In a Plight

Posted on November 27, 2024 by fxpoet

The Minutes explained that the Fed
Is confident, looking ahead
They’ve conquered inflation
Although its duration
May last longer than they had said

They still think their policy’s tight
And truthfully, they may be right
But if they are not
And ‘flation’s still hot
They might find themselves in a plight

Below are a couple of key passages from the FOMC Minutes which show that the Fed continues to put on a game face when it comes to their performance. Although some participants have begun to hedge their bets, it is clear the majority of the committee remains convinced that despite the broad inaccuracies of their models over the past ~~forty~~ four years, they are still on track to achieve their objectives.

“Participants anticipated that if the data came in about as expected, with inflation continuing to move down sustainably to 2% and the economy remaining near maximum employment, it would likely be appropriate to move gradually toward a more neutral stance of policy over time.”

“Participants indicated that they remained confident that inflation was moving sustainably toward 2%, although a couple noted the possibility that the process could take longer than previously expected.” [emphasis added]

And this morning, they will get to see if their confidence has been rewarded with the release of the October PCE data (exp 0.2%, 2.3% Y/Y headline; 0.3%, 2.8% Y/Y core). One of the tell-tale signs that they are losing confidence is there has been more discussion about the vagaries of where exactly the neutral rate lies as evidenced by the following comment.

“Many participants observed that uncertainties concerning the level of the neutral rate of interest complicated the assessment of the degree of restrictiveness of monetary policy and, in their view, made it appropriate to reduce policy restraint gradually.”

Once upon a time, the Fed was the undisputed master of markets, and their actions and words were the key drivers of prices across all asset classes. However, not dissimilar to what we have seen occur regarding other mainstream institutions and their loss in respect, the same is happening at the Marriner Eccles Building I believe. Chairman Powell, he of transitory inflation fame, is a far cry from the Maestro, Alan Greenspan, let alone Saint Volcker, and my observation is that more and more market participants listen to, but do not heed, the Fed’s words.

My read is the Fed has it in their mind that they need to continue to cut rates because the committee members have not lived through periods when interest rates were at current levels for any extended length of time. They still fervently believe that their policy is restrictive, despite all the evidence to the contrary (record high stock prices and GDP expanding above potential) and so seem afraid that if they don’t cut rates they will be blamed for a recession. I would argue the market interpretation of the Minutes was dovish as shown by the Fed funds futures market increasing the probability of a December cut to 66%. Remember, Monday it was 52%. My cynical view is the reason Powell wants to cut is his friends in the Private Equity space are suffering and he wants to help, because really, given both the inflation and economic activity data, it does not appear a cut is warranted.

Turning our attention elsewhere, there is a story going round that China is preparing to fire that bazooka this time…for real. At least that’s what I keep reading on X, and certainly, Chinese equity markets rallied on something (CSI 300 +1.75%, Hang Seng +2.3%), but I cannot find a news story explaining any of it. Were there comments from Xi or Li Qiang? If so, I have not seen them. While Chinese assets have underperformed lately, that seems to have been a response to the Trump announcements of even more tariff-minded economic cabinet members. And the currency is essentially unchanged this morning, hanging just above that 7.25 level vs. the dollar which has served as a cap for the past decade. (see below).

Source: tradingeconomics.com

Keep in mind that the consensus view is if Trump imposes tariffs, the renminbi will weaken enough to offset them very quickly. Arguably, the dollar’s strength since September, when it briefly traded below 7.00, is a response to first, Trump’s improving prospects to win, and then once he won, his cabinet selections. Will CNY really decline 5% if tariffs are imposed? That seems an awful lot, but I guess it’s possible. It strikes me that hedgers should be looking at CNY puts to manage their risk here.

Finally, a look at Europe shows that the dysfunction on the continent seems to be accelerating. France is the latest target as the current government is hanging on by a thread with growing expectations that Marine Le Pen’s RN party is going to call for a confidence vote and topple it. As well, there are growing calls for President Macron to resign as he has clearly lost control. They are currently running a 6% fiscal deficit (just like the US although without the benefit of the world’s reserve currency) and they already have the highest tax burden in Europe. With Germany sinking further into its own morass (GfK Consumer Confidence fell to -23.3 and continues to show a nation lacking belief in its future. Just look at the longer-term chart of this indicator below:

Source: tradingeconomics.com

While Covid was obviously a problem, things seemed to be getting back toward normal until Russia’s invasion of Ukraine in early 2022 sent energy prices higher and laid bare the insanity of their Energiewende policy. As industry flees the country and politics focuses on the immigration issues ignited by Angela Merkel’s open borders policy, people there truly have little hope that things will get better.

I cannot look at the situation in both Germany and France, with both nations struggling mightily and conclude anything other than the ECB is going to be cutting rates more aggressively going forward. Combining that with the ongoing belief that Trump’s policies are going to be dollar positive overall, it seems that the euro has much further to decline. Do not be surprised to see it break parity sometime early in 2025.

Ok, ahead of the Thanksgiving holiday, let’s look at other markets. In addition to the gains in Chinese shares, Australia (+0.6%) and New Zealand (+0.7%) had a good session with the latter buoyed by the RBNZ cutting rates the expected 50bps. However, Japan (-0.8%) was under pressure as the yen (+1.1%) rallied strongly on rumors that the BOJ is getting set to hike rates next month, a bit of a change from the previous viewpoint. In Europe, the CAC (-1.25%) is the laggard as investors are watching French OATs slide in price (rise in yields) relative to their German Bund counterparts and worrying that if the government does fall, there is no way for things to work without the RN involved. But the DAX (-0.6%) is also softer as is the rest of the continent. Only the UK (0.0%) is holding up this morning. meanwhile, at this hour (7:10), US futures are pointing slightly lower, just -0.15% or so.

In the bond market, Treasury yields (-4bps) continue to slide as investors are going all-in on the idea that proposed Treasury Secretary Bessent will be able to solve the intractable problems current Secretary Yellen is leaving him. This decline is helping European sovereign yields slide as well, as they decline between -1bp and -3bps. However, a quick look at the chart below shows the above-mentioned Bund-OAT story and how that spread is the widest it has been in many years.

Source: tradingeconomics.com

In the commodity space, oil (+0.2%) is settling in just below $70/bbl as it becomes clear that OPEC+ is not going to be raising production anytime soon. NatGas (-4.8%) has suffered this morning on warmer weather in Europe, but the situation there remains dicey at best, and I think this has further to run. In metals markets, gold (+0.8%) is continuing to rebound from Monday’s wipeout, having recouped about half of the move, and we are also seeing strength in silver and copper on the China stimulus story.

Finally, the dollar is under pressure again this morning with the yen and NZD (+1.1%) leading the way although the euro (+0.3%) and pound (+0.3%) are having solid sessions as well. In the EMG bloc, MXN (-0.3%) continues to be pressured by the tariff talk although much of the rest of the bloc is following the euro’s lead and edging higher. My sense here is that there are quite a few crosscurrents pushing the dollar around so on any given day, it is hard to tell what will happen. However, I still am looking for eventual further dollar strength, especially given the Fed seems to be far less likely to cut aggressively.

On the data front, yesterday’s new Home Sales were horrific, falling -17.3% and indicating the housing market is beginning to struggle. I think that is one of the reasons the rate cut probability rose. As to the rest of today’s data beyond PCE we see the following:

Personal Income	0.3%
Personal Spending	0.3%
Q2 GDP	2.8%
Durable Goods	0.5%
-ex Transport	0.2%
Initial Claims	216K
Continuing Claims	1910K
Goods Trade Balance	-$99.9B
Chicago PMI	44.0

Source: tradingeconomics.com

With the holiday, there are no Fed speakers scheduled and Friday, exchanges are only open for a half-day. There continues to be a very positive vibe overall, with retail investors the most bullish they have ever been according to several banking surveys. As well, there continues to be a positive vibe from the Trump cabinet picks which has many people expecting great things. As I said yesterday, I hope they are correct.

My concerns go back to the fact that I just don’t see inflation declining like the Fed projects and that is going to have some negative market impacts along the way. The one inflation positive is that I see oil prices with the opportunity to fall further, although demand for NatGas should keep that market underpinned. As to the dollar, I’m still looking for a reason to sell it and none has been presented.

There will be no poetry on Friday so please have a wonderful Thanksgiving holiday and we get to see how things play out come Monday.

