To Excess

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The State of the Union Address
Was, as is Trump’s wont, to excess
He touted his claims
And handed out blames
While focusing on his success
 
The market responded, it seems
Like Trump answered all of its dreams
Stocks round the world rose
Which shows, I suppose
The world does approve of his schemes

As I look at my screen this morning, literally every major equity market is higher, as per the below screenshot, as are US futures.

Source: tradingeconomics.com

In fact, if you ignore Russia, which hasn’t really been relevant since the Ukraine invasion-imposed sanctions, every market is higher over the last year, and US markets are the true laggards as seen by their monthly performance.  But you cannot look at this picture and determine that anything President Trump said last night was negative for the global economy.  I guess it’s full speed ahead now.

In true Trumpian fashion, the president remains incredibly optimistic about the future for the US and the Western world and perhaps that is what is reflected here this morning.  However, there were precious few new initiatives announced so it is unclear to me that this is going to be a topic of discussion in the financial markets going forward, although you can be sure that the political narrative is going to be very active.

So, let’s move on to things that matter for markets.

Is she hawk or dove?
Takaichi hates China,
Not easy money

As you can see in the above table, Japan’s Nikkei 225 rose sharply, nearly 4%, but that had nothing to do with the SOTU.  Rather, her administration named two new BOJ governors (it was simply time to rotate some) and both were seen as quite dovish.  In fact, one, Toichiro Asada, is known for his belief in the benefits of MMT (you remember the magical money tree idea that governments that print their own currency don’t need to worry about overborrowing).  The upshot is that while Japanese stocks raced to yet more new highs, as per the below chart, JGB yields reversed their recent declines and rose (10yr +5bps, 30yr +10bps) and the yen (-0.6%) continued its recent slide, although remains well above (dollar below) the 160.00 level, which many see as the BOJ’s line in the sand regarding intervention.

Source: tradingeconomics.com

But other than this story, it is much harder to find things that have been market drivers.  To my eye, we continue to see market participants laying back in most places as they are still recuperating from the raucous first six weeks of the year.

So, let’s go to the tape.  We’ve already seen the equity performance around the world, with the narratives forming that the US tariff situation is now a reduced stress on global trade as they have been reduced to 10% globally.  As well, there have been an increasing number of rebuttals to the AI piece I mentioned on Monday, with this one, I think, the most succinct takedown of the idea that AI is going to eat the world and drive us into a recession with no jobs left for people.  As such, Monday’s narrative of all stocks being worthless has changed.  Elsewhere, the tariff story and tech rally have been the key discussion points across markets.

In the bond market, yields are a touch higher with Treasuries (+2bps) edging up on what seems like ordinary trading.  The short-term trend here is lower yields, as per the chart below, but we know that nothing moves in a straight line.

Source: tradingeconomics.com

As to European sovereign yields, they, too, are mostly a few ticks higher this morning although, this also appears to be simple trading activity rather than a new narrative.  It is interesting that there are more stories today about ECB President Lagarde stepping down early, which is diametrically opposed to what she said when asked the question recently.  As I said before, I think she steps down and is going to run for President of France.

The commodity markets continue to be the place with the most price action and this morning is a continuation of that recent trend.  Gold (+0.9%), silver (+3.7%) and platinum (+5.5%) are all continuing their rebound from the extreme declines seen back on January 29th.

Source: tradingeconomics.com

I do not have any inside track as to the driver of those moves, but I continue to read and hear about significant intervention designed to burst those bubbles (and they were clearly bubbles) and allow key institutions to cover short positions at better prices.  The problem with these stories is that we have heard for years about the manipulation of the prices of both gold and silver by large banks, and the purveyors of those stories have neither great reputations nor track records, so it is always a tough sell in my mind.  There is no question that when markets go parabolic, as the precious metals did through January, the reversals have always been dramatic.  However, I cannot speculate on the driver as often times, there doesn’t need to be one.  This cartoon from Kaltoons demonstrates it perfectly.

Turning to oil (+0.8%), Iran remains a key narrative and continues to support the front month pricing.  However, it appears that several futures spreads are falling sharply, indicating a potential glut in physical supplies has developed, at least for now.  As I look at the front contracts in the futures curve, we are still in backwardation, which implies a shortage, although I suppose that is the Iran effect.  

Source: barchart.com

I understand the short-term concerns here regarding potential military escalation there, but nothing has changed my view that the long-term energy situation is one of abundance and maintaining much higher oil prices will be very difficult for the long-term.  After all, look at Venezuela, which has already increased production back above 1mm barrels per day with contracts being signed for more activity.  Too, Argentina’s Vaca Muerta shale production is at new record levels, also ~1 mmm bpd and we continue to see growth offshore Brazil and Guyana.  Longer term, there is plenty around, I think.

Finally, the dollar is mixed this morning as the yen’s weakness is being offset by modest strength in the euro (+0.1%) and pound (+0.2%).  However, the big movers today are KRW (+0.9%) which has benefitted from inward equity flows and hopes for tariff relief, as well as ZAR (+0.5%) on the back of the precious metals rally and CLP (+0.4%) on copper’s strength.  Remember, the US is not overly concerned about USD weakness in the FX markets as it suits the administration’s goals of reducing the trade deficit and encouraging onshoring of production.  But even with that, looking at the DXY, it is just below 98.00 and remains right in the middle of its trading range for the past 9 months.

Source: tradingeconomics.com

There is no major data out this morning with only the EIA oil inventories where a very modest build is anticipated.  

Big picture, I don’t think anything has changed.  Fiat currencies continue to lose value relative to ‘stuff’.  Equity markets continue to benefit from the global ‘run it hot’ policy and there is no clarity regarding the outbreak of a war in Iran.  With this in mind, it is hard to see a large move in the dollar in the near future.

Good luck

Adf

A Future, Dystopic

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On Monday, an analyst wrote
His thoughts how AI might promote
A future, dystopic
Though somewhat myopic
And offering no antidote
 
Although prior views had explained
That once AI’s suitably trained
Most labor would suffer
And lacking a buffer
Folks’ politics would be quite strained

This is the research report that got tongues wagging on Wall Street yesterday and the fear it allegedly engendered was impressive.  In essence, it said that by 2028, AI would replace vast swaths of the labor force, notably white-collar workers, and that it would lead to a massive recession, and more importantly to the Street, a significant decline in stock prices.  The back and forth on X was amusing all day as there were those who hyperventilated over the coming tragedy, and those who fought back.

It is important to understand this was not a prediction, per se, but one of the scenarios they came up with, although clearly the most dramatic one.  It certainly gained a lot of clicks and notoriety, and let’s face it, isn’t that the idea these days?

Given that the tariff story has now become too complex for anyone to truly understand, and while we all await the denouement in Iran, this appeared to be the best thing to occupy time amongst the trading community.  Personally, I spent the entire morning shoveling snow, but then, I’m no longer a trader.

The upshot is that the major indices all fell more than 1% while gold and silver rallied and bond yields fell.  Fear was palpable.  But will it last?

Last month’s yen rate checks
Came not from Ueda-san
But Bessent, himself

The other story of note was almost an aside, although it helps outline recent movement in USDJPY.  We all remember last month when the yen rallied very sharply during a Friday session in NY as word got out the Fed was “checking rates”.  As a reminder, this is when the Fed calls out to bank FX desks and asks for prices, although doesn’t actually deal.  However, the signal is strong as all the banks recognize the opportunity for intervention, and the news quickly spreads through the market with the effect you can see in the chart below.  During the next three sessions, the yen rallied 4.5%.

Source: tradingeconomics.com

During my career, I had never heard of this activity driven by anyone other than the BOJ, as they were always the most concerned with the yen’s value.  Certainly, they may have been responding to US pressure, but it was always their call.  Now the news comes out that Treasury Secretary Bessent did this on his own last month, a clear indication that the administration is not happy with an over weak yen.  This sets an interesting precedent regarding who controls any given currency.  Now, I doubt we will see this type of thing frequently, but we need to keep it in the back of our mind.  Meanwhile…

Seems Takaichi
Told Ueda, higher rates
Are not helping her

Last night, in a surprise to many in the market, news of a meeting between PM Takaichi and BOJ Governor Ueda resulted in Takaichi-san imploring Ueda-san to leave rates alone, rather than continue raising them.  Higher rates are not helping her growth agenda, and I imagine her belief set is that if the yen weakens too far, she can always intervene, and now that we know about Bessent’s actions, she can count on the US to help.  But I cannot observe this and think anything other than the market is going to test 160 and do so before long.  One poet’s opinion.

