talks seem like the biggest opportunity for a change in the narrative, but I don’t give them that high a probability of being successful.  In the meantime, ain’t nobody selling the dollar!

Good luck

Adf

Traders are Pining

Posted on by 
Risk appetite’s back on the menu
Across almost every stock venue
Bond yields are declining
As traders are pining
For times when our lives were less tenu (ous)

The proximate cause driving prices
Is hope the Iranian crisis
Is nearing its end
Thus, bulls all contend
‘You must buy’ when they give advices

While it may be the first day of Autumn, the markets have a distinctly summer doldrums feel to them this morning.  Crude prices (-3.1%) are sliding and that has encouraged buying of stocks and bonds across the board.  For instance, looking at the below screenshot from tradingeconomics.com, you can see that only Russia, of markets currently open (Tokyo was closed for Autumnal Equinox Day, and Canada, Mexico and Brazil are not open yet) has suffered today, and given oil’s decline, that makes sense,

If we look at the bond market, we also see bonds in demand (yields falling sharply) as Treasuries and all of Europe are having great days per the Bloomberg screenshot below.

So, is this all about oil prices?  In truth, I believe that is the largest part by far.  If we look at a chart of WTI prices vs. the S&P 500 over the past month, you can see that the tendency is toward a negative correlation, especially over the last week.

Source: tradingeconomics.com

And sometimes, things are just that simple.  While this is UN week and much has been made of the fact that President Trump is going to be meeting with President Xi later this week, as well as Japanese PM Takaichi, discussions of that nature, while potentially important on a geopolitical scale, typically don’t involve or impact financial markets directly.  In the meantime, we have just gone through every major central bank meeting in the past two weeks, so nothing is on the immediate horizon and there is no economic data of note scheduled to be released this week.  Which brings me back to oil as the driving force in markets right now.

As I scan headlines across the WSJ and Bloomberg and look at my X feed for the key information, things are turning toward the upcoming midterm elections as the next source of interest.  And of course, now that the NFL is back at it, along with college football, MLB and the approaching NBA and NHL seasons, there is plenty of nonmarket stuff to keep people busy.  And after all, there are many who believe it is their birthright to earn 15%+ each year on their equity investments, so aren’t worried about little things like earnings or business conditions.

Speaking of elections, one cannot ignore the two state elections in Germany this past weekend where in the state of Mecklenburg-Western Pomerania (they need better state names), not only did AfD win the largest share, 38.2%, but Chancellor Friedrich Merz’s CDU failed to win the requisite 5.0% of votes to remain in the state parliament chamber, a historical first.  I raise the point because it is simply another demonstration of the idea that people around the world are unhappy with the current situation in their countries and are seeking change.  

The nature of that change remains uncertain, as both populist left and populist right have been gaining votes, while the center is getting decimated.  And there are many other elections in large countries coming up, notably Brazil, where the polls are basically tied between incumbent Lula da Silva and the challenger, Flavio Bolsonaro, son of former president Jair Bolsonaro and where there is additional political intrigue regarding how the courts there have been behaving.

In fact, as I survey the world, it appears that the 4th Turning is clearly on track, and whether it peaks in 2027 or 28 or 30, it is coming soon to a screen near you.  I know that I have been looking at my personal investments through the lens of what can happen in a situation where institutions change and I believe that would be something important to consider as we all look ahead.

Ok, as to the markets not covered, FX is the main one but other than KRW (+1.0%) which saw the 20-day Export data jump 78.3%, nothing else happened.

Otherwise, the dollar is +/-0.15% or less vs. every major currency although the trend is very mildly positive for the dollar.

And in the metals markets, that modestly stronger dollar is seeing weakness in gold (-0.7%) and silver (-0.2%) although copper (+1.5%) is having a good day as there are more and more discussions regarding long-term shortages and absence of new supplies.

On the data front, the noteworthy thing is we get too much Fedspeak this week, but here are the few data points coming.

TodayChicago Fed National Activity0.2
WednesdayFlash Manufacturing PMI53.5
 Flash Serv ices PMI56..0
ThursdayInitial Claims203K
 Continuing Claims1735K
 New Home Sales620K
FridayDurable Goods-0.3%
 -ex Transport0.6%
 Michigan Sentiment47.5

Source: tradingeconomics.com

As to Fed speakers, we hear from eight speakers across eleven different venues this week and we have already seen the Chicago Fed’s Austan Goolsbee tell us the road to 2% inflation may not be painless in Bloomberg this morning and he is not one of the eight.  The point is, these folks love to hear themselves speak about things and love their 15 minutes of fame, that’s for sure.

