A score and five years now have passed
Since evil, near home, struck so close
And I will ne’er forget that blast
Though it brings back memories morose
While I have worked to block it out
We lived through a great deal of stress
And recent events leave no doubt
New York City is still quite the mess
I understand you weren’t there
But absence remains no excuse
To disregard those thoughts and prayers
Of folks who feel torment, profuse
No other day that I recall
Impacted our lives with such woe
And to this day, its darkened pall
Still hides much of life’s radiant glow
On this somber day, remembering the events of that bright and sunny morning, I sincerely hope none of you ever forget what happened. From my vantage point, a single block away, the devastation was remarkable. Unfortunately, I lost many friends that day, and they are all in my thoughts this morning. If ever you wondered how important the markets are, they pale in comparison to the realities of life…and death.
And while I try to keep politics out of this missive, this morning, it pains me greatly that New York City mayor Mamdani, with a history of supporting the very people who perpetrated this heinous crime, will have anything to do with the commemorative ceremony.
Now back to our regularly scheduled programming.
The punditry’s near salivating
As Treasury yields keep inflating
The glee they express
O’er bond market stress
Can fairly be called fascinating
Elsewhere, there’s a new boogeyman
Replacing the war in Iran
AI is Skynet
Much worse than huge debt
As it will destroy all it can
The primary market discussion this morning revolves around government bond yields after yesterday’s dramatic rise virtually across the board. If you look at the chart below, it shows the yields for US, UK and German 10-year bonds and how they have all risen dramatically in the past week (18bps, 20bps and 15bps respectively) with the bulk of that coming yesterday.
Source: tradingeconomics.com
There have been many theories as to why things broke yesterday with some pointing to oil’s dramatic rise, some pointing to President Trump’s $5k bonus payment and others pointing to Secretary Bessent’s bond repurchases where he was only able to buy $5.1 billion of the $6.0 billion they tendered for. As is often the case, all of these likely had some impact, and you can throw in some views of yesterday’s PPI data, which while released at expectations did nothing to cool inflationary ardor.
If we look at Fed funds futures in the table below from the CME, we can see that the probability of a rate hike next week has risen to 67%, but more interestingly, there is now pricing for a total of 100bps of hikes over the course of the next year.
In fact, if we look across the globe, the number of rate hikes has grown since yesterday. Compare this morning’s chart from rateprobability.com to the one I published yesterday, and you can see that expectations have risen between 15bps and 25bps across all the major central banks.
Today’s chart.
Yesterday’s chart.
At this point, we are highly confident that Japan is going to raise rates at their meeting later this month because Nikkei News reported it last night, and their track record here is, literally, perfect, never having missed a call. Of course, the ECB raised rates yesterday, and it appears quite likely that rate hikes are the new normal. I wonder what will happen, though, if today’s CPI (exp 0.4% Headline, 0.2% Core) comes in cool. Frankly, I think the market is so convinced that it won’t matter at all.
Ok, before I run down markets, I must comment on the increased chatter regarding AI. Let me start by saying, I am not an expert on AI, although I have a pretty good feel for human behavior. The recent comments from the Anthropic scientist who left and explained that AI was going to kill us all were remarkable. But what is more remarkable is the call for ‘government experts’ to oversee AI’s ongoing evolution. Every time I hear of government experts I hearken back to the end of “Raiders of the Lost Ark” when Indiana Jones tells the army intelligence men that the Ark needs to be studied, and they reply it is being studied. When queried ‘by who?’ they reply, top…men.
My point is there are likely zero AI experts who work in the government as all of them are working for companies building AI. Congress has proven itself to be uniquely incompetent across virtually every sphere of thought and action, so having Bernie Sanders or Hakeem Jeffries or Josh Hawley say they need to be involved does not inspire confidence. Here’s the thing, we have heard this before. After all, wasn’t global warming or climate change or Covid going to kill us all if we didn’t do exactly what government said? It is almost as if they are running the same playbook on AI and it is becoming pretty tiresome. Perhaps AI is developing into Skynet, but like virtually everything else, early hysteria is regularly misplaced.
Which takes us to markets. Oil (-3.2%) may have been a tad overdone yesterday during its $6.50 rally. Threats and counter threats between the US and Iran continue to be the backdrop, and Saudi Arabia did announce they produced their least amount of oil since 1991, but the US is producing record amounts, and Venezuela is coming back faster than expected and there still appears to be a surfeit of the stuff around. While EIA oil stocks had a very modest draw of 390K, gasoline stocks rose > 1mm barrels and there is no indication supplies are gone. However, while refinery runs in the US are consistently near 98% of capacity, the lack of refining in Russia and the Gulf continue to drive prices. I guess the question is how long can the IRGC withstand the very clear economic pressure the blockade and newer sanctions have imposed? I have no answers.
As to metals, yesterday saw sharp declines across the board as both interest rates and oil prices rallied, but this morning they are rebounding a bit (gold +0.5%, silver +0.5%) although copper is still under some pressure (-0.25%).
In the equity markets, in truth, despite all apocalyptic talk, the major US indices were only lower by about -0.6% across the board, not great but not devastating. Asia, however, had a rougher go of things with Tokyo (-1.9%), China (-0.8%) and HK (-0.6%) leading the way with most of the rest of the region also in the red (Korea -1.8%, Taiwan -1.6%, Australia -0.9%, etc.). But at some point overnight, things turned brighter as European bourses are higher by between 0.6% and 0.7% across the board with the only data release UK GDP and Production data, all coming in stronger than expected. Perhaps the idea is that if the UK can grow despite extraordinarily bad economic and energy policies, so can the rest of Europe! As to US futures, at this hour (7:30) they are higher by 0.6% across the board.
As we’ve already discussed bonds at length, it leaves us to the FX markets which continue to garner limited interest from the trading community. While the dollar is a touch firmer this morning, DXY +0.1%, if we use that as the proxy, over the past month, as you can see from the below chart, it has traded within a 1.5% range (98.50 – 100.00) and that is with a key piece of the index, JPY having shown a substantial move.
Source: tradingeconomics.com
Someone on X this morning was claiming that this market is setting up for a big move lower with many attendant impacts if that is to be the case, but while he is a very smart guy (Tavi Costa) whose views I respect, he is looking at a VERY long-term chart. Perhaps he is right, and I guess if we see major destruction in the bond market with yields exploding higher, that could be correct, but it is so hard to get excited about FX right now. It continues to be a background event.
In addition to the CPI data, we also see the preliminary Michigan Sentiment (exp 51.0) Survey but that’s it. My take on CPI is if the data is cool, it will have very limited impact, but if it comes in hot, we will see another wave of selling in bonds, and probably stocks, so an asymmetric outlook in my view.
Good luck and good weekend
Adf
fxpoetry 