Da Bomb

Posted on by 
The payroll report was da bomb
But markets remained rather calm
So, what will it take
To get stocks to break?
If job growth leaves nary a qualm

Perhaps this week’s ‘flation report
Will frighten the risk averse sort
If prices jump higher
The bond market choir
Will trill for a hike, costs, to thwart

By now, you have heard about the blowout NFP report on Friday, where new jobs totaled 162K with revisions higher of the previous two months by an additional 55K.  This was massively above the expectations going in of 56K.  Perhaps even more surprising was the other survey, the Household survey from which the BLS calculates the Unemployment Rate.  While the rate was unchanged at 4.1%, employment (+569K) and the labor force (+683K) both rose sharply compared to recent reports, although it does appear this was a catch up from weaker earlier data.

In the end, the idea that the economy is slowing has lost some of its mojo.  This is evident in the Atlanta Fed’s GDPNow Q3 estimate as per below, where it is now tracking to 4.7% real GDP growth.

Similarly, the Fed funds futures market has rebounded to a 60% probability of a hike next week and another one by March of next year.

Personally, my take is that Chairman Warsh is ecstatic that the probability continues to hover either side of 50%.  As I have written consistently, uncertainty may result in short-term volatility, but it forces position reductions and less market fragility.  Remember, fragile markets are the ones that need to get bailed out.

Under the guise of good news is bad, equity markets suffered a bit on Friday, with the major indices falling between -0.3% and -0.5%, not great, but seemingly not the beginning of the end.  Treasury yields did very little and the dollar slipped, but that was really all about the yen, which has been strengthening quite nicely over the past several sessions.  My thesis that the yen would continue to weaken is starting to look a little shaky as the dollar has now traded below its intervention lows and back to a level not seen since mid-February of this year as per the below chart from tradingecononomics.com.

While one hike is set
Is another coming soon?
And what of the Fed?

Which takes me to another question that has been difficult to answer; if both the BOJ and the Fed, as well as every other major central bank, raise rates this week and next, and are assumed to continue raising rates over the next year, as per the below chart from rateprobability.com, does that really change the relative situation and should FX rates move substantially on the news?  

According to the chart, the BOJ is going to hike by 25bps more than the Fed over the next year.  Is that really worth 10 big figures in spot USDJPY?  More?  Less?  The interesting thing about the weekend is that Japanese 10-year yields slipped -2bps and appear to have broken free, at least temporarily, from the gravity of Treasury yields as the latter continue to edge higher, rising 2bps since Friday as per the below chart.  (Europe was basically unchanged.)

Source: tradingeconomics.com

As I weigh the evidence, it appears that the market is pushing to find the fail-safe point for carry traders, as well as Japanese investors writ large, and where interest rate differentials, as well as outright rates, need to be to alter decades worth of behavior.  Perhaps it is not the yield differentials that are driving the FX rate but the other way around.  If USDJPY falls far enough, that could well be the catalyst for a major change in the relative yield structure between dollars and yen.  Bessent certainly has a delicate task ahead of him.  On an unscientific basis, but rather one that is simply my feeling from experience, and looking at the yen chart for the past five years, I would suggest that while 150 is the next big round number, we are likely to head to somewhere between 140 and 145 as the new home, a place where the yen has strengthened sufficiently to impact trade, but not so far as to result in massive Treasury sales.  We shall see.

Source: tradingeconomics.com

Turning away from the eccentricities of the yen, oil prices are rising again, up another 2.7% this morning and now well above $90/bbl.  This is, not surprisingly, dragging both gasoline and diesel prices along for the ride, a situation that I’m sure has the White House plotting.  But the Houthis have attacked Saudi oil infrastructure and the ongoing tit-for-tat in the Gulf and the Strait continues.  The WSJ had a headline story about the US naval blockade really starting to bite there as oil revenues dry up.  This has certainly been effective, although it is taking longer than, I’m sure, the administration had wanted.  Elsewhere in the commodity space, while gold and silver are little changed to slightly lower this morning, copper (+2.0%) has continued to rally and has reached new all-time highs on both the LME and the COMEX.  This continues to be a story of insufficient supply for requisite demand, and demand continues to grow as data centers keep mushrooming up.  But copper mines take a decade or more to find, permit and bring online, and there haven’t been any in the works for years.  I think this is a market that despite being at record highs has room to run.

Equity markets have also been under pressure as the combination of anticipated rate hikes, increased war concerns and higher energy prices has weighed on markets writ large.  Obviously, oil companies and mining companies are benefitting from the price movement, although higher interest rates are a drag, but elsewhere, things are tougher.  So, looking across Asia, red was the color of the day (Japan -1.7%, China -0.4%, HK -0.4%, Korea -0.6%, India -0.7%, Taiwan -0.5%, Australia -1.0%).  In Europe, the picture is not quite as grim, with the declines smaller (Germany -0.2%, France -0.1%, Spain -0.3%) but declines they are.  As to US futures, at this hour (6:55), -0.6% seems to describe the situation.  Of them all, I think the yen’s strength has been the driver for Nikkei under performance.

Finally, the FX markets, away from the yen show modest dollar strength.  The euro (-0.1%), pound (-0.1%), CHF (-0.3%), AUD (-0.1%) are all slightly softer as trading desks get back to full strength now that the summer has unofficially ended.  While yen is the major topic of conversation, it is no surprise to see CLP (+03%) rally alongside copper and KRW (+0.2%) continues its several month appreciation, which has now reached 16% since July 1st.  Otherwise, it is not too exciting on this front this morning either. 

As I mentioned above, we have PPI, CPI and the first of the multiple central bank meetings this month, the ECB, on Thursday.

TodayConsumer Credit$11.7B
ThursdayECB rate decision2.50% (current 2.25%)
 Initial Claims205K
 Continuing Claims1790K
 PPI0.4% (5.3% Y/Y)
 Core PPI0.3% (4.6% Y/Y)
 Existing Home Sales3.99M
FridayCPI0.4% (3.4% Y/Y)
 Core CPI0.2% (2.4% Y/Y)
 Michigan Sentiment51.0

Source: tradingeconomics.com

Obviously, all eyes will be on the CPI data but as things heat up in the gulf, I suspect we can look for movement catalysts there as well.  In the meantime, the yen will be of great interest to one and all, whether traders, investors or Treasury Secretaries.  If we see this strength continue, look for more discussion and other market movement.  I don’t foresee a collapse in the dollar, but rather a steady reversal of what has been a steady trend higher in the dollar, lower in the yen.

Good luck

Adf

Rumors Imply

Posted on by 
Did the BOJ
Intervene? Rumors imply
Lifers it the bid

Twenty-five? Fifty?
Do they really want yen strength?
Can they live with that?

When looking at charts, as I frequently indicate, the timeline of the chart matters a great deal.  For instance, if we look at this 1-year chart with daily candles of USDJPY after the yen jumped 1.8% yesterday, it would be easy to conclude there was another bout of intervention.  After all, the price action certainly seems to indicate a virtual gap move lower, just like the other interventions that we have seen during the past year.

Source: tradingeconomics.com

However, if we look at the chart with much shorter time increments, for instance 15-minute candles, we see that while there was significant selling pressure all day yesterday, and actually from the night before, there are really no gaps on the way down.  This is indicative of a large sell order that is relatively price insensitive meeting a market that is on edge, but absent a clearer signal of intervention, a market that is still willing to make prices.

