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Erring

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Excitement does not quite portray
The thirst for risk shown yesterday
Though media cried
Investors took pride
In Trump, sure that he’ll save the day
 
So, next Chairman Jay and the Fed
Will try to explain that instead
Of further rate paring
They might soon be erring
On side that Fed rate cuts are dead

 

Wow!  That is pretty much all one can say about yesterday’s equity market response to the confirmation that Donald Trump will be the next president of the United States.  The DJIA rose 3.6%, far outpacing both the S&P 500 (+2.5%) and the NASDAQ (+3.0%) but even that paled in comparison to the Russell 2000 small-cap index which jumped nearly 6% on the day!  Investors are all-in on the idea that Trump will seek to bring home as much manufacturing and economic activity as possible via tariff policies and small caps and old-line companies are the ones likely to benefit.

But boy, bonds had a tough day with yields across the curve rising between 10bps (2yr) and 20bps (30yr) with the 10yr gaining 15bps on the day.  It is all part of the same mindset, higher economic activity and no slowdown in spending leading to rising inflation and, correspondingly, rising yields.

The other area that really suffered were the metals markets, with gold (-3.3% or $90/oz), silver (-4.7%) and copper (-5.0%) all getting hammered.  The best explanation for the gold price’s decline I have heard is the idea that with Trump coming into office, the prospects for a nuclear war have greatly diminished.  Certainly, based on the fact that there were no new wars during his last term and one of his promises is to end the Russia/Ukraine war on the first day, perhaps that is correct.  As well, consider that the dollar exploded higher, something which had lately been a benefit for metals, but historically has been a negative, and at least we can make some sense of things here.

So, where do we go from here?  That, of course, is the $64 billion question.  Reactions around the world are still coming in and I would characterize them as a mix of stoicism and fear.  Perhaps a good place to start is Germany where the governing coalition just collapsed as Chancellor Sholz fired the FinMin who was the head of the FDP, one of his coalition’s groups.  Their problem is that the German economic model is crumbling, and the population is unhappy with the current situation.  The former can be demonstrated by today’s data showing the Trade Surplus fell more than expected while IP fell back into negative territory again, an all-too-common occurrence over the past three years as can be seen below, and hardly the best way to improve the productivity of your economy.

Source: tradingeconomics.com

Meanwhile, politically, the country is seeing a widening of views across the spectrum with the combination of the anti-immigration parties, AfD on the right and BSW on the left, garnering support of about 25% of the population and preventing any meaningful coalitions from being formed.  

If Germany continues to lag economically, it will negatively impact the whole of the Eurozone.  The divergence between the US economy, which has all the hallmarks of faster growth ahead, especially under a new administration, and the European economy, which continues to struggle under a suicidal energy policy that undermines any chance of industrial resurgence, and therefore a significant rebound in economic activity could not be greater.  While much ink has been spilled regarding the prospects that the dollar is going to collapse because of the debt situation and the BRICS are going to create something to replace it, the reality is the euro is in far more dire straits.  The ECB is going to be much more aggressive cutting rates than the Fed and the market is starting to price that in.  The below chart from Bloomberg this morning does an excellent job showing the change in market pricing over the past month.  

I find it hard to see how the euro can benefit in this environment regardless of the dollar’s performance against other currencies given the more limited economic prospects on the continent.  They are dealing with an existential crisis because of Russia’s more aggressive stance since the invasion of Ukraine combined with an undermining of their economic model which was based on exporting high value items to China and the rest of the world.  The problem with the latter is China has become a huge competitor and a shrinking market for their wares, and they have limited other markets.  If Trump holds to his word and imposes 20% tariffs on European imports to the US, the euro is likely to fall even further.

That is just a microcosm of one area and its response to the US election, but one that may well be a harbinger for many others.  The US stance in the world is changing and other nations are not really prepared.  Expect more financial market volatility, in both directions, as these changes become more evident and play out over time.

Ok, let’s see how other markets behaved with confirmation of the Trump victory.  In Asia, the Nikkei (-0.25%) slid but other indices rallied indicating a mixed picture.  Meanwhile Chinese shares rallied sharply (CSI 300 +3.0%, Hang Seng +2.0%) as expectations grow that the Standing Committee will expand the stimulus measures in the wake of the election.  Remember, the Chinese had delayed this annual meeting by a week to capture the results of the US election and now traders are betting on a bigger response.  As well, the Chinese Trade Surplus expanded far more than forecast, to its third highest monthly reading of all time at $95.3B.  As to the rest of the region, the picture was very mixed with some gainers (Singapore +1.9%, Taiwan +0.8%) helped by the China story and some laggards (India-1.0%, Philippines -2.1%) with the latter suffering from a much weaker than expected GDP report.

In Europe, interestingly, most markets are performing well this morning led by the DAX (+1.3%) although the rest of the continent’s bourses are only higher by around 0.5% or so.  The laggard here is the FTSE 100 which is unchanged on the day in the wake of the BOE’s widely expected 25bp rate cut.  Although, there were apparently some looking for a 50bp cut as stocks fell a bit in the wake of the news and the pound jumped 0.3%, a clear sign of a minor surprise.

Speaking of currencies, the dollar which has had quite a run in the past two sessions is backing off overall this morning although remains well above the pre-election levels.  In the G10, NOK (+1.3%) is the leader as the Norgesbank left rates on hold and indicated that was likely their stance going forward, while AUD (+1.0%) seems to be benefitting from both the rebound in metals prices and the potential Chinese stimulus.  Otherwise, currencies have rallied between 0.3% and 0.5% in this bloc.  In the EMG space, ZAR (+1.4%) is the biggest gainer, also on the precious metals rebound, while MXN (+1.2%) is next, although that is simply a continuation of the retracement from the post-election decline.  Bigger picture, I think the dollar remains well bid, but not today.

In the bond market, Treasury yields are unchanged this morning, consolidating their gains from the past week and waiting for the Fed this afternoon.  However, European sovereign yields have all rallied substantially, between 6bps and 9bps, which looks, for all intents and purposes, like the continent’s catch-up trade to yesterday’s US movement.  Nothing has changed the view that Treasury yields lead bond market moves in the G10.

Finally, in the commodity space, oil (-1.0%) is a bit lower this morning although yesterday it recouped most of its early losses and closed lower only minimally.  Yesterday also saw a surprising inventory build in the US which would be expected to weigh on prices.  In the metals markets, after a virtual collapse yesterday, this morning is seeing stabilization in precious metals and a sharp rebound in copper (+2.3%) as hopes for that Chinese stimulus spread to this market as well.

In addition to the FOMC meeting this afternoon, we see regular Thursday morning data of Initial (exp 221K) and Continuing (1880K) Claims as well as Nonfarm Productivity (2.3%) and Unit Labor Costs (1.0%).  However, despite all the recent activity, and the fact that a 25bp cut is a virtual certainty, Chairman Powell’s press conference will still have the trading community riveted to see how he describes any potential future paths in the wake of the election results.  Given the recent data and the estimate prospects of a Trump administration’s efforts to goose growth further, it is hard to see how the Fed can really discuss cutting rates much further.  In fact, I will go out on a limb and say I expect forecasts of the neutral rate are going to consistently climb higher and reach 4% before the end of 2025.  And that means, as is evident by both the economy and the stock market, the Fed has not tightened financial conditions very much at all.

Good luck

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The Throes of Anguish

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The answer this morning is clear
The president starting next year
Is Donald J Trump
Who always could pump
Excitement when he did appear

The market response has been swift
With equities getting a lift
The dollar, too, rose
But bonds felt the throes
Of anguish while getting short shrift

The punditry was quite convinced that it would be a long time before the results of the election were clear as they anticipated significant delays in the vote count in the battleground states.  Fears were fanned that if Trump were to lose, he wouldn’t accept the election.  As well, virtually every pundit in the mainstream media portrayed the race as “tight as a tick’ (a somewhat odd expression in my mind).

