Monthly Archives: June 2025

Quite Dreary

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While pundits expected inflation
Would rise with Trump as the causation
The data has not
Shown prices are hot
Since tariffs joined the conversation
 
In fact, there’s a budding new theory
That’s made dollar bulls somewhat leery
If Powell cuts rates
While Christine, she waits
The dollar might soon look quite dreary

 

Well, it turns out measured inflation wasn’t quite as high as many had forecast, even if we ignore those whose views are completely political.  Yesterday’s readings of 0.1% for both headline and core were lower despite all the tariff anxiety.  The immediate response has been, just wait until next month, that’s when the tariff impact will kick in, you’ll see.  Maybe that will be the case, but right now, for a sober look, the Inflation_Guy™, Mike Ashton, offers a solid description of what happened and some thoughts about how things may be going forward.  Spoiler alert, tariffs are not likely the problem, let’s start thinking about money supply growth.

However, the market, as always, is seeking to create a narrative to drive things (or does the narrative follow the market?  Kind of a chicken and egg question) and there is a new one forming regarding the dollar.  Now, with inflation appearing to slow in the US, this is an opening for Chair Powell to cut rates again, despite the fact that inflation on every reading remains above their target.  Meanwhile, the uncertainty that US policy is having on economies elsewhere, notably in Europe as the tariff situation is not resolved, means Madame Lagarde is set to pause, (if not halt), ECB rate cuts for a while and voilà, we have the makings of a dollar bearish story.  

That seems likely to have been the driver of today’s move in the euro (+1.0%) which has taken the single currency back to its highest level since November 2021.

Source: tradingeconomics.com

Now, if you are President Trump and are seeking to reduce the trade deficit while bringing manufacturing capacity back to the US, this seems like a pretty big win.  Lower inflation and a lower dollar both work towards those goals.  Not surprisingly, the president immediately called for the Fed to cut rates by 100 basis points after the release.  As much as FOMC members seem to love the sound of their own voices, perhaps this is one time where they are happy to be in the quiet period as no response need be given!

At any rate, the softer inflation data has had a significant impact on the dollar writ large, with the greenback sliding against all its G10 counterparts, with SEK (+1.3%) leading the way, although CHF (+1.1%), NOK (+0.9%) and JPY (+0.8%) have also been quite strong.  However, the biggest winner was KRW (+1.3%) as not only has there been dollar weakness, but new president, Lee Jae-myung, has proposed tax cuts on dividends to help support Korean equity markets and that encouraged some inflows.  Other EMG currencies have gained as well, although those gains are more muted (CNY +0.3%, PLN +0.6%) and some have even slipped a bit (ZAR -0.5%, MXN -0.1%).  Net, however, the dollar is down.

Yesterday, I, and quite a few other analysts, were looking for more heat in the inflation story.  Clearly, if that is to come, it is a story for another day.  With this in mind, we shouldn’t be surprised that government bond yields have also fallen around the world with Treasuries (-5bps) showing the way for most of Europe (Bunds -6bps, OATs -5bps, Gilts -6bps) and even JGBs (-2bps) are in on the action.  

Earlier this week, the tone of commentary was that inflation was coming back, and a US stagflation was inevitable.  This morning, that narrative has disappeared.    Interestingly, I would have thought the combination of the cooler CPI and the trade truce between the US and China would have the bulls feeling a bit better.  Alas, the equity markets have not responded in that manner at all.  Despite the soft inflation readings, US equity markets yesterday edged lower, albeit not by very much.  But that weakness was followed in Asia (Nikkei -0.65%, Hang Seng -0.4%, CSI 300 -0.1%) with India, Taiwan and Australia all under pressure although Korea (+0.45%) bucked the trend on that dividend tax story.  And Europe, this morning, is also unhappy with the DAX (-1.1%) leading the way lower followed by the IBEX (-.9%) and CAC (-0.7%).  The FTSE 100 (-0.1%) is faring a bit better as, ironically, weaker than expected GDP data this morning (-0.3% in April) has reawakened hope that the BOE will get more aggressive cutting rates.  US futures are in the red as well this morning, -0.5% across the board.  Perhaps this is the beginning of the long-awaited decline from overbought levels.  Or perhaps, this is just a modest correction after a strong performance over the past two months.  After all, the bounce in the wake of the Liberation Day pause has been impressive.  A little selling cannot be a surprise.

Source: tradingeconomics.com

Lastly, we turn to commodities where the one consistency is that gold (+0.5%) has no shortage of demand, at least in Asia.  It seems that despite a 29% rise year-to-date in the barbarous relic, US investors are not that interested.  Those gains dwarf everything other than Bitcoin, and yet they have not caught the fancy of the individual investor in the US.  However, I believe that demand represents an important measure of the diminishing trust in the US dollar, at least for the time being.  The other metals are less interesting today.  As to oil (-1.9%), it has rallied despite alleged production increases from OPEC and weakening demand regarding economic activity.  Some part of this story doesn’t make any sense, although I don’t know which part yet.

This morning’s data brings Initial (exp 240K) and Continuing (1910K) Claims as well as PPI (0.2%, 2.6% Y/Y headline; 0.3%, 3.1% core).  While there are no Fed speakers, there is much prognostication as to how the CPI data is going to alter their DOT plot and SEP information next week at the Fed meeting.  

Finally, the situation in LA does not appear to have improved very much and it is spreading to other cities with substantial protests ostensibly planned for this weekend.  However, market participants have moved on as nothing there is going to change macroeconomic views, at least not yet.  If inflation is quiescent, the Fed doesn’t have to cut to have the tone of the conversation change.  That is what we are seeing this morning and this can continue quite easily.  When I altered my view on the strong dollar several months ago, I suggested a decline of 10% to 15% was quite viable.  Certainly, another 5% from here seems possible over the next several months absent a significant change in the inflation tone.

Good luck

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PS – having grown up in the 60’s I was a huge Beach Boys fan and mourn, with so many others, the passing of Brian Wilson.  In fact, I wanted to write this morning’s rhyme as new lyrics to one of his songs, either “Fun, Fun, Fun” or “Surfin’ USA” two of my favorites.  But I realise that I have become too curmudgeonly as both of those are wonderfully upbeat and I just couldn’t get skeptical words to work.

Rate Cutting Pretension

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The US and China have shaken
Their hands, as trade talks reawaken
And while it’s a start
It could fall apart
For granted, not much should be taken
 
So, markets have turned their attention
To ‘flation with some apprehension
This morning’s report
Might help, or might thwart
Chair Powell’s rate cutting pretension

 

Starting with the trade talks between China and the US, both sides have agreed that progress was made. Here is a quote from a report on China’s state broadcaster, CCTV, last night.  “China and the US held candid and in-depth talks and thoroughly exchanged views on economic and trade issues of mutual concern during their first meeting of the China-US economic and trade consultation mechanism in London on Monday and Tuesday. The two sides have agreed in principle the framework for implementing consensus between the two heads of state during their phone talks on June 5, as well as those reached at Geneva talks. The first meeting of such consultation mechanism led to new progress in addressing each other’s economic and trade concerns.”  I highlight this because it concurs with comments from Commerce Secretary Lutnick and tells me that things are back on track.

