Author Archives: fxpoet

Nothing is Clear

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Though next week the Fed will cut rates
The bond market’s in dire straits
‘Cause nothing is clear
‘Bout growth, and Jay’s fear
Is he’ll miss on both his mandates

 

In the past week, 10-year Treasury yields have risen 13bps, as per the below chart, even though market pricing of a Fed rate cut continues to hover around 88%.  Much to both the Fed’s and the President’s chagrin, it appears the bond market is less concerned with the level of short-term rates than they are of the macroeconomics of deficit spending, and total debt, as well as the potential for future inflation.

Source: tradingeconomics.com

I don’t think it is appropriate to describe the current bond market as being run by the bond vigilantes, at least not in the US (Japan may be another story) but it is unquestionable that there is a growing level of discomfort in the administration.  This morning, we will see the September PCE data (exp 0.3%, 2.8% Y/Y headline; 0.2% 2.9% Y/Y Core) which will do nothing to comfort those FOMC members who quaintly still believe that inflation matters.

It’s funny, while the President consistently touts how great things are in the economy, both he and Secretary Bessent continue to push hard for lower interest rates, which historically had been a sign of a weak economy.

But as I have highlighted before, the data is so disparate, every analyst can find something to support their pet theory.  For instance, on the employment front, the weak ADP reading on Wednesday indicated that small businesses were under pressure, yet the Initial Claims data yesterday printed at a remarkably low 191K, which on the surface indicates strong labor demand.  Arguably, that print was impacted by the Thanksgiving holiday so some states didn’t get their data in on time, and we will likely see revisions next week.  But revisions are not nearly as impactful as initial headlines.  Nonetheless, for those pushing economic strength, yesterday’s Claims number was catnip.

So, which is it?  Is the economy strong or weak?  My amateur observation is that we no longer have an ‘economy’ but rather we have multiple industrial and business sectors, each with its own dynamics and cycles, some of which are related but others which are independent.  And so, similar to the idea that the inflation rate that is reported is an average of subcomponents, each of which can have very different trajectories than the others (as illustrated in the chart below), the economy writ large is exactly the same.  So, an analogy might be that AI is akin to Hospital Services in the below chart while heavy industry is better represented by the TV’s line.

But, when we look at the Atlanta Fed’s GDPNow forecast below, it continues to show a much stronger economic impulse than the pundits expect.

And quite frankly, if 3.8% is the real growth rate, that is quite strong, certainly relative to the last two decades in the US as evidenced by the below chart I created from FRED data.  The orange line represents 4% and you can see that other than the Covid reopening, we haven’t been at that level for quite a while.

What is the reality?  Everybody has their own reality, just like everybody has their own personal inflation rate.  However, markets have been inclined to believe that the future is bright, which given my ongoing view of every nation ‘running it hot’ makes sense, so keep that in mind regardless of your personal situation.

Ok, let’s look at how markets behaved overnight.  Yesterday’s nondescript day in the US was followed by a mixed Asian session with Tokyo (-1.0%) slipping on concerns that the BOJ is going to raise rates.  I’m not sure why that is news suddenly, but there you go.  However, China (+0.8%), HK (+0.6%), Korea (+1.8%), India (+0.5%) and Taiwan (+0.7%) all continued their recent rallies.  The RBI did cut rates by 25bps, as expected, but that doesn’t seem to have been the driver.  Just good vibes for now.

In Europe, screens are also green this morning, albeit not dramatically so.  Frankfurt (+0.6%) leads the way but Paris (+0.3%), Madrid (+0.2%) and London (+0.1%) are all on the right side of the ledger.  Eurozone growth in Q3 was revised up to 0.3% on the quarter, although that translated into an annual rate of 1.4%, lower than Q2, but the positive revision was enough to get the blood flowing.  That and the idea that European defense companies are going to come back into vogue soon.  And as has been their wont, US futures are higher by 0.2% at this hour (7:35).

In the bond market, Treasury yields are higher by 2bps this morning and European sovereign yields are getting dragged along for the ride, up 1bp to 2bps across the board.  JGB yields also continue to climb and show no sign of stopping at any maturity.  A BOJ rate hike of 25bps is not going to be enough to stop the train of spending and borrowing in Japan, so I imagine there is much further to go here.

In the commodity space, silver (+1.8%) has been getting a lot more press than gold lately as there are ongoing stories about big banks, notably JPM, having large short futures positions that were designed to keep a lid on prices there, but the structural shortage of the metal has started to cause delivery questions on the exchanges all around the world.  So, while it has not yet breached $60/oz, my take is that is the direction and beyond.

Source: tradingeconomics.com

Gold’s (+0.4%) story has been told so many times, it is not nearly as interesting now, central bank buying and broader fiat debasement concerns continue to be the key here.  Copper (+1.8%) is also trading at new highs in London and the demand story here knows no bounds, at least not as long as AI and electrification are part of the mix.  As to oil (-0.25%), it is a dull and boring market and will need to see something of note (regime change in Venezuela or peace in Ukraine seem the most likely stories) to wake it up.

Finally, the dollar is still there.  The DXY is trading at 99, below its recent highs but hardly collapsing.  Looking for any outliers today ZAR (+0.4%) is benefitting from the gold rally (platinum rallying too) but otherwise there is nothing of note.  INR (-0.2%) continues to trade around its new big figure of 90.00, but has stopped falling for now, and everything else is dull.

As well as the PCE data, we get September Personal Income (exp 0.3%), Personal Spending (0.3%) and Michigan Sentiment (52.0) with only the Michigan number current.  We are approaching the end of the year and while with this administration, one can never rule out a black swan, my take is positions are being lightened up starting now, and when the December futures contracts mature, we may see very little of interest until the new year.  In the meantime, nothing has changed my big picture view.  For now, absent a very aggressive FOMC cutting rates, the dollar is still the best of a bad bunch.

Good luck and good weekend

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Splitting More Hairs

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The data continues to be
Uncertain, and so what we see
Is both bulls and bears
Just splitting more hairs
Til markets reach their apogee
 
Meanwhile, throughout Europe concern
Is building, that no one did learn
Their energy dreams
Are nought but grift schemes
And growth’s in a long-term downturn

 

Once again, macroeconomic stories are light on the ground with no overarching theme atop the headlines.  As data continues to be released in the US post the government shutdown, we are seeing a similar pattern as before the shutdown, namely lots of conflicting data.  Yesterday was a perfect example as ADP Employment data was far weaker than expected printing at -32K (exp +10K) and indicative of a slowing economy.  At the same time, ISM Services showed unexpected strength, printing 52.6 with every sub indicator printing higher than last month except prices, which slipped 5 points.  While there was September IP and Capacity Utilization data, given it was so old, it just didn’t seem relevant.  

Depending on your underlying view, it was once again easy to point to recent data and make either the bull case on the economy and stocks or the bear case.  But there’s more.  A look at the last 5 years of ADP data shows a very distinct downward trend in employment as per the below.

Source: tradingeconomics.com

But as with so many things in the economy lately, it is fair to ask if the data we have known in the past is reflective of the current economic situation.  After all, if the Trump administration has deported 500K individuals, and another 1.5 million have self-deported, as the administration claims, it ought not be surprising that employment numbers are declining.  The implication is that population is declining, which would make sense.  So, I ask, does the declining ADP data signal what it did 5 years ago or 10 years ago?  I don’t believe the answer is that straightforward.

One of the things that has concerned me lately is the measurement of GDP.  My thesis has been that counting government spending in Keynes’s equation Y = C + I + G + (X-M) is double counting because, after all, if the government spends money, it goes into the economy and is recorded by the people/companies who receive it.  But perhaps my queasiness over the GDP idea is caused by something else instead, the fact that GDP measures credit creation, not economic activity.  This article by Alasdair Macleod, a pretty well-known economic analyst with a long career observing markets and economies, does an excellent job of identifying some really interesting problems that get accepted and assumed by many in their analysis of the current situation.  

For a while we have all seen, and probably felt, there is a disconnect between the data published and the feeling we get with respect to the current situation.  I highlighted the cost-of-living problem last week with the Michael Green articles.  This is another arrow in the quiver of things are not what they appear and that’s why so many people are so unhappy (even taking away TDS).

For me, where I try to synthesize a market view based on the information available, it is a very difficult time because of all the inconsistencies relative to what I have known in the past.  As well, I am being forced to reconfigure my mental models as the world has changed.  I suggest everyone do the same, as there is no going back to pre-Covid, let alone pre-GFC.