Good luck and good weekend

Adf

Think More Than Twice

Posted on November 26, 2024 by fxpoet

The verdict, as best I can tell
Is Trump and his new personnel
Are being embraced
So, buy risk, post-haste
Lest owners all choose not to sell!

And yet there seems always a price
Where owners will sell in a trice
But if it’s that high
It just might imply
It’s worth it to think more than twice

Euphoria is one way to describe what we have seen in markets over the past several sessions, with substantial gains across both equity and bond markets while havens like gold and the dollar have been discarded. Insanity may be a better way to do so. Regardless of your description, the facts are that risk assets have been consistently higher since the election results and there is a palpable excitement about how the future, at least for markets, will unfold. I hope all this excitement is not misplaced, but it is still early days. Just remember, that whatever ideas are currently being bandied about regarding Trumpian policies, it is almost certain that the reality will not quite live up to the hype.

Consider, too, for a moment just how different the impact will be on different markets. The obvious first thought is China, where we have seen a significant divergence between the S&P 500 and the CSI 300 over the past week as seen in the chart below.

Source: tradingeconomics.com

My point is all that euphoria is very country specific. After all, yesterday’s comments by President-elect Trump that on day one he will impose tariffs of 25% on all imports from both Mexico and Canada had the expected impact on their currencies, weakening both substantially. In fact, it is quite interesting to look at a longer-term chart of USDCAD and see that this is the third time in the past decade the exchange rate has traded above 1.40. The previous two times were the beginnings of Covid, amid massive risk-off trading…and in 2016 when Mr Trump was previously elected president.

Source: tradingeconomics.com

I assure you that whatever China decides to do, and they have many inherent strengths as well as weaknesses, both Mexico and Canada are going to ultimately concede to whatever Trump wants as they cannot afford to ignore it. In fact, my take is that the reason so many political leaders around the world are distraught is because they recognize that they are going to have to change their policies to keep in Trump’s good graces. To me, the implication is that we are due for much more volatility as markets respond to all the changes that are coming.

And that should be our watchword going forward, volatility. We live in a time where previous theories that led to previous policies are being questioned and upended. We are also living through what appears to be the end of the Pax Americana era, where the US is turning its focus inward rather than concerning itself with pushing its brand globally. These realignments are going to be ongoing for quite a while, and as new models will need to be developed and implemented, in both the public and private sectors, outcomes are going to remain quite uncertain for a while. It is this that will drive all the volatility. Once again, I urge hedgers to keep this in mind and maintain robust hedging programs as risk mitigation is going to be critical for future performance.

Ok, so let’s look at how things turned out overnight. While the rally in the US equity market continues, especially in value and small-cap stocks, the story in Asia was far less positive with declines in Japan (-0.9%), China (-0.2%) and Australia (-0.7%) and almost every regional exchange in the red overnight. This seems a direct response to the resurgence of tariff talk from Trump and I expect may be the guiding force for a while yet, perhaps even until the Inauguration. Of course, we could also see some nations capitulating quickly in an effort to gain favor and I would expect those markets to reflect a more positive stance in that situation. Neither is Europe immune from tariff talk as every bourse on the continent is weaker this morning amid concerns that tariffs are coming for them as well. In addition, Trump has made it clear he is uninterested in supporting the Ukraine effort which means that either Europe will need to spend more money, or the map is going to change in an uncomfortable manner. As to US futures, at this hour (7:20) they are modestly firmer.

In the bond market, yesterday saw the largest rally (-14bps) since the July NFP report showed Unemployment jumped to 4.3% in early August and triggered all sorts of claims that recession had started. Yesterday’s catalyst was far more ambitious, ascribing success to Treasury Secretary selection Scott Bessent’s ability to rein in the fiscal deficit. That bond rally dragged European sovereign yields lower, although a much smaller amount, 3bps-5bps, and this morning things are back to more normal trading with Treasury yields unchanged while Europeans are generally trading with yields lower by -2bps. Certainly, if fiscal issues are successfully addressed, the opportunity for bond yields to decline exists, but this seems like a lot of hope right now.

In the commodity markets, gold had its worst day in forever, falling $110/oz although it is rebounding a bit this morning, up $21/oz or 0.8%. That move seemed entirely driven by this same euphoria that has been underpinning both stocks and bonds, namely the future is bright, and havens are no longer needed. Silver, too, had a rough day yesterday and is rebounding this morning, +1.4%, while copper sits the whole move out. Oil (+0.8%) sold off yesterday amid the same risk thoughts as well as the news that an Israeli/Hezbollah ceasefire may be coming soon, reducing Middle East risk. In the short-term, the day-to-day vicissitudes of oil’s price are inscrutable to all but the most connected traders, but nothing has changed my longer term view, which has only been enhanced by Trump’s drill, baby, drill thesis, that there is plenty of oil around and sharp price rises are unlikely going forward.

Finally, the dollar seems to have put in a top last Friday and has been selling off since the Bessent announcement. I’m not sure I understand the logic here as Bessent is seeking to increase real GDP growth while reducing the deficit, both of which strike me as dollar positives. Perhaps the idea is interest rates will be able to be lower in that situation, thus undermining the dollar, but again, on a relative basis, it seems quite clear that the US remains in far better macroeconomic condition than virtually every other nation. So, if the US is cutting rates, others will be cutting even faster. However, that is where we are this morning, with both the euro (+0.5%) and pound (+0.4%) climbing alongside the yen (+0.7%). Offsetting that is the Loonie (-0.7%) and MXN (-0.8%) as both are the initial targets of those potential tariffs. It strikes me that we are likely to see a number of previous relationships break down as the tariff talk adjusts views on different national outcomes. Once again, volatility seems the watchword.

On the data front, this morning brings Case-Shiller Home Prices (exp 4.8%), Consumer Confidence (111.3) and New Home Sales (730K) and then the FOMC Minutes are released at 2:00. All eyes will be there as things have so obviously changed since the meeting earlier this month, including Chairman Powell’s downshifting on the rate cutting cycle. You remember, he is no longer in a hurry to do so. Interestingly, as of this morning, the futures market is pricing in a 60% chance of a cut next month, up from 52% yesterday morning. Perhaps that is a result of yesterday’s Chicago Fed National Activity Index, a meta index looking at numerous other indicators, which printed at -0.40, much worse than the expected -0.20, and as can be seen below, has shown a consistent trend that growth may not be what some of the headline data implies.

Source: tradingeconomics.com

Remember, too, with the holiday on Thursday, tomorrow brings a huge data dump so macro models will be waiting to respond. As well, given the holiday, liquidity is likely to be less robust than normal meaning price dislocations are quite possible.

My sense is the dollar’s decline is more of a profit taking exercise (recall it rallied more than 7% in a few months) than a change in the long-term fundamentals. But it is always possible that the new administration’s policies will be focused on pushing the dollar down, although funnily enough I don’t think Trump really cares about that this time. My take is he is far less concerned about growing exports than reducing imports and bringing production home. We shall see.

Good luck

Adf

Three-Three-Three

Posted on November 25, 2024 by fxpoet

Apparently, everyone’s sure
Scott Bessent is wholesome and pure
As well, he will fix
The Treasury’s mix
Of policies for more allure

He’s focused on three, three and three
His shorthand for what we will see
The budget he’ll cut
Build up an oil glut
And push up the real GDP

President-elect Trump has named hedge fund manager Scott Bessent to be Treasury Secretary. This appears to be one of his less controversial selections and has been widely approved by both the punditry and the markets, at least as evidenced by the fact that equity futures are rallying while Treasury yields are sliding. An article in the WSJ this morning lays out his stated priorities which can be abbreviated as 3-3-3. The 3’s represent the following:

Reduce the budget deficit to 3%
Pump an additional 3 million barrels/day of oil
Grow GDP at 3% on a real basis

The target is to have these three processes in place by the end of Trump’s term in 2028. I certainly hope he is successful! However, while 3-3-3 is a catchy way to define things, it is a heavy lift to achieve these goals. In the article, he also explains that he will be seeking to make permanent the original Trump tax cuts from 2017 as well as uphold Trump’s promises of no tax on tips, overtime or Social Security.

Now, the naysayers will claim this is impossible, especially the idea of cutting taxes and reducing the budget deficit, but then, naysayers make their living by saying such things. While nothing about this will be easy, the one overriding rule, I believe, is that increasing the pace of real GDP growth is the only way to achieve any long-term sustainability. It is in this space where I believe the synergies between Treasury and the newly created DOGE of Musk and Ramaswamy will be most critical. Improved government efficiency (I know, that is truly an oxymoron) and reduced regulatory red tape will be what allows the real economy to perform above its currently believed potential growth rate. And in truth, if Trump and his government are successful at that, the chances of overall success are quite high. Yes, that’s a big ‘if’ but it’s all we’ve got right now.