Ok, let’s see how markets traded overnight.  First off, last night was the first that all of Asia was back at work so overall liquidity was improved.  However, the results were mixed with Tokyo (+0.9%) ignoring the AI driven US rout while the Hang Seng (-1.8%) fell right alongside the US.  China (+1.0%) rallied in its first day back but consider that simply offset the decline of their last session and, like most other markets, it remains relatively unchanged over the period.  Meanwhile, the tech sense was strong with Korea (+2.1%) and Taiwan (+2.75%) both up nicely while India (-1.3%) suffered under the AI fear umbrella.  Elsewhere in the region, there was no pattern of note with both gainers and losers.

In Europe, the largest markets (UK, Germany and France) are basically unchanged this morning while both Spain (-0.7%) and Italy (-0.4%) are under some pressure.  There is talk of tariff issues, but I’m not sure why only those two markets are taking the heat.  As to the US, at this hour (7:00), all three major indices are higher by about 0.2%.

In the bond market, after a -4bp decline in Treasury yields yesterday they are unchanged this morning while European sovereigns are seeing yields slip -1bp across the board.  Too, JGB yields (-2bps) have continued their slow descent as it appears investors have acclimatized to the risks of Takaichi-nomics.  I think we will have to see inflation figures there to get a better sense.  Regarding Treasury yields, I’m not sure I can explain why I feel this way, but given how bearish sentiment is for bonds, (leveraged players are short >1 million futures contracts), it feels to me like we could see a short-term continuation of the recent rally with yields heading back to test the 3.8% level at least.  I understand both the fiscal argument and the technical argument (see long-term chart below) but neither rules out a short-term rally to inflict pain.  After all, that is what markets do best!  (full transparency, I bought some June TLT call spreads yesterday, so I am talking my book!)

Source: finance.yahoo.com

In the commodity markets, oil (+0.3%) continues to hold its recent Iran inspired gains as the world awaits the outcome of Friday’s meetings between the US and Iran.  I have no insight as to the potential outcome here other than what I read, but it does seem like there will be some type of military action as I do not see Iran ceding anything.  As to the precious metals, gold (-1.0%) is giving back yesterday’s gains but remains in its recent uptrend after the end-January crash, although it has yet to regain the old highs.  I imagine this will take more time, but it also seems quite likely to happen. This is still a quite bullish chart in my view.

Source: tradingeconomics.com

Interestingly, silver is little changed this morning as there continues to be much talk of delivery questions at the COMEX given the apparent lack of available ounces relative to outstanding contracts.  My take is things will get rolled as they usually do, but if not, beware a major spike higher on Friday!

Finally, the dollar continues to be the least interesting space there is with today’s JPY (-0.8%) move the exception that proves the rule.  Having already touched on that situation, there is literally nothing else to describe in either G10 or EMG currencies as +/-0.15% describes the entire session.

As to data this week, here’s what we have coming:

TodayCase Shiller Home Prices1.4%
 Consumer Confidence87.0
ThursdayInitial Claims216K
 Continuing Claims1872K
FridayPPI0.3% (2.6% Y/Y)
 -ex food & energy0.3% (3.0% Y/Y)
 Chicago PMI52.5

Source: tradingeconomics.com

In addition to this bit, we hear from seven more Fed speakers across nine venues, but I still don’t think anybody cares.  The market has priced out any rate cuts before Powell leaves, although there is still one cut priced for the year, expected in October.  

Frankly, it is not surprising that markets have calmed down so much given how much activity we saw in January.  As I wrote then, markets have a great deal of difficulty maintaining high volatility as traders and investors simply get tired and tune out.  We will need a new catalyst to get things going, either an attack on Iran or some new China news in my view.  Tariffs are no longer interesting, and frankly I think Iran and AI have both lost some pizzazz.  Maybe the UFO releases will get things going again!

Good luck

Adf

Far Too Extreme

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Said Roberts and five more Supremes
Those tariffs, are far too extreme
They don’t pass the test
And so, we request
You find a new revenue scheme
 
Said Trump, while I think you are wrong
Your actions won’t stop me for long
We have many laws
That give me good cause
For tariffs, that help make us strong

For whatever reason, this is what first popped into my head upon hearing the tariff ruling on Friday.  I guess I confused love for law, but whatever.  At any rate, I’m sure you have seen far too much on this subject already so I will be brief.  The Supreme Court ruled against President Trump’s use of the IEEEA law to enable the imposition of tariffs on foreign nations.  They did not discuss what to do about the ~$200 billion that has already been collected under that law.  The companies that sued want the money rebated, but that was not part of the decision, and of course, the logistics of that would be extraordinarily complex.

But in the end, President Trump simply imposed a sweeping 15% tariff across the board under a different law, which to my understanding can remain in place for 150 days.  The equity market shook off the news, rallying across the board on Friday (DJIA +0.5%, S&P 500 +0.7%, NASDAQ +0.9%), so it didn’t seem to be that big a deal.  But then when Asia opened Sunday night, risk was in a much less desired state.  Early returns show equities softer across the board (-0.75% at 10:00pm), the dollar (DXY -0.4%) under pressure and gold (+1.25%) and silver (6.25%) seeing significant haven demand.

One of the things that appeared to be in question was whether countries that had signed trade deals accepting tariffs and promising investments as part of the deal, would renege, but thus far, that has not happened.

My take is the tariff discussion is no longer a concern to investors.  Playing the lead role once again is Iran, as concerns over a potential US military strike rise, with a new actor joining the cast, Mexico, which appears to be suffering significant chaos after the elimination of a cartel leader, “El Mencho” has resulted in fire fights throughout the country there.  Obviously, given the proximity to the US, this has the potential to be quite significant, although since the border with Mexico has been effectively sealed, my take is all the action will stay in country there.

Historically, when there’s a war
The first move is stocks to the floor
But generally speaking
Post first mover freaking
The buyers step up to the fore

So, if tariffs are not going to be the primary topic of discussion, and I sincerely hope that is the case, after we finish congratulating the US men’s ice hockey team for the thrilling Olympic victory this weekend, what’s next on the agenda? Iran.

The US continues to amass forces in the Middle East and from various sources, including MSM and X and Substack, the growing consensus is that some type of military action is going to occur.  The question now seems to be whether it will be an attempt to decapitate the regime, or just to impede its ongoing buildup of armaments, notably ballistic missiles.

Negotiations are set to resume this week in Geneva and given the stakes, especially for the Ayatollah, it remains unclear as to his willingness to cede to American demands of essential disarmament and the end of terrorist support.  For President Trump, the risk is that any military action does not work as quickly and smoothly as either the first attacks on the nuclear sites, or the exfiltration of erstwhile Venezuelan president Maduro.  If there is something quick and relatively clean that achieves a clear objective, I think it can be a huge boon for the President, but if anything drags on, it will have numerous ramifications for both the mid-term election and the markets.  Let’s focus on the latter.

Below is a long-term chart of the S&P 500 which shows both the extraordinary recent performance relative to its previous history, as well as helps highlight some of the downturns seen during that time.  Of course, the noteworthy feature is that the downturns don’t last very long.

Source: finance.yahoo.com

If we move from right to left on the chart (these are monthly candles), the first spike down is Liberation Day in April 2025, when President Trump first announced his tariff plans.  Obviously, that is long past investors’ concerns now, especially given the events on Friday.  The next major decline took place in February 2022, when Russia invaded Ukraine.  But remember what also happened around that time, the Fed began its aggressive rate hiking when it figured out that inflation may not be transitory after all.  You probably remember that 2022 was one of the worst market performances for both stocks and bonds.  It is a worthwhile question to ask how much of that was the Russia/Ukraine situation and how much was the Fed.  My money is on the Fed.  Moving left, we see the Covid spike lower in Q1 2020 and then a baby dip during the repo shock of late 2018, when the Fed lost control of the Fed funds rate.  After that, we go back to the GFC in 2008-09 and the bursting of the dot com bubble in 2000 – 2003.  Sure, in 2003, the US invaded Iraq, but I don’t think that was the market driver.