But the US is relatively well-off compared to most of the rest of the G10 as evidenced by this morning’s Eurozone data where Construction PMIs were, in a word, dreadful as can be seen below:

Source: tradingeconomics.com

No matter how you slice it, the fact that every reading is below 50 is a telling statement on the economic situation in Europe.  Adding to this problem is the fact that it appears, the EU, under the guidance(?) of President Ursula von der Leyen, is getting set to force the appropriation of Russian assets that were frozen at the outset of the Ukraine war, an act that Russia has indicated would, itself, be an act of war and they would respond in kind.  The US has unequivocally said they will not defend Europe if that is their decision, although we will continue to sell them weapons.  

For 80 years, NATO has been the defense umbrella allowing Europe to spend their money on butter, not guns.  Despite all the plans of rearmament, if Europe goes down this road, I suspect that there is nothing they can do to defend themselves without the US.  Once again, it is difficult to look at fiat currencies around the world, especially in Europe, and think they have more staying power than the dollar.  

Ok, let’s tour markets.  A solid day in the US was followed by strength virtually across the board in Asia (Japan +2.3%, HK +0.7%, China +0.3%) with the rest of the region +/- 0.3%, so not overwhelmingly positive or negative.  The Japanese outlier was based on news about Fanuc signing a deal with Nvidia to make AI industrial robots and that took the whole tech sector in Tokyo higher.  In Europe, green is also today’s theme as despite the weak data shown above, we started to get the first hints that the ECB may consider rate cuts after all.  While Madame Lagarde has been on her high horse saying there is no need to adjust rates, Piero Cipollone, a board member has highlighted concerns over further potential economic weakness going forward.  I look for others to come to the same conclusion and talk of an ECB cut to start to increase although swaps markets do not yet reflect any changes.  And at this hour (7:40) US futures are pointing slightly higher, 0.15% or so.

In the bond market, Treasury yields are reversing some of yesterday’s modest decline, rising 2bps this morning and that has helped pull European sovereign yields higher by similar amounts across the board.  The one exception here is UK gilts, which given the ongoing weak data seem to be anticipating a greater chance of a BOE cut than before.  in Asia, JGB yields rose 4bps and now sit at 1.93%, a new high for the move, but there is no indication we are near a top.  There is growing confidence the BOJ will hike rates later this month, although I would expect that should help slow the rise as at least it will have a modest impact on inflation readings going forward.

In the commodity markets, oil (+0.5%) continues to chop back and forth making no new ground in either direction.  Stories about peace in Ukraine don’t seem to matter much, nor do stories about a US invasion of Venezuela.  In fact, nothing seems to matter too much to this market other than actual supply and demand, and that seems pretty balanced, at least as evidenced by  the fact that for the past 2+ months, we have gyrated either side of $60/bbl with no impetus in either direction.  (see below)

Source: tradingeconomics.com

Metals markets are slipping a bit this morning (Au -0.25%, Ag -1.8%, Cu -0.6%) but that is simply part of the recent consolidation.  After all, metals have rallied forcefully all year, so taking a breather is no surprise. 

Finally, the dollar is a nonevent today with the most noteworthy story the news that the PBOC fixing last night was 160 pips higher (weaker CNY) than forecast by the market.  As well, there have been several stories that Chinese state-owned banks are buying dollars in the market to help slow down the yuan’s recent appreciation.  I discussed the yuan yesterday so this should be no surprise.  The tension on China to maintain a weak enough currency to support their export industries is huge, so a quick appreciation would be extremely negative for the nation’s trade balance and economic activity.

On the data front, Initial (exp 220K) and Continuing (1960K) Claims lead us off and then Factory Orders from September (0.5%) come at 10:00.  There are still no Fed speakers, so markets remain subject to headline risk, notably from the White House.  As we are in December, my sense is that things will become increasingly uninteresting from a market perspective absent a major new event.  While price action will likely remain choppy, it is hard to see a major directional move until next year.

Good luck

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The American Dream

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To aid the American Dream
The most recent Trumpian scheme
Is new Trump Accounts
In proper amounts
To help stocks become more mainstream
 
One likely effect of this act
Is stocks will be forcefully backed
Though problems extant
May come back to haunt
For now, bearish plays will get whacked

 

Financial market news remains mostly uninspiring these days as the Fed story has largely gone back to a cut is coming next week (89.2% probability) thus the hawkish phase has passed.  AI is still the magical future, while precious metals continue to garner support overall as concerns rise about the ongoing debasement of fiat currencies.  Elsewhere, the war in Ukraine rages on as peace talks in Moscow were described as ‘constructive’ but have yet to resolve the issues.

The other piece of the Fed story, regarding the next Chair, has taken a modest turn as a series of interviews by the finalists in the process (allegedly Hassett, Warsh and Waller) with VP Vance, were suddenly canceled for no apparent reason.  As well, the president continues to hint that Mr Hassett is going to be the one.

But one of President Trump’s strengths is his ability to keep his ideas in the news, and nothing exemplifies that better than the new Trump Accounts.  This is the idea that the government should start investing in the next generation by way of establishing investment accounts in the name of children at birth with $1000 of seed money from the government.  If these accounts are invested in the S&P 500, for instance, with a historically average return of roughly 10%, by the time the child turns 18, the initial investment will have grown more than 5-fold.  As well, these accounts are eligible for additional contributions each year, up to $5000, so can really build some value in that circumstance.  

In addition, the news that Michael and Susan Dell will be donating $6.25 billion to add $250 to those accounts, tax free to the recipient, is another boon.  Estimates are that the total could rise to $4 billion/year of outlays, all of which will be required to go into the stock market.  It’s almost as though President Trump wants the government to support the stock market, but I’m sure that is a secondary consideration!

But away from that, the news has been sparse, so let’s look at market activity overnight.  yesterday’s US session played out like the opening, modest gains, and futures at this hour (7:15) indicate more of the same is on the way today.  In Asia overnight, while Tokyo (+1.1%) had a solid session, China (-0.5%) and HK (-1.3%) were far less fortunate.  Chinese PMI data continues to be soft but perhaps of more import is the fact that the yuan (+0.15%) continues to gradually strengthen, as it has been for the past year (see chart below).

Source: tradingeconomics.com

In fact, the yuan has reached its strongest level since September 2024.  The thing about a strong CNY is that it has definitive negative impacts on Chinese exporters.  While there has been very little discussion of the yuan regarding the trade talks between the US and China, the steady appreciation of the currency will certainly hurt Chinese company earnings, and by extension stock prices there.  One thing to note is that despite its recent strength, the yuan remains undervalued vs. the dollar based on a Real Effective Exchange Rate calculation by the World Bank as per the below chart, with the current USD value at 130.6 while the CNY sits at 113.1.  That is a substantial undervaluation that, if corrected, would likely have a significant impact on the respective economies of each nation as well as, maybe, the political rhetoric.

Elsewhere in the region, India was little changed even though the rupee (-0.4%) traded through 90.00 for the first time as the RBI has decided not to waste more reserves on supporting the currency.  It appears that capital outflows are driving the rupee, but that does not bode well for stocks there.  The rest of the region was mixed with more gainers (Korea, Taiwan, Australia, New Zealand) than laggards (Philippines, Thailand, Malaysia).

In Europe, both Spain (+1.5%) and Italy (+0.7%) are having solid sessions although much of the rest of the continent is less robust.  The story is that European defense companies have benefitted today based on the absence of a peace agreement, although Eurozone inflation readings coming in a tick hotter than forecast have put paid to any idea of an ECB cut anytime soon.

Moving on to bonds, Treasury yields (-3bps) have backed off a touch from highs yesterday and that has dragged European sovereigns down with them, with the entire continent seeing yields decline -1bp or so.  Overnight, JGB yields ticked up another 3bps, to further new highs for the move, as there is no indication that government spending is going to slow down while expectations of a BOJ hike remain in full force.

Commodity markets continue to show the most volatility with both oil (+1.3%) and NatGas (+2.3%) rising this morning, the former on the lack of peace talks, the latter on the expanding polar vortex which is driving cold weather in the Northeast.  Too, I would be remiss if I didn’t mention that European demand for US LNG is running at record rates as they try to wean themselves from Russian gas supplies.  FYI, NatGas is back to its highest level since late 2022, where it skyrocketed in the wake of the initial Russian invasion.  In the metals markets, after a bit of profit taking in yesterday’s session, both gold and silver have edged higher by 0.1% this morning as both continue to be accumulated by Asian central banks and Asian investors although Western investors don’t seem to believe in the idea.  Something to note is that silver has risen 102% so far in 2025, that’s a pretty big move!  Copper (+1.45%) has jumped on the back of news that Chinese smelters have reduced activity and inventories at the LME are limited.  Add to that the underlying electrification story, and demand seems likely to be pretty robust for a while yet.