To me the question is, has any part of the long-term story changed?  I don’t really think so.  In fact, while I usually believe politics doesn’t really impact markets, at least not directly, I have a feeling that we could see some major policy changes upcoming if elections bring in new views as to how things should be done.  That is the biggest wild card I see in the future but have no idea which way that card will fall.  In the meantime, I believe that we are going to see increased volatility overall, despite today’s lack of movement, so keep positions close to the vest.

Good luck

Adf

Before We All Die

Posted on by 
Like a fledgling bird
Rates in Japan edged higher
Will they really fly?

As universally expected, the BOJ raise their base rate last night by 25 basis points to 1.25%.  Much has been written about how this is the highest rate since 1995 which only tells me that Japan has had major problems for more than 30 years.  If you simply consider the idea that the interest rate represents the demand for money, either Japanese companies and people didn’t need any, or had a surplus of the stuff.  My money is on the latter.  At any rate, as you can see from the below chart, the rate hike did nothing to help support the still-beleaguered yen.

Source: tradingeconomics.com

On the chart, it shows all the interest rate moves of the last year and while the last two hikes coincided with MOF intervention and saw yen strength, I think the combination of the lack of intervention, the ostensible hawkishness from Fed Chair Warsh (I still don’t see that but I am in a minority) and the fact that the vote was 7-2 with two BOJ doves, Sato and Asada, voting to leave rates on hold seem to have undermined any chance for the hike to support the currency.  So, JPY (-1.1%) is the worst performer on the board today.  Now, we are still basically at the levels seen in the wake of the joint intervention at the end of July, but the recent trend cannot be comforting for Ueda-san, Takaichi-san or Secretary Bessent.

For now, the carry traders are back in fine fettle, especially those who added to their positions (and I’m sure many did) after the GPIF JPY purchases.  Here’s the thing about currencies: they tend to trend for long periods of time.  While many markets e.g., (interest rates, volatility) show reversion to the mean as an underlying property, that is not the case in FX (or equities!)  So, if we step out to a longer view of USDJPY, as you can see from the FRED chart below, after a 40-year trend of a stronger yen which peaked (dollar bottomed) in 2011, for the past 15 years, the yen has largely weakened.  Back in the beginning of the year, I forecast 180 as a year-end level, and while that may be aggressive, absent massive fiscal policy changes in Japan (i.e. austerity) or in the US, I fear we will be closer than further three months hence.

But meantime, while stocks here are rising
The narrative still is advising
To shackle AI
Before we all die
When there is a robot uprising

So, here’s the thing.  It’s not that I want to ignore what is happening in the Middle East, obviously, it is very important with respect to energy prices and supplies and by extension the evolution of economic activity around the world.  But it is hard to make much sense out of the recent price action in oil, which, while lower today by -1.2%, and by -4.8% in the past three sessions is still very clearly trending higher and has been since early August as per the below chart from tradingeconomics.com.

I read the same news you do, about the Houthis taking over much of the Red Sea, although the Yemenis apparently did them some material damage this morning, and who really knows what is going on in Iran since everything about it is propaganda from both sides.  One truth is Ukraine continues to destroy Russian refineries and that is having the biggest impact, I think, as products are not being produced and while I doubt we will see shortages in the US, prices here for gasoline and diesel can certainly head higher.  But I wonder, if global diesel prices rise, is the US really at a relative disadvantage economically?  After all, we are amongst the most energy efficient economies in the world.  Nonetheless, it will be painful on the pocketbook.

Which takes me back to the ongoing AI discussion/argument and what is happening there.  Let me start by saying, there are exactly zero companies that are altruistic.  With that as background, the idea that Anthropic and OpenAI are begging for regulation because they are afraid what they are doing will end mankind is, truthfully, pathetic.  AI is a remarkable tool, and one that is clearly improving at lightning speeds, but unfortunately for those who are trying to make the case that it is the most dangerous thing ever built, the story of the boy who cried wolf has too many similarities.  This can be seen from the politicians who are now pushing this story with the demise of their climate change narrative, and their covid narrative and every other narrative they have foisted on us over the past 50 years.  But it is regularly the same people.  And we all know that doom sells hence the amount of doomporn that sells itself as financial analysis or geopolitical analysis.  This is the best clip I have seen from a serious individual describing the situation at these companies.  I think it is worth the one minute plus to listen to Steve Eisman here.