Clearly, this is a positive, although one I suspect that equity markets anticipated as they have been rallying for the past several sessions prior to the announcements.  Certainly, this is good news for all involved as if trade tensions between the US and China diminish, it should be a net global economic positive.  While anything can still happen, we must assume that a conclusion will be reached going forward that will stabilize the trade situation.  However, none of this precludes President Trump’s stated desire to reindustrialize the US, so that must be kept in mind.  And one of the features of that process, at least initially, is likely to be upward price pressures in the economy.

Which brings us to the other key story today, this morning’s CPI report.  Expectations for headline (0.2% M/M, 2.5% Y/Y) and core (0.3% M/M, 2.9% Y/Y) are indicating that the bottom of the move lower in inflation may have been seen last month.  However, these readings, while still higher than the Fed’s target (and I know the Fed uses Core PCE, but the rest of us live in a CPI world) remain well below the 2022 highs and inflation seems to be seen as less of a problem.  Yes, there are some fears that the newly imposed tariff regime is going to drive prices higher, and I have seen several analysts explain that we are about to see that particular process begin as of today’s data.  

Of course, from a markets perspective, the key issue with inflation is how it will impact interest rates.  In this case, I think the following chart from Nick Timiraos in the WSJ is an excellent description of how there is NO consensus view at all.

At the same time, Fed funds futures markets are pricing in the following probabilities as of this morning.

Source: cmegroup.com

The thing about the Fed is they have proven to be far more political than they claim.  First, it is unambiguous that there is no love lost between President Trump and Chairman Powell.  Interestingly, the Fed is strongly of the belief that when they cut rates, they are helping the federal government, and more importantly, the population’s impression of what the federal government is doing.  Hence, the 100bps of cuts last summer/fall never had an economic justification, they appeared to have been the Fed’s effort to sway the electorate to maintain the status quo.  With that in mind, absent a collapse in the labor market with a significantly higher Unemployment Rate, I fall into the camp of no Fed action this year at all.  And, if as I suspect, inflation readings start to pick up further, questions about hikes are going to be raised.

Consider if the BBB is passed and it juices economic activity so nominal GDP accelerates to 6% or 7%, the Fed will be quite concerned about inflation at that point and the market will need to completely reevaluate their interest rate stance.  My point is the fact that rate cuts are currently priced does not make them a given.  Market pricing changes all the time.

So, let’s take a look at how things behaved overnight.  After a modest US rally in equities yesterday, Asia had a solid session, especially China (+0.75%) and Hong Kong (+0.8%) as both responded to the trade news. Elsewhere in the region, things were green (Nikkei +0.5%), but without the same fanfare.  I have to highlight a comment from PM Ishiba overnight where he said “[Japan] should be cautious about any plans that would deteriorate already tattered state finances.  Issuing more deficit financing bonds is not an option.”  That sounds an awful lot like a monetary hawk, although that species was long thought to be extinct in Japan.  It will be interesting to see how well they adhere to this idea.

Meanwhile, in Europe, the only equity market that has moved is Spain (-0.6%) which is declining on idiosyncratic issues locally while the rest of the continent is essentially unchanged.  As to US futures, at this hour (7:30) they are pointing slightly lower, about -0.15% across the board.

In the bond market, the somnolence continues with yields backing up in the US (+2bps) and Europe, (virtually all sovereign yields are higher by 2bps) with only UK Gilts (+5bps) under any real pressure implying today’s 10-year auction was not as well received as some had hoped.  In Japan, yields slipped -1bp overnight and I thought, in the wake of the Ishiba comments above, I would highlight Japan 40-year bonds, where yields have collapsed over the past three weeks.  Recall, back in May there was a surge in commentary about how Japanese yields were breaking out and how Japanese investors would be bringing money home with the yen strengthening dramatically.  I guess this story will have to wait.

Source: tradingeconomics.com

Turning to commodities, oil (+1.5%), which reversed course during yesterday’s session, has regained its mojo and is very close to closing that first gap I showed on the chart yesterday.  Above $65, I understand most shale drilling is profitable so do not be surprised to hear that narrative pick up again.  In the metals markets, gold (+0.2%) now has the distinction of being the second largest reserve asset at central banks around the world, surpassing the euro, although trailing the dollar substantially.  I expect this process will continue.  Silver (-0.8%) and copper (-2.1%) are both under pressure this morning although I have not seen a catalyst which implies this is trading and position adjustments, notably profit taking after strong runs in both.

Finally, the dollar is slightly stronger this morning with the euro and pound essentially unchanged, AUD, NZD and JPY all having slipped -0.25%, and some smaller currencies (KRW -0.55%, ZAR -0.5%) having fallen a bit further.  However, for those who follow the DXY, it is unchanged on the day.  The thing about the dollar is despite a lot of discussion about a break much lower, it has proven more resilient than many expected and really hasn’t gone anywhere in the past two months.  If the Fed turns hawkish as inflation rebounds, I suspect the dollar bears are going to have a tougher time to make their case (present poets included.)

In addition to the CPI at 8:30, we see EIA oil inventory data with a modest build expected although yesterday’s API data showed a draw that surprised markets.  I must admit I fear inflation data is going to start to rebound again which should get tongues wagging about next week’s FOMC meeting.  However, for today, a hot print is likely to see a knee-jerk reaction lower in stocks and bonds and higher in the dollar.  But the end of the day is a long way away and could be very different, especially given the always present headline risk.

Good luck

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The Mayhem-ber

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Five years ago, some will remember
George Floyd was the riotous ember
But while cities burned
What some of us learned
Was markets ignored the mayhem-ber
 
Of late, as the headlines are filled
With riots, no one’s been red-pilled
While some may disdain
Risk assets, it’s plain
That most buying stocks are still thrilled

 

The tragic goings on in LA remain the top story as we have now passed the fourth day of rioting.  It strikes me that ultimately, the constitutional question that may be addressed is how much power the federal government has in a situation where a state government seemingly allows rampant destruction of private property.  Of course, we saw this happen just over five years ago in the wake of George Floyd’s death in May 2020 and the ensuing riots in Minneapolis which ultimately spread to Portland, Oregon and Seattle.  

With this as a backdrop, I thought I would take a look at market behavior during that period, if for no other reason to be used as a baseline.  Of course, there are major caveats here as that was during Covid and the government had recently passed a massive stimulus bill while the Fed began to monetize that debt.  Now, we cannot ignore the BBB which looks a lot like a massive stimulus bill as well, so perhaps things are closer in kind than I originally considered.  At any rate, the chart below shows the S&P 500 leading up to and through the 2020 riots.

The huge dip before the riots began was the Covid dip, and the faint dotted line is the Fed Funds rate, so you can see things were clearly different.  However, the point I am trying to make is that despite the violence and disagreements over President Trump’s authority, I would contend the market doesn’t care at all about the situation there.  Investors remain far more concerned about the ongoing trade talks with China that are taking place in London and are “going well” according to Commerce Secretary Lutnick.  From what I read on X, it seems there is a growing expectation that a China deal of some sort will be announced soon and that will be the latest buy signal for stocks.  My larger point is that just because something dominates the headlines, it doesn’t mean that something is relevant in the financial world.

