Author Archives: fxpoet

Constitutional Repercussions

Posted on by

This is a story I wrote sometime in 2005 or 2006, i’m not sure exactly, but was inspired by the excitement over Arnold Schwarzenegger’s recent election as California governor. While there is no poetry, I hope you enjoy it. And let’s face it, it could be an awfully good way for the world to move forward!

Constitutional Repercussions 

 Foreigners Can Be President!  So screamed the headlines following the news that the 28th Amendment had been ratified.  The punditry was immediate in naming it the Arnold Amendment, enacted so as to allow persons born on foreign soil, who have been citizens of the US for at least 20 years, to become President of the United States.  The debate centered on the rationale of the founding fathers to include, in the constitution, the clause that only native-born citizens could be president.   

On one side were the strict traditionalists, decrying the change in the law, and declaring that if it was good enough for Washington and Jefferson, it should be good enough for us.  They conveniently forgot the fact that the clause was designed to prevent what was then perceived as the threat of an Englishman becoming president and trying to convert the great experiment known as the United States of America back to a British colony.  Their mantra was “As it is written, so it must be.”  In many ways, they resembled the creationists, who see the Bible as literally true, and believe the earth was created 6000 years ago.  In fact, many of them were the same people. 

On the other side were the more liberal modernists.  Their argument was that being born in the US didn’t necessarily make you a good person or uniquely qualify you for the job.  In fact, most naturalized citizens are far more patriotic. They are familiar with other countries and the lack of freedoms and opportunities that exist elsewhere.  

They revere rights that most native-born Americans take for granted. 

In the end, the liberals won the war.  The battle took place so that the erstwhile governor of California, Arnold Schwarzenegger, former movie star and real estate mogul, could run for the White House.  Of course, things are never that simple.  What was so intriguing was the reaction of other nations around the world.  Strange things were about to take place on the third planet from the sun. 

Many of us remember the schoolyard taunt, “my dad can beat up your dad.”  In college some even expounded on the idea that, rather than nations going to war, countries should have their leaders fight for what they believe is right.  This would save lives and solve problems far more quickly and in a far less costly manner.  Of course, nobody ever believed that anything like that would happen.  Leaders of countries are serious men and women, with a vision for the future and political skills to persuade their countrymen to follow that vision.  Why put someone in that role whose qualifications are merely strength of body, not mind?  Well, let me tell you the story of what went on after Ah-nold was elected president of the United States in 2012. 

 After a landslide victory, the Austrian bodybuilder turned American success story, started to use the bully pulpit more effectively than any president since Teddy Roosevelt.  Arnold was a man who had a finely tuned ear for the public’s feelings.  He was a man who preached common sense rather than political ideology.  In short, he was a man who could look you in the eye, describe his beliefs and persuade you of their merit because of the sincerity in his story.  He was born to lead, and now he was in the role of a lifetime. 

At a staff meeting in the early days of his presidency, Arnold realized that the budget situation was getting out of hand.  His advisors, to a man, focused only on the non-defense aspects of the budget, but he realized that defense spending represented nearly 20% of the total, and that a major reduction there could solve many great problems in a single act.  This was exactly the sort of thing Arnold had become famous for during his governorship of California. 

 And so he floated the suggestion… “What if I offered to fight the leader of a foreign country when we had a fundamental disagreement?  No guns, no knives, no armies, just me and him in the ring until there was just one of us left standing!” 

 His aides were shocked at the idea, but Arnold was on a roll.  “Think of what we could accomplish.  We could end war as we know it, disband the armed forces around the world and address grievances quickly.  Think of the ratings on TV!!  It would be the biggest draw in history.”  Arnold was starting to get excited now.  “What a spectacle this could be.  I would take on Rafarrin, or the Ayatollah in Iran, or anybody.” 

 His staff was adamantly opposed to the whole thing, but once again it was Arnold who had his finger on the pulse of the nation, and really of the whole world.  He recognized that ordinary citizens everywhere were tired of the state of war that had existed around the world for the past decade or more.  He was the first to truly understand that the vast majority of the Earth’s population was far more concerned with their individual security and ability to lead a productive life rather than the geopolitical issues that were constantly in the news.  Most Americans couldn’t care less about what was going on in Russia or Saudi Arabia or the Ivory Coast.  And most Russians and Saudis couldn’t care less about what went on in the United States.  All they heard was partisan bickering on TV and in the newspapers, and an increasing stream of bad news from some far corner of the globe.  American soldiers dying, a health epidemic or revolution or civil war beginning.  These seemed to be the only thing on the news recently.  Arnold, it turned out, had hit upon the key to move the global political situation to the next level.  Two months later, June 15, 2013, to be exact, Arnold Schwarzenegger stood in front of a special joint session of Congress and on global TV made the following announcement: 

 “My fellow Americans and good citizens of the world.  I come to you this evening with an idea.  It’s a simple idea, yet one so profound as to change the way the United States will handle conflict in the future.  I believe it can change the way that mankind handles all conflicts in the future. 

 I think we can all agree that given our choice, the vast majority of us would seek a peaceful life, and that if I presented an idea that was able to solve two seemingly intractable problems simultaneously, that you would give it serious thought.  In fact, the idea that I will present can do just that, I believe.  If, after hearing this, you agree, I want you all to contact your local representation and urge them to join in and embrace this idea.  For those of you watching who are not American, it will apply equally to each one of your nations and I believe you, too, will see its beauty and effectiveness. 

 The modern world has become a place where individuals all seek what’s best for themselves, without regard to what’s best for the nation as a whole.  In fact, this attitude has mutated into ‘I want what’s best for me and if I don’t get it, it must be somebody else’s fault.’  What has been the result of this attitude?  We have reached a time in society where entitlements have become the driving force behind many people’s lives.  There seems to be a belief that merely being born an American, or Englishman or Frenchman or any nationality, means that you are automatically deserving of a certain, cushy lifestyle.  And if something happens so that you do not get everything you want, you sue, or cause trouble.  This has led to several serious consequences.  First, government spending is out of control, and not just in America, but all around the world.  Taxes are rising, spending is rising special interests are happy because they are getting more money, but the average citizen is being worn down with nothing to show for it.  Demands for energy and commodities has resulted in a transfer of power to nations that have little or no experience in working effectively within the global nation-state system.  This leads to the second consequence…war.  It’s been more than 10 years since there was a semblance of peace in the world.  It’s been more than 10 years since a full month has passed without American soldiers dying in some far-off land; Iraq, Afghanistan, Korea, Zimbabwe, or some other place.  You name it and we’ve lost our brave young men and women there.  And for what? I ask.  So that the complainers in this country get their way?  More oil, cheap imports, export markets?  It seems that if you complain long enough and loud enough, that in this country we will send in a brigade on your behalf! 

 Well, no more!!  That stops right now if you listen to my idea, and we make it the law of the land. 

 I propose that disagreements between nations be settled in a manner that requires no armies, no navies, no air forces, nothing but this.  It requires merely that the leader of the aggrieved nations meet in an arena and join in combat until one concedes the issue.  These matches would be televised globally and would have no referees.  The only rule would be no weapons of any kind, just man against man.  Each issue would be decided in a single match and the outcome would be final and binding for at least 10 years.  But the key is that the leaders of nations must fight.  There would be no nomination of a champion in his or her stead. 

 Think about this.  Armed forces currently utilize upwards of 40% of some nations’ budgets.  How much better off would we all be if we spent that money on other, more peaceful things?  How much better off would we all be if we allowed you, the citizens of the world, to keep a larger proportion of earnings to save or spend as you saw fit as an individual?  This would not only save money and lives, but it would promote that other key for successful society, responsibility.  No more would people be rewarded for complaining loudly, for complaining often or both.   

You, the citizens of all nations, would need to learn to handle adversity.  You, the citizens of all nations, would learn that there is no birthright to material items, merely to the opportunity to obtain those things by lawful means.  I will not fight the King of Saudi Arabia just so that you can drive a bigger car.  It is not worth it.  You must learn to accept that gasoline could cost more or change your driving habits accordingly.   

But here is what I will do.  I will defend the right of this nation and its people to continue to practice business in accordance with the current laws.  I will defend the right of this nation to allow its citizens to worship any god of their choosing.  In short, I will defend the Constitutional rights of all citizens as deemed necessary in the global order.” 

It was truly a once in a lifetime experience.  Arnold was proposing to change the very fabric of international diplomacy, through this simple yet compelling idea.  Sides were quickly taken with the old school dismissing this concept as mere claptrap, something to be expected from an uneducated man like Arnold.  But the citizens of the world had a different idea.  They grabbed hold of the idea tightly, and within months there were referendums held in every remotely democratic country on the planet.  Of the 146 referendums held, every one passed on the first vote, most by a landslide. There was no ambiguity, the global population had spoken, and it had done so with a single clear voice.  Arnold became a hero to not only his fans in the United States, but to the subsistence farmers in Zambia and Eritrea as well.  And life, as we know it, changed forever. 

The first situation addressed by President Schwarzenegger under the new code of defense was the war on terror.  The firebrands of the Middle East, those Imams who preached not just Islam but death to the Infidels, found themselves on the wrong side of world opinion.  Even the French, who resisted American power at every turn could think of no excuse to prevent Arnold from facing off against the current head of Iran, Ayatollah ShahyAr Farshid, who for the past several years had done nothing but encourage violence against all things Western.  But the people of Iran, tired of isolation from the community of nations, and wanting the opportunity to partake in the fruits of their own labor, rose up and forced ShahyAr to take on Arnold.  The Iranian stakes were the end of terrorist support, to be proven by the dismantling, under UN supervision by UN personnel, of the weapons systems that Iran had either built or obtained.  The US risked the dismantling of the CIA, and the surveillance that went with clandestine operations.  The stage was the coliseum in Rome, with a worldwide audience.   

