Tag Archives: #Bessent

Positioning’s Fraught

Posted on by

The wonderful thing about Trump
Is traders no longer can pump
A market so high
That it can defy
Reality ere it goes bump
 
Since policies can change so fast
A long-term view just cannot last
So, Fed put or not
Positioning’s fraught
And larger ones won’t be amassed

 

As we await the NFP report this morning, I couldn’t help but ponder the uptick in complaints and concerns by traders that increased volatility in markets on the back of President Trump’s mercurial announcements has changed the trading game dramatically.  Let me say up front that I think this is a much healthier place to be and explain why.

Pretty much since the GFC and, more importantly, then Chairman Bernanke’s first utilization of QE and forward guidance, the nature of financial markets had evolved into hugely leveraged one-sided views based on whatever the Fed was guiding.  So, the initial idea behind QE and forward guidance was to assure all the traders and investors that make up the market that even though interest rates reached 0.0%, the Fed would continue to ease policy and would do so for as far out in time as you can imagine.  Lower for longer became the mantra and every time there was a hiccup in the market, the Fed rushed in, added yet more liquidity to calm things down, and put the market back on track for further gains.  This was true for both stocks and bonds, despite the fact that the Fed has no business or mandate involving the equity market.

This activity led to the ever-increasing size of trading firms as leverage was cheap and steadily rising securities prices led to lower volatility, both implied and real, in the markets.  Risk managers were comfortable allowing these positions to grow as the calculated risks were minimized by the low vol.  In fact, entire trading strategies were developed to take advantage of the situation with Risk Parity being a favorite.  

However, a negative result of these actions by the Fed was that investors no longer considered the fundamentals or macroeconomics behind an investment, only the Fed’s stance.  The only way to outperform was to take on more leverage than your competitors, and that was great while rates stayed at 0.0%.  Alas, this persisted for so long that many, if not most, traders who learned the business prior to the GFC wound up retiring or leaving the market, and the next generation of traders and investors lived by two credos, number go up and BTFD.

The Fed remained complicit in this process as FOMC members evolved from background players to a constant presence in our daily lives, virtually preening on screens and in front of audiences and reiterating the Fed’s views of what they were going to do, implicitly telling traders that taking large, leveraged bets would be fine because the Fed had their back.

Of course, the pandemic upset that apple cart as the combination of Fed and government response imbued the economy with significantly more inflation than expected and forced the Fed to change their tune.  The market was not prepared for that, hence the outcome in 2022 when both stocks and bonds fell sharply.  But the Fed would not be denied and calmed things down and created a coherent enough message so that markets recovered the past two years.  This has, naturally, led to increased position sizing and more leverage because that’s what this generation of traders understands and has worked.

Enter Donald J Trump as president, elected on a populist manifesto and despite his personal wealth, seemingly focused on Main Street, not Wall Street.  The thing about President Trump is if an idea he proffers doesn’t work, he will drop it in a heartbeat and move on.  As well, by wielding the full power of the United States when dealing in international situations, other nations can quickly find themselves in a difficult spot and, so far, have been willing to bend their knee.  As well, his focus on tariffs as a primary weapon, with little regard for the impact on markets, and the way with which he uses them, threatening to impose them, and holding off at the last minute when other nations alter their policy, has kept markets off-balance.

The result is large leveraged positions are very difficult to hold and manage when markets can move up and down 2% in a day, every day (like the NASDAQ 100 chart below), depending on the headlines.  

Source: tradingeconomics.com

The natural response is to reduce position size and leverage, and that, my friends, is a healthy turn in markets.  This is not to say that there are not still many significant imbalances, just that as they continue to blow up, whether Nvidia, or FX or metals, my take is the next set of positions will be smaller as nimble is more important than large.  It doesn’t matter how smart an algorithm is if there is no liquidity to adjust a position when the world changes.  This poet’s opinion is this is a much healthier place for markets to live.

Ok, let’s see what happened overnight ahead of today’s data.  Mixed is the best description as yesterday’s US closes saw a mixed outcome and overnight the Nikkei (-0.7%) fell while both Hong Kong (+1.2%) and China (+1.3%) gained ground.  Korea and India slid, Taiwan rose, the picture was one of uncertainty about the future.  That also describes Europe, where only Germany and Norway have managed any modest gains at all while the rest of the continent and the UK are all slightly lower.  Apparently, yesterday’s BOE rate cut has not comforted investors in the UK, nor has the talk of more rate cuts by the ECB bolstered attitudes in Europe.  As to US futures, at this hour (7:00) they are basically unchanged.