Source: tradingeconomics.com

As it happens, from what I understand the market rumor was that the GPIF was moving funds out of dollars, something that had been mooted several weeks ago after Japanese FinMin Katayama discussed it in a news conference, but there was no sign of the BOJ.  And, of course, this morning JPY (-0.5%), has reversed some of that move.  Remember, the BOJ meets in two weeks’ time and as I mentioned on Wednesday, while a 25bp rate hike seems to be baked in the cake, there is increasing talk of 50bps.  Right now, the market is not pricing 50bps, in fact they are at 21bps, so not quite a full hike.  If Ueda-san really wants the yen to strengthen, 50bps will do the trick as it would really hurt the massive JPY shorts that are still rampant.  (see below chart from cotsignal.com). 

Now, over the past month, that net short position, at least in the futures markets, has been reduced, but there are still many short positions in various forms OTC.  A 50bp hike would definitely hurt them and a move to, and possibly through, 150 would be viable then.

Of course, none of that even considers things like this morning’s NFP or next week’s CPI.  There is still plenty of fun to be had!

The other big story today
Is whether a rate hike's in play
If NFP's strong
One could come along
If weak, there will be a delay

Which takes us to the NFP release this morning.  here are the current median estimates by the economist community

Nonfarm Payrolls56K
Private Payrolls45K
Manufacturing Payrolls5K
Unemployment Rate4.1%
Average Hourly Earnings0.3% (3.0% Y/Y)
Average Weekly Hours34.3
Participation Rate61.4%

Source: tradingeconomics.com

Now, ADP Employment was slightly weaker than expected on Wednesday at 38K, but again, this begs the question of how many jobs are necessary in the US economy to continue to maintain full employment and economic growth.  Remember, too, last month’s NFP was surprisingly weak at -23K.  If we were to see another zero to negative outcome, the Fed funds futures market would completely reverse its recent hawkishness, which moved from a ~35% probability of a hike before the Warsh Jackson Hole Speech to a ~65% probability afterwards, but has since drifted back to basically 50:50 after hearing Fed Governor Waller indicate he is a hold as long as data keeps pointing toward declining inflation.  Any weakness today, and especially in next Friday’s CPI reading will likely reverse that period of hawkishness.

At this point, a hike is still fully priced in by the end of this year, although if they hold now, it would be a surprise to see a move one week before the midterm elections.  Arguably, the biggest problem regarding inflation in the US right now is diesel fuel, which as you can see in the below chart has more than doubled in price since December.

Source: barchart.com

Diesel filters into the prices of virtually all goods as transportation for delivery costs rise, and the one thing we all know is that once a company raises prices because of a fuel surcharge, that surcharge never goes away, it is simply absorbed into the price at some point in the future.  In fact, this may well be the single most concerning issue regarding future inflation, at least until the military action in both Iran and Ukraine/Russia ends.  Of course, the Fed cannot print diesel, but do they really want to go down the route of demand destruction?  That is a tough call.  I guess we shall all learn more in two weeks’ time as the quiet period is beginning today.

Which takes us to market activity.  Yesterday’s strong US equity performance was followed by a mixed picture in Asia, although there was far more strength (Tokyo +1.3%, HK +1.7%, Korea +1.6%, India +0.5%, Taiwan +1.5%) than weakness (China -0.1%, Australia -0.2%, Malaysia -0.4%, Indonesia -0.5%) with the rest of the bloc stronger rather than weaker.  In Europe, though, markets are essentially unchanged this morning ahead of the NFP number and US futures are also little changed at this hour (6:55).

In the bond market, Treasury yields (-1bp) have stopped climbing for now although remain at the upper end of their recent range as you can see in the below tradingeconomics.com chart

European sovereign yields have edged higher by 1bp across the board this morning and JGB yields, perhaps on the alleged buying by GPIF which led to USD sales in the FX market yesterday, have slipped by -4bps.  That is, of course, exactly what FinMin Katayama wants to see.

In the commodity markets, oil (-1.0%) is trading just above $90/bbl as the escalation of fighting in the Gulf has not had many headlines lately, although I think it continues.  Many have made the point, though, it is the products that are the driver, so diesel, jet fuel and gasoline are what matter to both measured inflation and the national zeitgeist.  In the metals markets, this morning prices are very little changed although as you can see in the chart below, gold’s recent sharp decline has been reversed to the tune of about 50% of the move.

Source: tradingeconomics.com

And finally, the dollar, away from the yen, is also largely holding its breath for the NFP report this morning.  KRW (+0.45%) continues to be the big winner over the past several months as capital continues to flow into Korea and its tech industry and tech stocks.  But if we look at the DXY, it is trading just above 99.0 this morning and frankly, if we step back and take a longer-term view of the dollar, away from the histrionics that many pundits try to add, it hasn’t gone anywhere since April 2025 as you can see below.  You may recall the gnashing teeth describing the dollar’s 15% decline in the first six months of 2025 as being ‘unprecedented’, but one need only look at the chart below to see a larger decline in the second half of 2023.  That was much ado about nothing.  But since then, 99 +/- 3 cents has been home.

Source: tradingeconomics.com

And that’s all there is today.  We simply await the data before the next move.

I want to thank all of you who mentioned Marvel, he showed beautifully yesterday but we did not get picked for an award.  We have two big shows this weekend and then the Nationals are the first weekend of October. 

Good luck and good Labor Day weekend

adf

Center of Blame

Posted on by 
It's not just the 'economy's heat
Why we're at the edge of our seat
But also, Iran
Where this all began
That's left traders feeling downbeat

Thus, crude oil's back in the game
As being the center of blame
How high can crude rise
Til bonds paralyze 
Activity, snuffing that flame

Bond yields remain topic A this morning as they continue to climb around the world.  There are many opinions as to why that is happening but I think it boils down to either 1) increasing deficit spending by governments around the world resulting in significant increases in supply thus driving yields higher, or 2) rising oil prices after the US-Iran conflict has seen an increase in military action on both sides thus driving the inflation narrative further.  Arguably, it is a combination of both these things.

Much has been written that these are the highest yields since 2011 or 2008 (or 1996 in Japan’s case) and how that makes them, somehow, more dangerous.  Or at least that is the implication.  When it comes to bond yields though, I always like to maintain perspective by looking at the long-term history of 10-year yields.  If you look at the chart below from FRED, I think it fair to ask the question, what is the aberration, current yields at 4.8% or yields at 2.5% or lower seen post the GFC?

As I have written before, the average 10-year yield over the past 60 years is 5.81%, still 100bps higher than current levels.  I understand that debt outstanding has grown dramatically over the years, but it’s not like it wasn’t growing during Covid.  In fact, it was exploding higher then too.  Ultimately, the original sin is excess government spending relative to the economy’s overall size and, unfortunately, the underlying thesis of RIH is that is not going to change.  To me the question becomes, how does one prepare for the impacts of this policy.  And remember, this is not a US only policy, it is now the default policy of every government in the world, save perhaps Switzerland.

How can it get fixed?  That is the $64 trillion question and there is no easy answer.  If governments around the world reduced their spending, especially on things that add no true economic value (subsidies for green energy are huge and immediately come to mind), it would help but not solve the problem.  Entitlement spending is the major expense everywhere in the G10 and as those nations age demographically, that will only get worse. 

I haven’t discussed the 4th Turning in a while, but this is all of a piece with that scenario, massive institutional changes as old institutions, be they corporations, central banks, government structures or educational organizations, will be redesigned for the new age.  Perhaps that is the promise of AI, a “voice” that can analyze history and help guide future decisions.  Alas, mankind is mankind, and I don’t foresee that changing so whatever comes out on the other side, it, too, will only have four generations of life!

