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Rare Earths No More

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Said Xi, we’ll sell rare earths no more
Said Trump, well that means we’re at war
The stock market puked
As traders got spooked
And Trump imposed tariffs galore
 
The question is just why would Xi
Get feisty when things seemed to be
Improved for both sides
With fewer divides
Did Mideast peace kill his esprit?

 

Let’s talk about markets for a moment.  Sometimes they go down and go down fast when you’re not expecting it.  That is their very nature, so it is important to understand that Friday’s price action, while dramatic relative to what we have seen over the past 6 months, is not that uncommon at all over time.  It appears the proximate cause of the market decline was the word from China that they would stop selling and exporting rare earth minerals. 

It can be no surprise that President Trump immediately responded by threatening an additional 100% tariffs on all Chinese exports and new controls on software, all to be implemented on November 1st.  There is a lot of tit-for-tat in the dueling messages from China and the Trump administration and it is hard to tell what is real and what isn’t.  However, equity markets clearly weren’t prepared for a break in the previous expectations that the US and China were closing in on a more lasting trade stance.

But weekends are a long time for markets as so much can happen while they are closed.  This weekend was a perfect example.  After the carnage on Friday, we cannot be that surprised that both sides of this new tiff modified their responses.

First we saw this on Truth Social:

Then China backed off clarified that what they are really doing is require licensing for all rare earth minerals and products that contain them in exports.  China claims that applications that meet regulations will be approved although the regulations have not yet been defined. Ostensibly this is for national security reasons, and it is unclear exactly who will receive licenses, but this is clearly not the same as ending exports.  

And just like that, many of the fears that were fomented on Friday have been alleviated as evidenced by this morning’s equity market moves in the futures markets.

Source: tradingeconomics.com

But why did Xi make this move in the first place?  I have no idea, nor does anyone but Xi, although here are two completely different thought processes, one very conspiratorial and one rooted in the broader escalation of geopolitical affairs.

As to the first, (Beware, you will need your tinfoil hat here!) consider if the Israel-Gaza peace settlement, (with the hostages returned as of the time I am writing this morning at 5:30) does not serve China’s interest.  First, the one Middle East nation that will be on the outside is their ally, Iran.  Second, the ongoing problems there were always a distraction for the US, something that clearly suits Xi and China.  After all, if the US is focused there, they will have more difficulty paying attention to things Xi cares about like Taiwan and the South China Sea.  If the peace in Israel-Gaza holds, and the Abraham Accords extend to the bulk of the rest of the region, Xi loses a major distraction that cost him virtually nothing.  Plus, this opens the door for tightening sanctions on Iran even further, which could negatively impact China’s oil flows.  

The second is much more esoteric and I read about it this weekend from Dr Pippa Malmgren, someone who has a deep insight into global politics from her time as a presidential advisor as well as from her father, Harold Malmgren, who advised four presidents.  In her most recent Substack post she explained the importance of Helium-3 (3He), a rare isotope of helium that has major energy and military implications and where the largest deposit of the stuff known to man is on the moon.  Her claim is this is the foundation of the recent acceleration in the space race between the US and China and without rare earth minerals, the US ability to achieve its goals and obtain this element would be greatly hampered opening the door for China to get ahead.

Are either of these correct?  It is not clear, but I would contend each contains some logic.  In the end, though, as evidenced by the quick retreat on both sides, I suspect that the trade situation between the US and China will move forward in a positive manner, although there could well be a few more hiccups along the way.  And those hiccups could easily see equity markets decline such that there is a real correction of 15% to 20%.  Just not today.

So, what is happening today?  Let’s look.  First, I would be remiss if I didn’t highlight the following Bloomberg headline: ‘Buy the Dip’ Call Grows Louder as China Selloff Seen Contained, as it perfectly encapsulates the ongoing mindset in equity markets.  At least in US equities.  Asia had a much rougher session despite the backtracking with HK (-1.5%) and China (-0.5%) under pressure and weakness virtually universal in the time zone (Korea -0.7%, India -0.2%, Taiwan -1.4%, Australia -0.8%). Tokyo was closed.  It appears there are either still concerns over the trade situation, or perhaps the fact that globally, markets have had long rallies has led to some profit taking amid rising uncertainties.  

European bourses, though are all in the green, with the continent seeing gains of 0.5% or so across the board although the UK is lagging with a miniscule 0.05% gain at this hour (6:30).  As to US futures, as seen above, gains range from 1.0% (DJIA) to 2.0% (NASDAQ).

Meanwhile, bond yields also saw a dramatic move on Friday, tumbling -8bps and back to their lowest level seen in a month as per the below chart from tradingeconomics.com

This morning, those yields are unchanged.  European sovereign yields, which followed Treasury yields lower on Friday are also little changed at this hour, down another -1bp as concerns begin to arise that economic growth is going to be impaired by the escalation in trade tension between the US and China.  

I would argue that commodities are the one area where the back and forth is raising the most concern.  At least that is true in metals markets, with gold, which rallied 1% Friday amid the equity carnage, higher by another 1.6% this morning, to more new highs and we are seeing silver (+1.6%), copper (+4.2%) and Platinum (+3.6%) all in sync.  To me, this is the clearest indicator that there is an underlying fear pervading markets.  Oil (+1.8%) has rebounded from Friday’s rout as the easing of trade tensions appears to have calmed the market somewhat, although WTI remains just below $60/bbl at this point.  

Finally, the dollar is firmer again this morning as, although it softened slightly Friday, it has since regained most of those losses and is back on its recent uptrend as you can see below.

Source: tradingeconomics.com

While Tokyo was closed overnight, we did see further JPY weakness as the yen retraced most of its Friday gains like the rest of the market.  The biggest G10 mover was CHF (-0.9%) followed by AUD (-0.7%) and JPY (-0.7%) with other currencies less impacted and NOK (+0.2%) benefitting from the oil rally.  However, the EMG bloc has seen a much wider dispersion with MXN (+0.5%), ZAR (+1.1%) and CLP (+0.8%) all rallying sharply on the metals rally while PLN (-0.5%) and CZK (-0.4%) lag as they follow the euro lower.

And that’s enough for today.  With the government still on hiatus, no official statistics will be released although we do get a little bit of stuff as follows:

TuesdayNFIB Small Business Index100.5
WednesdayEmpire State Manufacturing-1.8
 Fed’s Beige Book 
ThursdayPhilly Fed Manufacturing9.1

Source: tradingeconomics.com

But, with the lack of data, it appears Chairman Powell has instructed his minions to flood the airwaves with a virtual cacophony of speeches this week, I count 18 on the calendar including the big man himself on Tuesday afternoon.  It seems difficult to believe that their opinions on the economy will have changed very much given the lack of new data.  The market is still pricing a 98% chance of a cut at the end of this month and another 91% chance of a cut in December.  With the increased trade tension, there is much more discussion regarding a slower economic course ahead, which would play into further rate cuts.  However, while that would clearly help precious metals as it ends any ideas of an inflation fight, it is not clear it will weaken the dollar very much as everybody else will almost certainly follow along.

Good luck

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Alone in the Wilderness

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Takaichi-san
Alone in the wilderness
No partners will play

 

In a major blow to Japan’s largest political party, the LDP, their long-time partner, Komeito, has withdrawn from the twenty-five year coalition.  Ostensibly, Komeito asked Takaichi for a commitment to address the financing corruption issue that was one of the reasons for the Ichiba government’s collapse and she either could not or would not do so immediately.  There seems to be a bit of he said, she said here but no matter, it is a major blow to the LDP.  While it remains the largest party in both Houses, it doesn’t have a majority in either one and there is the beginning of talk as to how a coalition of other parties may put forward a PM candidate leaving Ms Takaichi on the outside looking in.  