My point here is that any impact from military action is likely to be very short-lived in equity markets.  The other market that will certainly be impacted is the oil market.  A look at the long-term story there shows that, here too, there are many things that have a major impact on oil other than war.

Source: finance.yahoo.com

The huge decline on the left was the GFC and ensuing recession.  The drop in 2014 was the realization that shale oil was going to add an enormous amount of supply to the market.  You can see the Covid spike to negative prices and then the run up in prices in the wake of the Russian invasion in 2022, which was relatively short-lived, and we have been declining ever since.

Much of the commentary regarding Iran right now revolves around their ability to close the Strait of Hormuz and how that would cut 20% of the world’s oil supply from reaching the market.  (It would cut almost all of Iran’s oil off from the market as they have virtually no pipeline network).  But even here, the evidence is that a price spike will be relatively short-lived.

I raise these issues because while war is inflationary, that is generally not because of the impact on oil prices, but rather because of the increased government spending that accompanies war (remember LBJ’s guns AND butter policies leading to the inflation of the 1960’s and 70’s.). 

Summing the discussion up, while in the immediacy, there will be market responses to military actions, I do not believe they will have long-term impacts.

Ok, I went on way too long, so let’s do a hyper quick tour of markets this morning and I will leave the weekly data until tomorrow.

Equities – mainland China is still closed, (they open tomorrow) but the rest of Asia mostly ignored the war drums.  HK (+2.5%), Korea (+0.65%), India (+0.6%) and Taiwan (+0.5%) all showed strength although Australia (-0.6%) seems to have suffered on the tariff story.  Tokyo, too, was closed last night.  In Europe, despite slightly better than expected German Ifo data, the DAX (-0.45%) is today’s laggard while the IBEX (+1.0%) and FTSE MIB (+1.0%) both have seen strong support, ignoring any uncertainty regarding the US tariff situation and benefitting from positive earnings results. The UK and France have done little.  As to the US futures market, at this hour (7:15) they have risen from their early evening lows but are still softer by -0.35% across the board.

Bonds – the bond market remains the enigma, in my mind, as it is basically locked in place and has been for months.  Treasury yields (-1bp) have edged lower and European sovereign yields are essentially unchanged, as are JGB yields.  It continues to baffle me that bond markets, which typically sense fear first, do not seem to care about all that is ongoing in the world right now, whether war, government spending, or commodity prices.

Commodities – this morning, oil (0.0%) is ignoring Iran, which is maybe the most surprising thing of all.  Perhaps this is telling us that concerns over a closure of the Strait of Hormuz are overblown, or perhaps if that does happen, we will see a dramatic spike higher.  Again, like the bond market, something feels amiss.  In the metals markets, while both gold (+0.8%) and silver (+2.25%) are higher than Friday’s closing levels, they are well below last night’s opening levels.  I guess fear is abating, at least for now.

FX – As to the dollar, it’s early decline has largely been erased with both the euro and pound unchanged, AUD (-0.4%) sliding and the rest of the G10 under pressure.  In the EMG space, MXN (-0.5%) is feeling a little stress from the increased violence that has begun and there seems to be some sympathy in that move with CLP (-0.3%) and BRL (-0.2%). On the flip side, CZK (+0.5%) is the biggest gainer as the market continues to respond to recent central bank hawkishness.

In the US today we see the Chicago Fed National Activity Index (exp 0.3 in January) and Factory Orders (-0.5% from Dec).  But remember this, as per the below, don’t look for that much activity in NY as this is the picture out my backyard this morning, I’m estimating 10” of snow, so skeleton staffs will be the rule.

Good luck

Adf

Not All in Sync

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The story that’s tripping off lips
Is whether the buildup in ships
And aircraft we’ve seen
Is likely to mean
A war with Iran’s in the scripts
 
But markets are not all in sync
As equities clearly don’t think
That war would be trouble
While bond traders’ double
Their bets war will drive stocks to drink

Economic data is clearly not a key driver of market movement these days, arguably because we continue to get mixed outcomes, with some things looking good (Initial Claims, Philly Fed) while others are less positive (Trade Balance, Leading Indicators), although granted, it is not clear to me what the Leading Indicators purpose is anymore.  My point, though, is that we have not seen unambiguous strength or weakness across the data set for several months.  This allows every pundit to frame the economic situation through their own personal lens, whether bullish or bearish.  A perfect example is the dichotomy between the strength of US corporate balance sheets, as per Torsten Slok and seen below, 

and the rise in corporate bankruptcies as per this X post from The Kobeissi Letter (a great follow on X) which shows the following chart.

So, which is it? Are things good or bad?  My understanding is that strong balance sheets and a high number of bankruptcies are not typically correlated, but I could be wrong.  

Given the lack of direction, markets have turned their focus to other things, with most headlines currently garnered by the ongoing buildup of US military power in the Middle East as President Trump tries to pressure Iran into ceding its nuclear and missile programs.  (Of course, the announcement that all information on UAP’s (fka UFO’s) has many excited, and of course, the Epstein files continue to garner attention, as does the SAVE Act, but none of those are even remotely related to financial markets.)

But even here, we are seeing very different responses by the financial markets.  For instance, equity markets continue to perform pretty well, even though Tokyo and Australia sank a bit last night.  Look at the monthly and YTD returns in Europe, Japan and Australia below:

                                           Daily   Weekly   Monthly   YTD

Source: tradingeconomics.com

It strikes me that if war was a major concern, investors wouldn’t be stocking up on risk assets.  Rather, havens would be in more demand, which we are also seeing with gold (+0.4%) and silver (+3.3%) rising overnight as despite extreme volatility in the precious metals space, there is clearly underlying demand for these havens.

Bond yields over the past month have declined, indicating that despite ongoing deficit spending, investors are seeking their perceived safety whether in Treasuries, Bunds or JGBs as per the below chart of all three.

Source: tradingeconomics.com

Finally, the dollar, despite frequent calls for its death, has been edging higher in a classic risk-off response as no matter how much some may hate the dollar philosophically, when bad things happen, its massive legal and liquidity advantages outweigh virtually everything else.  Once again, the DXY has moved back to the middle of its trading range, just below 98.00 this morning, and to my eyes, shows no signs of an imminent collapse.  Rather, if hostilities do break out in Iran, I expect the greenback to rally to at least the top of this trading range at 100, and depending on the situation, it could easily go higher.

Source: tradingeconomics.com

All this is to point out that nobody knows nothing.  Narrative writers continue to try to keep up with the action, and it is increasingly difficult to do so as things change on the ground so rapidly.  Let me be clear when I say I have zero inside information regarding any of this, I am merely an observer.  However, my observations are that there will be some type of military action in Iran as to build up this much fire power in a concentrated area and not use it would be remarkable and I can see no way in which the Ayatollah can accept the terms being offered as it would end his leadership if he does.  I guess we will find out soon enough as President Trump has put a 10-day timeline on things.

Arguably, the only market I didn’t mention here was oil (-0.5%) which is consolidating after a 20% rise in the past two months.  Remember, if military activity is directed at oil production or transport, we could see a sharp spike here and that will not help equities or economic data, although both gold and the dollar are likely to benefit.

Source: tradingeconomics.com

I don’t think there is anything else to discuss market wise so let’s turn to the data.  This morning brings a bunch of important stuff as follows:

Personal Income0.3%
Personal Spending0.4%
PCE0.3% (2.8% Y/Y)
-ex food & energy0.3% (2.9% Y/Y)
Q4 GDP3.0%
Flash Manufacturing PMI52.6
Flash Services PMI53.0
Michigan Sentiment57.3
New Home Sales730K

Source: tradingecomomics.com

We also hear from two more Fed speakers, but at this point, they are all singing from the same hymnal explaining policy is in a good place and unless there are major changes in the data, there is no reason to change.

Arguably, the PCE data is the key for markets here as if it continues to run hotter than target, hopes for further rate cuts will continue to dissipate.  In fact, the next cut is now priced in for July with a second for October.  

Source: cmegroup.com

Remember, too, at that point it will be Kevin Warsh’s Fed, not Jay Powell’s, and Warsh has a very different idea about the way things need to be done.  Interestingly, as this 4th Turning proceeds and old institutions come under increasing pressure, their efforts to fight back and maintain the status quo is no longer behind the scenes as evidenced by this Bloomberg article this morning.