In the bond market, the biggest mover overnight was in Japan where JGB yields rose 3bps, once again touching that recent 30-year high.  While some BOJ comments indicated inflation remained well-behaved, the market is clearly of the view that Ueda-san is getting set to hike rates further.  In Europe, yields are basically lower by 1bp across the board and Treasury yields are unchanged on the session as investors and traders continue to focus on Treasury Secretary Bessent’s conversation that he cares about 10-year yields, not Fed funds.  Perhaps the Fed will cut rates to recapture the spotlight they have grown to love.

Oil (+0.5%) prices continue to drift lower overall, although this morning they are bouncing from yesterday’s closing levels.  Questions about sanctions policy on Iran, on Russia’s shadow fleet and about the state of the global economy and therefore oil demand remain unanswered.  However, the fact that oil has been sliding tells me that there is some belief that President Trump may get his way regarding a desire for lower oil prices.  In the metals markets, copper (+1.1%) is flying higher again, and seems to be telling us that the economy is in decent shape.  Either that or there is a major supply shortage, although if that is the case, I have not seen any reporting on the subject.  Both gold and silver are very modestly higher this morning after small declines yesterday as the London – NY arbitrage continues to be the hot topic and financing rates for both metals have gone parabolic.

Finally, the dollar is mixed this morning, perhaps slightly firmer as JPY (-0.5%) is actually the worst performer around, despite the rise in JGB yields.  There is a lot of chatter on how the yen is due to trade much higher, and it has rallied over the past month, but it is certainly not a straight line move.  As to the rest of the space, virtually every other currency is +/-0.2% from yesterday’s close with CLP (+0.5%) the lone exception as the Chilean peso benefits from copper’s huge rally.

On the data front, here are the latest expectations for this morning’s employment report:

Nonfarm Payrolls170K
Private Payrolls141K
Manufacturing Payrolls-2K
Unemployment Rate4.1%
Average Hourly Earnings0.3% (3.8% Y/Y)
Average Weekly Hours34.3
Participation Rate62.5%
Michigan Sentiment71.1

Source: tradingeconomics.com

Remember, though, the ADP number on Wednesday was much better than expected at 183K (exp 150K) with a major revision higher by 54K to the previous month).  As well, this month brings the BLS adjustments for 2024 which will not be broken down, just lumped into the data.  Recall, there are rumors of a significant reduction in the number of jobs created in 2024 as well as a significant increase in the population estimates with more complete immigration data, and that has led some pundits to call for a much higher Unemployment Rate.  I have no insight into how those adjustments will play out although the idea they will be large seems highly plausible.

Ahead of the number, nothing will happen.  If the number is strong, so NFP >200K, I expect that bonds will suffer, and the dollar will find some support.  A weak number should bring the opposite, but the revisions are a wild card.  As I stated this morning, the best idea is to maintain the smallest exposures possible for the time being, as volatility is the one thing on which we can count.

Good luck and good weekend

Adf

Three-Three-Three

Posted on by

Said Bessent, when speaking of rates
The 10-year yield’s what dominates
Our focus and goals
As that’s what controls
Most mortgages here in the States
 
Remember, our goal’s three-three-three
With job one on deficits key
So, that’s why we’ll slash
The wasting of cash
With tax cuts set permanently

 

There is a new voice in Washington that matters to Wall Street, that of the new Treasury Secretary Scott Bessent.  Yesterday in his first significant comments since his swearing-in, he made very clear that he and the president were far more focused on the 10-year Treasury yield, and driving that lower, than they were concerned over the Fed funds rate.  Talk about a different focus than the last administration!  At any rate, he expounded on his views as to how that can be achieved, namely lower energy prices and a reduced budget deficit alongside deregulation.  Recall, his three-three-three plan is 3% budget deficit, 3mm barrels of oil/day additional supply and 3% GDP growth.  Clearly, this is a tall order given the starting point, but he has not shied away from these goals and insists they are achievable.

Yesterday also brought the Quarterly Refunding Announcement, the Treasury’s announced borrowing schedule for the current quarter.  Under then-Secretary Yellen, the US shifted its borrowing to a much greater percentage of short-term T-bills (<1-year maturity) while avoiding the sale of longer date notes and bonds.  This is something which Bessent has consistently explained his predecessor screwed up given her unwillingness to term out more debt when the entire interest rate structure was much lower.  After all, homeowners were smart enough to refinance down to 3% fixed rate mortgages, but the Treasury secretary thought it was a better idea to stay short.  