It was just before midnight when Arnold entered the arena to a wildly enthusiastic crowd.  After all, here was the man who had single-handedly changed the political equation on the planet.  Here was the man who had initiated the first truly new idea for achieving world peace since Jesus.  He was dressed, as one would expect, in the garb of an ancient Roman gladiator, a simple white toga, a brown belt and sandals.  He radiated confidence.  Despite recently celebrating his 66th birthday, he didn’t look a day over 45.  His muscles were bulging, and his skin glistened with sweat.  Moments later, ShahyAr entered the arena from the opposite side.  Dressed in the traditional Bisht of the Arab street, he was a wiry man, just 42 years old, with a medium length beard and long hair beneath his Ghutra.  Sweat was visible on his brow and upper lip.  His eyes betrayed his fear.  As a leader of a militant mosque, he was used to having his underlings do his dirty work. ShahyAr had never been in a position where he had to fend for himself.  There had always been someone else to support him, and now he was scared.   

At the stroke of midnight, there was a loud chime and the two men started to circle warily.  Despite Arnold’s obvious physical advantage, he recognized that his opponent was a much younger man and may be concealing something beneath his robe.  The crowd began to chant, at least two-thirds screaming for Arnold and the balance chanting ShahyAr’s name.  The intensity increased as the two warriors edged closer and closer to one another.  As the screaming reached a fevered pitch, Arnold made his move.  He was deceptively quick for one his age, and before ShahyAr knew what happened, he was on his back with Schwarzenegger’s massive hand around his throat, and his arms pinned beneath Schwarzenegger’s knees.  ShahyAr struggled to reach the knife illegally concealed beneath his robes, but Arnold’s grip was akin to a vice.  There was no escape from this position, and ShahyAr knew it.  He was about to lose, in moments, what he had worked the past 20 years to achieve, a position of power and respect amongst his followers.  But there would be no respect after losing, and his life’s aims would be dashed.  Certainly, the people of Iran would opt for another in his stead, someone who could defend the country’s honor and way of life.   

ShahyAr was having difficulty concentrating as the airflow to his brain was restricted by Schwarzenegger’s death grip.  He was sure he would meet Allah now, especially as he will have died fighting the Infidel, and he would be a martyr for his people.  They would rise against this ridiculous idea of leaders fighting leaders, and things would return to normal, leaders sending armies to fight their battles.  As he lost consciousness, ShahyAr prepared to meet Allah. 

But Arnold was smarter than that.  He had no intention of creating a martyr during the first attempt at a new world order.  As ShahyAr passed out, Arnold released his grip and let him live.  In fact, this would be a much better solution.  ShahyAr was now disgraced by his loss but had no opportunity to achieve martyrdom.  He was merely a weak leader of a country about to get weaker through the loss of key weapons systems.   ShahyAr was the laughingstock of the Arab world, losing a battle to a much older man, and letting down his people. 

In fact, the impact was much greater than just that in Iran.  Leaders around the world took stock in the situation and had to weigh the possibility of having to literally fight for what they believed in, versus the very real risk of losing the fight and being killed, or worse, like ShahyAr, disgraced.  The change in attitude around the world was remarkably rapid.  Oppressed people everywhere were clamouring for someone to fight their oppressors.  Oppressors everywhere were looking for a place to hide from the global media’s spotlight.  The subjugation of ethnic groups became a very dangerous practice for erstwhile dictators.  Now they could get called on the carpet and must answer for their crimes directly.  Less power suddenly seemed a better option than total control.  

Total control was likely to be challenged.  Power sharing was not. 

And so it came to pass, that a man, born in Austria, emigrated to the United States with nothing but a dream and the determination to see it through, became the single most powerful force in the world.  He affected more lives positively than Christ, Muhammed and the Buddha combined.  He caused the creation of a new geopolitical order, and fostered peace on earth.  All because the 28th Amendment was passed into law. Stranger things may have happened, but I dare you to show me one. 

Fearmongers Now Say

Posted on by

A question that’s going around
Is where will the buyers be found
For all the new debt
That nations are set
To issue as budgets compound
 
As well, the fearmongers now say
A crisis is coming our way
If voters elect
The folks who reject
The status quo finance cliché

 

As markets return from yesterday’s US holiday, activity remains somewhere between muted and ordinary in most markets.  At times like these, it is interesting to take note of the tone of the articles in financial journals, whether the WSJ, Bloomberg or the New York Times, as they are the place where I find politics is inserted into the discussion.  

For instance, there have been several articles regarding the pending French election and the market’s concern about a victory by Marine Le Pen on the right.  The thesis seems to be if her RN party wins and takes over parliament, that her plans will result in a collapse in French finances based on the promises she has made throughout the campaign.  There are many analogies to what occurred in October 2022 in the UK, when the newly elected PM, Liz Truss, put forth a program of unfunded spending and the Gilt market fell sharply.  You may recall the result was that the BOE had to step in to buy Gilts even though at that time, they had just begun to sell them to reduce the size of their balance sheet. 

Of course, what gets far less press is the fact that UK insurance companies had levered up their balance sheets because of ZIRP as they tried to earn a sufficient return to match their pension liabilities and when the BOE started tightening policy, those companies were already in trouble.  Certainly, the market response accelerated the problem, but even without Truss, as the BOE kept raising rates, the outcome would likely have been the same.  However, it was politically expedient for the press to blame Truss and the Tories.

Now consider the US, where government profligacy is truly breathtaking as the current government is borrowing $1 trillion every 100 days or so.  Certainly, this topic has been reported, although it is difficult to find a discussion from the mainstream media that makes the leap that spending as much as is currently happening is the underlying cause.  (Yes, there are many stories of this from conservative media as well as on Twitter, but not on the CBS Nightly News.)  However, those same mainstream sources threaten everyone that in the event Donald Trump is elected, it will spell the end of the bond market and the US economy because of his policy proposals of tax cuts and supporting energy growth.

It is commentary of this nature that, in my opinion, has reduced the value of mainstream media via the constant politicization of every subject.  This is also why alternate media sources, like the numerous excellent articles on Substack, have become so popular and widely read.  Analysts who are not beholden to a corporate policy and politics are able to give much more accurate and politically unbiased views.

At any rate, there was much concern ahead of this morning’s French bond auctions (they issued €10.5 billion across various maturities from 3-8 years) as this was the first attempt to sell debt since President Macron called his snap election after his European Parliament electoral disaster.  However, happily for all involved (except the doom mongers) things went just fine with a solid bid-to-cover ratio and a modest decline in market spreads.  All told, while nobody knows the future, it is difficult to expect that a Le Pen government will be any worse financially than the current Macron led government.  After all, France has just been warned by the European Commission that it must reduce its budget deficit from the current 5.5% to 3.0% as per the Maastricht Treaty, and there is no “far-right” influence on the current government.

Enough politics, let’s recap the overnight markets.  Asian markets were mixed as the Nikkei edged higher (+0.15%) but the Hang Seng (-0.5%) gave back some of yesterday’s spectacular rally.  The laggard, though, was mainland China (-0.7%).  In Europe this morning, despite the fears of a Le Pen victory, the CAC (+1.0%) is the leading gainer as either we are seeing a trading bounce after a terrible week last week, or maybe the initial hysteria is being seen for what it was, unfounded hysteria.  Meanwhile, as the BOE just left rates on hold, as widely expected, the FTSE 100 has bounced about 0.3% in the first 15 minutes since the announcement and is up 0.5% on the day.  Overall, Europe is having a good day with the DAX and virtually all markets ahead.  US futures, too, are firmer this morning, with both the NASDAQ and S&P higher by 0.5% or more although the Dow continues to lag.

In the bond market, Treasury yields have backed up 2bps this morning but the picture in Europe is much more mixed.  German yields are higher by 3bps, but UK yields have slipped a similar amount.  In fact, looking at all the nations there, it appears that there is slightly less concern over Europe as a whole as French yields are only higher by 1bp and Italian yields have slipped 1bp, thus narrowing the spread with Germany overall.  Turning to Asia, JGB yields rose 2bps, following USDJPY higher, or perhaps anticipating a higher inflation reading tonight.

In the commodity markets, crude oil (+0.15%) is edging higher this morning, although it slipped in futures trading yesterday (the only market open).  This morning brings the inventory data which is anticipating a draw of 2M barrels.  Metals markets are solid again with gold (+0.4%), silver (+1.7
%) and copper (+0.2%) all continuing their rebound from the dramatic decline two weeks ago.

Finally, the dollar is stronger this morning against most of its counterparts, notably the JPY (-0.3%) and CNY (-0.1%).  I highlight these because the yen story remains critical to the global financial markets, and it appears that Japanese investors are beginning to turn back toward Treasuries and away from JGBs supporting the moves in those markets and USDJPY.  

