Chthonic

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The bond vigilantes have spoken
The CPI data was smokin’
For Waller a half
Would not be a gaffe
But rather a TDS token

The dollar responded by soaring
While bonds, everyone were abhorring
Though stocks settled chthonic
It’s not clear it’s chronic
And oil, remarkably’s, boring

On this Veteran’s Day, let me start by thanking all of you who served in the name of this nation, I truly appreciate your efforts and service.  As well, given it is a partial holiday, with banks, and therefore the bond market, closed, I will endeavor to keep this short this morning.

You may recall that yesterday morning we heard from Fed Governor Chris Waller who explained that not only did 25bps make sense, but if yesterday’s CPI data was hot, 50bps should be on the table.  And he got his wish (?), with the headline printing at 0.4% and the core at 0.3% (remember official Y/Y data was absent because of last year’s government shutdown.). Certainly, the bond market got the message with 10-year yields jumping 10bps and 2-year yield exploding 13bps during the session as per the below chart.

Source: tradingeconomics.com

Here’s the thing about the inflation data, at least in my opinion, the current rate has largely been the rate for quite a while.  Broad-based inflation has been running in the 3.5% ish area for a while now, and it certainly doesn’t appear that it will be declining anytime soon.  As the Inflation Guy, Mike Ashton, explains, yesterday’s data showed that there were few outliers, everything is just rising at that pace.

The bigger problem remains that the Fed has this myopic belief that adjusting the short-term interest rate is going to solve the inflation problem while they continue to grow M2.  While my Excel skills seemed to be sleeping this morning, the below two charts are from FRED data showing the last 10 years of M2 growth annualized and Headline CPI.  There is a very clear relationship between the growth in M2 and the subsequent lagged growth in CPI.  The problem is, M2 is growing at a solid 6.0% clip which bodes ill for reducing the rate of inflation anytime soon.

As Mike explains, while higher interest rates may destroy demand, they also raise the costs of supply and do not have a consistent impact on inflation.  Milton Friedman explained many years ago, “inflation is always and everywhere a monetary phenomenon”, but the current neo-Keynesian framework doesn’t like that viewpoint so focuses on interest rates.  Alas!

But this is where we are in central banking circles, so it is unlikely to change in the near term.  It will be very interesting to see if Chairman Warsh can institute meaningful change at the Fed, because if it happens there, it will follow around the world.  We would all be better off if that was the case.

Beyond the bond market, how did things behave?  Surprisingly, at least to me, while stocks were lower, it was hardly a rout, with the NASDAQ (-0.75%) the worst performer in the US and the other major indices lower by -0.35% or so.  And Asia seemed just fine, with gains in Tokyo (+1.3%), China (+0.4%), Korea (+2.6%) and Taiwan (+3.6%) with only HK (-1.0%) lagging on many alleged issues with profit-taking seeming the key driver.  After all, in the past week, it had rallied 8%, so taking some money off the table was reasonable.

Meanwhile, European bourses are generally having a good day (Germany (+0.75%), France (+0.4%), UK (+0.4%) although both Spain (0.0%) and Italy (0.0%) are not taking part.  A dearth of data has left investors to contemplate their own navels this morning.  But whatever fears there were yesterday about rising interest rates, the better than expected Coreweave earnings last night has the US futures on a roll with the NASDAQ (+1.9%) leading the way higher.

Oil prices (+1.1%) are modestly higher this morning but still below $90/bbl and there is still lots of back and forth as to whether talks are ongoing or not.  The one thing I have become far more certain about is that there is plenty of crude around.  Diesel remains a problem, but that is more a Ukraine/Russia thing than an Iran thing I believe.  As to metals, gold (+0.3%) and silver (+2.5%) are both stronger this morning after both sold off hard yesterday on the rate story.  Ultimately, as long as M2 continues to grow quickly, and it is growing faster elsewhere in the world, notably China, precious metals vs. fiat currencies leans in favor of metals.

Finally, the dollar exploded higher yesterday, jumping 0.7% as per the DXY and as you can see in the chart below.