Of course, changing the current treasury mix is one of the impediments to lower 10-year yields because changing it would require an increase in the sale of longer dated paper which would depress the price and raise those yields.  Bessent has his work cut out for him.  However, my take is this is a goal, but one that will be achieved gradually.  He even commented that until the debt ceiling is raised, there will be no changes in the debt mix.  Arguably, if the administration can make real progress on reducing the budget deficit, that is what will allow for the gradual adjustment of the debt mix without a dramatic rise in long-term yields.

Perhaps it is still the honeymoon period, but the market is showing some deference to Mr Bessent as 10-year yields have fallen steadily in the past two weeks, dropping from a high of 4.81% the week before the inauguration to their current level at 4.44%.  

Source: tradingeconomics.com

While we cannot attribute the entire move to Bessent, certainly investors are showing at least a little love at this stage.  I believe the 10-year yield will grow in importance for all markets as movement there will be seen as the report card for Bessent and this administration’s goals.

Meanwhile, in the UK, stagflation
Is now the Old Lady’s vexation
But cut rates, they will
Lest growth they do kill
As prices continue dilation

The BOE is currently meeting, and expectations are nearly universal that they will cut their base rate by 25bps to 4.50% with 8 of the 9 MPC members set to vote that way.  The only hawk on the committee, Catherine Mann, is expected to vote for no change.  The problem they have (well the problem regarding monetary policy, there are many problems extant in the UK right now) is that core inflation continues to run above 3.0% while GDP is growing at approximately 0.0% in recent quarters and at 1.0% in the past year.  A quick look at the monthly GDP readings below shows that things have not been moving along very well, certainly not since PM Starmer’s election in July.

Source: tradingeconomics.com

In stagflationary environments, the most successful central bank responses have been to kill the inflation and suffer the consequences of the inevitable recession first, allowing growth to resume under better circumstances.  Of course, Paul Volcker is most famous for this model, which he derived after numerous other countries, notably the UK, failed to effectively solve the problem in the mid 1970’s in the wake of the first oil price shocks.  Now, the UK has created its own energy price supply shock via its insane efforts to wean itself from fossil fuels without adequate alternate supplies of energy, and stagflation is the natural result.  However, addressing inflation does not appear to be the primary focus of the Bank of England right now.  I am skeptical that they will be successful in achieving their goals which is one of the key reasons I dislike the pound over time.

Ok, let’s turn to market activity overnight.  The party continues on Wall Street with yesterday’s equity gains attributed to many things, perhaps Bessent’s comments being amongst the drivers.  Certainly, a reduced budget deficit and reduced 10-year yields are likely to help the market overall.  That attitude has been uniform overnight and through the morning session with every major Asian market (Japan, +0.6%, Hong Kong +1.4%, China +1.3%) and European market (Germany +0.8%, France +0.8%, UK +1.45%) higher on the session.  As it happens, the BOE did cut rates by 25bps as expected and now we await Governor Bailey’s comments.  As to US futures, at this hour (7:25) they are little changed on the session.

In the bond market, the ongoing rally has stalled for now with Treasury yields higher by 2bps this morning while most European sovereign yields are little changed on the day.  A key piece of information that is set to be released tomorrow comes from the ECB as their economists are going to report the ECB’s estimate of where the neutral rate lies in Europe.  With the deposit rate there down to 2.75%, many pundits, and ECB speakers, are targeting 2.0% as the proper level implying more rate cuts to come.

In the commodity markets, oil (+0.65%) is bouncing off its recent trading lows but in truth, a look at the chart and one is hard-pressed to discern an overall direction.  More choppiness seems likely as the market tries to absorb the latest information from the Trump administration and its plans.

Source: tradingeconomics.com

As to the metals markets, gold, which had a strong rally yesterday and made further new all-time highs, is unchanged this morning while silver (-0.75%) consolidates its recent gains and copper (+0.6%) adds to its gains.  The thing about copper is it is, allegedly, a good prognosticator of economic activity as it is so widely used in industry and construction, and it has been rallying sharply for the past month.  That does seem to bode well for future activity.

Finally, the dollar is firmer this morning, recouping some of its recent losses although I would contend we have merely been consolidating after a sharp move higher during the past three months.  The pound (-1.0%) is today’s laggard after the rate cut but we are seeing weakness almost everywhere in both G10 and EMG currencies.  One exception is the yen (+0.2%) which seems to be benefitting from comments by former BOJ Governor Kuroda that the BOJ is likely to raise rates above 1.0% during the coming year.  Interestingly, he explained that given the recent economic trajectory, it was only natural that the BOJ would seek to normalize rates.  However, given that interest rates in Japan have been 0.5% or below for the past 30 years, wouldn’t that be considered normal these days?  Just sayin’!