But none of that is what happened at all.  Instead, somewhere around 3:00am NY time, Donald J Trump was called the winner of the presidential election, effectively in a landslide as he appears set to win > 300 electoral votes and, perhaps more importantly as a signal, the popular vote, and will be inaugurated as the 47thpresident of the United States on January 20th, 2025.  Congratulations are in order.

It ought not be surprising that the ‘Trump trade’ is back in full force early on with US equity futures rallying about 2%, Treasury bonds selling off sharply with 10-year yields jumping 20bps and the dollar exploding higher, jumping by about 1.5% as per the DXY, with substantial gains against virtually all its G10 and EMG counterparts.  Oil prices are under pressure as the prospect of ‘drill, baby, drill’ is the future and Bitcoin has exploded higher to new all-time highs amid the prospects of a pro-crypto Trump administration.

Much digital ink will be spilled over the next weeks and months as the punditry first tries to understand how they could have been so wrong, and then tries to create the new narrative.  However, if we learned nothing else from this election it is that the previous narrative writers, especially the MSM, have lost a great deal of sway and that it will be the new narrative writers, those independents on X and Substack and podcasters, who don’t answer to a corporate master, who will be leading the way imparting information and stories.  I’ve no idea how this will play out with respect to financial markets, but I am confident it will have an impact over time.

With all of the votes being tallied
While stocks and the dollar have rallied
We’ll turn to the Fed
Who soon will have said
On rate cuts, we’ve not dilly-dallied

With the election now past, at least as a point of volatility, all eyes will likely turn to the FOMC meeting, which starts this morning and will run until the statement is released tomorrow at 2pm with Chairman Powell’s press conference coming 30 minutes later.  The election result has not changed any views on tomorrow’s rate cut, with futures markets still pricing in a 98% probability, but the pricing as we look further out the curve has changed a bit more.  For instance, the December meeting is now priced at less than a 70% probability for the next 25bps, and if we look out to December 2025, the market has removed at least one 25bp cut from the future.

This makes sense based on the idea that a Trump administration is going to be heavily pro-growth and one consequence will potentially be more inflationary pressures.  Of course, if energy prices decline, that is going to help cap inflation, at least at the headline level, so the impact going forward is very hard to discern at this time.  As well, if that pro-growth agenda helps improve the employment situation, the Fed will be far less compelled to cut rates further.  In fact, the only reason to do so at that time would be to address the massive debt load and that cannot be ruled out, but my take is Powell is not inclined to try to help President Trump in any way, so will likely feign allegiance to the mandate when the situation arises.

But with all the election excitement today, my sense is the Fed is tomorrow’s market discussion, not today’s.  Rather, let’s see how markets around the world have responded to the news.

It seems that yesterday’s US markets foretold the story with a solid rally across the board.  Overnight, Japanese shares (+2.65%) were beneficiaries as the yen (-1.7%) weakened sharply along with all the other currencies.  Elsewhere in the region, China (-0.5%) and Hong Kong (-2.2%) both suffered on prospects of more tariffs coming and Korea (-0.5%) was also under pressure, but almost every other regional exchange rallied nicely.  As to Europe, green is the predominant color with the DAX (+0.9%), CAC (+1.5%) and FTSE 100 (+1.2%) all performing well although Spain’s IBEX (-1.5%) is underperforming allegedly on fears of some tax issues that will impact the Spanish banking sector.  But I would look at Spain’s Services PMI falling short of expectations as a better driver.

In the bond market, while US yields have rocketed higher as discussed above, in Europe, that is not the case at all.  Instead, we are seeing declines of between 4bps and 5bps across the continent as concerns grow that Eurozone economic activity may suffer with Trump in office as threats of tariffs rise.  The market has now priced in further rate cuts by the ECB and that seems to be the driver here.

Aside from oil prices falling, metals, too, are under severe pressure with the dollar’s sharp rally.  So precious (Au -1.3%, Ag-2.3%) and industrial (Cu-2.8%, Al -1.0%) are all selling off.  Now, this space has seen a strong rally overall lately so a correction can be no real surprise.  However, it strikes me that if the growth story is maintained, demand for industrial metals will expand and gold is going to find buyers no matter what.

Finally, the dollar just continues to rock, climbing further since I started writing this morning.  the biggest loser is MXN (-2.9%) which has fallen to multi-year lows amid concerns they will be an early target of tariffs.  While the dollar, writ large, is stronger across the board today, it is only back to levels last seen in July, hardly a massive breakout.  However, do not be surprised if this rally continues over time as investors learn more specifics of how President Trump wants to proceed on all these issues about the economy, taxes and tariffs.

The only meaningful data releases this morning are the EIA Oil inventories, which last week saw a large draw and are expected to see a further one today.  Otherwise, European Services PMI data, aside from Spain’s disappointing showing, was actually better than expected, probably helping equity markets there as well.  Of course, as the Fed doesn’t come out until tomorrow, there is no Fedspeak so traders will likely continue to push the Trump trade for now.  As such, look for the dollar to remain strong until further notice.

Good luck
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Half-Crazed

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The rest of the world is amazed
And frankly, I think, somewhat dazed
The vote in the States
Deteriorates
Each cycle, as folks turn half-crazed
 
But still, everyone cannot wait
To find out if we will be great (again)
Or if we will turn
The page and thus spurn
The chance to encourage debate

 

By now, I imagine most of you have figured out my preference for the election outcome and whatever your view, I sincerely hope you don’t hold it against me.  However, if that is the case, so be it.  In the meantime, whatever happened in markets yesterday and overnight just doesn’t matter at all as the opportunity for a major revision of perceptions is so large as to make any price information completely useless, at least in the US markets.

I have seen numerous studies showing the history of how markets behave in presidential election cycles, but I think it is a fair assessment that the current cycle is unlike any previous cycle that we have seen since, perhaps, just before the Great Depression.  Simply consider the massive amount of information that is available to the average person from numerous sources these days compared to anytime in the past.  As such, I don’t put much faith in any of those studies.

Which takes us to this morning.  Do we truly have any idea what the outcome will be?  I would argue not although we all have our favored outcomes.  And that bias, I believe, is deeply embedded in virtually every analysis.  As such, I will not try to analyze.  Rather, I will observe.

The first observation is that market implied volatility has been rising for the past weeks as the seemingly dramatic differences in policy outcomes depending on the ultimate winner mean market dislocations in either direction are quite possible.  

For example, let’s look at 1-month implied volatility in the major USD currency pairs this year as per the below:

Source: Capital Edge Corner via X

They have been rising steadily since early October as a combination of corporate hedgers trying to protect themselves and hedge funds and traders trying to profit from the dislocation have increased demand steadily.  The one truism here is that upon confirmation of a winner, regardless of the underlying move in the dollar, implied volatility is going to decline.

Much has been made of the ‘Trump trade’ which appears to mean that if Trump wins, the prospects for higher growth and inflation will steepen the yield curve, driving yields higher, while supporting the dollar (much to Trump’s chagrin) as foreign investors flock to US equities.  In fact, the most common explanation for the dollar’s decline over the past several sessions has been that Harris has improved in the polls.  

But it is not just the FX markets where implied volatility is rising, look at the VIX below, which is also showing a steady climb over the past two months.

Source: Fred.gov

That spike in August was the almost forgotten market response to the BOJ tightening policy and the -12% decline in the Nikkei just days after the Fed didn’t cut interest rates as many had hoped.  But if you eliminate that event, the trend higher remains intact.

Finally, the MOVE Index, which is the bond market volatility index shows very similar behavior, a steady climb over the past month especially, but truly trending higher since the summer as seen below:

Source: Yahoo Finance

My point is that given the growing uncertainty across all markets as well as the complete inability to, ex ante, determine who is going to win the election, the signal to noise ratio of price movement right now is approximately 100% noise, at least in financial markets.  Commodity markets have a bit of a life away from the election, so price action there is far more representative of true supply and demand issues.  Arguably, this is merely another consequence of the financialization of most things, the loss of market signals as they have been overwhelmed by the flood of liquidity provided by central banks around the world.