Funnily enough, because the LA riots are sucking the oxygen from every other story, there is relatively little to drive market activity, hence the relatively benign market activity we have been seeing for the past few days.  Yesterday was a perfect example with US equity markets trading either side of unchanged all day and closing pretty much in the same place as Friday.  In Asia overnight, the picture was mixed with the Nikkei (+0.3%) edging higher while both the Hang Seng (-0.1%) and CSI 300 (-0.5%) finished slightly in the red.  The one big outlier there was Taiwan (+2.1%) with other markets showing less overall interest.  I suspect this movement was on the back of the positive vibe the market is taking from the US-China trade talks.

As to Europe, the continent has a negative flavor this morning with the DAX (-0.5%) the laggard and other major indices edging lower by just -0.1% or so.  However, the FTSE 100 (+0.4%) has managed a gain after softer than expected employment data has increased discussion that the BOE will be cutting rates a bit more aggressively.  US futures are still twiddling their proverbial thumbs with no movement at this hour (7:10).

In the bond market, Treasury yields have slipped -3bps and we are seeing similar yield declines throughout the continent.  However, UK gilts (-7bps) are really embracing the slowing labor market and story of a more aggressive BOE rate cut trajectory.

In the commodity markets, oil (+0.5%) continues to climb higher despite the alleged increases in supply and is close to filling the first gap seen back in April (see chart below from tradingeconomics.com)

Given OPEC+ and their production increases, this is a pretty impressive move, especially as the recession narrative remains largely in place.  One tidbit of information, though, is that the Baker Hughes oil rig count is down 37 rigs since the 1st of May, a sign that US production, despite President Trump’s desires for more energy, may be slipping a bit.  As to the metals markets, gold (+0.45%) keeps on trucking, with a steady grind higher although both silver and copper are little changed this morning.  I must mention platinum as well, given I discussed it yesterday, and we cannot be surprised that after a remarkable run, it is softer by -1.3% this morning taking a breather.

Finally, the dollar, like equities, is directionless overall with the pound (-0.3%) slipping on the weak labor data but the rest of the G10 within 0.1% of Monday’s closing levels.  In the EMG bloc, KRW (-0.9%) is the outlier, apparently responding to the positive signals from the US-China trade talks.  However, I question that narrative as no other APAC currency moved more than 0.1% on the session in either direction.  And truthfully, that pretty well describes the rest of the bloc in LATAM and EEMEA.

On the data front, the NFIB Small Business Optimism Index was released this morning at a better than expected 98.8, which as you can see below, is a solid reading overall, certainly compared to most of 2022-2024.

Source: tradingeconomics.com

And here is the rest of what we get this week:

WednesdayCPI0.2% (2.5% Y/Y)
 -ex food & energy0.3% (2.9% Y/Y)
ThursdayPPI0.2% (2.6% Y/Y)
 -ex food & energy0.3% (3.1% Y/Y)
 Initial Claims240K
 Continuing Claims1908K
FridayMichigan Sentiment53.5
 Michigan Inflation Expected6.6%

Source: tradingeconomics.com

However, we must take that Inflation expectation number with at least a few grains of salt (even assuming it has value as an indicator at all), as yesterday, the NY Fed released their own survey of Inflation expectations which fell to 3.2%.  A quick look at the two indicators overlaid on one another shows that the Michigan indicator, if nothing else, has much greater volatility which reduces its value as an indicator.

Source: tradingeconomics.com

It is difficult to get excited about movement in either direction right now.  At some point, the mayhem in LA will end and news sources will look for the next story.  I suspect that trade deals are going to grow in importance as Mr Trump will need to sign some more before long.  As well, the BBB, which I continue to believe will be passed in some form, is going to add some measure of certainty and stimulus to the economy, which, ceteris paribus, implies that the long-awaited reckoning in the stock market may be awaited even longer.  If that is the case, then the weak dollar story, one I understand, is likely to fade for a while as well.

Good luck

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In a Trice

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While jobs data Friday was fine
The weekend has seen a decline
In positive news
As riots infuse
LA with a new storyline
 
The protestors don’t like that ICE
Is doing their job in a trice
So, Trump played a card,
The National Guard
As markets search for the right price

 

Despite all the anxiety regarding the state of the economy, with, once again, survey data like ISM showing things are looking bad, the most important piece of hard data, the Unemployment report, continues to show that the job market is in solid shape.  Friday’s NFP outcome of 139K was a few thousand more than forecast, but a lot more than the ADP result last Wednesday and much better than the ISM indices would have indicated.  Earnings rose, and government jobs shrunk for the first time in far too long with the only real negative the fact that manufacturing payrolls fell -8K.  But net, it is difficult to spin the data as anything other than better than expected.  Not surprisingly, the result was a strong US equity performance and a massive decline in the bond market with 10-year yields jumping 10bps in minutes (see below).

Source: tradingeconomics.com

But that is not the story that people are discussing.  Rather, the devolution of the situation in LA is the only story of note as ICE agents apparently carried out a series of court-warranted raids and those people affected took umbrage.  The face-off escalated as calls for violence against ICE officers rose while the LAPD was apparently told to stand down by the mayor.  President Trump called out the National Guard to protect the ICE agents and now we are at a point of both sides claiming the other side is acting illegally.  Certainly, the photos of the situation seem like it is out of hand, reminding me of Minneapolis in the wake of George Floyd, but I am not on site and can make no claims in either direction.  

It strikes me that for our purposes here, the question is how will this impact markets going forward.  A case could be made that the unrest is symptomatic of the chaos that appears to be growing around several cities in the US and could be blamed for investors seeking to move their capital elsewhere, thus selling US assets and the dollar.  Equally, a case could be made that haven assets remain in demand and while US equities do not fit that bill, Treasuries should.  In that case, precious metals and bonds are going to be in demand.  The one thing about which we can be sure is there will be lawsuits filed by Democratic governors against the federal government for overstepping their authority, but no injunctions have been issued yet.

However, let’s step back a few feet and see if we can appraise the broader situation.  The US fiscal situation remains cloudy as the Senate wrangles over the Big Beautiful Bill (BBB), although I expect it will be passed in some form by the end of the month.  The debt situation is not going to get any better in the near-term, although if the fiscal package can encourage faster nominal growth, it is possible to flatten the trajectory of that debt growth.  Meanwhile, the tariff situation is also unclear as to its results, with no nations other than the UK having announced a deal yet, although the administration continues to promise a number are coming soon.

If I look at these issues, it is easy to grow concerned over the future.  While it is not clear to me where in the world things are that much better, capital flows into the US could easily slow.  Yet, domestically, one need only look at the consumer, which continues to buy a lot of stuff, and borrow to do it (Consumer Credit rose by $17.9B in April) and recognize that the slowdown, if it comes, will take time to arrive.  Remember, too, that every government, everywhere, will always err on the side of reflating an economy to prevent economic weakness, and that means that the first cracks in the employment side could well lead to Fed cuts, and by extension more inflation.  (This note by StoneX macro guru Vincent Deluard discussing the Cancellation of Recessions is a must read).  I have spoken ad nauseum about the extraordinary amount of debt outstanding in the world, and how it will never be repaid.  Thus, it will be refinanced and devalued by EVERY nation.  The question is the relative pace of that adjustment.  In fact, I would argue, that is both the great unknown, and the most important question.