On the data front, with the BOE out of the way, we now get the weekly Initial (exp 213K) and Continuing (1870K) Claims data as well as Nonfarm Productivity (1.4%) and Unit Labor Costs (3.4%).  Yesterday’s ADP Employment data was much stronger than expected with a revision higher to last month as well, certainly a positive for the job outlook.  As well, this afternoon we hear from three more Fed speakers, but so far this week, the word caution has been the most frequently used noun in their vocabulary.  Of course, with Mr Bessent now starting to make his views known, perhaps more focus will turn there and away from the Fed for a while.

Market participants are clearly feeling pretty good right now, especially about the recent activity in the US.  I think you have to like US assets, both stocks and bonds, while expecting the dollar to continue to hold its ground.  This sounds like a recipe for weaker commodity prices, notably gold, but so far, that has not been the case.

Good luck

Adf

Deceit

Posted on by

Though many will claim it’s deceit
The Chinese declared they did meet
The target that Xi
Expected to see
Though skeptics remain on the Street
 
In fact, it appears there’s a trend
That data surprises all tend
To flatter regimes
And their stated dreams
As policy faults they defend

 

Last night, the Chinese released their monthly data barrage with final 2024 numbers as part of the mix. Despite numerous indications that Chinese growth is slowing, somehow, they managed to show a 5.4% annualized GDP growth rate for Q4 and a 5.0% GDP growth rate for all of 2024, right on President Xi’s target.  

Now, the government did add some stimulus in Q4 as they recognized things are not going well, and I continue to read articles that President Xi is starting to feel increased pressure from CCP insiders as to his stewardship of the nation and the economy.  Statistics like electricity usage and travel don’t really jive with the data, although it is certainly possible that ahead of the mooted tariffs that President Trump has threatened to impose starting next week, many companies preordered extra inventory to beat the rush, and that goosed growth.  

But there are a couple of things that continue to drag on the Chinese economy, with the primary issue the continuing implosion of the property market there.  For instance, while house price declines have been slightly slower, (only -5.3% last month) it has basically been three years since there was any gain at all as shown in the chart below.

Source: tradingeconomics.com

As well, one of the key concerns about China has been Foreign Direct Investment, which has not merely slowed down but has actually been reversing (companies leaving China) over the past two years as per the next chart.

Source: tradingeconomics.com

Meanwhile, a WSJ headline, China’s Population Fell Again Despite a Surprise Rise in Births, highlights yet another issue President Xi faces, the ongoing aging and shrinking of his nation.  Remember, GDP is basically the product of the number of people working * how much they each produce.  If that first number is shrinking, and the working age population in China is doing just that, it is awfully difficult to generate GDP growth.  Finally, I couldn’t help but notice in yesterday’s confirmation hearings for Treasury secretary, where Scott Bessent offered his view that China is actually in a recession, with massive deflation and are struggling to export their way out of the problems, rather than address their internal imbalances.  This is a theme that has been discussed widely in the past, and ostensibly, China has admitted they want to be more consumption focused in their economy, but it doesn’t appear that is the direction they are heading.

I raise these points in the context of the Chinese renminbi and how we might expect it to behave going forward.  The question of tariffs remains open at this stage, although I daresay we will learn more next week.  If they are imposed, there is a strong belief that the renminbi will weaken to offset the terms.  As it is, the currency remains within pips of its weakest level in 18 years and the trend, both short-term and for the past decade, has been for it to weaken further. 

Source tradingeconomics.com

Xi remains caught between the need for the currency to weaken to maintain competitiveness in the face of threatened tariffs from the US, and his desire to demonstrate that the renminbi is a stable store of value that other nations can trust to hold and use outside the global dollar network.  In the end, I expect the immediate competitiveness needs are going to overwhelm the long-term aspirations, especially if it is true that Xi is feeling internal pressure because of an underperforming economy.  Nothing has changed my view that we approach 8.00 by the end of the year.

Ok, and that’s really the big news overnight.  As an aside, it was interesting to watch Mr Bessent dismantle the attempts by the Democrat senators for a ‘gotcha’ moment.  As I wrote yesterday, it wasn’t really a fair fight given his intelligence, experience and understanding of markets and the economy compared to the Senators.