Source: tradingeconomics.com

Interestingly, for the first time in more than a month I read something about the yen, which had been idling on either side of 158 in the wake of the September intervention, but this morning, the yen (-0.3%) has slipped further and is now back to levels not seen since early September with the dollar above 159.00.  However, if one considers that this is not a yen phenomenon, but rather a dollar one, it strikes me there is little reason for the BOJ/MOF to be concerned.  There is nothing they can do about a broad dollar move higher.

Of course, that is the question, are we setting up for a broad dollar move higher?  If you believe in 50bps by the Fed next month and ongoing hawkishness, I can see the case and the futures market is pricing a probability of that now, with 25bps in both December and January the high probability events as per the below from cmegroup.com

Remember, there are still four weeks before the next FOMC meeting with PCE and NFP data coming before that meeting, and all the Congressional machinations that are possible in this lame duck session.  Fundamentally, I see no reason for that much more tightness, but I have been wrong before.

And that’s all today.  There is no data because of the holiday.  Tomorrow, there will be no poetry as we are taking Marvel to another show in the morning.  So, I will be back on Friday and who knows what will have happened by then!

Good luck

Adf

As the Politics Fray

Posted on by 
Now, some have suggested the gov
Is showing the stock market love
Supporting the bulls
With deep pocketfuls
Of cash, lest the bears, too hard, shove

But who in the market will chance
Their own cash, if asked to advance?
The Fed’s not permitted
So who benefitted
From rallies?  At least at first glance

Which brings us to ‘flation today
And whether more views it can sway
A hot print may thrust
Funds up, when discussed
Next month as the politics fray

Starting with the stock market’s movement over the past several sessions, wow is all I can say.  There have clearly been some changes in opinions, at the very least, as evidenced by the massive rally, then decline, then rally again.  The horizontal red line on the chart is the closing level of the S&P 500 on November 2, the day before the election, at 7555.  With all the gyrations of the post=-election hysteria, the market is in exactly the same place after last night’s close.

Source: tradingeconomics.com

Certainly, the immediate post-election rally made no sense to me, but the word is that the sharp sell-off the next day was led by deleveraging of ETF positions and some forced closures of smaller hedge funds.  I have no insight into that, but it is certainly possible.  But it has been hinted by some that both the Wednesday rally, as well as Friday’s and yesterday’s are part of a concerted government campaign to support the stock market.  The thing about this story is I cannot comprehend the mechanism.  Who is buying?  Arguably, the Democratic victors would want to show the market approves of them, but they have no government tools to do so, and we know the Fed is not legally allowed to touch equities.  I’m confident Secretary Bessent wouldn’t be part of that either.  Did they get Soros and Gates to pony up on their own?  Those two won’t spend 2 nickels of their own money for anything.  China has an organized process, their national team, where insurance companies and banks are told to buy, and they do.  That seems hard to believe here.  I need proof to change my mind on this one.

So, what was the driver?  Well, the one thing we know is that sometimes markets can be quite volatile, especially when they really don’t know what is coming up.  The reading of Articles of Impeachment against Secretary of War Hegseth cannot help as it indicates things could get messy very quickly, well before the Democratic majorities are sworn in, and damage can be done with the current lame-duck session already destroyed.  But that would be a distinct negative for stocks, so the rebound makes no sense.  There are pieces to this puzzle that are very well hidden, I believe, so be careful.

But ask yourself who really benefits from this rally.  What was a big issue in a number of races?  Personal profits made by members of Congress.  It is not hard to believe that they would impose as much pressure as possible on any players capable of buying to push things higher for their personal benefit.  I don’t know how they can do it, but that doesn’t mean they can’t although I still need proof.  Keep in mind though, sometimes stocks go up and other times they go down and it’s as simple as that.

The other story today is, of course, the CPI release.  It is important, though, to frame the discussion based on new information we have from Fed Governor Waller who explained this morning in London, “However, if inflation comes in substantially higher than I expect, more robust action by the FOMC may be called for.”  Now, he didn’t say what he expected, so there is some wiggle room, but he also indicated that 50bps might be appropriate.  That’s a far cry from voting for no change last month.

