Monthly Archives: March 2025

Starting to Fret

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In DC, they’re starting to fret
That Trump will make good on his threat
If government closes
The risk that it poses
Is markets become quite upset

 

There is yet another budget showdown in Washington as the Biden administration never passed the bills necessary to fund the government for the rest of this fiscal year ending on September 30th.  The previous continuing resolution (CR) expires at midnight on Saturday and if a new funding law is not enacted, then a government “shutdown” occurs.  Now, a government shutdown is not like a company that runs out of money shutting down.  Rather roles the President deems essential continue to operate, along with the military, but other roles see the people furloughed until new legislation is passed.  Everybody gets paid back wages when things go back to normal.

The situation is that the House of Representatives did pass a CR to fund the government at almost the exact same levels as last year and sent it to the Senate.  However, in the Senate, it needs to beat a filibuster, so needs 60 votes to pass and get to President Trump’s desk.  However, last night, Senate Minority Leader Shumer declared the Democrats would not support the bill, so would rather have the government shut down.  This is a big change from the previous 3 times that there were government shutdowns, because each of those was blamed on Republican intransigence.  

In the end, whatever the politics, the market impact has been negative for stocks while bonds held up, even rallied.  Of course, previous shutdowns all were amidst very different economic environments as inflation was quiescent and bull markets in both stocks and bonds were extant.  As such, arguably, the momentum behind the market was sufficient to offset any concern over the shutdown.  But this time markets are already under pressure going into the potential shutdown.  I fear that market dislocation, at least in the equity markets, could be far more severe if this one occurs.  Something to keep in mind.

The history shows the US
Has long done all things to excess
But now, as they try
With less, to get by
The pundits complain of regress

Reading the WSJ this morning, I couldn’t help but think of the George Costanza opposite day episode of Seinfeld when reading the Heard on the Street column decrying the fact that the Trump administration is seeking to rein in fiscal excess.  Of course, this is an issue that has been fodder for the punditry for a long time, how the US was living beyond its means and borrowing too much money.  But now, this article is concerned about the opposite.  The key concern is that if the US government doesn’t continue to run massive deficits, the economy will slow and corporate profits will fall dramatically, resulting in falling equity prices.

Arguably, this would always be the case if a change of this nature were to be made.  And remember, the punditry was all in on making these changes.  However, now, they point to Germany and the DAX, which has outperformed US markets over the past several weeks as the model.  (chart below from WSJ)

And what is Germany doing so well?  Why, they are talking about borrowing an extra €500 billion, eliminating their debt brake that ensures budget deficits remain below 0.35% of GDP, and funding a huge buildup in defense spending.  Germany, which has long been seen as the only source of fiscal rectitude is now being lionized for getting rid of that trait.  As I said, opposite day!

The lesson, if you haven’t learned it yet, is that the ascendance of Donald Trump to the presidency is going to continuously change many long-held beliefs in governments around the world, as well as in the punditry, who may find that things which seemed great in theory may have consequences previously unconsidered.  From a market perspective, this means volatility will continue to be the best estimate for the future.

Ok, let’s turn our attention to markets and see how things performed overnight.  After yesterday’s mixed session in the US, where the DJIA could not manage a gain despite cooler than expected CPI readings, overnight saw a mixed picture as well.  Japan was either side of unchanged while both Hong Kong (-0.6%) and China (-0.4%) slipped as did most other Asian markets with Malaysia (+1.7%) the true exception.  In Europe, though, screens are green as excess government spending is rewarded, although the gains are modest, 0.3% or so.  

On the topic of excess spending regarding Germany, I read yesterday that the plan to alter the constitution may have serious problems (meaning that spending may not materialize) because about 50 Bundestag members in the old parliament lost their seats in the election, so it is not clear they will be willing to vote to overturn the constitution during the current lame duck session and allow the debt brake to be set aside for defense purposes.  As I said when the story first arose, we are still a long way from Germany paying their own way defensively.  US futures, meanwhile, are slightly softer at this hour (7:15).

In the bond market, yesterday saw yields climb a few bps and this morning those trends remain with Treasury yields (+2bps) not climbing as much as European sovereigns (+3bps to 4bps) as there appears to still be a level of confidence that all the extra defense spending will happen.  One story that should have Europeans concerned is that the European Commission, in their effort to find funding for their newly found defensive aggressiveness, have spied the €10 trillion in savings that European citizens hold.  Frau von der Leyen, the European Commission President was quoted as saying, ”we’ll turn private savings into much needed investment.” 

Call me crazy but my economics classes taught me the identity that Savings º Investment, so I am not sure why those savings aren’t already being invested.  Perhaps European citizens are not investing where Frau von der Leyen wants and that is the problem.  At any rate, I suppose even if Germany fails to overcome its constitutional debt brake, the EU will get there anyway.

In the commodity markets, oil (-0.3%) is edging lower after a nice run for the past several days as it bounced off the bottom of its trading range.  Yesterday’s EIA data showed a large draw in gasoline, but I am given to understand that is a seasonal thing (H/T Alyosha).  Meanwhile, nothing has dissuaded investors that gold (+0.25%) is a good thing to hold as it rallied further after yesterday’s gains, although both silver (-0.3%) and copper (-0.4%) are a touch softer this morning.

Finally, the dollar is somewhat firmer this morning, albeit not dramatically so.  Of course, it has been under significant pressure during the past week+, so this trading response ought be no surprise.  SEK (-0.8%) is the laggard in the G10, but you must remember that it has been the leading gainer over the past month.  Meanwhile, AUD (-0.5%) and NZD (-0.45%) are also under a bit of pressure this morning, but the rest of this bloc has seen far less movement.  In the emerging markets, HUF (-0.6%) is the laggard with the rest of the bloc seeing declines on the order of -0.3% or less.  As I said, nothing dramatic here to see.

Yes, yesterday’s CPI data was a bit cooler than anticipated, but as my friend The Inflation Guy™, Mike Ashton, explained here, I wouldn’t get too excited that inflation is collapsing back to the Fed’s 2% target.  This morning brings the weekly Initial (exp 225K) and Continuing (1900K) Claims data as well as PPI (headline 0.3%, 3.3% Y/Y; core 0.3%, 3.5% Y/Y). However, given CPI is already out, I don’t think it will have much impact.  Rather, as we have observed lately, politics remains the key driver of all market reactions.  The unfolding government shutdown in the US and the German debt drama are the two most noteworthy issues right now, but Ukraine and the Middle East are still out there to offer surprises.

Once again, volatility is the only thing about which we can be sure.  That said, my confidence is growing that the dollar will decline over time.

Good luck

Adf

Lost In Translation

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The data today on inflation
Will help tweak the latest narration
But arguably
There’s little to see
As CPI’s lost in translation
 
And too, central bankers have learned
Their comments leave folks unconcerned
Today’s BOC
Where rate cuts will be
The outcome will ne’er be discerned

 

It is Donald Trump’s world, and we are all just living in it.  Virtually everything that happens in any financial market these days is a result of something that President Trump has either said or done.  Obviously, tariffs are a major player, but so are the peace talks in Ukraine (good news that Ukraine has agreed a cease fire to get things started) and his domestic initiatives regarding DOGE and the shake up that has come to government from that project.  You cannot look at a business journal without reading a story about how corporate America’s CEO’s are very concerned because of all the activity as they are having difficulty planning their strategies.

While this poet endeavors to track the macroeconomic issues and how they impact markets, and one can argue that tariffs are a macro issue, the ongoing back and forth as to which products will get tariffed and when is occurring far more rapidly than is worth reporting on a daily outlook.  After all, nobody has any idea what today will bring on that front.