The one thing I have learned over the years is that all politics is temporary, at least when it comes to Western democracies.  So, whatever the headlines blare today, the opportunity for Komeito to rejoin the LDP remains wide open.  Additionally, after twenty-five years sharing power, I am pretty certain that they are unlikely to simply walk away and cede that benefit.  My take, and this is strictly from my observations of how politics works everywhere, is that this spat will be overcome and Takaichi-san will, in fact, become Japan’s first female Prime Minister.  

Japanese equity markets (-1.0%) were already closed ahead of the long weekend there (Japan is closed for Sports Day on Monday) when the news hit the tape, so it is not surprising that Nikkei futures fell further, another -1.25% (see chart below from tradingeconomics.com), but if I am correct, by Tuesday, all will be right with the world again.  As an aside, Japanese share weakness was a follow on from US equity weakness, and that sentiment was pervasive across all of Asia (China -2.0%, HK -1.7%, Thailand -1.8%) with only Korea (+1.7%) bucking the trend as it reopened for the first time in a week and was catching up to the rally it missed.

The Bureau of Labor Statistics
Though staffed by what often seems mystics
Has called some folks back
So that they can track
Inflation’s key characteristics

It turns out, the cost-of-living adjustments for Social Security payments are made based on the September CPI data which were originally due to be released on October 15th.  Of course, the government shutdown, which now heads into its second week, resulted in BLS employees being furloughed alongside many others.  However, it now appears that several of them have been called back into the office in order to prepare the report to be released some time before the end of the month, if not on the originally scheduled date.  One added benefit (?) of this is that the Fed, which meets on October 28thand 29th may have the data at the time of their meeting to help with their decision making.  Of course, the market continues to price a very high probability of a cut at that meeting, currently 95%, despite a continued mix of comments from Fed speakers.  Just yesterday, Governor Barr urged caution on further cuts, although we also have heard from others like Chicago Fed president Goolsbee, that the labor situation is concerning and that further cuts are appropriate.  Regarding the Fed, I think the doves outnumber the hawks and a cut is coming, if for no other reason than it is already priced in and they are terrified to surprise markets on the hawkish side.

Away from those two stories, all the market talk yesterday was on the early spikes in precious metals (gold touched $4058/oz, silver $50.93/oz) before they fell back sharply on what seemed to be either serious profit-taking or, more likely, a massive attempt to prevent these metals from rallying further.  There have long been stories that major banks have been manipulating prices, especially in silver, as they run huge short futures positions in their books.  I do not know if those stories are true or apocryphal, but there is no doubt that someone sold a lot during yesterday’s session.

Source: tradingeconmics.com

My friend JJ (Alyosha’s market vibes) made the observation that the price action felt as though suddenly algorithms, which have ignored these markets because they haven’t offered the opportunities that equity markets have, were involved.  If that is the case, it is very possible that we are going to see a very different characteristic to metals markets going forward, with much more controlled price action.  Food for thought.

Ok, let’s recap the rest of the markets ahead of the weekend.  The US equity declines were early with modest rallies into the close that left the major indices only slightly lower on the day.  We have already discussed Asian markets and looking at Europe, price action has been limited although Spain (+0.4%) is having a decent day for no particular reason.  Elsewhere, though, +/-0.2% describes the session.

Treasury yields (-3bps) are leading all government bonds higher (yields lower) with all European sovereigns seeing similar yield declines and even JGBs slipping -1bp.  The only data from the continent was Italian IP (-2.4%) which seems to be following in the footsteps of Germany.  Too, Spanish Consumer Confidence fell to 81.5, which while a tertiary data point, extends its recent downward trajectory.  In this light, and finally, the probability of an ECB cut at the end of the month has moved off zero, albeit just to 1%, but prior to today, futures were pricing a small probability of a rate hike!

Oil (-1.2%) has fallen back to the bottom of that trading range ostensibly because the Middle East peace process seems to be holding.  This is a wholly unsatisfactory thesis in my mind given my observation that the Israel/Gaza conflict seemed to have no impact on prices for a long time because of its contained nature.  Rather, Russia/Ukraine seems like it should have far more impact.  But then, I’m just an FX guy, so oil markets are not my forte.

Finally, the dollar, which continues to rally in the face of all the stories about the dollar’s demise, is consolidating today after a pretty strong week.  Using the DXY as our proxy, this week’s trend is evident as per the below chart from tradingeconomics.com

A popular narrative amongst the ‘dollar is doomed’ set is that a look at dollar reserves at central banks around the world shows a continuing reduction in holdings with central banks exchanging dollars for other currencies, (euros, pounds, renminbi, Swiss francs, etc.) or gold.  Now, there is no doubt that central banks have been buying gold and that has been a key driver of the rally in the barbarous relic’s price.  But the IMF, who is the last word on this issue, makes very clear that any change recently has been due to the FX rate, not the volume of dollars held.  As you can see below, in Q2 (the latest data they have) virtually the entire reduction in USD reserves worldwide was due to the dollar’s first half weakness.

There are many problems in the US, and the fiscal situation is undoubtedly a mess, but as of now, there is still no viable alternative to holding dollars, especially given the majority of world trade continues to be priced and exchanged using the buck.

And that’s all for today.  We do get the Michigan Confidence number (exp 54.2), which is remarkably low given the ongoing rally in equities.  As you can see from the below chart overlaying the S&P 500 (gray line) with Michigan Confidence (blue line), something has clearly changed in this relationship.  This appears to be as good an illustration of the K-shaped economy as any, with the top 10% of earners feeling fine while the rest are not as happy.

Source: tradingeconomics.com

As we head into the weekend, with US futures pointing higher, I have a feeling that yesterday will be the anomaly and the current trends will reassert themselves.

Good luck and good weekend

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Warnings Arise

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The headline today is ‘bout peace
In Gaza, and hostage release
Can this program last?
And both sides hold fast?
Or once more will violence increase?
 
Now, turning to markets we see
Risk assets continue their spree
But it’s no surprise
More warnings arise
That markets shun reality

 

In what can only be described as a monumental breakthrough in the Middle East, a peace plan between Israel and Hamas has been agreed that will see to the release of the remaining hostages and the disarmament of Hamas fighters while the Israeli army pulls back to specified lines near the border.  The idea is that a group of Arab nations will oversee the Gaza strip with funding coming from the Saudis, amongst others, and it appears this may be the best chance for peace in the area in centuries if not millennia.  President Trump has orchestrated this and deserves enormous credit for a truly momentous outcome.  I certainly hope the plans are fulfilled and we can remove one historical warzone from the map.  While this has had no immediate market impact, its importance is such that it cannot be ignored IMHO.

Ok, let’s move to the markets. Stocks, gold and the dollar continue to rally, continuing the conundrum that we have observed for the past several weeks.  However, my take is there has been an increase in the number of warnings that the end is nigh.  For instance, Bloomberg has a headline article about Nassim Taleb, the author of Black Swans, explaining that a debt crisis is looming and you need to hedge against that outcome.  As well, all over my XFin feed, I continue to see comments about how the end is nigh with respect to the equity market rally as the debt situation is going to soon overwhelm everything.