Was it hint or threat?
Could Ueda hike fifty?
No breath holding, please

The other story of note this morning was that BOJ Board Member Takata, a known hawk, gave a speech and indicated that the BOJ could surprise with a 50bp hike this month, or perhaps hike two months in a row rather than their current once every six months cadence.  Bloomberg’s article was succinct.  This story did have a modest impact on the yen (+0.25%) as you can see in the chart below.

Source: tradingeconomics.com

But if we step back from the 1-week view above to the movement over the past year, as per the below chart, it doesn’t appear to have had a significant impact.

Source: tradingeconomics.com

The post-intervention pattern remains perfectly intact.  However, it did help increase the probability of further rate hikes by the BOJ as you can see in the rateprobability.com chart below.  The blue line is the current market compared to previous readings, with the market now expecting a total of 100bps of hikes during the next year. 

Alas, that did not help the JGB market, where yields remain at the 3.0% level, although they did not rise further last night.  Speaking of bonds, Treasury yields, which climbed 3bps yesterday, are unchanged this morning but European sovereign yields are all higher by between 3bps and 5bps, with France the worst case.

Looking at equity markets, red is the color of the day as every major market either declined last night or is in the process of doing so as I type as per the below Bloomberg screenshot.

Certainly, there is a great deal of angst in equity markets right now, but when I looked at the S&P 500, it is still just 2.5% off its all-time highs from the middle of August.  And this morning, while the NASDAQ futures are lower by -0.7%, the other two indices are unchanged as we await this morning’s ADP data (exp 47K) and this afternoon’s Beige Book.  Higher yields are always a struggle for equity markets, but there is no collapse yet, that’s for sure.

In the commodity markets, oil (-0.7%) has backed off the highs from yesterday and has traded back below $90/bbl, although that remains far higher than just a few weeks ago.  The escalation of fighting has certainly got traders nervous.  As to the metals markets, while they have been getting crushed the last few days, this morning they are essentially unchanged, perhaps consolidating after that rough ride.  You may remember there had been a strong negative correlation between oil and gold for a while which seemed to dissipate during the summer when things in the Gulf settled down.  Well, as you can see in the chart below, that negative correlation is back in spades for the past two weeks.  We will have to see how long that lasts, as historically, the two traded together more often than not.

Source: tradingeconomics.com

Finally, the dollar is creeping higher again this morning with the DXY (+0.1%) a pretty good proxy of the entire market with just a few exceptions.  We already noted the yen but NZD (-1.2%) fell sharply after the RBNZ raised rates by 25bps, as expected, but sounded more dovish in their comments afterwards.  As it happens, that helped the NZ stock market buck the negative trend as well.  The other outlier was KRW (+0.8%) which continues to rally strongly on positive inflows and positive economic news.  Last night, inflation data was better than expected, which helped the currency, rather than set it up for a rate hike.

And that’s really it today.  We also get Factory Orders (0.6%, 0.2% ex Transport) and the EIA oil inventories.  ADP could be interesting, but all eyes remain on Friday’s NFP on the data front.  And of course, who knows what will happen in the Gulf.

There will be no poetry tomorrow as we show GCH Nubia’s Take Your Breath Away on the road to the Nationals next month.

Good luck

Adf

Markets This Hated

Posted on by 
No matter the nation you view
Its bondholders now see to rue
Their previous buys
And under that guise
Won't buy and bonds that are new

So, yields have been rising with haste
Though currencies have not debased
But markets this hated
Have often created
Reversals, which many then chased

Global Bond Yields Surge as Oil Prices Fuel Inflation Worries

The above article in the WSJ this morning captures the current zeitgeist in markets and seeks to explain why everything has turned bad.  Certainly, the rebound in oil prices (+2.5%) is putting pressure on economies around the world, but so, too, are the unrestricted spending plans seen throughout the G10, and frankly across most of the planet.  My take is that ‘run it hot’ (RIH) has become the economic strategy around the world.  Perhaps the only outlier here is China, but even that is not really true, they are just running it hot differently.  While most governments are responsive to their peoplevoters, Xi Jinping has demonstrated time and again he doesn’t really care about that.  Rather he has his strategic goals of global domination and is pushing his economy to achieve that.

The upshot is that bond yields are rising and as you can see in the chart below, it is uniform, this is not just a US phenomenon.  In fact, much ink has spilled that 10-year JGB yields have traded to 3.0%, their highest level in 30 years.

Source: tradingeconomics.com

Now, as I said at the top, oil prices are clearly one of the pressure points as there are fears it will feed into higher inflation, thus investors are demanding higher yields.  And the other big story, which in my view is more concerning, is that governments are running increasingly larger budget deficits as the guns AND butter approach has become de rigueur in polite circles, or at least political ones.  In fact, the concern is that governments are increasingly running primary budget deficits (spending less interest payments) which is why debt loads are growing so rapidly.

Source: @KobeissiLetter

And this leads to the RIH theory.  If a country can grow its nominal GDP fast enough, then the denominator in the debt/GDP ratio will rise more quickly than the numerator thus reducing that ratio and implying a healthier fiscal outlook.  Now, nominal GDP is the sum of real GDP, the number that is reported, plus inflation and that sum can be any combination.  For instance, a nominal GDP growth of 7% could easily be 2% real GDP and 5% inflation, or vice versa.  In the RIH scenario the typical outcome is that wages rise, corporate earnings rise, stock market values rise…and prices rise.  The last point being the key political question.

Which takes us back to the bond market and a few questions I have.  First an observation.  In the old days (Greenspan era) a rule of thumb in the bond market was the 10-year yield should approximate nominal GDP growth as a stable base.  I mention that because I am confused by the bond market reaction given the near universal view of Chairman Warsh’s speech on Friday was that he was hawkish and that rate hikes were coming.  But if that is the case, and the Fed is going to more aggressively address inflation, then why are bonds selling off?  Second, regarding the debasement trade, if bonds are selling off because of concerns over massive debt issuance and the assumed result that the dollar, and all currencies, are going to lose purchasing power, why is gold (-1.4%) selling off so aggressively?  It strikes me that gold should be flying higher on the view that inflation is going to rise, but then, I’m just a poet.  I guess one could make the technical argument that it is merely correcting its recent strong rally and it remains far above its 50-day moving average as per the below chart.

Source: tradingeconomics.com

I wish I had the answers here, but I don’t.  However, something is amiss.  If the Fed was so hawkish, the bond market would not be aggressively selling off.  If the Fed was not hawkish, then the sell-off makes sense, but 90% of the punditry was wrong in their analysis of Warsh’s speech.  (My guess is they see that as a bigger problem.) One thing I do know, though, is that the bond market is quite bearish right now with nary a positive word to be found.  There is still a huge net short position in the bond futures market, as per the below chart.

Source: cotsignal.com

Here’s the thing about markets, at least in my experience.  Markets tend to seek out the ‘pain’ trade, the trade that will hurt the most participants most significantly.  As well, bull markets begin when all investors express uniform hatred of a product, like bonds right now.  Combining those two things leads me to believe that we could well be setting up for a significant bond market rally.  Just beware.

In the meantime, a quick tour of markets overnight shows negativity everywhere.  After yesterday’s declines in the US session, Asia saw mostly red numbers (Tokyo -0.15%, China -0.3%, HK -0.9%, Malaysia -1.5%, Singapore -0.8%) although Taiwan (+1.8%) and Korea (+0.25%) bucked the trend on some tech support which is also why the NASDAQ fell the least yesterday.  As to Europe, as you can see in the below screenshot from Bloomberg, it is universally red.