While answering this is impossible, a few observations from recent data are worth remembering.  US economic activity, at least per the Atlanta Fed’s GDPNow continues to rebound dramatically from Q1 with a current reading of 3.8%.  Meanwhile, Chinese trade data showed a dramatic decline in exports to the US (-35%) but an increased Trade Surplus of $103.2B as they shifted exports to other markets and more interestingly, imports declined-3.4%.  in fact, it is difficult to look at this chart of Chinese imports over the past 3 years and walk away thinking that their economy is doing that well.  Demand is clearly slowing to some extent, and while their Q1 GDP was robust, that appears to have been a response to the anticipated trade war.  Do not be surprised to see Chinese GDP slowing more substantially in Q2 and beyond.

Source: tradingeconomics.com

Europe has been having a moment as investors listen to the promises of €1 trillion or more to build up their defense industries and flock to European defense companies that had been relatively cheap compared to their US counterparts.  But as the continent continues to insist on energy suicide, the long-term prospects are suspect.  Canada just promised to raise its defense spending to 2% of GDP, finally, a sign of yet more fiscal stimulus entering the market and the UK, while also on energy suicide watch, has seen its service sector hold up well.

The common thread, which will be exacerbated by the BBB, is that more fiscal spending, and therefore increased debt are the future.  Which nation is best placed to handle that increase?  Despite everything that you might believe is going wrong in the US, ultimately the economic dynamism that exists in the US surpasses that of every other major nation/bloc.  I still fear that the Fed is going to cut rates, drive inflation higher and undermine the dollar before the year is over, but in the medium term, no other nation appears to have the combination of skills and political will to do anything other than what they have been doing already.  And that is why the long-term picture in the US remains the most enticing.  This is not to say that US asset prices will improve in a straight line higher, just that the broad direction remains clear, at least to me.

Ok, I went on way too long, sorry.  As there is no US data until Wednesday’s CPI, we will ignore that for now.  A market recap is as follows:  Asia had a broadly stronger session with Japan, China, HK, Korea and India all following in the US footsteps from Friday and showing solid gains.  Europe, though, is mostly in the red with only Spain’s 0.25% gain the outlier amongst major markets.  As to US futures, they are essentially unchanged at this hour (7:00).

Treasury yields have backed off -2bps from Friday’s sharp climb and European sovereign yields are softer by between -3bps and -4bps as although there has been no European data released; the discussion continues as to how much the ECB is going to cut rates going forward.  JGB yields were unchanged overnight.

In the commodity space, while oil (+0.3%), gold (+0.1%) and even silver (+0.8%) are edging higher, platinum has become the new darling of speculators with a 2.8% climb overnight that has taken it up more than 13.5% in the past week and 35% YTD.  Remarkably, it is still priced about one-third of gold, although there are those who believe that is set to change dramatically.  A quick look at the chart below does offer the possibility of a break above current levels opening the door to a virtual doubling of the price.  And in this environment, a run at the February 2008 all-time highs seems possible.

Finally, the dollar is softer across the board this morning, against virtually all its G10 and EMG counterparts.  AUD (+0.55%) and NZD (+0.7%) are leading the way, but the yen (+0.5%) is having a solid session as are the euro and pound, both higher by 0.25%.  In the emerging markets, PLN (+0.7%) is the leader with the bulk of the rest of the space higher by between +0.2% and +0.4%.  BRL (-0.3%) is the outlier this morning, but that looks much more like a modest retracement of recent gains than a new story.

Absent both data and any Fedspeak (the quiet period started on Friday), we are left to our own devices.  My take is there are still an equal number of analysts who are confident a recession is around the corner as those who believe one will be avoided.  After reading the Deluard piece above, I am coming down on the side of no recession, at least not in a classical sense, as no politician anywhere can withstand the pain, at least not in the G10 and China.  That tells me that while Europe may be the equity flavor of the moment, commodities remain the best bet as they are undervalued overall, and all that debt and new money will continue to devalue fiat currencies.

Good luck

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Mugwump

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The feud between Elon and Trump
Show’s Musk has become a mugwump
But though there’s much drama
It’s not clear there’s trauma
As markets continue to pump
 
So, turning our eyes toward today’s
Report about jobs, let’s appraise
The call for recession
That’s been an obsession
Of some for six months of Sundays

 

Clearly the big headlines are all about the escalating war of words between President Trump and Elon Musk.  I guess it was inevitable that two men with immense wealth and power would ultimately have to demonstrate that one of them was king.  But other than the initial impact on Tesla’s stock price, it is not clear to me what the market impacts are going to be here.  After all, President Trump has attacked others aggressively in the past when they didn’t toe his line, and it is not a general market problem, only potentially the company with which that person is associated.  As such, I don’t think this is the place to hash out the issue.

However, I think it is worth addressing one point that Musk raised regarding the Big Beautiful Bill.  The thing about reconciliation is it only addresses non-discretionary spending, meaning Social Security, Medicare, Medicaid and the interest on the debt.  All the other stuff that DOGE made headlines for, USAID etc., could never be part of this bill.  That requires recission packages where Congress specifically passes laws rescinding the previously enacted payments.  So, if this was a part of the blowup, it was senseless.  I will say, though, that the Trump administration did not communicate this fact effectively as I read all over how people are upset that Congress is not addressing these other things.  At any rate, this is not a political commentary, but I thought it was worth understanding because I only learned of this in the past weeks and I don’t believe it is widely understood.

Onward to the major market news today, the payroll report.  As of this morning, according to tradingeconomics.com, here are the forecast outcomes:

Nonfarm Payrolls130K
Private Payrolls120K
Manufacturing Payrolls-1K
Unemployment Rate4.2%
Average Hourly Earnings0.3% (3.7% Y/Y)
Average Weekly Hours34.3
Participation Rate62.6%

Of course, Wednesday’s ADP Employment number was MUCH lower than expected, so the whispers appear to be for a smaller outcome.  As well, the key wildcard in this data is the BLS Birth-Death model which is how the BLS estimates the number of jobs that have been created by small businesses which aren’t surveyed directly.  As with every model, especially post-Covid, what used to be is not necessarily what currently is.  The most accurate, after the fact, representation of employment is the Quarterly Census of Employment and Wages (QCEW) but that isn’t released until 6 months after the quarter it is addressing, so it is not much of a timing tool.  It is also the genesis of all the revisions.  

Here’s the thing, a look at the chart below shows that the BLS Birth-Death model appears to still be substantially overstating the payroll situation.  Given the datedness of its model, that cannot be a real surprise, but I assure you, if there is a major revision lower in that number, and NFP prints negative, it WILL be a surprise to markets.  I am not forecasting such an occurrence, merely highlighting the risk. 

If that were to be the case, I imagine the market reaction would be quite negative for stocks and the dollar, positive for bonds (lower yields) and likely continue to push precious metals higher, although oil would likely suffer.  I guess we will all have to wait and see at 8:30 how things go.