Let’s start in the equity world where US markets opened higher but ultimately slid all day long to close on their lows.  An uninspiring performance to say the least.  That performance weighed on much of Asia with the Nikkei (-0.3%) sliding alongside Australia, Korea and India.  On the plus side, modest gains were shown in China (Hang Seng and CSI 300 both +0.3%) and some positive numbers were seen in Taiwan, Malaysia and Singapore.  But overall, the movements were not substantial in either direction.  In Europe, though, markets are starting to anticipate more aggressive ECB rate cuts as data continues to show weakness in economic activity.  Weak UK Retail Sales data has the FTSE 100 (+1.3%) leading the way higher as hopes for a BOE cut grow.  Meanwhile, the CAC (+1.0%) and DAX (+1.0%) are both rallying on the thesis that Chinese growth is going to attract imports from both nations.  Meanwhile, US futures are higher by 0.4% at this hour (7:40).

In the bond market, all the inflation fears seem to have abated.  Either that or we continue to see a massive short squeeze and position unwinding.  But the result is yields are lower across the board with Treasury yields down 3bps further, and below 4.60% while European sovereign yields have fallen between -3bps and -5bps as investors take heart that the ECB and BOE are going to be cutting rates soon.  Perhaps the market is showing faith that Mr Bessent will be able to address the US fiscal financing crisis.  After all, he did explain in no uncertain terms that the US would not default on its debt.  But my sense is the market narrative about rising inflation and higher yields had really pushed too far, and this is simply the natural bounce back.  While this week’s inflation data was not as hot as feared, nothing has changed my view that inflation remains a problem going forward.

In the commodity markets, oil is unchanged on the day, having given back some of its substantial gains over the past two sessions, although it remains right near $79/bbl this morning.  Apparently, there are rumors Trump will end Russian oil sanctions as part of the Ukraine negotiations, but that doesn’t sound like something he would offer up initially, at least to me.  Meanwhile, NatGas (-4.0%) though slipping this morning, remains above $4/MMBtu as the US prepares for a major arctic cold snap next week.  In the metals markets, my understanding is there has been a lot of position adjustment and arbitrage between NY and London as we approach futures contract maturities, and that has been a key driver of the recent rally in metals (H/T Alyosha at Market Vibes, a very worthwhile trading Substack), but may be coming to an end in the next several sessions.  However, here, too, nothing has changed my longer-term view of higher prices over time.

Finally, the dollar is a tad stronger this morning, rallying vs. the pound (-0.4%), Aussie (-0.4%), NOK (-0.5%) and NZD (-0.5%) as all those ECB and BOE rate cut stories weigh on those currencies.  Interestingly, JPY (-0.3%) is also weaker this morning despite an article overnight signaling the BOJ will be raising rates next Friday.  On the flip side, looking at the EMG bloc, I see very modest gains by many of the key players (MXN +0.15%, ZAR +0.1%), although those moves feel far more like position adjustments than fundamentally driven changes in view.

On the data front, this morning brings Housing Starts (exp 1.32M) and Building Permits (1.46M) and then IP (0.3%) and Capacity Utilization (77.0%) later on.  There are no Fed speakers on the docket, and tomorrow is the beginning of the quiet period.  The last thing we heard from Cleveland Fed president Hammack was that inflation remains a concern and they have not yet finished the job.

For the day, I don’t think the data will have much impact.  Rather, as we are now in earnings season, I suspect that stocks will take their cues there and FX will remain in the background for now.

Good luck and good weekend

Adf

Shortsighted

Posted on by

The CPI data delighted
Investors, who in a shortsighted
Response bought the bond
Of which they’re now fond
And did so in, time, expedited
 
But does this response make much sense?
Or is it just way too intense?
I’d offer the latter
Although that may shatter
The narrative’s current pretense

 

Leading up to yesterday’s CPI data, it appeared to me that despite a better (lower) than expected set of PPI readings on Tuesday, the market was still wary about inflation and concerned that if the recent trend of stubbornly sticky CPI prints continued, the Fed would soon change their tune about further rate cuts.  Heading into the release, the median expectations were for a 0.3% rise in the headline rate and a 0.2% rise in the core rate for the month of December which translated into Y/Y numbers of 2.9%% and 3.3% respectively. At least those were the widely reported expectations based on surveys.  

However, in this day and age, the precision of those outcomes seems to be lacking, and many analysts look at the underlying indices prepared by the BLS and calculate the numbers out several more decimal places.  This is one way in which analysts can claim to be looking under the hood, and it can, at times, demonstrate that a headline number, which is rounded to the first decimal place, may misrepresent the magnitude of any change.  I would submit that is what we saw yesterday, where the headline rate rose to the expected 2.9% despite a 0.4% monthly print, but the core rate was only 3.24% higher, which rounded down to 3.2% on the report. Voila!  Suddenly we had confirmation that inflation was falling, and the Fed was right back on track to cut rates again.