With that in mind, one of the other things I have discussed has been the demotion of central bankers from their previous preeminence in the world of financial markets.  Now, every one of them is simply left to respond to whatever President Trump says that day.  Consider, the Fed entered their quiet period last Friday and the fact that we have not heard a word from them is entirely inconsequential.  The Fed funds futures market is currently pricing just a 3% probability of a rate cut next week and a total of 75bps of cuts by the end of the year, but that has been true for the past several weeks.  Despite an increase in the talk of a US recession, the markets are not indicating that is a concern.

Now, that doesn’t mean that other central banks aren’t doing things, but when the BOC cuts rates by 25bps this morning, taking their base rate to 2.75%, 150 basis points below the US, nothing is going to happen in the market.  It is already widely assumed.  I guess it is possible that Governor Macklem could make some comments of note, but given that Canada remains a bit player on the world stage, does whatever he says really matter?  In fact, the only reason people are discussing Canada now is because of President Trump and his trolling former PM Trudeau and calls to make it the 51st state.  Let’s face it, the economy there is ticking along fine for now, although if their exports to the US are impaired by tariffs it will definitely hurt them.  Meanwhile, other than a huge housing bubble, nobody really notices them.  After all, their economy is roughly $2.3 trillion, smaller than that of Texas.

We have also heard from Madame Lagarde recently as she tries to calm European leaders’ nerves while the ECB tries to manage their policy around US fiscal gyrations.  However, the most concerning information from there has been her confirmation that the ECB is pushing forward with their central bank digital currency (CBDC) project, looking to get things started in October of this year.  This contrasts with President Trump’s EO that the US will not pursue a CBDC and there is currently legislation in Congress to enshrine that into law.  My personal view is a CBDC would be very concerning given its inherent reduction in individual liberties.  While the current setup is for the euro to rise relative to the dollar, it is not clear to me that will remain the case in the event the digital euro comes into being.  In fact, it would not surprise me if many Europeans decided that holding dollars was a much better idea than holding euros in that environment.  But that is a story for the future.

As to today, CPI is set to be released with the following median expectations; headline (0.3%, 2.9% Y/Y) and core (0.3%, 3.2% Y/Y).  Both of those annualized numbers are one tick lower than last month’s outcomes, so would help the Fed narrative that inflation is falling back to their target.  But again, absent a major discrepancy, something like a 0.1% or 0.5% reading on the core number, I don’t think it will have any market impact across any market.  Data is just not that important these days.

Let’s turn to the overnight session to see how things are behaving in the wake of yesterday’s late US equity rebound, where while the indices all finished lower, they were well off the daily lows.  In Asia, the picture was very mixed with some major gainers (Korea +1.5%, Indonesia +1.8%, Taiwan +0.9%) and some major laggards (Thailand -2.5%, Malaysia -2.3%, Australia -1.3%, Hong Kong -0.8%) with both Japan and mainland China showing little movement.  In Europe, after a down day yesterday, this morning is seeing a solid rebound across most major markets with the DAX (+1.8%) leading the way followed by the CAC (+1.4%) and FTSE 100 (+0.6%).  Some solid earnings reports and ongoing hope belief that European defense spending will ramp up seems to be the drivers.  As to US futures, at this hour (7:30) they are firmer by 0.8% ish across the board.

In the bond market, after Treasury yields climbed 7bps yesterday, this morning they have edged a further 1bp higher.  The big domestic story is the continuing resolution which was just passed by the House and now sits at the Senate.  If it is not passed by Friday, the government will shut down, although it is not clear to me how that can be more disruptive than the way things have been operating for the past 6 weeks!  Meanwhile, European sovereign yields are also edging higher with German bunds (+4bps) leading the way as the ongoing discussion over breeching the debt brake continues and concerns over massive new issuance remain front and center.   Elsewhere in Europe, yields have risen as well, but generally by only 1bp or 2bps.  Last night, JGB yields didn’t move at all.

In the commodity bloc, oil (+1.1%) is continuing to bounce along the bottom of its trading range as per the below chart.

Source: tradingeconomics.com

A look at the trend line there shows that, at least based on the past 6 months, there has not been any net movement of note.  The question of whether the Ukraine war ends and that allows Russian oil back into the market, out in the open, is also current, with no clear answer in sight.  Meanwhile, the metals markets continue to ignore the recession calls with silver (+0.7%) and copper (+2.3%) both strong although gold is unchanged on the day.

Finally, the dollar is bouncing slightly this morning after declining sharply in 5 of the past 7 sessions with the other two basically unchanged.  This has all the hallmarks of a trading pause as there is nothing that has altered the idea that President Trump wants the dollar lower, and his policies are going to push it in that direction.  The one big outlier this morning is CLP (+0.9%) which is tracking copper’s rally, but otherwise, the yen (-0.6%) is the only mover of note, and that also seems a trading response, certainly not a fundamental change.

And that’s really it.  CPI is the only data for the day and there are no Fed speakers.  Of course, tape bombs are the new normal and we never have any idea what President Trump or Secretary Bessent may say at any given time.  However, with that in mind, the bigger picture remains intact.  I remain negative the equity space overall as changes continue, while the dollar is likely to remain under pressure as well.  This should help the bond market, and commodities.

Good luck

Adf

Trumpian Thunder

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No respite was found yesterday
With risk assets given away
Now traders all wonder
If Trumpian thunder
Will ever, a rally, convey
 
But from the cheap seats what seems clear
Is Trump, for right now, will adhere
To efforts to trim
The grift and the skim
A prospect his enemies fear

 

The only discussion in markets today is about yesterday’s sharp declines in equity markets.  Questions about how long this can continue or how long President Trump can withstand the pain that accompanies these declines are rampant.  However, thus far the indications are that he and his administration are aware of the risks but also committed to achieving his goals of more domestic manufacturing activity and a perceived fairness or leveling of the international commerce playing field.

We have heard from Trump, Bessent and Commerce Secretary Lutnick, that there is going to be some pain, but they believe it will be short-lived in nature.  And ask yourself this, given how overextended both market valuations and debt metrics had become, was there any way to address these issues (assuming you believed they were issues) without some pain?  Of course not.  I have long maintained that what needs to happen in the US economy is for markets to be allowed to clear, all markets, whether housing or financial, and that we have not seen that happen for more than 50 years.  

While perhaps the case can be made that the housing market came close to clearing in the wake of the GFC, consider what has happened since then with the implementation of waves of QE and ZIRP.  The chart below from the St Louis Fed’s FRED database shows their housing index over time.  Ask yourself if you think the housing market really cleared?  And more importantly, look at the acceleration since then.  President Trump has made clear his focus is on Main Street, not Wall Street, and it is easy to argue that a key driver of this massive rise in house prices has been the Fed and their efforts to prop up Wall Street.  Reversing that is going to be painful.  Hell, simply stopping that move will be painful.

As to equity markets, the only clearing event that we have seen was the crash of the NASDAQ after the tech bubble burst in 2000.  But again, the Fed was there cutting rates and easing policy to support things.  The best evidence that equity markets are at unsustainable levels comes from the valuation metrics, with things like the Shiller CAPE ratio pushed to levels only ever seen in that tech bubble, and clearly significantly above long-term mean (17.21) and median (16.03) levels with today’s current reading of 35.34.

Source: multpl.com

All of this is my way of saying that I do not believe we are anywhere near the end of this process.  While many of you don’t remember President Reagan, at the beginning of his first term, he stood by Fed Chairman Volcker in his efforts to squelch inflation, when Volcker raised Fed funds to 22.0% (see below) and the economy suffered two quick recessions in 1980 and 1982.  