Forecasts for this morning are as follows: 0.3% headline and 0.2% core M/M with the Y/Y expectations missing because last year, you may remember, we were in the middle of the government shutdown and no data was printed.  Of course, 0.3% still annualizes to ~3.7%, well above target.  But this is all a story of the past.  Arguably, the FOMC is supposed to address the future.  So, what is one of the biggest drivers of CPI?  Gasoline prices.  If we look at the RBOB contract, the two red vertical lines represent the end of September and the end of October.  In the interim, gasoline fell by 3.2% and as of this morning, has fallen substantially further on the latest word that President Trump indicated talks were going well and there is no need to escalate fighting in Iran.

Source: tradingeconomics.com

Oil prices (-1.0% today, -10.5% in the past week) are continuing to decline and that will surely have a positive impact on inflation, i.e. reducing price pressures.  And I think this is exactly the point with respect to why the Fed, and basically every central bank, does things poorly.  They respond to history that cannot be changed while ignoring what is happening at the current time (anybody remember transitory inflation?).

The fatal flaw in most current monetary policy is central banks seem to ignore money, ironically, with the virtually universal view amongst that set being Keynesian, or neo-Keynesian, which means they look entirely at the demand side.  The other day I highlighted that M2 is growing quickly again and that is going to keep upward pressure on inflation regardless of the price of gasoline.

So, wrapping up, it appears that Governor Waller has highlighted today’s CPI print as THE critical piece of information in his next FOMC vote, the Fed funds futures market has moved back to a 99% probability of a hike in December after his comments and 2-year Treasury yields have jumped 6pbs on the Waller comments.  See if you can determine what time he spoke this morning from the below chart.  FYI, that was a 5-minute move.

Source: tradingeconomics.com

There is no shortage of moving pieces in the market right now and generating a coherent story as to the narrative has become difficult even for the narrative writers themselves.  In the meantime, let’s tour the markets.

While 2-year yields jumped sharply on the Waller comments, 10-year yields are only higher by 1bp, and European sovereign yields are lower by between -1bp and -3bps across the board as per the below Bloomberg screenshot.  These yields are more directly following the oil price, I believe.

Turning to equities, yesterday was a spectacular day with rallies almost everywhere in the world.  Again, a (Bloomberg) picture is worth 1000 words here.

The regional Asian bourses didn’t disappoint either with Korea (+4.4%) and Taiwan (+2.5%) both up strongly on the rebound in tech and AI shares.  However, as I type at 7:00, US futures are mixed with NASDAQ (-0.3%) slipping a bit although DJIA (+0.4%) are gaining a bit.  All eyes are on the CPI number.

We’ve discussed oil already, but Governor Waller’s biggest impact may have been on gold (-1.6%) and silver (-2.0%) as both responded immediately to the call for higher US rates.  Despite the Waller comments, though, we are still a long way from the next meeting, 29 days to be exact, and a lot can happen between now and then.  Interestingly, the next CPI will be released the day after the FOMC meeting, but word is they get that info ahead of time, so perhaps they will know.

Finally, despite all the gyrations elsewhere, the dollar is still asleep this morning.  Other than NOK (-0.5%) which is sliding on the oil price decline, the rest of the FX market is +/-0.25% or less relative to yesterday’s closing prices.  Again, my view is that FX is decoupling, at least for now, from the broader market narrative.  As an aside, the below chart of NOK vs Brent Crude offers proof of the petrocurrency status of the krone.  It is so strong it is remarkable.

Source: tradingeconomics.com

And that’s really it for the day.  We hear from a bunch more Fed speakers, Logan, Bowman, Schmid and Bowman again, and my take is there will be more hawkishness than dovishness, especially if this morning’s CPI is hot.  The question becomes, if CPI is hot, will that push stocks lower?  After all, the prospect of higher rates is seen as a negative for equity markets, but the ability of companies to raise prices is a clear positive for earnings.  Which one matters more?