And I understand this concept well (and have been carrying Index put options for a while accordingly) but thus far, the mooted equity market collapse seems to be awaiting the mooted recession that has also yet to arrive.  The government shutdown has had essentially no impact on markets, perhaps improving them given the lack of data that tends to cause significant gyrations.  The Russia/Ukraine war is just background noise to markets at this point and the one thing that remains constant is that money supply continues to grow around the world with the result that both asset prices and high street prices rise.  In other words, governments around the world are ‘running it hot’ and will continue to do so for as long as they can.

The FOMC Minutes were released yesterday, and they explained what we already knew based on the dot plot (shown below), there is a wide dispersion of views on the committee.

Perhaps the most interesting thing is that despite there being a pretty even split between those expecting two more rate cuts this year and those expecting no more rate cuts this year, the Fed funds futures market is still pricing a 95% probability for a cut at the end of this month and a 79% probability for a second cut in December as per the below CME table.

As well, given the absence of recent data, the Fed speak is not coalescing around a single narrative so that dot plot is still our best estimate of what FOMC members are thinking, i.e. there are 17 independent views right now.

I understand the concerns which range from an incipient debt crisis to the risks that stem from AI and AI investment representing virtually all economic growth right now to the exclusion of almost all other economic sectors.  But markets are going to do what markets are going to do, and right now, the bears are having a tough time making their case.  

Remember, timing is everything in life, and in markets being early is effectively the same as being wrong unless one has significant ability to withstand drawdowns.  There are certainly signs around of the beginning of the unraveling (sudden bankruptcies of large firms like Tricolor and First Brands; SOFR spreads widening; difficult Treasury auctions, etc.).  For now, there is no obvious catalyst to change the recent direction of travel, but markets don’t need a specific catalyst, sometimes it is just time to change.  This is why hedging matters.

Ok, let’s recap how things played out overnight.  After more record closes for the S&P 500 and NASDAQ, Tokyo (+1.8%) exploded higher again on the back of more AI related news.  China (+1.5%) opened higher after its one-week hiatus although HK (-0.3%) lagged.  The news on the mainland appears to be some optimism regarding the upcoming Trump-Xi meeting.  Korea remains closed although India and Taiwan both had positive sessions, which given the tech focus there should not be surprising.  Elsewhere it was mostly modest gains although the Philippines saw a decline despite the central bank cutting rates in a surprise move.

I fully admit I no longer understand the reaction function in European shares as the DAX (+0.3%) continues to rally despite one dire economic report after another.  This morning Germany released trade data showing both exports (-0.5%) and imports (-1.3%) fell far more than expected which given the declines indicates a complete lack of growth, if not shrinkage.  Too, the CAC (+0.2%) is modestly higher as the French are going to try to get another PM to pass a budget, although I am skeptical.  However, the rest of Europe is modestly softer this morning.  As to US futures, at this hour (7:00), they are essentially unchanged.

In the bond market, yields are basically unchanged across the board, with French OATs the best performers (-2bps) on the positive political news.  While we have definitely seen an uptick in commentary about the unsustainable debt story in the US over the past month, market participants don’t seem to be reading those stories.  A quick look at the chart below shows that we have spent the bulk of the time of the last month with 10-year Treasury yields trading between 4.05% and 4.15%, hardly a sign of crisis.

Source: tradingeconomics.com

On the commodity front, oil (-0.5%) continues to trade within the middle of its recent range and is just not very interesting right now.  Metals, however, remain the focus and while gold (0.0%) is unchanged consolidating at its new highs, we see silver (+1.65%, and just 35¢ from $50/oz), copper (+2.3%) and platinum (+1.6%) all continuing their recent rallies.

Finally, the dollar continues to rally as well with the euro (-0.2%) looking a lot like it is going to trade below 1.16 soon.  Remember, it wasn’t that long ago when the “consensus” view was it was going to trade to and through 1.20!  The pound (-0.3%) is slipping and JPY (-0.1%) while not moving much so far today, is just below 153 and shows no signs of stopping its recent decline (dollar rally).  The Scandies are weak, CLP (+0.4%) is benefitting from copper’s rise and overall, the DXY is now above 99.00 and looking like 100.00 is just a matter of days away.

Arguably, the biggest news this morning is Chairman Powell speaking at the Community Bank Conference in Washington, but given the venue, I have a feeling we will not hear very much of note regarding monetary policy.  

The current correlations seem to be holding, so higher stocks and higher metals lead to a higher dollar, although it is not clear that is the causation route.  Perhaps it is demand for those dollar-denominated instruments is driving dollar demand.  But I don’t see a reason for it to change for now.  Risk is still there, and hedging still matters, don’t forget that, but enjoy the ride!

Good luck

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The Chaos Extant

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Though yesterday equities fell
The trend that most pundits foretell
Is higher and higher
As AI’s on fire
And it would be crazy to sell
 
And, too, precious metals keep soaring
A sign of investors abhorring
The chaos extant
Which serves as a taunt
To those who prefer markets boring

 

My friend JJ (Alyosha at Market Vibes on Substack) made a very interesting point about recent markets, which I have felt, but not effectively articulated until he pointed it out; the correlation of pretty much all markets is approaching one, but they are rallying.  Historically, every market has its own drivers and tends to trade somewhat independently of other markets, at least across asset classes.  While it is certainly common to see equity indices rise and fall together, we have all become used to bond markets moving in the opposite direction while commodity and FX markets tend to follow completely different drummers.  After all, while there are certainly big unifying themes, each of these markets, and the components that make them up, all have idiosyncratic drivers of price.

Again, historically, the only time this changes is when there is a crisis, at which point the correlation between markets tends to one (or minus one) as panic selling of risk assets and buying of perceived havens becomes the ONLY trade of interest.

However, what we have observed over the past several weeks is that virtually all risk assets are rising simultaneously, with equities, gold and bitcoin all on a tear as you can see below.

Source: tradingeconomics.com

In other words, their correlations are approaching one.  The odd thing about this is that equity markets tend to reflect expectations for the future of economic activity along the following line of reasoning; strong economic growth leads to strong earnings leads to higher equity prices.  At least that has been the history.  Meanwhile, gold, and more recently bitcoin, have served as the antithesis of that trade, increasing concern over weaker economic outcomes which results in increased demand for haven assets that can buck that trend.  

Of course, historically there has been another asset class seen as protection, bonds, but those are in a tough spot right now as the ongoing massive increases in issuance by countries all over the world has investors somewhat concerned about their safety.  This has been especially true in Japan, where JGB yields last night traded to their highest level since 2008 at 1.70%.

Source: marketwatch.com

But my observation is that investors elsewhere are uncertain how to proceed as yields, though higher than seen several years ago, are not increasing dramatically despite the narrative of fiat debasement, increased inflation and major fiscal problems building around the world.

Source: tradingeconomics.com

The explanation that makes the most sense to me is the concept that governments around the world are going to ‘run it hot’ as they seek faster economic growth at the expense of all else and will only pay lip service to trying to fight inflation.  The result is fiscal spending will continue to prime the pump, whether on purely domestic issues or things like defense, debt issuance will tend toward shorter dates as there is a much greater appetite for T-bills than bonds given the inflation concerns, and so stock markets will benefit, but perceived inflation hedges like gold and bitcoin, will also benefit.  (At this point, I will insert a plug: If you want to protect against inflation, at least against CPI’s rise, while maintaining liquidity, USDi, the only inflation tracking cryptocurrency is a very good idea for some portion of your portfolio.  Check out http://www.USDicoin.com).

The concern about this entire story is that when things change, and they always do at some point, all these assets that are rising in sync will fall in sync, and remember, falling markets tend to move a lot faster than rising ones.  I’m not saying this is imminent, just that the setup feels concerning, at least to my eyes and my gut.