However, that was the medicine that was needed to break inflation’s back and begin a 40-year run of stability and growth in the US amid low inflation.  It is not hard to believe that we are going to need to see another cleansing bout of austerity to once again reset the economy.  And remember, Trump is not running again, so is not worried about reelection.  If we do have a recession soon, it will likely be over and the recovery under way as we head into the next elections, a perfect political outcome for his party.

Ok, let’s see how other markets responded to yesterday’s US declines.  In Asian equity markets, Tokyo (-0.6%) slid, but nowhere near the declines seen in the US.  China (+0.3%) and Hong Kong (0.0%) basically ignored the situation, but the rest of Asia saw a lot more red on the screen with large losses seen in Korea, Taiwan, Australia, Malaysia, Singapore and the Philippines.  In Europe, though, the price action is mixed with some gainers (DAX +0.4%, CAC +0.2%) and laggards (IBEX -0.2%, FTSE 100 -0.15%) as it appears funds continue to flow from the US markets to Europe on the back of the mooted defense buildup.  US futures at this hour (7:10), are very modestly higher, 0.15% across the board, but my take is there is further pain to come.

In the bond market, yesterday saw a flight to safety with Treasury yields sliding 10bps and although we did not see similar moves in European sovereigns.  This morning, Treasury yields are unchanged from the close while European bonds are showing modestly higher yields, between 1bp and 3bps.  JGB’s though, saw yields follow Treasuries lower, dropping -6bps last night as not only did US yields fall, but Japanese Q4 GDP data was released at a weaker than preliminarily reported 2.2%.  Although that was higher than Q3, and represents solid growth, it is not quite what was in the market.

In the commodity market, oil (+0.9%) while higher this morning continues to hold its downtrend as per the below chart.  With further Russia/Ukraine peace talks starting up in Saudi Arabia, the prospects of Russian oil coming back to the market seem to be growing.

Source: tradingeconomics.com

As to the metals markets, gold (+1.0%) is the laggard this morning with both silver (+1.6%) and copper (+1.9%) leading the space higher.  If US equities are responding to a growing probability of a US recession, then I would have expected the industrial metals to soften.  However, after several down days, this could well be just a reflexive trading bounce.  We will need to see further movement to get a better sense of things.

Finally, the dollar remains under pressure generally with the euro (+0.5%) once again gaining ground and touching the 1.09 level for the first time since the US presidential election.  Not surprisingly, that has dragged the CE4 currencies higher as well, but the dollar’s weakness is seen vs. CNY (+0.4%), KRW (+0.5%), SEK (+0.45%), NOK (+0.8%) and even CAD (+0.25%).  Again, the big picture here is that the current policy aims for the US have begun to alter the concept of US exceptionalism with regards to the stock market.  As funds flow elsewhere, the dollar is quite likely to continue to decline.  This will be reinforced if we continue to see 10-year Treasury yields decline.

On the data front, while today is not very exciting, we do see CPI and PPI this week.

TodayJOLTS Job Openings7.75M
WednesdayCPI0.3% (2.9% Y/Y)
 Ex food & energy0.3% (3.2% Y/Y)
ThursdayInitial Claims225K
 Continuing Claims1910K
 PPI0.3% (3.3% Y/Y)
 Ex food & energy0.3% (3.6% Y/Y)
FridayMichigan Sentiment66.3

Source: tradingeconomics.com

We are now in the Fed’s quiet period so there are no Fed speakers until their meeting next Wednesday, but as I have been saying, nobody is really paying much attention to them anyway.  I think we have seen some major changes evolve and that means that equities are likely to remain under pressure along with the dollar, while bonds should hold their own.

Good luck

Adf

In a Trice

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The calendar’s not e’en turned twice
Since Trump, with JD as his Vice
Have taken the reins
And beat up on Keynes
While weeding out waste in a trice
 
For markets, the problem, it seems
Is rallies are now merely dreams
So, equity buyers
Are putting out fires
While thinking up pump and dump schemes
 
For bondholders, it’s not so clear
If salvation truly is near
But one thing seems sure
The buck will endure
Much weakness throughout this whole year

 

We have not even reached 50 days of a Trump presidency as of this morning and nobody would fault you if you estimated we had three years of policies enacted to date.  The pace of changes has been blistering and clearly most politicians, let alone investors, have not been prepared for all that has occurred.

One of the things that I read regularly is that Trump is destroying the Rules Based Order (RBO) which was underpinned by the Pax Americana of the US essentially being the world’s policeman.  This is cast as a distinct negative under the premise that things were going great and now, he is upsetting the applecart for his own personal reasons.  Of course, market participants had grown quite accustomed to this framework, had built all sorts of models to profit from it and with the Fed’s help of monetization of debt, were able to gain significantly at the expense of those without market linked assets.  Hence, the K-shaped recovery.

But while that is a lovely narrative, is it really an accurate representation of the way of the world?  If the US was truly the world’s policeman, and we certainly spend enough on defense to earn that title, perhaps it was time for the US to be fired from that role anyway.  After all, there is currently raging military conflict in Ukraine, Lebanon, Syria, Congo, Sudan and the ongoing tensions in Gaza.  That’s a pretty long list of wars to claim that things were going great.

Secondly, the question of financing all this conflagration, as well as other economic goals, notably the alleged transition to net zero carbon energy production, appears to be reaching the end of the line.  While the US can still borrow as needed, (assuming the debt ceiling is raised), the reality is that the US gross national debt outstanding is greater than $36,000,000,000,000 relative to GDP that is a touch under $28,000,000,000,000.  On a global basis, total (not just government) debt is in excess of $300,000,000,000,000 while global GDP clocks in somewhere just north of $100,000,000,000,000.  Arguably, on a credit metric basis, the world is BB- or B+, a clear indication that all that debt is unlikely to be repaid.

If we consider things considering this information, perhaps the RBO had outlived its usefulness.  Arguably, the loudest complaints are coming from those who benefitted most greatly and are quite unhappy to see things change against them.  But as evidenced by the polls taken after President Trump’s speech last Tuesday evening, the bulk of the American public is still strongly supporting this agenda.  The idea that the president and his Treasury secretary are seeking to engineer a short-term recession early, blame it on fixing Biden’s mess, and having things revert to stronger growth in time for the 2026 mid-term elections is not crazy.  In fact, there have been several comments from both men that short-term pain would be necessary to achieve a stabler, long-term gain.

So, what does this mean for the markets?  You have no doubt already recognized that volatility is the main event in every market, and I don’t see that changing anytime soon.  But some of the themes that follow this agenda would be for US equities to suffer relative to other markets, as the last decade plus of American exceptionalism, led by massive deficit spending and borrowing, would reverse under this new thesis.  Add to this the sudden realization that other nations are going to be investing significantly more in their own defense, and money will be flowing out of the US into Europe, Japan and emerging markets around the world.

Bonds are a tougher call as a weaker economy would ordinarily mean lower yields, but the question of tariff impacts on prices, as well as reshoring, which, by definition, will raise prices, could mean we see the yield curve steepen with the Fed cutting rates more aggressively than currently priced, but 10-year and 30-year yields staying right where they are now.

I believe this will be a strong period for commodities as all that foreign capex will be a driver, as will the fact that, as I will discuss shortly, the dollar is likely to underperform significantly.  Gold will retain its haven characteristics as well as remain in demand for foreign central banks, while industrial metals should hold their own.  As to oil, my take is lower initially, as OPEC returns its production and slowing GDP weighs on demand, at least for a while, although eventually, I suspect it will rebound along with economic activity.

Finally, the dollar will remain under significant pressure across the board.  Clearly, Trump is seeking a weaker dollar to help the export industries, as well as discourage imports.  Add to this the potential for lower yields, lower short-term rates, and an exit of equity investors as US stocks underperform, and you have the making of at least another 15% decline in the greenback this year.