Finally, the dollar is under pressure this morning with the DXY, though still in its range, trading below 99.00 for the first time in 3 weeks.  But looking at actual currencies, the euro (+0.4%), pound (+0.7%), NOK (+0.6%), SEK (+0.5%) and CHF (+0.4%) are all nicely higher this morning.  The rest of the G10 are in a similar state, albeit with slightly smaller gains.  In the EMG bloc, CLP (+0.5%) is climbing on the back of copper’s rise, while the CE3 are all following the euro higher rising in step.  ZAR (+0.1%), BRL (+0.1%) and MXN (+0.2%) are underperforming this morning, likely because the metals markets, other than copper, are underperforming.

Turning to the data, this morning brings ADP Employment (exp 10K), IP (0.0%), Capacity Utilization (77.3%) and then ISM Services (52.1) at 10:00.  Given the IP data is old, I expect ADP to be the number with the most possible influence.  But, given the market is already assuming a cut next week, it would have to be a dramatic negative number to change any views.

The big picture remains the same, run it hot, fiat currency debasement and the dollar should be the best of a bad lot, but on any given day, much can happen that doesn’t fit that story.  Today is one of those days.

Good luck

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Remarkable Fragility

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JGB yields have
Risen to multi-year heights
Is this why stocks fell?

 

Yesterday I highlighted that 10-year JGB yields had risen to their highest level since 2008.  As you can see below, the same is true for 30-year JGBs and essentially the entire curve there.

Source: tradingeconomics.com

Ostensibly, this move was triggered by comments from BOJ Governor Ueda indicating that a rate hike was coming this month.  However, the thing I find more interesting is that this move in JGB yields has become the bête noire of markets, now being blamed for every negative thing that happened yesterday.  

For instance, Treasury yields yesterday rose 7bps despite ISM data indicating that manufacturing activity remains sluggish at best.  In fact, the initial response to that data was that it confirmed the Fed will be cutting rates next week.  But the narrative seems to be that Japanese investors are now willing to repatriate funds, selling Treasuries to buy JGBs, in order to invest locally because they are finally getting paid to do so.  Certainly, looking at the chart above shows that Japanese yields had been tantamount to zero for a long time prior to 2024, and even then, have only started to show any real value in the most recent few months.  Of course, real 10-year yields in Japan remain significantly negative based on the latest inflation reading of 3.0%.  The upshot is, rising JGB yields are deemed the cause of Treasury market weakness.

Turning to risk assets, the story is the same for both stocks (which saw US equities decline across the board yesterday) and cryptocurrencies, notably Bitcoin.  Ostensibly, the rise in yields, and the prospect of a rate hike by the BOJ (to just 0.75% mind you) has been cited as the driver of an unwinding in leveraged trades as hedge funds seek to get ahead of having their funding costs rise thus crimping their margins.  

There is no doubt in my mind that the yen has been a critical funding currency for a wide array of carry trades, that is true.  In fact, that has been the case for several decades.  But is 25 basis points really enough to destroy all the strategies that rely on that process?  If so, it demonstrates a remarkable fragility in markets, and one that portends much worse outcomes going forward.  

If we look at the relationship between Bitcoin and 10-year JGBs, it appears that there has been a significant change in tone.  For the past two months, while JGB yields have continued to climb, BTC has broken its correlation with JGBs and has fallen dramatically instead. (see below chart from tradingeconomics.com). When it comes to crypto, I am confident that leverage levels are higher than anywhere else, in fact that seems part of the attraction, so it should not be as surprising to see something of this nature.  But again, it speaks to a very fragile market situation given there was no discernible change in the Japanese yield trend to drive a Bitcoin adjustment.

The upshot here, too, is that rising JGB yields are claimed to be the reason Bitcoin is declining.  In fact, nearly all the commentary of late seems to be focusing on JGBs as the driver of everything.  While I concede that Japanese yields are an important part of the USDJPY discussion, it is difficult for me to assign them blame for everything else.  I have seen numerous commentators explaining that the Japanese have been selling Treasuries because they don’t trust the US, and this has been ongoing for years.  I have also seen commentators explain that because Japanese surpluses had been invested internationally for years and funding so much of the world’s activity, now that they can invest at home, liquidity everywhere will dry up, and asset prices will fall.  

Responding to the first issue, especially with new PM Sanae Takaichi, I do not believe that is a concern at all.  If anything, I expect that the relationship between the US and Japan will deepen.  As to the second issue, that may have more import but the one thing of which we can be sure is that central banks around the world will not allow liquidity to dry up in any meaningful fashion.  Remember, the Fed ended QT yesterday and it won’t be long before the balance sheet starts to grow again, adding liquidity to the system.  One thing I have learned in my many years observing and trading in markets is, there doesn’t need to be a catalyst for markets to move in an unexpected direction.  Certainly not a big picture catalyst.

And with that, let’s look at how markets responded overnight to yesterday’s risk-off session in the US.  Looking at the bond market first, yesterday’s rise in yields was nearly universal with European sovereigns all following the Treasury market’s lead.  And this morning, across the board sovereigns are higher by 1bp, the same as Treasury yields.  While JGB yields didn’t budge overnight, we did see Australia and other regional yields catch up to yesterday’s rise.  I fear bond investors are stuck as they see the potential for inflation, but they also see weakening economic activity as a moderator there.  As an example, the OECD just reduced its US GDP forecast for 2026 to 2.9% this morning, from 3.2%.  Personally, I don’t think anything has changed the run it hot scenario.

In the equity markets, Asian bourses were mixed with Korea (+1.9%) and Taiwan (+0.8%) the notable gainers while elsewhere movement was much less substantial (Japan 0.0%, HK +0.2%, China -0.4%).  There was no single story driving things there.  As to Europe, things are brighter this morning led by Spain (+1.0%) and Italy (+0.5%) although there is no single driving issue here either.  US futures are edging higher at this hour as well, +0.2%, so perhaps yesterday was more like a little profit taking after last week’s strong rally, than anything else.

In the commodity sector, oil (-0.3%) is slipping after yesterday’s rally.  I suppose the potential peace in Ukraine is bearish, but that story has been dragging on for a while so I’m not sure when it will come to fruition.  In the metals markets, after a gangbusters rally yesterday, with silver trading to $59/oz, we are seeing a modest retracement this morning across the board (Au -0.6%, Ag -1.2%, Pt -2.0%) although copper (+0.4%) is holding its gains.  Nothing indicates that these metals have topped.

Finally, the dollar is little changed as I write, giving back some early modest strength.  JPY (-0.3%) continues to be amongst the worst performers, and although it has bounced from its recent lows, remains within a few percent of those levels.  My take here is we will need to see both a more aggressive Fed and a more aggressive BOJ to get USDJPY back to 150 even, let alone further than that.  If we look at the DXY, it is sitting at 99.45, and still well within its trading range for the past 6+ months as per the below.  For now, the dollar remains a secondary story.

Source: tradingeconomics.com

On the data front, here’s what comes the rest of this week:

WednesdayADP Employment 10K
 IP0.1%
 Capacity Utilization77.3%
 ISM Services52.1
ThursdayInitial Claims220K
 Continuing Claims1960K
 Trade Balance -$65.5B
FridayPersonal Income (Sep)0.4%
 Personal Spending (Sep)0.4%
 PCE (Sep)0.3% (2.8% Y/Y)
 -ex food & energy0.2% (2.9% Y/Y)
 Michigan Expectations51.2
 Consumer Credit$10.5B

Source: tradingeconomics.com

As the Fed is in its quiet period, there are no Fed speakers until Powell at the presser next week.  Given the age of the PCE data, I don’t see it having much impact.  Rather, ADP and ISM are likely the things that matter most for now.

Ultimately, I believe more liquidity is going to come to the market via central banks around the world, and that will support risk assets, as well as prices for the things we buy.  Nothing has changed in my view of the dollar either.

Good luck

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A Latent Grim Reaper

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The zeitgeist, of late, has been leaning
Toward welcoming gov intervening
Because costs have soared
So, folks once abhorred
Like Socialists, seem more well-meaning
 
Perhaps, though, the story’s much deeper
And points to a latent grim reaper
Elites on one side
Claim Trump’s only lied
While Populists serve as gatekeeper

 

Quite frankly, I feel like markets have become very secondary to an understanding of what is happening in the economy, and while there is intrigue over who may be the next Fed Chair, and correspondingly, if Mr Powell will resign from the FOMC when his chairmanship is up, I believe that pales in comparison to much larger macroeconomic issues with which we all have to deal on a daily basis.  Once again, my weekend reading has highlighted two key pieces that I believe do an excellent job of explaining much of what is going on, not just in the economy, but in the streets.