Lastly, US futures are under the gun this morning, down -0.5% except for the NASDAQ which is reversing yesterday’s outperformance and lower by -1.3% at this hour (7:20)

We’ve already discussed bonds, but this Bloomberg screenshot is worthwhile, I think.

Of course, the outlier here is the UK, which was closed yesterday so had a lot of catching up (down?) to do.

We’ve already discussed commodities which brings us to the dollar, which is rising despite yields rising everywhere.  Now, the DXY is at 99.60, hardly new territory although the trend over the past year is marginally higher as per the below chart.

Source: tradingeconomics.com

If we look at individual currencies, JPY (-0.2%) has seen the dollar rise back above 160 as the post intervention price action remains consistent with every previous effort.  Perhaps the most surprising outcome today is ZAR (-0.1%) which is holding up quite well despite much higher oil prices and much weaker gold prices, the two key issues in that economy.  But net, as much as people worry about the debasement of the dollar, it appears they are more worried about the debasement of other currencies more rapidly.

On the data front, this morning brings ISM Manufacturing (exp 55.2) and Prices Paid (72.0) as well as the JOLTs Job Openings report (7.3M). Fed Governor Barr speaks before the data at 9:00 this morning so I wonder if he will reaffirm the hawkish vibe, and if he does, shouldn’t that help the bond market?  I am still focused on Friday’s NFP as the next truly important piece of news, but there is an awful lot that can happen between now and then, especially with this President.

Good luck

Adf

Hike!

Posted on by 
Said Kevin, well, not really much
And pundits, their pearls, they did clutch
The haters all said
He's over his head
While others admired his touch

The hawks, meanwhile, think he said "Hike!"
And two-year yields promptly did spike
The dollar exploded
And gold just eroded
Though stocks drifted somewhat dreamlike

I must have listened to a different Kevin Warsh speech than most in the market on Friday morning, as the extreme hawkishness that seems to be the consensus outcome was completely lost on me.  Perhaps this is simply another Warshach Test.  He certainly repeated that the Fed is going to be successful at achieving their 2% target, although I clearly missed the part where he said they would be hiking in September.  But I must be the only one.  Futures traders clearly heard a hike was coming as the probability for a hike has risen to 62%, from about 32% prior to Warsh’s comments as you can see below.

In addition, a second hike in January seems highly probable and the chance of another one next summer has risen to 25%.  

Personally, I thought the most interesting, and encouraging, feature of the speech was his willingness to discuss the details of how PCE is created, a combination of 199 subcategories.  This is akin to the way my favorite inflation analyst, @inflation_guy, Mike Ashton, views the CPI data, and he has created a diffusion index to follow just how many categories are rising rapidly and how many are either falling or rising less rapidly than the overall rate.  Here is his discussion of the July data, released in August.  And here is a chart from that note (which you all should read and subscribe to as it’s free) showing his diffusion index and why inflation is not likely to subside quickly.

But clearly, the market is not interested in my spin, nor in the spin of anyone who disagrees that a hike is on the way.  The behavior of the Treasury market was quite interesting with 2yr yields jumping 12bps while 10yr yields rose 4bps and 30yr yields rose only 1bp.  This was a classic bear flattening of the curve, and it was the driver behind the dollar’s strength (+0.55%) and more impressively, the 3+% decline in the price of gold and silver.  If yields are going up, there is no reason to own gold, apparently.  That seems at odds with all last week’s talk about the resurrection of the debasement trade, but then, I’m just a poet.

One last thing.  After rereading the speech several times (talk about a boring life) my interpretation of the following comment within his Key Principles seems to be very different than the rest of the Street.  

“Fifth, short-term interest rates are the predominant tool to achieve the dual mandate. Unconventional policies to spur economic activity may suit genuine crises but should otherwise be used sparingly, if at all.”

I read this as he wants to reduce the balance sheet to reduce the Fed’s market impact and use interest rates as their policy tool and that currently, reducing the balance sheet will result in tighter policy with the same Fed funds rate.  But it appears the first part of my view, which is something Warsh has explained numerous times, is being ignored by the trading community.  Of course, it will take a change of the ‘ample reserves’ framework to get the Fed to reduce its balance sheet, and that will need the imprimatur of the balance sheet task force as well as time for the rest of the committee to get on board.

Regardless of my views, though, the market is now increasingly convinced the Fed is going to hike next month absent much weaker than expected NFP and CPI releases.

It wasn't all that long ago
When war in the Gulf ran the show
When fighting expanded
The market demanded
More havens as risk was the foe

But now, when the fighting gets hot
Most traders don't give it a thought
We're back to the Fed
And all that they've said
As key to what's sold or what's bought

Apparently, there was further military action in the Persian Gulf and the Strait of Hormuz yesterday as the US struck missile launchers on a small island there, claiming the IRGC was planning to launch more naval mines.  Iran said there will be great consequences, but the missile volleys they sent at US bases in Jordan were intercepted which prompted one of the funniest responses on X that I have seen.

Meanwhile, oil (+3.3%) prices have risen in response, but it has not generated nearly the excitement that we have seen in the past.  And I cannot help but look at the price action in oil over the past six months, since the war began, and remain unconcerned about the future.  Certainly, there has been volatility, but as I have highlighted in other markets, volatile markets are anti-fragile, and that is worth a lot.

Source: tradingeconomics.com

As to the metals markets, after Friday’s washout across the board, this morning gold is unchanged, silver (+1.7%) has rebounded more than $1/oz and copper (+0.4%) has basically recouped its much smaller decline from Friday.  Nothing has changed my view that all metals remain in uptrends.

Perhaps the most interesting reaction to the Warsh speech was the equity market on Friday, where the main indices only fell by very modest amounts.  There was no indication from that price action that there is concern about a major tightening cycle.  Turning overseas, the picture was mixed last night in Asia (Tokyo -0.15%, China +0.35%, HK -0.1%, Korea +0.5%, India -0.4%) and is mixed this morning in Europe (Germany -0.8%, France 0.0%, Spain +0.1%) with Germany the obvious outlier.  I might argue that is a response to higher-than-expected inflation readings there and concerns that it might drive the ECB tighter.  I guess if you look at the curve below from rateprobability.com it does imply slightly tighter policy over time, but that’s really at the margin.

As to US futures, at this hour (7:10) they are pointing slightly softer, -0.2% or so.

Of course, Friday was much more exciting for the bond market but this morning Treasury yields are unchanged from the Friday close.  Europe, however, has seen yields climb higher with continental sovereigns all higher by 3bps.

Finally, the dollar, which rallied sharply on Friday is giving back some of those gains with USDJPY back below 160, having closed above that level on Friday, while the bulk of the G10 currencies have gained between 0.1% and 0.2%.  The one exception here has been KRW (+0.7%) which has been on a remarkable roll over the past two months.  Between efforts to internationalize the currency and repatriation by the big semiconductor producers, the won has risen ~12% in the past two months, largely in a straight line.

Source: tradingeconomics.com

On the data front, there is nothing today but there is a big week coming culminating in NFP on Friday.