With this as backdrop, we need to touch on three key stories this morning.  First, Friday’s NFP report was pretty much in line with expectations at the headline level but seemed a bit weaker in some of the underlying bits, specifically in the Household Survey where a total of 588K jobs were lost and there was a large increase in the number of part-time workers doing so for economic reasons.  Basically, that means they wanted full-time work but couldn’t find a job.  Markets gyrated after the release, with yields initially sliding but then rebounding to close higher on the day.  Equities, too, closed higher on the day although that had the earmarks of a relief rally after a lousy week overall.  The thing about this report is that it did not include any of the government changes that have been in the press, so next month may offer more information regarding the impact of DOGE and their cuts.

The second story comes from north of the border where Mark Carney, former BOC and BOE head, was elected to lead the Labour Party in Canada and replace Justin Trudeau.  As is always the case, when there is new leadership, there is excitement and he said he will call for a general election in the next several weeks, ostensibly to take advantage of this new momentum.  It seems that President Trump’s derision of not only Trudeau, but Canada as well in many Canadian’s eyes, will play a large role with the two lead candidates, Carney and Poilievre, fighting to explain that they are each better placed to go toe-to-toe with Trump on critical issues.

Here’s the thing, though.  Despite much angst about the US-Canada relationship on the Canadian side of the border, the market viewpoint is nothing has really changed.  a look at the chart below shows that after a bout of weakness for the Loonie in the wake of the US election and leading up to Trump’s tariff announcements, USDCAD is basically unchanged since mid-December, with one day showing a spike and reversal in early February.  My point is that the market has not, at least not yet, determined that the Canadian PM matters very much.

Source: tradingecoomics.com

The last story to discuss is Chinese inflation data which was released Saturday evening in the US and showed deflation in February (-0.7% Y/Y) for CPI and continuing deflation in PPI (-2.2%).  In fact, as you can see from the below chart, PPI in China has been in deflation for several years now.  Recently there have been several articles explaining this offers President Xi a great opportunity for significant stimulus because no matter how much the government spends and how much debt they monetize, inflation won’t be a problem for a long time to come.  I would counter that given deflation has been the norm for several years, they have had this opportunity for quite a while and done nothing with it.  Why will this time be different?  Ultimately, the default result in China is when things are not looking like they will achieve the targeted growth of “about 5%”, you can be sure there will be more investment to build things up adding still more downward pressure on prices as production facilities increase.  

Source: tradingeconomics.com

The renminbi’s response to this news has been modest, at best, with a tiny decline overnight of -0.25%.  And a look at the chart there shows it is remarkably similar to the CAD, with steady weakness through December and then no real movement since then.  Given the dollar’s recent weakness overall, this seems unusual.  Although, we also know that China prefers a weaker currency to help support their export industries, so perhaps this in not unusual at all.

Source: tradingeconomics.com

Ok, this note is already overly long, so will end it here.  We do have important data later this week with both CPI and Retail Sales coming.  As well, the consensus from the Fedspeak is that they are pretty happy right here and not planning to do anything for a while.

The big picture is best summarized, I believe, by the idea that we are at the beginnings of a regime change in markets as discussed above.  Volatility continues to be the driving force, so hedging remains crucial for those with natural exposures.

Good luckAdf

Inundated

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Investors have been inundated
By news that has been unabated
There’s tariffs and war
Plus rate cuts and more
With stocks and bonds depreciated
 
Now looking ahead to today
The payroll report’s on its way
As well, later on
With nothing foregone
We’ll hear from our own Chairman Jay

 

It has certainly been an interesting week in both markets and the world writ large.  So much has happened and yet so much is still unclear as to how things may evolve going forward.  Through it all, volatility is the only constant.  To me, what has become abundantly clear is the post WWII order is being dismantled, and every nation is trying to determine its place in the future.  This is a grave threat to those who benefitted from flowery words and limited action, which covers a wide swath of government leaders around the world.  I’m not sure if this is the 4th Turning, or if this is merely the prelude, with the impacts of all these changes what brings the 4thTurning about.  Regardless, history is clearly in the making.

I do not have the bandwidth to continuously follow the tariff story, although yesterday’s news was there will be more delays for both Canada and Mexico.  China received no such relief and at their National People’s Congress they seemed resolute in their pushback and highlighted their own achievements.  The data from China, though, tells me that their goals for more domestic consumption remain far in the distance.  Last night they reported their Trade Balance for the January/February period (they always combine because of the Lunar New year disruptions) and it jumped to $170.5B, far greater than anticipated.  While exports underperformed slightly, growing only 2.3% compared to a 5% estimate, it was the imports that really tells the story.  Imports fell -8.4%, a significant shortfall from both last year and consensus estimates, and an indication that the Chinese consumer is not yet the type of force that President Xi would like to see.  

In fact, a look at the chart below showing imports for the past 10 years demonstrates that very little has changed on this front.  As I wrote yesterday, converting a mercantilist economy into a consumer-focused one is a huge lift, and one that the CCP has not yet figured out.  It is not clear that they ever will.  Meanwhile, the obvious explanation for the huge jump in the trade balance was companies pre-ordering things to get ahead of the tariffs.

Source: tradingeconomics.com

Moving on to the Ukraine situation, while yesterday’s news was of the “whatever it takes” moment for defending Europe, this morning it seems there are some caveats attached.  Of course, the first caveat is the changing of the German constitution to allow them to spend all that money.  The second seems to be that not every European nation is on board for the massive spending increase and continuation of the war.  There are many political and financial hurdles to overcome in this story in Europe, and this morning’s European equity markets are indicative of the idea that this is not a straight-line higher.  In fact, every equity market in Europe is lower this morning, led by the DAX (-1.5%) although with solid declines elsewhere as well (CAC -1.0%, FTSE 100 -0.5%).  This, too, is a story with no clear end in sight.  One unconfirmed story I saw was that the group convened by the UK last weekend has not been able to agree terms for additional support.

Meanwhile, yesterday the ECB cut their short-term rates by 25bps, as widely expected, with the Deposit Rate now down to 2.50%.  The funny thing is nobody really noticed.  This is of a piece with my observation that central bankers just don’t have that much sway on market activity these days, it is all about politics and statecraft, not monetary policy.  This morning, Eurozone GDP for Q4 was released at 0.2%, a tick higher than forecast but still lower than Q3’s 0.4%.  There is no doubt the financial mandarins of Europe are keen to get this defense spending going, because otherwise they will continue to preside over a stagnant economy.  

But here’s an interesting thing to consider.  Germany has made a big deal about this new willingness to spend €500 billion outside the bounds of their budget framework on defense.  However, they continue with their Energiewende policy which has been the Achilles Heel of the German economy and will prevent them from actually producing armaments if they seek to continuously reduce fossil fuel powered energy for renewables.  It is almost as if this is theater, rather than policy, but that may just be my cynicism speaking.

Moving on to the US, this morning brings the Payroll Report with the following current median estimates:

Nonfarm Payrolls160K
Private Payrolls111K
Manufacturing Payrolls5K
Unemployment Rate4.0%
Average Hourly Earnings0.3% (4.1% Y/Y)
Average Weekly Hours34.2
Participation Rate62.6%

Source: tradingeconomics.com          

As well, we hear from Chairman Powell at 12:30pm, along with Bowman, Williams and Kugler in the hours leading up to that.  But again, I ask, do they matter to the markets right now?  Certainly, there is much discussion that the US economic data is starting to show more weakness, and there are many who are saying that long-anticipated recession is going to become evident.  If that is the case, we could certainly see the Fed cut rates, but again, my take is markets are far more attuned to 10-year yields than Fed funds.  And remember, while 10-year yields are clearly quite inflation sensitive, what we also know that questions over budget deficits and supply are critical to their pricing as well.  This was made evident yesterday in Germany.