Last week, I highlighted Michael Green’s piece regarding a new estimate of what the poverty line looks like, putting paid to the idea that the official government level of $31,500 is appropriate, and that in suburban NJ (Caldwell to be exact) it is more like $140K.  Now, you will not be surprised that his piece garnered a great deal of attention given its premise, but I will not go into that.  However, he did write a follow-up piece which is worth reading and where he discusses the reaction.  In brief, whatever number is correct, it is clear that $31.5K is laughably low.   Ultimately, I believe this work has quantified the concept of the “vibecession” which has been making the rounds for a while.  People are allegedly making a decent living and yet are living paycheck to paycheck because the cost of living (not inflation) has risen so remarkably over time and priced many folks out of previously ordinary levels of attainment.

Which brings me to the second key piece I read this weekend, this from Dr Pippa Malmgren, which does a remarkable job explaining how the nation (and not just in the US, but we are more familiar here) has (d)evolved into two groups; Elites and Populists.  The former are the old guard politicians (both Democrats and Republicans), the global organizations like the World Bank, IMF, UN and WEF, and more perniciously in my mind, the so-called deep state.  The latter are personified by President Trump, but include NYC Mayor-elect Mamdani, AfD in Germany, Marine LePen in France and Victor Orban in Hungary, and their followers, to name a few.

The frightening conclusion Dr Malmgren drew was that there is no ability for a nation to continue to operate successfully if the population is split in this manner, and that eventually, one side is going to wind up victorious.  I would say this is the very definition of the 4th Turning and we are living through it.

So, we must ask, what are the potential ramifications from a financial markets perspective with this backdrop?  I have repeatedly highlighted that the Trump administration is going to “run it hot” going forward, meaning the goal will be to increase nominal GDP fast enough to outweigh the inevitable rise in prices.  The idea is if incomes rise quickly enough, people will be able to tolerate rising prices more easily.  

But the one thing of which I am increasingly confident is that prices and their rate of change are going to rise under this scenario.  As central banks leave policy easy, or ease further in an effort to support their respective economies, that is going to be the outcome.  A look at the chart below from the FRED data base of the St Louis Fed shows there is a very strong relationship between CPI and nominal GDP.  In fact, I ran the numbers and the correlation for the past 75 years has been 0.975!  Prices are going to rise friends, alongside M2.

What does this mean?  It means that the debasement of fiat currency is going to continue apace and so commodities, notably precious metals, but also base metals and property are going to be recognized as better stores of wealth.  If you wonder why gold (+0.9%) and silver (+2.2%) are continuing to rocket higher, look no further than this.  What about equities?  For now, I expect they will continue to perform well as all that liquidity will be looking for a home although this morning, not so much as US futures are lower by -0.5% across the board.  Bonds?  This is a tougher call, and I suspect that the yield curve will steepen further as central banks press short rates lower, but inflation undermines long duration fixed income assets.  Finally, the dollar remains, in my view, one of the best of the fiat currencies, but like all of them, will continue to degrade vs. gold and hard assets.

Keeping that in mind, there are two other stories of note this morning, only one of which is impacting markets.  The non-impactful one is that apparently President Trump has selected Kevin Hassett, currently the White House Economic Council Director, as the man to succeed Jay Powell in the chair.  He is a long-time political operative with deep ties in Washington and I presume will get through the vetting and be confirmed on a timely basis.  As I wrote above, it is not clear to me the Fed matters as much as other things in the current environment, although we will continue to hear about it.  In this light, the Fed funds futures market is currently pricing an 87.5% probability of a 25bp cut next week and is back to a 58% probability of a total of 100bps of cuts by the end of 2026 as per the below from the CME.

The other story of note, this one definitely impacting markets, is the news that Ueda-san hinted more definitively at a Japanese rate hike later this month, with Japanese swaps market raising the probability of that hike to 80% from about 60% last week.  The knock-on effects were that 10-year JGB yields jumped 7bps, to 1.86%, their highest level since 2008 and as you can see from the chart below, continue to trend strongly higher.  Of course, given that inflation in Japan remains well above target, it is not that surprising that yields are climbing.  

Too, the other outcome here has been the yen (+0.7%) gaining a little ground, as per the below chart from tradingeconomics.com, and perhaps we have seen a short-term low in the currency.  Certainly, the increasing probability of US rate cuts is weighing on the dollar overall, so that is part of the story, but it remains to be seen if there are going to be wholesale changes in investment allocations that would be necessary to completely reverse the yen’s remarkable weakness over the past nearly four years.

The move in JGB yields has been blamed for the rise in yields around the world with Treasury and European Sovereign yields uniformly higher by 3bps this morning while some other regional Asian yields climbed between 4bps and 6bps.  In the end, inflation remains a problem almost everywhere in the world and I think that is what we are witnessing here.

As well, the JGB move was seen as the cause for Japanese equities’ (-1.9%) very weak performance which also dragged down some other regional markets (Taiwan, Australia, Philippines) but was not enough to undermine the rest of the region.  The flip side of that weakness was China (+1.1%) and HK (+0.7%) where it appears that hopes for a Fed rate cut more than offset weaker than forecast PMI data from China.  Another interesting story from the mainland was that the monthly Housing price data that was compiled by two key private companies was squashed by the Chinese government after China Vanke, one of the largest Chinese property companies, explained they would be late on an interest rate payment.  One can only imagine what that data looked like!

Meanwhile, in Europe, red is the color led by Germany’s DAX (-1.5%) although with weakness across the board (CAC -0.8%, IBEX -0.6%, FTSE MIB -0.9%).  Apparently, the story that progress has been made regarding peace talks in Ukraine is not seen as a positive there.  After all, if there is peace, will European governments still be so keen to build out their military, spending billions of euros at local defense and manufacturing firms?  It seems after a very strong close to the month in November, there is a bit of profit taking underway this morning.

In the commodity space, oil (+1.3%) is bouncing back to its trend line after OPEC confirmed it will not be increasing production in Q1 next year at a meeting yesterday.  I would expect that a real peace deal would be negative for this market as some part of that would be the relaxation of sanctions, I would assume.  But maybe I’m wrong there.  However, I continue to believe the trend is modestly lower going forward as there is far more supply available.  As to the other metals, both copper (+0.6%) and platinum (+1.5%) are continuing their runs higher with no end currently in sight.

Finally, the dollar is softer overall this morning, and while the yen (+0.7%) is the leader, the euro (+0.3%), SEK (+0.3%) and CHF (+0.25%) are also nicely up on the day with the rest of the G10 little changed.  The real movement, though, has been in the EMG bloc with CZK (+0.75%), HUF (+0.5%), PLN (+0.5%), and CLP (+0.4%) all benefitting from the Fed rate cut story as well as Chile’s benefits from copper’s rally.  While a cut seems highly likely, I suspect the real dollar story will be about the dot plot and SEP as well as Powell’s presser next week.

I’ve already run too long so will just mention that ISM Manufacturing (exp 48.9) is due this morning and I will review the week’s data expectations tomorrow.  

The world is changing and I expect that we will continue to see volatility across markets as investors come to grips with those changes, whether simple central bank rate decisions or more complex social movements and electoral outcomes that lead to major policy changes.  Be careful out there.

Good luck

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The Narrative’s Turned

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Last Friday it certainly seemed
The bears had achieved what they’d dreamed
Most bulls were in hell
As stock markets fell
While bears felt that they’d been redeemed
 
But since then, the narrative’s turned
And short-sellers all have been burned
In fact, round our sphere
Investors all cheer
For Jay to cut rates, Fed hawks spurned

 

The holiday spirit is alive and well this morning, and in truth has been all week.  And not just in the US, but around the world.  Literally, I am hard-pressed to find a stock market that has declined in the past twenty-four hours, with most on multi-day rallies.  And so, I must wonder, has everything really gotten that much better in the world?

A quick tour around the world of problems extant includes:

  • Russia/Ukraine war
  • Chinese property deflation
  • Net zero insanity
  • TDS
  • K-shaped economies
  • Rise of Socialism
  • Excessive global debt/leverage
  • Cost of living

I’m sure there are others, but I just wanted to touch on a few and try to figure out why investors have turned so positive.  After all, a look at the S&P 500 chart below shows that we are less than 2% from the historic highs set back on October 29th.

Source: tradingeconomics.com

So, let’s run through the list.