TuesdayISM Manufacturing55.2
 ISM Prices Paid72.0
 JOLTs Job Openings7.3M
WednesdayADP Employment47K
 Factory Orders0.6%
 -ex Transport0.2%
 Fed’s Beige Book 
ThursdayTrade Balance-$90.0B
 Initial Claims205K
 Continuing Claims1816K
 Nonfarm Productivity1.4%
 Unit Labor Costs1.3%
 ISM Services54.3
FridayNonfarm Payrolls58K
 Private Payrolls58K
 Manufacturing Payrolls5K
 Unemployment Rate4.1%
 Average Hourly Earnings0.3% (3.0% Y/Y)
 Average Weekly Hours34.4
 Participation Rate61.4%

Source: tradingeconomics.com

In addition to this, we hear from three Fed speakers.  The data we have seen of late indicates that the economy remains quite resilient in the face of higher energy prices.  Corporate earnings remain on fire and that continues to underpin risk assets overall.  However, all eyes will be on Friday’s NFP as that will serve to reconfirm prior opinions or perhaps change them.  The hawks will have a hard time making their case if the number is weak, and similarly, the doves if it is strong.  One little noticed thing from Friday was the NFP revisions for the 12 months from April 2025 through March 2026, which were revised lower by ‘just’ 79K.  Last year, the revision was -911K, so if nothing else, the BLS counted better!  But this begs the question, if the population is not growing, or even shrinking after all the deportations, and Baby boomers are retiring, thus reducing headcount, how many jobs are needed to maintain strong economic output?  

It makes a great deal of sense that Chairman Warsh wants to rethink the data because it does feel like the current data is outdated when it arrives, and that does not help forward looking policy decisions.  As to today’s session, it is hard to get too excited about anything right now, certainly in the FX markets.

Good luck

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Monet’ry Bleating

Posted on by 
Today it is all about Kevin
And whether, bond markets, he'll leaven
But what if his talk
Does naught to unlock
His views? For bond bears t'will be heaven

Remember, the them of this meeting
Is payments, not monet'ry bleating
Well, if that's the case
There will be a race
In which, only short, are competing

Markets have remained quiet for the past several sessions as investors, traders and algorithms all turn their focus to Jackson Hole, Wyoming this morning awaiting the sage comments of Fed Chair Kevin Warsh.  The market punditry seems convinced he will lay out things like his reaction function to data and his views on where monetary policy is headed.  Of course, I think they are talking their book as they are desperate to write about that.  We know this because all they have written about lately is how awful Warsh is for not telling them all that stuff.

But I have a sneaking suspicion that any discussion of monetary policy will be fleeting, at best, as the title of the symposium is “Financial Innovation: Implications for Payments and Policy.”  Frankly, this sounds like an opportunity for Warsh to wax poetic on the future of money and stablecoins and how the Fed will deal with these new vehicles and their impact on monetary policy.  I have already discussed the idea that stablecoins are going to be inflationary in their own right, and here is an article that describes the situation better than I can.  But in this context, and with the potentially major ramifications of the US government’s embrace of stablecoins, it would not be a surprise for Chairman Warsh to essentially ignore the current interest rate structure and focus entirely on the balance sheet.

If that is the direction of his speech, I expect that the bond bears will look to double down and really hit the futures market hard, driving yields higher extending the recent move seen in the chart below.

Source: barchart.com

But I also do not rule out Secretary Bessent taking advantage of that and buying them aggressively.  Would it really be a surprise if Bessent, a former hedge fund trader who understands both bond math and the way markets work extremely well, used his ‘at least’ $4 billion of buying power to purchase futures, utilizing leverage to expand the impact significantly?  At current margin levels, that $4 billion could purchase at least $60 billion equivalent in futures or 600,000 contracts in the first week of activity alone.  I think that could drive a pretty good short squeeze, exactly what Bessent wants to see.  Below is a chart of the Commitment of Traders report for 10-year note futures showing a net short of ~915k.  What kind of impact would buying 600k futures have?

Source: cotsignal.com

My take is there would be quite a few hedge fund traders whose bonuses would be negatively impacted!

This is all speculation, obviously, but from what I have read around, the market is really looking for something I sense Warsh is not going to give them.  Prepare for more volatility ahead after several weeks of limited movement.  Just sayin’.

In the meantime, let’s run down market movements overnight, although there was not a lot of excitement.  Yesterday’s US rally was followed by broad-based, albeit not excessive, strength throughout most of Asia (Japan +0.4%, HK +0.1%, Australia +0.6%, Taiwan +0.8%) although both China (-0.4%) and Korea (-1.8%) did not partake.  Given the Nvidiphoria, Korea is a surprising outcome, but volatility in that market has been extreme as I have shown in the past.  

European bourses are also higher this morning (France +0.9%, Spain +0.5%, German +0.5%) after data showed improved business confidence throughout the continent although GDP continues to be lackluster (e.g., France 0.7% Y/Y in Q2).  But sentiment indicators are picking up there slightly and, after all, equity markets are supposed to be forward looking.  Maybe things will get better in Europe, although given their energy policies and the fact that they are behaving far more like grasshoppers than ants these days with respect to Natural gas storage (see chart below), things may get tougher if they are wrong about global warming.

As to US futures, at this hour (7:15) while NASDAQ futures are softer (-0.6%) the other two major indices are essentially unchanged ahead of Mr Warsh.

In the bond market, yields continue to creep back higher with Treasury yields (+1bp) the best performer after JGB yields (+4bps) rose overnight and European sovereign yields have climbed between 2bps and 3bps this morning.  As I highlighted yesterday, or more accurately, the WSJ did the work for me, European yields have been climbing more rapidly than US yields lately as European nations have demonstrated no ability to rein in spending, and in fact, are planning the guns AND butter approach as they build out their defense capabilities while maintaining their nanny states.  What can possibly go wrong? 🙃

In the commodity space, we continue to hear that the Strait of Hormuz is either open or closed depending on the source, although the fact that oil continues to flow has me leaning toward more open than closed.  This morning WTI (-0.6%) is slipping a bit, although it rallied a bit yesterday.  There was a very interesting article in Bloomberg yesterday regarding the shale drillers’ ability to increase production dramatically by using more surfactants (soap) to help the oil flow, gains of 20% or more in a well, which simply reminds us of the amazing technology that exists in that sector.  There is no shortage of oil folks, and likely never will be.  As to the metals markets, gold is flat this morning and silver (+1.3%) is rising again, back above $70/oz.  Copper (+0.6%), too, is having a solid session.  Nothing has changed my views on the metals going higher over time.

Finally, the dollar has been stuck in neutral as we await Chairman Warsh with the DXY still hovering right above 99.00.  We have not discussed the yen (-0.2%) much lately as it has not been noteworthy, but now that it has been one month since the major intervention, I thought it worthwhile to take a peek at the chart and see how its doing.

Source: tradingeconomcis.com

I challenge you to explain the difference to me between the price action after the last interventions and this one.  The intervention in May took about 6 weeks to unwind and the yen continued lower for another 6 weeks before they stepped in again alongside the US.  Pretty much the only thing I can see that really stops this move is if I am right about Bessent squeezing the shorts and driving yields sharply lower.  In that case, USDJPY would fall sharply without intervention.  Otherwise, it’s hard to get excited about anything in the FX markets right now.

And that’s really it for today.  At 8:30 Canadian GDP (exp 3.4%) is released and then we see Chicago PMI (57.0) and Michigan Confidence (51.0) when Warsh starts to speak.  We also get the annual NFP revision although I have not seen any estimates for that.  But as I have said all week, it’s all about Kevin.  Now we wait and see.

