Tag Archives: #biden

No Quid

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We have now a President Joe
Whose allies had asked him to go
Reject them, he did
For there was no quid
To pay him if he gave the quo
 
But Sunday, the news was revealed
That his campaign, he would now yield
It’s, therefore, not clear
Who’s running this year
‘Gainst Trump, it’s a wide-open field

 

Of course, you are all aware by now that President Biden has decided to abandon his re-election campaign and “to focus solely on fulfilling my duties as president for the remainder of my term.”  While he has endorsed Vice-president Kamala Harris, and since the announcment, there have been more endorsements for the VP, nothing is clear yet.  If nothing else, there has been no clarity whatsoever regrading who VP Harris would select as her running mate should she be the presidential nominee.

In the end, this adds uncertainty to the political situation and is likely to add some volatility to financial markets as well.  However, remember that political impact on financial markets tends to be relatively rare and if it is going to be significant, must be a genuine surprise.  Given the drumbeat from an increasing number of Democrat politicians and donors, this cannot be considered a real surprise.  I suspect that recent volatility will continue, but it is unlikely to increase substantially because of this.  However, if, say, the Fed were to cut rates next week, that would be a genuine surprise with a major market reaction.  (That is a hypothetical, I am not forecasting that.)  All told, the circus that is the US presidential campaign seems likely to simply continue for the next four months.

In China, the Plenum has ended
And rate cuts last night were extended
But is that enough
To help Xi rebuff
The weakness with which he’s contended

In the meantime, while all eyes around the world remain on the US as both allies and enemies try to determine what is happening, and likely to happen going forward, in the US regarding its presidential politics, China’s Third Plenum has ended, and the decisions have been made public.  Reuters has given an excellent, and succinct, description of what this meeting represents and why it is seen as so important.  The link above is a worthwhile, and quick read, but the money lines are [emphasis added]: “China’s ruling Communist Party commenced its so-called third plenum on Monday, a major meeting held roughly once every five years to map out the general direction of the country’s long-term social and economic policies,” and “This week’s third plenum, described by Chinese state media as “epoch-making”, is expected to deliver major initiatives to address the risks and obstacles related to China’s long-term social and economic progress.”  

So, in essence, this is the annual meeting where Xi and his fellow senior policymakers focus on the economy for the next decade.  This is quite timely given the economy in China has been consistently disappointing over the past several years with the most recent data releases showing that GDP growth declined to 4.7%, far below expectations as well as Xi’s target, in the second quarter.  Now, the law of large numbers would indicate it will be increasingly difficult for China, a $17 trillion economy, to continue to grow at previous rates, especially since its population is shrinking.  But that will not stop Xi from trying, or at least from having the government publish numbers that indicate he is succeeding.  

Ultimately, the problem in China remains that domestic consumer demand remains lackluster, largely because of the sharp decline in the Chinese property market.  In China, property had been a key store of personal wealth as there were limited vehicles in which citizens could invest.  But with that bubble having burst, and continuing to deflate, ordinary people do not feel the confidence to continue previous consumption patterns.  This is the underlying reason why China continues to focus on industry, and the genesis of the international angst over China’s manufacturing exports.  It is also the genesis of why tariffs are so prominent in discussions around Western policy circles.  The perception that China is dumping product offshore at a loss, undermining Western companies, and therefore Western job markets, is a powerful political motive to find some way to restrict said exports.  Tariffs are the most obvious first solution.

But China knows there are problems internally and that led to last night’s surprise cuts in the Loan Prime Rates for both 1-year and 5-year, with each being cut by 10 basis points.  I would look for further rate cuts shortly after the Fed starts to cut rates here (assuming they do so) whether that is next week or in September. Ultimately, I continue to believe that the PBOC will need to allow the renminbi to weaken, but it will be a long, drawn-out process as Xi remains steadfast in his view that the currency must be seen as a stable store of value.  Ironically, I believe we are entering a timeline when pretty much every nation will seek to weaken their currency to gain a trading advantage, but of course, if that is the case, then the only thing that will change is inflation will rise.  Oh well, policymakers around the world all have the same blind spots.