Regarding China, last night the PBOC fixing was at 7.1192, its highest level since November 2023 and the largest move (33 pips) in weeks.  It appears that there are numerous changes being considered and ongoing in China regarding its domestic bond market (the PBOC is looking to become more involved to support liquidity) as well as the overall monetary structure (there is talk that they will be adjusting the framework of three different rates to something more akin to what Western central banks use with a single policy rate).  In the end, given the ongoing lackluster performance of the Chinese economy, a weaker CNY remains my base case and while it may be gradual, it seems it is the PBOC’s view as well.  The onshore market continues to trade at the edge of the 2% allowable band and the offshore market is a further 35bps higher (weaker CNY) than that.  

Elsewhere, ZAR (-0.85%) which has had a good run on the back of the ultimate electoral outcome, seems to be afflicted with some profit-taking and then most of the rest of the currencies are softer vs. the dollar by about 0.2%.  One last exception is CHF (-0.65%) which has slipped after the SNB cut their policy rate by 25bps, as expected, to 1.25%.

On the data calendar today, we see Initial (exp 235K) and Continuing (1810K) Claims, Philly Fed (5.0), Housing Starts (1.37M) and Building Permits (1.45M), all at 8:30.  Then, later this afternoon, Thomas Barkin of the Richmond Fed will undoubtedly remind us that things are moving in the right direction, but patience is required.

Summing it all up, while I didn’t specifically mention it, the key thing in financial markets continues to be Nvidia, which is much higher in pre-market trading again, and apparently is the driver of everything.  However, traditional relationships have been under strain as although it appears to be a risk-on day, both the dollar and precious metals are firmer.  Overall, nothing has changed my view that the Fed is going to remain firm for now, and that (too) much credence will be assigned to next Friday’s PCE data.  But such is the state of the world.

Good luck

Adf

Just Simply Don’t Care

Posted on by

On Tuesday, six Fed members spoke
And none of them, from the pack, broke
While May’s CPI
Caught everyone’s eye
No ideas of cuts did it stoke
 
But markets just simply don’t care
Instead, all is well, traders swear
Nvidia rose
And at Tuesday’s close
No other firm could quite compare

 

Another day, another new all-time high for the S&P 500 and the NASDAQ (boy, my call from two weeks ago didn’t age well!).  And so it goes, the Fed imagines it is maintaining tight financial conditions and is trying to rein in spending and price pressures, and equity investors simply buy more NVDA every day.  Yesterday, the chipmaker became the most valuable company in the world, or at least the one with the largest market capitalization, cresting Microsoft and Apple, although all three are now worth about $3.3 trillion each.  I raise the point because it is such a perfect description of market sentiment.  It seems that everyone has placed their hopes (and potentially future wealth) on the back of a single company.  I’m sure it will work out well 😱.

In fact, as the investing community narrows its focus to an ever-smaller number of companies, and news elsewhere appears to show cracks in the façade of a solid economy, I suspect that problems may be coming our way.  For instance, remember Battery Electric Vehicles, and how they were the future?  Not just Tesla, but all these companies like Lucid, Polestar, Nikola, VinFast and Fisker?  Well, every name on this list has either gone bankrupt or is on the edge with Fisker being the latest to file Chapter 11.  The point is that in an environment where liquidity is abundant, or overly so, investment decisions tend to be less well thought out.  While the Fed has certainly tightened policy dramatically and been resolute in its efforts to maintain that tighter policy while inflation still percolates, the federal government’s excessive largesse (the CBO just announced they now expect a budget deficit this fiscal year of $1.9 trillion, up from the $1.5 trillion estimate last quarter) is too much for the Fed to stop.

One other thing to note about Nvidia, and AI in general, is that in China, Ali Baba has reduced the charge for using its AI function and it appears that AI, rather than being a new revenue stream for companies may simply become increased overhead of doing business.  In that world, as margins of the Apples and Microsofts and Googles compress, perhaps there will be more discernment before the next order of Nvidia chips.  There are many imbalances in this market, and it appears most of them are a result of the mania for AI.  When this passes, and it will pass, be prepared for some repricing of risk.

Ok, but back to the other stuff, namely the overwhelming amount of Fedspeak that keeps coming from all these FOMC members.  Yesterday, we actually had seven members speak, NY’s John Williams was not on the calendar ahead of time, and to a (wo)man, they explained that patience remains a virtue.  Happily, Bloomberg News put together the following list of key comments from the entire group:

Despite the modestly softer than expected CPI data last week, and even yesterday’s somewhat softer than expected Retail Sales data, it is hard to look at this grouping of comments and expect a rate cut is coming anytime soon.  Now, the one thing we can never forget is that markets can move incredibly quickly when it comes to readjusting its views on a subject.  In addition, history has shown that when the Fed figures out they are behind the curve and the economy is beginning to slow, they have the ability to cut rates very quickly as well.  But right now, I just don’t see the roadmap for a rate cut before the end of the year.  If this is the case, the one thing that seems most evident is that the dollar will maintain its overall bid.  Despite all the talk that the dollar is losing its reserve status, and that too much debt is going to destroy it, the reality remains there is no viable alternative as a means to store wealth and for governments to store reserves.  I don’t doubt the day will come when a substitute is found, but I do doubt I will be around to see it.

Ok, let’s see how the rest of the world celebrated the new leader in the market cap sweepstakes.  In Asia, the Nikkei (+0.25%) edged higher but the Hang Seng (+2.9%) had a fantastic run as the tech stocks resident there seemed to follow Nvidia.  Not surprisingly, Taiwan and Korea had good days, but elsewhere in the region, there was far more red than green as tech stocks are not the basis of those markets.  As to Europe, it is a mixed picture there but probably more red than green.  UK (+0.15%) stocks have edged higher after the UK inflation report showed that the headline number touched 2.0% for the first time in three years, but it doesn’t appear that will be enough to get the Tories re-elected next month.  However, we have seen most of the continent bleed lower after the European Commission warned a series of nations (including France and Italy) that they needed to address their budget deficits which are far above the 3% “limit” that was embedded in the entire Eurozone project.  Meanwhile, despite the fact that the US equity markets will be closed today for the Juneteenth holiday, futures are trading although they are little changed at this hour (7:45).

It is also a bank holiday here, so there will be no bond trading in the US, but in Europe, yields are a bit higher this morning, between 2bps and 4bps, bucking the trend from yesterday’s Treasury market and seeming to demonstrate a little concern over the ongoing political ructions on the continent.  However, there is one place where yields are having difficulty finding a base, Japan.  Despite all the talk that the BOJ was going to allow yields to rise more aggressively, or that there was no cap at 1.00%, JGBs fell 1bp overnight and have shown no inkling of moving higher in any substantial amount.  With this in mind, look for the yen to remain under pressure.

In the commodity markets, the early part of the month, which saw oil prices slide is just a memory now as once again, WTI (+0.1%) is holding onto its gains from yesterday and is now firmly above $81/bbl.  It appears that demand figures are starting to improve and inventory draws are being seen now.  Watch at the pump.  In the metals markets, after rallies yesterday, the precious set are holding the gains, up just 0.1% each, but copper has rebounded a further 1.5%, again an indication that economic activity seems better than feared.

Finally, the dollar is slightly softer this morning, slipping a touch against most of its G10 and EMG counterparts, but the noteworthy thing is that no currency has moved more than 0.25% in either direction.  In other words, nobody seems to care this morning here.

There is no data and no Fed speakers given the holiday so not only will things slow quickly by 11:00am, it seems a safe bet that movement will be di minimus.  Tomorrow brings a reawakening, but for today, enjoy the sunshine.

Good luck

Adf

Ne’er Have Nightmares

Posted on by

Said Harker, it’s likely one cut
Is all that we’ll need this year, but
Depending on data
My current schemata
Might wind up by changing somewhat
 
However, in truth no one cares
‘Bout Harker and views that he shares
As long as, stocks, tech
Don’t suddenly wreck
Investors will ne’er have nightmares

 

“If all of it happens to be as forecasted, I think one rate cut would be appropriate by year’s end.  Indeed, I see two cuts, or none, for this year as quite possible if the data break one way or another.  So, again, we will remain data dependent.”  These sage words from Philadelphia Fed president Patrick Harker are exactly in line with the message from Chairman Powell last week, as well as the dot plot release.  In other words, there was nothing new disclosed.  Now, today, we will hear from six more Fed speakers (Barkin, Collins, Kugler, Logan, Musalem, and Goolsbee) and I will wager that none of them will offer a substantially different take.  

At this point, market participants seem to feel quite confident they understand the Fed’s current reaction function and so will respond to data that they believe will drive different Fed actions than those defined by Harker above.  But if the trend of data remains stable, the Fed will not be the driving force in the market going forward.

In fact, there appears to be just one thing (or maybe two) that matters to every market, the share prices of Nvidia and Apple.  As long as they continue to rise, everything will be alright.  At least that’s what a growing share of investors and analysts have come to believe.  Alas, this poet has been in the market far too long to accept this gospel as truth.  I assure you there are other issues extant; they are simply hidden by the current Nvidia-led zeitgeist.

For example, Europe remains on tenterhooks for several reasons, only one of which is likely to be settled very quickly, the upcoming French election.  But remember, there is still a war in Ukraine and NATO and European nations have just upped the ante by allowing their weapons to be used to attack into Russia in addition to supplying F-14 fighter jets as part of the package.  In an almost unbelievable outcome so far, while Russian piped natural gas to Europe has fallen to essentially nil, Russia has become Europe’s largest supplier of LNG, surpassing cargoes from both the US and UAE.  I’m not sure I understand the idea behind sanctioning Russian oil and buying their gas, but then I am not a European politician, so perhaps there are nuances that escape me.  But the point is that Russia can cut that off as well, and once again disrupt the already weak Eurozone economy.

