On Friday we questioned what stage The BOJ reached for to gauge If yen intervention Would soon get a mention And could Katayama assuage
The markets, without spending dough Since Friday, we’re now in the know That Bessent checked rates With yen reprobates Now anxious to deal a deathblow
On Friday, I asked the question whether the movement seen in Tokyo after the BOJ meeting was finished consisted of step six, rate checks, or step seven, intervention. Of course, my comments preceded the NY session and then in the afternoon, as you can see from the below chart, something much more substantial occurred.
Source: tradingeconomics.com
At this point on Sunday evening, it appears that about 11:00 Friday morning in NY, as Europe was heading home for the weekend, the Fed rang into major dealers around the Street and asked for prices where they could buy yen / sell dollars. This is the very definition of ‘rate checks’ and the market response was exactly what you would expect. The sequence of events was almost certainly that the Japanese MOF reached out to the Treasury department who then rang up the Fed and asked them to act. (Remember, currency policy is a Treasury function, not a Fed one). As you can see from the chart above, the initial move when Asia opened was a continuation of the yen’s strength, and in truth dollar weakness against most currencies, but we have already seen the initial bounce (the green bars to the right.)
Here’s the thing about rate checks, and in truth, every monetary policy, the law of diminishing returns is in effect here, so the next time they try it, and I would not be surprised to see something again tonight or tomorrow in NY, it will have a smaller impact. Now, perhaps they are comfortable at 155 instead of pressing 160 and if USDJPY stabilizes here, things will go on much as before. But I doubt that without further efforts, including direct intervention, things are going to change. And even then, as history has shown time and again, intervention’s impact typically wears off after a few months. The only way to truly change this trajectory is to change policy in Japan, and by all accounts, as the country heads into an election where PM Takichi’s platform is ‘run it hot’ that seems unlikely.
It may not be a fade today, but at 150 or so, I expect that the risk/reward of selling yen is going to be extremely attractive again.
History has shown It takes seven steps before The BOJ acts
Inquiring minds ask Was last night six or seven? FinMin’s lips are sealed
I must admit, when I went to bad last night, I thought this morning’s lead discussion would be about gold as it crested $5000/oz given it was trading at $4967 and nothing seemed likely to stop it. But something did, probably some profit taking into the weekend, given it has rallied more than 7% this week.
Thus, since there are no new geopolitical stories of note, with everyone still trying to figure out what the past several days means, we look toward the East this morning and start with Japan. The BOJ left policy rates on hold, as widely expected, but Ueda-san also raised the BOJ’s forecasts for inflation (see below from BOJ policy statement).
The latter move has been interpreted as offering more flexibility for the BOJ to hike rates further with expectations for a hike next month rising above 60%. But of more interest was the price action seen in the immediate wake of the Ueda comments as seen in the below chart.
Source: tradingeconomics.com
While some have asked if the BOJ intervened last night, I would categorically answer, No. The fact that the dollar’s decline was so short lived indicates that something else was likely the catalyst. On the 7-step road to intervention, step 6 is checking rates. This occurs when the BOJ calls the FX trading desks at banks in Tokyo and asks for prices where they could buy yen, but don’t actually execute the transaction. However, it is a powerful signal that the BOJ, on behalf of the MOF, is growing concerned. The thing is, historically when this happens, it is widely circulated within the market that the BOJ is checking rates.
Thus far, we have not heard that at all from either the banks or the MOF. Rather, FinMin Katayama once more explained, “We’re always watching with a sense of urgency.” (As an aside, I assume this comment is a result of a translation of Japanese that doesn’t fit the English language well as I do not understand how one can watch something ‘urgently’). But that urgency is classic step 5, not step 6, so it is not clear that we are closer to intervention at this point. After all, the dollar’s high last night was not as high as we had seen just 9 days ago, when they first took step 5, and historically, a new high is needed before the next step is taken.
But, getting away from the minutiae of their intervention process, I believe last night’s activities tell us that there is growing concern about the yen’s level and its impact on rising inflation. If Governor Ueda is priming markets for a rate hike sooner than previously anticipated, it tells me that inflation data coming up is going to be higher than previously forecast, and he wants to be prepared. Interestingly, JGB markets did not see the same type of price behavior as you can see below.
Source: tradingeconomics.com
My conclusion is there was no rate checking, but FinMin Katayama’s comments were sufficient to convince some that it was coming soon to a screen near you. Remember, last month, Japanese CPI slipped to 2.1%, its lowest level since March 2022. Given the next release is still nearly a month away, there is no clear consensus as to its reading, but I suspect a rebound is in order. If forecasts start indicating a substantial rise, I expect the yen to initially weaken, and perhaps that will be sufficient for the BOJ to take the 6th step.
But other than that, there seems very little new news to discuss. WEF is over and while there are still numerous analyses about what happened, and how things will evolve from here, consensus conclusions are few and far between. So, let’s see how the rest of the financial markets fared overnight.