In the meantime, ahead of the weekend, let’s see how markets behaved overnight.  Yesterday’s modest sell-off in the US was followed by a mixed session in Asia (Nikkei +0.5%, Hang Seng -0.5%, CSI 300 -0.1%) but strength in Korea (+1.5%) and India (+0.9%).  Trade discussions still hang over the market and there are increasing bets that both India and Korea are going to be amongst the first to come to the table.  As well, the RBI cut rates by 50bps last night with the market only expecting 25bps, so that clearly supported the SENSEX.  In Europe, no major index has moved even 0.2% in either direction as positive European GDP data was unable to get people excited and there is now talk that the ECB will not cut rates again until September.  As to US futures, at this hour (6:50) they are pointing higher by about 0.3% across the board.  It appears that the Tesla fears are abating.

In the bond market, yields continue to slide with Treasuries falling -1bp and European sovereign yields down between -3bps and -5bps despite the stronger than expected Eurozone data which also included Retail Sales (+2.3%) growing more rapidly than expected.  But this is a global trend as recession discussions increase while we also saw JGB yields slip -2bps overnight.  It feels like the bond markets around the world are anticipating much slower economic activity.

In the commodity space, oil (0.0%) is unchanged this morning and continuing to hang around at its recent highs, but unable to break above that $63+ level.  It strikes me that if slower economic activity is on the horizon, that should push oil prices lower as there appears to be ample supply.  But I read that Spain has stopped importing Venezuelan crude as US secondary sanctions are about to come into effect there.  As to the metals markets, silver (+1.5%) and platinum (+2.6%) have been the leaders for the past few sessions although gold (+0.2%) continues to grind higher.  The loser here has been copper (-0.8%) which if the economic forecasts of slowing growth are correct, makes some sense.  Of course, there is a strong underlying narrative about insufficient copper supplies for the electrification of everything, but right now, payroll concerns are the story.

Finally, the dollar is a bit firmer this morning, but only just, with G10 currencies slipping between -0.2% and -0.3% while EMG currencies have shown even less movement.  INR (+0.25%) stands out for being the only currency strengthening vs. the dollar after the rate cut and positive growth story, but otherwise, this is a market waiting for its next cue.

In addition to the payroll report, we get Consumer Credit (exp $10.85B) a number which gets little attention but may grow in importance if economic activity does start to decline.  As well, I cannot ignore yesterday’s Trade data which saw the deficit fall much more than expected, to -$61.6B, its smallest outturn since September 2023.  While I didn’t see any White House comments on the subject, I expect that President Trump is happy about that number.

Are we headed into a recession or not?  Will today’s data give us a stronger sense of that?  These are the questions that we hope to answer later this morning.  FWIW, which is probably not that much, my take is while economic activity has likely slowed a bit, I do not believe a recession is upon us, and as I do believe the reconciliation bill will be passed which extends the tax cuts, as well as adds a few like no tax on tips or Social Security, I expect that will turn any weakness around quickly.  What does that mean for the dollar?  Right now, it is piling up haters so a further decline is possible, but I cannot rule out a reversal if/when the tax legislation is finalized.

Good luck and good weekend

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Gone Astray

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The ADP Labor report
On Wednesday, came up a bit short
Investors decided
That they would be guided
By this and bought bonds like a sport
 
As well, there’s a story today
The BLS has gone astray
It seems that their data
Might have the wrong weight-a
So, CPI’s not what they say

 

It has been another very dull session in most markets although yesterday did see a strong bond market rally after the ADP Employment Report was released much lower than expected at just 37K jobs created.  Certainly, the trend has been lower for the past three years as you can see in the below chart from tradingeconomics.com, so I guess we cannot be that surprised.

You will also not be surprised that this data brought out the recessionistas as they jumped all over the release to make their case that recession was just around the corner, and quite possibly stagflation.  Adding to their case was the ISM Services data which also disappointed at 49.9 and has also been trending lower for the past three years.  As well, they were almost gleeful in their description of the Prices Paid sub index rising to 68.7, its highest print since November 2022.  Alas, while Pries Paid have been rising for the past year or so, a look at the trendline shows they are continuing to retreat from the highs seen during the Bidenflation of 2022.

Source: tradingeconomics.com

In the end, although this data was unquestionably disappointing, it feels a bit too early, at least to me, to declare the recession has arrived.  But not too early for the bond market where 10-year yields tumbled 11bps on the day and almost all the damage was done in the first hour after the ADP release although the ISM helped things along as well.

Source: tradingeconomics.com

Perhaps we are going into a recession, or even already in one, but overall, the data so far are just showing the beginnings of that.  I imagine opinions will be strengthened one way or another tomorrow when the NFP report is released, but for now, the recessionistas appear to have the upper hand, at least in the bond market.

The other story that is getting a response, at least amongst the Twitterati (X-eratti?) is the WSJ article about how the BLS, due to President Trump’s hiring freeze, is suddenly calling into question the accuracy of their statistical releases, notably the CPI report due next week.  I will let my friend, The Inflation Guy™, Mike Ashton, explain why this is a nothing burger. [emphasis added]

“WSJ story about how staff shortages at BLS are affecting how many estimates the staff has to make instead of collecting actual data. It is very hard to make these errors accumulate to as much as 1-2bps on the monthly number.

UNLESS: there is bias in the estimating, or there are very large categories affected, or there are HUGE errors in some categories. Lots of random errors increases the overall error but is unlikely to affect the mean. And be honest. Do you have any idea what the MSE (mean standard error) of the CPI is?

People really should care about the error bars but even most economists almost never do. Unless it’s an opportunity to complain about budget cuts to economists, which is what this is. Nothing to see here.”

Otherwise, folks, another day in paradise with nothing else new, at least on the market front.  At some point, domestic politics, or geopolitics or war or something else is going to catch the fancy of the algos and change trading, but right now, that does not appear to be the case.  Perhaps Friday’s NFP data will be the catalyst to start a serious change in attitudes but I’m not holding my breath.

In the meantime, let’s survey market activity.  Yesterday’s US session was quite dull with limited movement and low volumes. Asia saw a mixed picture with the Nikkei (-0.5%) slipping, ostensibly, on concerns that a weaker US would negatively impact their export sector, tariffs be damned.  Hong Kong (+1.1%) though, rallied on Chinese PMI data holding on to recent levels rather than slipping further.  The rest of the region was far more positive, led by Korea (+1.5%) although the gains were more on the order of +0.5%.  Europe is all green this morning, with the CAC (+0.5%) leading the way, although the DAX (+0.4%) and FTSE 100 (+0.3%) are also holding up well on the back of positive German Factory orders data and solid UK Retail Sales.  Meanwhile, at this hour (7:00), US futures are ever so slightly firmer, +0.15% or so.

In the bond market this morning, after the big rally yesterday discussed above, Treasury yields this morning have edged lower by 1bp and European sovereigns have seen yields slide by between -3bps and -5bps as inflation data on the continent continues to soften encouraging the belief that the ECB, later this morning, may even consider more than the 25bp cut that is priced in.