 As to the rest of the markets, equities had a nice day yesterday with oil’s decline, as US markets, and basically every major Asian market overnight all showed material strength.  Alas for Europe, this morning has seen declines of -0.7% to -0.9% across the board.  There don’t appear to be any specific catalysts to drive this movement with most attributing it to some profit taking after several positive sessions in a row.  If we look at the Fear and Greed Index, it is heading lower as per the below chart, so perhaps that is some of the driver, although that wouldn’t explain Asia or the fact that US futures are all pointing higher this morning by +0.2% or so.

Turning to the bond market, yields, which had slipped a bit yesterday are higher by 2bps in Treasuries and European sovereign yields are all higher by between 2bps (Germany) and 6bps (France).  It seems the fact that Europe appears to be preparing to enter the Russia/Ukraine war and need to borrow yet more money to arm themselves, is not helping things.  As to JGB yields, after the BOJ move last night, they slid -1bp.

With oil prices slipping this morning, we are seeing metals behave quite well (Au +1.0%, Ag +2.9%) although copper is unchanged on the day.  That negative correlation remains firmly intact.

Finally, the dollar continues to hold its recent gains.  Away from the yen, most currencies are softer by between -0.1% and -0.3% in both G10 and EMG spaces, but I must admit, most of the discussion remains dollar focused rather than currency specific focused.  One thing worth mentioning is KRW (-0.45%) which after a remarkable rally since early July increased the value of the won by nearly 17%, it has reversed course over the past two weeks and given back nearly 5% of that move.  In truth, it wouldn’t be surprising if this was just a trading reaction, but the consistency of movement in both directions has me wondering if there is something else going on, although at this point, I am not sure what it is.

Source: tradingeconomics.com

On the data front, this morning brings IP (exp 0.3%) and Capacity Utilization (76.4%) at 8:30 and then Leading Indicators (0.1%) at 10:00, with Governor Bowman speaking at 9:30.  It will be interesting to hear if she is hawkish or not, but I wonder, will the narrative call her that regardless?  Certainly, it appears that there are a lot of folks who really want the Fed to continue to hike rates.  Personally, I am not in that group.

As to today, absent some new news from the Middle East, I suspect that we are going to finish the week the way it has been going, firmer stocks, lower oil and a dollar stuck in the middle.

Good luck and good weekend

Adf

One Hawkish Dude

Posted on by 
In what cannot be a surprise
The Fed funds rate surely did rise
But look at the Dots
My read is those spots
Do not portend hikes called king-size

The funny thing is the new mood
Is Warsh is now one hawkish dude
Most pundits agree
That what we’ll now see
Is hikes of a great amplitude

But when I look at the dot plot
One more hike is all that they’ve got
Then, as time progresses
The best of their guesses
Is rates will be falling a lot

I feel very out of touch with the punditry this morning as the virtually unanimous view was that Chairman Warsh was quite hawkish in his press conference and from what I have read this morning, the Fed is embarking on a series of rate hikes to address inflation.  However, that is not what I took away from yesterday’s events.  In fact, if you look at the below chart which was published in the WSJ this morning and is truly quite helpful in showing the dot plot and the Fed funds rate next to each other and on the same scale, the median view is for one more rate hike this year and then a hold and decline going forward.

However, my view is clearly a minority one right now.  As you can see in the cmegroup.com table below, futures are pricing about a 50% probability of a hike in October and the certainty of one, plus a chance for more, by December with two more coming next year.

Again, that is far different than the dots and not what I heard, but then, I am just a poet.  So, let us turn to how markets responded to the event.  Below is a chart of both the 2yr (in green, LHS) and the 10yr (in blue, RHS) over the past 24 hours.  While both curves show a similar shape, be sure you look at the Y-axes as the increments are wider for the 2yr than the 10yr.  

Source: tradingeconomics.com

As of this morning, the 10-year is essentially unchanged while the 2yr yield has climbed about 6bps, implying the cash bond market, too, is looking for more hikes sooner rather than later.  We have discussed the logic behind hiking rates at this time, but oftentimes logic does not matter, at least not for a while.

As to equity markets, while both the DJIA and SPX closed lower yesterday, the NASDAQ was unchanged by the end of the day, as you can see from the chart below, those losses have also been recouped.

Source: tradingeconomics.com

In fact, green is this morning’s color with all of Europe and US futures all higher as I type at 6:00.