Source: tradingeconomics.com

Now, I cannot look at the above chart of core CPI and take away that the rate of inflation is clearly heading back to 2% as the Fed claims to be the case.  But don’t just take my word for it.  On matters inflation I always refer to Mike Ashton (@inflation_guy) who has a better grasp on this stuff than anyone I know or read.  As he points out in his note yesterday, 3.5% is the new 2.0% and that did not change after yesterday’s data.

However, markets and investors did not see it that way and the response was impressive.  Treasury yields tumbled 13bps and took all European sovereign yields down by a similar amount, equity markets exploded higher with the NASDAQ soaring 2.5% and generally, the investment world is now in nirvana.  Growth remains robust but that pesky inflation is no longer a problem, thus the Fed can continue cutting rates to support equity prices even further.  At least that’s what the current narrative is.  

Remember all that concern over Treasury yields?  Just kidding!  Inflation is dying and Trump’s tariffs are not really a problem and… fill in your favorite rationale for remaining bullish on risk assets.  I guess this is where my skepticism comes to bear.  I do not believe yesterday’s data reset the clock on anything, at least not in the medium and long term.

Before I move on to the overnight, there is one other thesis which I read about regarding the recent (prior to yesterday) global bond market sell-off which has some elements of truth, although the timing is unclear to me.  It seems that if you look at the timing of the recent slide in bond markets, it occurred almost immediately after the fires in LA started and were realized to be out of control.  This thesis is that insurers, who initially were believed to be on the hook for $20 billion (although that has recently been raised to >$100 billion) recognized they would need cash and started selling their most liquid assets, namely Treasuries and US equities.  In fact, this thesis was focused on Japanese insurers, the three largest of which have significant exposure to California property, and how they were also selling JGB’s aggressively.  Now, the price action before yesterday was certainly consistent with that thesis, but correlation and causality are not the same thing.  If this is an important underlying driver, I would expect that there is more pressure to come on bond markets as almost certainly, most insurance companies don’t respond that quickly to claims that have not yet even been filed.

Ok, let’s see how the rest of the world responded to the end of inflation as we know it yesterday’s CPI data. Japanese equities (+0.3%) showed only a modest gain, perhaps those Japanese insurers were still out selling, or perhaps the fact that the yen (+0.3%) is continuing to grind higher has held back the Nikkei.  Hong Kong (+1.25%) stocks had a good day as did almost every other Asian market with the US inflation / Fed rate cuts story seemingly the driver.  The one market that did not participate was China (+0.1%) which managed only an anemic rally.  In Europe, the picture is mixed as the CAC (+2.0%) is roaring while the DAX (+0.2%) and IBEX (-0.4%) are both lagging as is the FTSE 100 (+0.65%).  The French are embracing the Fed story and assuming luxury goods will be back in demand although the rest of the continent is having trouble shaking off the weak overall economic data.  In the UK, GDP was released this morning at 1.0% Y/Y after just a 0.1% gain in November, slower than expected and adding pressure to the Starmer government who seems at a loss as to how to address the slowing economy.  As to US futures, at this hour (7:30) they are pointing slightly higher, about 0.2%.

In the bond market, after yesterday’s impressive rally, it is no surprise that there is consolidation across the board with Treasury yields higher by 2bps and similar gains seen across the continent.  Overnight, Asian government bond markets reacted to the Treasury rally with large gains (yield declines) across the board.  Even JGB yields fell 4bps.  The one market that didn’t move was China, where yields remain at 1.65% just above their recent historic lows.

In the commodity markets, oil (-1.0%) is backing off yesterday’s rally which saw WTI trade above $80/bbl for the first time since July as despite ongoing inventory builds in the US, and ostensibly peace in the Middle East, the market remains focused on the latest sanctions on Russia’s shadow tanker fleet and the likely inability of Russia (and Iran) to export as much as 2.5 million barrels/day going forward.  NatGas (+0.75%) remains as volatile as ever and given the polar vortex that seems set to settle over the US for the next two weeks, I expect will remain well bid.  On the metals side of things, yesterday’s rally across the board is being followed with modest gains this morning (Au +0.3%) as the barbarous relic now sits slightly above $2700/oz.