I have glossed over market activity overnight so will give a really short update here.  Yesterday’s weakness in the US was followed by broad weakness throughout Asia, with most markets there lower on the day, notably Japan (-2.2%), but declines almost everywhere.  We have already discussed European bourses and at this hour (7:30) US futures are basically unchanged ahead of the data.

In the bond market, Treasury yields are slipping back -3bps this morning and we are seeing similar price action across most of Europe although Spain (+1bp) is bucking the trend on some domestic issues.  It is easy to believe that the Germany story was a bit overblown, and remember, if they cannot change the constitution, I expect a rally in Bunds (lower yields) along with a selloff in the DAX and the euro.

Speaking of the euro, it is continuing its sharp ascent, up another 0.6% this morning.  however, something to keep in mind regarding all the huffing and puffing about the euro is that with this sharp move higher in the past week, it is merely back to the middle of its 3-year trading range.  So, is this as big a deal as some are saying?

Source: tradingeconomics.com

But the overall currency picture is more mixed with both AUD (-0.6%) and NZD (-0.5%) lower along with CAD (-0.2%).  There are other gainers (GBP +0.2%, SEK +0.7%) and other laggards (ZAR -0.2%) although I would say the broad direction is still for dollar weakness.  

Finally, oil (+1.5%) is bouncing this morning, although this could well be a trading bounce as I have seen no new news on the subject.  I guess the delay on Canadian tariffs probably played a role as well.  Gold (+0.4%) is also firmer although both silver (-0.4%) and copper (-1.2%) are lagging.  In fairness, the latter two have had significant up weeks so are likely seeing some profit taking.

Once again, I will remark that for those who have real flows and exposures, the current market situation is why hedging is critical to maintain financial performance.  Nobody really knows where anything is going to go, but right now, it feels like the one thing we know is prices will not remain where they currently are for very long.

Good luck and good weekendAdf

Dynamited

Posted on by

Investors don’t seem that excited
‘Bout Germany’s now expedited
Designs to rearm
And that caused much harm
To Bunds, with their price dynamited

 

One of the biggest impacts of President Trump’s recent friction with Ukraine and its security is that European nations now realize that their previous ability to make butter, not guns, because the US had enough guns for everybody is no longer necessarily the case.  Mr Trump’s turn inward, which should be no surprise given his campaign rhetoric and America First goals, apparently was a surprise to most European leaders.  It seems they couldn’t believe the US would change course in this manner.  Regardless, the upshot is that Europe finds itself badly under armed and is now promising to change this.

The country best placed to start this process is Germany, where soon-to-be Chancellor, Friedrich Merz has promised a €500 billion spending spree on new defense items.  However, as the Germans don’t have this money laying around, they will need to borrow it.  The wrinkle in this plan is that enshrined in Germany’s constitution is a debt brake designed to prevent fiscal profligacy, kind of like this.  So, Merz has proposed waiving the debt brake for defense expenditures, but in order to do so, will need a two-thirds majority vote in the Bundestag (German parliament).  Now given AfD has been quite anti-war, it is not clear he will be able to obtain the requisite votes but for now, that is not the concern.

However, the German bund market clearly believes he will be successful as evidenced by the chart below. Overall, German 10-year yields rose 30bps yesterday, a dramatic move, and dragged most European sovereigns along for the ride as the new narrative is that all European nations will increase borrowing to spend on their defense.  It is worth noting, though, that the reason German yields have been so low is because the economy there has been exhibiting approximately 0% growth for more than a year as they continue to commit energy suicide seek to achieve their idealistic greenhouse gas emission goals.

Source: tradingeconomics.com

The trick, though, is that while Germany, with a debt/GDP ratio around 60%, has plenty of fiscal space to follow through, assuming they can alter their constitution, the rest of Europe is in a much more difficult spot with both France and Italy already under EU scrutiny for their budget deficits and debt/GDP ratios.  Recall, a key aspect of the Eurozone’s creation was the regulation designed to keep national budget deficits below 3% of GDP and drive the debt/GDP ratios to 60% or below.  Right now, Germany is the only nation that fits within those parameters. 

While I have no doubt that they will alter the rules as necessary elsewhere in Europe and certainly given the now perceived existential crisis for Europe, those limits are sure to be ignored, the story in Germany remains different because of the constitution.  Markets, though, clearly believe that a lot more debt is about to be issued by European nations, hence the dramatic decline in bond prices and jump in yields.  

But there are other knock-on effects here as well, notably that the euro is climbing dramatically against the dollar, up nearly 4% in the past week, and far ahead of the pound and most G10 currencies with only the SEK (+1.0% overnight, +6.1% in past week) outperforming the single currency.  For a while I have suggested that short-term rates were losing their sway over the FX markets and traders were looking at 10-year yields.  Certainly, the recent price action indicates that remains the case as Treasury yields (+2bps) have bounced off their lows but have risen far less than their G10 counterparts.  In fact, a look at the movement in 10-year government bond yields over the past month and year reveals just how significant these changes have been.

Source: Bloomberg.com

I feel safe in saying that for the next several weeks, perhaps months, this story of European defensive revival and the knock-on effects is going to be top of mind for both investors and pundits.  Only history will determine if these dramatic changes in policy stances will have been effective in reducing the chance of war or not and if they will have been beneficial or detrimental to economies around the world. As much of the current narrative is driven by politics rather than economics, punditry on the latter is going to be worse than usual.  Once again, I harken back to the need for a robust hedging plan for all those with exposures.  As recent price action across all markets demonstrates, volatility is back, and I believe here to stay for a while.

Ok, let’s run down the rest of the markets not yet discussed.  Yesterday’s US equity bounce was widely appreciated by many although this morning, futures markets are all pointing lower by between -0.75% and -1.25%, enough to wipe out yesterday’s gains.  As to Asia overnight, Japan (+0.8%) followed the US and both Hong Kong (+3.3%) and China (+1.4%) are continuing to get positive vibes from the Chinese twin meetings of policymakers.  More stimulus continues to be the driving belief there although China’s history has shown their stimulus efforts have tended to fall short of initial expectations.  As to Europe, this morning only the DAX (+0.5%) is continuing yesterday’s gains as concerns begin to grow that while Germany can afford to spend more money on defense, the rest of Europe is not in the same situation, so government procurement contracts may be less prevalent than initially hoped.  This is evident in the -0.4% to -1.0% declines seen across both the UK and most of the rest of the continent.

We’ve already discussed bonds, although I should mention that JGB yields have risen 10bps as well, up to new highs for the move and finally above 1.50%

In the commodity space, oil (+0.65%) which has had a very rough week, falling more than -5% in the past seven days, seems to be finding a bit of support.  Recall yesterday’s chart showing the bimodal distribution and that we are now in supply destruction territory.  Ultimately, that should support the price, but the timing is unclear.  In the metals markets, this morning sees red across the board, although not dramatically so, with both precious and base metals sagging on the order of -0.5%.

And lastly the dollar continues to decline, albeit not as swiftly as yesterday.  However, while it is considerably weaker vs. its G10 counterparts, versus the EMG bloc, the story is far less clear.  For instance, the only notable EMG currency gaining ground this morning is CLP (+1.2%) while virtually every other major emerging market currency is actually slipping a bit.  Look at this list; CNY -0.2%, MXN -0.25%, PLN -0.3%, ZAR -0.15%, INR -0.3% and HUF -0.5%.  I have a feeling we are going to see more behavior like this going forward, where G10 currencies are now trading on a different basis than EMG currencies.