Good luck and good weekend

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A Great Deal of Sorrow

Posted on by 
With Warsh set to speak on the morrow
The rate at which we all can borrow
Has been creeping higher
Which for some is dire
And causing a great deal of sorrow

The question is what will he say
Inflation'ry fears, to allay
Seems most want to hear
That during this year
Fed funds will rise without delay

Arguably, the biggest story this morning is that Nvidia’s earnings beat handily and Jensen’s forecasts were even more bullish.  The upshot is NASDAQ futures are rallying (+0.7%) and we saw strength in the tech sectors in equity markets overnight (Korea +1.5%, Taiwan +0.3%, China +0.9%), although it was not as euphoric as might have been expected.  I read this morning that price targets for Nvidia have been raised dramatically now, so there doesn’t seem to be any slowing of that thought process.

But otherwise, bond markets remain the focus as the combination of Secretary Bessent’s efforts to hold down long-term yields and anticipation of Fed Chair Warsh’s speech tomorrow are the main topics of conversation.  Interestingly, as much as the punditry loves to hate the US for its fiscal profligacy and the story of US yields rising has been top of mind, this morning the WSJ reminded its readers that the story in the US is not quite as bad as that in other major nations like France, Italy, the UK and Japan.  The below chart leads the story on the subject and is worth seeing.

The point is that virtually every Western nation is in the same boat and is likely to stay there for the foreseeable future.  The global regime that had been in place for upwards of 40 years; globalization leading to outsourcing manufacturing and financialization of major corporations is changing before our eyes.  Covid awakened many to the fact that the G10 had become dangerously reliant on China as a supplier for too many critical inputs which led to serious strategic concerns and weakness.  As that perceived weakness is being addressed by nations around the world, it turns out it costs a lot of money to do so, and nations are struggling to figure out how to pay for it.  Promises made when those nations could apply all their tax revenue to social causes are hard to keep when those resources are now being called upon to address strategic and security needs.  Hence the massive borrowing we have seen throughout the G10 and the corresponding rise in government bond yields.

But one of the interesting things about this process is that despite government yields rising, corporate bond yields have been quite well behaved, with credit spreads remaining near their tightest levels ever.  I saw this chart this morning which helps explain that seeming anomaly and it helped clarify my thinking.

Basically, it is explaining that US corporates during Covid refinanced their debt at the rock-bottom levels of the time and reduced their interest expense dramatically.  Meanwhile, due to arguably the single greatest fiscal policy error of all time by then Secretary Janet Yellen, the US didn’t term out its debt, instead going the other way, issuing more T-bills when yields were low, thus government interest payments, as we hear on a daily basis, have climbed dramatically. I’m still waiting for some news organization to ask her about this boneheaded decision, but I won’t hold my breath.

At any rate, the bond market story is the one currently with legs and I assume that will be true at least until Chairman Warsh speaks tomorrow.  While speeches of this nature are often quite dry, I am truly looking forward to hearing what he has to say.

In the meantime, let’s see how other markets are behaving this morning.  After yesterday’s very modest declines in the US, the rest of Asia was mixed as Tokyo (-0.25%) slid alongside HK (-0.3%), neither being a major concern.  Australia (-1.0%) was the worst performer out there after stronger Household spending data bolstered the case for an RBA hike next month raising the probability to 54%.

Europe, however, is having a tougher time this morning led by Paris (-1.1%) where concerns are rising based on both a Fitch credit review of the country (last year they were downgraded one notch to A+) as well as growing uncertainty over the presidential election next year as the main candidates describe their policies to business leaders in a debate format.  But both Spain (-0.5%) and the UK (-0.5%) are also under pressure with only Germany (+0.2%) bucking the trend after a slightly better than expected GfK Consumer Confidence reading of -26.6.  I think it is worthwhile, though, to get a better idea of the situation in Germany, and by extension all of Europe, to look at that confidence measure’s history below.

Source: tradingeconomics.com

Sure, the reading was better, but how awful must confidence be in Germany.  I guess this is the way people respond to their suicidal energy policies.

While I discussed bonds in general above, I didn’t mention the overnight movement which has seen yields continue to edge back higher led by Treasuries (+2bps) with European sovereigns right there, rising between 1bp and 2bps.

In the commodity markets, oil (+0.3%) has been trading around unchanged all night as it was slightly lower when I first sat down.  We continue to hear conflicting stories about the situation in Iran and the Gulf and whether tankers are transiting the Strait, but we have still not seen any blowout in prices.  EIA inventories yesterday showed a small net draw in gasoline and distillates, but crude remains available and Cushing inventories are being rebuilt.  As to metals, gold is flat this morning with silver (+0.6%) edging higher.  There continues to be real support for the precious metals as both grind slowly higher.

Finally, the dollar continues to languish, doing very little overall.  Despite much excitement several weeks ago about the dollar breaking out higher, the fact remains that the DXY is basically in exactly the same place it was in April 2025 as you can see below.  As I have repeatedly explained, at some point the dollar will matter again to markets, but I’m not sure what will drive that change.

Source: tradingeconomics.com

As it is Thursday, we see the weekly Initial (exp 208K) and Continuing (1790K) Claims data.  We also see the Goods Trade Balance (-$99.0B) and then some tertiary data.  Today has all the hallmarks of a sleeper as we await Chairman Warsh tomorrow.   

Good luck

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Run-Of-The-Mill

Posted on by 
The funniest thing that I read
Was Bloomberg, in which someone said
That Bessent's bond buys
Have seen prices rise
So maybe, he's not a blockhead

Meanwhile, today brings PCE
Which pundits are anxious to see
If it comes out hot
They'll claim Warsh has wrought
Disaster and sip their Chablis

But if PCE remains chill
The pundits, when ink meets their quill,
Will pivot to stories
In new categories
And claim it was run-of-the-mill

As we await this morning’s PCE data (exp 0.1%, 3.6% Headline; 0.2%, 3.3% Core), as well as a bunch of other stuff like Personal Income (0.2%), Personal Spending (0.1%) and GDP (1.5%), many in the market continue to discuss the pros and cons of Treasury Secretary Bessent’s efforts to push down longer dated Treasury yields.  Before this morning, it was widely reported, or perhaps loudly reported is more accurate, that this was a desperate act and demonstrated that he didn’t know what he was doing and was simply a Trump puppet.  But the top story in Bloomberg this morning is titled “Bessent Bounce Starts to Emerge in Long Bond Market Metrics”.  In the story, they describe that despite all the controversy and certainty it would fail, it seems to be working for now.

Certainly, based on yesterday’s bond market price action, where 10-year yields slid -6bps, that may be the case.  And remember, the increased buybacks aren’t going to take place for another two weeks, so we still don’t know how much the Treasury is going to buy.  Personally, I like the idea of Treasury buying bond futures, where there is a massive speculative short position, and squeezing them all badly.  Remember, he was a hedge fund manager and knows exactly how that process works.  (As an aside, I have a feeling that Druckenmiller’s op/ed was him talking his book because he is short futures as well.)

At any rate, now that complaining about Bessent is not in tune with today’s market, the punditocracy has pivoted back to Chairman Warsh trying to anticipate what he is going to say Friday morning.  As Warsh remains tight-lipped about everything, it is much easier for the pundits to make claims without being proven instantly wrong.  And whatever Warsh says, you can be sure the pundits will claim they knew it all along!

Meanwhile, in the markets, I believe oil (-2.6% today, -5.0% in the past week) continues to slide and is back at levels seen earlier this month around $80/bbl as per the below chart. 

Source: tradingeconomics.com

I am continually amazed at the commentary regarding oil and Iran and potential peace talks as the response to virtually every statement by the Trump administration about the situation, whether about the ability to traverse the Strait, or the status of talks with Iran, is to dismiss it out of hand by many commenters on X, but when Iranian propaganda media makes claims, it is taken as gospel.  Yesterday I recall Iran claiming economic sanctions won’t matter, they are prepared, and yet today there are stories of how Iran and Oman are furiously trying to come to some type of agreement.  I do not know the situation on the ground there but after 6 months of bombardment and embargos on their oil exports, my sense is the IRGC is feeling a lot of pressure.  I guess we shall see, but in the meantime, oil inventories remain robust with no shortages seen.