Meanwhile, let’s look at how markets behaved overnight.  Yesterday saw US equity markets slip a bit, although they closed well off their early morning lows and futures this morning are pointing higher by a small amount, 0.2%.  Asian markets saw Japan (-0.5%) and HK (-0.5%) both slide as well, following the US while China remained closed for the holiday but will reopen this evening.  Elsewhere in the region, for those markets that were open (Australia, India, Taiwan were the majors) modest weakness was also the story.  

Europe, though, is a bit of a conundrum as it is having a very positive session (UK +0.9%, Germany +0.7%, France +0.8%, Spain +0.6%) despite the fact that data there continues to disappoint (German IP -4.3%) which as you can see from the below chart continues a three year run of pretty horrible outcomes.

Source: tradingeconomics.com

As well, France has no government, and the UK government is seeing its support erode dramatically.  But looking at the ECB, there is no expectation priced into the market for further rate cuts, so I am baffled as to why European equity markets are performing well.  

Perhaps it is because the dollar is strengthening, which is the recent trend with the euro slipping another -0.25% overnight and trading back to its lowest level in a month.  Too, the pound (-0.2%), CHF (-0.2%) and JPY (-0.6%) have all suffered pushing the DXY up toward 99.00.  Does a strong dollar help foreign markets?  I always thought the story was it hurt them as funding USD debt became more difficult for foreign companies.  Something doesn’t make sense here.  As to EMG markets, they are also seeing their currencies slip, mostly in a similar fashion to the euro, down about -0.2%, although KRW (-0.6%) is the laggard as they have been unsuccessful in getting any tariff relief from President Trump.

Finally, commodity prices continue their remarkable rally, at least metals prices are on a remarkable rally with gold (+1.3% or $50/oz) and silver (+2.5%, now at $49/oz) driving the bus and taking copper (+0.7%) and platinum (+1.8%) along for the ride.  While gold has rallied more than 53% so far this year, it has not been a US investor focus until recently.  I think it has further to run, a lot further.  As to oil (+1.5%), it continues to bounce from last week’s lows but remains well within its recent trading range.  Ukrainian attacks have been successful in reducing Russian output and OPEC+ only raised production by 137K barrels at their last meeting, less than had been rumored.  However, as I observe this market, it needs a large external catalyst to breech the range in my view, and if war doesn’t do the job, I’m not sure what will.

And that’s really it for the day.  Government data remains on hiatus and even though Fed speakers are polluting the airwaves, nobody is listening.  The government has been shut down for a week, and I think that most people just don’t care.  In fact, if the result was less government expenditure for less government service, I think many would make the tradeoff.  The upshot is, the larger trend of equity and commodity rallies remain in place, and the dollar continues to look a lot better than most other fiat currencies.

Good luck

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Never Sold

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The news of the day is that gold
Is actively bought, never sold
The Four Thousand level
Led some folks to revel
And drew many more to the fold
 
But weirdly, the dollar keeps rising
Which based on the past is surprising
The problems in France
And Sanae’s stance
Have been, for the buck, energizing

 

A month ago, many Wall Street analysts came out with forecasts that gold could trade as high as $4000/oz by mid 2026 as they reluctantly jumped on the bandwagon.  But, by many accounts, although my charts don’t show it, the barbarous relic’s futures contract traded a bit more than 120 lots at $4000.10 last night, nine months earlier than those forecasts.

Source: Bloomberg.com

Right now (6:20), the cash market is trading at $3957 (-0.1%) but there is absolutely no indication that the top is in.  Rather, I have been reading about the new GenZ BOLD investment strategy, which is buying a combination of Bitcoin and gold.  Mohammed El-Arian nicknamed this the debasement trade, which is a fair assessment and a number of banks have been jumping on this theme.

Perhaps more interesting than this story, which after all is simply rehashing the fact that gold is seen as a long-term hedge against inflation, is the fact that the dollar is trading higher alongside gold, which is typically not the case.  In fact, for the bulk of my career, gold was effectively just another currency to trade against the dollar, and when the dollar was weak, foreign currencies and gold would rise and vice versa.  But look at these next two charts from tradingeconomics.com, the first a longer term view of the relationship between gold and DXY and the second a much shorter-term view.

The one-year history:

Compared to the one-month history:

I believe it is fair to say that while there is a clear concern about, and flight from, fiat currencies, hence the strength of precious metals as well as bitcoin, in the fiat universe, the dollar remains the best of a bad lot.  Yesterday I described the problems in France and how the second largest nation in the Eurozone was leaderless while trying to cope with a significant spending problem amid broad-based political turmoil.  We have discussed the problems in Germany in the past, and early this morning, the fruits of their insane energy policies were shown by another decline in Factory Orders, this time -0.8%, far less than the 1.7% gain anticipated by economists.  I don’t know about you, but it is difficult for me to look at the below chart of the last three years of Germany’s Factory Orders and see a positive future.  Twenty-two of the thirty-six months were negative, arguably the driving force behind the fact that Germany’s economy has seen zero growth in that period.

Source: tradingeconomics.com

Meanwhile, the yen continues to weaken, pushing toward 151 now and quite frankly, showing limited reason to rebound anytime soon.  Takaichi-san appears to be on board with the “run it hot” thesis, looking for both monetary and fiscal stimulus to help Japan grow itself out of its problems.  The JGB market has sussed out there will be plenty more unfunded spending coming down the pike if she has her way as evidenced by the ongoing rise in the long end of the curve there.  While the 30-year bond did touch slight new highs yesterday, the 40-year is still a few basis points below its worst level (highest yield) seen back in mid-May as you can see in the chart below.  Regardless, the chart of JGB yields looks decidedly like the chart of gold!

Source: tradingeconomics.com

In a nutshell, there is no indication the fiscal/financial problems around the world have been addressed in any meaningful manner and the upshot is that more and more investors are seeking safety in assets that are not the responsibility of governments, but either private companies or have inherent intrinsic value.  This is the story we are going to see play out for a while yet in my view.

Ok, so, let’s look at how markets overall behaved in the overnight session.  China remains on holiday, but it will be interesting to see how things open there on Thursday morning local time.  Japan, was unchanged overnight, holding onto its extraordinary post-election gains.  As to the other bourses there, holidays abound with both Hong Kong and Korea closed last night and the rest of the region net doing very little.  Clearly the holiday spirit has infected all of Asia!  In Europe, though, we are seeing very modest gains across the board despite the weak German data.  The DAX (+0.2%) has managed a gain and we are seeing slightly better performance in France (+0.4%) and Spain (+0.4%) with the UK (+0.1%) lagging slightly.  On the one hand, these are pretty benign moves so probably don’t mean much, but it is surprising there are rallies here given the ongoing lousy data coming from Europe.  As to US futures, at this hour (7:20), they are all pointing higher by just 0.1%.

In the bond market, yields are continuing to edge higher with Treasuries (+2bps) leading the way and European sovereigns following along with yield there higher by between 2bps and 3bps.  There continues to be a disconnect between what appear to be government policies of “run it hot” and bond investors, at least at the 10-year maturity.  Either that or there is some surreptitious yield curve control ongoing to prevent some potentially really bad optics.