  • The war in Ukraine continues apace, although we cannot ignore the uptick in ostensible peace talks that have been occurring in the past week.  I’m game to accept those talks as a positive.
  • The Chinese economy continues to overproduce amid weakening domestic demand as property prices show no signs of bottoming.  This is one of the major reasons for the massive global imbalances we have experienced over the past two decades and President Xi has basically proven that they only model he understands is mercantilism.  With President Trump addressing that directly, this will continue to generate uncertainty and volatility, so there will be up days, but also plenty of down ones.
  • The ongoing waste of resources in this Quixotic effort, especially by the Europeans will serve only to further depress their economies while adding debt to pay for their ill-advised policies.  As long as this continues, Europe will be poorer in the future and that doesn’t bode well for their equity markets.
  • Nothing will change TDS but its bifurcation of the population, and not just the US but globally, is likely to be a net negative for everything.
  • The K-shaped economy is a major problem, and not one restricted to the US.  As long as this remains the case, it will breed social unrest, as we continue to see, and have encouraged policies that have proven time and again to be disastrous, but sound good to those in the bottom leg of the K, i.e. Socialism.  I assure you, Socialism will not enhance market capitalization.
  • See above
  • The global debt problem continues to hang over the global economy like the Sword of Damocles, ready to decimate economies with just the right (wrong?) catalyst.  Of course, this is why rate cuts are so favored, and QE more so, but while those may be solutions for government accounts, they will simply exacerbate the last on this list
  • I specifically point to the cost of living since the economists’ concept of inflation, the rate of change of prices, is irrelevant to most people.  The price level is the key, and there is no world where the price level will decline absent a major depression, which is why run it hot is the favored plan.  If growth can be raised sufficiently so that people believe life is affordable again, it will alleviate the K-shaped problem as well as the socialism problem.  But that is a big IF.

And yet, as you can see from this screenshot from Bloomberg.com, as I type, every market is in the green.

My conclusion is that either investors have grown to believe that the key short-term problems, like Russia/Ukraine will be effectively addressed, or under the guise of YOLO, they are all in on AI and the stock market and see it as the only way forward.  I wish I could be so sanguine, but then I am just an old misanthrope.  I hope they are right!

Ok, well, absent any real new news, and leading up to the Thanksgiving holiday here in the US, market signals are telling me everything is right with the world.  You see the equity markets above, and US futures are higher as well at this hour (7:30), albeit only about 0.2%.  

In the meantime, with risk in such demand, it is no surprise that bond yields are edging higher with Treasuries +2bps, after trading below 4.0% during yesterday’s session on a weak ADP weekly employment report (-13.5K) as well as PPI data that seemed less concerning.  European sovereign yields have all edged higher by 1bp this morning, again synchronous with risk on, and JGB yields also edged higher by 1bp after the government there explained they would be borrowing ¥11.5 trillion (~$73.5 billion) in extra debt to fund Takaichi-san’s supplementary budget.  The big outlier is Australia, where AGBs rose 10bps after CPI rose a hotter than expected 3.8% in October, not only putting paid any thoughts of a further rate cut but bringing rate hikes back into view.

In the commodity markets, oil (-0.2%) continues to slide lower, now below $58/bbl, and following its recent trend as per the below tradingeconomics.com chart.

Javier Blas, the widely respected Bloomberg oil analyst, put out an op-ed this morning explaining that he saw higher oil prices in the future.  That is at odds with my view, but I have linked it here so you can help determine if his reasons make sense.  I believe he underestimates both the impact of technology making it ever cheaper to get oil, and the political incentives to drill for more of the stuff by those nations that have it.  Net zero will not survive much longer in my view.

In the metals markets, prospects for lower interest rates have helped encourage further buying and this morning we see the entire complex higher (Au +0.7%, Ag +1.5%, Cu +1.3%, Pt +1.0%).  To the extent that the leverage story remains, and governments are going to continue to print money to pay their debts, metals prices across both precious and base, should continue to appreciate in price.

Finally, the dollar, which slipped a bit yesterday, is mixed this morning.  the yen (-0.3%) is sliding along with KRW (-0.6%), but really, there seem to be more gainers than that.  The biggest mover was NZD (+0.8%) after the RBNZ cut its base rate, as expected, but indicated the cutting cycle is over.  AUD (+0.3%) has also rallied on that inflation report.  I haven’t focused much on the renminbi (+0.1%) lately, largely because the daily movement is typically small, but if you look at the chart below, you can see that the trend has been steady all year, with CNY appreciating nearly 4% since the beginning of the year.  There are many analyses that indicate the renminbi is massively undervalued, so perhaps this is part of the trade deal with the US.  But it will be difficult for Xi to countenance too much strength as it will negatively impact his mercantilist policies.

Source: tradingeconomics.com

Lastly, the pound is gyrating this morning as Chancellor Rachel Reeves offers her budget.  The highlights are a larger than expected fiscal buffer of £22 billion achieved by raising taxes by more than £29.8 billion on gambling and real estate.  However, the recent history of tax hikes in the UK, as they try to tax the wealthy, is that the wealthy simply leave and the result is tax deficits.  Maybe it really is different this time!

And that’s what we have going into the weekend.  Data today brings September Durable Goods (exp 0.3%, 0.2% ex transport), Initial Claims (225K), Continuing Claims (1975K) and Chicago PMI (44.3).  I see no reason for this recent rebound to end as clearly everybody is feeling good into the holiday.  As I highlighted above, there remain myriad problems around, none of which will be solved soon, but apparently, that doesn’t matter.  So go with it!

There will be no poetry tomorrow or Friday so Monday, we will see how things have evolved.

Good luck and have a great holiday weekend

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The Whisperer’s Roar

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Most focus is still on the Fed
And what every Fed speaker said
But do not ignore
The Whisperer’s roar
That Jay’s got the votes, rates to shred
 
And this is why markets are soaring
While bond vigilantes are snoring
But, too, it’s why gold
Is bought and not sold
The question is, whose ox Jay’s goring?

 

One thing that is very clear right now, the demand for lower interest rates is extremely widespread, regardless of one’s political persuasion.  People may despise everything that President Trump has done or claims he will do, but those same folks are desperate for him to be able to force the Fed to cut rates further.  At least that’s my observation.  

But putting that aside, the narrative around next month’s FOMC meeting seems to be coming to a clearer point; a cut is in the cards, but a potentially long delay in the next move will follow.  While there were no Fed speakers on the calendar, at least the calendar I use, yesterday, we did hear from two more, the presidents of San Francisco and Boston, and though the former, renowned dove Mary Daly, was far more forthright in her views a cut was appropriate, the latter, centrist Susan Collins, clearly was amenable to the idea, though not forcefully so.  But we know that Chair Powell cares since the Fed Whisperer, Nick Timiraos, got top billing in this morning’s WSJ with the following article, “Fed Chair Powell’s Allies Provide Opening for December Rate Cut.”  

As this story was coming into view yesterday, we saw equity markets rise sharply in the US, or at least the tech portion (the DJIA managed only a 0.4% gain compared to the NASDAQ’s 2.7% jump).  We also have seen the Fed funds futures market up the pricing of a rate cut to 81% as of this morning, with the concerns last week about Powell’s hawkishness quickly forgotten.  One other thing of note was the strong rally in precious metals, with gold (0.0% this morning, +1.8% yesterday) and silver (-0.3% this morning, +2.6% yesterday) responding to the imminent further debasement of the dollar.  While both remain somewhat below their October highs, nothing indicates that their trends higher have ended.

Source: tradingeconomics.com

There continues to be a lot of discussion on two fronts, the state of the economy and the rationale for further equity market gains, and interestingly, they are completely independent discussions.  For the former, the dribs and drabs of data that have been released since the end of the government shutdown have been inconclusive as to what is going on, at least officially.  Yesterday brought nothing new, although this morning we are due to see September data on Retail Sales (exp 0.3%, 0.3% ex autos), PPI (2.7% for both headline and core) and House Prices (+1.4% Case Shiller) along with November Consumer Confidence (93.5, down slightly from last month).  It hardly seems this will change any views

But the market conversation is completely different.  Between talk of a Santa rally, the popping of the AI bubble (assuming there is such a thing) and growing certainty that a Fed cut will help goose the stock market, that economic uncertainty means nothing.  There remains a large swath of investors who are certain the Fed will not allow equity markets to fall in any meaningful fashion and who are prepared to continue to buy the dip.  