On the data front, this morning brings Initial (exp 235K) and Continuing (1880K) Claims as well as the Trade Balance (-$127.4B) and Nonfarm Productivity (1.2%) and Unit Labor Costs (3.0%) all at 8:30.  We also hear from two more Fed speakers, Waller and Bostic later in the day.  Yesterday’s ADP employment data was much weaker than expected, falling to 77K, while the ISM Services data held up well although the prices paid piece did rise.  In addition, there has been a change in tone from the Fed speakers as we are now hearing mention of the possibility of stagflation due to the Trump tariffs, although there was no indication as to which way they will lean if that is the economic path forward.

I continue to highlight volatility as the watchword for now and the near future at least.  As long as politics has become the key driver, and as long as President Trump is that driver, given his penchant to shake things up, the one thing of which I am sure is we have not seen the last dramatic change in perception.  With that in mind, my view is the dollar will remain under pressure for a while yet.

Good luck

Adf

Things Are Creaking

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Before Mr Trump started speaking
The Chinese explained things are creaking
As growth there is slow
So now they will blow
More funds to achieve what they’re seeking

 

The Chinese government has outlined a very active agenda for 2025 as the current pace of growth in their economy remains sluggish at best.  They continue to focus on a 5% headline GDP target and have promised to increase the budget deficit by a similar amount, so the idea of organic growth seems to be dead.  They reiterated their plan to recapitalize the big banks with CNY 500 billion and are looking to raise defense spending by 7.2%.  Long term debt issuance will increase with CNY 1.3 trillion planned for this year and they talk about adding 12 million urban jobs.  It all sounds fantastic.
 
But will it work?  Of course, there is no way to know yet, but if history is any guide, the mercantilist structure of the Chinese economy remains extremely difficult to overcome and replace with a more consumer-focused economy.  The property market there remains in terrible shape and that continues to be a drag on the overall economy as individuals, who had been encouraged to invest in property as a means of creating a retirement nest egg find themselves with much less disposable income and an illiquid and depreciating asset.
 
President Trump’s tariffs are not going to help them at all, but it is unclear if they will be significantly detrimental.  While I would not bet against China reporting 5% GDP growth in 2025, given the questionable reliability of their data, it is not clear it will be reflective of the state of the nation.
 
My take on market impacts are as follows: Chinese yields will climb as more debt is issued while growth will allegedly increase, Chinese equities should benefit If they are successful at getting things moving, but the yuan will have a harder time in my view, as capital flows to the nation remain stunted.  Of course, much will also depend on the evolution of US policy, which has been erratic, to say the least.

Said Trump, It’s a “new golden age”
As finally, we turn the page
On four years of waste
And so, we’ll make haste
With changes despite Dem outrage

Of course, the other big news was last night’s speech by President Trump to a joint session of Congress where he outlined both the many things he has accomplished in the first 6 weeks of his presidency, but also his plans for the rest of the time.  While many are still reeling from the speed with which changes are being made, there was no indication that his pace is going to slow.

Mr Trump did acknowledge that there may be some short-term pain as the economy adjusts to the changes he has wrought, but he remains focused on the long-term and how to achieve a strong economy with a far better balance sheet and a smaller government.  The implication is that he is still the avatar of volatility, and that aspect will not be changing.

Let us, though, take a step back and look at a much bigger picture.  For the past seventeen years, the US economy was the clear leader in global growth with massive government spending and budget deficits incurred to drive the process.  Meanwhile, while most of the rest of the world exited the pandemic with a burst of reopening growth, they have all lagged the US.  The chart below shows the ratio of the MSCI US index / MSCI World index and demonstrates that investment into the US, following that leading growth profile, has been historic in its effects.

Source: longtermtrends.net

But that situation seems to be changing.  President Trump is openly seeking to reduce the size of the US government and withdraw spending on many foreign adventures while the rest of the world is doing the opposite.  As per the above, China has just announced significant new stimulus.  As well, Europe, now that they need to become more responsible for their own defense, has also announced a major spending plan to rearm themselves.  This is the real sea change, I think, and the one that is going to have the biggest medium and long-term impacts on markets everywhere.  Changes in the level of capital flows and changes in trade patterns are going to significantly impact the value of the dollar as well as stocks, bonds and commodities.  It is a brave new world, so attention must be paid.

In the meantime, let’s see the markets’ initial response to the recent spate of news.  The tariff news has served to undermine US equities for the past two sessions and is still dragging on some markets, but the new spending promises are the new drivers.  So, in Asia, while the Nikkei (+0.2%) managed only a modest rally, the Hang Seng (+2.8%) exploded higher on the Chinese stimulus story although surprisingly, the CSI 300 (+0.5%) did not do nearly as well.  But elsewhere in the region, it was mostly large gains with Korea, India, Taiwan, Indonesia and Thailand all rallying more than 1%.  The laggards were Australia and New Zealand, which seemed to focus on the negatives of tariffs.

In Europe, Germany’s DAX (+3.4%) is the beneficiary of most of the mooted defense spending as not only are there quite a few defense focused firms, but rumors are that the government is going to coopt the auto manufacturers into building defense equipment (shades of WWII).  As well, the rest of the continent is flying (CAC +1.9%, IBEX +1.6%) and even the UK (+0.45%) is benefitting although there is growing concern that the BOE is not going to be aggressively cutting rates to support the economy because of still sticky inflation.  As to US futures, they are bouncing this morning and higher by 0.4% at this hour (7:00).

In the bond market, while Treasury yields rebounded from their recent lows yesterday, gaining 9bps on the day, this morning they are unchanged.  However, a look at European sovereigns tells the story of investors anticipation of a big uptick in new issuance to fund that defense spending.  The picture below is that of German yields, as an example, showing its 20bp rise this morning, but the entire continent has seen yields rise by at least 16bps!

Source: tradingeconomics.com

The market clearly believes the Europeans are going to move forward!

In the commodity markets, oil (-1.6%) remains under pressure as despite the mooted fiscal stimulus, there continues to be more concern over excess supply than newly created demand.  The below chart is quite interesting as a history of long-term price activity in oil with the interpretation that if we are near the supply destruction level, the future for prices is likely to be bullish.  Something to keep in mind. (as an aside, Josh_Young_1 is an excellent follow on X for oil ideas and information.)

As to the metals markets, gold is little changed but copper (+4.7%) has clearly gotten excited over the Chinese stimulus as well as the European defense spending, where copper will be an important piece of the puzzle.

Finally, the dollar is under substantial pressure this morning vs. both G10 and EMG currencies.  Given the yield changes, and my view that 10-year yields have become the FX driver, rather than short-term rates, it should be no surprise that the euro (+0.6%) is rallying to levels not seen since November.  The pound (+0.3%) is following suit, also making 5-month highs.  But the really impressive moves are in the peripheral European currencies with SEK (+1.1%) and PLN (+1.1%) both trading back to levels not seen since September.  On the tariff front, both MXN (+0.25%) and CAD (+0.1%) are lagging the main move but still managing a very modest rally v. the greenback.

In this brave new world, where the US is not the fiscal profligacy leader, but that role is assumed by others, my sense is that the dollar may well have topped for a much longer-term period.  While at the beginning of the year I was confident that the dollar would outperform, the policy changes we have seen since then have altered my views.  While volatility will still be rampant, I believe the broad direction will be a lower dollar going forward.

On the data front, this morning brings ADP Employment (exp 140K) as well as ISM Services (52.6) and Factory Orders (1.6%).  Then we see the EIA oil inventories where a small draw is expected and at 2:00pm, the Fed’s Beige book.  Perhaps the best thing about the changing world order is that central banks are losing some of their market power.  As I wrote yesterday, perhaps US rates are destined to fall as both the president and Chair Powell are keen to see that happen.

At this point, I think the dollar may have seen its highs for quite a while.  Remember, FX trends tend to be very long-term in nature.  For those of you who are payables hedgers, keep that in mind going forward.