At any rate, until we know who wins, it will be difficult to establish a view of the near-term or long-term future of market activity. So, let’s recap the overnight session as its all we have left.

After yesterday’s equity selloff in the US, most Asian exchanges posted gains led by China (+2.5%) and Hong Kong (+2.1%) which responded to comments from Chinese Premier Li Qiang’s comments that, “The Chinese government has the ability to drive sustained economic improvement.”  And perhaps they do, although there are clearly issues regarding the local entities that are willing to gain at the expense of each other in order to demonstrate their own progress.  But Japanese shares (+1.1%) also rallied along with most of the region, perhaps a direct analogy to the US decline as the ‘Trump trade’ has included weakness in markets likely subject to Trump’s promised tariffs.  Meanwhile, in Europe, bourses have edged slightly higher this morning, between 0.1% and 0.2%, with no new data or news of note.  Interestingly, US futures are starting to trade higher at this hour (6:50), perhaps an indication of market beliefs, although just as likely part of the random walk down Wall Street.

In the bond market, Treasury yields (+3bps) are creeping higher again, also in line with the Trump trade, and that seems to be dragging European sovereign yields along for the ride as all those markets have seen yields climb between 4bps and 5bps.  Again, given the lack of new data, and the history of these yields following Treasuries, I see no other strong explanation. 

In the commodity markets, oil (+0.3%) continues its rebound and has now gained more than 6.5% in the past week.  The combination of OPEC+ delaying their planned production increases and seeming hopes for a pickup in Chinese demand on the back of the coming details of the stimulus package seems to have traders in a better mood these days.  As to the metals markets, they are all firmer this morning with gold (+0.2%) mostly biding its time ahead of the election, but both silver (+0.8%) and copper (+0.9%) starting to accelerate a bit.  Nothing has changed my view that regardless of the election outcome, this space is far more dependent on continued central bank policy easing and there is no indication that is going to end soon.

Finally, the dollar is softer again this morning, but in a more muted fashion than the past several sessions.  Although, with that in mind, we still see the euro and pound both climbing a further 0.25% and AUD (+0.6%) today’s leader after the RBA left rates on hold with a more hawkish statement than anticipated.  But the weakness is widespread with NOK (+0.4%) continuing to benefit from oil’s rise while ZAR (+0.6%) gains on the back of the rise in metals.  Of course, the currency that has seen the most discussion ahead of the election is MXN.  It is basically unchanged this morning, a perfect description of the narrative that the election will be extremely close.  However, a quick look at its price movement over the past week shows that it follows every bump in the polls.

Source: tradingeconomics.com

And that’s really it this morning.  We see the Trade Balance (exp -$84.1B) and ISM Services (53.8) but honestly, nobody is going to respond to that data.  Instead, all eyes will be on the early exit polls and the reporting of how the election is going.  No matter what, it seems hard to believe we will really have an idea before 10:00pm this evening, and then only if it is a blowout in either direction, seemingly a low probability.  So, today is a day to watch and wait if you don’t already have hedges in place because honestly, it’s probably too late to do anything now.

Good luck and go vote

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Fraught

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The job growth that everyone thought
Existed, seems like it was fraught
Meanwhile ISM
Showed further mayhem
As growth slowed while prices were hot
 
The funny thing was the reaction
Where stocks were a source of attraction
But at the same time
Bond buys were a crime
With sellers the ones gaining traction

 

The NFP data was certainly surprising as the headline number fell to its lowest level, 12K, since December 2020 with the worst part, arguably, the fact that government jobs rose 40K, so there were 52K private sector job losses.  That is just not a good look, nor were the revisions to the previous months which saw another 112K jobs reduced from the rolls.  It cannot be surprising that the Fed funds futures market immediately took the probability of a rate cut to 99% this week and raised the December probability to 82%, up more than 10 points in the past week.  After all, Chair Powell basically told us that he has slain inflation, and they are now hyper focused on the employment mandate.  With that in mind, the futures reaction makes perfect sense.

Perhaps even more surprising was the market reaction, or the dichotomy of market reactions, which saw equity markets in the US rally nicely, with gains between 0.4% and 0.8% in the major indices, while Treasury yields spiked 10bps despite the data.  That yield spike helped carry the dollar higher as the greenback rallied smartly against virtually all its counterparts by more than 0.50%, and it undermined commodity prices.  

The most common explanation here, though, had less to do with the NFP data and more to do with the recent polls regarding the US election, where it appeared the former president Trump was gaining an advantage.  Remember, the ‘Trump trade’ is being described as a steeper yield curve with benefits for the dollar and US equities on the back of stronger growth and higher inflation.

There once was a US election
Where both candidates lacked affection
The worry it seems
Is half the world’s dreams
Are likely soon met with dejection
 
Meanwhile for investors worldwide
This week ought to be quite a ride
To all our chagrins
No matter who wins
Look for either outcome denied

However, this morning, the markets have changed their collective mind, with virtually all of Friday’s movement now unwound, at least in the bond and FX markets.  What would have caused such a reversal?  Well, the latest polls show that the race is much tighter than thought on Friday, with VP Harris gaining ground in a number of them, which now has most pundits simply calling for their favored candidate to win, rather than trying to read the polls.  As such, the Trump trade has been partially unwound and my sense is that until there is an outcome, it will be difficult for markets to do more than increase the amplitude of their moves amid less and less actual trading.  At least, that is true in bonds, FX and commodities.  Stocks, as we all know, are legally mandated to rise every day, so are likely to continue to do so. 

And now, despite the fact that the Fed meets on Thursday, with a rate cut all but assured and ostensibly a great deal of interest in Chairman Powell’s press conference, all eyes are on the election.  Remember, too, not only is that the case in the US, but also around the world.  Whether friend or foe of the US, pretty much all 195 nations on the planet are invested in the outcome.

With that in mind, and since this poet has no deep insight into the outcome, let me simply recount the overnight market activity with the understanding that many trends have the opportunity to reverse depending on the results.

Starting with equity markets, Japanese shares (-2.6%) fell sharply as a combination of both their domestic political struggles (remember their government situation is unclear after the recent snap election) and the significant rebound in the yen (+0.9%) weighed on equities there.  India (-1.2%) also struggled but elsewhere in the time zone, stocks rallied nicely led by China (+1.4%) and Korea (+1.8%) as visions of that Chinese fiscal bazooka continue to dance in investors dreams.  Interestingly, the WSJ had an article this morning downplaying the idea, which based on their history makes a great deal of sense to me.  Turning to Europe, most markets there are firmer, albeit only modestly so, with gains from the CAC and IBEX (+0.3% each) outpacing the DAX (0.0%).  Finishing off, US futures are basically unchanged at this hour (7:00).

In the bond markets, while the Treasury move Friday did help drag European yields somewhat higher, it was nothing like seen in the US and this morning, those yields are essentially unchanged, +/- 1bp in most cases.  The only data of note was the final PMI data which confirmed the flash data from last week.  As to JGB yields, they have been stuck in the mud for a while now, still hanging below the 1.0% level with no designs of a large move.

Oil prices (+3.1%) are rebounding nicely on news that OPEC+ has delayed their previous plans to start increasing production as of December this year.  Concerns about oversupply in the global market plus the return of Libyan production and record high US production have convinced them they better leave things as they are.  Metals markets are a bit firmer this morning with gold (+0.2%) actually somewhat disappointing given the magnitude of the dollar’s decline, while both silver (+1.25%) and copper (+1.1%) show nice gains.