Source: tradingeconomics.com

Although, in fairness, China (-0.5%) and HK (-0.4%) didn’t have as much fun, much of Asia also was higher overnight.  It appears that the idea that central banks are set to fight inflation more aggressively, as confirmed by the Fed’s hike yesterday, has equity investors feeling better about themselves.

And that idea remains cemented in traders’ collective views as my new favorite website on the topic, rateprobability.com, continues to show plenty of hikes in the pipeline.  Interestingly, though, this morning’s BOE meeting is only showing a 24% probability as of 6:40am, 20 minutes before the release.

But now let’s turn away from the central banks and see what else is happening.  Oil prices (-1.8%) are slipping again as it appears the latest attacks on Saudi infrastructure have stopped and the Saudis claim they will have restored the bulk of the flow to Yanbu in the Red Sea within weeks.  At the same time, inventory data from the US continues to show plenty of oil around, as well as gasoline, although distillates are not as prevalent.  And of course, with oil lower, we cannot be surprised that the metals complex is higher (Au +1.25%, Ag +1.2%, Cu +1.3%).  

Finally, the dollar, after a 6-day run higher, is consolidating with the DXY now slightly above 100.00.  However, as I have been saying for quite a while, the reality is the dollar is doing very little overall, having traded both sides of 100 regularly and not trending in any direction.  

Source: tradingeconomics.com

Now, USDJPY (-0.4%) has bounced from its recent lows (yen highs) although remains below the levels of the initial intervention from the end of July as per the below chart.  And with the BOJ set to hike rates tonight, absent a massively hawkish message from Ueda-san, I think 154-156 is going to be the new home for a while.

Source: tradingeconomics.com

Looking across the rest of the currency universe, there are several moves today in line with the yen strength as ZAR (+0.55%), SEK (+0.4%), and NZD (+0.4%) are all having solid sessions with the rest of the lot +/-0.15% or less.  Again, I ascribe this more as a reaction to recent price moves than to anything new in the world.

And that’s really it in the markets this morning.  Fortunately, AI has not yet killed us all, although we continue to hear from various players that it is a civilizational threat.  The biggest problem those people have is that we have recently seen several civilizational threats that just didn’t come true, whether Covid, the reelection of Donald Trump or the strong showing by AfD in Germany.  Climate change is certainly biding its time if it is going to kill us all, and to my knowledge, CO2 is still exhaled by everyone who has informed us that CO2, if it reaches 0.045% of the atmosphere, will end life.  Perhaps that is what AI will do.  Perhaps it will take control of all the oil drilling and coal mining around the earth, expand it, combust it and drive that CO2 number up high enough to do the job!

On the data front, the UK left rates on hold, as largely expected, but I guess that means they will be hiking next time.  In the US, we get the weekly Initial (exp 208K) and Continuing (1780K) Claims data as well as Housing Starts (1.31M), Building Permits (1.41M) and Philly Fed (30.5) all at 8:30.  And that’s it.  The BOJ will be hiking rates tonight and there are no Fed speakers on the calendar today, although we will hear from Governor Michelle Bowman tomorrow morning.

The hawks are certain that Chairman Warsh has joined their club.  Personally, I think he is biding his time until the task forces report so that he can start to make the changes that are necessary at the Fed since it clearly has not done its job properly for many years.

As to the dollar, there is nothing exciting on the horizon overall, although I guess a surprise from Tokyo tonight could change a few views.

Good luck

Adf

A Fait Accompli

Posted on by 
While everyone waits for the Fed
A story that’s come to its head
Is Canada speaking
To Europe while seeking
A road where the two can now tread

Meanwhile in the markets we see
A rate hike’s a fait accompli
But what will Warsh say
Some hours away?
Not much based on his history

I have to start with the news about the EU looking to make Canada an honorary associate member of the bloc since they all hate President Trump so much.  Now, maybe this will work out very well for them, after all, Canada is rich with natural resources and Europe is desperate for a friendly source.  But then, Europe has gone out of their way to hamstring themselves by banning fracking and new drilling for oil in the North Sea, so I wonder why they will be so happy to buy Canadian oil and gas.  Oh, and there are no effective ways to move that energy from Alberta, where most of it sits, to Europe as there is no pipeline network across Canada.  But I am certain they will make many impressive speeches on the topic and will feel really good about themselves.  It’s funny, I always thought politics was about the possible, but apparently in Europe it is more about the good feelings of moral superiority.  As the continent, writ large, is very likely going to be deficient in natural gas come January, I hope they all have warm sweaters and blankets.