And truthfully, this has been the only story of note overnight as the punditry churns out stories about what can be good or why he will fail. While there was a note that a ceasefire in Lebanon may be close, I don’t believe that has been a major part of the market narrative regarding oil prices for a while. After all, Lebanon doesn’t have any oil infrastructure and while Iran clearly funds Hezbollah, it doesn’t appear they have been willing to lay it all on the line for Hezbollah’s success.

So, market participants are very busy trying to determine the best investments in the new Trump administration and based on all we have seen so far, it appears that Bitcoin is at the top of the list followed by equities, especially value and small-cap and then the rest of the equity universe. US markets remain more attractive than foreign markets while commodities, especially haven assets like precious metals, have lost their allure in this shiny new world. At this point, the big Investment banks are busy increasing their equity market targets for 2025 and beyond with S&P 500 forecasts of 6700 and more already being put in place.

Oh yeah, one other thing is the dollar, which had been on a tear for the past two months, has at the very least paused and some are calling that it has topped. While it is certainly softer this morning, calling a top may be a bit premature. At any rate, let’s see how markets around the world have behaved in the wake of the newest US news.

Some are saying that Friday’s US equity rally was in anticipation of the Bessent pick, and certainly his name was on the short-list, but that’s a tough case to make in my eyes. Nonetheless, rally it did and that was followed by strength in Japan (+1.3%) overnight as well as most of Asia (Korea +1.4%, India +1.25%, Australia +0.3%) although both China (-0.5%) and Hong Kong (-0.4%) lost ground as Bessent is very clear that tariffs are an important part of his strategy. Meanwhile, in Europe, there are modest gains (DAX +0.1%, FTSE 100 +0.2%, IBEX +0.6%) although the DAX (-0.1%) is softer after weaker than forecast IFO data. Europe remains stuck in a difficult situation as their energy policy is hamstringing the economy while services inflation remains stickier than they would like to see, thus potentially hindering more aggressive ECB policy. In the end, though, prospects on the continent are just not as bright as in the US right now. US futures are quite happy with the Bessent choice, rising 0.5% at this hour (7:30).

In the bond market, investors are also of the belief that Bessent will be able to solve some of the US’s problems and Treasury yields have slipped -4bps this morning, although remain near 4.40%. However, European sovereign yields are all creeping higher, between 1bp and 3bps, as the prospects there seem less positive. I would say that investors are willing to give Bessent a chance to try to improve the US fiscal situation and that should help encourage bond buying.

Commodity markets, though, are under pressure generally, although not completely. For instance, oil prices fell $1/bbl upon the Bessent news but have since regained the bulk of that as it appears the growth story is starting to take over. Nat Gas (+4.8%) is continuing to rally strongly, especially in Europe as cold weather forces rapid inventory drawdowns and supplies remain a political, not market question. Interestingly, upon inauguration, one of the first things Trump has promised is to take the pause off the LNG terminals which should raise demand in the US as exports increase and potentially reduce prices in Europe.

However, as mentioned above, precious metals are under pressure (Au -1.2%, Ag -1.9%) as investors believe that a combination of less warmongering and an attack on the fiscal deficit will both reduce the need for a safe haven. As well, given Trump’s well-known disdain for the climate change hysteria, it seems likely support for wind and solar will be reduced, if not eliminated, and silver is a critical need for solar panels.

Finally, the dollar is under pressure this morning, lower versus almost all its counterparts, notably the euro (+0.6%), although also seeing losses (currency gains) against the entire G10, more on the order of 0.25% or so. In the EMG bloc, CLP (+0.9%) is the leader as copper (+0.6%) is the outlier in the metals group gaining on the positive economic story. But we are seeing strength in MXN (+0.45%), PLN (+0.8%) and CNY (+0.15%) as long dollar positions are reduced.

On the data front this week, with the Thanksgiving holiday on Thursday, everything is crammed into the beginning of the week as follows:

Today	Chicago Fed National Activity	-0.15
Tuesday	Case-Shiller Home Prices	4.9%
	Consumer Confidence	111.6
	New Home Sales	730K
	FOMC Minutes
Wednesday	PCE	0.2% (2.3% Y/Y)
	Core PCE	0.3% (2.8% Y/Y)
	GDP	2.8%
	Personal Income	0.3%
	Personal Spending	0.3%
	Durable Goods	0.5%
	-ex transports	0.2%
	Initial Claims	217K
	Continuing Claims	1910K
	Real Consumer Spending	3.7%
	Chicago PMI	44.7

Source: tradingeconomics.com

Mercifully, the Fed seems to be taking the week off with no scheduled speakers although I suppose if something surprising happens, we will likely hear from someone.

I guess the question is, does Scott Bessent really change everything by that much? Obviously, we have no way of knowing until he is in the chair, and that is probably two months away at minimum and then it will take some months before anything of substance actually happens.

But, when I consider my long-term thesis which was that inflation is going to be with us for a while which will result in a steeper yield curve, especially if the Fed continues to cut rates, that would have helped both the dollar and gold while hurting both equities and bonds. This morning, though, the probability of a December rate cut has fallen to 52%, and I imagine it will continue to decline, especially if the PCE data remains hotter than the Fed keeps expecting. As well, questions about the Fed’s political bias will be raised again as the rationale for cutting rates 75bps given the headline data remained strong has always been unclear. So, if the Fed is done cutting, that means the dollar is far more likely to rally from here than fall further, commodity prices will struggle (except maybe NatGas) and bond markets may not anticipate nearly as much future inflation with a tighter Fed and a new administration focused on more fiscal rectitude. In that situation, equities certainly hold much more appeal, although pricing remains steep no matter how you slice it.

Good luck

Adf

Growth Stank

Posted on November 22, 2024 by fxpoet

Three score and a year have now passed
Since flags in the States flew half-mast
In honor of Jack
Who wouldn’t backtrack
On his goal of world peace at last

It has been sixty-one years since President John F Kennedy was assassinated in Dallas. This was one of the most dramatic and impactful events in the history of the US with many still of the belief that it was an inside job. One needn’t wear a tin-foil hat all the time to recognize that the government has done nothing but grow dramatically since then, with the defense complex the leader of the pack. Perhaps in his second term, President Trump will release the case files in an effort to shine a light on the underbelly of the government. This poet has no idea what occurred that day (although I did recently visit the 6^th floor museum in Dallas, a quite interesting place) and I would guess that all these years later, there are very few, if any, people who may have been involved that are still alive. Of course, the risk is that powerful organizations like the CIA and FBI could be forever tarred with this if they were involved, and that would have dramatic implications going forward, hence their desire to maintain secrecy. I highlight this simply as another potential flashpoint in the upcoming Trump presidency.

The data from Europe revealed
That if there is growth, it’s concealed
The PMI’s sank
And German growth stank
Thus Christine, her razor, will wield

Let us now discuss the Eurozone. Not only do they have an increasingly hot war on their border and not only are they being inundated by a major blizzard interrupting power and transportation throughout France, Germany and Scandinavia, but their economies appear to be slowing down far more rapidly than previously anticipated. But that inflation was slowing as quickly!

This morning the Flash PMI data was released for Germany, France and the Eurozone as a whole, as well as the UK. It did not make for happy reading if you are a politician or policymaker in any of these nations.

Indicator	Current	Previous
	Germany
Manufacturing PMI	43.2	43.0
Services PMI	49.4	51.6
Composite PMI	47.3	48.6
	France
Manufacturing PMI	43.2	44.5
Services PMI	45.7	49.2
Composite PMI	44.8	48.1
	Eurozone
Manufacturing PMI	45.2	46.0
Services PMI	49.2	51.6
Composite PMI	48.1	50.0
	UK
Manufacturing PMI	48.6	49.9
Services PMI	50.0	52.0
Composite PMI	49.9	51.6

Source: tradingeconomics.com

One needn’t look too hard to see that the economic situation in Europe is ebbing toward a recession or at least toward much slower growth (German GDP was also released at a slower than expected 0.1% Q/Q, -0.3% Y/Y). While the ECB is very aware of this situation, the problem is that like most other central banks, their strong belief that inflation is going to reach their 2.0% goal has not yet been realized let alone shown an ability to stay at that level over time. However, the ongoing comments from ECB members is that more rate cuts are coming with only the timing and size in question. There is still a strong belief that interest rates in Europe (and the UK) are well above ‘neutral’.