Good luck

Adf

Recession in Sight

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There once was a policy view
That tariffs, we all should eschew
But President Trump
Explained on the stump
To this idea, he wouldn’t hew
 
And so, as the clock struck midnight
Trump’s tariffs once more saw the light
Most analysts say
The tariffs will weigh
On growth, with recession in sight

 

By now you are all aware that as of 12:01 EST this morning, 25% tariffs have been imposed on all imports from both Canada and Mexico except energy products, which have seen 10% tariffs imposed.  As well, all Chinese imports have been hit with an additional 10% tariff.  Once again, President Trump has proven to be a man of his word, promising these tariffs during his election campaign and imposing them now.

The mainstream view is that these tariffs are a disaster and will send the economy into a recession.  In fact, the International Chamber of Commerce said a depression was likely.  As well, there is much concern that inflation will rise during the recession, which for Keynesians must be a very difficult concept to grasp given their strongly held belief that a recession will result in declining inflation.

Now remember, I am just a poet, so please take that into account when I offer my views here.  First, we have no idea how things will play out.  The one thing about which I am extremely confident is that there will be numerous behavioral changes by everyone because of these tariffs.  The first question is who will absorb the cost of the tariffs.  Remember, essentially the definition of a recession is that demand is declining.  Will companies be able to pass through the higher costs?  In some instances, they likely will, but in others probably not.  Anecdotally, there was a story in the WSJ that Chipotle will see its costs rise because of the tariff on avocados from Mexico but will not change their prices to account for that.  I’m confident they are not the only company who will absorb those costs.

However, there will certainly be companies that believe they can raise prices and maintain their sales and will try to do that.  My point is each company will evaluate the environment under which they operate and respond in the profit-maximizing manner, but each company’s scenario will be different.

Second, let’s consider the reason that President Trump is such a strong believer in tariffs.  He sees them as the stick to achieve his goals.  I would argue there are two goals in sight.  With Canada and Mexico, he is still unsatisfied with their efforts on the border and with fentanyl smuggling and is very keen to push that to completion.  However, the broader goal is to return manufacturing to America from its decampment overseas, mostly to Southeast Asia, during the past forty years.  And remember, he is seeking to implement a carrot as well, looking to cut corporate taxes to 15% going forward, which would put the US in the lowest quartile of corporate tax rates in the world.  While this morning the headlines are all about the tariffs and their potential destruction, just yesterday, Taiwan Semiconductor announced they would be investing $100 billion to build new fabrication plants in Arizona.  That is exactly the response Trump is seeking.

We all recognize that the world today is very different than it was even two months ago as President Trump has taken an extraordinary number of steps to implement the ideas upon which he was elected.  Interestingly, a large majority of the public remains strongly in his camp with approval ratings for many of his policies well above 60% and as high as 80%.  While markets are clearly unhappy as they have no idea how things will play out, and companies are now faced with far more uncertainty as they attempt to plan for their future, there is no reason to believe this process is going to change anytime soon.  

Keep one other thing in mind, unlike Trump’s first term in office, where he was constantly touting the strength of the stock market as a vote of confidence, this time around he and Treasury Secretary Bessent have been entirely focused on the 10-year yield and getting that rate down.  After a 7bp decline yesterday, he has been successful there. (see chart below) I would be surprised if Trump speaks about the stock market much at all for a while.

Source: tradingeconomics.com

With that in mind, let’s see how markets have been handling the tariff imposition.  After yesterday’s rout in the US, where a higher open morphed into a sharply lower close on the day, we saw red throughout Asia (Nikkei -1.2%, Hang Seng -0.3%, CSI 300 -0.1%) and Europe (DAX -2.1%, CAC -1.2%, IBEX -2.3%).  In fact, it is far harder to find a market that has rallied at all, although US futures at this hour (6:40) are pointing slightly higher.  However, after the sharp declines, an early bounce is not uncommon though not necessarily a harbinger of activity for the day.  All of this makes sense as public companies are likely going to see impacts on their profitability either because of reduced sales or reduced margins, or both, with tariffs now in place.  (Well, private companies are going to feel the same pressures, but there are no markets for them to worry about.). The worry for investors is given the extremely high price multiples that currently exist across so many companies, margin pressures can be problematic for stock prices.  For the near term, it is easy to make the case that equities have further to fall.

In the bond market, after yesterday’s Treasury yield decline, there has been a modest 1bp bounce, although as per the above chart, the trend remains lower.  In Europe, the news just hit the tape that the Eurozone is creating a plan to rearm the continent allowing for European countries to exceed debt restrictions to enable them to borrow and spend the money on this task.  The mooted amount is €800 billion, meaning that markets can expect that much new debt issuance across the continent in the coming months and years.  However, it appears investors are viewing the situation overall and are far more concerned with potential slowing growth than on increased issuance as yields have slipped one or two basis points across all nations in Europe.  Perhaps that is a signal that there is little belief in the likelihood of this new plan coming to fruition.

In the commodity markets, oil (-1.4%) continues its slide as a combination of worries over future growth due to the US tariffs and the OPEC+ announcement that they would start to bring production back online beginning in April (just 138K bbl/day, but the signal is quite clear that more is on the way) has traders unnerved.  Certainly, this is part of what President Trump is seeking, lower oil prices to help keep a lid on inflation, and there is no doubt he has pressured OPEC+ on the issue.  Remember, too, that if gasoline prices fall at the pump, that is a key driver of inflation perceptions for everyone.  As to the metals markets, we are seeing a split this morning with precious (Au +1.0%, Ag +0.65%) rallying on uncertainty and fear while copper (-1.2%) seems to be suffering on recession fears.

Finally, the dollar is lower again this morning with the DXY breaking back below 106 for the first time since early December as a signal of the broad trend.  This is interesting as the textbooks claim that if the US imposes tariffs, the dollar will strengthen, or more accurately other currencies will weaken, to offset those tariffs, and yet this morning CNY (+0.55%) and CAD (+0.45%) are bucking that trend although MXN (-0.2%) is behaving as most would expect.  But the dollar’s weakness is broad based, and my take is given the movement in interest rates, which are suddenly declining far more rapidly than anticipated just a week ago (Fed funds futures are now pricing in 75bps of cuts this year with a 11% probability of a cut in March, up from 2% last week) the dollar bull case is under real pressure.  I have maintained all along that if the Fed reignited their easing policy, the dollar would suffer.  Funnily enough, despite any angst between Chairman Powell (remember him?) and President Trump, they both may see lower rates as their preferred outcome.  In that case, the dollar has further to fall.

There is no hard data set to be released today although we do hear from NY Fed President Williams this afternoon.  This could be the first hint that the Fed’s caution is abating, and further rate cuts are in store.  Of course, with Powell on the calendar for Friday, if there is a change in tone, most market participants will be waiting to hear it from him.

The watchword has shifted from caution to uncertainty.  The tariffs have thrown sand into the gears of the economy and markets.  It remains to be seen how much impact they will have, but for now, fear is rising although the dollar is not following suit.  I think Trump must be happy, but I’m not sure how many in the markets are.

Good luck

Adf

Balling Their Fists

Posted on by

The world is no longer the same
Since Trump put Zelenskiy to shame
Now Europe insists
They’re balling their fists
And this time it isn’t a game
 
But markets just don’t seem to care
That, anymore, war’s in the air
Instead, what’s decisive
Is that the new price of
All cryptos has answered their prayer

 

Last Friday’s remarkable live TV meeting between Presidents Trump and Zelenskiy in the Oval Office has rocked the entire world, or certainly the entire Western World.  The unwillingness of Zelenskiy to consider a ceasefire and Trump’s dismissal of him from the White House, even before lunch, has clearly changed a lot of views of how things are going to evolve from here.