At the same time, Germany, still the largest economy in Europe, remains in economic purgatory as evidenced by today’s ZEW data (Sentiment 47.5, exp 50.0; Current Conditions -73.8, exp -65) as well as the fact that Germany’s largest union, IG Metall, is now demanding a 7% wage increase for this year, far above the inflation rate and exactly the sort of thing that, if agreed, will delay further rate cuts by the ECB.  Productivity growth throughout Europe remains lackluster and combining that with the structurally high cost of energy due to European energy policies like Germany’s Energiewend, is certain to keep the continent and its finances under pressure.  Right now, equity markets in Europe are following US markets higher, but they lack a champion like Nvidia or Apple, and are likely to be subject to a few hiccups going forward.

Or perhaps we can gaze eastward to China, where economic activity remains lackluster, at best as evidenced by the slowdown in Fixed Asset Investment and IP, as well as by the fact that the PBOC continues to try to create support for the still declining property sector without cutting rates further and inflating a bubble elsewhere.  The onshore renminbi continues to trade at the limit of the 2% band as the PBOC adjusts the currencies level weaker by, literally, one pip a day, and the offshore version is trading 0.25% through the band and has been there for the past month.  The economic pressure for the Chinese to weaken their currency is great, but obviously, the political goal is to maintain stability, hence the incremental movements.

My point is that Nvidia is not the only thing in the world and while its stock price performance has been extraordinary, I would contend it is not emblematic of the current global situation.  Rather, it is an extreme outlier.  Not only that, but when other things break, they will have deleterious impacts on many financial markets, probably including the NASDAQ.  Just sayin’!

However, despite my warnings that things will not always be so bright, so far in this session, they have been.  Overnight, Japanese stocks (+1.0%) followed the US higher as did Australia (+1.0%) and much of Asia other than Hong Kong (-0.1%) which slipped a bit.  Meanwhile, as all sides in the French election try to pivot toward the center to gather votes, European bourses are all in the green as well, somewhere between 0.25% and 0.5%.  As to US futures, at this hour (7:30), they are little changed.

Bond yields have continued to rebound from the lows seen Friday, with Treasury yields edging up another basis point this morning.  However, European sovereigns have seen demand with yields slipping a few bps, perhaps on the idea that growth remains lackluster as evidenced by the ZEW report, or perhaps on the idea that the French election may not be as terrible as first discussed.  Meanwhile, JGB yields edged up 1bp but remain below the 1.00% level despite Ueda-san explaining that a rate hike was on the table for July and that QT and rate hikes were different processes and independent decisions.

In the commodity markets, oil is unchanged this morning but that is after a strong rally yesterday in NY with WTI closing above $80/bbl for the first time since the end of April, as suddenly, the story is oil demand is improving while supply will remain tight on the back of OPEC+ measures.  I’m not sure how that jives with the IEA’s recent comments that there would be a “massive”oil supply glut going forward, (which I find ridiculous), and perhaps market participants have turned to my view.  Metals, though, remain in the doghouse falling yet again across the board.  Something else I don’t understand is how the demand story for metals can be weak while the demand story for oil can be improving given both are critical to economic activity.  

Finally, the dollar continues to find support, despite its oft-expected demise, as it gains vs. virtually all of its counterparts both G10 and EMG.  The biggest laggards this morning are NZD (-0.6%) and NOK (-0.4%) in the G10 while we have seen weakness in the CE4 (HUF -0.5%, CZK -0.55%, PLN -0.5%) as well as most Asian currencies.  The outliers here are ZAR (+0.5%) which continues to benefit from the re-election of President Ramaphosa and his coalition with centrist parties, and MXN (+0.4%) which seems to be finding a floor after its extraordinary decline in the wake of the election there two weeks ago.

On the data front, this morning we see Retail Sales (exp 0.2%, 0.2% ex autos), IP (0.3%) and Capacity Utilization (78.6%) in addition to all those Fed speakers.  While Retail Sales can be impactful, it would need to be extraordinary, in my view, to alter the current Fed viewpoint of wait for lots more data.  

My take is it will be a quiet session today, and likely for the rest of the week, as the next important data point is not until PCE on June 28th.  Til then, trading ranges seem the most likely outcome, although if I had to choose a side, I would be looking for the dollar to continue to grind higher.

Good luck

Adf

Trussed

Posted on by

The markets are worried that France
If given a half-decent chance
Will vote for Le Pen
And so, seems the ten-
Year OAT is now looked at askance
 
But ECB “sources” have said
There’s no TPI straight ahead
The French, rather, must
Show they won’t be “Trussed”
Else traders will leave them for dead

 

On an otherwise quiet summer morning, the ripples from the European Parliament election continue to grow. Not only did French President Macron dissolve parliament there and call new elections, but it appears the German government is far closer to falling as well.  However, right now, France is the story of note.

Elections in France are a two-stage affair where multiple candidates run for specific seats and then the two largest vote-getters in each district have a runoff a week later, if nobody won an outright majority.  Additionally, as is common throughout Europe, it is not a two-party affair like in the US, but there are several political parties vying for seats.  What makes this election so different from previous votes is the fact that the parties on the right are leading in all the polls.  Historically, throughout Europe, the right wing was anathema given that so many believed anything right of center would lead to the second coming of the Nazi Party.  This is the main reason that Europe has been consistently left of the US politically since the end of WWII.

However, what we have seen over the course of the past decade, and what has accelerated rapidly in the post-Covid era, is that many citizens of most Western countries are feeling dissatisfied with the politics of the left.  Immigration, which is obviously a huge issue in the US, is no less a problem in Europe.  The other key policy discrepancy is in the politics of global warming climate change global boiling, as it has become clearer each day that the policies that have been enacted, and those promised, have done nothing but raise the price of energy and the cost of living for all Europeans with no corresponding benefit to the climate.

The upshot is that many citizens throughout the continent are ready for a change, and this is beginning to frighten financial markets.  This can be seen in the chart below from tradingeconomics.com that shows German 10-yr yields in blue on the right-hand axis and French 10-yr yields in green on the left-hand axis.  While the spread has been creeping higher for the past six months, it has widened dramatically in the past week and is now at its widest (80 basis points) since the Eurozone crisis in 2013.

Source: tradingeconomics.com

It is not clear to me why financial markets are so concerned with excess spending by the right, as compared to excess spending by the left, but that seems to be the pattern.  (Recall the UK’s issue in October 2022 when Liz Truss, the newly minted PM, proposed a great deal of unfunded spending and the UK Gilt market sold off so sharply it put a number of insurance companies at risk and forced the BOE to buy gilts despite their efforts to shrink the balance sheet.)

At any rate, back in 2022, the ECB created a new program, the Transmission Protection Instrument (TPI) to help them prevent Italian BTPs from collapsing during the pandemic, thus maintaining what they believed to be an appropriate spread between bunds and BTPs.  While that spread peaked at 250bps, it is now a much more sedate 155bps, and despite Giorgia Meloni being a right-wing PM, the markets seem comfortable.  

However, with the ructions in France, there are many questions as to whether the ECB will dust off the TPI again to prevent a greater dislocation of French OATs vs. bunds.  Remember, too, that Madame Lagarde may have a personal vested interest in France, given her nationality, but as of yet, there has been no willingness to discuss using this tool.  However, if OATs continue to widen vs. Bunds, you can be certain this discussion will heat up even more.  We have already seen French stocks fall sharply, with French bank stocks down more than 10% in the past week.  It is movement like this that typically draws a response from central banks.  And of course, the euro is not immune to this situation as evidenced by its nearly 2% decline since the beginning of the month.  We will need to watch this closely until the elections at the end of the month and the second round on July 7th.

Beyond that, however, markets remain relatively dull.  Friday’s weaker than expected Michigan Sentiment data combined with the higher than expected inflation expectations was not very well received by risk assets (other than Nvidia and Apple) although by the end of the day, US major indices closed near flat.  Japanese shares fell sharply (Nikkei -1.8%) while the rest of Asia closed with much smaller declines, albeit they were declines.  In Europe, this morning, the picture is mixed with the big three markets, UK, Germany and France, all little changed on the day (a change for France of late) although there is more movement elsewhere but no consistency with both gainers and losers of up to 0.5%.  And following its recent pattern NASDAQ futures are edging higher this morning while DJIA futures are falling although neither has moved very much.  Arguably, the question is how long can the Magnificent 7 6 3 1 continue to rally in the face of increasing headwinds?

In the bond markets, yields are creeping higher with Treasuries (+2bps) bouncing off recent lows while European sovereigns all have shown similar yield gains except French OATs (+7bps) as the stress there continues to grow.  However, Asian bonds did little overnight with JGBs slipping one more basis point and now back to 0.92%, nearly 15bps lower than its peak at the end of May.  Things in Japan just take a verrryyy long time to play out.

In the commodity markets, oil (+0.25%) has managed to eke higher this morning, but the metals markets remain under pressure (Au -0.5%, Ag -1.0%, Cu -1.6%) as confidence in the economy ebbs alongside significant position reductions as metals had been one of the market themes for the first half of the year.  While I still like the long-term story, it seems clear there is no love for the space right now.