Finally, the dollar is under severe pressure across the board.  The biggest gainers are MXN (+1.2%), NOK (+1.2%) and PLN (+1.1%) although most gains are on the order of 0.7% or more.  Certainly, the oil story is helping NOK, and given the concerns that traders have about prospective tariff increases on Mexico if Trump wins, the idea that the race is closer than previously thought has supported the peso.  As to the zloty, it seems that their PMI data, printing at 49.2, a fourth consecutive rise) has traders looking for a more hawkish central bank on the back of stronger economic activity.

On the data front, aside from the election and the Fed, there is other information, although it is not clear that anyone will notice.

TodayFactory Orders-0.4%
TuesdayTrade Balance-$84.1B
 ISM Services53.8
ThursdayBOE Rate Decision4.75% (current 5.00%)
 Initial Claims223K
 Continuing Claims1865K
 Nonfarm Productivity2.5%
 Unit Labor Costs1.1%
 FOMC Rate Decision4.75% (current 5.0%)
FridayMichigan Sentiment71.0

Source: tradingeconomics.com

Of course, the election will dominate everything, and it certainly appears that there will be legal challenges from the losing side regardless of the outcome.  My expectation is that markets will remain jumpy with outsized moves on low volumes until there is more clarity.  It is not often that an FOMC meeting is seen as an afterthought, but much to Chairman Powell’s delight, I sense that is going to be the case this week.  

I have already voted early and I encourage each of you to vote as the more voices heard, the better the case the winner will have at achieving a mandate.  And the reality is, we need a president with a mandate if we are going to see broad-based positive changes in the nation going forward.

Good luck

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Looking Elsewhere

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The Middle East story is back
With fears that Iran might attack
So, oil is rising
And it’s not surprising
The dollar is leading the pack
 
But til anything happens there
The market is looking elsewhere
The Payrolls report
May well be the sort
That causes Chair Powell to care

 

It was only a week ago when the Israeli response to the Iranian missile barrage was seen by market participants as a clear de-escalation of tensions in the Middle East.  The market’s response was to reduce the risk premium in the price of oil which promptly fell $5/bbl amid signs of slowing growth in China as well.  Alas, as can be seen in the chart below, that was Monday’s story and no longer pertains.  Rather, the new concern is that Iran is planning to launch yet another attack, this time via proxies in Iraq, with Israel vowing to respond more severely.  You cannot be surprised that oil has regained its levels prior to Monday’s narrative.

Source: tradingeconomics.com

Adding to the buying pressure for oil has been the better than expected growth data from China (Caixin Mfg PMI printing better than expected 50.3) and solid US GDP data on Wednesday along with stronger Personal Income and Spending data yesterday.  And remember, the market is also looking ahead to the Standing Committee of the National People’s Congress in China to add significant fiscal stimulus there, with CNY 10 trillion (~$1.4 trillion) the most popular number being bandied about.  If that comes to pass, it will seemingly increase demand for oil on China’s part.

Of course, there is another piece of news that the market is awaiting with the potential for a significant impact, today’s Employment Report.  Ahead of the release, these are the current consensus forecasts:

Nonfarm Payrolls113K
Private Payrolls90K
Manufacturing Payrolls-28K
Unemployment Rate4.1%
Average Hourly Earnings0.3% (4.0% Y/Y)
Average Weekly Hours34.2
Participation Rate62.5%
ISM Manufacturing47.6
ISM Prices Paid48.5

Source: tradingeconomics.com

You may remember that last month, the NFP number printed much higher than expected at 233K which began the questioning of the Fed’s expected rate cutting path.  Frankly, the data since then has done very little to argue for much policy ease as Retail Sales have held up, GDP was solid and prices appear to be moving higher, not lower.  In fact, you can see how things have played out over the past month in the chart/table below from the CME showing the market priced probability of future Fed funds rates.  Check out where things were a month ago, just prior to the last NFP report.

The market was pricing a more than 50% probability of at least 75 basis points of rate cuts by December. Obviously, that is no longer the case and if this morning’s data proves stronger than forecast (remember, ADP Employment was significantly stronger than expected) many more people are going to call into question the assumption that the Fed is going to be cutting rates at all.  If you think about it, GDP is growing above trend at 2.8%, inflation remains above target with core CPI 3.3% and Unemployment is at a still historically low 4.1%.  if I look at those three major economic guideposts, the one that stands out to be addressed is inflation, not Unemployment, and that takes tighter policy.

Now, maybe this morning’s data will be awful, with a 50K NFP print and a jump in the UR to 4.3%.  That would certainly bring the doves out more aggressively but absent something like that, I continue to scratch my head as to why the Fed is so keen to cut the Fed funds rate.  Let’s put it this way, if the data surprises to the upside, I expect the December rate cut probability to fall close to 50%.

At any rate, those are the topics du jour, away from the election stories that are suffocating most everything else.  So, let’s see how things behaved overnight.

Well, I guess there has been one other story that has gotten tongues wagging, the fact that US equity markets had their worst session in two months with all three major indices falling sharply.  This was blamed on weaker than forecast earnings releases from several companies in the tech sector, where even if the actual earnings were solid, there were other issues like guidance or breakdowns of revenues, that disappointed.  It is far too early to declare that the love affair with the tech sector, especially AI, is ending, but there are a few names in the sector that are suffering greatly.  This certainly bears close watch going forward, because if this theme starts to lose adherents, even in the short run, it appears there is ample room for a move lower in stocks.

Turning to other markets overnight, Tokyo (-2.6%) led the way lower in Asia with most regional exchanges falling and only Hong Kong (+0.9%) bucking the trend.  There are those who believe there is a causal relationship between the Nikkei, the NASDAQ and USDJPY with one theory that it is the FX rate that drives these movements.  While it is certainly true that we have seen correlation amongst these three markets, I find it difficult to make the case that USDJPY is the driver.   A quick look at all three on the same chart certainly shows that they regularly move in similar directions, but I have a harder time claiming which one is the leader.

Source: tradingeconomics.com

However, despite the negativity from yesterday’s US moves and the overnight sell-off and the sharp rise in oil prices, European bourses are all in the green today, higher by about 0.5% across the board.  In fact, this is in sync with US futures which are also trading higher, by about 0.4%, this morning.

In the bond market, other than UK Gilt yields, which rose 7bps net yesterday although traded as high as 20bps higher than Wednesday’s close during the session, the rest of the bond markets were quiet.  It seems that UK bond investors are not that happy with the recently promulgated budget, and neither are voters as there was a by-election in a “safe” Labour seat that went to Nigel Farage’s Reform UK party.  I have a feeling that bond markets are going to be the epicenter of market activity over the next week or two as huge differences of opinion remain regarding the potential outcomes of the US election.

Away from oil (+1.9%) this morning, the rest of the commodity sector is also doing well today with both precious and base metals all in the green.  But they have not recouped yesterday’s declines which saw gold fall back -1.5% with even larger losses in silver (-3.2%) although copper (-0.6%) didn’t have nearly as bad a day.  This morning, the metals are higher by between 0.2% (gold ) and 0.6% (silver), so it seems like it was a month-end position adjustment and profit-taking exercise.

Finally, the dollar is strong this morning, rallying against most of its G10 counterparts with JPY (-0.4%) the laggard while the pound (+0.1%) seems to be benefitting from higher yields.  Versus the EMG bloc, the dollar is also broadly higher with only MXN (+0.2%) showing any life.  The peso has a number of issues ongoing with concerns that a Trump victory may lead to tariff increases and strain on the economy while domestic issues have arisen over the potential resignation of eight of their Supreme Court Justices which will have a big impact on the judicial system and potentially the Morena party’s ability to rule effectively.  However, after a steady weakening of the peso throughout October, it appears we are seeing a bit of a bounce this morning.

And that’s really what we have today.  At this point, we will all await the NFP and respond accordingly.  Something to keep in mind is that the hurricanes last month could well impact the data, so whatever the outcome, you can be sure that there will be those saying to ignore it as incomplete.  Regarding the dollar, it is still hard to bet against in my mind given the US economic data continues to be the best around.