In the commodity markets, oil (+0.1%) is still firmly ensconced in its recent range with no signs of a breakout.  I read a remarkably interesting article from Doomberg (if you do not already get this, it is incredibly worthwhile) this morning describing the methods that the Mexican drug cartels have been heavily involved in the oil business in Mexico, siphoning billions of dollars from Pemex and funding themselves, and more importantly, how the US was now addressing this situation.  This is all of a piece with the administration’s view that the Americas are its key allies and its playground, and it will not tolerate the lawlessness that has heretofore been rampant.  It also implies that if successful, much more oil will be coming to market from Mexico, and you know what that means for prices.  As to the metals markets, they are taking a breather this morning with gold (-0.1%) and sliver (-0.3%) consolidating after yesterday’s rally.  We discussed gold above, but silver is about $1.50 from the big round number of $50/oz, something that I am confident will trade sooner rather than later.

Finally, the dollar is rallying again with the euro (-0.5%) and pound (-0.6%) both under pressure and dragging the rest of the G10 with them.  If the DXY is your favorite proxy, as you can see from the chart below, this is the 4th time since the failed breakout in late July that the index is testing 98.50 from below.  It seems there is some underlying demand, and I would not be surprised to see another test of 100 in the coming days.

Source: tradingeconomics.com

It should be no surprise that the CE4 currencies are all under pressure this morning and we have also seen weakness in MXN (-0.3%) and ZAR (-0.3%) although given the holidays in Asia, it is hard to make a claim there other than that INR (-0.1%) continues to steadily weaken and make new historic lows on a regular basis.

With the government shutdown continuing, there is still no official data although there is a story that President Trump is willing to have more talks with the Democrats.  We shall see.  I think the biggest problem for the Democrats in this situation is that according to many polls, nobody really cares about the shutdown, with only 6% registering any concern.  It is a Washington problem, not a national problem.  Of course, FOMC members will continue to speak regardless of the shutdown and today we hear from four more.  Interestingly, nothing any of them said yesterday was worthy of a headline in either the WSJ or Bloomberg which tells me that there is nothing coming from the Fed that matters.

Running it hot means that we will continue to see asset prices rise, bond prices suffer, and the dollar likely maintain its current level if not rally a bit.  We need a policy change somewhere to change that, and I don’t see any nation willing to make the changes necessary.  I have no idea how long this can continue, but as Keynes said, markets can remain irrational longer than you can remain solvent.  Be careful betting against this.

Good luck

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The Winds of Change

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Takaichi-san
Her pronouns so very clear
Brings the winds of change

 

Japan has a new Prime Minister, Sanae Takaichi, the first woman to hold the position.  She was deemed by most of the press as the most right-wing of the candidates, which fits with a growing worldwide narrative regarding nationalism, antagonism toward immigration and concerns over China and its plans in the region.  However, in the waning days of the campaign, she moderated a number of her stances as she does not have a majority in either house of the Diet, and will need to persuade other, less rigid members to vote with her in order to pass legislation.

However, the initial market response has been remarkable.  The Nikkei opened in Tokyo +5.5% and held most of those gains, closing higher by 4.75%.  USDJPY gapped 1.3% on the Tokyo opening and is currently higher by 2.0% and back above 150.  Perhaps the most interesting thing is that despite dollar strength, the precious metals have roared higher with both gold and silver gaining 1.4% as gold touches yet another new all-time high and silver pushes ever closer to $50/oz. Meanwhile, JGB yields are little changed as I imagine it will take a few days, at least, for investors to get a better sense of just how effective she will be at governing in a minority role.

Below is the chart for USDJPY, demonstrating just how big the gap was.  This appears to be another chink in the ‘end of the dollar’s dominance’ armor.  Just sayin’!

Source: tradingeconomics.com

In Europe, the powers that be
Have found citizens disagree
With most of their actions
Thus, building up factions
That want nothing but to be free
 
The most recent story is France
Where Macron’s PM blew his chance
He’s now stepped aside
But Macron’s denied
He’ll willingly exit the dance

However, the dollar’s gains today are not merely against the yen, but also, we have seen the euro (-0.7%) slide sharply with the proximate cause here being the sudden resignation of French PM LeCornu.  And the reason it seems like it was only yesterday that France got a new PM after a no-confidence vote in September, is because it basically was only yesterday.  PM LeCornu lasted just one month in the role as President Macron didn’t want to change the cabinet there, thus making LeCornu’s job impossible.  While the next presidential election is not scheduled until April 2027, and Macron is grasping to his role as tightly as possible, it appears, at least from the cheap seats over here in the US, that the vote will happen far sooner than that.  He appears to have lost whatever credibility he had when first elected, and France has now had 4 PM’s in the past twelve months, hardly the sign of a stable and successful presidency.

Like the bulk of the current European leadership, Macron has decided that nearly half the country should not have their voices heard by banning Madame LePen’s RN from government.  And while President Biden was never successful imprisoning President Trump, in France, they managed to convict LePen on some charge and ban her from running.  But that has not dissuaded her followers one iota.  We see the same behavior in Germany with AfD, and the Merz government’s attempts to ban them as a party, and similar behavior throughout Europe as the unelected Brussels contingent in the European Commission struggles to do all they can to retain power.

In fact, if you look at the most recent polls I can find for France, from Politico, you can see that RN, LePen’s party, is leading the polls while ENS, Macron’s centrist party has just 15% support.  The far left NFP is in second place and the center-right LRLC is at 12%.  It is difficult for me to believe that Macron can hold on until 2027, at least 18 months away, and if he does, what type of damage will he do to France?

The point of the story is that whatever you may think of Donald Trump, he has the reins of government and is doing the things he promised on the border and immigration, reducing government and reducing regulations.  In Europe, the entrenched bureaucracy is fighting tooth and nail to prevent that from happening with the result that economic activity is suffering and prospects for future growth are stunted.  And all that was before the US change in trade policy.  With that in mind, absent a massive Fed turnaround to dovishness, which doesn’t seem likely in the near term, the euro has more minuses than pluses I think and should struggle going forward.

Ok, two political stories are the driver today, and neither one has to do with Trump!  Meanwhile, let’s look at how everything else has behaved overnight.  Friday saw a mixed session in the US, and all I read and heard over the weekend was that the denouement was coming, perhaps sooner than we think.  The recurring analogy is Hemingway’s description of going into bankruptcy, gradually, then suddenly, and the punditry is trying to make the case that the ‘suddenly’ part is upon us.  I’m not convinced, and would argue that, at least in the US, things can go on longer than they should.  This is not to say the US doesn’t have serious fiscal issues, just that we have better tools to address them than anyone else.

Elsewhere in Asia, China is still on holiday while HK (-0.7%) could find no joy in the Japanese election.  But Korea (+2.7%), India (+0.7%) and Taiwan (+1.5%) all rallied nicely with only the Philippines (-1.8%) showing contrary price action as investors grew increasingly concerned over a growing corruption scandal with the government there and infrastructure embezzlment allegations.  I didn’t mention above but the rationale behind the Japanese jump is that Takaichi-san is expected to push for significant fiscal expansion on an unfunded basis, great for stocks, not as much for bonds.

In Europe, though, you won’t be surprised that France (-1.6%) is leading the charge lower, although in fairness, the rest of the continent is doing very little with the other major exchanges +/- 0.1% basically.  As to US futures, at this hour (7:15), they are all pointing higher by 0.5% or so.

In the bond market, Treasury yields have moved higher by 4bps this morning, adding to a similar gain on Friday as it appears there are lingering concerns over what happens with the government shutdown.  (Think about it, that issue hasn’t even been a topic of discussion yet this morning!). But remember, the government shutdown does not impact the payment of coupons on Treasury debt, so the issues are very different than the debt ceiling.  As to European sovereigns, not surprisingly, French OATs are the wors performers, with yields jumping 8bps (they have real fiscal problems) but the rest of the continent has tracked Treasury yields and are higher by 3bps to 4bps as well.