Of course, it will not surprise you to see the chart of the EURUSD exchange rate given this information as the single currency ~~collapses~~ continues its sharp decline.

Source: tradingeconomics.com

Since the end of September, the single currency has declined ~7.0% in a quite steady fashion. All the technical levels that had been in play have been broken with the next noteworthy level to consider being parity. I have been clear for a while that I expected the dollar to continue to perform well and nothing has changed that view. The combination of an increase in fear amid the escalation of tensions in Ukraine and Russia’s intimation that the US and NATO have entered the war already and the very divergent paths of the US and Eurozone economies can only lead to the conclusion that the euro is going to continue to decline for a while. And remember, this price action has very little to do with potential Trump tariff or other policies as they remain highly uncertain. The euro is simply a victim of its own leaders’ ineptitude on both the economic and diplomatic/military fronts. Any Trump tariffs that are imposed on Europe will simply add to the pain.

Before we head to other asset classes, let’s take a quick look beyond the euro in the FX markets. It should be no surprise that the dollar is broadly higher, although not universally so. Versus the rest of the G10, even the yen has not been able to find enough haven demand to hold up as the greenback rallies against them all with the euro (-0.6%) and pound (-0.6%) sharing honors as the laggards. However, in the EMG bloc, the picture is more mixed with CE4 currencies all sliding but ZAR (+0.4%) rallying amid the ongoing rebound in the price of gold (+1.2%) which is also benefitting from increased fear and risk disposition. As to Asian currencies, most were somewhat weaker but other than KRW (-0.4%) the moves were unimpressive.

On the commodity front, oil (-0.6%) is slipping a bit heading into the weekend but it has had an excellent week, rallying more than 4%. There are many cross tensions in this market as on one side we have fears that the Russia/Ukraine situation will impact supply, or that Iran will react to Israel’s ongoing campaign in Lebanon and do something about the Strait of Hormuz. These are obviously bullish for crude. But the flip side is that Trump has made very clear his desire to open up far more land for drilling and is seeking to increase supply substantially, a negative price signal.

Turning to bond markets, there is demand everywhere as the combination of risk aversion and weaker Eurozone growth have brought the buyers out of the woodwork. Treasury yields have slipped -4bps and in Europe, the entire continent is seeing yields decline between -7bps and. -8bps. After the PMI data this morning, the Euribor futures market upped pricing for a December ECB rate cut from a 15% to a 50% probability. Add to that comments from ECB members Stournaras and Guindos and it seems quite likely that rates in Europe are going to decline.

Finally, equity markets have shown very little consistency. Yesterday’s strong US rally was followed by strength in Japan (+0.7%) but massive weakness in China (CSI 300 -3.1%, Hang Seng -1.9%) as concerns over those Trump tariffs continue to weigh on investors there. However, it was only China that suffered as pretty much every other market in the region saw gains, with some (India +2.55, Taiwan +1.6%, New Zealand +2.1%) quite substantial. European shares, however, are more mixed with most continental bourses showing modest declines although the UK (+0.8%) has managed to buck that trend despite the weak PMI data and weak Retail Sales data as investors seem to be prepping for a BOE rate cut next month. As to US futures, at this hour (7:30) they are little changed.

Yesterday’s data showed Initial Claims sliding but Continuing Claims rising to their highest level, above 1.9M, in three years. It appears that while layoffs aren’t increasing, finding a job once you are unemployed is much tougher. Philly Fed was also softer than forecast and that seemed to help the Fed funds futures market push up the probability of a December cut to 59% this morning, up from 55% yesterday. This morning, we see the Flash PMI data here (exp Mfg 48.5, Services 55.0) and then Michigan Sentiment (73.7). There are no Fed speakers on the schedule so I expect that this morning’s trends may run for a little longer, but as it is Friday, I would not be surprised to see a little reversal amid week ending profit taking. However, the dollar has further to go, mark my words.

Good luck and good weekend

Adf

Missiles are Flying

Posted on November 21, 2024 by fxpoet

Apparently, nerves are on edge
Though pundits, no worries, allege
But missiles are flying
So, traders are buying
Safe havens as they start to hedge

So, it cannot be that surprising
The dollar and gold keep on rising
While sales are quite brisk
For assets with risk
Like stocks with investors downsizing

While some of you may be concerned over the news that Russia has launched an intercontinental ballistic missile in an its latest attack on Ukraine (as an aside, since both Russia and Ukraine are in Europe, was it really intercontinental?), by focusing on mundane aspects of life and death, you may have missed the truly important news release from yesterday afternoon, Nvidia’s guidance was disappointing and its stock price declined! It is for situations like this that I write this morning missive, to make sure you focus on the important stuff.

All kidding aside, the knock-on effects of the escalation of the fight in Ukraine are likely to be more impactful over time, especially for Europe. Consider the fact that most of Europe has recently been blanketed by a major winter storm with much colder than normal temperatures, and another one is forecast for the coming days. As well, part of this weather pattern is weaker than normal wind speeds, so much of the continent is suffering a dunkelflaute again. The energy implications are significant as both wind and solar power are virtually non-existent which means they are hugely reliant on NatGas to both keep the lights on and keep warm.

However, Europeans continue their energy suicide and have recently closed one of the only domestic sources of NatGas to satisfy their Green tendencies. This means they will be buying more LNG and competing more aggressively with Asia for cargoes. While NatGas prices in the US have risen sharply in the past month, ~46%, they remain far below prices in Europe, less than one-quarter as expensive. It is exactly this reason that an increasing number of companies in Europe are looking to relocate to areas with less expensive energy, like the US, and why investment in the US continues to outpace investment elsewhere. Look no further than this to understand a key ingredient of the dollar’s ongoing strength.

Of course, there is another story that is dominating the press, the ongoing Trump cabinet picks and all the prognostications as to what they all mean for the future of US policies. You literally cannot read a story without someone elsewhere in the world quoted as explaining they are awaiting the inauguration to see how things evolve and so they are postponing any new actions. This is true for both governments and private companies (although obviously, the Biden administration is taking the opposite tack of trying to do as much as possible before the inauguration, like starting WWIII it seems).

And that is the world this morning, anxiety over the escalation in Ukraine, disappointment that Nvidia didn’t beat the most optimistic forecast expectations and uncertainty over what President-elect Trump is going to do once he is in office. It is with this in mind that we look at markets and see that the best performances are coming from havens and necessities. On days like this, risk does not seem as appetizing.

Let’s start in the commodity markets this morning, where oil (+2.0%) is responding to both the Russia/Ukraine escalation and the US veto of a UN ceasefire resolution in Gaza with both of these prompting increased concerns of a short-term supply disruption. While yesterday’s US inventory data showed some builds, for now, fear is the greater factor. Meanwhile, NatGas (+6.3%) is skyrocketing amid forecasts for colder weather as a polar blast hits both Europe and the West Coast. While the longer-term implications of a Trump presidency are for energy prices to stabilize or decline on the back of increased supply, that is not yet the case. Meanwhile, gold (+0.5%) continues its rebound from its recent correction as havens are clearly in demand. Remember, too, that almost every central bank remains in easing mode as they all convince themselves they have beaten inflation.

However, a look at equity markets shows a less resilient picture, at least from Asia where we saw the Nikkei (-0.85%) slip after that Nvidia result and the Hang Seng (-0.5%) also feel that pain. Remember, these indices are very tech focused and Nvidia remains the tech bellwether. While mainland Chinese shares were little changed, there was weakness in India, Taiwan, Malaysia and Indonesia, as a taste of how things behaved overnight. Europe, though, is managing to shake off some of its concerns and most markets have edged higher, between 0.2% and 0.4% although the CAC (-0.15%) is lagging. The latter is somewhat ironic given that French Business Confidence rose more than expected to 97, although that is merely back toward the long-term average of that series. Arguably, the European move is on the back of US futures, which had been lower all evening but at this hour (7:30) are now all in the green by at least 0.2%.

However, under the heading havens are in demand, bond yields are backing off a bit with Treasury yields lower by -2bps and most European sovereigns lower by between -1bp and -3bps. The tension in this market remains between recent declines in some inflation readings and growing concerns over the potential inflationary policies that President Trump will enact when he gets into office. Nothing has changed my view that inflation is not dead and that a grind higher in yields seems the most likely outcome.