Good luck and good weekend

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She Just Doesn’t Know

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Though there was no change
Ueda-san hinted that
The future is known

 

Last night, the BOJ left policy unchanged, as universally expected, but indicated that “Our basic stance is that if our economic and price outlooks are realized, we’ll respond by raising rates.”  That seems pretty clear, and the market responded accordingly with the yen rallying nearly 1% in the immediate aftermath of the comments, although it has since retraced a bit and is now higher by just 0.5% on the session.  As well, he explained, “We’ve been looking at the downside risks to the US and overseas economies, but that fog is clearing somewhat. Needless to say, new risks could emerge depending on the policies coming from the new US president.”  The upshot is that market expectations are now for the next rate hike to take place at the January meeting (69% probability), although December cannot be ruled out.

Japanese equity markets fell modestly during the session (Nikkei -0.5%), but that could also have been more related to the US equity performance, where all three major indices fell yesterday (something that I thought had been made illegal 🤣).  As to JGB’s, they rallied slightly with the 10-year yield slipping 2bps on the session.

In the current market zeitgeist, I don’t believe the happenings in Japan are that crucial.  As Ueda-san said, US politics remains a key focus for every financial market around the world, as well as every economy, given the potential for a Trump victory and some very real changes to the current global trade and economic framework.  However, that doesn’t mean other things of note have stopped occurring.

The message from Madame Lagarde
Is further rate cuts aren’t barred
She just doesn’t know
How fast she should go
Though colleagues, more cuts, have pushed hard

The other story this morning, in the wake of some Eurozone data showing inflation ticked higher in October (headline 2.0%, core 2.7%), is the commentary from several ECB members.  Notably, Madame Lagarde explained “The objective is in sight, but I am not going to tell you that inflation is under control.  We also know that inflation will rise in the coming months, simply because of base effects.”  The punditry sees this as a middle ground between the more hawkish ECB members, like Nagel and Schnabel, who are calling for a “gradual approach” and that the ECB “mustn’t rush further steps,” and the doves, led by Panetta, who are concerned, “Monetary conditions are still tight and new cuts will be necessary.”  

The ECB is finding itself in a difficult position as they refuse to accept the idea that a recession is coming despite the lackluster economic data and the ongoing anecdotal evidence of trouble as evidenced by VW’s closing of factories and seeking wage cuts.  Meanwhile, they understand that inflation, at least optically, is due to rebound somewhat, and cutting rates while that is occurring may be more difficult to explain.

Ultimately, as we have seen repeatedly across all markets and nations, the biggest driver of almost everything is the combination of US economic activity and monetary policy.  However, that is not to say that other nations or blocs cannot demonstrate some independence for their own idiosyncratic reasons.  Regarding the euro, I find it interesting that I have seen more comments this morning about how the currency has found a bottom and is set to rebound.  However, I cannot help but look at the bigger picture (see chart below) and think nothing at all has changed.

Source: tradingeconomics.com

I continue to believe that in order for there to be any changes of substance, we will need to see the US policy change substantially.  That could take the form of an acknowledgement by the Fed that the economy remains strong and further cuts are not necessary (see yesterday’s ADP Employment number of 233K, twice expectations) or a decision by Chairman Jay that there are enough structural issues in the banking and financial system that further rate cuts are necessary despite what appears to be solid growth and still-high inflation.  If the former were to occur, I would look for the dollar to take another strong step higher and the euro to test parity along with other currencies declining commensurately.  If the opposite were to occur, the dollar would weaken substantially in my view, with the euro rising toward 1.15 or so.  However, I don’t see either of those scenarios playing out, so I believe the reality is we remain in the range we have traded in for the past two years as seen above.

And those were really the only stories to discuss away from the US election cacophony.  So, let’s see how markets behaved broadly overnight.  As mentioned above, US equities had a down day after some disappointing earnings results added to some overly long positioning.  Beyond Japanese shares, the rest of Asia was broadly negative as well, with Korea (-1.5%) and India (-0.7%) leading the way lower, but almost every market in the red.  We are seeing similar price action in Europe this morning as it appears Lagarde’s comments did not soothe any frazzled nerves, and the data was unhelpful as well.  As such, the CAC (-0.85%) is the lagging performer although the DAX (-0.5%) and FTSE 100 (-0.8%) are also under pressure.  Now, regarding the FTSE 100, that is also a product of the UK budget announcement yesterday which has been widely panned by most analysts.  It appears they have actually managed to create a situation where they increase spending and taxes but reduce growth substantially.  The upshot here is that there seems to be a little buyers’ remorse with the July election results.  Meanwhile, US futures are all pointing lower as well this morning, at least -0.5%.

In the bond market, yesterday saw Treasury yields rebound to their recent highs at 4.30% but this morning they have slipped back lower by -2bps.  European sovereigns, however, are higher by those same 2bps as the market responds to the combination of yesterday’s Treasury movement and the higher than forecast Eurozone inflation report.  The outlier here is the UK, which after the budget has seen yields rise dramatically, a sign that markets are distinctly unimpressed with the proposals.  This is a case where a picture is truly worth 1000 words.

Source: tradingeconomics.com

I’ll let you determine when the budget was released, but one must be impressed with the more than 20bp response!

In the commodity space, oil (+0.5%) is continuing its rebound from its worst levels at the end of last week after EIA inventory saw surprising draws rather than modest builds.  As well, Chinese PMI data overnight was slightly better than expected and there are those now calling for a more robust Chinese economic rebound and increase in demand.  As to the metals markets, though, weakness is the order of the day with both precious and industrial metals slightly softer, although remember, these have rallied sharply over the course of the past month, so some trading movement lower is no surprise.

Finally, the dollar is mixed to slightly higher with only the MXN (+0.3%) showing any gains of note beyond the yen’s moves while there is more breadth in the decliners (NOK (-0.3%, ZAR -0.2%, AUD -0.2%) with almost no movement in Asian currencies overnight.

On the data front, this morning brings the weekly Initial (exp 230K) and Continuing (1890K) Claims data as well as Personal Income (0.3%), Personal Spending (0.4%) and PCE (0.2%/2.1%) and core PCE (0.3%/2.6%).  Already we are hearing that the impact of the recent hurricanes is likely to confuse the employment data, which makes sense, but I think much more attention will be paid to the Income/Spending data.  Certainly, Retail Sales have held up well, and if Personal Income continues to do well, it will call into question the need for that many more rate cuts by the Fed.  As of this morning, the futures market is pricing in a 94% probability of a cut next week and a 70% probability of another one in December.  Perhaps more interestingly, and where things could really change, is the fact the market is pricing in a total of 135bps of cuts by the end of next year.  We will need to keep an eye on how that changes for clues to the dollar’s future.

For now, the dollar appears on its back foot, but absent some much weaker than forecast data, it is hard for me to see a sharp decline.  Rather, I continue to see more reason for the dollar to maintain its broad strength going forward.

Good luck

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Another Mistake

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Said Janet, we need to watch out
‘Cause bank fraud is starting to sprout
So maybe I’ll make
Another mistake
And drive banking stocks to a rout

 

“I absolutely agree with the premise — which is that fraud is becoming a huge problem.”  These sage wordsfrom our esteemed Treasury Secretary have made headlines and also raised some alarms.  After all, was not Madam Yellen in charge of bank regulation not that long ago?  Did she not receive millions of dollars in speaking fees from those same banks before being named Treasury Secretary?  It is difficult to listen to the recent change in tone without considering the fact that she is concerned if the election results in a Trump victory, her time at Treasury may come under deeper scrutiny so she is starting to spill a few beans to show she was on the ball.

But arguably, the biggest issue is not that fraud is rampant in banking, with action around government checks being the most fertile area, the biggest issue remains the nonstop borrowing that continues as the US government debt continues to grow aggressively each day.  There have been several recent commentaries by some very smart guys, Luke Gromen and Bob Elliott,  regarding the coincidence of rising interest rates in the US and almost every other G10 economy despite significant differences regarding the economic situation and borrowing patterns.  One conclusion is that owning government debt from any western government, at least debt with any significant duration, is losing its luster quickly.  This is a valid explanation of why yields continue to rise despite the Fed’s, and other central banks’, recent rate cuts.  