I’ve already highlighted precious metals, although copper (-0.7%) is bucking the trend, albeit after having risen more than 10% in the past month.  Oil (+1.4%) is also continuing to bounce off the bottom of the range trade and remains firmly ensconced in the $61.50 to $65.50 range as it has been for the past six months.  In fact, looking at the chart below from Yahoo finance, you can see that except for the twelve-day war between Israel and Iran, nothing has gone on here.  The net price change in the past six months has been just -0.19% as you can see in the upper left corner.  While this will not go on forever, I have no idea what will break this range trade.

Finally, the dollar is stronger across the board with the pound (-0.4%) and SEK (-0.5%) the next worst performers in the G10 while CAD and NOK are both unchanged on the day, reflecting the benefits of stronger oil and commodity prices.  In the EMG bloc, the CE4 are all softer by between -0.6% and -0.9%, tracking the euro, and we have seen APAC currencies slip as well (KRW -0.5%, CNY -0.15%).  MXN (-0.2%) and ZAR (-0.3%) seem to be holding in better than others given their commodity linkages.

And that’s all we have today.  With the shutdown ongoing, there are no government statistics coming but we will hear from 8 different Fed speakers, including Chairman Powell on Thursday morning, over a total of 15 different venues this week.  Again, there is a wide dispersion of views currently on the FOMC, so unless we start to see some coalescing, which given the lack of data seems unlikely in the near term, I don’t think we will learn very much new.  As far as the shutdown is concerned, the next vote is scheduled for today, but thus far, it doesn’t seem the Democratic leadership is willing to change their views.  Funnily, I don’t think the markets really care.

Overall, I see more reasons to like the dollar than not these days, and it will take a major Fed dovish turn to change that view.

Good luck

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Jobs is Passe

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The usual story today
Would be NFP’s on its way
But with BLS
On furlough, I guess
The story on jobs is passe
 
But ask yourself, if we don’t get
A data point always reset
That’s only a fraction
Of total job action
Is this something ‘bout we need fret?

 

I guess the question is, is the government shutdown impacting markets?  Frankly, it’s hard for me to see that is the case. Today offers a perfect scenario to see if it is true.  After all, if the government was working, the BLS would have released the weekly Claims data yesterday and market participants would be waiting with bated breath for today’s NFP number.  As I said yesterday, while Ken Griffin is likely quite annoyed because I’m sure Citadel makes a fortune on NFP days, the rest of the world seems to be getting along just fine.  In fact, maybe this is exactly what market participants need to learn that the data points on which they rely don’t really matter.  

With NFP in particular, the monthly number, which since 1980 has averaged 125K with a median of 179K seems insignificant relative to the number of people actually employed, which as of August 2025 was recorded as 159.54 million.  Now I grant, that the employed population has grown greatly in the past 45 years, so when I take it down to percentages, the average monthly NFP result is 0.10% of the workforce during that period, with the median a whopping 0.14%.  The idea that business decisions are made, and more importantly, monetary policy decisions are made on such a tenuous thread is troublesome, to say the least.  Did this report really tell us that much of importance?  Especially given its penchant for major revisions.

Below is a graphic history of NFP (data from FRED) having removed the Covid months given they really distorted the chart.

And below is a chart showing total payrolls (in 000’s) on the RHS axis with the % of total payrolls represented by the monthly change in NFP on the LHS.  Notice that almost the entire NFP series, as a %age of total employment, remains either side of 0 with only a few outcomes as much as even 0.5%.  My point is, perhaps the inordinate focus on this data point by markets and policymakers alike, has been misguided, especially as the accuracy of the initial releases seems to have worsened over time.  Maybe everybody will be able to figure out that they can still do their jobs even without this data.  (Ken Griffiin excepted. 🤣)

Food for thought.

Like swallows return
To Capistrano, Japan
Votes again this year

 

The other notable news story is tomorrow’s election in Japan’s LDP for president of the party and the likely next Prime Minister.  While there are technically 5 candidates, apparently, it is really between two, Sanae Takaichi, a former economic security minister and a woman who would be the first female PM in the nation’s history, and Shinjiro Koizumi, son of former PM Junichiro Koizumi, and a man who would become the nation’s youngest prime minister.  There are several others, but these are the front runners.  From what I gather, Takaichi-san is the defense hawk and the more conservative of the two, an updated version of Margaret Thatcher, to whom she will constantly be compared if she wins.  Meanwhile, Koizumi is more of the same they have had in the past.

There are some analysts who are trying to make the case that this election has had a major impact on Japanese markets, and one might think that makes sense.  But if I look at USDJPY (0.0% today), as per the below chart, I am hard pressed to see that the election campaign has had any impact of note.

Source: tradingeconomics.com

If we turn to the Nikkei (+1.9%) which made a new high last night, it seems that is tracking US technology shares and is unconcerned over the election.  

Source: tradingeconomics.com

Arguably, if the equity market is forward looking (which I think is true) investors are indifferent to the next PM.  Finally, a look at JGBs shows that yields continue to climb there, albeit quite slowly, but consistently make new highs for the move and are back to levels last seen in 2008.

In fact, like almost everything since the GFC, perhaps the recent run of incredibly low yields in Japan is the aberration, not the rule!  But the argument for higher Japanese yields is more about the fact that inflation there is running at 3.5% and the base rate remains at 0.50%.  Investors remain concerned that the recent history of virtually zero inflation in Japan may be a thing of the past and so are demanding higher yields to hold Japanese debt.

I have no idea who will win this election, although I suspect that Takaichi-san may wind up on top.  But will it change the BOJ?  I don’t think so.  And the fact that the LDP does not have a working majority means not much may get done afterwards anyway.  All told, it is hard to be excited about holding yen in my eyes.

Ok, let’s look at the rest of the world quickly.  Despite a soft start, US equity markets managed to close in the green and this morning all three major indices are pointing higher by 0.25%.  Away from Japan, Chinese markets are closed for their holiday, and most of the rest of Asia followed the US higher, notably Korea (+2.7%) and Taiwan (+1.5%).  The only outlier was HK (-0.5%) which looked to be some profit taking after a sharp run higher in the past week.  In Europe, Spain (+0.8%) and the UK (+0.6%) are the best performers despite (because of?) slightly softer PMI Services data.  Either that, or they are caught up in the US euphoria.

The bond market saw yields slip a few basis points yesterday and this morning, while Treasury yields are unchanged at 4.08%, European sovereigns are sliding -1bp across the board.  I think the slightly softer data is starting to get some folks itching for another ECB rate cut, or at least a BOE cut.

In the commodity markets, oil (+0.4%) which continued to fall throughout yesterday’s session to just above $60/bbl, looks like it is trying to stabilize for now.  There continues to be discussion about more OPEC+ production increases, and it seems that whatever damage Ukraine has done to Russia’s oil infrastructure is not considered enough to change the global flows.  As to the metals, gold (+0.2%) and silver (+1.2%) absorbed a significant amount of selling yesterday in London, which may well have been one account, as they reversed course late morning and have been climbing ever since.  Copper (+1.1%) is also pushing higher and the entire argument about the defilement of fiat currencies remains front and center.  I guess JP is now calling it the debasement trade as Gen Z, if I understand correctly, is selling other assets and buying a combination of gold and bitcoin.