Finally, the dollar continues to find support versus almost all its counterparts, although this morning the yen (+0.5%) is demonstrating its own haven characteristics. But broadly, the DXY is higher by 0.1% with the euro creeping ever closer to 1.0500 and the pound to 1.2600. As well, NOK (+0.3%) is benefitting from the oil’s rise. This latter relationship, which makes perfect economic sense given the importance of oil to Norway’s economy, has been quite strong for a long time as can be seen in the chart below. While daily wiggles may be different, the only true disruption was the start of the Ukraine war where oil jumped massively, and NOK did not follow along given its proximity to the war. But otherwise, it’s pretty clear.

Source: tradingeconomics.com (NOKUSD is the inverse of what you typically see)

As to the emerging markets, we are seeing weakness in LATAM (BRL -0.8%, MXN -0.5%) as well as EEMEA (PLN -0.3%, CZK -0.5%, HUF -0.5%) although ZAR (+0.2%) seems to be benefitting from the ongoing rise in gold. Asian currencies were much less impacted overnight and have not moved much at all.

On the data front, this morning brings the weekly Initial (exp 220K) and Continuing (1870K) Claims data as well as Philly Fed (8.0) and then at 10:00 Existing Home Sales (3.93M) and Leading Indicators (-0.3%). Chicago Fed president Goolsbee speaks this afternoon, but again, it would be quite a surprise if he veers away from Powell’s comments last week. This morning, the Fed funds futures are pricing a 55.7% probability of that December rate cut, and today’s data seems unlikely to change that. Next week’s PCE data will be far more important.

It is interesting to see the equity market rebound but there is a huge amount of belief that Mr Trump is going to fix everything. While I hope his policies improve the situation, and there is much to improve, it will take time before we see any truly positive impacts I believe. I understand that markets are forward looking, but clarity remains elusive at this time. The one thing that remains clear to me, though, is the demand for dollars is likely to continue for a while yet.

Good luck

Adf

Kind of a Ruse

Posted on November 20, 2024 by fxpoet

The central bank mantra worldwide
Is ‘flation is set to subside
So, rate cuts remain
The path they’ll maintain
With alternate views all denied

But weirdly, despite these strong views
The data just seems to refuse
To show ‘flation slowing
In fact, it keeps showing
Their comments were kind of a ruse

Ask any central banker around the world their view on the path of inflation and I assure you they will claim it is slowing and will return to their 2% goal over time. They will point to obscure signals some months, and headline inflation prints other months, but nothing will dissuade them from this view.

Now, I am just an FX guy and so clearly don’t have the same expertise in econometric modeling that all those PhD’s in all those central banks have but…it does sort of seem like all their models simply have 2% as one side of the equation and they use goal-seek in Excel to create their outcomes. And anyway, how did 2% become the “natural” rate of inflation? After all, that inflation rate was literally pulled out of thin air by RBNZ Governor Donald Brash back in 1990 and has been copied by virtually every other central bank around the world since.

But, whatever the history, that is the goal and recent data from countries throughout the G10 show that prices are not really converging to this rate. The UK is the latest to release data with the Headline CPI rising 2.3%, a tick more than expected and Core rose 3.3%, 2 ticks more than expected. It seems that the same problems the Fed is having with services ex-shelter are being felt in many places around the world. This is the portion of the CPI basket that is most directly impacted by wages and wages continue to rise (which is a good thing for most people), just not necessarily quickly enough to keep up with inflation. For example, Eurozone Negotiated Wage Growth rose 5.42% in Q3, its fastest rise since the Eurozone was formally created as per the chart below. It strikes me that the ECB is going to find it very difficult to push prices lower absent causing a deep enough recession where layoffs are widespread, and wages fall. And my guess is that is not one of their goals.

Source: tradingeconomics.com

Of course, we all know the situation here in the States, where the CPI data has formed a base above 3% and seems far more likely to rise than fall, also absent a major recession.

Ultimately, it begs the question why we care about this data (other than the obvious reason we all have to live with rising prices) from a market perspective. To the extent that monetary policy is a key driver of markets around the world, and relative monetary policy is an important input into the value of different currencies, the relative inflation rates are a critical piece of the puzzle to try to figure out what is happening and how one can hedge their exposures. So, if inflation rates everywhere are slow to return to that sacred 2% level, then different central banks are going to behave differently in order to achieve their goals.

For instance, earlier this week we saw the Minutes of the RBA’s meeting where they were distinctly hawkish regarding the fact that inflation does not seem to be falling the way they ~~hoped~~ ~~prayed for~~ expected based on their models. As such, markets adjusted their pricing for interest rates to remain higher for longer and that helped support the AUD on a relative basis. This morning, amidst a broad-based dollar rally, the pound (-0.25%) is the second-best performer in the G10, after the dollar, as the higher than forecast CPI data has traders expecting the BOE to slow the pace of rate cuts to address the issue. And this is why we care.

Remember, too, while there is currently an extraordinary amount of digital ink being spilled as pundits around the world try to anticipate what President-elect Trump is going to do regarding fiscal policy and tariffs and how that is going to impact relative trade flows as well as monetary policy responses to these actions, my take is that is an enormous waste of time. The first thing we know is that nobody, not even Trump himself, really knows how this is going to play out as there are so many potential paths down which he can tread. And second, the situation seems akin to Keynes’ famous analogy to a beauty contest where you need to select the person who the crowd thinks is the most beautiful, not the one you may think fits that description. In other words, trying to predict the outcome implies understanding what everyone else is expecting, and right now, expectations are widely disparate.

It is for this reason that hedging is so critical, and having a consistent hedging plan is key. None of us has a crystal ball, and managing risk is far more about mitigating big drawdowns than capturing big gains.

Ok, a little long-winded this morning so let’s zip through the overnight market activities. Mixed is the best description for yesterday’s US session, with the DJIA sliding while the other two major indices rallied a touch. It also describes the Asian session overnight as the Nikkei (-0.2%) slipped along with Australia (-0.6%) while China and Hong Kong both managed modest 0.2% gains. The PBOC left Loan Rates unchanged last night, as widely forecast and I expect they will not do anything until Trump is in office and has his team in place. As to European bourses, they are all in the green this morning, but just barely so, with gains between 0.1% and 0.3%, hardly exciting. As to US futures, they are edging higher this morning by 0.1% or so as the most important news in the world, Nvidia earnings, are due to be released after the close today.

In the bond market, yesterday’s yield declines are being almost perfectly reversed this morning with Treasury yields higher by 3bps and European sovereign yields rising between 4bps and 6bps. Certainly, the higher inflation print in the UK has not helped sentiment and I suppose there is some reaction to some of Trump’s recently announced Cabinet picks, notably the Commerce Secretary choice, Howard Lutnick, who is by all accounts a major proponent of tariffs.

In the commodity markets, oil (+0.5%) is holding its recent gains although WTI remains below $70/bbl. My take is that a Trump presidency is going to be quite negative for the price of oil as reduced regulations on drilling along with access to more sites will see production increase. As to the metals markets, gold (-0.2%) has slowed its recent rebound, as has silver (-1.2%) although copper (+0.6%) is holding its own this morning. The last week has seen the metals markets recoup a substantial portion of the recent drawdown although all of them remain lower than levels seen a month ago.

Finally, the dollar is back in fine form this morning, rising against all its counterpart currencies. The laggards in the G10 are NOK (-0.8%) and SEK (-0.8%) although the euro (-0.5%) is under severe pressure again as it continues to probe toward the key 1.0500 technical level. In the EMG bloc, HUF (-1.0%) is the laggard although most of the bloc is softer by between -0.3% and -0.5%. We continue to see CNY (-0.25%) slide as the dollar pushes back above 7.25 this morning. That is the level that has held things in check for the past 5 years, and many believe that when Trump takes office, we could see the renminbi weaken much further once tariffs are imposed. Of course, one of the things the PBOC has been fighting for a long time is a chaotic slide in the renminbi as that does not suit President Xi’s goals of stability to encourage more use by other parties.

The only US data today is the EIA oil inventories with a modest build expected after last week’s large draws. Yesterday’s housing data was a touch weaker than expected and we have heard very little from Fed speakers since Powell explained he was sauntering toward the next rate cut rather than hurrying there. As of this morning, the market probability of that cut happening in December sits at 57%, which is the lowest it has been since the previous meeting.