As I have written before, President Trump is the avatar of the 4th Turning and the institutions that are going to change are desperate to maintain the status quo.  This is, truly, the big fight that will continue through the end of the decade in my view.  Every institution that has been overseeing the global situation, whether politically, financially or militarily, is coming under pressure as income and wealth inequality have driven an ever wider disparity of outcomes.  As much power as the rich have, there are a lot more people who are not rich.  Ask Louis XVI how much being rich helped him.

On a lighter note, I watched the gold medal skating performance of Alysa Liu and it was truly magical.  A much better thought for the weekend!

Good luck and good weekend

Adf

Chock Full of Crises

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Their mandate includes stable prices
And that they should use all devices
To work to achieve
That goal lest they leave
A legacy chock full of crises

“Most participants, however, cautioned that progress toward the Committee’s 2 percent objective might be slower and more uneven than generally expected and judged that the risk

of inflation running persistently above the Committee’s objective was meaningful.”

These words [emphasis added] are from the FOMC Minutes released yesterday afternoon.  To set the stage, the Fed left rates on hold then, although there were two votes for another cut.  However, a full reading of the Minutes shows there were those who would have considered a hike as well.   Now, I am just a guy in a room who observes market behavior through the lens of too many years involved on a daily basis, and my resources are virtually nil, especially compared to the Federal Reserve.  I don’t have a PhD in economics (although I believe that is a benefit in this context, if not every context).  However, the bolded part of the comment seems a tad disingenuous to me based on the below chart which shows the history of their inflation metric, Core PCE prices.

Source: tradingeconomics.com

It has been exactly 5 years since their metric was at or below their 2% target by which they defined stable prices.  The idea that they are claiming the risk of inflation running hot was a meaningful risk is perhaps the worst gaslighting comments they have made.  It is very difficult to believe that the Fed, in its current incarnation, is going to ever address the inflation issue appropriately.  Perhaps a Chairman Warsh, if he is successful at reconfiguring their operating procedures will be able to drive positive changes.  I am hopeful but not confident.  The one thing we know is that changing government institutions requires a mammoth effort.  And let’s face it, he will only have two plus years of leeway for sure depending on whoever becomes president in 2028.

I continue to believe that the market is going to increasingly focus only on Warsh’s comments going forward as the direction he has expressed is very different than the current FOMC membership mindset.  We shall see how this all evolves.  In the meantime, I expect that Fed funds are not going anywhere before Warsh is confirmed.  As to bond yields, that is a very different question and will depend on both the macroeconomic outcomes and the risk perception of investors around the world.  For now, that trading range of 4.00%. – 4.20% seems likely to hold absent a major economic data miss in one direction or the other.  But as long as we continue to get mixed data, this market will remain on the backburner.

The fear that is growing each day
Trump’s policy might go astray
Regarding Iran
Although not Japan
Thus, oil’s up, up and away

Texas tea (+1.5%) is following yesterday’s 4.6% rise with another strong session and as you can see in the chart below, is showing a very clear trend higher since December.

Source: tradingeconomics.com

This movement is very clearly a response to the ongoing buildup of US military assets in proximity to Iran, with two aircraft carriers, and somewhere above 200 military aircraft as well as the carrier group tenders with Tomahawk missiles in tow.  While negotiations are ostensibly ongoing, the one thing that seems clear is that absent a complete capitulation by the Iranian government, something big is going to happen here.  Of course, the question is, how much, and for how long, will it impact oil supplies?

Obviously, nobody knows the answer to that question, but the recent history has shown that every time there was an event in the Middle East, whether the 12-day war several months ago, the killing of Suleimani, the attacks on Saudi oil infrastructure, or others, prices retraced pretty quickly as per the below.  

Even the Ukraine invasion in February 2022 saw prices retrace 50% within a few months.  Other issues lasted less time than that.  This recent history implies that fading the rally is the right trade, but boy, that is hard to do.  And of course, in the event that the Iranian government falls, the chaos could result in a significant degradation of Iranian oil production.  Given they pump about 5 mm bpd, ~5% of global supply, that would matter a lot at the margin.  Certainly, the oil glut narrative would disappear in a hurry.  This is a very large risk to both markets and the economy, and one which needs to be hedged, if possible.  This will certainly be the focus of markets for the next few weeks, at least, so be prepared.  Personally, I do own some stuff here, but I like the drillers generally, as they are going to be employed no matter what!

Ok, let’s see what else is happening.  After a solid US session yesterday, Asia saw some major positive price action with Korea (+3.1%) the leader although Tokyo (+1.1%) also had a solid session, as did Taiwan, New Zealand, Singapore and Australia.  The exception to this rule was India (-1.5%) which suffered after a three-day positive run as traders and investors fled worrying about oil, the Fed, and the future of India’s relationship with Russia after the seizure of more ‘dark fleet’ oil tankers trying to avoid sanctions on Russian oil.  Europe, meanwhile, is uniformly lower this morning, with all the major indices slipping -0.8% or so.  The narrative is pointing to the escalation in Iran as the cause du jour.  US futures are also slipping at this hour (7:20), -0.25% or so across the board.

I touched on bonds briefly above, but today’s price action shows yields edging higher by 1bp in Treasury markets and between 1bp and 2bps across European sovereign markets.  There has been no data of note to alter views, and the only ECB news is that Spain has thrown their hat into the ring to have the next ECB president.

In the metals markets, yesterday’s gains are being followed by a mixed picture with gold (+0.2%) and silver (+0.3%) edging higher while copper (-1.6%) and platinum (-1.8%) cede those gains.  However, as I highlighted yesterday, this all still feels like consolidation.  FYI, there is much talk in the markets about silver and how there is not enough physical silver in the COMEX vaults to cover open interest, and how that could result in a major squeeze, but my take is most of it will roll forward as the fundamental supply/demand equation does not appeared to have changed.

Finally, the dollar had a strong session yesterday, rising 0.6% as measured by the DXY, and making gains vs. almost all currencies.  This morning, those trends are continuing with SEK (-0.4%) and GBP (-0.2%) leading the way lower in the G10 space while ZAR (-0.85%), INR (-0.4%) and KRW (-0.4%) are dragging down the EMG bloc.  Again, data has been scarce, so I see this as a more traditional risk-off sentiment than some new macro story.

Data yesterday was generally stronger than forecast, notably IP and Capacity Utilization, which showed solid outcomes that were ascribed to AI infrastructure building as well utilities activity.  It strikes me this is exactly what the Trump administration is trying to achieve with their reshoring goals.  I guess the question is how productive this investment will be and how will it impact inflation readings.  This morning, we see the weekly Initial (exp 225K) and Continuing (1860K) claims, as well as the Trade Balance (-$55.5B), Philly Fed (8.5) and Leading Indicators (0.0%).  The interesting thing about the Leading Indicators number is that a flat result would be the highest in 4 years.  A look at the Conference Board’s chart below shows an interesting thing about this number, and to me, anyway, calls its value into question.  Leading Indicators have been declining for four years while coincident indicators (and economic growth) have been moving along just fine.  I’m trying to figure out what these indicators lead.

And that’s really it for today.  We do see oil inventories as well, with a slight build expected and we will hear from Minneapolis Fed president Kashkari, but I cannot remember the last time he said anything interesting.  To me, the concern today, and tomorrow and next week, is that we see an escalation in rhetoric regarding Iran, at the very least, if not an actual military strike.  That feels like it would be bad for stocks, good for bonds, the dollar and gold.  Hopefully I am wrong there.

Good luck

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No-Holds Barred

Posted on by

The rumor is Madame Lagarde
Who, through her incompetence, scarred
The ECB, now
Is set to, out, bow
To run for French Prez, no-holds barred
 
The fear that this move does display
Is Madame LePen’s making hay
So, globalists now
Will hardly allow
Their efforts to just go away

We continue to trade in recent ranges across most products in financial markets as investors and traders seek the next catalyst for secular movement.  Even precious metals, which have shown the most volatility of any sector, are now developing a new range as per the chart below.