We have seen significant volatility already recently and there is nothing indicating that is going to slow down.  I still don’t think a rate hike is in order, but I am not on the FOMC so they don’t care.  And in their framework, they are suddenly terrified.  (As I asked before, though, if they start hiking rates more aggressively and the economy slows, will the newly empowered Democrats be happy?)

Good luck

Adf

Something is Wrong

Posted on by 
The data on Friday was strong
With bulls happy they were all long
And so far, today
Things still seem that way
And yet, it feels something is wrong

No matter the truth on the ground
The narrative seeks to confound
All news that is good
With blatant falsehood
Lest media ratings fall down

Humans are an odd species.  Positive outcomes are positively loathed by so many, or at least so many whose role is to disseminate information.  I have to believe that is a natural outcome as while that group may be a minority, they have realized if they get to write the narrative, even if it is completely false, they can instill their misery on the large majority of people who are pretty happy to go about their lives and see the good that exists.  This is not to say that bad things don’t happen, they clearly do.  It is also not to say that there are no bad people, or that only bad people go into media, but it certainly appears that there is a larger than statistical aggregation of doomsayers in the media business.

I highlight this because if one looks at Friday’s data objectively, assuming one can do so, it was unambiguously positive as a description of the economy.  The payroll data was much stronger than expected with NFP printing at 165K, 100K more than forecast, while the Unemployment Rate fell to 4.1%.   As well, Michigan Sentiment rose to 51.0, still lousy, but higher than last month and the forecast, although as you can see from the below chart, the trend remains lower ever since Covid.

Source: tradingeconomics.com

Not only that, equity markets had a generally positive day on Friday, stabilizing from Thursday’s dramatic decline, and actually rising slightly, as per the below chart.

Source: tradingeconomics.com

And this morning, US futures are higher across the board, with the DJIA +1.0% as I type at 7:07am with the other two major indices showing lesser gains.  Europe is universally higher and Asia had a pretty good session led by Taiwan (+5.0%) after their plunge protection team entered the market.  You can see all this in the screenshot from tradingeconomics.com.

I highlight this because I did not see one positive story this morning in the press about anything of note.  There is still a significant amount of discussion regarding Thursday’s declines and what that means and if it portends the beginning of the end of the major rally.  And this morning’s new fixation is on Jensen Huang’s girlfriend and whether or not she is/was a Chinese spy, with the Nvidia board opening an investigation and the shares lower by -6.4% this morning.  This is all in accord with the media theme, ‘if it bleeds, it leads’.  So, the amateur psychologist in me is wondering why so many people want to see bad things happen to others and lap up stories about those things, whether they are real or fake and whether they are history or forecast.  This is the doom porn I mention all the time.  I guess winning and having good outcomes is just not as satisfying for some and I fear their number is growing.

And ultimately, this is my greatest fear, that the negativity that permeates social media, and my experience is that is the majority of stuff, will lead to worse actual outcomes.  One need only look at the recent elections and wonder how even though affordability was the single biggest concern according to polls, the party elected to power has NEVER in history been able to address that in an adequate manner.  We are already hearing about price freezes being implemented along with moratoria on economic activity like data center construction, and I assure you, all that will do is result in shortages of stuff with two coincident outcomes, black markets and long wait times, both of which are simply inflation in another guise.  As Friedrich Hayek noted, “if socialists understood economics, they wouldn’t be socialists.” (as an aside, if you have never seen this video, it is so well done!)

And that is enough philosophizing for this morning, let’s look at the other markets around.  Bonds are pretty sleepy this morning with treasury yields unchanged although European sovereign  yields are slipping a few basis points as the session progresses as you can see in the below Bloomberg.com screenshot.  While yields remain higher over the past year, they have generally retreated recently.

Here’s the thing about bonds, though, while their recent performance has been far better than many expected just a month ago, we cannot lose sight of the longer-term trend which turned at the end of Covid and has been trending with higher yields for the past 5 years at least.  Just look at the chart below from yahoo finance.  A 40-year trend of lower interest rates ended and seems to have reversed pretty clearly.  We will need to see yields slide quite a bit further to break this new trend.  My point is bond strength (lower yields) may not be a long-term position here, just a good trade.