Yesterday’s solid US equity performance was followed by a generally solid one in Asia as well. Tokyo (+0.3%) was nonplussed by the intervention discussion, while HK (+0.45%), Korea (+0.8%) and Taiwan (+0.7%) all followed the US higher. However, there were some laggards with China (-0.45%) and India (-0.9%) suffering on what appeared to be some profit taking on the previous day’s gains. Overall, there were more gainers than laggards here. In Europe, the picture is also mixed as the IBEX (-0.4%) and CAC (-0.3%) both suffer after weaker than expected Flash PMI data was released while Germany (+0.1%) and the UK (+0.2%) are benefitting from modestly better numbers there. We continue to hear German Chancellor Merz explain all the things that Germany is going to do to make things better going forward, but the nation has so totally hamstrung itself with its energy policy of the past decade, it is not clear to me they have any opportunity to be successful in the short run. As to US futures, at this hour (7:40), they are pointing slightly lower, -0.15% or so.
In the bond market, yields around the world are within 1 to 2 basis points of yesterday’s closing levels with France (-4bps) the outlier after the weak data and the news that PM LeCornu has survived the first of two no-confidence votes and appears set to get a budget passed, albeit with a 5% deficit forecast. Otherwise, not much here with yesterday’s PCE data unable to move the needle given it was right on forecasts.
In the commodity market, oil (+1.9%) is rallying after President Trump hinted at further Iranian activities when he indicated an armada of US naval vessels is heading there. That has traders nervous, but, of course, with President Trump, it is always difficult to determine his strategy, even if we know the end game is to remove the theocracy if possible. NatGas (-1.6%) is giving back some of its recent gains but given the forecast for a massive arctic blast this weekend, with single digit temperatures and up to two feet of snow on the East coast, I suspect it will maintain its recent gains for a few more days.
In the metals markets, gold is unchanged on the session, although continues to sit tantalizingly close to $5000/oz. Just as remarkable is that silver (+3.1%) is now trading above $99/oz and certainly seems like it is going to crest $100/oz in the very near future. This has helped all metals with both copper (+2.5%) and platinum (+5.2%) to rally with the latter now trading at an all-time high as well.
Finally, the dollar is…doing nothing. While the DXY has sipped -0.07%, we are seeing a mixed picture with the euro slightly softer while the pound (+0.2%) has rallied on the stronger PMI data. In fact, scanning my screens, nothing has moved more than 0.3% (NOK, AUD on the plus side, PLN, INR on the minus side), but indicative that FX remains an afterthought for now (except for the yen).
On the data front, we see the Flash PMI data (exp 52.0 Mfg, 52.8 Services) and Michigan Sentiment (54.0) and that’s it. Given all the excitement from the president’s WEF visit, I think most traders and investors will be happy if we have a quiet session to head into the weekend. As well, if the weather forecasts prove correct, I expect that Monday will be very quiet as many traders will be unable to get into the office.
I don’t know about you, but it is certainly exhausting trying to keep up with the world these days. Hedging remains an important strategy regardless of your asset class, but right now, both equity and metals trends do not appear to be breaking while the dollar and bonds remain trendless.
On the horizon The specter of BOJ Intervention climbs
For those of you who don’t know, the genesis of this note was a daily update during my time covering US corporates for their FX hedging needs. The poetry was episodic… until it wasn’t. At any rate, this is the reason I sometimes harp on particular currencies rather than markets more generally. And right now, while the dollar, writ large, is not that interesting, as I have been explaining for months, the yen (+0.3%) is becoming interesting in its own right as its recent spate of weakness has opened the door to intervention. Last night, I would say we took a half-step forward on this journey as, while the BOJ did not check rates, FinMin Katayama was more explicit in her discussion about the yen’s weakness, even discussing the fact that the ‘agreement’ that her predecessor made with Treasury Secretary Bessent has no restrictions on intervention if deemed appropriate.
Following are her remarks from last evening, “We can take decisive measures against sudden movements that do not reflect fundamentals. This refers to intervention, and there are no constraints or restrictions on this. I have repeatedly stated that we will take bold action including all the different measures available. We shared the view that recent moves have been excessive and do not reflect fundamentals.” Then, she followed that up by referring back to her discussions with Bessent in Washington on Monday. “For many years before I took office, the Treasury secretary has held the personal view that monetary policy has been behind the curve.”
The chart below shows that for now, jawboning is the preferred measure to prevent further yen weakness, but as jawboning is only ever a temporary solution, it seems clear to me that there will be intervention at some point. In fact, given Monday is a bank holiday in the US, implying less liquidity as banks run skeleton staffs, that may be an ideal time to get the most bang for their buck.
Source: tradingeconomics.com
But remember, even if/when they intervene, the impact will only be temporary. Perhaps keeping a floor underneath the currency for a month or two. Ultimately, though, it will follow the fundamentals, and if those are such that the US continues to grow rapidly and receive investment flows, unless the BOJ raises rates dramatically to moderate those flows, the yen will ultimately weaken further. Now, ask yourself if you think the BOJ can raise rates aggressively given the combination of Japan’s 250% debt/GDP ratio and the fact that Takaichi-san’s policy mix is to borrow more and run things as hot as possible.