Finally, the dollar is…the dollar.  Back on April 20, DXY was at 98.08.  This morning it is 97.75.  look at the chart below from tradingeconomics.com and tell me you can get excited about any movement at all.  We will need a major outside catalyst, I believe, to change any views and right now, I see nothing on the horizon.

And that’s really all there is.  We do get ISM data this morning as it’s privately compiled and released (exp 51.7) and Fed speakers apparently will never shut up.  What is interesting there is that Lorrie Logan, Dallas Fed president, has come out much more hawkish than some of her colleagues.  That strikes me as a disqualification for being elevated to Fed chair.

I continue to read lots of bear porn and doom porn, and it all sounds great and markets clearly don’t care.  The government shutdown has been irrelevant and that should make a lot of people in Washington nervous given this administration.  President Trump has been angling to reduce government, and if it is out of action and nobody notices, it will make his job a lot easier.  But for now, nothing stops this train with higher risk assets the way forward.

Good luck and good weekend

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Who Will Blink First?

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The question’s now, who will blink first?
With Democrat leaders immersed
In internal strife
Concerned their shelf life
Is short and their party’s been cursed
 
Or will the Republican leaders
Start caring if New York Times readers
Scream loudly enough
The polls will turn rough?
My bet’s on the Dems as conceders

 

So, the government is shut down and yet, the sun continues to rise and set, and life pretty much goes on as before.  Is this, in fact a big deal?  It all depends on your point of view, I suppose.  It is certainly a big deal for those furloughed government employees, especially those whose jobs may disappear in the pending RIF.  But as I have often said, if they leave government and become baristas at Starbucks, they are almost certainly adding more value to the economy.  And consider, whenever you have to interface directly with the federal government (post office, passports, IRS, etc.) has the customer service ever been useful or effective?  Explaining that people will have to wait longer is hardly a compelling argument.  In fact, of all the places where AI is likely to be most useful, repetitive government tasks seems one of the most beneficial potential applications.

Nonetheless, this is the story that is going to lead the headlines for a few more days.  Ultimately, as we have already seen several Democrat senators vote to pass the CR, I expect enough others to do so to reopen the government, if not at the next scheduled vote tomorrow, then at the one following next week.  Ultimately, I believe what we’ve relearned is that most politics is simply performance art.

Too, remember that the decision as to who is considered essential, when the government shuts down, is left up to the president.  So, the Democrats shut down the government and have allowed President Trump to decide what gets done.  Pretty soon, I suspect they will figure out that was a bad idea as we have already seen specific projects in NY (home to both House and Senate minority leaders) get halted with the funds flows stopping as well.

Meanwhile, in the markets, nobody appears to have noticed that the government has shut down.  That is the key conclusion to be drawn from the continuation of the equity market rally where all three major US indices closed at record highs yet again. I am hard pressed to look at the below chart of those indices and glean any concern by markets regarding the government shutting down.  Perhaps, even, they are applauding the idea as it means less spending!

Source: tradingeconomics.com

Arguably, the market’s biggest concern is that government data releases will be missing from the mix, although, that too, might be a blessing.  The person most upset there will be Ken Griffin, as Citadel’s algorithms will not be able to take advantage of the data prints before everyone else!  In fact, I suspect that he is already bending the ears of the Democratic leadership to get things back to normal.

Meanwhile, would it be too much to ask to close the Fed during the shutdown?  Asking for a friend!

Ok, what is happening elsewhere in the world.  Japanese Tankan data the night before last came in a tick weaker than forecast, and than last month, but remains solid overall.  Deputy BOJ Governor Uchida reiterated that if the economy performs as currently expected, the BOJ will continue to remove policy accommodation going forward with expectations for a rate hike at the end of the month priced at a 60% probability.  Interestingly, despite that, the Nikkei (+0.9%) rallied overnight along with the yen (+0.3% overnight, +2.1% in the past week), although the yen move makes more sense.  As to the rest of Asian equity markets, China (+0.5%) and HK (+1.6%) are clearly unperturbed by the US situation as a positive outlook on trade talks with the US are the narrative there heading into their weeklong National holiday.  Elsewhere in the region, every major bourse is higher with some (Korea +2.7%, Singapore +1.7%) substantially so.  The US rally is dragging along the world.

This is true in Europe as well with the DAX (+1.4%) and CAC (+1.3%) leading the way as all major bourses rise alongside the US.  Apparently, increasing global liquidity is good for risk assets.

In the bond market, Treasury yields continue to slide, down another -1bp overnight after slipping -4bps yesterday.  The only data was the ADP Employment Report which showed a decline of -32K jobs compared to expectations of +50K.  It is important to recognize that this report included ADP’s benchmark revisions which, not surprisingly, resulted in fewer jobs create last year just like the QCEW showed with the NFP report two months’ ago.  This data took the probability of a Fed cut at the end of the month up to 99% and pushed the probabilities for cuts next year higher as well.

Source: cmegroup.com

Of course, this is the very definition of bad news is good for equities and bonds, as there continues to be a strong expectation that rate cuts are designed to support asset prices rather than address real weakness in the economy.  And in a way, this makes sense.  After all, the Atlanta Fed’s GDPNow forecast for Q3 is currently at 3.8%, hardly the sign of an impending recession.

So, stronger than long-term growth and rate cuts seem an odd policy pairing, but the stock markets love it!

The other markets that love this policy are precious metals which continue to make new highs as well, for gold (+0.5%) these are all-time highs, for silver (+0.3%) they are merely 14-year highs.  But the one thing that is clear (and this is true of platinum and palladium as well) is that investors are starting to look at the current policy mix and grow concerned over the value of fiat currencies.  Oil (-0.7%), though, is currently on a different trajectory, trading right back to the bottom of its months’ long trading range less than a week after touching the top.

Source: tradingeconomics.com

There seems to be a difference of opinion regarding future economic activity between equity and oil markets.  I have read a number of analyses describing peak oil, yet again, although this time they are calling for peak demand, not peak supply.  Given that fossil fuels continue to generate more than 80% of global energy, and that oil also is the base for some 6000 products utilized around the world in everyday applications and the fact that there are some 7 billion people who are energy starved compared to the Western nations, I find the peak demand story to be hard to accept.  But that’s just me and I’m an FX guy, so what do I know?

Speaking of FX, the decline in yields and growing belief in easier US monetary policy has worked its way into the dollar, pushing it a bit lower, about -0.15% based on the DXY.  But looking across both G10 and EMG currencies, the yen’s 0.3% move describes the maximum gain with the rest having either gained less or declined a bit.  Right now, the dollar doesn’t appear to be the focus of the macro world, although that is certainly subject to change at a moment’s notice.

We know there is no government data coming, although apparently, the Treasury is still auctioning T-bills today, that activity will not be delayed!  We also hear from Dallas Fed President Logan, someone who ostensibly has been mooted as a potential next Fed chair.  Again, the one thing we know about the FOMC right now is that there is no consensus opinion on what to do next, at least based on the dispersion of the dot plot from the last meeting.

While the Trump administration may be getting ready to axe a lot of Federal jobs, that will not stop the liquidity impulse.  It’s not that this government is going to spend less, it is just spending money on different priorities.  But running it hot is clearly the MO for now and the foreseeable future.  Ultimately, if the GDPNow forecast is correct, a much weaker dollar seems unlikely regardless of the Fed’s moves.  But that doesn’t mean a dollar rally, rather we could stay near here for a lot longer.

Good luck

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Introducing Marvel

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For those of you who missed the poetry this morning, it had nothing to do with the government shutdown, but rather a special day for my pup. 