Finally, the dollar is mixed this morning with modest gains and losses overall across both G10 and EMG blocs.  The biggest winner is ZAR (+0.7%) which continues to retrace post-election losses as the new coalition government is gaining adherents in the investor community.  Alas, MXN (-0.2%) continues to feel pressure as concerns grow that president-elect Sheinbaum is going to be far more left leaning than markets expected.  In the majors, there is not much of distinction today with both gainers and laggards, although more laggards than gainers.  It should be no surprise that JPY (-0.25%) is pushing back to 158 given the yield moves overnight.

On the data front, there is some important stuff to be released this week, as well as a plethora of Fedspeak.

TodayEmpire State Manufacturing-9.0
TuesdayRetail Sales0.2%
 -ex Autos0.2%
 IP0.3%
 Capacity Utilization78.6%
ThursdayInitial Claims235K
 Continuing Claims1810K
 Philly Fed4.5
 Housing Starts1.38M
 Building Permits1.45M
FridayFlash PMI Manufacturing51.0
 Flash PMI Services53.3
 Existing Home Sales4.09M
 Leading Indicators-0.4%

Source: tradingeconomics.com

In addition to the data, we hear from seven Fed speakers with Richmond’s Thomas Barkin regaling us twice.  I would contend the narrative is searching for a direction other than BUY NVIDIA, as we continue to see a mixed picture.  While the NFP was strong, it appears data since then has softened.  If this remains the case, then the talk of a Fed cut sooner rather than later is going to really start to come back.  While July is only priced for a 10% chance of a cut, the market has September in its sights with a nearly two-thirds probability currently priced.  If the data weakens, that is viable.  In that scenario, I would expect the dollar to suffer and everything else to rally.  But we need to see a lot more soft data to reach that point.

Good luck

Adf

Ain’t

Posted on by

Ueda explained
Buying bonds is still our bag
But buying yen ain’t

 

The last of the major central banks met last night as the BOJ held their policy meeting.  As expected, they left the policy rate unchanged between 0.00% and 0.10%.  However, based on the April meeting comments, as well as a “leak” in the Nikkei news, the market was also anticipating guidance on the BOJ’s efforts to begin reducing its balance sheet.  Remember, they still buy a lot of JGBs every month, so as part of the overall normalization process, expectations were high they would indicate how much they would be reducing that quantity.

Oops!  Here is their statement on their continuing QQE program [emphasis added]:

Regarding purchases of Japanese government bonds (JGBs), CP, and corporate bonds for the intermeeting period, the Bank will conduct the purchases in accordance with the decisions made at the March 2024 MPM. The Bank decided, by an 8-1 majority vote, that it would reduce its purchase amount of JGBs thereafter to ensure that long-term interest rates would be formed more freely in financial markets. It will collect views from market participants and, at the next MPM, will decide on a detailed plan for the reduction of its purchase amount during the next one to two years or so. 

In other words, they have delayed the onset of their version of QT by another month and based on the nature of their process, where they pre-announce the bond buying schedule on a quarterly basis, it is entirely possible that the delay could be a bit longer.  You will not be surprised to know the yen fell sharply on the news, as per the below chart.

Source: tradingeconomics.com

In fact, it traded to its weakest (dollar’s highest) level since just prior to the intervention events in April.  However, as you can also see, that move was reversed during the press conference as it became clear to Ueda-san that his delay did not result in a desired outcome.  The issue was the belief that the BOJ cannot make decisions on interest rates and QT simultaneously (although for the life of me, I cannot figure out why that was the belief), and so Ueda addressed it directly, “We will present a concrete plan for long-term JGB buying operations in July. Of course, it’s possible for us to raise the short-term interest rate and adjust the degree of monetary easing at the same time depending on the information available then on the economy and prices.”

In the end, the only beneficiary of this was the Japanese stock market, which managed a modest rally of 0.25%.  Certainly, this did not help either Ueda’s or the BOJ’s credibility that they are prepared to normalize policy, and it also left the entirety of currency policy in the lap of the MOF.  The problem for Ueda-san is that until the Fed decides it is time to start cutting interest rates, a prospect which seems further and further distant, the yen is very likely to remain under pressure.  I am beginning to suspect that despite Ueda’s stated goal of normalizing monetary policy, the reality is that, just like every other central banker today, his bias is toward dovishness, and he cannot let go.  I fear the risk is that the yen could weaken further from here rather than it will strengthen dramatically, at least until there are real policy changes.  FYI, JGB yields closed 3bps lower after the drama.

Away from that, the overnight session informed us that Chinese economic activity appears to be slowing, at least based on their loan growth, or lack thereof.  Loans fell, as did the pace of M2 Money Supply and Vehicle Sales.  While none of these are typically seen as major data releases, when combined, it seems to point to slowing domestic activity.  The upshot is a growing belief that the PBOC will ease policy further thus supporting Chinese equities (+0.45%) and maintaining pressure on the renminbi which continues to trade at the limit of its 2% band vs. the daily CFETS fixing.

As to Europe, it is becoming clearer by the day that investors around the world have begun to grow concerned over what the future of Europe is going to look like.  Despite the ECB having cut their interest rates last week, the results of the European Parliament elections continue to be the hot topic and we are seeing European equity markets slide across the board, with France (-2.5% today, -5.8% this week) leading the way lower as President Macron’s Renaissance Party looks set to be decimated in the snap elections at the end of the month.  But the entire continent is under pressure with Italy (-2.8% today, -5.7% this week) showing similar losses and the other major nations coming in only slightly better (Germany -2.75% this week, Spain -3.9% this week).  You will not be surprised to know that the euro (-0.4%) is also under pressure this morning, extending its losses to -1.0% this week with thoughts it can now test the lows seen last October.

There is a great irony that the G7 is meeting this week as so many of the leaders there, Italy’s Giorgia Meloni and Japan’s Kishida-san excepted, looks highly likely to be out of office within a year.  Macron, Olaf Sholz, Justin Trudeau, President Biden and Rishi Sunak are all far behind in the polls.  One theory is that the blowback from the draconian policies put in place during the pandemic restricting freedom of movement and speech within these nations, as well as the ongoing immigration crisis, which is just as acute in Europe and the UK as it is in the US, has turned the tide on the belief that globalization is the best way forward.  

Earlier this year I forecast that there would be very severe repercussions during the multitude of elections that have already taken place and are yet to come.  Certainly, nothing has occurred that has changed that opinion, and in fact, I have a feeling the changes are going to be larger than I thought.  

The reason this matters is made clear by today’s market price action.  If the world is turning away from globalization, with a corresponding reduction in trade, equity markets which have been a huge beneficiary of this process (or at least large companies have directly) are very likely to come under further pressure.  As well, fiscal policies are going to put more pressure on central banks as the natural response of politicians is to spend more money when times are tough, and we could see some major realignments in market behaviors.   This will lead to ongoing inflationary pressures, thus weaker bond prices and higher yields, weaker equity prices, much strong commodity prices and the dollar, ironically, likely to do well as it retains its haven status.  Certainly, the euro is going to be under pressure, but very likely so will many other currencies.  This is a medium to long-term concept, certainly not something that is going to play out day-to-day right now, but I remain firmly in the camp that many changes are coming.

As to the rest of the markets overnight, yields are falling everywhere (Treasuries -5bps, Gilts -9bps, Bunds -12bps, OATs -6bps, Italian BTPs -1bp) as investors are seeking havens and for now, bonds seem better than stocks.  You will also notice that the spread between Bunds and other European sovereigns is widening as there is clear discernment about individual nation risk.  This is not a sign that everything is well.

Maintaining the risk-off thesis, gold (+1.25%) and silver (+1.00%) are rallying despite a much stronger dollar this morning and we are also seeing some strength in oil (+0.2%).

As to the dollar, it is stronger vs. almost every one of its counterparts this morning, most by 0.3% or more with CE4 currencies really under pressure (PLN -1.0%, HUF -0.8%).  However, there are two currencies that are bucking this trend, CHF (+0.25%) which is showing its haven characteristics and ZAR (+0.5%) where the market is responding to the news that the ANC has put together a coalition and that President Ramaphosa is going to remain in office.

Yesterday’s PPI data showed softness similar to the CPI on Wednesday but more surprisingly, the Initial Claims number jumped to 242K, its highest print since August 12, 2023, and a big surprise to one and all.  The combination of data certainly added to yesterday’s feel that growth and inflation were ebbing.  This morning, we get the Michigan Sentiment (exp 72.0) and then a couple of Fed speakers (Goolsbee and Cook) later on during the day.

I should note that equity futures are all in the red this morning, with the Dow continuing to lag the other markets, probably not a great signal of future strength.  Arguably, part of today’s price movement is some profit taking given US equity markets have rallied this week and month.  But do not discount the bigger issues discussed above as I believe they will be with us for quite a while to come and put increasing pressure on risk assets with support for havens.  As such, I think you have to like the dollar given both the geopolitical issues and the positive carry.

Good luck and good weekend

Adf

Indigestion

Posted on by

The answer to yesterday’s question
Is CPI’s seem some regression
Both stocks and bonds soared
The dollar was floored
But Powell now has indigestion
 
To no one’s surprise he left rates
Unchanged, while the dot plot translates
To higher for longer
Though pressure’s grown stronger
To cut to achieve his mandates

 

Unequivocally, the CPI data was cooler than market forecasts.  Month over month prices were unchanged at the headline level and grew only 0.16% on a core basis, with the year-on-year numbers each coming in one tick below expectations.  It took absolutely no time for markets to run with this data as the following charts from tradingeconomics.com for the NASDAQ 100, 10-year Treasury yields and EURUSD demonstrate.  See if you can determine when the CPI data was released.