In the commodity space, oil (-2.8%) is falling once again this morning and taking products (gasoline -2.0%) along with it.  It remains difficult for anybody not directly involved with the ostensible Iran negotiations to know if there are negotiations and what is happening.  One thing I read this weekend was that the recent ‘defensive’ attacks on Qeshm Island and others in the area are part of a systematic US campaign to degrade what’s left of Iranian missile command along the Strait to help maintain traffic volumes there.  But frankly, it is almost as though the Iran war is becoming extraneous to the oil market.  Clearly there remains plenty of oil around and now, nine months into this campaign, the only shortages, diesel, are largely a result of Ukraine’s attacks on Russian refineries.

It is worth noting that today’s RBOB futures price is right where we spent virtually the entire post Covid Bidenflation years, as per the below chart, with lower prices only achieved at the beginning of President Trump’s second term with his drill, baby, drill policies.

Source: tradingeconomics.com

Given the relationship between gold and oil, it should be no surprise that the precious metals complex is stronger this morning (Au +1.1%, Ag +1.5%).  The best case for owning these metals remains the fact that M2 continues to climb rapidly in the US, and regardless of where interest rates go, inflation will be hard to control with that outcome.

Finally, the dollar is on its back foot this morning, down roughly 0.5% +/- a bit across the board.  The biggest gainer was NZD (+1.25%) after their national election left the ruling center-right National Party in power, easing concerns over worse economic policies (they have enough bad ones already), and we also saw KRW (+1.3%) rebound after a rough week as corporate repatriation of dollars helped support the won.  But really, since the beginning of October, the dollar has been a nonevent in markets, and I continue to believe it is separating itself from the narrative, at least for a while.

On the data front, this is inflation week and here’s what we have coming.

TuesdayNFIB Small Biz Optimism97.7
 CPI0.3% (3.9% Y/Y)
 -ex food & energy0.2% (2.8% Y/Y)
ThursdayInitial Claims195K
 Continuing Claims1720K
 Existing Home Sales3.98M
FridayPPI0.4% (6.6% Y/Y)
 -ex food & energy0.3% (5.0% Y/Y)

Source: tradingeconomics.com

As well, we have the 3-year, 10-year and 30-year auctions this week, and we hear from 11 Fed speakers over 18 different venues!  That’s just too much.  It will be interesting to see how this plays out now.  After all, consider that my thesis is the hawkishness has been driven by, or at least abetted by, the idea that most FOMC members dislike President Trump and want to hurt him, but now that the Democrats will be in charge of both houses of Congress, do they want to raise rates?  Seems like the Fed has found itself in a difficult position where hawkishness will hurt their favored partners.  Perhaps the most enjoyable thing this morning was the WSJ article by the former Fed (Powell) whisperer, Nick Timiraos, basically admitting that politics is going to drive the Fed going forward despite all the claims that the Fed is apolitical.

So, that’s the week.  Wednesday is Veteran’s Day and markets will be closed.  For now, regardless of the politics, markets are showing optimism with oil falling and equities rising.  I have a feeling things will remain choppy for a while and there is still a chance of some negative outcomes especially if Congress tries to implement some of the craziest themes.  I assure you that Medicare for all will be a massive economic, and market, disaster, although I don’t believe that is on the near horizon.

Good luck

Adf

Naught But a Guess

Posted on by 
The blood on exchanges is real
As traders and markets now feel
The future may not
Be all that they thought
When Trump wrote “The Art of the Deal”

It’s clear there was leverage, excess,
And that’s what has driven this stress
So, when might it end
This big new down trend?
An answer’d be naught but a guess

It was certainly ugly if you owned stocks yesterday, that’s for sure.  Ironically, while I had bought portfolio protection for an event of this nature post-election, Wednesday’s rally convinced me that the Democratic sweep had been priced into the markets already, and following my trading rules, I sold out the puts at a small loss.  Oops!  The lesson is that sometimes, trading discipline can result in decisions that don’t work out the way you expect, but that doesn’t mean trading discipline is a mistake.