The most noteworthy result is the sudden realization by the EU and NATO that the US is committed to ending the war and is not interested in spending much, if any, more money on the subject.  The response by the EU, an emergency meeting in London yesterday where every nation committed to a strong defense of Ukraine, including boots on the ground, is remarkable.  My fear is that if they proceed along these lines, and French or British soldiers are attacked/shot during the conflict, NATO will seek to invoke Article 5 and drag the US into the conflict.  Certainly, that appears to be Zelenskiy’s goal, to get the US to fight Russia on their behalf.  (Although, there are those who might say the Biden administration was using Ukraine to fight Russia on their behalf, so this is justified not surprising.). In the end, I believe this path is terrifying as that would result in two nuclear powers meeting on the battlefield, perhaps a cogent definition of WWIII.

However, there is little evidence that market participants are terribly concerned about this situation.  Perhaps they are confident that this is all bluster and ultimately President Trump’s plan of increasing US economic interests in Ukraine will be enacted and a sufficient deterrent to prevent that outcome.  Or perhaps this is a YOLO moment, where the belief is, if nuclear war destroys the world, I can’t stop it, so I better make as much money as possible now.  I recognize geopolitical risk is tough to price, but I would have expected a lot more flight to safety than so far seen.

In fact, in markets, the true story of the weekend was the announcement of a cryptocurrency reserve to be created by the US although no specific size was revealed.  While I don’t typically write on the topic, that is because the crypto space has not yet, in my view, become enough of an influence on the macro world to matter.  However, this could change that.  

Source: tradingeconomics.com

One cannot be surprised that crypto currency prices have rallied dramatically on the back of the announcement, which almost seemed timed to arrest what had been a very sharp decline in those prices recently.  It is too early to really determine if this will draw cryptocurrencies closer to mainstream economic and financial discussion, but I would argue it is closer now than it has ever been before.

In Europe, the scoop on inflation
Does not seem ripe for celebration
While CPI slipped
Most forecasts, it pipped
So, slower but not near cessation

Eurozone CPI data was released this morning and the response to the outcome is quite interesting.  The data showed that headline fell from 2.5% to 2.4%, while core fell from 2.7% to 2.6%.  Obviously, that is a step in the right direction.  Alas, analysts’ forecasts were looking for a 0.2% decline in both readings, so while the data was good, it was worse than expectations.  In a perfect encapsulation of how narrative writing is so critical, both the WSJ and Bloomberg wrote articles explaining how the declines had set the table for the ECB to cut rates at their meeting this Thursday with neither one discussing market forecasts.

Now, a look at the market response shows that European sovereign yields have all risen between 6bps and 9bps, hardly the response one would expect in a lower inflation world.  As well, with Treasury yields higher only by 5bps this morning, as they bounce from their recent declines, the euro (+0.7%) has rallied sharply on the day.  

Much has been made of the European’s new commitments to increase defense spending, especially in the wake of yesterday’s meeting discussed above, and the requisite increases in defense spending that would accompany this new stance.  However, increased European defense spending has been a story for the past many weeks as President Trump has been railing against European members of NATO for not holding up their end of the bargain.  I guess the meeting added a greater sense of urgency, but remember, not an additional dime has been spent yet, nor even legislated.  Talk is cheap!

But there you have it.  Despite what appears to be a giant step closer to a major global conflagration, the market response has been a more classic risk-on result, with bond yields rising, the dollar falling and most equity indices doing fine.  Some days, things don’t make much sense.

Time for a quick recap of overnight markets then.  Friday’s strong US equity rally was followed by strength in Tokyo (+1.7%) and Australia (+0.9%) although both Hong Kong and China were little changed in the session. It appears Chinese traders are awaiting the news from Wednesday’s NPC meeting where the government will define their economic growth targets for the current year and how they might achieve them.  In Europe, Spain (-0.1%) is the laggard with the rest of the continent doing well, led by Germany (+1.1%).  It seems there are more defense companies there to benefit from all this mooted spending than elsewhere, hence the rally. Lastly, US futures are higher by 0.35% or so at this hour (7:00).

We have already discussed bonds, where yields are higher everywhere, including Japan (+4bps) as all the war talk has investors convinced there will be a lot more government borrowing everywhere in the world going forward.

In the commodity markets, oil (+0.25%) has been trading either side of unchanged in the overnight session but seems to be consolidating after last week’s declines.  I continue to believe that if the Ukraine war does end (and I believe that will be the outcome regardless of Europe’s hawkish turn), oil prices are likely to slide further as one of the likely outcomes will be the end of sanctions against Russian oil and Russian oil transports.  Meanwhile, gold (+0.6%) which had a rough week last week, is bouncing and dragging the entire metals complex higher with it.  If war is truly in the air, gold and silver seem likely to rally further.

Finally, the dollar is under great pressure this morning across the board.  Not only is the euro higher, but only JPY (-0.4%) is weaker vs. the dollar in the G10 as this seems a very risk-on initiative.  SEK (+1.3%) is the leader, perhaps because it is on the front lines of the potential war?  Seriously, I have no explanation there.  But EMG currencies are also rallying with HUF (+2.1%) the big winner, although the entire CE4 is stronger.  Again, this makes little sense to me if the politics is pushing toward war as all those nations are on the front lines.  Meanwhile, MXN (+0.4%) is managing to rally despite the ongoing threat of tariffs to be imposed tonight at midnight.  I continue to read numerous stories on the potential impacts of tariffs with dramatically different takes.  In the end, it appears that at least some things will go up in price, although fears of widespread massive price rises seem a bit overdone.

On the data front, along with Thursday’s ECB meeting, Friday brings the payroll report and there is plenty of stuff between now and then.

TodayISM Manufacturing50.5
 ISM Prices Paid56.2
WednesdayADP Employment 140K
 ISM Services52.9
 Factory Orders1.6%
 -ex Transport0.3%
 Fed’s Beige Book 
ThursdayECB Rate Decision2.75% (current 3.00%)
 Trade Balance-$93.1B
 Initial Claims340K
 Continuing Claims1870K
 Nonfarm Productivity1.2%
 Unit Labor Costs3.0%
FridayNonfarm Payrolls153K
 Private Payrolls138K
 Manufacturing Payrolls5K
 Unemployment Rate4.0%
 Average Hourly Earnings0.3% (4.1% Y/Y)
 Average Weekly Hours34.2
 Participation Rate62.6%
 Consumer Credit$15.5B

Source: tradingeconomics.com

In addition to this, we hear from 7 more Fed speakers at 9 venues including Chairman Powell Friday afternoon at 12:30.  Now, I have made a big deal about the fact that the Fed has lost much of its sway in the market to President Trump.  I believe that Powell’s speech will tell us much about whether they are unhappy about this, or whether they will be quite comfortable sinking into the background.  Given Powell’s previous antagonistic relationship with President Trump, I would think it would be the latter.  But every central banker seems drawn to the limelight like moths to a flame, so I would not be surprised to see something more dramatic.

As things currently stand, I see the ongoing efforts to cut government spending as a critical piece of the US fiscal puzzle.  The more success that DOGE and the administration has in this process, the better the potential outcomes for the US, tariffs or not.  This could increase private sector activity and reduce the deficit, thus slowing the debt issuance, and perhaps, weighing on inflation.  However, this is a longer-term process, not something that will happen in weeks, but over quarters.  In the meantime, I cannot get past the Ukraine situation as the biggest potential risk factors around, and if escalation is in the cards, I would expect Treasury yields to decline amid growing demand while the dollar rallies along with the yen as a haven.  Hopefully not but be prepared.

Good luck

Adf