And those are really the only stories of note, although naturally, the first one is massive and will be the talk of the world for at least the next month until the Democratic convention produces a presidential ticket.  So, with all that in mind, let’s look at the market responses overnight.

Friday’s continued weakness in the US equity markets was mostly followed in Asia with the Nikkei (-1.2%) continuing its recent retracement from the highs made a week and a half ago.  And that red ink was seen throughout the region with one exception, the Hang Seng (+1.25%) as it responded to the PBOC’s rate cuts.  Interestingly, the onshore markets (CSI 300 -0.7%) did not.  However, in Europe, this morning, equities are having a great day with strong gains across the board.  While part of this is certainly simply a rebound from last week’s declines, it seems that there is a thesis brewing regarding Europeans now gaining confidence that Mr Trump will not be re-elected and so attracting some bullish views.  I don’t necessarily agree with that, but that seems to be the take.  As to US futures, they are firmer this morning as well, although given the sharp declines at the end of last week, this seems a reflexive bounce

In the bond markets, Treasury yields, which backed up despite the equity market declines on Friday, are softening a bit this morning, down 2bps, while European sovereign yields are mostly little changed from Friday’s levels, down about 1bp in most nations.  Right now, there is very little excitement in this space.

In the commodity space, oil prices are continuing their decline from last week with WTI back below $80/bbl as this market seems to believe that Mr Trump will win in November and that he is very serious about ‘drill baby, drill’.  Certainly, I would anticipate a Trump administration will be quite focused on increasing energy output and that should undermine prices.  As to the metals markets, gold (+0.5%) continues to find buyers although it did sell off sharply on Friday, but the rest of the space is under pressure, notably copper (-1.25%) as that Third Plenum did not encourage anyone that China would be subsidizing further economic activity and driving up demand for the red metal.

Finally, in the FX markets, the dollar is under modest pressure overall, although not universally so.  JPY (+0.4%) is the leading gainer in the G10 space as hopes for a Fed cut continue to impact views on the carry trade here.  However, the euro (+0.1%) and pound (+0.25%) are also edging higher, albeit on much less information.  Perhaps, the idea that Trump has been vocally calling for a weaker dollar is part of this movement, but that seems awfully early in the process.  On the flip side, AUD (-0.3%) is being weighed down by the decline in commodity prices.  In the EMG bloc, MXN (+0.35%) is the biggest gainer on the day although the CE4 currencies are all demonstrating their high beta with the euro as they have gained about 0.25% across the board.  Lacking new information, it appears that the peso is acting as a broad EMG proxy for traders wanting to short the dollar.

On the data front, the important stuff all comes at the end of the week with GDP on Thursday and PCE on Friday.

TodayChicago Fed National Activity0.3
TuesdayExisting Home Sales3.99M
WednesdayGoods Trade Balance-$98.0B
 Flash Mfg PMI51.7
 Flash Services PMI54.4
 New Home Sales640K
ThursdayInitial Claims239K
 Continuing Claims1869K
 GDP Q21.9%
 Durable Goods0.4%
 -ex Transport0.2%
FridayPersonal Income0.4%
 Personal Spending0.3%
 PCE0.1% (2.4% Y/Y)
 Core PCE0.1% (2.5% y/Y)
 Michigan Sentiment66.5
Source: tradingeconomics.com

Mercifully, there will be no Fedspeak at all this week as they remain in the quiet period.  The expected declines in PCE inflation will continue to support the September rate cut expectation which remains at a virtual 100% probability according to the CME Fed funds futures pricing.  That would be in concert with everything we heard from Fed speakers in the past several weeks, although the stronger than expected Retail Sales data has some claiming the Fed will remain on hold.  My read is there are fewer people discussing an impending recession, although that may be more about the cacophony of political discussion drowning things out, than a real change in sentiment.  Alas, I find myself far more concerned about an economic slowdown, although not necessarily with a corresponding decline in inflation.  Meanwhile, the dollar, while under some modest pressure, remains pretty solid and I wouldn’t look for a significant change, at least not until Friday’s data.