Of course, there is another popular explanation about the recent rise in yields; the prospects of a Trump victory and corresponding sweep in the House and Senate is seen as growing substantially.  The thesis is that if that is the outcome, the budget deficit will grow even larger as the tax cuts due to expire next year will very likely be rolled over, and there is no indication there will be a reduction in spending (the Republicans merely have different spending priorities).  Hence, deficits will continue to grow, Treasury debt will continue to increase, and yields will increase as well.  At least, that’s the thesis.

One thing which is undoubtedly true is that if there is an increase in volatility in government bond markets, the dollar is going to be one of the beneficiaries.  Keep that in mind going forward.

Though views about Europe were dire
Today, GDP printed higher
While Italy sank
They’ve Germans to thank
For being the major highflier

The other story of note this morning is the Eurozone GDP report alongside GDP readings from several key nations.  At the Eurozone level, GDP surprised everyone with a 0.4% Q/Q print and a 0.9% Y/Y print, higher than the 0.2%/0.8% expectations.  Now, in the big scheme of things, those numbers are not that great, but better than expected is certainly worth something.  Germany was the key driver as they avoided a technical recession by growing 0.2% in Q3.  What is little noted is that Q2’s data was revised lower from -0.1% to -0.3%, so it is fair to say that things have not been great there.  In fact, below is a chart of the past 5 years’ worth of quarterly results in Germany and you can see that the concept of a growth impulse there, at least since the beginning of 2022, has largely been absent.

Source: tradingeconomics.com

Another telling sign that the headline may not be a true reflection of the situation on the ground there is that the Eurozone also released a series of sentiment indicators, almost all of which were weaker than expected, notably Economic Sentiment (95.6 vs. 96.3 last month and expected) and Industrial Sentiment (-13.0 vs. -11.0 last month and -10.5 expected).  Apparently, the growth was the product of greater than expected government spending, not really the best way to grow your economy.  However, the market did respond by pushing the euro (+0.15%) a bit higher although the recent downtrend remains in place as evidenced by the below chart.  It remains difficult to get too excited about the single currency given the growing divergence in views on the Fed and ECB, with the former being questioned about its policy easing while the latter is being called on to do more.

Source: tradingeconomics.com

And that was really the macro news for the evening so let’s see how markets overall behaved.  Yesterday’s mixed US session was followed by similar price action in Asia with the Nikkei (+1.0%) continuing its recent rally as the market gets comfortable with PM Ishiba putting together a minority government while Chinese shares (CSI 300 -0.9%, Hang Seng -1.55%) suffered as hopes for the ‘bazooka’ stimulus faded, at least temporarily.  As to the rest of the region, almost all the stock markets declined on the evening.  That negative price action is evident in Europe as well this morning with every major market in the red (CAC -1.4%, DAX -0.8%, IBEX -0.6%) as the better than expected GDP figures don’t seem to have been that enticing for investors.  In the UK, too, stocks are softer (FTSE 100 -0.3%), although there has been no data released.  The big story there today is the budget release upcoming with most pundits looking for a lot of smoke and mirrors and no progress on spending stability.  Meanwhile, US futures are a bit firmer this morning after solid earnings from Google after the close yesterday.

In the bond market, yields have backed off from their recent highs with Treasuries (-4bps) falling after yesterday’s 4bp decline.  Yesterday’s US data was a bit softer than expected (Goods Trade Deficit fell to -$108.23B, much larger than expected while the JOLTS data (7.44M) fell to its lowest level since January 2021 and indicates a rough balance in the jobs market.  As discussed above, European yields are following Treasuries lower with declines on the order of -3bps across the major economies with only Italy (+1bp) the outlier on higher than expected CPI readings.  Meanwhile, UK Gilts (-10bps) are the real outlier as bond investors seem intrigued over the potential budget.

In the commodity space, oil (+1.3%) is bouncing a bit although remains well below the $70/bbl level.  It appears that the worst is over for now and a choppy market is in our immediate future pending the election outcome.  Consider that if Trump wins, given his ‘drill, baby, drill’ plank in the platform, it is likely that oil will slide on the news while a Harris win is likely to see prices rise on the fear of a fracking ban.  Gold (+0.2%) continues its steady march higher with investors abandoning bonds and looking for a haven, although the other metals (silver -1.1%, copper -0.6%) are suffering this morning on the softer economic data.

Finally, the dollar is under very modest pressure this morning but remains at the high end of its recent trading range.  JPY (+0.25%) has managed a modest rally ahead of tomorrow’s BOJ meeting but we have seen a mixed picture overall with some gainers (AUD, NZD, KRW) and some laggards (SEK, GBP, HUF).  Ahead of the election, I continue to expect choppiness and a lack of direction but once that is complete, as I have said before, market volatility in other markets is likely to lead to a stronger dollar.

On the data front today, we start with ADP Employment (exp 115K) and then see the first look at Q3 GDP (3.0%) along with a key subcomponent of Real Consumer Spending (3.0%).  We also see the Treasury Refunding Announcement, with not nearly as much press given to this as today as we had seen over the past several quarters.  Expectations are running for no large increases although given the budget deficit continues to widen, I’m not sure how that math works.  Lastly, we see oil inventories where a modest build is anticipated.

While the election continues to dominate the discussion, we cannot ignore this data or what is to come tomorrow and Friday, as the Fed will not be ignoring it.  We will need to see a spate of much weaker data to change my long-held view that the dollar has further to climb, so let’s watch and wait.

Good luck

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Full Throat

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The news cycle’s still ‘bout the vote
With Harris and Trump in full throat
‘Bout why each should be
The one filled with glee
When voters, to prez, they promote
 
Meanwhile, out of China we hear
More stimulus is coming near
The rumor is on
That ten trillion yuan
Is how much Xi’ll spend through next year

 

The presidential election continues to be the primary source of news stories and will likely remain that way until a winner is decided.  The vitriol has increased on both sides, and that is unlikely to stop, even after the election as neither side can seem to countenance the other’s views on so many subjects.  

As we watch Treasury yields continue to rise, many are ascribing this move to the recent polls that show former President Trump gaining an advantage.  The thesis seems to be that his proffered plans will increase the budget deficit by more than Harris’s proffered plans, but I find all this a bit premature as budget deficits are created by Congress, not presidents, so the outcome there will have a significant impact on the budget.  With that in mind, though, if we continue to see the yield curve steepen as long-end rates rise, my take is the dollar will continue to perform well.

But the election is still a week away and while there is no new data of note today, we do see important numbers starting tomorrow.  In the meantime, one of the big stories is that the Chinese National People’s Congress is now considering a total stimulus package of CNY 10 Trillion to help support the economy, and that if Trump wins, that number may grow larger under the assumption that he will make things more difficult for the nation.  This report from Reuters indicates that there would be a lot of new debt issuance to help support local governments repay their current borrowings as well as support the property market.  

Now, this is very similar to what was reported last week, although the totals are larger, but there is nothing in the story indicating that President Xi is going to give money to citizens, nor focus on new production.  This all appears to be an attempt to clean up the property market mess (remember, most local government debt problems are a result of the property debacle as well), which while necessary is not sufficient to get China back to its pre-pandemic growth trend.

As it happens, this story did not print until after the Chinese equity markets closed onshore, so the CSI 300’s decline of -1.0% has been reversed in the futures aftermarket.  As well, given that Hong Kong’s market doesn’t close until one hour later, it had the opportunity to rebound before the close and finished higher on the day by 0.5%.  As to the rest of Asia, it mostly followed the US rally from yesterday with the Nikkei (+0.8%) performing well and gains seen across virtually all the other markets there.