The one true consistency lately has been gold (+0.8%) which has no shortage of demand, especially in Asia, and certainly feels like it is going to test, and break, the previous high of $3500/oz, which is now just $100 away.  But this has encouraged silver (+4.0%), copper (+2.65%) and now even platinum (+3.8%) has been invited to the party.  Regardless of the macroeconomic statistics, the ongoing global monetary policy of fiat debasement seems set to continue which can only help these metals.  As to oil (+0.3%), it continues to sit near its recent highs with not much activity in either direction.  It feels like we will need a major event/pronouncement of some sort, whether wider war in the Middle East or a change in OPEC policy to move this thing.

Finally, the dollar can best be described, again, as mixed.  While the euro and pound are marginally higher, the yen is marginally weaker.  In the EMG bloc, both KRW (+0.4%) and ZAR (+0.5%) are showing gains this morning, but nothing else of note is moving.  And when looking at the broad DXY, unchanged is where it’s at.  As with most markets right now, metals excepted, doing nothing seems the best choice.

On the data front, this morning brings the weekly Initial (exp 235K) and Continuing (1910K) Claims as well as the Trade Balance (-$94.0B) which if correct will almost certainly bring on a lot of White House crowing but is likely inconsequential with respect to the overall scheme of things.  We also see Nonfarm Productivity (-0.7%) and Unit Labor Costs (+5.7%) a combination of expectations that does speak to stagflation.  The ECB meeting will get some eyeballs, but unless they cut 50bps, a very low probability event based on current market pricing, it is hard to see much impact there either.

We are in a rut for now.  Whatever the catalyst that is required to change views substantially, it is not obvious at this point.  Bigger picture, nothing indicates any government is going to slow their spending or their money printing.  There is too much debt to ever be repaid, so a slow inflationary debasement is very likely our future.  I still think the dollar slides further, but it could be a few months before the current range breaks.

Good luck

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Nobody Knows

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The doldrums of summer are here
And just like occurs every year
Most markets compress
As pundits profess
The future, for them’s, crystal clear
 
But truthfully, nobody knows
The things, the next week will disclose
While there is no doubt
Big change is about
T’will likely be months (years?) til it shows

 

I wish there was something interesting to discuss this morning in any market, but the reality is some days the news feed has nothing of note.  Surveying the headlines shows that despite the tariff uncertainty, equity markets (as per the MSCI All-Country World Index) traded to new all-time highs.

Maybe tariffs are not going to be the end of the world after all.  Adding to this story is the fact that corporate credit spreads continue to compress, a clear signal that concerns over future economic activity are not that significant.  A look at the chart below shows that the current level, below 100bps, is the exception, not the rule when it comes to perceptions of debt risk.  In fact, the current reading of 0.91% is in the 13th percentile, well below the long-term average of 1.49% and median of 1.29%.  My point is, although the political lens through which so much news is presented continues to scream that everything the Trump administration is doing is an existential threat to the global economy, it appears a majority of investors have taken a different view.

So, I guess it’s good times for all.  In other markets, the dollar’s recent modest weakness continues to be highlighted as the beginning of the end of its reserve currency status and another existential threat to the US.  But again, one cannot look at a long-term chart of the euro and believe that we are on the edge of the precipice.  The EUR/USD exchange rate has been both much higher and much lower during the euro’s lifetime which began back in 1999.

It’s summer, folks, and oftentimes throughout my career, that signaled a significant reduction in market activity, liquidity and overall movement.  This is not to say that something untoward cannot occur before Labor Day, but perhaps this year will see a summer lull.  If pressed, I would say that the key risks to the idea of a true summer of doldrums would be a significant increase in the probability of a global conflagration, where both the Russia/Ukraine and Iran talks go off the rails with more kinetic activity in either or both places.  Certainly, if China were to invade Taiwan, that would change things.  And perhaps, if the Big Beautiful Bill fails to be enacted, prospects for the US economy would decline as tax rates would rise dramatically.  My take is that would not be good for either stocks or bonds, and probably not for the dollar either.

History, however, tells us that assuming little or no change is the best bet for the immediate future, so I don’t see any of those things happening.  In fact, my take is financial markets are becoming inured to most of President Trump’s pronouncements at this stage.  Given the movement we have seen in equities and credit spreads, it appears to me there is already a strong assumption of some trade deals to be announced in the near future.  Maybe that will be a ‘sell the news’ event.  But for now, there is precious little about which to get excited.

So, let’s see how things behaved overnight.  It oughtn’t be surprising that equity markets around the world are higher since the MSCI Index, as mentioned above, is setting records.  So, solid gains in the US yesterday were followed by similar type gains in Asia (Japan +0.8%, HK +0.6%, China +0.4%, Australia +0.9%) with the latter rising despite weaker than expected GDP growth in Q1 of 1.3%.  In Europe, too, gains are the general order of the day with Germany (+0.5%) and France (+0.5%) both in fine fettle although Spain (-0.3%) is today’s aberration as PMI data there was weaker than expected (perhaps the blackout had a negative impact!). I guess we oughtn’t be surprised that US futures are pointing slightly higher at this hour as well.

In the bond market, apparently everybody took Ambien today as yields are within 1bp of yesterday’s closing levels in the US, Europe and Asia.  I will take this as no news is good news.

In the commodity complex, oil is stuck near its recent highs and unchanged on the day.  Some might argue this is a triple top as per the chart below, where a break higher would target something on the order of $70/bbl and closing that huge gap from April.  However, given the general lack of activity, there doesn’t seem an obvious catalyst for that type of move.

Source: tradingeconomics.com

As to the metals markets, the extra bond market Ambien was distributed to those traders.

Finally, the dollar is mixed with the overall situation, at least as defined by the DXY, unchanged.  So, AUD (+0.4%) has rallied a bit while JPY (-0.2%) is sliding a bit.  In fact, most currencies are within 0.2% of yesterday’s closing levels although NOK (+0.5%) is today’s big winner as continued support in the oil market helps the krone.  But there is nothing to get excited about here either.

On the data front, ADP Employment (exp 115K) is probably the most interesting number although we also get ISM Services (52.0) and then the EIA oil inventory data with a modest build expected across products.  The BOC meets and nobody expects any policy rate change there and Atlanta Fed president Bostic speaks, but again, who cares at this point?

Quiet is the name of today’s game.  It wouldn’t surprise me if that is the rest of the week’s MO as well, although at some point, we will definitely see a break in one market that is likely to be contagious.  Until then…,

Good luck

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Hard to Resolve

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The OECD has declared
That growth this year will be impaired
By tariffs, as trade
Continues to fade
And no one worldwide will be spared
 
The funny thing is, the US
This quarter is showing no stress
But how things evolve
Is hard to resolve
‘Cause basically it’s just a guess

 

The OECD published their latest economic outlook and warned that global economic growth is likely to slow down because of the changes in tariff policies initiated by the Trump administration.  Alas for the OECD, the only people who listen to what they have to say are academics with no policymaking experience or authority.  It is largely a talking shop for the pointy-head set.  Ultimately, their biggest problem is that they continue to utilize econometric models that are based on the last 25-30 years of activity and if we’ve learned nothing else this year, it is that the world today is different than it has been for at least a generation or two.

At the same time, a quick look at the Atlanta Fed’s GDPNow forecast for Q2 indicates the US is in the midst of a very strong economic quarter.