Finally, the dollar doesn’t seem to be following the correct trajectory lately as although there was a spike lower after the CPI print yesterday, it was recouped within a few hours, and we have held at that level ever since.  In fact, this morning we are seeing broader strength as the euro (-0.2%), pound (-0.4%) and AUD (-0.5%) are all leaking and we are seeing weakness in EMG (MXN -0.6%, ZAR -0.6%) as well.  My take is that the bond market, which had gotten quite short on a leveraged basis, washed out a bunch of positions yesterday and we are likely to see yields creep higher on the bigger picture supply issues going forward.  For now, this is going to continue to underpin the dollar.

On the data front, this morning opens with Retail Sales (exp 0.6%, 0.4% -ex autos) and Initial (210K) and Continuing (1870K) Claims.  We also see Philly Fed (-5.0) to round out the data.  There are no Fed speakers today, although in what cannot be a surprise, the three who spoke yesterday jumped all over the CPI print and reaffirmed their view that 2% was not only in sight, but imminent!  As well, today we hear from Scott Bessent, Trump’s pick to head the Treasury so that will be quite interesting.  In released remarks ahead of the hearings, he focused on the importance of the dollar remaining the world’s reserve currency, although did not explicitly say he would like to see it weaken as well.  The one thing I know is that he is so much smarter than every member of the Senate Finance committee, that it will be amusing to watch them try to take him down.

And that’s really it for now.  If Retail Sales are very strong, look for equities to see that as another boost in sentiment, but a weak number will just rev up the Fed cutting story.  Right now, the narrative is all is well, and risk assets are going higher.  I hope they are right; I fear they are not.

Good luck

Adf

Three-Three-Three

Posted on by

Apparently, everyone’s sure
Scott Bessent is wholesome and pure
As well, he will fix
The Treasury’s mix
Of policies for more allure
 
He’s focused on three, three and three
His shorthand for what we will see
The budget he’ll cut
Build up an oil glut
And push up the real GDP

 

President-elect Trump has named hedge fund manager Scott Bessent to be Treasury Secretary.  This appears to be one of his less controversial selections and has been widely approved by both the punditry and the markets, at least as evidenced by the fact that equity futures are rallying while Treasury yields are sliding.  An article in the WSJ this morning lays out his stated priorities which can be abbreviated as 3-3-3.  The 3’s represent the following:

  • Reduce the budget deficit to 3%
  • Pump an additional 3 million barrels/day of oil
  • Grow GDP at 3% on a real basis

The target is to have these three processes in place by the end of Trump’s term in 2028.  I certainly hope he is successful!  However, while 3-3-3 is a catchy way to define things, it is a heavy lift to achieve these goals.  In the article, he also explains that he will be seeking to make permanent the original Trump tax cuts from 2017 as well as uphold Trump’s promises of no tax on tips, overtime or Social Security.  

Now, the naysayers will claim this is impossible, especially the idea of cutting taxes and reducing the budget deficit, but then, naysayers make their living by saying such things.  While nothing about this will be easy, the one overriding rule, I believe, is that increasing the pace of real GDP growth is the only way to achieve any long-term sustainability.  It is in this space where I believe the synergies between Treasury and the newly created DOGE of Musk and Ramaswamy will be most critical.  Improved government efficiency (I know, that is truly an oxymoron) and reduced regulatory red tape will be what allows the real economy to perform above its currently believed potential growth rate.  And in truth, if Trump and his government are successful at that, the chances of overall success are quite high.  Yes, that’s a big ‘if’ but it’s all we’ve got right now.

And truthfully, this has been the only story of note overnight as the punditry churns out stories about what can be good or why he will fail.  While there was a note that a ceasefire in Lebanon may be close, I don’t believe that has been a major part of the market narrative regarding oil prices for a while.  After all, Lebanon doesn’t have any oil infrastructure and while Iran clearly funds Hezbollah, it doesn’t appear they have been willing to lay it all on the line for Hezbollah’s success.

So, market participants are very busy trying to determine the best investments in the new Trump administration and based on all we have seen so far, it appears that Bitcoin is at the top of the list followed by equities, especially value and small-cap and then the rest of the equity universe.  US markets remain more attractive than foreign markets while commodities, especially haven assets like precious metals, have lost their allure in this shiny new world.  At this point, the big Investment banks are busy increasing their equity market targets for 2025 and beyond with S&P 500 forecasts of 6700 and more already being put in place.

Oh yeah, one other thing is the dollar, which had been on a tear for the past two months, has at the very least paused and some are calling that it has topped.  While it is certainly softer this morning, calling a top may be a bit premature.  At any rate, let’s see how markets around the world have behaved in the wake of the newest US news.