Now, as I explained, and has become abundantly clear to anyone watching, the equity market is in a world of its own.  While yields backed up and the dollar rebounded (euro fell) after the somewhat more hawkish than expected FOMC statement, dot plot and Powell press conference, the NASDAQ ignored everything and kept on rallying.  While that is remarkably impressive, I remain of the opinion that trees still don’t grow to the sky, although apparently, they can get really tall!

At any rate, a quick look under the hood at the CPI shows that core goods prices continue to fall, which was largely why today’s data looked so good, but primary rents and OER continue to climb at about 0.4% monthly despite many assurances by many pundits, analysts and economists that rental inflation was sure to begin declining soon.  It has been rising at this pace or faster for more than two years, and while the actual pace has backed off from the rate a year ago, if you annualize 0.4% you come up with just under 5.0% inflation.  It remains hard to believe that shelter costs can rise at that pace and the general price level is going to get back to 2.0%.  Yesterday’s data was good, but we are not out of the woods yet.

Turning to the FOMC, the statement was virtually unchanged from the May statement, which makes sense since the mix of data that we have seen in the interim shows some hot and some cold numbers and no clear line of sight to the end game.  As such, it is not surprising that Chairman Powell tried to veer hawkish at the press conference in what appears to have been an attempt to offset the (over)reaction to the CPI data.  In fact, a look at the dot plot shows that, as I suggested, the median expectation for rate moves in 2024 is down to a single cut, although they are more confident that inflation will continue to fall next year with the median expectation for an additional 4 cuts.  However, as I also suggested, the longer-term outlook continues to rise with the median there now up to 2.80% from 2.60% in March, and 2.5% or below for the 3 years prior to that.

Interestingly, in their Summary of Economic Projections they expect PCE inflation to be 2.6% this year, up from 2.4% in March, with core PCE to be at 2.8% this year, up from 2.6% in March.  They did, however, maintain their views of GDP growth (2.1%) and Unemployment (4.0%).  At least, unlike Madame Lagarde who cut rates despite raising inflation forecasts, the Fed’s inaction made far more sense.

But pressure is building on Powell and the Fed to cut rates.  Today, several senators wrote (and released) a letter to Powell exhorting him to cut rates because everybody else is doing it.  They claim that his intransigence is hurting the economy, although the whole point of higher for longer is that there is scant evidence that the economy, as a whole, is in trouble despite rates where they are, although certainly some sectors are feeling a pinch.  As an aside, given the extreme degree of financial and economic ignorance that is routinely demonstrated by virtually every member of the House and Senate, this letter is simply political grandstanding.  But pressure is pressure, and Powell will certainly feel it, although I don’t think he is too concerned by this group overall.

While this morning brings PPI (exp 0.1%/2.5% headline and 0.3%/2.4% Core) as well as the weekly Initial (225K) and Continuing (1800K) Claims data, it is hard to believe that either of those data points are going to have any substantive impact given everything we learned yesterday.  So, let’s look elsewhere to see what is happening.

One of the interesting stories right now is the ongoing situation in France with the snap elections called by President Macron.  Apparently, the quick timing has resulted in significant confusion on both the left and right of the spectrum as to who will be allying with whom, and what they stand for.  While this is amusing in its own right (see this Twitter thread), the ramifications are greater for the impact on the French OAT market and the euro.

Briefly, the issue is that France has been slowly sliding from the figurative north of Europe to the South, meaning that it used to be considered a country with almost Germanic fiscal sensibilities and now it is much more akin to the PIGS than Germany.  The WSJ had an interesting article this morning describing the situation.  Ultimately, the market response has been for French yields to rise compared to German yields, adding pressure to the country as it needs to continue to finance its 5%+ budget deficit.  Now add to that the absolute trainwreck that is the current government leadership (as evidenced by that Twitter thread) and investors have decided that there are better places to invest with less credit risk.  After all, S&P Global downgraded French debt last month due to their profligate spending and I assure you, whatever the election outcome, there will be more spending not less.  

If we view this through a FX lens, the combination of clear dysfunction in Europe, lower interest rates in Europe and a Fed still committed to seeing the whites of 2%’s eyes before cutting rates here, it is very easy to anticipate the euro will be biased downwards over time.  While I know there are many who continue to write the dollar’s obituary, the fact remains that it is still standing with no competitors of note.  In fact, part of the raison d’etre of the euro was to be able to replace the dollar as a reserve currency.  It seems that hasn’t worked out all that well.

Ok, let’s see how global markets responded to the US data yesterday.  Perhaps the most interesting thing was that even in the US, the DJIA fell slightly, despite the conviction that rates are heading lower.  In Asia, the picture was mixed with Japan (-0.4%) and China (-0.5%) sliding while Hong Kong (+1.0%) rallied on the tech rally.  Many consider the Hang Seng to be China’s NASDAQ with respect to the weight of tech companies in the index.  As to European bourses, they are all in the red this morning by more than -1.0% with France (-1.4%) leading the way lower.  Of course, based on the above discussion, that can be no surprise.  Lastly, in the US, futures at this hour (6:45) are mixed with NASDAQ higher by 0.6% while DJIA futures are -0.4%.  Apparently, the prospect of lower rates doesn’t help more mature companies.

In the bond market, after yesterday’s wild ride (see above chart), Treasury yields have edged lower by -1bp, but in Europe, yields are continuing higher from their closing levels, catching up to the Treasury yield rebound in the wake of the FOMC meeting.  Not surprisingly, French OATs are leading the way with yields higher by 4bps while Germany has seen only a 2bp rise.

This morning, commodities are uniformly under pressure with oil (-0.8%) sliding after a solid weekly performance while metals markets are also slipping (Au -0.1%, Ag -0.8%, Cu -0.6%) as traders try to come to grips with the next interest rate moves and adjust their positions.  An interesting story this morning is that a shipment of copper from Russia to China for 2000 tons apparently never arrived in China.  This is simply the latest quirk in the metals markets where confirmation of what is being traded is limited.  You may recall the story last year about nickel inventories at the LME actually being bags of painted rocks.  In this space, the broad trend remains that there is excess demand for metals, especially copper, silver and aluminum, as all three are critical to electrification of systems and grids, but it is going to be a bumpy ride higher!

Finally, the dollar, which was decimated in the immediate wake of the CPI data yesterday, managed to claw back some of those losses in the afternoon thanks to the more hawkish Fed and this morning, that slow rebound continues with the greenback higher vs. almost all its counterparts in both the G10 and EMG blocs.  However, nothing really stands out as having moved significantly, with a general trend of about 0.2% or so across the board.

And that is really all we have today.  The first post-FOMC speaker is NY Fed president Williams at noon, although I suspect his message will be identical to Powell’s yesterday.  As to the rest of things, the BOJ meets tonight and while there is no expectation of a policy change, Ueda-san’s comments will be carefully parsed for any clues to when a change may be coming.  

Since nothing seems to matter to the NASDAQ and everyone wants to own it, I suspect that the dollar will maintain its gradual strength until further notice.

Good luck

Adf

Thoroughly Schooled

Posted on by

Has CPI actually cooled?
Or did April have us all fooled?
Both Tiff and Lagarde
Have played their first card
Has Jay now been thoroughly schooled?
 
First, if CPI comes in hot
The Chairman will certainly not
Decide to cut rates
And leave the debates
Til things show the damage he’s wrought
 
But if the inflation report
Is nothing at all of that sort
Then many have said
This summer, the Fed
‘Round rate cuts will gather support

 

A quick look at yesterday’s 10-year Treasury auction shows it was far better than the 3-year on Monday with a strong bid/cover ratio of 2.67, its highest since February 2022, and a result where the auction cleared 2bps lower than the pricing ahead of the announcement, a sort of negative tail.  Indirect bidders represented nearly 75% of the bids, so there was real demand for this paper.  Certainly, Janet and Jay are feeling better, and yields fell 6bps on the day.  

As I explained yesterday, the auctions are just one tiny signal in a large body of information, and just like almost everything else, it seems there is no consistency there either.  However, one auction does not a trend make.  One last thing, the strength of the auction ahead of today’s CPI report and FOMC meeting seems somewhat odd given the potential risks attached to both those events.  Generally, investors would prefer to reduce exposure ahead of a big event, not increase it.  This has awakened some conspiracy theorists as to who actually bought the paper.  There is no evidence that there was any behind the scenes Fed activity, but many are trying to figure out the incentive to aggressively bid for bonds ahead of key data.  We need to stay vigilant.  

Ok, on to the CPI this morning.  The current consensus forecasts are for the headline (0.1% M/M and 3.4% Y/Y) and the core (0.3% M/m and 3.5% Y/Y).  During the month of May, wholesale gasoline prices fell nearly 6% which is clearly weighing on the headline monthly outcome.  Of course, that is not a seasonally adjusted number, that is the raw result.  Last month, despite gasoline prices rising a similar amount, in the CPI data, the seasonally adjusted number showed a decline, and that is what is in the report.  That is just one of the many unusual features of the way CPI is calculated, and why it must be carefully considered.  