Now, while the US does not represent the entire OECD, it remains the largest economy in the world and continues to be the driver of most economic activity elsewhere.  As the consumer of last resort, if another nation loses access to the US market, they will see real impairment in their own economy.  I would argue this has been the underlying thesis of the Trump administration’s tariff negotiations, change your ways or lose access, and that is a powerful message for many nations that rely on selling to the US.

Of course, it can be true that the US performs well while other nations suffer but that is not the OECD call.  Rather, they forecast US GDP growth will fall to 1.6% this year, down from 2.4% last year and previous forecasts of 2.2%.

But perhaps now is a good time to ask about the validity of GDP as a marker for everyone.  You may recall that in Q1, US GDP fell -0.2% (based on the most recent update received last Thursday) and that the media was positively gleeful that President Trump’s policies appeared to be failing.  Now, if Q2 GDP growth is 4.6% (the current reading), do you believe the media will trumpet the success?  Obviously, that is a rhetorical question.  But a better question might be, does the current calculation of GDP measure what we think it means?

If you dust off your old macroeconomics textbook, you will see that GDP is calculated as follows:

Y = C + I + G + (X – M)

Where:

Y = GDP

C = Consumption

I = Investment

G = Government Spending

X = Exports

M = Imports

In the past I have raised the question of the inclusion of G in the calculation, as there could well be a double counting issue there, although I suppose that deficit spending should count.  But the huge disparity between Q1 and Q2 this year is based entirely on Net Exports (X -M) as in Q1, companies rushed to over order imports ahead of the tariffs and in Q2, thus far, imports have fallen dramatically.  But all this begs the question, is Q2 really demonstrating better growth than Q1?  Remember, the GDP calculation was created by John Maynard Keynes back in the 1930’s as a policy tool for England after WWI.  The world today is a far different place than it was nearly 100 years ago, and it seems plausible that different tools might be appropriate to measure how things are done.  

All this is to remind you that while the economic data matters a little, it is not likely to be the key driver of market activity.  Instead, capital flows typically have a much larger impact on market movements which is why central bank policies are so closely watched.  For now, capital continues to flow into the US, although one of the best arguments against President Trump’s policy mix (and goals really) is that they could discourage those flows and that would have a very serious negative impact on financial markets.  Of course, he will trumpet the real investment flows, with current pledges of between $4 trillion and $6 trillion (according to Grok) as offsetting any financial outflows.  And in fairness, I believe the economy will be better served if the “I” term above is real foreign investment rather than portfolio flows into the S&P 500 or NASDAQ.

There is much yet to be written about the way the economy will evolve in 2025.  I remain hopeful but many negative things can still occur to prevent progress.

Ok, let’s take a look at how markets are absorbing the latest data and forecasts.

The barbarous relic and oil
Spent yesterday high on the boil
While bond yields are tame
These rallies may frame
A future where risk may recoil

I’ll start with commodities this morning where we saw massive rallies in both the metals and energy complexes yesterday as gold (-0.8% this morning) rallied nearly 2% during yesterday’s session and both silver (-1.4%) and copper (-1.7%), while also slipping this morning, saw even bigger gains with silver touching its highest level since 2012.  Copper, too, continues to trade near all-time highs as there is an underlying bid for real assets as opposed to fiat currencies.  Meanwhile, oil (+0.3%) rallied nearly 4% yesterday and is still trending higher, although remains in the midst of its trading range.  Given the bearish backdrop of declining growth expectations and OPEC increasing production, something isn’t making much sense.  Lower oil prices have been a key driver of declining inflation readings around the world.  If this reverses, watch out.

Turning to equities, yesterday’s weak US start turned into a modest up day although the follow through elsewhere in the world has been less consistent.  Tokyo was basically flat while Hong Kong (+1.5%) was the leader in Asia on the back of the story that Presidents Trump and Xi will be speaking this week as well as some solid local news.  But elsewhere in Asia, the picture was more mixed with modest gains and losses in various nations.  In Europe, despite a softer than expected inflation reading this morning, with headline falling to 1.9%, equity indices have been unable to gain much traction in either direction.  This basically cements a 25bp cut by the ECB on Thursday, but clearly the trade situation has investors nervous.  Meanwhile, US futures are pointing slightly lower at this hour (7:25), but only on the order of -0.2%.

Bond yields, which backed up yesterday, are sliding this morning with -2bps the standard move in Treasuries, European sovereigns and JGBs overnight.  We did hear from Ueda-san last night and he promised to adjust monetary policy only when necessary, although given base rates there are 0.5% and CPI is running at 3.5%, I’m not sure what he is looking at.  The very big picture remains there is too much debt in the world and the big question is how it will be resolved.  But my take is that won’t happen anytime soon.

Finally, the dollar, which had been under pressure yesterday has rebounded this morning, regaining much of the losses seen Monday.  The euro (-0.5%) and pound (-0.4%) are good proxies for the magnitude of movement we are seeing although SEK (-0.7%) is having a little tougher time.  In fairness, though, SEK has been the best performing G10 currency so far this year, gaining more than 13%.  In the EMG bloc, PLN (-1.0%) is the laggard, perhaps on the election results with the right-wing candidate winning and now calling into question the current government there and its ability to continue to move closer to the EU policy mix.  It should also be noted that the Dutch government fell this morning as Geert Wilders, the right-wing party leader, and leading vote getter in the last election, pulled out of the government over immigration and asylum issues.  (and you thought that was just a US thing!). In the meantime, I will leave you with the following 5-year chart of the DXY to allay any concerns that the dollar is about to collapse.  While we are at the bottom of the range of the past 3 years, we have traded far below here pretty recently, let alone throughout history.

Source: tradingeconomics.com

On the data front, JOLTs Job Openings (exp 7.1M) and Factory Orders (-3.0%, 0.2% ex Transport) are on the docket and we hear from 3 more Fed speakers.  But again, Fed comments just don’t have the same impact as they did even last year.  In the end, I do like the dollar lower, but don’t be looking for a collapse.

Good luck

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Gnashing and Wailing

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The narrative writers are failing
To keep their perspectives prevailing
They want to blame Trump
But if there’s no slump
They’ll find themselves gnashing and wailing
 
Economists have the same trouble
‘Cause most of their models are rubble
The change that’s been wrought
Requires more thought
Than counting on one more Fed bubble

 

Investors seem to be growing unhappier by the day as so many traditional signals regarding market movement no longer appear to work.  Nothing describes this better, I think, than the fact that forecasts for 10-year Treasury yields by major banks are so widely disparate.  While JPMorgan is calling for 5.00% by the end of the year, Morgan Stanley sees 2.75% by then.  What’s the right position to take advantage of that type of knowledge and foresight?

One of the most confusing things over the past months, has been the growing dichotomy between soft, survey data and hard numbers.  But even here, it is worth calling into question what we are learning.  For instance, this week we will see the NFP data along with the overall employment report.  That data comes from the establishment survey.  It seems that just 10 years ago, more than 60% of companies reported their hiring data.  Now, that is down to ~43%.  Does that number have the same predictive or explanatory power that it once did?  It doesn’t seem so.