Source: tradingeconomics.com

Now, I will grant the range in gold (+0.7%) is wider than many other products, but the chart clearly looks, at least to me, like an ongoing consolidation awaiting the next big thing.  As to other products, I have shown bonds, the dollar and even stocks doing the same thing lately, consolidating, and as of this morning, none of them are breaking out in either direction.  (As an aside, there is still a very loud group claiming the dollar is about to collapse, but thus far, their views have been unrequited). In fact, if we use the DXY as today’s dollar proxy, we appear to be heading back to the middle of the range rather than breaking lower.

Source: tradingeconomics.com

Net, there is not much to discuss in the markets which leads me to the most interesting topic, what will be the catalyst to break these ranges?  Historically, there are two types of things that act as a market catalyst, a change in the data trajectory or a geopolitical shift.  Right now, the former does not appear to be in the cards.  We know this because there are vocal proponents of both substantial economic strength and economic weakness in the future.  The lesson from this is that the data remains quite mixed, with some areas of the economy performing well, while others are struggling, but not enough on either side to expect a major trend.  

For instance, in the US, recent data showed relative employment market strength while inflation data continues to compress.  Now, you can quibble with the construction of both data sets, and there are many valid concerns, but for policymakers, especially those steeped in the view that strong growth necessarily drives inflation higher and vice versa, the current data set does not argue for any policy shift.  

Arguably the biggest geopolitical change of late was the dramatic Takaichi-san victory in Japan, which has enabled her to impose her will on the economy.  As such, we can expect more ‘run it hot’ actions there.  However, thus far, the JGB market has not rebelled against further unfunded government spending.  We are one month, and 20bps, removed from the recent peak in yields.  We shall see how long that lasts and if, a change in that view impacts bond markets elsewhere in the world, but as you can see below, it does not look that scary right now.

Source: tradingeconomics.com

But otherwise, Russia/Ukraine continues apace with negotiations going nowhere and the US/Iran talks, with articles this morning claim progress is being made there.  Arguably, some type of deal with Iran ought to be bearish oil as it would seemingly involve the lifting of sanctions on their oil sales, but who knows.

Which takes us to the most interesting headline this morning (see Bloomberg’s headline below), the story that Madame Lagarde is rumored to be stepping down as ECB president before her term expires next year.  While, naturally, she has denied the story, there is certainly enough palace intrigue to dig a little deeper.

Ask yourself why, a woman who has spent her career striving to reach the pinnacle of geopolitics, would willingly give up a role at the top.  While the initial punditry stories indicate she wants to allow President Macron to be involved in the discussions as to her replacement (if she serves out her term, he will be gone and they fear Marine LePen on the right will be able to influence the next decision), Occam’s Razor tells me it is far more likely she is going to prepare to run for president of France herself.  After all, did she not just see her erstwhile colleague, Mark Carney, be elected PM of Canada?  And as powerful as major central bank president is, it pales in comparison to national president.  Added to her impetus was the resounding Takaichi victory, demonstrating that a woman can be elected in the CEO role, and I must believe, this is her motivation.

If you are of a globalist mindset, Christine Lagarde is the perfect French president, completely beholden to your ideals, and yet, as a woman, believed to be able to work effectively with others (notably President Trump) in order to prevent further damage to your goals.  Mark my words, she will step down and announce her candidacy before the summer. Funnily enough, I expect if she leaves, it will be a benefit for the euro!

Ok, the briefest of turns around markets shows that Asian equities followed yesterday’s US market rally higher, at least those that were open, with New Zealand (+1.5%) leading the way after the RBNZ left rates on hold, as expected, but came across as more dovish than expected.  Otherwise, Tokyo (+1.0%) and Australia (+0.5%) were the next best gainers with the former responding to the news that the first major Japanese investment into the US was announced, a $36 billion set of deals including a massive NatGas power project in Ohio.

European bourses (DAX +0.85%, CAC +0.55%, IBEX +1.25%) are also higher, rising on hopes that the announced increases in defense spending will be spent at home and boost European companies across the continent.  As to the UK (+1.0%), softer inflation readings this morning have raised hopes that the BOE will be more aggressive easing policy soon.  US futures are higher by about 0.5% this morning as it seems many of the fears about overinvestment in AI have suddenly waned.

Bond yields, which have fallen steadily over the past several weeks have all backed up 1bp, in the US, Europe and Japan.  Overall, nothing really to mention here.

In the commodity markets, oil (+2.9%) just jumped after the Russia/Ukraine peace talks broke up abruptly after just 2 hours.  Fears of more strikes on Russian infrastructure have risen.

Source: tradingeconomics.com

As to the metals, after yesterday’s declines, this morning they are all bouncing (Au +0.9%, Ag +2.8%, Cu +1.2%, Pt +1.6%) as they continue to consolidate.

Finally, the FX markets are showing very modest net USD strength with NZD (-0.7%) the laggard after the RBNZ while NOK (+0.7%) is the leader, jumping right after the oil news.  Otherwise, +/- 0.15% is the order of the day.

On the data front, we get some second-tier information as follows: Durable Goods (exp -2.0%, +0.3% ex transport), Housing Starts (1.33M), Building Permits (1.40M), IP (0.4%) and Capacity Utilization (76.5%).  (An interesting tidbit regarding Capacity is that I read China’s Capacity Utilization is just 74.3%.  Based on their trade balance, I would have expected a much higher number.  It tells me that over (mal?) investment there is even greater than I thought.). 

Too, we hear from Fed Governor Michelle Bowman and get the FOMC Minutes at 2:00.  Yesterday, Governor Barr said there was no reason to adjust policy for the reasons I stated above, nothing is clear, and I suspect Ms Bowman will be similarly inclined.

It is hard to get excited in today’s market, that’s for sure.  In fact, I expect we will need to see something pretty dramatic to drive a break of these ranges, and I have no idea what that will be.  Play it close to the vest for now.

Good luck

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Hold My Beer

Posted on by

For months, I was calmly assured
A weak dollar must be endured
The US had peaked
And money had leaked
Elsewhere, so it could be secured
 
But suddenly, it’s not so clear
The end of the dollar is near
Instead, other nations
Have seen expectations
Decline, saying, here, hold my beer

The long holiday weekend is behind us now and with China on holiday all week, it seems there may be fewer interesting stories to consider.  However, one of the things that tickled my fancy is the sudden, recent adjustment in several pundits’ views on the dollar.  

By now you are all aware that I have been more bullish than consensus on the basis of the US economic situation relative to that of Europe and the UK (Japan may have changed their stripes in the wake of Takaichi-san’s recent landslide election, so we will need to revisit that).  After all, the combination of stronger GDP growth, higher interest rates and ostensibly calming inflation in the US relative to Europe and the UK (as well as numerous other nations) seemed to offer better investment opportunities, and therefore more demand for the dollar.  And this was outside the need for dollars simply to service the enormous amount of USD debt outstanding around the world, estimated at between $60 trillion and $80 trillion.

I will use the euro (-0.1%) today, rather than the DXY (+0.35%), as my dollar proxy because there is some deliciously ironic news from Bloomberg on the single currency.  But below, you can see the past year’s trading pattern, where, like the DXY, it has largely been range bound since June.  Sure, we saw a little spike up at the end of January, during the metals/equity market correction, but that story has passed.

Source: tradingeconomics.com

But I couldn’t help but chuckle at the following two headlines on Bloomberg.com this morning, literally right next to each other.

Briefly, the first story describes how the FinMins throughout the Eurozone want to expand the use of the euro globally and are considering offering swap lines to other nations that have difficulty accessing the single currency (although I cannot imagine why they would have such difficulty).  The second story highlights the French explaining that if the first story is true, the euro might gain strength and that would hurt their export industries, something the current government can ill afford right now.  It’s almost as if there is no agreement at all.  

Just remember, Eurozone GDP is growing at ~1.0%, its base rate is 2.0% and inflation is at 2.3%.  In the US, GDP is growing at 3+%, its base rate is 3.75% and inflation was just released at 2.4%.  Add to this the fact that energy costs in Europe, which is a price taker producing less than 15% of its energy needs domestically, are more than 2X higher than in the US, and in some countries, 3X higher, and it becomes increasingly difficult to say, damn, euros are the place to be!

And for the UK, where this morning they reported the highest Unemployment Rate in five years (see chart below) with wages slipping, slowing growth and a worse inflation and energy picture, arguably, things are even worse.

Source: tradingecomomics.com

It continues to be difficult for me to understand the relative merits of owning euros or pounds (-0.5%) in the current macroeconomic environment.  The fact that equity multiples remain lower there than in the US has certainly peaked some investor interest, but prospects just don’t appear that great.