Turning to Europe, the only data of note was the German GfK Consumer Confidence index which rose to -18.3.  While this was better than last month and better than expected, a little perspective is in order.  Here is the series over the past ten years.

Source: tradingeconomics.com

While it seems clear that consumers are feeling a bit more confident than they have in the past year, ever since the pandemic, the German consumer has been one unhappy group!  And the other story from Germany this morning helps explain their unhappiness.  VW is set to close at least 3 factories and reduce wages by 10% as they try to compete more effectively with Chinese EV’s.  I can only imagine how confident that will make the people of Germany!

Now, the interesting thing about confidence is that while it offers a view of the overall sentiment in markets, it doesn’t really correlate to any specific market moves.  For instance, the euro (-0.2%) remains rangebound albeit slightly lower this morning, while the DAX (+0.25%) has actually rallied a bit, although that is likely on the basis of the VW news helping to convince the ECB that they need to cut rates further and faster.  In fact, most European bourses are firmer this morning on the lower rate thesis I believe, although Spain’s IBEX (-0.25%) is lagging after some moderately worse earnings news from local companies.

Turning to the commodities sector, it should be no surprise that they are higher across the board as the combination of proposed Chinese stimulus and potential future inflation in the US based on a possible Trump victory (although there is nothing in the Harris policies that seem likely to reduce inflation) means that commodities remain a favored outlet for investors.  After a couple of days of choppiness, we are seeing oil (+1.2%) rise nicely (perhaps the decline was a bit overdone on position adjustments) and the metals complex rise as well (Au +0.3%, Ag +1.3%, Cu +1.1%) as all three will benefit from all the new spending that is likely to occur in the US as well as China.  

One other thing to note, which disappointed the gold bulls, as well as the dollar bears, is that the BRICS meeting in Kazan, Russia resulted in…nothing at all regarding a new currency to ‘challenge’ the dollar.  Toward the bottom of their proclamation, they indicated they would continue to look for ways to work more closely together, but there is nothing concrete on this subject.  As I have been writing for the past several years, and paraphrasing Mark Twain, rumors of the dollar’s demise have been greatly exaggerated.  So, there will be no BRICS currency backed by gold or anything else, no new payment rails and Treasuries are going to remain the haven asset of choice alongside gold.

As to the dollar vs. its other fiat counterparts, it is a bit stronger this morning alongside US yields (Treasuries +3bps) with even the commodity bloc having difficulty gaining ground.  Of note is USDJPY, which is higher by 0.35% and now firmly above 153.00.  Last night, we did hear our first bout of verbal concern from a MOF spokesman explaining they are watching the yen carefully.  I’m sure they are, but I believe they will be very reluctant to enter the market when US yields are rising, and the BOJ is not keeping pace.  In fact, while the November rate cut is baked in at this point, the probability of the Fed cutting in December continues to slowly decrease (now 71%).  If we see a good NFP number Friday, I would look for that to decrease more rapidly and the dollar to see another leg higher.

And that’s all the market stuff today.  On the data front, Case Shiller Home Prices (exp 5.1%) and the JOLTS Job Openings data (7.99M) are the major releases.  As well, the Treasury is auctioning 7-year Notes this morning after a tepid 2-year auction yesterday.  It is very possible investors are starting to get a bit nervous about the US fiscal situation and if that continues, the irony is that higher yields will beget a higher dollar despite the concerns.

It is difficult to get away from the election impact on markets, and it seems that as momentum for Trump builds, the market is going to continue to push yields and stocks higher with the dollar gaining ground alongside gold.  Go figure.

Good luck

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A Brand-New World

Posted on by

Even in Japan
Incumbency is questioned
It’s a brand-new world

 

Yesterday’s elections in Japan brought about the downfall of yet another incumbent government as people around the world continue to demonstrate they are tired of the status quo.  Recently appointed PM, Shigeru Ishiba called for a snap election within days of his appointment following the resignation of previous PM Kishida on the heels of a funding scandal.  Ishiba’s idea was to receive a fresh mandate from the electorate so he could implement his vision.  Oops!  It turns out that his vision was not in sync with the majority of the population.  Ultimately, the LDP and its key ally, Komeito, won only 215 seats in the Diet (Japan’s more powerful Lower House), well below the 233 necessary for a majority and even further from the 293 seats they held prior to the election.  The very fact that this occurred in Japan, the most homogenous of G10 nations, is indicative of just how strong the anti-incumbent bias has grown and just how tired people are of current leadership (keep that in mind for the US election).

Now, turning to the market impact, the tenuous hold any government formed from these disparate results means that Japan seems unlikely to have a clear, coherent vision going forward.  One of the key issues was the ongoing buildup in defense expenditures as the neighborhood there increasingly becomes more dangerous.  But now spending priorities may shift.  Ultimately, as the government loses its luster and ability to drive decisions, more power will accrue to Ueda-san and the BOJ.  This begs the question of whether the gradual tightening of monetary policy will continue, or if Ueda-san will see the need for more support by living with more inflation and potentially faster economic growth.The yen’s recent decline (-0.25% today, -8.5% since the Fed rate cut in September) shows no signs of slowing down as can be seen from the chart below.  As the burden of policy activity falls to the BOJ, I expect that we could see further yen weakness, especially when if the Fed’s rate cutting cycle slows or stops as December approaches.  If this process accelerates, I suspect the MOF will want to intervene, but that will only provide temporary respite.  Be prepared for further weakness in the yen.

Source: tradingeconomics.com
 
This weekend’s Israeli response
To missile attacks from Iran-ce
Left bulls long of oil
In massive turmoil
As prices collapsed at the nonce

The other major market story this morning was the oil market’s response to Israel’s much anticipated retaliation to the Iranian missile barrage from several weeks ago.  The precision attacks on military assets left the energy sector untouched and may have the potential to de-escalate the overall situation.  With this information, it cannot be surprising that more risk premium has been removed from the price of oil and this morning the black, sticky stuff has fallen by nearly 6% and is well below $70/bbl.  This has led the entire commodity sector lower in price with not only the entire energy sector falling, but also the entire metals sector where both precious (Au -0.6%, Ag -0.9%) and base (Cu -0.2%, Al -1.1%) have given back some of their recent gains.  While declining oil prices will certainly help reduce inflationary readings over time, at least at the headline level, I do not believe that the underlying fundamentals have changed, and we are likely to continue to see inflation climb slowly.  In fact, Treasury yields (+3bps) continue to signal concern on that very issue.

Which takes us to the rest of the overnight activity.  Friday’s mixed session in NY equity markets was followed by a lot more green than red in Asia with the Nikkei (+1.8%) leading the way on the back of both lower energy prices and the weaker yen, while Chinese stocks (+0.2%) managed a small gain along with Korea (+1.1%) and India (+0.8%).  However, most of the other regional markets wound up with modest declines.  In Europe, mixed is the description as well, with the CAC (+0.25%) and IBEX (+0.4%) in good spirits while both the DAX and FTSE 100 (-0.1%) are lagging.  Given the complete lack of data, the European markets appear to be responding to ECB chatter, which is showing huge variety on members’ views of the size of the next move, and questions about the results of the US election, with President Trump seeming to gain momentum and traders trying to figure out the best way to play that outcome.  As to US futures, this morning they are firmer by 0.5% at this hour (7:20).

Although Treasury yields have continued their recent climb, European sovereign yields are a touch softer this morning, although only by 1bp to 2bps, as clarity is missing with respect to ECB actions, Fed actions and the US elections.  My sense is that we will need to see some substantial new news to change the current trend of rising yields for more than a day.

Finally, the dollar is net, a little softer today although several currencies are suffering.  We have already discussed the yen, and we cannot be surprised that NOK (-0.4%) is weaker given oil’s decline, but we are also seeing MXN (-0.3% and back above 20.00 for the first time since July) under pressure as that appears to be a response to a potential Trump electoral victory.  But elsewhere, the dollar is under modest pressure with gains on the order of 0.1% – 0.3% across most of the rest of the G10 as well as many EMG currencies.  There are precious few other stories of note this morning.