Good luck

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Deep-Rooted

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We have now a president, Biden
Who lately, has taken much chidin’
Last night he debated
A man who he hated
Alas, polls against him did widen
 
The market response, though, was muted
With not many trades prosecuted
Instead, we await-a
The PCE data
To learn if inflation’s deep-rooted

 

While it was painful to watch, I did last through most of the debate.  Unfortunately, it didn’t help me sleep any better!  Clearly the top story around the Western world today is the performance of President Biden and the concerns it raised over his abilities to not merely execute the responsibilities of the President if he is re-elected, but to complete his current term.  There have been numerous calls by high profile Democratic strategists and pundits for him to step down from the ticket.  We shall see what happens, but my personal take is he will not willingly step aside regardless of the situation and that those closest to him will not force him to do so.

The upshot is that in the betting markets, Mr Trump is now a 60% favorite with Mr Biden at 22% and a host of other Democrats making up the difference, at least according to electionbettingodds.com.  Arguably, though, the question that most concerns all of us is how will this outcome impact markets going forward.  And remember, there is a very big election this weekend in France that is also going to have a major impact, not just in France, but in all of Europe.

Perhaps the most surprising thing to me is the non-plussed manner that markets have behaved in the wake of the debate.  Equity markets around the world have traded higher as have US futures.  Bond yields have traded modestly higher and so has oil, metals markets and the dollar.  Clearly, investors do not appear to be concerned that the leader of the free world is in such dire physical condition.  While I would not have expected a collapse, it doesn’t seem hard to foresee a chain of events that results in less positive economic outcomes.  

Or…perhaps the market has absorbed this outcome and determined that central banks, and especially the Fed, are going to be starting to err on the side of easy money to ensure that economies don’t fall into disarray, so all that rate cutting that has been discussed, hypothesized and, frankly, dreamed about may be coming sooner than the hawkish central bankers themselves had considered previously.  I understand that political events typically don’t have a big market response, but the depth and breadth of the damage that last night’s debate had on ideas about President Biden’s mental competence and acuity are stunningly large.  That cannot inspire confidence in investors.  

Of course, of far more importance to the market, obviously, is today’s PCE data release and the corresponding Personal Income and Spending figures.  So, let’s take a look at expectations there.

PCE0.0% (2.6% Y/Y)
Core PCE0.1% (2.6% Y/Y)
Personal Income0.4%
Personal Spending0.3%
Chicago PMI40.0
Michigan Final Sentiment65.8

Source: tradingeconomics.com

Of this grouping of data, the Core PCE reading is the most important as it represents the Fed’s North Star on inflation.  (While we all live in a CPI world, the Fed apparently found out that their models worked better with core PCE and so that became the benchmark.)  At any rate, forecasts are that prices, ex food & energy, did not rise in May.  That was not my lived experience, and I will wager not many of yours either, but we don’t really matter in this context.  However, the Bureau of Economic Analysis, when they are calculating GDP also calculate their own PCE figure for the quarter.  That was released yesterday with the Core PCE printing at 3.7% while GDP was raised to 1.4%.  In total, that implies nominal GDP was at 5.1% in Q1, a slight decline from Q4’s reading of 5.4%.  It should not be surprising that both these PCE measures track one another well, and as per the chart below, that seems to be the case.

Source: tradingeconomics.com

However, I cannot help but look at this chart and see that the blue line (the quarterly BEA data, RHS numbers) is not trending lower at all.  Perhaps it turns around, but perhaps the forecasts for this morning’s numbers are a bit too optimistic.  After all, we saw higher inflation in Canada and Australia this month.  As well, we have seen a continuation in the rise in the price of housing and energy.  None of those are perfect analogs for the PCE data this morning, but I sense that we may have found the lows in inflation.

Ahead of the data, as I discussed briefly above, markets are in fine fettle.  After a modestly positive session in the US yesterday, virtually every market in Asia was in the green as well, with the Nikkei (+0.6%) leading the way and smaller gains, on the order of 0.1% – 0.2% across the rest of the major markets in the region.  In Europe, the CAC (-0.3%) is bucking the trend as investors continue to leave the market ahead of the elections this weekend, but the rest of the bourses are all decently firmer, on the order of 0.35% – 0.55%.  I suppose the reason French investors are concerned is the possibility of a hung Parliament, where no party has a majority and therefore no new legislation will be able to be enacted under a caretaker government for at least a year.  Of course, there are also those who are concerned that a ‘cohabitation’ between President Macron and the RN might have trouble governing as well.  As to US markets, they continue to rally with futures higher across all three major indices this morning, roughly by 0.35%.