As to other markets, let’s tour around to see what’s happening.  Completing the commodity group, metals are consolidating weekly gains with gold (-0.8%) and silver (-0.2%) slipping a bit although both remain higher by more than 2% this week and about 15% in the past month.  Copper is little changed.

In the bond market, after yesterday’s sharp decline in yields, where European sovereigns followed Treasuries, albeit not quite as far, this morning has seen yields back up 1bp across both the treasury and European markets.  As I have been saying, I believe this market is waiting for Chairman Warsh to speak before deciding its next move.

In the equity markets, US markets all rallied yesterday afternoon and closed near their highs with that price action following across most of Asia.  Tokyo (+0.6%), HK (+0.6%) and China (+0.85%) all had good sessions as did Korea (+1.0%) and Taiwan (+1.5%) as all those tech related markets await Nvidia’s earnings to be reported after today’s US close.  The exception here was Australia (-0.4%) which slipped after higher than forecast inflation readings were released and markets have increased the probability of a rate hike by the RBA at their September meeting to 45% from about 25% prior to the release as you can see in the chart below from rateprobability.com.

In Europe, equity markets are fairly quiet overall with modest gains of 0.2% to 0.4% everywhere except the UK which has seen a decline of -0.2%.  Ironically, despite the problems the UK is having with energy prices, two key members of the FTSE 100, Shell and BP are lower on the lower oil price and that is dragging down the index.  As to US futures, at this hour (7:40), NASDAQ (-0.5%) futures are softer, but the other major indices are little changed.

Finally, the dollar is slightly firmer this morning but continues to be an afterthought in markets.  The DXY is exactly where it was yesterday when I wrote and the only true outlier today is AUD (+0.25%) which is benefitting from higher interest rate expectations.  Otherwise, the dollar is modestly firmer against most every counterparty of note.  At some point, the dollar will get interesting again, I just don’t know when that will be.

And that is really it today.  Perhaps there will be a deal from Iran although I doubt it.  

Instead, a tribute to one of the true superstars of our time, and by all accounts one of the finest human beings ever, Ms Dolly Parton.

Good luck

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A Desperate Act

Posted on by

A key market story yesterday was that the Treasury buyback operations, you know the ones that would be “at least” doubled to $4 billion per event, could grow much larger as secretary Bessent would tap the Treasury General Account (TGA) for this purpose.  Now the TGA is the federal government’s checking account.  It is where your taxes get paid into, along with the receipts from bond sales and tariffs.  It is also the account that pays all the federal government’s obligations like salaries and purchases of defense and other equipment.  The current balance (a/o Aug 21st) is about $936 billion according to the Treasury website.  Obviously, that is a huge amount of money, but then the federal government has a huge amount of payment obligations.  I bet it is a hard checking account to balance!

Now, technically, I presume that all their operations are paid by the TGA.  The mechanics would work that Treasury would issue T-bills, receive the cash in the TGA and use that cash to buy back bonds.  But the implication was that he would just spend the money that was already there.  Personally, I doubt that will be the outcome, and frankly, it almost sounded more like a threat than a future course of action.  But it did get tongues wagging.  

According to Grok, these comments came in an interview on CNBC at a bit after 9:00 yesterday morning.  The chart below shows the bond market price action from that point onward, which tells me that while there was a modest initial response, it completely disappeared until another catalyst (lower oil prices I believe) helped push yields down early this morning.

Source: tradingeconomics.com

But this clearly struck a nerve as in this morning’s WSJ, Stan Druckenmiller, Bessent’s mentor at the old Soros hedge fund, wrote an op/ed decrying the move.  As I survey all that I have learned thus far, it seems clear that Bessent is looking to remove duration from the market in an effort to drive longer dated yields lower.  But his tools are limited compared to the Fed’s abilities and, at least right now, it does not appear the Fed is going to cooperate.  The first operations aren’t scheduled until September 7th, so until then, it is all just speculation, and I’m not even going to try.

The other thing that Secretary Bessent did yesterday, that may have a larger impact on things, was announce sweeping new sanctions on Iran and countries that do any residual business with Iran in an effort to add further pressure on the regime.  It is possible, but not clear to me, that this is part of the rationale for this morning’s decline in the price of oil (-3.0%).  However, if you look at the chart of oil for the past 24 hours, it is remarkably similar to that of the 10-year Treasury above.

Source: tradingeconomics.com

Ostensibly, the news here, which of course would impact bond yields, is that the Pakistani army chief was intermediating between the US and Iran in an effort to find a solution and reduce tensions in the Gulf.  That would certainly be a welcome outcome for all, but I’m not holding my breath.  However, this price action has set the tone for risk markets this morning, so let’s take a look.

While Asia was mixed overnight (Tokyo +0.5%, China -0.3%, HK 0.0%) following the mixed US session, with pressure still evident on the tech sector, Europe is firmer this morning across the board (Germany +0.8%, Spain +0.4%, France +0.4%, UK +0.25%) with all those rallies timed almost exactly alongside the oil and bond moves.  As you can see in the chart below, the same is true in the US where futures at this hour (7:25) are also higher and moved right alongside other equity markets.  As to specific stories here, I think there is a great deal of breath holding for the Nvidia earnings report tomorrow after the close.

Source: tradingeconomics.com

In the bond market, as mentioned above, yields are lower across both Treasuries (-3bps) and all European sovereigns with the entire bloc seeing yields decline by between -3bps and -4bps.  It appears this all revolves on the same story driving oil and equities.

In the metals markets, gold (-0.2%) is edging lower but basically consolidating another strong day yesterday.  It is reasonable to conclude that market participants are growing cautious regarding US debt given there is no indication of spending restraint.  But the reality is that markets are growing cautious of all G10 debt given that statement regarding spending restraint is universally true in that bloc.  I continue to believe we are going to see governments around the world try to ‘run it hot’ with nominal GDP growth rising faster than government spending, thus reducing the real burden.  However, running it hot generally means higher inflation, and that is something that is a political problem.  As to the other metals, silver (-1.2%) is under pressure, although still far higher over the past week and month, while copper (+0.5%) is a bit firmer this morning.

Finally, the dollar is still sleeping this morning, virtually unchanged on the DXY at 99.00 and virtually unchanged vs. almost every major counterpart.  The biggest mover is INR (+0.35%) a major beneficiary of lower oil prices and not surprisingly, NOK (-0.2%) is suffering on the same catalyst.  But otherwise, everything is +/- 0.1% from yesterday’s close.

On the data front, there is not a ton this week, although PCE comes tomorrow, but really all eyes remain on Chairman Warsh’s speech Friday morning.

TodayCase-Shiller Home Prices1.7%
 New Home Sales620K
 Consumer Confidence90.2
WednesdayPCE0.1% (3.7% Y/Y)
 Core PCE0.2% )3.3% Y/Y)
 Q2 GDP1.5%
 Durable Goods0.7%
 -ex Transport0.5%
 Personal Income0.3%
 Personal Spending0.2%
ThursdayGoods Trade Balance-$99.0B
 Initial Claims208K
 Continuing Claims1811K
FridayChicago PMI57.0
 Warsh Speech 
 Michigan Sentiment51.0

Source: tradingeconomics.com

In addition, the EIA oil inventories are expected to see another build as there remains ample supply, at least so it seems.  While PCE is important, I think it will be less so given the pending Warsh comments.  To me, tomorrow’s Nvidia earnings and then Warsh are the keys for the rest of the week, absent a major change in Iran, and alas, I don’t see that.