On the data front, it is a very big week as we see not only NFP data but also PCE data.

TuesdayCase-Shiller Home Prices5.4%
 JOLTS Job Openings7.99M
 Consumer Confidence99.3
WednesdayADP Employment115K
 Q3 GDP3.0%
ThursdayInitial Claims233K
 Continuing Claims1880K
 Personal Income0.2%
 Personal Spending0.4%
 PCE0.1% (2.1% Y/Y)
 Core PCE 0.1% (2.7% Y/Y)
 Chicago PMI47.5
FridayNonfarm Payrolls180K
 Private Payrolls160K
 Manufacturing Payrolls-35K
 Unemployment Rate4.2%
 Average Hourly Earnings0.3% (4.0% Y/Y)
 Average Weekly Hours34.2
 Participation Rate62.5%
 ISM Manufacturing47.5
 ISM Prices Paid48.2

Source: tradingeconomics.com

Of course, with the FOMC meeting next week, we are now in the Fed’s quiet period, so there will be no more official commentary.  The one thing to watch is if something unexpected occurs, then look for an article from the Fed whisperer, Nick Timiraos of the WSJ.  But otherwise, this is shaping up as a week that starts slowly and builds to the back half when the data comes.

Regardless of the election outcome, I expect that the budget situation will only devolve into greater deficits.  I believe that will weigh on the bond market, driving yields higher and for now, I think that will likely help the dollar overall, but not too much.  It remains difficult for me to see the dollar reverse course lower absent a much more aggressive FOMC, and that just doesn’t seem to be on the cards.

Good luck

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This is the Vibe

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In DC, the IMF tribe
Is meeting, and this is the vibe
Leave China alone
While they all bemoan
Das Trump to whom, problems, ascribe
 
Meanwhile in Beijing, Xi’s delayed
His policies as he’s afraid
If Trump wins the vote
More tariffs, he’ll float
Reducing Xi’s winnings in trade

 

With the US election fast approaching, it appears that virtually every aspect of life now hinges on the outcome.  This is even true in ostensibly neutral NGOs like the IMF.  As an example, the title of this Bloomberg article, Trump 2.0 Haunts World Economy Chiefs Gathering in Washington Before Vote is enough to make you question the neutrality of both Bloomberg and the ongoing activity at the IMF.  Briefly, in this article, the authors quote several meeting participants explaining that a Trump victory could disrupt the current global “stability” in trade.  (I’m not sure why they think the current situation is stable given the ongoing increases in tariffs already being implemented by the Eurozone as well as the US vs. Chinese manufactured goods, but they all are certain it will be a problem only if Trump is elected.)

In fact, earlier this week, the IMF explicitly said that a Trump victory would be negative for the global economy and that his policies would be worse for the US as well when compared to Harris’s policies.  My first thought is, how do they know Harris’s policies as she hasn’t been able to articulate any, but second, the idea that a supranational organization would express its electoral preferences leading up to a major national vote is remarkable.  Clearly the concept of neutrality no longer exists.

At any rate, as I explained yesterday, the US election remains THE topic on both investors’ and traders’ minds.  As well, it is THE topic on every other government’s mind around the world.  As such, arguably until the vote is complete and a victor declared, I suspect that all markets will see plenty of volatility with each change in the polls but limited additional secular movement.

One of the ongoing activities that passes for analysis these days is the forecasting of future bond yields or equity returns based on the winner.  This is generally explained as this market will rise if one wins and fall if the other does, or vice versa.  My take is this is simply another way for analysts to proffer their political views under the guise of economic analysis and as such, while I get a chuckle from these earnest descriptions of the future, I certainly don’t see them as rigorous analysis.  

But really, this week, that is all that is happening.  Next week, we do see a lot of data, including the NFP report as well as PCE readings and the BOJ’s interest rate decision, so perhaps there will be more market focused discussion.  But right now, virtually everything you read revolves around the election and the possible results.

So, with that in mind, let’s take a look at what happened overnight.  Yesterday’s mixed US session, with the DJIA slipping while the other major indices rallied a bit, led to a mixed picture in Asia as well.  Japanese shares (-0.6%) suffered a bit as Japan, too, is heading toward a general election and questions about whether new PM Ishiba will be able to win a majority in the Diet are very real this time.  Apparently, even in a homogenous society like Japan, there are questions about the ruling party and how much it is focused on helping the population.  As to the rest of Asia, both China (+0.7%) and Hong Kong (+0.5%) managed modest gains, but there are still many questions as to exactly how much stimulus China is going to inject into the economy there.  In fact, you can see the market asking those questions by the chart below, where the spike was the initial euphoria that something was going to be done, and the retracement is the realization that it was hope and not policy that drove things.

Source: tradingeconomics.com

The numbers show that after a >30% rally in a few sessions, investors have unwound about one-third of the climb as they await the outcome of the National People’s Congress meeting to see if a new fiscal package will be approved.  (Cagily, they have set the dates for the meeting to be November 4-8 to make sure that they can encompass the outcome of the US election in their decisions.  The rest of Asia saw a mix of gainers (Taiwan, Philippines, Australia) and laggards (India, Singapore, Malaysia) with other markets barely moving.

Meanwhile, in Europe, this morning is a down day, although the losses are quite modest (CAC -0.3%, IBEX -0.4%, FTSE 100 -0.2%) as traders head into the weekend with limited confidence on how things will play out going forward.  As to the US, at this hour (7:30), futures are pointing slightly higher, 0.2% or so.

In the bond market, Treasury yields (-2bps) have backed off their highs from earlier in the week but remain far above the levels seen prior to the Fed’s rate cut in September.  A view growing in popularity is that the 10yr yield will rise above 5.0% if Trump is elected while it will decline to 3.5% in a Harris victory.  Personally, I cannot see any outcome that doesn’t boost yields as there seems to be scant evidence that either side will slow spending and the Fed has made it clear that higher inflation is ok, at least by their actions, if not yet by their words.  As an aside, I couldn’t help but notice comments from Secretary Yellen explaining that the budget deficit was getting out of hand and “something” needed to be done about it, as though she had no part in the situation!  Meanwhile, European sovereign yields are mostly edging higher this morning, but only by 1bp or 2bps, as they continue to hold onto the gains that came alongside the Treasury market.  In the end, Treasury yields remain the key global driver.

In the commodity markets, oil (+0.7%) is bouncing slightly this morning after yesteray’s decline.  The talk in the market is that the Saudis are considering opening a price war to regain market share after they have withheld so much production.  That would certainly be a different tack than their recent activities and I imagine that President Putin would not be pleased, but that is one rumor.  As to the metals markets, they are under pressure this morning with all the major metals somewhat softer (Au -0.2%, Ag -0.9%, Cu -0.2%) as we continue to see profit taking in the space after a very large run higher over the course of the entire year.

Finally, the dollar is little changed overall this morning with no G10 currency having moved even 0.2% since the close yesterday although we have seen a couple of EMG currencies (KRW -0.7%, ZAR +0.3%) with a little dynamism.  The won fell further after weaker than forecast GDP encouraged traders to look for further rate cuts by the BOK while the rand’s movement appears more trading than fundamentally focused as there was neither data nor commentary to drive things.

On the data front, this morning brings Durable Goods (exp -1.0%, ex Transport -0.1%) and Michigan Sentiment (69.0).  As explained above, the data doesn’t seem to matter right now with all eyes on the election.  There are no Fed speakers scheduled but it is not clear that all their chatter this week had any impact.  The market is still pricing a 25bp cut in November and a 75% probability of another one in December, which is what it has been doing for a while.

It is very difficult to observe recent market activity and come away with a strong directional view.  My take continues to be that the December rate cut will lose its support based on the data and the dollar will appreciate accordingly.  But right now, that is a minority view.

Good luck and good weekend

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