In the bond market, yields are higher across the board after they traded up yesterday as well.  This morning, Treasury yields are +2bps while European yields have risen between 3bps (Germany, Netherlands) and 9bps (Spain) with French and Italian yields 6bps higher.  This is the most straightforward explanation as investors demonstrate their concern with a further split between Germany and the rest of Europe regarding fiscal policies.  As to JGB’s they have slipped 2bps lower overnight, despite Tokyo CPI data printing a tick higher than expected at 2.3% headline, 2.1% core.

Oil prices (+0.75%) continue to rally as summer driving demand is now the story of the market despite the large inventory builds seen this week.  In a bit of a conundrum, metals markets are also firmer across the board despite the higher yields, although in the past hour or so, the dollar has reversed some of its earlier gains, so that is giving some support.  However, I suspect that these markets will be subject to a dislocation in the event that we see a surprising PCE report.

Finally, the dollar has edged a bit lower this morning with modest declines vs. the G10 bloc, on the order of 0.1% – 0.2%, and a few outliers vs. EMG currencies like ZAR (+1.4%) and KRW (+0.6%).  The won has benefitted from the upcoming increase in onshore trading hours as the country attempts to increase trading volumes and get more activity and more market participants to help the currency’s international standing.  As to the rand, it appears that the sharp rally today in the Johannesburg stock exchange has drawn in outside investors and supported the currency.

In addition to the data, we hear from both Governor Bowman, again, and SF Fed president Daly this afternoon.  Bowman has already explained, twice, that she would be amenable to raising rates if inflation rebounded, while you may recall Daly exhibited concern over the labor market and what to do if it deteriorates.  Well, labor is a discussion for next week when the NFP report is released.  Today is all about PCE.  My sense is it will be higher than forecast which will probably undermine equities to some extent and keep pressure on bonds while supporting the dollar.  In that situation, I see commodities suffering as well.

Good luck and good weekend

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Change at the Top

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Democracy lives and it dies
By voting for folks who devise
The laws to define
What’s right, or a crime
And this year, there’s much to surmise
 
Some sixty-four nations will vote
And watch as incumbents scapegoat
Political foes
For national woes
And claim they’re the best antidote
 
However, results that we’ve seen
Show that many nations are keen
For change at the top
Or leastwise, to swap
The current regimes’ philistines

 

So, I know I am not a political analyst, but I try to be a keen observer of trends around the world.  After all, to understand the macroeconomic situation globally, one needs to at least be aware of the politics in the major nations.  As such, I am going to attempt to analyze the elections we have seen around the world to date and see if we can use this trend to look ahead and forecast how things may turn out here in the US come November.

As of today, 35 nations have held elections for either Parliament (Congress), president, or both ranging from St. Maarten to India and many in between with respect to populations.  Arguably the most important have been India, Mexico, South Africa, Taiwan, Russia, Indonesia and Iran.  That list is based on both population and geopolitical importance.  

A look at the results shows the following:

  • India – PM Modi lost significant support and will now be ruling in a coalition, rather than his previous majority.  This was a far cry from the anticipated super-majority he sought.
  • Mexico – AMLO’s hand-picked successor, Claudia Sheinbaum won handily and the Morena party won a supermajority in the lower house, but not in the Senate, so there are great expectations for significant changes unchecked by congress there.
  • South Africa – President Ramaphosa and the African National Congress (ANC) the party that has ruled this nation by itself since the end of apartheid in 1994, lost their absolute majority and is casting about for a coalition partner to allow them to remain in power.
  • Taiwan – New President Lai Ching-te, an avowed separatist relative to China won, but the people did not give him the parliamentary majority to enable significant policy changes
  • Russia – was this really an election?
  • Indonesia – New President Prabowo, a former soldier and defense minister is tipped to be far more aggressive in his handling of dissent and criticism, a concern for some, but clearly given the size of his majority (>58%) something the people are ready for.
  • Iran – This is difficult to assess as the parliamentary elections have been overshadowed by the recent accidental death of the president in a helicopter crash, with a presidential election slated for June 28th.