Which takes us to today’s biggest story, the FOMC meeting and the interest rate decision.  The futures market is pricing a 92.5% probability of a hike and another three over the course of the next year as per the below table from cmegroup.com.

At the same time, yields continue to rise in the US across the board as you can see from the below Bloomberg screenshot, although this morning, the 10-year yield has slipped back -2bps.

There is a strong thesis that if the Fed hikes and sounds hawkish that the bond market will reverse course as investors gain comfort that the Fed is going to be addressing inflationary pressures.  Yet, I don’t understand why that would be the case since raising the Fed funds rate is not only not going to produce more oil or open the Strait of Hormuz, but it is going to make drilling for oil more expensive.  However, that is the discussion that I have seen on X as well as the WSJ this morning.

At this point, you are aware of my view that the Fed has no reason to hike, and, in fact, I fear it would be counterproductive.  It would not surprise me if the vote, whichever way it goes, winds up 7-5 as I think despite the market pricing, there is real skepticism on the committee.  We shall see later today.

And with that in mind, let’s look at how other markets are behaving this morning.  There has definitely been an air of negativity around markets lately, with much more discussion regarding the bad things that can happen rather than any potential good ones.  Whether it is the energy crisis finally arriving, or the ‘AI is going to kill us all’ story or higher rates are going to force the stock market to implode, the bears have ample opportunity to make their case.  And yet, as I type this morning, screens are green in equity markets around the world.

Source: tradingeconomics.com

So, Asia saw strength in Tokyo, Shanghai and Mumbai, Europe is seeing it across the board and US futures are all pointing slightly higher.  Too, it is important to remember that while share prices were lower yesterday in the US, it was not a rout, all three major indices were lower by about -0.5% to -0.6%.  I would not panic at this price action.

While above I noted how much US yields have moved over the course of the last month and year, the overnight movement is a touch lower, -2bps, and that is consistent with European sovereigns, all of which have seen their yields slip -1bp or -2bps this morning.  In fact, the UK (-6bps) is the outlier here after inflation data this morning was less concerning than expected.  And overnight we saw Asian bond markets, led by JGBs (-5bps) all see yields slide a bit.  

There are still many analysts and pundits who are looking at the US fiscal situation, as well as fiscal situations elsewhere in the world (all of them are bad) and calling for much higher US yields with the 10-year set to go to 6% or 7% or 10% even in the extreme cases.  But I think that is so much clickbait and not serious analysis.  Consider, for many years it was assumed that Japanese yields had to climb dramatically as the debt/GDP ratio there rose to 250% and growth was stagnant, yet they maintained that situation for more than two decades!  However bad the situation is in the US, and I’m not saying things are great fiscally, it can go on for a much longer time.

In the commodity markets, this morning oil (-2.4%) is backing off a bit but remains well above $100/bbl.  It appears that the Saudis have shut the East-West pipeline after attacks recently and that could reduce supply by 4mm bpd, a significant hit, especially for Europe and Asia.  While timing is everything in life, and the fact that drilling and setting up production takes time, nothing has changed my view that there is essentially infinite oil available around the world that will come online and replace those flows.  Consider that Venezuela is now pumping 1.2mm bpd (according to OPEC via Grok) far more than before the events last January, and far more than the pundits had said could be pumped in such a short period of time.  There is plenty of oil around, it is more a question of getting it from where it is to where it needs to be, and that infrastructure is still being built out.

As to the metals markets, with oil lower, it is no surprise they are higher (Au +1.35, Ag +1.9%, Cu +1.1%).  Certainly, as you can see in the below chart, there has been a very strong negative correlation between oil and gold over the past month, at least.

Source: tradingeconomics.com

Finally, the dollar continues to find support.  No matter how much people want to hate the dollar and explain it is going to collapse, it just won’t die.  This morning, the dollar’s gains are minimal, 0.05% to 0.15% largely across the board, but this feels more like consolidation than reversal.  I suppose traders are trying to run ahead of the FOMC news (boy if they don’t hike, I suspect the dollar really could fall sharply, but once again, I posit that no matter how bad things are in the US, they are generally worse everywhere else.

On the data front, this morning brings Retail Sales (exp 0.8%, 0.5% ex autos) and the EIA oil inventory data with a small draw expected.  Then, of course, the FOMC at 2:00 and the press conference at 2:30.  My sense is people hold their collective breath until then.

Good luck

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