However, beyond gasoline prices, the indications of rising prices continue to come from things like the ISM Prices paid index for both Manufacturing and Services, as well as the robust wage growth from the NFP report last week.  And certainly, I am hard-pressed to have seen prices do anything but rise in the past month and year based on my personal consumption basket.  But I do not have an econometric model that I use to estimate these things like my good friend the @inflation_guy, who you all should be following on X(Twitter) or at his inflationguy blog.  However, based on the other pricing data we have seen, I expect that the risks to the consensus are on the high side, not the low side.  We shall find out at 8:30.

In this case, I think it is clear that a hot number will result in a sharp decline in bond prices (jump in yields), a rise in the dollar and, at least initially, a decline in equity markets.  Of course, the latter clearly have a life of their own.  A lower-than-expected print should see the opposite, with stocks ripping higher.

And lastly, we turn to this afternoon’s FOMC meeting.  At this point, the only thing that anyone is discussing is the dot plot.  Below is the March edition where the median indicated 3 rate cuts in 2024, but it was very close, a 10-9 outcome with 9 members seeing 2 cuts or less.

Source: federalreserve.gov

As I recall, I was far more interested in the idea that the Longer run rate, which is often defined as R* or the neutral rate, started to creep higher than its recent estimates of 2.5%.  Since the March meeting, there has been an uptick in discussion as to what the longer run rate should be, with every estimate rising some amount.  

As to the immediate situation, given there is a vanishingly small chance they adjust rates today, there are only four meetings left in 2024 so it would seem likely that the maximum number of cuts the updated version of the dot plot will indicate is two.  Personally, I think it will come in at one unless this morning’s CPI is much lower than expectations, although given the ECB managed to cut rates while raising their inflation forecasts, anything is possible in the convoluted world of central banking.  Funnily, the strength of yesterday’s 10-year auction may give them enough confidence that their current policy is not a problem resulting in an estimate of fewer cuts rather than more.

However, the real interest will be Powell’s press conference.  Based on everything we heard from Powell and all his acolytes prior to the quiet period, there certainly seemed to be no rush to cut rates as they still lacked confidence that inflation was going to head back to target.  And, of course, the biggest piece of data we have seen in the interim, last Friday’s NFP number, was much hotter than expected as was the wage data, so it doesn’t seem that he would change that tune.  Thus, much relies on this morning’s CPI and how that may change any opinions on the committee.  While I believe that his underlying desire is to cut rates, there does not yet seem to be an opening to do so.  In the end, my take is that the risk to the market is he is more hawkish than dovish with the corresponding risk-off results.  That’s what makes markets.

Ok, I’ve rambled on a lot already so suffice to say that the overnight price action was generally pretty benign as everyone around the world has been awaiting today’s CPI and FOMC.  Yesterday’s mixed US session was followed by a mixed Asian session with some gainers and some laggards although European bourses are feeling chipper this morning, with all higher by about 0.5%.  As to US futures, they are ever so slightly firmer at this hour (7:00), just 0.1%.

Bond yields around the world have followed Treasuries lower, with the US 10-yr falling one more basis point while all of Europe is down 2bps, except for Italy (-5bps) where the spread to bunds is narrowing on hopes of broader interest rate declines.  Even JGB yields (-4bps) softened last night.  As I have repeatedly explained, as goes the Treasury market, so goes the rest of the global bond market.

Oil prices (+1.1%) are climbing again after inventory data yesterday showed larger draws than expected while metals prices are little changed this morning after another weak session yesterday.

Finally, the dollar is on its back foot, down about -0.15% vs. most of its G10 counterparts save the yen (-0.2%) which continues to drift back toward that 160 level which catalyzed the BOJ’s intervention.  I think the dollar’s movement is the easiest to forecast ahead of the CPI and FOMC as hot CPI will see the dollar rally, as will a hawkish Fed, with the opposite also true in the event that things are cool and/or dovish.

And that’s really all today.  So, buckle up for the 8:30 data and then after that flurry, you can relax until 2:00pm.

Good luck

Adf

Concern ‘Bout the Fate

Posted on by

While waiting for Jay and the Fed
And CPI data on Wed
This week’s 3-year note
Was less than the GOAT
Though risk assets still moved ahead
 
But talk from some sources of late
Exhibit concern ‘bout the fate
Of how the US
Will deal with excess
Supply of bonds as they inflate

 

Since we observe market activities daily, though we remain subject to surprising outcomes (see Friday’s NFP results), there are more consistent features that offer a hint of how the mechanics of financial markets are working, and whether those mechanics are running smoothly or a bit creakier.

Arguably, the thing getting the most press is Nvidia’s stock price, as its continued rapid rise has resulted in the company now representing ~6.5% of the market capitalization of the S&P 500.  Along with Apple and Microsoft, all currently having market caps > $3 trillion, we are looking at three companies representing nearly 20% of the S&P 500.  This is unprecedented and many (including this poet) believe that it is unsustainable in the long run, and probably the medium run.

But another key market, arguably the most important when discussing the financial markets and the Fed, is the US Treasury market.  Countless hours are devoted to dissecting each tick and how movements in the yields of various maturity bonds may impact the economy and overall market sentiment.  With this in mind, when new securities are auctioned, it is always worth a look.  So, yesterday, the Treasury issued $53 billion of 3-year notes at a yield of 4.659%.  The underlying characteristics of this auction were not particularly encouraging for a Treasury that will be issuing 10-year and 30-year bonds as the week progresses, as well as another $trillion this year.  

The numbers that are most closely watched are the tail (the difference between the market estimate of the final yield prior to the auction and the actual results) which was at 1.1bps, a full basis point above the average tail of the past 6 months, an indication that demand was lacking.  As well, the bid to cover ratio (how many $ of bids were received vs. the $53 billion offered) fell to 2.43X, well below the average over the past 6-months of auctions.  Dealers were saddled with nearly 20% of the paper and overall, domestic demand was not very robust.

This gets highlighted because these little data points are often harbingers of bigger problems to come.  After all, if there is a dearth of demand for US Treasury paper, even short-dated paper like 3-year notes, that bodes quite ill for the US government, as well as for global financial markets.  Remember, US Treasury paper is the baseline for virtually all debt issuance around the world.  If it fails here, it will be GFC 2.0 or worse.

Why, you may ask, is this becoming an issue?  Well, one answer would be that the US’s current financial profligacy is starting to be discussed in quite negative terms at key institutions around the world.  For instance, the IMF’s managing director, Kristalina Georgieva, has expressed concern recently that the US is essentially hogging all the borrowing capacity around the world.  As well, Banque de France governor, Francois Villeroy de Galhau, explained, “U.S. fiscal policy is the elephant in the room: it is not in the hands of the Fed, and could significantly affect the level of long-term interest rates.  A large U.S. fiscal deficit tightens financial conditions and fuels inflation.”  

The point is that while Secretary Yellen, and Chair Powell, will not even discuss the potential ramifications of excess US government borrowing, it is being noticed in the halls of power elsewhere in the world, as well as on trading floors and in investment meetings at major asset managers.  This is not to say that anything dramatic is going to happen anytime soon, but death by a thousand cuts is still death.  Remember this, whatever the Fed’s mandate may say about price stability and maximum employment, I assure you, their number one priority, by miles and miles, is a smoothly working Treasury bond market.  A 1 basis point tail may not seem to be much, but like the little boy in Holland with his finger in the dike, it may foretell bigger problems to come.

The reason I can focus on minutiae like the details of a Treasury auction is that there is so little else ongoing from a macro perspective right now.  With US CPI to be released tomorrow and the FOMC meeting, statement and subsequent Powell press conference coming later tomorrow afternoon, most market participants are effectively holding their collective breath waiting for new information.

So, let’s review the overnight activity, which was not that exciting.  After modest gains in the US yesterday, Asia couldn’t seem to follow except for Japan (+0.25%) with most of the rest of the region selling off, notably the Hang Seng (-1.0%) and Australia (-1.3%).  European bourses, too, are under pressure across the board this morning with Spain (-1.4%) leading the way, but all the other large markets lower by at least -0.7%.  There is a rumor that French President Macron may resign if the RN wins the election at the end of the month and the first polling shows that Marine Le Pen’s group will win a plurality of votes, but not necessarily a working majority.  This will obviously be a major focus of markets going forward as regardless of who is in charge, it would be reasonable to expect many of the key issues that have driven this political shift (immigration, inflation, Ukraine) to become policies going forward.  As to US futures, at this hour (6:45) they are lower by about -0.25%.

In the bond market, the big news is really in Europe where the spread between German bunds and French OATs has widened by a further 8bps as concerns over the future government of France creep into investors’ minds.  Historically, Madame Le Pen has been quite anti-Europe so there seem to be some worries that if the RN wins an outright majority, there will be significant ructions in the European Union with France seeking more independence.  In the end, uncertainty breeds investor concern so I would not be surprised to see this spread widen further leading up to the election.  As to the Treasury market, yields have backed off 4bps this morning in what appears to be position inspired trading rather than being caused by new information.

Commodities, which had a very nice rebound yesterday with both energy and metals markets performing well, are back under pressure this morning with oil (-0.3%) and gold (-0.1%) the least impacted but the rest of the metals complex feeling the heat again.  However, NatGas continues its strong rally, up another 5% this morning and looking for all the world like it is going to continue rising until it tests the November 2023 highs of $3.80/MMBtu which is still $.75 higher.