As well, starting tomorrow, there will be voting for the European Parliament by all twenty-seven member nations.  This is a three-day process so we should know the results by next week.

In the meantime, let me offer my take on the results in a broad-brush manner.  People around the world are unhappy with their leadership and are seeking change.  More importantly, current incumbents are really annoyed by the fact that their populations are not happy.  It has been quite a long time since there have been so many efforts by governments to control all dialog and censor anything that offers an opposing view to government rules, laws and commands.

For instance, in India, despite being very popular, Modi must now account for the fact that he has lost majority support.  He has done much good for the nation, but clearly, there is a large segment of the population that does not feel they are benefitting and were looking for change.

In South Africa, it was a little different as the economic situation there is a wreck.  Inflation is rising (5.3% and climbing), Unemployment is rampant (32.9%) and confidence readings are negative while GDP stagnates. Even though the ANC has ruled for 30 years, people want change, especially since there have been numerous allegations of corruption at the top, and the country continuously has blackouts because of failures with energy policy.

In Taiwan, while former president Tsai Ing-wen was widely admired and had high favorability ratings, there is a clear concern over too much saber rattling with the mainland.  Arguably, China spent a lot of money to interfere in that election but was unsuccessful in getting their candidate elected.  However, the population there does not want war, and that seems to be the driving force.

My point is that even popular leaders have found that their popularity is not necessarily translating into power.  It is not hard to understand why this is the case given that inflation has been a global phenomenon, and the list of military conflicts has grown and forced many nations to choose sides rather than simply do what’s seen as best for themselves.

I know I ignored Mexico here, the exception that proves the rule, although perhaps the people felt that AMLO didn’t go far enough and given the huge rise in crime from the cartels there, people were looking for a stronger government to act, hence the supermajority.

What does this mean for Europe this weekend and the US later in the year?  I have been quite clear in my views that this is a change election year.  The current left leaning coalition in the European parliament is in danger of losing its ability to enact any legislation.  We have seen these changes in the Netherlands and Sweden, and Germany’s AfD party continues to gain adherents alongside the National Front in France and Italy’s European Conservative party.  Germany has three landes (state) elections in September, all in the former East Germany, where AfD is strongest.  While every other party has indicated they will not enter a coalition with AfD, I predict that in at least one of these states, AfD will win outright, and that will really shake things up.  As to the European parliament, the voting bloc on the right may be large enough to prevent almost all new legislation.  

Meanwhile, turning back home, the US election season is heating up and here, too, I would argue the population is very unhappy.  This is evident by the dreadful polling numbers of President Joe Biden, and perhaps even more significantly, by the growth in the number of Trump converts from previously solid democratic voters (watch this 2 minute video and ask yourself if Joe Biden is in trouble or not).  The efforts to utilize the DOJ to prevent Trump from contesting the election is not going over well across the nation, and I believe it will be seen as the biggest own goal in this process.

While I believe that Mr Trump WILL BE PUT IN JAIL because the Democratic party is desperate to do anything to tarnish him, it will not matter.  In fact, it will martyr him even further.  Remember, Nelson Mandela was jailed before being elected president, Vaclav Havel of the Czech Republic was imprisoned before being elected president, Lech Walesa of Poland was imprisoned before being elected president, Lula da Silva of Brazil was imprisoned before being elected president, Mohandas Gandhi was imprisoned for sedition, and yet still became leader of India.  History shows that the people of a nation can see through the political efforts of an incumbent party in their effort to remain in power, and when they demand change, they will get it.

With this in mind, my views on the economic situation remain that inflation continues to be a major impediment for every government worldwide, but if recent data is truly an indication of slowing economic activity, the outcome could well be easier monetary policy, but still weak growth, rising inflation, a falling dollar and rising commodities.  

Politics clearly matters, but it is a longer-term issue.  For now, all the efforts by governments and central banks to apply band-aids for the current ailments seem unlikely to be effective in the timeline required to alter the current broad-based unhappiness amongst the electorate.  Change is coming, and there will be hell to pay on the other side as all these short-term fixes will simply leave the long-term problems in worse shape.

One poet’s views, and I welcome any commentary and pushback.

Thanks

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