There are certainly emerging markets whose currencies had been extremely weak, and which have significantly higher real interest rates than in the US (Mexico, Brazil, South Africa) where I can see the attraction, although this morning’s South African Unemployment report (31.4%!) might still give one pause as to the prospects.

One other place where the currency has been strengthening is China, where the PBOC has been walking the renminbi higher (dollar lower) for the past year (see below), as President Xi seems to want to show the world the renminbi is a strong and stable currency. 

Source: tradingeconmics.com

And of course, a large part of this particular currency discussion is that the Chinese are ‘dumping’ US assets, notably Treasuries.  Alas, recent data as per the below from two of the best-informed analysts regarding China and its activities shows that the PBOC has basically been offloading Treasuries to State owned Chinese banks and their US assets are, in fact, growing.  The CNY is a completely managed currency and can be set at any level the PBOC chooses.  Exclaiming the dollar is falling against it is not a very good representation.

Ok, I will stop repeating myself regarding my view on the dollar and turn to other markets.  In equities, Asia was very quiet as numerous nations observed the lunar new year so really, all we saw was Japan (-0.4%), India (+0.2%) and Australia (+0.2%), with China, Korea and Taiwan all closed.  I would argue we did not learn very much from the session.  Europe, though, is edging higher this morning with Spain (+0.6%) and the UK (+0.45%) leading the way.  The latter seems to be benefitting from the bad news is good scenario, as the weak employment data has investors looking for a BOE rate cut at the next meeting, while Spain has not seen any economic data to help drive things.  Perhaps, the ZEW data, where both Germany and the Eurozone printed at lower levels than last month and much lower levels than expected, has more belief in an ECB cut coming forward.  Net, however, activity here is muted.  As to US futures, at this hour (7:25), they are softer with the NASDAQ (-0.7%) the laggard by far.

In the bond market, right now, the inflationistas are having a hard time explaining the decline in yields.  Treasury yields (-2bps and back to 4.03%) have been marching lower for the past two weeks as per the below, and we have seen similar price action elsewhere.

Source: tradingeconomics.com

European sovereign yields have also slipped -2bps across the board while UK gilt yields have fallen -4bps.  But the big winner is Japan (-8bps) where investors apparently no longer fear unfunded spending and aggressive fiscal policy by PM Takaichi, as the 5-year auction last night was extremely well received and investors are looking forward to the 20-year auction later this week.

In the commodity bloc, oil (+1.5%) has moved up after Iran closed part of the Strait of Hormuz, restricting traffic there.  This seems odd to me as they desperately need that to remain open to deliver their oil, but perhaps they are trying to show their strength.  A second round of discussions are ongoing between the US and Iran as I type, so we shall see what happens here.  Meanwhile, in the metals markets, with China on holiday, and given they have been the source of the most demand, it cannot be surprising that all are lower this morning (Au -1.0%, Ag -0.75%, Cu -1.3%, Pt -1.7%).  My take is these markets are likely to spend the next several months consolidating before any leg higher (and I believe that is the direction) will be evident.  

Finally, we discussed the dollar above and the only noteworthy move beside the pound is SEK (-0.6%) which appears more to be a function of its higher beta to the rest of Europe than any specific news.

On the data front, this week brings a bunch as follows:

TodayEmpire State Manufacturing6.0
WednesdayHousing Starts1.33M
 Building Permits1.40M
 Durable Goods-2.0%
 -ex Transport0.3%
 IP0.4%
 Capacity Utilization76.5%
 FOMC Minutes 
ThursdayInitial Claims225K
 Continuing Claims1870K
 Trade Balance-$56.0B
 Phiily Fed9.3
FridayQ4 GDP3.0%
 Personal Income0.3%
 Personal Spending0.4%
 PCE0.3% (2.8% Y/Y)
 -ex food & energy0.3% (2.9% Y/Y)
 Flash Mfg PMI52.6
 Flash Service PMI53.0
 Michigan Confidence57.0
 New Home Sales730K

Source: tradingeconomics.com

In addition, we hear from 5 more Fed speakers, but as I have consistently said, I don’t think they matter that much at this point.  Overall, my take is that sector rotation in the equity markets is the key activity there, that bond markets are beginning to get more comfortable with a lower inflation outlook since the recent data has been pointing in that direction, and that the dollar, despite its many detractors, is not dead yet.  We have seen an awful lot of volatility for the past several weeks.  As I have repeatedly reminded you, that cannot continue forever.  While I am sure that we will see more bouts of volatility this year, it does feel like for the next several sessions, things will be pretty quiet.  Let’s be thankful for that.

Good luckA

Yesterday’s Trauma

Posted on by

The story is yesterday’s trauma
As risk assets traded with drama
For stocks, it was news
AI could abuse
More sectors, that triggered the bomb-a
 
For gold and the metals, however,
It seemed an alternative lever
A bear raid, perhaps
Or filling chart gaps
No matter, twas quite the endeavor
 
Which leads to today’s CPI
Where narratives that with AI
Deflation is coming
As all jobs but plumbing
We’ll no longer need to apply

Let’s start with this morning’s CPI data as in some ways, I feel like that is a key part of the overall market discussion regarding yesterday’s dramatic declines.  Expectations are for both Core and Headline prints of 0.3% M/M and 2.5% Y/Y.  If we feed those numbers into the current narrative, the implication might be that the Fed is continuing to see a slowdown here and it would open the door to further rate cuts.  Remember, despite the comments of two Fed speakers earlier this week, Logan and Hammack, the most recent information we have is that the neutral rate is believed to be 3.0%, a full 75bps lower than the current Fed funds rate.  Interestingly, if we look at the Fed funds futures market, it shows that even after yesterday’s abysmal Existing Home Sales data (-8.4%), the probability of 3 cuts doesn’t hit 50% until the end of 2027!

Source: cmegroup.com

Remember, too, that the payroll report was strong on Wednesday, but that major annual revisions took much of the shine off that.  And of course, we cannot forget that since everything is political these days, certain FOMC members who dislike the President may be against rate cuts simply because the President wants them.  The point here is that the appearance of pretty solid economic activity combined with gradually decreasing inflation could argue for rate cuts but could also argue to leave things as they are since they seem to be working.  And let’s face it, the Fed doesn’t really know anyway, nor do any of us.

Which takes us to the broader narrative about what is driving stock market activity and why we saw such dramatic declines in the US yesterday, and pretty much everywhere else overnight.  It appears the proximate cause is the idea that recent AI announcements have indicated that there are entire service industries that may be destroyed because AI will serve as an effective replacement for their customers.  We have seen it for law firms, accountants and consultants and now logistics and software companies are under the gun.

Adding to the narrative is Elon Musk, who continuously claims that AI and robots will replace virtually all human labor and create enormous wealth for us all while driving prices ever lower.  The flip side of that claim is that throughout history, every major technological advance, while initially destroying jobs in the areas it was used, resulted in more, and better paying, jobs to help advance the overall economic situation.  Of course, historically, these changes took at least a generation, if not several to play out, while things appear to be happening a bit faster this time.

I have not done a deep dive on AI so take this for what it’s worth.  I use Grok as it is convenient for me given I have X open on my computer all the time.  I use it for quick research as it responds to my poorly worded questions with the information I seek and, happily, cites its sources.  But I am looking for data questions (e.g. the GDP of China or the size of European holdings of Treasuries) and I have never even considered using it to write my poetry.  Is it ready to make intuitive leaps in thought?  Maybe, but that seems a stretch.  As with all computers, its advantage over the human brain is its ability to ‘brute force’ a solution by making so many calculations in such a short time that no human can match.  However, my take is breakthroughs have come from intuitive leaps from one topic to another, not from simply doing more math on the same topic.  And it is not clear to me that AI programs, as they currently exist, are intuitive.

Of course, for our purposes, it doesn’t really matter right now if AI is that capable or not, it only matters if investors and traders believe that to be the case and invest accordingly.  That was yesterday’s story, as well as well as the story at the beginning of last week, at least based on the way the NASDAQ traded as per the below chart.