Let me introduce you to Champion Nubia’s Take Your Breath Away, aka Marvel, who turns out to be more than our beloved family pet, but also a pretty accomplished show dog. Today was the 2025 edition of the Morris and Essex Kennel Club’s quinquennial dog show with over 4500 dogs in attendance. In the Doberman Pinscher breed class, Marvel was Best of Opposite Sex, essentially second place to a beautiful female named Penny, who happens to be the number one dog in the nation. We are quite proud.

Here he is with his handler, Kristen earlier today.

FX poetry will be back at its regular time tomorrow.

thanks

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A Few Glitches

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Though stocks worldwide this year are higher
Investors have sought to inquire
If their dreams of riches
Might have a few glitches
And if they all sell, who’s the buyer?
 
Meanwhile, the key news of the day
Revolves around government pay
Will seven Dems buck
The warnings of Chuck
Or will the “resistance” hold sway?

 

Midnight tonight is the deadline for Congress to pass a continuing resolution to keep the government funded.  Democratic leaders, Representative Hakeem Jeffries and Senator Chuck Schumer, met with President Trump yesterday but came to no agreement.  The House has passed a clean CR, meaning it continues funding exactly as currently laid out, but the Senate needs 60 votes and Minority leader Schumer wants to increase spending by upwards of $1.5 trillion over the next 10 years to support the CR.  

Looking at the list of Senators, I count 9 democrats in states that President Trump won in the 2024 election and who may feel it is in their best interest to consider voting for the resolution than shutting down the government although history shows elected Democrats vote the party line regardless of the consequences.

I asked Grok what happens in a shutdown and reading through what occurs in each cabinet department, it will take several weeks, I believe, before anybody really notices.  The War Department and Homeland Security continue to function, so ICE agents are not going to disappear from the streets anytime soon.  Too, Social Security, Medicare and Medicaid are untouched.  I would argue those are the biggest issues.  The FBI and prisons remain active as does the FAA and TSA.  Maybe the biggest short-term issue is economic data will be delayed so there will be no NFP on Friday.  Given its recently demonstrated inaccuracies, that may be a benefit, although I’m sure that’s not the case.

Of course, the most important question is, will a government shutdown cause the stock market to decline, as we all know a rising stock market is the MOST important thing ongoing!  Thus far, it doesn’t appear investors are that worried, but perhaps that will change today.  After all, all the major US indices rallied yesterday although as of this morning (6:25) futures are pointing lower by about -0.1%.

But here’s the thing about stocks, no matter how much angst some folks have had, and how many calls for recession have been made, and how much people may hate President Trump, below is a table from tradingeconomics.com showing most major stock market indices and their performance YTD at the far right.  Take away Russia, which isn’t really major, and there is an awful lot of green!

Perhaps the proper question is, why has this been the case and can it continue?  Certainly, the fiscal underpinnings of almost every nation are deteriorating as debt grows rapidly alongside government spending while the prospects of repaying said debt diminishes.  So, the macroeconomic backdrop in many nations is shaky, at best (France, UK, US, Germany, Australia, Japan, to name a few).

Of course, any individual company will typically reflect the prospects of that company, the very fact that markets have rallied so strongly this year continues to support the rally.  Remember, there have been numerous recession calls, and even the Fed has begun to look at the employment situation as becoming a bigger issue than inflation, indicating they, too, are concerned over future economic growth prospects.  Hence, the widespread expectations for further rate cuts.  in fact, looking at the futures market, not only is it pricing two more cuts this year, but a further two more by September 2026, and then a long period of 3.0% Fed funds afterwards.

Thus, it appears the equity market is counting on rate cuts to support future earnings even though those rate cuts imply weaker economic activity which will undermine future earnings.  Quite the balancing act!  But then, I’m just an FX guy, so the intricacies of equities are clearly lost on me. 

Ok, you’ve already seen the overnight equity movement with Chinese shares the largest beneficiary of PMI data showing modest growth.  Combining that with the news of further stimulus yesterday and things in China look pretty good right now.

Turning to bonds, yields fell yesterday despite any noteworthy data.  Perhaps it was the Fed speakers who highlighted the need to ease policy further as their concerns grow over slowing employment.  At any rate, this morning, 10-year Treasury yields are unchanged at 4.14%, while a few bps above the lows seen last week, hardly demonstrating a major move higher.  European sovereign yields have edged higher by 1bp this morning across the board, also not really demonstrating much concern about things.  We did see some Eurozone data this morning with French inflation soft (1.2% Y/Y) while German Unemployment rose slightly and German state inflation data has generally been higher than last month.  The nationwide number is released at 8:00 this morning.  Meanwhile, Italian inflation was a bit softer than forecast (1.6%), so bond investors seem satisfied for now.

As has been the case for a while now, the biggest moves have come in the commodity space with oil (-0.7%) falling back to the middle of its trading range as per the below chart from tradingeconomics.com.

For whatever reason, the end of last week had oil bulls out in force, but they are an unhappy lot this morning.  Apparently, President trump and Israeli PM Netanyahu have agreed a Gaza peace plan, although the Palestinians were not privy to the details.  Perhaps peace there is reducing concerns in the oil market although I would have thought the Russia/Ukraine situation has a more direct impact.  As to metals, after another series of new highs across the precious space yesterday, this morning we are finally seeing a bit of profit taking (Au -0.7%, Ag -1.7%, Pt -2.8%, Cu -1.0%).  However, it is difficult to look at the chart and sense that this is over.

Source: tradingeconomics.com

Finally, the dollar is a touch softer this morning, essentially unchanged vs. the euro and pound although the yen (+0.4%) and Aussie (+0.4%) have both managed to rally.  The RBA met last night and left rates on hold, as expected, although their commentary afterwards had a hawkish tilt regarding the future of inflation which undermined equities and helped the currency.  As to the yen, their ‘Minutes’ were released and indicated there was growing support for a rate hike in October, although I will believe it when I see it.  But away from those two, there was virtually no movement and no news of note.

On the data front, I will lay out the alleged releases, although with the shutdown, the BLS and BEA ones will likely be delayed.

TodayCase Shiller Home Prices1.6%
 Chicago PMI43.0
 JOLTs Job Openings7.2M
 Consumer Confidence96.0
WednesdayADP Employment50K
 ISM Manufacturing49.0
 ISM Prices Paid63.2
ThursdayInitial Claims223K
 Continuing Claims1930K
 Factory Orders1.4%
 -ex Transport0.1%
FridayNonfarm Payrolls50K
 Private Payrolls60K
 Manufacturing Payrolls-7K
 Unemployment Rate4.3%
 Average Hourly Earnings0.3% (3.7% Y/Y)
 Average Weekly Hours34.2
 Participation Rate62.3%
 ISM Services51.7

Source: tradingeconomics.com

Today’s data will be released, and tomorrow’s is privately sourced, so shouldn’t be a problem, but come Thursday and Friday, that’s when things will go missing.  Ironically, the biggest impact will be on options traders who frequently place trades in anticipation of a data point, and with that data point missing, those premia are likely to diminish quickly.  Too, spare a moment for the algorithms who won’t have anything to trade against without data.  Poor programs 🤣.

History has shown the dollar tends to decline through government shutdowns, if they last any length of time (>3 or 4 days), so if we shut down and are still that way next week, I expect we could see some weakness.  But I’m sure there will be one more vote today to see if it will happen.  My take is a shutdown is in the cards but for how long, I have no idea.

Good luck

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