Interestingly, the place where these two issues meet, earnings forecasts, shows that while fixed income investors may feel uncertain about the economy’s future, 2026 earnings estimates of 14% growth have equity investors in a very different place.  While I don’t know which side is correct, I suspect that the ‘run it hot’ philosophy which has been driving everything this administration does will favor equities over bonds.  While a correction is still likely in my mind, there is still nothing to stop this train!  

Ok, let’s turn to market performance overnight.  Japan (+0.1%) didn’t love the US tech story, which is somewhat surprising, although that may be because there continues to be growing concern regarding the JGB market and the spat with China.  China (+1.0%) and HK (+0.7%) however, both rallied on the US rate cut plus tech rally story.  Taiwan (+1.5%) and Thailand (+1.3%) also liked that story, but the rest of Asia was nonplussed, and more exchanges saw weakness than strength.  As to Europe, nobody there has a strong view this morning with every major bourse +/- 0.15% or less.  The only data was German GDP, which rose to…0.0% for Q3 and clocked in at +0.3% Y/Y! Look at the history of German economic activity over the past 3 years below and ask yourself if this is the powerhouse of Europe, why would anyone want to own any European assets?

Source: tradingeconomics.com

As well, the increased focus on a potential peace in Ukraine may be a negative for the continent.  While it has the potential to help them on the energy side, much of the rally seen across these nations was predicated on the military buildup that was coming.  However, if there is peace, I sense it will be difficult for a group of nations that are massively in debt to convince their populations to borrow more to defend themselves since the threat has abated.  After all, I’m willing to wager there isn’t a single person in the EU who if given the choice between defense spending for a potential future threat or an increased pension will opt for the former.  As to US futures, at this hour (7:25) they are unchanged.

In the bond market, Treasury yields are unchanged this morning after slipping another few basis points yesterday and are sitting at 4.03%.  Either the market is sanguine about the ongoing federal deficit spending or…everybody assumes the Fed is going to restart QE in some form or another if things start to deteriorate.  European sovereign yields are slipping this morning, down between -1bp and -3bps, with the UK on the larger end despite (because of?) tomorrow’s Budget announcement.  

While you may think the US has a fiscal problem, and it does, at least it has the global reserve currency and with it, the ability to live beyond its means for a long time.  The UK, however, simply has the first part, a fiscal problem, which they have exacerbated by adopting the most idiotic energy policies in the world (who would ever have thought that solar power made sense in the UK given the fact it rains, on average, 50% of the days in the year.)  It is unclear to me what the UK can do to right the ship with the current government and its stated priorities.  I suppose that we will see new regulations requiring UK financial institutions to hold more Gilts as otherwise nobody will buy them.  Before I leave this asset class, I cannot ignore the JGB market where back-end yields continue to climb.  As you can see from the below chart, the 10-, 30-, and 40-year yields are all at record highs and show no signs of stopping their multi-year rise.

Source: tradingeconomics.com

I had a long conversation with Charlie Garcia on Substack, someone you should all follow as he has very sharp ideas, on the causes, ramifications and potential outcomes of this unprecedented rise in yields there.  Needless to say, the end game will not be very good for anyone, but the timing remains in question.  As Keynes warned us all, markets can remain wrong longer than you can remain solvent.  But Japan has its own, unique fiscal problems along with every other nation in the world.

Turning to commodities, oil (-0.3%) continues to be the least interesting thing around, drifting slowly lower, but at an increasingly leisurely pace.  The glut narrative has calmed down, but I think there is more concern over the weakening economic story.  Hard for me to say from the outside, but lower is the direction of travel here.  The opposite is true for NatGas (-3.3%) which despite today’s decline is up 55% since October 16th!

Finally, the dollar is under modest pressure today with both the euro and pound stronger by 0.2%, a move that describes almost the entire G10.  One outlier here is NOK (-0.2%) which is clearly suffering on oil’s ongoing weakness.  In the EMG bloc, though, there has been more substantial movement with KRW (+0.7%) rising as traders position for the BOK to remain on hold while the Fed gets ready to cut, thus reversing some of the recent 7% decline in the won over the past quarter.  The CE3 have also rallied nicely, on the order of 0.5%, as they continue to demonstrate their excessive beta with the euro and even CNY (+0.3%) is moving this morning on the back of a potential thaw in relations between the US and China after Presidents Xi and Trump spoke by phone yesterday.  While my long-term perspective on the dollar remains positive, if the Fed does get aggressive, the greenback can certainly come under short-term pressure.

And that’s really all there is today.  With Thanksgiving coming, I expect that volumes will begin to decline so keep that in mind when trying to execute any trades.

Good luck

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Circumspect

Posted on by

Said Williams, I really don’t think
Inflation will get us to blink
The jobs situation
Has led the narration
That growth has now started to shrink
 
But is that assumption correct?
In truth, it’s quite hard to detect
Atlanta’s Fed states
The ‘conomy’s great
And so, rate cuts are circumspect

 

Friday, John Williams was the latest FOMC member to regale us with his views and left us with the following:

“I view monetary policy as being modestly restrictive, although somewhat less so than before our recent actions. Therefore, I still see room for a further adjustment in the near term to the target range for the federal funds rate to move the stance of policy closer to the range of neutral, thereby maintaining the balance between the achievement of our two goals…

“My assessment is that the downside risks to employment have increased as the labor market has cooled, while the upside risks to inflation have lessened somewhat. Underlying inflation continues to trend downward, absent any evidence of second round effects emanating from tariffs.”

The reason his comments are important is because, not only is he a permanent voting member as NY Fed president, but he is also deemed quite close to Chairman Powell, and the belief is Powell okayed the text, implying Powell is still leaning toward a cut.  The Fed funds futures market certainly thinks so as the probability of a cut jumped from 32% on Thursday to 75% this morning.  In fact, that seemed to be the driver of the rebound in equity markets on Friday as futures market started their all-day rally right as he spoke at 7:30 in the morning.

Source: tradingeconomics.com

As to the Atlanta Fed’s GDPNow forecast, it ticked higher on Friday and is now sitting at 4.2% for Q3, certainly not synchronous with a major employment crisis.

This week, we will start to get much more information from the BLS and BEA although there is still a huge hole in that output, notably CPI, PCE and GDP.  It will likely take several more months before the rhythm of data gets back to the pre-shutdown cadence and more importantly, it offers the same level of completeness that existed back then.  I guess the FOMC will have to earn their keep for a while longer.

But Williams triggered a solid risk-on session with equities rallying and Treasury yields slipping, while the dollar held tight.  However, I want to touch on one more thing before looking at markets, where the overnight session was rather bland, and that is in reference to a Substack article by Michael Green I read over the weekend that offered a more quantitative approach toward understanding why despite what appears to be solid economic activity, so many people are so unhappy, unhappy enough to believe Socialism is a better choice for the nation going forward. 

The essence of the article, which is very well worth reading as he does all the math to prove his points, is that the delineation of poverty in the US (and I suspect in many Western nations) is laughably low.  For instance, the current poverty line is $31,200, which we all know is far below livable, while the current family median wage in the US is ~$80,000.  Seemingly, most folks should have no problems.  But Green does the calculations to show that if a family of 4 earns less than ~$140,000, they are going to struggle, even if they live in a lower cost area, not NYC where you probably need $350,000 to live.  Between health care, childcare, housing and food, etc., less than that $140k means you are not only living paycheck to paycheck but falling behind as well.

Read the article, linked above, and afterward, you can get a better appreciation for how Zohran Mamdani was elected Mayor of New York City, promising all sorts of free stuff, even though he has approximately zero chance of delivering any of it.

At any rate, that is background for the week ahead.  In Asia, Japan was closed for Workers Day, but Takaichi-san continues to make news regarding her hawkish stance on China.  Meanwhile, bourses in the region had a mixes session with some nice gainers (HK +2.0%, Australia +1.3%, Indonesia +1.85%) although the bulk of the rest of the region saw relatively little overall movement, +/-0.2% or so.  I guess they didn’t understand the benefits of the Fed potentially cutting rates. 🙃

Meanwhile, in Europe, things are far less interesting with a mix of gainers (Spain +0.5%, Germany +0.3%) and laggards (France -0.3%, Italy -1.1%) and the only notable news released being the German Ifo Expectations which slipped although remain solidly within its recent range.  Turning to US futures, at this hour (7:00), they are pointing higher by 0.5%.

In the bond market, Treasury yields continue to slide, down -2bps this morning and now back at 4.05%.  Clearly, the change in sentiment regarding the Fed rate cuts is dragging this yield lower for now.  In Europe, sovereign yields are little changed, overall, with some showing a -1bp decline and others completely lifeless.  Of course, JGB yields are unchanged given the Tokyo holiday.