Some are saying that Friday’s US equity rally was in anticipation of the Bessent pick, and certainly his name was on the short-list, but that’s a tough case to make in my eyes.  Nonetheless, rally it did and that was followed by strength in Japan (+1.3%) overnight as well as most of Asia (Korea +1.4%, India +1.25%, Australia +0.3%) although both China (-0.5%) and Hong Kong (-0.4%) lost ground as Bessent is very clear that tariffs are an important part of his strategy.  Meanwhile, in Europe, there are modest gains (DAX +0.1%, FTSE 100 +0.2%, IBEX +0.6%) although the DAX (-0.1%) is softer after weaker than forecast IFO data.  Europe remains stuck in a difficult situation as their energy policy is hamstringing the economy while services inflation remains stickier than they would like to see, thus potentially hindering more aggressive ECB policy.  In the end, though, prospects on the continent are just not as bright as in the US right now.  US futures are quite happy with the Bessent choice, rising 0.5% at this hour (7:30).

In the bond market, investors are also of the belief that Bessent will be able to solve some of the US’s problems and Treasury yields have slipped -4bps this morning, although remain near 4.40%.  However, European sovereign yields are all creeping higher, between 1bp and 3bps, as the prospects there seem less positive.  I would say that investors are willing to give Bessent a chance to try to improve the US fiscal situation and that should help encourage bond buying.

Commodity markets, though, are under pressure generally, although not completely. For instance, oil prices fell $1/bbl upon the Bessent news but have since regained the bulk of that as it appears the growth story is starting to take over.  Nat Gas (+4.8%) is continuing to rally strongly, especially in Europe as cold weather forces rapid inventory drawdowns and supplies remain a political, not market question.  Interestingly, upon inauguration, one of the first things Trump has promised is to take the pause off the LNG terminals which should raise demand in the US as exports increase and potentially reduce prices in Europe.  

However, as mentioned above, precious metals are under pressure (Au -1.2%, Ag -1.9%) as investors believe that a combination of less warmongering and an attack on the fiscal deficit will both reduce the need for a safe haven.  As well, given Trump’s well-known disdain for the climate change hysteria, it seems likely support for wind and solar will be reduced, if not eliminated, and silver is a critical need for solar panels.  

Finally, the dollar is under pressure this morning, lower versus almost all its counterparts, notably the euro (+0.6%), although also seeing losses (currency gains) against the entire G10, more on the order of 0.25% or so.  In the EMG bloc, CLP (+0.9%) is the leader as copper (+0.6%) is the outlier in the metals group gaining on the positive economic story.  But we are seeing strength in MXN (+0.45%), PLN (+0.8%) and CNY (+0.15%) as long dollar positions are reduced.  

On the data front this week, with the Thanksgiving holiday on Thursday, everything is crammed into the beginning of the week as follows:

TodayChicago Fed National Activity-0.15
TuesdayCase-Shiller Home Prices4.9%
 Consumer Confidence111.6
 New Home Sales730K
 FOMC Minutes 
WednesdayPCE0.2% (2.3% Y/Y)
 Core PCE0.3% (2.8% Y/Y)
 GDP2.8%
 Personal Income0.3%
 Personal Spending0.3%
 Durable Goods0.5%
 -ex transports0.2%
 Initial Claims217K
 Continuing Claims1910K
 Real Consumer Spending3.7%
 Chicago PMI44.7

 Source: tradingeconomics.com

Mercifully, the Fed seems to be taking the week off with no scheduled speakers although I suppose if something surprising happens, we will likely hear from someone.  

I guess the question is, does Scott Bessent really change everything by that much?  Obviously, we have no way of knowing until he is in the chair, and that is probably two months away at minimum and then it will take some months before anything of substance actually happens.

But, when I consider my long-term thesis which was that inflation is going to be with us for a while which will result in a steeper yield curve, especially if the Fed continues to cut rates, that would have helped both the dollar and gold while hurting both equities and bonds.  This morning, though, the probability of a December rate cut has fallen to 52%, and I imagine it will continue to decline, especially if the PCE data remains hotter than the Fed keeps expecting.  As well, questions about the Fed’s political bias will be raised again as the rationale for cutting rates 75bps given the headline data remained strong has always been unclear.  So, if the Fed is done cutting, that means the dollar is far more likely to rally from here than fall further, commodity prices will struggle (except maybe NatGas) and bond markets may not anticipate nearly as much future inflation with a tighter Fed and a new administration focused on more fiscal rectitude.  In that situation, equities certainly hold much more appeal, although pricing remains steep no matter how you slice it.

Good luck

Adf