Source: tradingeconomics.com

We had six different significant drawdowns within a given hour since the end of January, and virtually all were described as a consequence of some industry sector being decimated by AI.  The thing is, valuations are pretty high in the tech sector (the area most likely to be hit) and it may simply be that investors have decided to sell the rich stuff and buy cheap stuff instead, like defensives and materials companies.  Just a thought.  But be prepared for a lot more of this narrative about AI eating some other company’s/industry’s lunch as we go forward.

Ok, let’s look at the overnight now.  First, remember, China is going on holiday all next week, and we will see much less activity from Asia accordingly.  But last night, Asia basically followed the US lower with Japan (-1.2%), HK (-1.7%), China (-1.25%) and Australia (-1.4%) headlining.  India (-1.25%) and Singapore (-1.6%) also suffered and you are hard pressed to find any markets that rose there.  As this was very tech focused, it should be no surprise.  (PS India is also suffering on AI as much of the business that had been outsourced to India could well be replaced by AI.)

In Europe, too, red is today’s color, and not simply because they lean more communist every day.  While tech is not a major part of the markets there, watching Italy (-1.5%), Spain (-1.0%), Norway (-1.1%) and Greece (-2.1%) all slide sharply tells the story, I think.  As it happens, France (-0.35%) and Germany (-0.1%) are the continental leaders and the UK (+0.1%) is the only market of note showing gains at all.  As to US futures, ahead of the data at this hour (7:30) they are softer by -0.2% across the board.

In the bond market, yesterday saw Treasury yields slip -4bps after the Housing data and this morning, they have recouped just 1bp.  European sovereign yields are all lower by between -1bp and -2bps as data releases continue to show a ‘muddle-through’ economy rather than one either growing strongly or falling sharply.  We did hear from ECB member Kazaks, telling us that the euro’s strength over the past year could have a negative impact on the economy there, implying the ECB may need to ease further.  Meanwhile, JGB yields (-2bps) continue to demonstrate virtually no concern about PM Takaichi’s plans for unfunded fiscal expansion.

Metals markets were the other noteworthy place yesterday with some very dramatic declines happening simultaneously in both gold and silver just after 11:00am.  (see below) My friend JJ who writes Market Vibes, explained last evening that the timing was impeccable as London had closed and the US is the least liquid metals market around, so if a large speculator was seeking to drive prices lower, that was when to do it.  And somebody did!  

Source: tradingeconomics.com

But that was then, and this is now.  As you can see from the chart, the market is already rebounding with gold (+1.0%) and silver (+3.2%) simply demonstrating that they remain incredibly volatile.  In truth, this was the best take I saw on the subject yesterday.

Turning to oil, President Trump indicated that talks with Iran may go on for weeks, so it is unlikely that things will combust there for a while.  At the same time, the IEA continues to try to convince everyone that peak oil is here and there is a huge glut, but net, Texas Tea slipped -2.8% yesterday and is lower by another -0.35% this morning.

Finally, the dollar…well nothing has changed.  the DXY (+0.1%) is clinging to 97 with no impetus to move in either direction.  JPY (-0.4%) may be softer this morning but is far enough away from 160, the perceived intervention level, that nobody cares.  AUD (-0.6%) slipped on the weak commodities pricing, although remains near its highest levels in three years as the RBA turned hawkish last week.  We are also seeing weakness in the EMG bloc (KRW -0.4%, ZAR -0.5%, CLP -0.6%) with yesterday’s tech and metals sell-offs the proximate drivers.  The narrative remains that the dollar is set to collapse, but I still don’t see it.  Maybe I’m just blind.  I cannot get past the economic growth outperformance and inward investment plans, as well as the need for dollars to continue the global USD debt flywheel as the key demand points.

And that’s really it.  Volatility is with us and likely to stay for a while.  This is a global regime change with respect to economic statecraft rather than the previous rules-based order, and frankly, nobody really knows how it’s going to ultimately play out.  This is why gold remains in demand, because history has shown it has maintained its value on a purchasing power basis for millennia, whatever the terms of the relevant currency may be.  But in the fiat world, I’m waiting for someone to make a better argument for something other than the dollar over time.

Good luck and good weekend

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Venting Spleen

Posted on by

It used to be data was seen
As noncontroversial and clean
But politics, lately
Has damaged it greatly
With both D’s and R’s venting spleen
 
So, it ought not be a surprise
That yesterday’s NFP rise
Was claimed by the left
To lack any heft
While R’s crowed out loud to the skies

By now, you are well aware that the NFP number was released much higher than the forecasts, printing at 130K vs a consensus forecast of 70K.  The previous two months were revised lower by 17K, so still a huge number, and it was the main topic of conversation in the markets all day. 

To me, the big news was that private sector jobs rose 172K, while government jobs declined by 42K.  In fact, the Federal civilian workforce is back to its smallest count since 1966!  That is an unalloyed positive in my view.  Too, manufacturing jobs increased by 5K, which is the first time we have seen a rise since November 2024.  In fact, if you look at the chart below of manufacturing jobs for the past 5 years, it is easy to see what President Trump is trying to achieve.  One month does not indicate success, but it’s a start.

Source: tradingeconomics.com

The last positive was that the Unemployment Rate fell to 4.3%, so overall, this seems like a pretty good report.  But as with everything these days, it depends on the lens through which you view it.  As with most national data in an economy as large and varied as the US, there were real and perceived negatives.  The BLS made their annual benchmark revisions to the data which removed 403K jobs from 2025’s numbers.  These revisions come as they adjust their birth-death model as well as get updated population statistics.  But for those who seek bad news for this administration, that reduction of 403K jobs is proof that the president’s policies are failing.  Another complaint has been that the bulk of the increase in NFP was in the health care sector, although given the ongoing aging of the population, that cannot be very surprising.

Nonetheless, just like every other piece of data these days, NFP was a Rorschach test of your underlying political beliefs and not so much a description of the economy.  My question is, if the employed population is ~159 million, is an adjustment of 400K really meaningful?  After all. It’s about 0.25% of the working population in a measurement of a dynamic statistic amid people changing jobs and the economy growing.  Perhaps the politics are the signal, and the data is the noise.

Given that there were two very different takes on the data, it ought be no surprise that the S&P 500 finished the day exactly unchanged which is a pretty rare occurrence, happening less than 2% of the time in the past 10 years.  In fact, that lack of movement was the norm with both the NASDAQ and DJIA slipping -0.1%.  Net, I don’t think we learned much new and now markets and the algorithms will focus on tomorrow’s CPI data.

However, the narrative writers had their work cut out for them.  All those who were seeking to pan the government had to change their tune and now they are focused on the fact that there don’t need to be rate cuts if the employment situation is better.  Again, through a political lens this is good if you are anti-Trump because it prevents him getting the rate cuts he has been demanding.  I guess we cannot be surprised that Stephen Miran, in comments yesterday, continues to explain rate cuts make sense, which simply confirms the view that everything is political these days.

So, do we know anything new this morning?  Alas, I don’t think we learned anything to change the big picture yesterday, so let’s see how the data was received around the world.  Tokyo followed the S&P’s lead and was unchanged overnight with China (+0.1%) also doing little.  HK (-0.9%) lagged as traders prepare for the Chinese New Year holiday that runs all next week and took profits.  Korea (+3.1%) continues to perform well while India (-0.7%) continues to waver as the trade deal with the US impacts different parts of the economy very differently there.  Net, a mixed session.  In Europe, Germany (+1.3%) is the leader this morning on the strength of solid earnings reports by key companies as there has been no data released.  France (+0.75%) too is having a good day on earnings although Spain (-0.2%) is lagging.  The UK (+0.1%) is the only place where data made an appearance and it showed that GDP growth has fallen to 1.0% Y/Y there, another problem for the embattled PM Starmer.  It appears his time in office will be ending soon as literally every policy decision he has made has had a negative outcome.  As to US futures, at this hour (7:30) they are firmer by about 0.3%.

Bond markets saw the biggest move yesterday, with Treasury yields rising 4bps, although they have slipped back -1bp this morning and continue to trade in their range of 4.0% – 4.2%.  while we did spend some time above that range, it appears that fears of a bond market meltdown, or that China was going to sell their bonds or something else have faded somewhat.  In fact, globally, 10-year yields this morning are essentially unchanged.