In the commodity space, oil (-0.25%) continues to drift lower and the trend remains very much in that direction as can be seen in the chart below.  There was a very interesting article by Doomberg on Substack this week, reviewing their call that the idea of peak cheap oil is a myth, and there is a virtually unlimited supply of hydrocarbons available with only the politics preventing more production. (For instance, consider the UK essentially shutting down their North Sea oil production despite being in the midst of a self-inflicted energy crisis with the highest electricity prices in the world.  That’s not geology, that’s politics.)  But geology shows there is plenty to go around and growing supply will continue to pressure prices lower.

Source: tradingeconomics.com

Meanwhile, the metals markets are fairly quiet this morning with gold (+0.25%) and silver (+0.1%) showing far less movement than we have seen of late.  The one thing to note is that while both these metals are well off their highs from last month, they both seem to have found a comfortable resting place for now, and nothing about the global macroeconomic situation leads me to believe that the direction is lower from here.

Finally, the dollar is a touch softer this morning with the euro (+0.25%) the largest gainer in the G10 although JPY (-0.3%) remains under pressure overall.  However, in the EMG bloc, INR (+0.5%) and the CE3 (HUF +0.4%, CZK +0.4%. PLN +0.5%) are all firmer with many other currencies in this bloc creeping higher by 0.2% or so.  Interestingly, the DXY has barely slipped and remains above 100 for now.

This week, we are going to see a lot of the delayed September data come out, so like the NFP report from last week, which was old news, the question is, will we learn anything?  But here is a listing to keep in mind:

TuesdaySep Retail Sales0.4%
 -ex autos0.4%
 Sep PPI0.3% (2.7% Y/Y)
 -ex food & energy0.3% (2.7% Y/Y)
 Case Shiller Home Prices1.4%
 Consumer Confidence93.5
WednesdaySep Durable Goods0.2%
 -ex Transport0.2%
 Initial Claims227K
 Chicago PMI43.8
 Fed’s Beige Book 

Source: tradingeconomics.com

Obviously, Thursday is the Thanksgiving holiday and Friday there is nothing slated to be released.  Housing Data, Personal Income and Spending and PCE data are all still up in the air as to when, and what exactly, will be released.  The good news is it appears the entire FOMC is taking the week off as no Fed speakers are currently on the calendar.

If I recap what we know, the market remains beholden to the idea that the economy needs a Fed rate cut and was encouraged by Williams’ comments Friday.  However, questions about AI accounting methods are being raised and there is a growing split between those looking for an equity correction and those who think the near-future is going to be all roses.  From this poet’s perspective, nothing has changed my view that the Fed wants to cut rates, they just need cover to do so, and some softer data will give that cover.  But I also look around the world and find almost every other nation is in a worse situation than the US from a macroeconomic perspective, and it is that issue that informs my view that the dollar remains the best of a bad lot.  So, while fiat currencies will remain under pressure vs. commodities, I’d rather hold dollars than yen, euros, pesos or pretty much anything else.

Good luck

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Markets Ain’t Fair

Posted on by

The pundits, when looking ahead
All fear that their theses are dead
‘Cause bitcoin’s imploding
And that is corroding
The views they have tried to embed
 
The thing is, it’s simply not clear
What caused this excessive new fear
But those with gray hair
Know markets ain’t fair
And force us to all persevere

 

It all came undone yesterday around 10:45 in the morning for no obvious reason.  There was no data released then to drive trader reaction nor any commentary of note.  In fact, most of the punditry was still reveling in the higher Nvidia earnings and planning which Birkin bag they were going to buy for their girlfriends wives.  But as you can see from the NASDAQ chart below, in the ensuing two hours, the index fell by 4% and then slipped another 1% or so from there into the close, the level that is still trading at 6:30 this morning

Source: tradingeconomics.com

As a member in good standing of the gray hair club, I have seen this movie before, and I have always admired the following image as a perfect example of the way things work in markets.  

And arguably, this is all you need to know about how things work.  Sure, there are times when a specific data release or Fed comment is a very clear driver of market activity, but I would contend that is the exception rather than the rule.  The day following Black Monday in 1987, the WSJ asked noted Wall Street managers what caused the huge decline.  Former Bear Stearns Chairman, Ace Greenberg said it best when he replied, “markets move, next question.”  And that is the reality.  While I believe that macroeconomics offers important information for long-term investing theses, on any given day, anything can happen.  Yesterday is a perfect example of that reality.

But let us consider what we know about the overall financial situation.  The Damoclesian Sword hanging over everything is excessive leverage across the board.  I have often discussed the idea that global debt is more than 3X global GDP, a clear an indication that there will be repayment problems going forward.  And something that seems to have been driving recent equity market gains has been an increase in margin buying of stocks and leverage in general.  After all, the fact that there are ETFs that offer 3X leverage on a particular stock or strategy is remarkable.  But a look at the broad levels of leverage, as shown by the increase in margin debt in the chart below from Wolfstreet.com (a very worthwhile follow for free) tells me, at least, that when things turn, there is going to be an awful lot of selling that has nothing to do with value and everything to do with getting cash for margin calls.

It is this process that drives down the good with the bad and as you can see in the chart, happens regularly.  I’m not saying that we are looking at a major reversal ahead, but as I wrote earlier this week, a correction seems long overdue.  Perhaps yesterday was the first step.

One last thing.  I mentioned Bitcoin at the top and I think it is worthwhile to look at the chart there to get a sense of just how speculative assets behave when times are tough.  Since its peak on October 6th, 46 days ago, it has declined ~45% as of this morning.  That, my friends, is a serious price adjustment!

Source: tradingeconomics.com

Ok, let’s see how other markets are behaving in the wake of this, as well as the recent news.  Remember, yesterday we saw a slew of old US data on employment, but it is all we have, so probably has more importance than it deserves.  After all, it is pre-shutdown and things have clearly changed since then.

Starting in Asia, it wasn’t pretty with the three main markets (Nikkei, Hang Seng, CSI 300) all declining by -2.40%.  Korea (-3.8%) and Taiwan (-3.6%) fared even worse but the entire region was under pressure.  The narrative that is forming as an explanation is that there is trouble in tech land, despite the Nvidia earnings, and since Asia is all about tech, you can see why it fell.

Meanwhile, the antithesis of tech, aka Europe, is also lower across the board this morning, albeit not as dramatically.  Spain’s IBEX (-1.3%) is leading the way down but weakness is pervasive; DAX (-0.8%), CAC (-0.4%), FTSE 100 (-0.4%), as all these nations also released their Flash PMI data which came in generally softer across the board.  But there is one other thing weighing on Europe and that is the publication of a 28-point peace plan designed to end the Russia/Ukraine war.  The plan comes from the US and essentially ignored Europe’s views as it is patently clear they are not interested in peace.  In fact, it appears peace will be quite the negative for Europe as it will undermine their rearmament drive and likely force governments there to focus on domestic issues, something which, to date, they have proven singularly incompetent to address.  In fact, if the war really ends, I suspect there are going to be several governments to fall in Europe with ensuing uncertainty in their economies and markets.  As to the US futures markets, at this hour (7:30) they are basically unchanged to leaning slightly higher.  Perhaps the worst is past.

In the bond market, yields are lower across the board led by Treasuries (-4bps) while European sovereign yields have slipped -2bps to -3bps.  Certainly, the European data does not scream inflationary growth, but I have a feeling this is more about tracking Treasuries than anything else.  I say that because JGB yields also fell -4bps despite the passage of an even larger supplementary budget than expected, ¥21.7 trillion, which is still going to be paid for with more borrowing.  That is hardly the news to get investors to buy JGBs and I suspect yields will climb higher again going forward.  I think it is worth looking at the trend in US vs. Japanese 10-year yields to get a fuller picture of just how different things are in the two nations.  Of course, there is one thing that is similar, inflation continues to remain above their respective 2.0% targets and is showing no signs of returning anytime soon.

Source: tradingeconomics.com

You will not be surprised to know that commodity prices remain extremely volatile.  Oil (-1.0%) had a bad day yesterday and is continuing lower this morning although as you can see from the chart below, it is off its worst levels of the session.  But the one thing that remains true despite the volatility is the trend remains lower.

Source: tradingeconomics.com

Metals markets also suffered yesterday and are under pressure this morning with gold (-0.4%) and silver (-2.5%) sliding.  One thing to remember is that when margin calls come, traders/investors sell what they can, not what they want, and given the liquidity that remains in both gold and silver, they tend to get sold to cover margin calls.  Too, today is the weekly option expiry in the SLV ETF and as my friend JJ (writes at Market Vibes) regularly explains, there is a huge amount of silver activity driven by the maturing positions.