There are many cross currents in the market narrative at this time with nothing remotely clear. The one thing we know about Donald Trump is he has the capacity to surprise absolutely everyone with his actions, regardless of his words. Again, this is what informs us that a consistent hedging program is the only way to mitigate against major surprises.

Good luck

Adf

Whining and Bleating

Posted on November 19, 2024 by fxpoet

In Rio, the G20’s meeting
With typical whining and bleating
No progress was made
On tariffs or trade
And Trump, though not there, took a beating

Seems leaders in most of these nations
Are fearful of future relations
With Trump and the States
Which just demonstrates
How low are their own expectations

I guess the idea of these broad talking shops is rooted in a desire to keep open lines of communication between parties with different views on the way things should be in the world. But, boy, the G20 has really deteriorated over time. Probably, this is merely a symptom of the underlying changes in international relations. Remember, the G20 is an outgrowth of the Group of 7 nations (US, Germany, UK, Japan, France, Canada and Italy) and only began in 1999. The idea was to help develop the globalization initiative by creating an organization that included both developed and developing nations. It was this group that led to China joining the WTO in 2001 and, ironically, which laid the groundwork for its own slow disintegration.

This is not to say that these leaders are going to stop meeting each year, just that the opportunity for substantive policy proposals has likely passed us by. And understand, this has been the case for a while now as the Chinese mercantilist policy has seemingly reached the end of its global acceptance. While President-elect Trump tends to get the most bashing for this, one need look no further than Europe to see tariff and non-tariff barriers rising quickly. Below, I will allow Bloomberg’s reporters to summarize some of the key issues highlighting the lack of agreement on anything.

Germany’s Olaf Scholz and France’s Emmanuel Macron are pushing for tougher language in the summit communique against Hamas and Russia on the wars. Brazil doesn’t want to reopen the text, fearing that it will reignite battles over other issues too.
UK Prime Minister Keir Starmer irritated Chinese officials by raising human rights and the issue of Taiwan with President Xi Jinping at their first bilateral meeting.
The potential impact of Donald Trump’s impending return to the White House on trade and diplomatic relations hung over many of the day’s bilaterals.
The rivalry between host Brazil’s Luiz Inacio Lula da Silva and Argentina’s Javier Milei was on full display on everything from the role of the state in fighting poverty to climate change, with the latter leader maintaining his contrarian stance to some of the key points in the summit’s statement.
There was even drama around the traditional family photo, which US President Joe Biden, Canada’s Justin Trudeau and Italian Prime Minister Giorgia Meloni somehow missed.

As I said, I expect that these meetings will continue but their usefulness is very likely to continue to deteriorate. One way you know that this process has reached the end of the road is that no financial markets have reacted to any commentary from anyone at the meeting. In the past, the G20 statement or comments from leaders on the sidelines would move markets as they implied policy shifts. No longer. Remember, too, that at least four of these leaders are lame ducks (Biden, Macron, Scholz and Trudeau) and will be out of office within a year.

Away from the photos and sun
Investors see fear and not fun
Ukraine’s getting hotter
Midst greater manslaughter
While pundits, new stories, have spun

However, if we step away from the glitz (?) of the G20 meeting, markets are demonstrating a fearful tone this morning. Yesterday saw US equities with a mixed session as investors continue to try to determine the impacts of President Trump’s return. Will there be tariffs? If so, how big and on what products? And which companies will benefit or be hurt by the process. Generally speaking, the thought has been small-cap companies would be the big beneficiaries while both Big Pharma and Big Food would feel pressure from this new administration. But how has that impacted other nations and other markets?

In truth, I have a feeling one of the key issues this morning is that President Biden’s change in policy to allow Ukraine to fire long-range missiles into Russia is now a growing concern. Russia has altered their nuclear response policy, essentially threatening that if this keeps up, they will both blame the US and NATO and respond with nuclear weapons if they determine that is appropriate. Funnily enough, investors, especially those in Europe, have determined that may not be a positive outcome for European companies. Hence, bourses across the continent are all lower this morning with declines greater than -1.1% everywhere with Poland (-2.1%) the laggard. As to Asian markets overnight, they were broadly firmer as the potential escalation in Europe is likely to have a smaller impact there. But US futures are under pressure this morning, -0.4% across the board at this hour (6:30).

That risk off feeling is being felt in bond markets as well, with yields falling everywhere as investors switch from stocks to bonds. Treasury yields have fallen -6bps and we are seeing similar declines, between -4bps and -6bps, across the continent as well. Fear is palpable this morning here.

This fear is clear in the commodity markets as well where oil (-1.0% after a 3.3% rally yesterday) is softer along with copper (-0.7%) but precious metals (Au +0.8%, Ag +0.5%) are both in demand. The one other noteworthy move this morning is NatGas (+0.6%), bucking the oil trend as despite the oft-feared global boiling (to use UN Secretary General Antonio Guterres term), Europe is feeling an unseasonable cold spell with rain and temperatures just 40° Fahrenheit, some 15° below normal.

Finally, the dollar is back on top this morning as fear has driven investors and savers to holding the greenback despite all its problems. Using the Dollar Index (DXY) as our proxy, you can see from the below chart that despite all the huffing and puffing that the post-election climb of the dollar had ended last Thursday, in fact, we have only seen a very modest correction of the sharp election move and my take is we have higher to go from here.

Source: tradingeconomics.com

Adding to the risk-off thesis is the fact the JPY (+0.4%) is firmer and CHF (0.0%) has not declined with both of those traditional havens holding up well. One other note is AUD (-0.2%) is one of the better performers after the RBA Minutes last night indicated that the central bank Down Under is also in no hurry to cut rates with fears of inflation still percolating there. A quick look across the EMG bloc shows us that virtually all these currencies are softer with PLN (-0.8%) and ZAR (-0.65%) the laggards. I guess given the concerns over Poland and a potential escalation of the war in Ukraine, it is no surprise the zloty is under pressure.

On the data front, this morning brings Housing Starts (exp 1.33M) and Building Permits (1.43M) as well as Canadian inflation (1.9% headline, 2.4% Median). There are no Fed speakers scheduled today and quite frankly; it doesn’t strike me that Housing data is critical to decision making right now. Fear is in the air and that is likely to continue to drive markets. With that in mind, a deeper equity correction along with continued USD strength seem like the best bets for the day.

Good luck

Adf

A Policy Tweak

Posted on November 18, 2024 by fxpoet

Some mornings there’s nothing of note
Upon which this poet can dote
The news cycle’s turned
To what folks have learned
While still up in arms o’er the vote

So, data last night and this week
Is not very likely to wreak
Much havoc on prices
Unless there’s a crisis
That starts from a policy tweak

On the macroeconomic front, there has been very little new news to discuss since I last wrote. Friday’s Retail Sales data was a bit stronger at the headline level, and there was also a revision higher to the previous month, although the ex-autos number was soft. Perhaps more impressive though, was the Empire State Manufacturing Index which jumped from -11.90 to +31.20, the highest reading since December 2021 and the biggest one-month jump on record. It appears there is some excitement about the election results. But all that was Friday, and markets have priced it in. Since then, crickets.

Which takes us to the story that seems to be getting more press than anything else, although it seems only tangentially related to how markets may behave, at least so far. This is the news that President Biden has given permission for Ukraine to use long-range missiles supplied by the US and Europe to attack Russia directly. Now, I am not a geopolitical analyst, but this seems unusual on two counts. First, given President Biden is the dictionary definition of a lame duck, it is hard to understand the perceived benefit of this move, especially given that President-elect Trump has been quite clear in his goal to end the war, or at the very least the US activities there. And second, what possible good can come from raising the specter of increased hostilities with a nuclear power?

Beyond the very obvious reasons that we all should care about this as nobody wants a nuclear conflagration, it has been interesting to observe the market response to this news. We ought not be surprised that safe havens have rallied which helps explain the rebound in gold (+1.1%) and silver (+1.6%) this morning. As well, oil (+0.5%) and NatGas (+1.8%) seem to be benefitting as a serious increase in fighting there could well have a negative impact on production. While many had been focused on the Middle East being the likely hot spot for an oil production halt, perhaps this will surprise folks.