As of 6:15 this morning, this is how futures markets around the world were behaving, and you can already see that there is a bounce in the NASDAQ as some dip buyers are jumping back into the market.

Source: tradingeconomics.com

The real outlier is India, where equities rose 2.2% overnight on the back of somewhat lower oil prices and, I think more realistically, a place where international fund managers believe the AI fallout is not going to be as significant.  But it is also worth noticing the YTD performances, where despite the angst generated by yesterday’s price action, long-term holders of equities remain in the green everywhere except China (and Russia, but that doesn’t count as a real market).  And you wonder why the Chinese National Team, as they call it, or the plunge protection team, as it is more colloquially known, is on the case.  In fact, Bloomberg had an interesting article on the subject this morning.

So, is the world ending?  That feels like an aggressive statement at this point.  Were some market excesses washed out yesterday?  That seems very clear.  Is the US economy going to fall into a recession?  That is a much harder question to answer, and the answer depends on your timeline.  Eventually, I suspect that will be the case, but it certainly doesn’t appear to be a near-term probability.  After all, look at the data we saw yesterday, where Initial Claims fell to 189K, a 57-year low while Continuing Claims have also been trending steadily lower since the middle of last year.  Something else to consider on the Initial Claims result is 57 years ago, the US population was 203 million or so, compared to today’s 340 million.

Perhaps just as importantly, the productivity data yesterday rose to 3.6% Q/Q in Q3, and as you can see below, continues to point to positive economic outcomes going forward.  After all, productivity growth is the key to economic growth, especially given the slowdown in population growth.  Maybe AI’s benefits are starting to show up after all.

Source: tradingeconomics.com

All this is a way of saying that yesterday was not, in my opinion, the beginning of the end of the equity market’s long-term rally.  I remain of the opinion that the upcoming gridlock between Congress and the Administration is going to prevent very much from happening at all, and generally, that is a net benefit to the economy and markets.

Attention now turns to the tape
And whether employment’s shipshape
The trend has been lower
Which could mean growth’s slower
But many misread that landscape

To finish off a week full of significant news, we get the payroll report this morning with the following expectations:

Nonfarm Payrolls65K
Private Payrolls64K
Manufacturing Payrolls5K
Unemployment Rate4.2%
Average Hourly Earnings0.3% (2.9% Y/Y)
Average Weekly Hours34.4
Participation Rate61.9%
Michigan Sentiment48.0

Source: tradingeconomics.com

For those of us who have been following markets for a long time, an NFP number of 65K would be considered near recessionary, which makes the Unemployment Rate at 4.2% that much harder to understand.  But as has been identified over the past two years, the Trump administration’s crackdown on illegal immigration has dramatically changed the nature of this data, as confirmed by several Fed working papers on the subject.  The result is that previous estimates of the need for between 150K and 200K new jobs every month to prevent the Unemployment Rate from rising have been whittled down to between 0 and 50K.  With that in mind, the recent NFP trend may not seem as concerning.

Source: tradingeconomics.com

In fact, it is this dichotomy, the fact that the labor market seems to be in very good shape according to the data, and the overall economic angst that clearly exists across the nation, which remains difficult for many to understand.  But that is where we are.

With all the other things ongoing, we have not heard anything about the Fed lately, and I must imagine Chairman Warsh is thrilled with that.  Are they still going to hike rates next month?  The UK just hiked, as did Australia, the ECB and the BOJ while the Fed paused last week although markets are pricing a 70% probability of a December hike.  But with oil starting to retreat, and more importantly gasoline prices retreating as per the below chart, are inflationary pressures really extant?

Source: tradingeconomics.com

Thinking through the Fed’s Keynesian framework, I would expect they could well see a change on the horizon.  Of course, the fact that this framework has been wrong for decades will not dissuade them from believing it.  Alas, as long as they continue to increase the size of their balance sheet, which they have been doing despite talking up rate hikes, I fear they will not arrive at their desired 2.0% PCE outcome anytime soon.