Finally, the dollar continues to remain solidly bid, although is merely consolidating recent gains as it trades just above the key 100 level in the DXY.  Two things of note today are JPY (+0.5%) which responded to comments from not only the FInMin, but also Ueda-san explaining that a weak yen is driving inflation higher and might need to be addressed.  Step 4 of the dance toward intervention?  As to the rest of the G10, movement has been minimal.  But in the EMG bloc, INR (-1.1%) fell to record lows (dollar highs) after the RBI stepped away from its market support.  It sure seems like it is going to break through 90 soon and I imagine 100 is viable.  As well, ZAR (-0.7%) is suffering on the weaker metals prices, along with CLP (-0.5%) while BRL (-0.5%) slipped as talk of a more dovish central bank stance started percolating in markets.

Today’s data brings US Flash PMI (exp 52.0 Manufacturing, 54.6 Services) and Michigan Sentiment (50.5).  We hear from five more Fed speakers, with a mix of hawks and doves.  It will be interesting to see how the doves frame yesterday’s better than expected September NFP report as their entire thesis is softening labor growth is going to be the bigger problem than rising prices.

I, for one, am glad the weekend is upon us.  For today, I am at a loss for risk assets.  The case can be made either way and I have no strong insight.  However, the one thing that I continue to believe is the dollar is going to find support.  Remember, when things get really bad (and they haven’t yet) people still run to T-bills to hide, and that requires buying dollars.

Good luck and good weekend

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Divergent Views

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This morning, we all must feel blessed
Nvidia is still the best
Its’s earnings were great
Which opened the gate
For buyers, much more, to invest
 
But contra to that piece of news
The Minutes showed divergent views
On whether to slash
Next month, rates for cash
Or else wait for more weakness clues

 

Whatever your view of AI and the entire discussion, one must be impressed with Nvidia’s performance as a company, and as an equity.  Last night’s earnings release was clearly better than expected as CEO Jensen Huang indicated that revenues for Q1 should grow to ~$65 billion as there is still significant demand for the buildout of data centers.  He also pushed back on the idea that AI was a bubble.  Of course, he would do that given he is at the center of the discussion.  Nonetheless, after modest gains in US equities yesterday, despite much more hawkish than expected FOMC Minutes (discussed below), US futures are rising sharply this morning, with NASDAQ futures currently higher by 1.6% (6:15) and taking all the indices with it.  Life is good!

Which takes us to the FOMC Minutes and our first look at dissention in the Eccles building.  I think the following paragraph, directly from the Minutes [emphasis added], does a good job in describing the wide range of views that currently exist around the table at the Fed, and make no mistake, I am hugely in favor of a wide range of views as I would contend it has been the groupthink in the past that led us to the current, unfavorable situation.

“In considering the outlook for monetary policy, participants expressed a range of views about the degree to which the current stance of monetary policy was restrictive. Some participants assessed that the Committee’s policy stance would be restrictive even after a potential 1/4 percentage point reduction in the policy rate at this meeting. By contrast, some participants pointed to the resilience of economic activity, supportive financial conditions, or estimates of short-term real interest rates as indicating that the stance of monetary policy was not clearly restrictive. In discussing the near-term course of monetary policy, participants expressed strongly differing views about what policy decision would most likely be appropriate at the Committee’s December meeting.”

Below I have copied the dot plot from the September meeting, which contra to most previous versions shows a particularly wide range of views regarding the future level of Fed funds.  I have to wonder, though, after reading the Minutes, if those dots will be stretched even wider apart from top to bottom in the December report.

Of course, our interest is how did the market respond to this release?  Well, it can be no surprise that the Fed funds futures market repriced further and is now showing just a 32% probability for a cut next month and 78% probability of the next cut coming in January.  That said, the market remains convinced that rates must go lower over time, something that does not appear in sync with equity market growth expectations and seems to be completely ignoring the announced inward investment flows to the US from around the world.

Source: cmegroup.com

As to the equity market response, the two vertical lines show the release of the Minutes and then the release of Nvidia earnings.  You can see for yourself which matters more to the market.

Source: tradingeconomics.com

Between the GDPNow data, which continues to show growth remains robust, and more announcements of inward investment on the back of trade deals, with the Saudis ostensibly promising $1 trillion after the recent White House dinner, I will take the over on future economic activity.  Remember, too, the government is actively supporting mining, drilling and manufacturing and all of that is going to feed into economic growth here.  My view is the Fed funds futures market is completely wrong, and we will not see rates back at the 3.0% level anytime in the next few years.  I’m not suggesting we won’t see an equity market correction, just that the end is not nigh.

Each day the yen slides
Intervention creeps closer
Yen traders beware

Turning to the dollar, it continues to strengthen across the board with the DXY trading back above 100 this morning, and now that the Fed seems more hawkish, looking like it may have legs.  But let us focus on the yen, quite beleaguered of late, as it appears to be accelerating its downfall.  Not only is this evident on the chart below, but we also have heard concerns for the third time, as per the following quotes from Minoru Kihara, the chief cabinet secretary:

“The yen is experiencing sudden, one-way movements that are concerning and which require close monitoring.  Excessive fluctuations and disorderly movements in exchange rates must be monitored with vigilance.  We are concerned about the recent one-way and sudden movements in the foreign exchange market. It’s important for exchange rates to remain stable, reflecting fundamentals.”

In the past six months, the yen has fallen >10% vs. the dollar and is lower by nearly 4% in the past month.  At the same time, JGB yields are starting to accelerate higher, trading to yet another 20-year high at 1.82% and the price action there is remarkably similar to that of USDJPY as per the below chart.  The problem for the JGB market is the BOJ already owns more than 50% of the outstanding debt, so buying more doesn’t seem to be a solution, whereas buying JPY in the FX market will have an impact, albeit short-term if they don’t change policies.   

Source: tradingeconomics.com

The upshot of all this is the world is awash in debt, with global debt/GDP exceeding 3x.  The lesson is that not all this debt will be repaid, in fact probably not that much at all.  Be careful as to what you hold.

Ok, let’s briefly tour the markets I have not yet touched.  Tokyo equities (+2.65%) loved the Nvidia earnings as did Korea (+1.9%), Taiwan (+3.2%) and most of Asia although China (-0.5%) and HK (0.0%) didn’t play along last night.  I guess the ongoing restrictions on sales of Nvidia chips to China is still a negative there, as are recurring concerns over the property market as there is talk of yet another attempt to fix things by the government.  Europe, too, is firmer this morning, although clearly not on tech bullishness given the lack of tech on which to be bullish.  But there is talk of a Russia/Ukraine peace deal which may be a benefit.  At any rate, gains are widespread on the order of +0.6% or so across the board.

In the bond market, Treasury yields rose a couple of ticks yesterday and are higher by 1 more basis point this morning, but still at just 4.14%.  The front of the curve rose by more on the back of the Minutes.  European yields are also higher this morning, between 2bps and 3bps with UK gilts the outlier, unchanged on the day, as softer inflation has traders expecting a rate cut at the next BOE meeting on December 18th.

Oil (+1.0%) has rebounded off its recent lows and is trading back at…$60/bbl, the level at which it is clearly most comfortable these days.  Meanwhile, gold (0.0%) gave back yesterday’s overnight rally to close mostly unchanged with the same true across the other metals although this morning silver (-0.7%) is slipping a bit further.

Finally, other currency movements beyond the yen (-0.3% today) are of a similar size across both the G10 and EMG blocs.  Using the DXY as proxy, this is the third test above 100 since August 1st with many analysts are calling for a breakout at last.  

Source: tradingeconomics.com

Perhaps this is true given the word is the Russia/Ukraine peace deal was negotiated entirely between the US and Russia without either Ukraine or Europe involved, demonstrating how insignificant Europe, and by extension the euro, have become.  Just a thought.

On the data front, the big news is the September employment report is going to be released this morning along with some other data:

Nonfarm Payrolls50K
Private Payrolls62K
Manufacturing Payrolls-8K
Unemployment Rate4.3%
Average Hourly Earnings0.3% (3.7% Y/Y)
Average Weekly Hours34.2
Participation Rate62.3%
Philly Fed-3.1
Existing Home Sales4.08M

Source: tradingeconomics.com

On the one hand, the data is stale.  On the other hand, it is all we have, so it will likely have greater importance than it deserves.  I have a hard time looking at the economy and seeing substantial weakness, whether because of corporate earnings, inward investment announcements or the Fed’s growing concern over higher inflation.  All that tells me the dollar is going to be in demand going forward.

Good luck

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