The bond brouhaha is much ado about nothing I believe as it will not change the trajectory of Federal spending, and that is what is necessary to have a long-term impact.  Unfortunately, that usually takes a crisis, and those are unpleasant.  They also take a VERY long time to develop, after all Argentina imploded for nearly 100 years before electing Javier Milei who promised to do something about it.  It has only been 25 years here since we last ran a budget surplus.  I fear it could be much longer before things really change.

Good luck

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Things Are Bleak

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The one thing on which you can rely is that there is a large segment of the punditry who will complain about every action taken by financial authorities, often offering ad hominem comments to make their case while demonstrating their own ignorance.  The benefit you have here is that I know there are many things I don’t know and don’t pretend otherwise.

Of course, I am referring to the Treasury Secretary’s recent announcement to ‘at least’ double the activity in their bond purchase program.  Once again, let me remind everyone that Secretary Bessent did not unilaterally pass laws to enact spending, that was Congress’s doing and the dramatic increase in spending has been ongoing for at least 25 years.  Just like every treasurer in every company, Bessent’s primary job is to ensure there is sufficient funding, and that is what he is doing.  Machinations as to the tenor of the debt are left to his discretion and fortunately, he is a man with an extraordinarily broad and deep understanding of financial markets.

The claims that he is panicking now are ridiculous, although I’m sure he isn’t thrilled with the situation.  But he inherited the situation, he didn’t create it.  For every doomster out there explaining the bond market is going to collapse, or the government is going to be forced to change their ways, my response is, don’t hold your breath.  

While yields have certainly risen over the past several years, that was from the extremes of Covid policy.  If you take a longer look, as per the chart below from FRED, the current level of 10-year yields is hardly dramatic, and actually, as I have written before, remains well below the long-term average.

Now, I understand that the amount of debt outstanding is much larger, on both an absolute and relative to GDP basis, but I also know that there is literally a 0.0% probability that the US will not repay that debt.  The question is what the real value of the dollars you receive will be when they are returned, and there, the picture is less bright.  Of course, as you can see from the below chart, also from FRED, this is hardly a new concept either.  In fact, ever since the Federal Reserve was created in 1913, the value of the dollar has declined by about 97%.  This is not a new phenomenon.

Which brings us to Chairman Warsh.  I find it interesting that the punditry believes that Bessent’s activities were completely independent of Warsh.  The two are BFF’s for god’s sake, and speak every week, if not every day.  Each has a job to do, and each is working to achieve it.  Inherently, Warsh’s job is made more difficult because of the US fiscal situation, not because Bessent is tweaking the Treasury’s maturity ladder.

And here’s the thing, both men are working to make institutional changes in hidebound institutions that are fighting things tooth and nail.  Frankly, I sincerely hope both are successful.  Back to Warsh.  Friday, he will speak at the KC Fed’s annual Jackson Hole Symposium, this year titled “Financial Innovation: Implications for Payments and Policy.”  Now, that is a bit afield from the details of monetary policy, as I suspect the policy part of the title refers more to the stablecoin question rather than the size of the Fed’s balance sheet.  But I am confident he will discuss current monetary policy in some manner.  I am also confident he will not offer suggestions as to the next rate move.  

The current narrative has morphed into, the problem for markets/analysts is not the lack of forward guidance, it is those people don’t understand the Fed’s reaction function.  This, too, is disingenuous in my mind as Chairman Warsh has made clear, his function is to reduce inflation to the 2% target, and he has clear ideas how to do that.  The problem is his ideas are different than the neo-Keynesian views that dominate the Fed (and every other central bank), and so are making people uncomfortable.  He has made very clear he is happy to allow the bond market to do the Fed’s work, tightening policy.  He is also very politically astute and clearly understands Bessent’s actions.  I would contend that of all the dysfunction in the government, the least concern should be afforded to the Fed/Treasury nexus.

And finally, it appears that the latest trade talks with Canada have broken down and both sides will be imposing tariffs on the other side.  My personal view is this is a mistake, only because there is no predatory relationship between the two nations, but politics is politics and PM Carney has called on national pride as his rationale.  The thing for the US is, it isn’t going to matter that much. According to Grok, Canadian imports represent ~10% of total US imports and ~1.5% of GDP, so higher tariffs on that relatively small amount is not going to change much.  For Canada, though, exports to the US represent ~20% of GDP, so interruption there is going to hurt a lot more.  Something tells me we will get a deal here pretty soon though as both sides will benefit.

The market’s initial reaction in USDCAD was a slight hit to the Loonie (-0.6%) as you can see in the chart below.  But the CAD has been appreciating over the past month like every other currency vs. the dollar, and this move is hardly breathtaking.  My take is USDCAD remains far more beholden to the broad dollar story with this simply a blip.

Source: tradingeconomics.com

Sticking with the currency theme, the dollar more broadly is a touch higher this morning, with the DXY up 0.2% and modest gains vs. most of its G10 and EMG counterparts.  With the dollar back in the middle of its broader long-term range, it is hard to get excited in either direction at this point.  Certainly, a case can be made that we will see a significant decline going forward if the worst-case scenarios play out, but that is not my base case.  Rather, I have a sense that we are going to remain somnolent in the dollar for a while to come, at least until policies are clearer and that is anybody’s guess as to the timing.

Looking at commodity markets, oil (-2.2%) which spent most of last week rising on increased concerns over Iran and the situation there, has reversed course this morning on two stories.  First, it appears that flows through the Strait of Hormuz have been picking up again as per this article, although it remains very uncertain as to the full amounts.  However, oil is moving.  The second story is the latest set of sanctions that the US is set to impose on Iran and secondary nations that trade with Iran as a means to effectively starve the regime there.  Regardless, lower oil prices are certainly better than higher from a global perspective.

Meanwhile, despite the dollar’s modest strength this morning, the barbarous relic (+1.1%) is higher by 15% since the beginning of August and really appears to be building strength in the move.  Is this related to concerns over fiat currency debasement in the US and elsewhere?  Probably as that 5000-year history of holding value in all times is starting to seem quite attractive.  Not surprisingly, this has helped silver (+0.5%) and copper (+0.1%).

Source: tradingeconomics.com (that green bar on the right appears to be a misprint)

In the bond market, yields are edging lower this morning with Treasuries (-3bps) leading the way and most European sovereigns, as well as JGBs seeing -1bp declines.  Nothing has changed the big picture here with too much government debt being issued around the world, but I have a feeling everyone is waiting for Chairman Warsh on Friday before taking their next steps.

Finally, equity markets which had a decent session in the US on Friday, are more mixed.  In Asia, the big markets all fell (Tokyo (-0.75%, HK -1.9%, China -1.2%, Korea -3.1%, Taiwan -1.0%) with only Australia (+0.5%) bucking the trend on stronger commodity prices.  In Europe, it has been a very quiet session, no surprise at the end of August, with bourses there within 0.2% of Friday’s close.  US futures, though, are being dragged down by tech and the NASDAQ (-0.8%) at this hour (8:05) although the other indices are only marginally softer.

As I’ve run on too long as it is, I will cover data this week tomorrow given there is nothing to be released today.  The oil story and anecdotes about tech are the keys for now absent a major White House surprise, something you can never rule out.

Good luck

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