Perhaps it is also no surprise that the dollar is holding its own this morning, slightly higher vs. most G10 currencies with the yen (-0.5%) the laggard. In one way, that is unusual as the yen is typically seen as a haven in its own right, but last night, BOJ Governor Ueda spoke and said the following, “The actual timing of the adjustments [rate hikes] will continue to depend on developments in economic activity and prices as well as financial conditions going forward. Gradually adjusting the degree of accommodation in line with improvement in economic activity and prices will support long-term economic growth and contribute to achieving the price stability target in a sustainable and stable manner.” In other words, while rate hikes may be necessary, it is still too soon to determine if that is the appropriate policy going forward and what the timing may be. Meanwhile, in the EMG bloc, only ZAR (+0.5%) is bucking the trend of dollar strength and that seems to be based on the rebound in precious metals prices.

Finishing up with other markets, bond yields are climbing higher across the board, with Treasury yields higher by 3bps and European sovereign yields rising between 4bps and 7bps as concerns grow that central bank policy is out of step with the potential inflation outcomes. Consider that, other than the BOJ, the rest of the G10 are cutting interest rates and inflation’s decline appears to be abating everywhere. In that situation, it should be no surprise that investors are demanding higher yields to own sovereign debt. But honestly, it is very hard to link today’s price action here to the change in Ukraine policy.

Finally, equity markets are ~~confused~~ mixed. Friday’s US selloff was followed in Japan (-1.1%) despite the yen’s weakness which generally helps equities there. Hong Kong (+0.75%) managed a gain although mainland shares (-0.5%) continue to leak oil. There is a story that the government in China will allow some regions to bring forward that debt swap to get things started sooner, but the more widely read story is that the Chinese population is set to shrink by >50 million by the end of the decade, an unenviable situation in which President Xi finds himself. After all, inward migration to China is non-existent. European bourses are mostly softer, but only modestly so (DAC -0.2%, CAC -0.2%, IBEX -0.1%) as investors await the ongoing news from the US and the presidential transition. ECB speakers have begun to harp on the issue of primary budget deficits across the Eurozone and how that will impair growth opportunities going forward, although will not dampen inflation. As to US futures, at this hour (7:30) they are basically unchanged.

The fact there was limited data overnight was a harbinger of the upcoming week, where there is also limited data.

Tuesday	Housing Starts	1.34M
	Building Permits	1.43M
Thursday	Initial Claims	223K
	Continuing Claims	1875K
	Philly Fed	8.0
	Existing Home Sales	3.93M
Friday	Flash Manufacturing PMI	48.8
	Flash Services PMI	55.3
	Michigan Sentiment	73.5

Source: tradingeconomics.com

Interestingly, it appears that the Fed has started their Thanksgiving break early as there are only three speeches slated, and Chicago Fed president Austan Goolsbee is making two of them. However, Powell’s comments on Thursday about no hurry remain the market’s guiding light for the time being. Futures markets are continuing to price about a 62% probability of a cut next month and are only pricing a total of 75bps of cuts by the end of 2025. Once again, if you want to understand the dollar’s resilience, look no further than this situation.

For now, I expect that every announcement by Trump regarding cabinet positions, especially the Treasury role, is going to be of far more significance than any of the economic data set to be released. Perhaps the only other noteworthy thing this week is Nvidia is due to report earnings Wednesday after the close, and of course, that will get pulses quickening.

Nothing has changed my long-term view that the dollar remains best placed to perform well. Here’s hoping that there is no nuclear war!

Good luck

Adf

Not in a Hurry

Posted on November 15, 2024 by fxpoet

Said Jay, we are not in a hurry
To cut, as the future is blurry
As well, since it’s Trump
We don’t want a slump
‘Cause really, his favor, we curry

Apparently, the Chairman is reading FX Poetry (🤣) these days as he has come to the same conclusions I have drawn, there is no reason to cut rates anytime soon. Yesterday, in a moderated discussion in Dallas, the Chairman said, “The economy is not sending any signals that we need to be in a hurry to lower rates. The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully.” And let’s face it, yesterday’s data simply added to the picture where the employment situation is not in trouble (Initial Claims rose only 217K, less than expected) while inflation signals remain hotter than desired with both core CPI and core PPI looking like they have bottomed as per the chart below.

Source: tradingeconomics.com

One of the things that Fed speakers consistently discuss is whether or not current policy is accommodative or restrictive based on their view of where the neutral rate of interest lies. The problem, of course, is that neutral rate, also known as R* (R-star) is unknown and unknowable, only able to be determined in hindsight. But that doesn’t stop them from trying.

At any rate, a consistent theme we have heard recently from Fed speakers is that they believe their policy is restrictive, hence the need to lower interest rates at all. But there is a case to be made that policy is not restrictive at all right now as evidenced by the fact that the 10-year Treasury rate is actually below the “true” risk free rate. How is that possible you may ask.

Consider that 30-year mortgage rates are also generally considered risk-free as not only are they collateralized, but they are mostly guaranteed by FNMA, GNMA and FHLMC, quasi government agencies that were shown to have the full faith and credit of the US government behind them when things got tough during the GFC. Historically, meaning prior to Covid, the spread between 30-year mortgage rates and 10-year Treasuries was about 165bps on average. However, since February of 2020, that average spread has expanded to 230bps. (Notice how the green line representing the difference between the two rates is stably higher since Covid in 2020.)

Source: data FRED database, calculations @fx_poet

That difference is important because if you consider the idea that mortgage rates represent a better estimate of the “true” risk-free rate, then Treasury yields are cheap by 65bps relative to where they would otherwise be. In other words, policy is looser by that amount than the Fed believes. Why would this be the case? Well, QE has very obviously distorted the price signals from the bond market. Now, I grant that the Fed has also distorted the mortgage market (recall, they still own $2.26 trillion of those), but despite the ongoing QT process, they own $4.3 trillion of Treasuries. And if price signals are distorted, making policy becomes that much tougher for the Fed. It seems quite possible that through their own actions they have lost sight of reality and therefore, continue to make policy based on inaccurate data. I would offer that as an explanation as to why the Fed always seems out of touch…because they are looking at the wrong things.

Ok, let’s take a look elsewhere in the non-political world to see what is going on. Last night, China released their monthly data on Retail Sales (4.8% Y/Y), IP (5.3% Y/Y), Unemployment (5.0%) and Fixed Asset Investment (3.4% Y/Y). Some parts were good (Unemployment was a tick lower than last month and expected, Retail Sales was a full point higher than expected) and some not so good (IP was 0.3% lower than forecast and Fixed Asset Investment came in 1 tick lower.). As well, the House Price Index there fell -5.9% Y/Y last month, which as you can see in the chart below, is indicative of the fact that the property problems in China are still significant and seemingly getting worse.

Source: tradingeconomics.com

However, one thing China is doing is pumping up its exports ahead of the inauguration of Donald Trump as they are clearly very concerned over the widely mooted 60% tariffs to be imposed on Chinese exports to the US. In October, exports exploded higher by 12.7% and I expect we will see that again in November and December as companies there do all they can to beat the clock. One thing this will do is help goose GDP data in China so that 5.0% growth target seems much more attainable now. How things play out going forward remains to be seen, but for now, China is going to push as hard as possible.

Alas for the Chinese, that data and this idea did nothing to help the stock market there where the CSI 300 fell -1.75% last night, the laggard in the Asian time zone. Given equities are discounting instruments, it appears people are more concerned over the future than the past. Elsewhere in Asia, markets were generally flat to modestly firmer (Nikkei +0.3%) after (despite?) the US equity declines yesterday. In Europe this morning, most markets are little changed to slightly softer although Spain’s IBEX (+0.9%) is bucking the trend with its financial sector performing well, perhaps on the idea that the two big Spanish banks, Santander and BBVA, will benefit from the Fed’s seeming policy shift. However, US futures are softer at this hour (7:15) lower by between -0.3% and -0.6%.

In the bond market, yields around the world are virtually unchanged this morning with 10yr Treasuries at 4.43% and no movement in either Europe or Japan. This feels to me like investors are not sure which way to go. Perhaps more are beginning to understand my type of explanation above regarding where things are now and are unsure how to play the future regarding inflation prospects, especially with potentially large changes coming under a new administration. My take is yields will continue to drift higher alongside rising inflation, but that is not a universal view at all.

In the commodity space, oil (-0.4%) is a touch softer this morning although the big declines seemed to have stopped for now. Here, too, uncertainty about how policy will evolve going forward has traders on the sidelines. In the metals markets, yesterday’s lows seem to be holding for now as while gold is unchanged on the session, both silver (+0.85%) and copper (+1.75%) seem to be rebounding. If yields are going to continue higher, the road for metals is likely to be tough, but ultimately, lack of supply is going to drive this story.