Source: tradingeconomics.com

A resumption of the previous downtrend would be a far more effective methodology for them to rein in inflation.  Maybe Chairman Warsh will get his way one day.

As to other markets, bond yields saw another sharp decline yesterday but this morning, they are bouncing a bit, (US +3bps, Germany +2bps, UK +5bps, France +4bps) ahead of the NFP data.  However, over the past month, Treasury yields are now lower by 50bps in pretty much a straight line as per the below chart.  For now, at least, Treasuries remain a place to hang your hat if you are an investor.

Source: tradingeconomics.com

Perhaps more interestingly, despite the decline in yields, the dollar is firmer across the board this morning, with the euro (-0.4%) under pressure, albeit not as much as the Antipodeans (AUD -0.7%, NZD -0.8%).  As yields everywhere are following the US lead, this must be something else.  It is entirely possible that this short-term move is the embodiment of the haven trade as investors bought dollars to buy Treasuries, but if they were liquidating their US equities, they already had those dollars.  One cannot rule out the idea that the relative macroeconomic stories between the US and the rest of the world remain heavily in favor of the US.  Certainly, this is not indicative of an immediate slowdown of the inward investment to the US in the wake of the election, but it is early days.

Lastly, if we look at commodity markets, oil (0.0%) has been chopping back and forth during the session as everybody is trying to figure out whether Mr Trump is going to resume attacks on Iran or if a deal is coming soon.  Crack spreads, (the value able to be retrieved from a barrel of oil), have fallen substantially from where they were just a month ago as per the below chart from data4thepeople.com, although they remain elevated in the long-term scheme of things.

In the metals markets, gold (-0.4%) has regained the $4000/oz level after significant month end selling last week and seems to be stabilizing here.  Silver (+0.6%) is in the same boat, having weathered the sub-$50/oz storm.  Until we see changes in fiscal policies and the ensuing monetary profligacy that always follows, I believe that these metals will retain their value.  But commodities have always been extremely volatile, after all, they are the very epitome of the boom-bust cycle.  Yet over time, inflation has eroded fiat currencies universally.

And that’s all I’ve got.  I’m happy it is the end of the week, as it has been more than enough to think about.  My sense is that with the election now behind us, focus will return to more market internals and the Fed, but for now, I expect that most folks just want to get to the weekend!

Good luck and good weekend

Adf

No Real Distaste

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

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

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

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

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

Source: tradingeconomics.com

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

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

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

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

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

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

Source: tradingeconomics.com

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

Source: tradingeconomics.com

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

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

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

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

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

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

Good luck

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A Plus or a Mess?

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

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

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

Source: tradingeconomics.com

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

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

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

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

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

Source: tradingeconomics.com

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

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

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

Source: tradingeconomics.com

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

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

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

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

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

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

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

Good luck

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A Sneak Peek

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

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

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

Source: tradingeconomics.com

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

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

Source: tradingeconomics.com

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

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

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

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

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

Source: tradingeconomics.com

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

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

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

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

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

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

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

Source: tradingeconomics.com

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

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

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

Good luck

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Still Burning

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

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

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

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

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

Source: tradingeconomics.com

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

Source: tradingeconomics.com

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

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

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

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

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

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

Source: tradingeconomics.com

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

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

Source: tradingeconomics.com

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

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

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

Source: tradingeconomics.com

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

Good luck

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In a Trance

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: tradingeconomics.com

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

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

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

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

Source: tradingeconomics.com

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

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

Source: cmegroup.com

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

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

Good luck and good weekend

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The What’s What

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

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

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

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

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

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

source: tradingeconomics.com

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

Source: tradingeconomics.com

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

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

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

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

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

Source: tradingeconomics.com

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

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

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

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

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

Source: tradingeconomics.com

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

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

Source: tradingeconomics.com

Otherwise, FX remains dull with nothing to discuss.

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

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

Source: tradingeconmics.com

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

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

Good luck

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