Finally, the dollar continues to gain at the margins with the euro (-0.2%) slipping further on the French political news, although the pound is bucking the trend with a very modest rise.  The other currency that is having a good day is MXN (+0.8%) which continues its slow rebound from its post-election collapse last week.  Otherwise, EEMEA currencies are all under pressure as is the CNY (-0.1%).  Now, 0.1% may not seem like a lot, but the PBOC has been walking the value of the renminbi lower (dollar higher) ever so slightly every day for the past three months and the fix last night was at its highest level since January.  It appears clear that the pressure for a devaluation is strong in China and that the PBOC is working very hard to maintain a sense of stability.  My sense is this gradual weakness will continue for quite a while, at least until the Fed makes a change.

And that’s what we have today.  The NFIB Small Business Optimism Index was just released at 90.5, a bit firmer than forecast, but that is not a market-moving data point.  And there are no other data points to await today, nor any Fedspeak so the FX markets will take its cues from bonds and stocks.  Given that CPI and the Fed are both tomorrow, I anticipate another very quiet session overall in the US as investors (and algorithms) will want new news to drive their next trades.  Broadly, I think we are in a ‘good data is bad’ for risk assets as the mindset is it will delay any Fed rate cuts even further.  Of course, if Treasury auctions continue to see shrinking demand (today there is a 10-year auction for $39 billion) that will certainly have an impact on the bond market, the Fed’s response, and by extension risk assets and the dollar.  So, arguably, that auction is the biggest news of the day this afternoon.

Good luck

Adf

Crushed

Posted on by

On Friday, the NFP showed
That job growth has not really slowed
And wages were hot
So, pundits all thought
That ‘flation just might well explode
 
But under the NFP’s hood
Some things didn’t look quite so good
The joblessness rate
Itself did inflate
Though household jobs fell, understood?
 
Meanwhile across Europe the vote
For Parliament seems to denote
Incumbents were crushed
And governments flushed
While media seeks a scapegoat

 

Remember the narrative that had everyone feeling so good?  Inflation was drifting lower, albeit not in a straight line, but central bankers around the world were quite confident that their collective 2.0% targets were coming into view, and pretty soon at that.  This would lead to lower bond yields, continued strong performance in risk assets and slowing, but still solid economic activity.  In other words, many were invested in the Goldilocks thesis of a soft landing.  

Now, the data that we had seen last week seemed to indicate that was a viable process as the ADP Employment number was a touch soft, the JOLTS Job Openings number was definitely soft and although the ISM Services data was a lot stronger than anticipated, the ISM Manufacturing number was soft as well.  In addition, if we go back to the previous week, the Chicago PMI print was abysmal at 35.4.

This was all a prelude to Friday’s NFP data which confirmed confused everything.  While the headline number was much stronger than expected at 272K, the Unemployment Rate rose to 4.0% for the first time in more than two years, and Average Hourly Earnings rose 0.4% with an annual increase of 4.1%.  But even more confusing was the fact that looking at the Household survey, the survey that is used to calculate the Unemployment Rate, showed the number of jobs FELL by 408K while 250K people exited the workforce.  Now, if things were truly running smoothly, as the NFP number indicated, we would expect to see that household number of jobs rise, not fall.  Something is amiss.

Having read far too much about this over the weekend, it appears that the BLS data and its models are not a very accurate representation of the current reality, at least for the monthly data.  The BLS also produces a quarterly survey called the Quarterly Census of Employment and Wages (QCEW) which is a census of 11 odd million businesses in the US, rather than a survey of some 600k businesses for the NFP.  If one looks at the growing discrepancy between the number of jobs shown in that data vs. the NFP data, the NFP data has been rising far faster with the gap widening severely.   This can be seen in the below graph from the mishtalk.com website (from Mike Shedlock, an excellent economist/analyst).

The upshot is that while that headline NFP number has looked very good, there appears to be something else happening in the underlying data.  Early next year, the BLS will revise its NFP data, and you cannot be surprised if they reduce the readings significantly.  But revisions don’t have the same cachet as headlines, and so this is our current world. 

The market response was as you would expect; bonds got crushed with the entire yield curve jumping 15bps, the dollar rallied sharply, up nearly 1% on the DXY with several currencies falling farther than that (e.g., MXN -2.85%, NOK -1.5%, BRL -1.6%), and equity markets falling although not nearly as much as you might expect, only about -0.15% on average across the big indices.  But the notable moves were in commodities with gold (-2.2%), silver (-3.9%) and copper (-3.0%) just in the wake of the NFP data, with larger declines overall on the day.  Energy was the only space that held in on the day, but of course, it has been under pressure for several weeks.

What’s next?  Well, this week brings a great deal of new information including CPI, PPI, the FOMC Meeting and the BOJ meeting.  My take is many traders are licking their wounds right now, so given today’s calendar is quite benign, I imagine things will be a bit choppy as positions get adjusted, but direction will be hard to discern.  Except…

The European Parliament elections were held starting last Thursday but running through Sunday, with all 27 nations in the EU voting for their parliamentary representatives.  The story is, as you will clearly have heard by now, that the left wing, center-left and centrist parties got decimated while everyone on the right side of the aisle massively outperformed.  The Belgian PM resigned and there will be elections there.  French President Macron dissolved parliament for a snap election as his party won just 15% of the vote while Marine Le Pen, the conservative candidate leading the National Rally, won more than 31% of the votes.  As well, German Chancellor Olaf Sholz has been decimated as have the Green parties across the continent.  Times, they are a-changin’.  It is no surprise that the euro continues to falter after Friday’s declines as the European part of the equation just added to the woes from the US implication of higher interest rates.

What will these elections mean for markets?  The clearest message that I see is that the climate agenda is likely to be altered such that demand for oil and gas may well increase.  Do not be surprised to see more European nations abandon the Net Zero concept, at least reaching it by 2050.  Ironically, while the first move was seen as a negative for the euro, this may well be a harbinger of future euro strength if the Eurozone economies waste less money on impossible dreams and spend more on actual economic activity that generates benefits and income for its citizens without government subsidies.  But that will take a bit more time.

Perhaps the most important thing is that this election may well be a harbinger of the US election in November as the European people have clearly rejected the current themes and are looking for a change.  Far left Green policies that have been promulgated by the Biden administration have found no favor in Europe and certainly the current polling indicates it is equally unpopular in the US.

OK, a quick tour of the overnight session shows that Japanese equity markets performed well after GDP data there last night showed a less negative outcome in Q1 than originally reported, while most of the rest of Asia was closed for various holidays.  European bourses, however, are under pressure across the board led by France (-2.2%) although most of the rest of the continent has seen declines on the order of -1.0%.  As to the US futures markets, at this hour (6:15), they are lower by -0.3%.

Bond yields continue to climb with Treasuries up another 2bps and European sovereigns rising between 2bps (Germany) and 8bps (France and Italy) as the combination of higher US yields and some concerns over the future direction in Europe have come to the fore.  Overnight, JGB yields also jumped 7bps and are back above 1.00%, with the Japanese data and US data the drivers.  The BOJ meets Friday this week, so there is much speculation as to the outcome, although a rate hike is not forecast.

In the commodity markets, after Friday’s rout in the metals space, the big ones are all firmer this morning, although this looks like a trading bounce rather than a change of views.  Oil markets are little changed this morning, trading at the lower end of their recent ranges but NatGas, something I haven’t discussed in a while, is rallying again.  It is higher by 3% this morning and 26% in the past month, rising to $3.00/MMBtu, its highest price since November and double the lows seen in March.  Consider that if there is continued pushback against the Green agenda, as evidenced by the European elections, demand for NatGas is likely to grow quite strongly.

Finally, the dollar is continuing to gain strength this morning, with the euro down -0.6% following Friday’s declines and the EEMEA currencies all falling more than that.  Given the holidays in Asia, there was limited trading in the onshore markets there, and other than MXN, which is unchanged this morning, the rest of LATAM hasn’t opened yet.  However, remember that the peso has fallen 10% in the past week, so there is likely going to be some more movement in that space going forward.  Markets typically don’t dislocate by 10% and then just stop.

As if last week didn’t bring enough surprises between the NFP and election results in India, Mexico and Europe, this week we have a lot more to look for, although today is a blank slate.

TuesdayNFIB Small Biz Optimism89.8
WednesdayCPI0.1% (3.4% Y/Y)
 -ex food & energy0.3% (3.5% Y/Y)
 FOMC Rate Decision5.5% (unchanged)
ThursdayInitial Claims224K
 Continuing Claims1800K
 PPI0.1% (2.5% Y/Y)
 -ex food & energy0.3% (2.5% Y/Y)
FridayBOJ Rate Decision0.10% (unchanged)
 Michigan Sentiment72.0
Source: tradingeconomics.com

As this is a quarterly meeting of the FOMC, we will get new projections and a new dot plot, and of course, Chairman Powell will be speaking afterwards.  As of now, the market is pricing about a 50:50 chance of the first cut coming in September and a total of one and one-half cuts for the rest of the year.  It remains very difficult to discern what is really happening in the economy with all the conflicting data.  However, whatever the growth stories, nothing has indicated that inflation is going to decline very far.  I maintain the Fed is going to be higher for longer for even longer.  It continues to be difficult to see the benefits of many other currencies, although I would not be surprised to see MXN regain much of its lost ground as I doubt Banxico will be easing policy anytime soon, and president-elect Sheinbaum is not going to change things there that much and doesn’t take office until October.

Good luck

Adf