Too, if we consider the Michigan Sentiment data, it has become completely corrupted by the political angle, with the current situation being Democrats answering the survey anticipate high inflation and weak growth while Republicans see the opposite.  Is that actually telling us anything useful from an economic perspective let alone a market perspective?  (see charts below from sca.isr.unmich.edu)

But this phenomenon is not merely a survey issue, it is an analysis issue.  At this point, I would contend there are essentially zero analysts of the US economy (poets included) who do not have a political bias built into their analysis and forecasts.  Consider that if you are in a good mood generally, then your own perspective on things tends to be brighter than if you are in a bad mood.  Well, expand that on a political basis to, if you are a Democrat, President Trump has been defined as the essence of evil and therefore your viewpoint will see all potential outcomes as bad.  If you’re a Republican, you will see much better potential.  It is who we are and has always been the case, but it appears a combination of President Trump and social media has pushed this issue to heretofore unseen extremes.

There are two problems with this.  First, for most consumers of financial information, the decision matrix is opaque.  Who should you believe?  But perhaps more concerningly, as evidenced by the decline in the response rate to hard data, for policymakers like the Fed and Treasury, what should they believe?  Are they receiving accurate readings of the economic realities on the ground?  Is the job market as strong (or weak) as currently portrayed?  Is the uncertainty in ISM data a result of political bias?  And if politics is an issue in these situations, who is to say that answers to questions will be fact-based rather than crafted to present a political viewpoint?

I would contend that the reason the narrative is breaking down everywhere is that the willingness of investors, as well as the proverbial man on the street, to listen to pronouncements from on high has diminished greatly.  After all, the mainstream media, which had always been the purveyor of the narrative, or at least its main amplifier, has lost its luster.  Or perhaps, they have lost all their credibility.  Independent media, whether on X, Substack or simply blogs that are posted all over the internet, have demonstrated far more clarity and accuracy of situations than anything coming from the NYT, WSJ, BBG or WaPo, let alone the TV “news” programs.

We are on our own to determine what is actually happening in the world, and that is true of how markets will perform going forward.  I have frequently written that volatility is going to be higher going forward across all markets.  President Trump is the avatar of volatility.  As someone whose formative years in trading were in the mid 80’s, when inflation was high, and Paul Volcker never said a word to anyone about what the Fed was doing (and even better, nobody even knew who the other FOMC members were), the best way to thrive is to maintain modest positions with limited leverage.  The time of ZIRP and NIRP will be seen as the aberration it was.  As it fades, so, too, will the ability to maintain highly levered positions because any large move can be existential.

With that cheery opening, let’s take a look at what has happened overnight.  Friday’s US session was not very noteworthy with mixed data leading to mixed results but no real movement.  Alas, things have taken a turn lower since then.  Asian markets were weaker overnight (Nikkei -1.3%, Hang Seng -0.6%, CSI 300 -0.5%) with most other regional markets having a rough go of things as well.  Concerns over further tariffs by the US (steel tariffs have been raised to 50%) and claims by both sides of the US – China trade debate claiming the other side has already breached the temporary truce have weighed on sentiment overall.  Meanwhile, PMI data from the region was less than inspiring with China, Korea, Japan and Indonesia all showing sub 50 readings for Manufacturing surveys.

In Europe, equity markets are also generally softer (DAX -0.5%, CAC -0.7%) although the FTSE 100 (0.0%) has managed to buck the trend after data this morning showed Housing Prices firmed along side Credit growth.  As investors await the US ISM/PMI data, futures are pointing lower across the board, currently down around -0.4% at 7:15.

In the bond market, yields all around the world are backing up with Treasuries (+3bps) bouncing off the lows seen on Friday, although remaining below 4.50%, while European sovereigns have climbed between 3bps and 4bps across the board.  JGB’s overnight (+2bps) also rose, although the back end of that curve saw yields slip a few bps.  It seems the world isn’t ending quite yet, although there does not seem to be any cure for government spending and debt issuance anywhere in the world.

Commodity prices, though, are on the move as it appears investors are interested in acquiring stuff that hurts if you drop it on your foot.  Gold (+1.85%), silver (+0.9%) and copper (+3.6%) are all in demand this morning, the latter ostensibly benefitting from fears that the US will impose more tariffs on other metals thus driving prices higher.  But the real beneficiary overnight has been oil (+4.0%) which rose on the back of an intensification of the Russia – Ukraine war as well as the idea that OPEC+ ‘only’ raised production by 411K barrels/day, less than the whisper numbers of twice that amount.  As I watch the situation in Ukraine, it appears to have the hallmarks of an imminent peace process as both sides are pulling out all the stops to gain whatever advantage they can ahead of the ceasefire and both recognizing that the ceasefire is going to come soon.  But despite the big jump in the price of WTI, you cannot look at the chart below and expect a breakout in either direction.  If I were trading this, I would be more likely to fade the rally than jump on board the rise.

Source: tradingeconomics.com

Finally, the dollar is under the gun this morning, falling against pretty much all its major counterparts.  Both the euro (+0.7%) and pound (+0.6%) are having strong sessions although JPY (+1.0%) and NOK (+1.3%) are leading the way in the G10.  NOK is obviously benefitting from oil’s rally, while there remains an underlying belief that Japanese investors are slowing their international investments and bringing money home.  Now, the ECB meets this week and is widely anticipated to be cutting rates 25bps, but my take is, today is a dollar hatred day, not a euro love day.  As to the EMG bloc, gains are evident across regions with CZK and HUF (both +1.0%) demonstrating their beta to the euro although PLN (+0.5%) is lagging after the presidential election there disappointed the elites with the Right leaning candidate winning the job and likely frustrating Brussels in their attempts to widen the war in Ukraine.  In Asia, CNY (+0.1%) was relatively quiet but KRW (+0.5%), IDR (+0.8%) and THB (+0.9%) all benefitted from that broad dollar weakness.  So, too, did MXN (+0.65%) although BRL has not participated.

There is plenty of data this week culminating in the payroll report on Friday.

TodayISM Manufacturing49.5
 ISM Prices Paid70.2
 Construction Spending0.3%
TuesdayJOLTS Job Openings7.1M
 Factory Orders-3.0%
 -ex Transport0.2%
WednesdayADP Employment115K
 BOC Rate Decision2.75% (current 2.75%)
 ISM Services52.0
 Fed’s Beige Book 
ThursdayECB Rate Decision2.00% (current -2.25%)
 Initial Claims235K
 Continuing Claims1910K
 Trade Balance-$94.0B
 Nonfarm Productivity-0.7%
 Unit Labor Costs5.7%
FridayNonfarm Payrolls130K
 Private Payrolls120K
 Manufacturing Payrolls-1K
 Unemployment Rate4.2%
 Average Hourly Earnings0.3% (3.7% Y/Y)
 Average Weekly Hours34.3
 Participation Rate62.6%
 Consumer Credit$10.85B

Source: tradingeconomics.com

In addition, we hear from four more Fed speakers over five venues.  The thing about this is they continue to discuss patience as the driving force, except for Governor Waller, who explained overnight that he could see rate cuts if inflation stays low almost regardless of the other data.

The trade story remains the topic of most importance in most eyes it seems, although it remains a mystery where things will wind up.  The narrative is lost for all the reasons above, but I will say that it appears risk aversion is today’s theme.  The new part is that the dollar is considered a risk asset.  

Good luck

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