Source: tradingeconomics.com

In the commodity space, the Iran situation continues to be top of mind for oil traders although WTI (-0.3%) is not really moving much this morning.  There was no announcement from the White House regarding the meeting between President Trump and Israeli PM Netanyahu which indicates, to me at least, that nothing was decided.  While a second US aircraft carrier steams toward the Persian Gulf, we are all on tenterhooks as to how this plays out.  Right now, it doesn’t appear that discussions between the US and Iran are leading anywhere.  Meanwhile, metals (Au -0.4%, Ag -1.6%, Pt -1.3%) are giving back some of yesterday’s strong gains with gold firmly back above the $5000/oz level again.  There is much talk of a major shortage on the COMEX for deliveries for March, but we shall see how that plays out.  Certainly, there has been no change in the demand structure for silver, but we just don’t know how much silverware has been sold for scrap to help alleviate the shortage at this point.  

Finally, the dollar is little changed vs most major counterparts with the two outliers KRW (+0.6%) on the back of strong equity market inflows and CHF (+0.4%) which appears to be the one haven that is behaving like one this morning.  JPY (-0.2%) has strengthened several percent over the past week, and comments from the latest Mr Yen, Atsushi Mimura, make clear they continue to watch the market closely, but for right now, there seems little concern, or likelihood, that intervention is coming soon.

One thing the NFP data did achieve was to alter the Fed funds futures market which now is pricing just a 6% probability of a rate cut at the March meeting with two cuts priced for the year.  I have to say that based on the comments from Logan and Hammack, as well as the NFP data, it certainly doesn’t appear likely that the Fed is going to cut again soon.  Tomorrow’s CPI data may change some opinions there, but we will have to wait to find out.

But riddle me this, if the Fed has finished its loosening cycle, and Kevin Warsh is seen as someone who is keen to reduce the size of the Fed’s balance sheet, why would we think the dollar is going to decline sharply from here?  For now, the buck remains rangebound, but as I watch what is going on elsewhere around the world regarding economic activity, the US continues to lead the way.  I still don’t see the dollar collapse theory making sense, although frankly, I think the administration would be fine with it.  Let me leave you with the entire history of the EURUSD exchange rate since its inception in 1999 and you tell me if you think the dollar is exceptionally weak or strong here.  Remember, a weak dollar is a strong euro, so higher numbers.  Frankly, it feels like we are close to the middle of the range, or if anything, stronger rather than weaker.

Source: data FRED, graph @fx_poet

Good luck

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Havoc He’s Wreaking

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The focus has turned to the data
And whether it’s good or it’s bad-a
We all want to see
Today’s NFP
Then listen to punditry chat-a
 
It’s funny, cause generally speaking
Most pundits are strongly critiquing
The numbers released
Declaring they’re greased
To help Trump and havoc he’s wreaking

It’s NFP day today, which given it is Wednesday is a bit odd, but that’s what happens when the government shuts down for a few days.  At any rate, this is the biggest data week we’ve had in a while as not only did we see Retail Sales yesterday, which disappointed at 0.0% despite showing the largest actual jump, $80 billion, ever between November and December, although that was completely removed by the largest seasonal adjustment ever, (Read about it here at WolfStreet.com) we also get CPI on Friday.  For good order’s sake, here are the current consensus forecasts for NFP:

Nonfarm Payrolls70K
Private Payrolls70K
Manufacturing Payrolls-5K
Unemployment Rate4.4%
Average Hourly Earnings0.3% (3.6% Y/Y)
Average Weekly Hours34.2
Participation Rate62.3%

Source: tradingeconmomics.com

As the market continues to adjust to the recent gyrations, there is hope that the data will lead to unequivocal conclusions about the economy, which could drive Fed decisions and then coalesce around a clear direction of travel.  I’m not holding my breath.  

The first thing to remember is that the data is revised virtually every month, and when the economy is at an inflection point, or even when it is showing more pronounced activity in one sector than another, those revisions can tell a very different story than the original print.  But even beyond that, while the algorithms are clearly programmed to respond to the data, longer term investors have a much tougher time discerning what is happening.  All that is a long way of saying, nobody still has any idea where things are headed!

While I dismiss the FOMC speaking circuit, yesterday’s two speakers, Logan and Hammack, who are both voting members this year, said that they felt the current rate is at neutral.  Remember, right now Fed funds are 3.75%, which is a far cry from the Longer run neutral rate they have been feeding us in the Dot Plot!

In fact, their median expectation is 3.0%, so the fact that two voting members think 3.75% is neutral is somewhat confusing especially as both indicated they expected inflation to continue to decline and exhibited concern over the employment situation.  My views of where things are headed don’t matter nearly as much as theirs do, but there seems to be a little inconsistency involved here.  As it happens, the current Fed funds futures market pricing shows that there is a 22% probability of a rate cut in March and then it’s 50:50 in April as per the below chart fromcmegroup.com.

At this point, I suspect we will need to see negative NFP numbers along with continuing declines in CPI/PCE for the Fed to cut as I think Chairman Powell is so miffed at President Trump, he doesn’t want to do anything that Trump wants.  It would also not surprise me if that attitude has suffused the bulk of the FOMC.  The irony remains that Governors Cook and Jefferson are raging doves but would rather keep policy tight to stymy Trump rather than act as they otherwise would.  At least that’s my take.

Anyway, that’s what we have to look forward to this morning.  So, how have things behaved overnight?  Let’s look.  Tokyo (+2.3%) continues to be the star of the show, continuing to rally on excitement and optimism that PM Takaichi is going to solve Japan’s problems.  Maybe she will, but they have a lot of them, so it will take time.  But the tech story is strong there and it appears that foreign buying is picking up, which has been one of the drivers of the JPY (+0.5%) lately.  In fact, this week, the yen is leading all currencies having gained more than 2.3% so far.

Source: tradingeconomics.com

As to the rest of Asia, China (-0.2%) and HK (+0.3%) did little although the tech-based Korean (+1.0%) and Taiwanese (+1.6%) exchanges did well, as did Australia (+1.6%) on the back of stronger metals prices.  One other interesting note is Indonesia (+2.0%) where the government just restricted mining of Nickel (+1.7%) in order to raise the price of their largest export!

Europe is a lot less interesting with the continent under some pressure (France -0.2%, Spain -0.3%, Germany -0.2%) although the UK (+0.7%) is performing well on the back of strength in mining and natural resource shares.  US futures at this hour (7:35) are pointing slightly higher, about 0.15%.

In the bond market, things have gone back to sleep with 10-year yields lower by -1bp pretty much throughout the US and Europe.  JGB yields also did nothing last night, and it appears that despite the massive debt that continues to grow around the world, bond investors are comfortable right now.  Perhaps they see deflation in our future, but that doesn’t feel right to me.

Turning to the markets that continue to show the most volatility, commodities, let’s start with oil (+2.1%) which is demonstrating concern over re-escalating tensions regarding Iran, the negotiations and the potential for military activity there.  There are reports that the US may intercept Iranian tankers and if you look at the chart below, a pretty good uptrend has developed over the past two months.  You won’t be surprised that NOK (+0.6%) has benefitted from today’s move either.

Source: tradingeconomics.com

As to the precious metals, after yesterday’s modest decline, we are back on the rise with gold (+0.85%), silver (+5.5%), copper (+2.1%) and platinum (+3.3%) all nicely higher.  The silver story is about declining inventories in Shanghai, which was the last place that can afford it since both the COMEX and London are already light on available ounces.  While we saw a dramatic decline nearly two weeks ago, I have to say things appear to be shaping up to recoup all those losses and then some!

Finally, the dollar is back under pressure this morning across the board.  I’ve already mentioned the two biggest movers and AUD (+0.5%) joins the list on the back of commodity strength.  Otherwise, the movements are not terribly large here, with the euro (+0.1%), pound (+0.3%), KRW (+0.3%), and ZAR (+0.2%) indicative of the situation.  I expect that the dollar will be responsive to today’s NFP data with a strong print helping the dollar and a weak one pushing it down a bit further.  However, remember that it remains within its trading range, albeit nearer the bottom than the top of that range as per the below.

Source: tradingeconomics.com

And that’s really it for today.  The NFP should drive the first movement and after that, there is still White House bingo for fun and surprises.  While the dollar is soft, I don’t see a collapse coming, and in the end, the more I read about EU energy policy, I can only expect that any collapse will be that of the euro, not the dollar.  But that is a ways into the future I think.

Good luck

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