Finally, the dollar is giving back some of its gains from this week in what appears to be a profit taking move. It can be no surprise this is the case, especially given holding positions over the weekend at the current time remains a fraught exercise. After all, will there be an escalation in Israel/Lebanon? Ukraine? Somewhere else? And what will Trump announce over the weekend? There has still been no announcement regarding his Treasury Secretary, and that is obviously crucial. So, the dollar has given back about 0.3% of this week’s move largely across the board and I wouldn’t give it any more thought than that.

On the data front, this morning brings the Empire State Manufacturing Index (exp -0.7) as well as Retail Sales (0.3%, 0.3% ex autos) at 8:30. Then, at 9:15 we see IP (-0.3%) and Capacity Utilization (77.2%). There are no other Fed speakers scheduled today, although after Powell pushed back on further rate cuts yesterday, it will be interesting to hear the next ones and how they describe things. If today’s data is hot, I would expect the probability of a rate cut in December, which currently sits at 62.4%, to fall below 50%. As I have maintained, there just doesn’t seem to be much of a case to keep cutting given the economy’s overall strength.

With that in mind and given that growth elsewhere in the world is lagging, I still like the dollar to maintain and gain strength going forward.

Good luck and good weekend

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Right On Humming

Posted on November 14, 2024 by fxpoet

So, CPI didn’t decline
And may not be quite so benign
As Jay and the Fed
Consistently said
When hinting more rate cuts are fine

However, that will not deter
Chair Powell, next month, to confer
Another rate cut
Though it is somewhat
Unclear if his colleagues concur

Despite the fact the narrative is pushing Unemployment as the primary focus of the FOMC, yesterday’s CPI report, which seemingly refuses to decline to the Fed’s preferred levels, had Fed speakers beginning to hedge their bets regarding just how quickly rates would be coming down from here. [Emphasis added.]

St. Louis Fed President Alberto Musalem explained, “The strength of the economy is likely to provide the space for there to be a gradual easing of policy with little urgency to try and find where the neutral rate may be.”

Dallas Fed President Lorrie Logan commented (using a series of maritime metaphors for some reason) “After a voyage through rough waters, we’re in sight of the shore: the FOMC’s Congressionally mandated goals of maximum employment and stable prices, but we haven’t tied up yet, and risks remain that could push us back out to sea or slam the economy into the dock too hard.”

Finally, Kansas City Fed President Jeff Schmid told us, “While now is the time to begin dialing back the restrictiveness of monetary policy, it remains to be seen how much further interest rates will decline or where they might eventually settle.”

If we ignore the oddity of the maritime metaphor, my takeaway is that the Fed is still looking to cut rates further as directed by Chairman Powell, but the speed with which they will act seems to be slowing down. As I have maintained in the past, given the current data readings, it still doesn’t make that much sense to me that they are cutting rates at all, but arguably, that’s just another reason I am not a member of the FOMC. Certainly, the market is on board as futures pricing increased the probability of that cut from 62% before the release to 82% this morning. There is still a long way to go before the next meeting, with another NFP, PCE and CPI report each to be released, as well as updates on GDP and Retail Sales and all the monthly figures, so this story is subject to change. But for now, a rate cut seems likely.

One other thing, I couldn’t help but notice a headline that may pour a little sand into the gears of the rate cutting apparatus at the Eccles Building. This is on Bloomberg this morning: Manhattan Apartment Rents Rise to Highest Level Since July. Again, the desperation to cut rates seems misplaced.

Despite the fact rate cuts are coming
The dollar just keeps right on humming
This morning it’s rising
Which ain’t that surprising
As more depths, the euro is plumbing

Turning our attention to the continent, European GDP figures were released this morning, and they remain disheartening, to say the least. While the quarterly number rose to 0.4%, as you can see from the chart below, it has been several years since the continent showed any real growth, and that was really just the rebound from the Covid lockdowns. Prior to Covid, growth was still lackluster.

Source: tradingeconomics.com

While these are the quarterly numbers, when looking at the Y/Y results, real GDP grew less than 1% in Q3 for the past 6 quarters and, in truth, shows little sign of improving. After all, virtually every nation in the Eurozone is keen to continue their economic suicide via energy policy and regulation. This thread on X (formerly Twitter)is a worthwhile read to get an understanding of the situation on the continent. I show it because this morning, the euro has fallen yet further, and is touching the 1.05 level, seemingly on its way to parity and below. It highlights that since just before the GFC, the Eurozone economy has fallen from virtually the same size as the US economy, to just 60% as large, and explains the key reasons. Read it and you will be hard-pressed to consider the euro as a safe store of value, at least relative to the dollar. And remember, the dollar has its own issues, but at least the US economy remains dynamic.

But the dollar is king, again, this morning, rising against virtually all its counterparts on the session. Versus the G10, the average movement is on the order of 0.3% or so, but it is uniform. USDJPY is now pushing 156.00, the pound seems headed for 1.2600 and Aussie is below 0.65. My point is concerns about the dollar and its status in the world seem misplaced in the current environment. If we look at the EMG bloc, the dollar is stronger nearly across the board as well, with similar gains as the G10. MXN (-0.5%), ZAR (-0.4%) and CNY (-0.2%) describe the situation which has been a steady climb of the greenback since at least the Fed rate cut, and for many of these currencies, for the past 6 months. Nothing about President-elect Trump’s expected policies seems likely to change this status for now.

If we look at equity markets, yesterday’s US outcomes were essentially little changed on the day. However, when Asia opened, with the dollar soaring, we saw a lot more weakness than strength, notably in China with the CSI 300 (-1.7%) and Hang Seng (-2.0%) leading the way lower although the Nikkei (-0.5%) also lagged along with most other Asian markets. While there were some modest gainers (Australia +0.4%, Singapore +0.5%) red was the predominant color on screens. In Europe, however, investors are scooping up shares with the DAX (+1.2%) leading the way although all the major bourses are higher on the session. It seems that there is a growing consensus that the ECB is going to cut 25bps in December and then another 25bps in January, which has some folks excited. US futures, meanwhile, are slightly firmer at this hour (7:00).

All this is happening against a backdrop of a continued climb in yields around the world. Yesterday, again, yields rose with 10yr Treasuries trading as high as 4.48%, their highest level since May, and that helped drag most European yields higher as well. This morning, we are seeing some consolidation with Treasury yields backing off 1bp and European sovereign yields lower by -2bps across the board. The one place not following is Japan, where JGB yields edged higher by 1bp and now sit at 1.05%. Consider, though, that despite those rising yields, the yen continues to slide. In fact, that is the correlation that exists, weaker JPY alongside higher JGB yields as you can see in the below chart.

Source: tradingeconomics.com

While it is open to question which leads and which follows, my money is on Japanese investors searching for higher yields, selling JGB’s and buying dollars to buy Treasuries.

Finally, the commodity space continues to get blitzed, or at least the metals markets continue that way as once again both precious and industrial metals are all lower this morning. In fact, in the past week, gold (-5.7%), silver (-6.4%) and copper (-9.1%) have all retraced a substantial portion of their YTD gains. It is unclear to me whether this is a lot of latecomers to the trade getting stopped out or a fundamental change in thinking. My view is it is the former, as if the Trump administration is able to support growth, I expect that will reveal the potential shortages that exist in the metals space. Oil (+0.4%) is a different story as it continues to consolidate, but here I think the odds are we see lower prices going forward as more US drilling brings supply onto the market.

On the data front, this morning brings the weekly Initial (exp 223K) and Continuing (1880K) Claims data along with PPI (0.2%, 2.3% Y/Y) and core PPI (0.3%, 3.0% Y/Y). In addition, the weekly EIA oil data is released with modest inventory builds expected and then we hear from Chair Powell at 3:00pm this afternoon. Arguably, that is the event of the day as all await to see if the trajectory of rate cuts is going to flatten out or not.

I cannot look at the data and conclude that the Fed will be very aggressive cutting rates going forward. The futures market is now pricing in about 75bps of cuts, total, by the end of 2025. That is a 50bp reduction in that view during the past month and one of the reasons the dollar remains strong. I would not be surprised if there are even fewer cuts. Right now, everything points to the dollar continuing to outperform virtually every other currency.

Good luck

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fxpoetry

Explaining the rhyme and rhythm of the FX markets each day

Monthly Archives: November 2024

In a Plight

Think More Than Twice

Three-Three-Three

Growth Stank

Missiles are Flying

Kind of a Ruse

Whining and Bleating

A Policy Tweak

Not in a Hurry

Right On Humming