Away from the mess in Japan A story of note is Iran But tensions have waned And thus, it’s explained The oil complex can, down, stand
Looking elsewhere for news of note, there continues to be an enormous amount of energy focused on Minneapolis, which has no market impact. Remarkably, Venezuela has become an afterthought to the markets as the new narrative is their natural resources are not economically retrievable at current prices. Iran remains a hot topic in the oil market, but the concerns registered by traders early in the week have ebbed overall, although this morning, Texas tea is higher by 1.5% and back over $60/bbl.
Looking at other markets, bonds remain somnolent, with yields up 1bp this morning, reversing yesterday’s decline of -1bp but still firmly within the 4.00% – 4.20% range. European sovereign yields have edged higher by 2bps this morning and overnight JGB yields rose 3bps. However, it remains difficult to see any significant pattern over the past month as evidenced by the chart below of French and German 10-year yields. Net movement has been a handful of basis points overall.
Source: tradingeconomics.com
Even the metals markets, which have been THE story for the past months, have calmed down a bit as they consolidate their recent remarkable gains. This morning, gold (-0.25%), silver (-2.1%), copper (-1.5%) and platinum (-3.2%) are all softer, but all remain higher on the week and over the past month, with silver having gained 37% since this time in December, and sitting above $90/oz.
Equity markets in the US rebounded yesterday, seemingly on some decent earnings data, but overnight, there was little love with Japan (-0.3%), China (-0.4%) and HK (-0.3%) all slipping from recent highs. Elsewhere in the region, though, there was much more positivity as Korea (+0.9%), India (+0.25%), and Taiwan (+1.9%) all rallied with the latter benefitting from the agreement of a trade deal with the US that cut tariffs on Taiwanese exports in exchange for a $250 billion commitment of investment into the US.
In Europe, France (-0.8%) is the laggard du jour as ongoing budget negotiations in the government are no closer to completion and showing signs of breaking down. As to the rest of the continent, modest declines are the order of the day while the UK is unchanged. US futures at this hour (7:40) are pointing higher, however, led by the NASDAQ at +0.7%.
While overall, the dollar remains dull, an underreported story is the CNY (0.0% today) which has been appreciating steadily for the past year and is now at its strongest level since May 2023. In the beginning of the year my view was if Xi actually got Chinese consumers to raise their spending and back away from the mercantilism that has been the driver of the Chinese economy since the beginning, we would see CNY strength, calling for 6.50 by the end of the year. Well, a look at the chart below helps keep things in perspective as while CNY has appreciated about 5% in the past year, it remains far below (dollar higher) levels seen post pandemic. However, I need to see the data indicate Chinese domestic demand is growing before I become a true believer! Note, too, that the pace of this move is hardly remarkable.
Source: finance.yahoo.com
And that’s all I got today. Today’s data brings IP (exp 0.2%) and Capacity Utilization (76.0%) with a few more Fed speakers as well. Remarkably, despite the Fed trotting out virtually every member this week, nothing of note has been said given the current focus on defending Chairman Powell regarding the renovations at the Eccles Building.
One other thing I have been wondering, and this has been for a long time, is the meaning of the Capacity Utilization reading. On its surface, it tells us that only three-quarters of the US currently available manufacturing, mining and drilling capacity is being utilized. But that seems like a low count based on the economy and the narrative. I wonder, how much of what is considered available capacity is actually obsolete? Undoubtedly, as you can see from the chart below from the FRED database, the trend is falling.
But do companies really build so much capacity they don’t use and it sits idle? Seems a tough way to make a living in a highly competitive world. I understand that globalization undermined US manufacturing ever since China entered the WTO in 2001. And maybe that is all this reflects. But given the dramatic buildout in AI infrastructure, as well as growth in LNG and power production of late, if nothing else, I have to believe this trend is set to reverse in the near future. After all, isn’t that Trump’s goal?
Meanwhile, I feel like we are all awaiting the next headline to determine the next move. The underlying trend in commodities remains in place, and mostly, bonds and the dollar have no reason to go anywhere.
JGB yields have Risen to multi-year heights Is this why stocks fell?
Yesterday I highlighted that 10-year JGB yields had risen to their highest level since 2008. As you can see below, the same is true for 30-year JGBs and essentially the entire curve there.
Source: tradingeconomics.com
Ostensibly, this move was triggered by comments from BOJ Governor Ueda indicating that a rate hike was coming this month. However, the thing I find more interesting is that this move in JGB yields has become the bête noire of markets, now being blamed for every negative thing that happened yesterday.
For instance, Treasury yields yesterday rose 7bps despite ISM data indicating that manufacturing activity remains sluggish at best. In fact, the initial response to that data was that it confirmed the Fed will be cutting rates next week. But the narrative seems to be that Japanese investors are now willing to repatriate funds, selling Treasuries to buy JGBs, in order to invest locally because they are finally getting paid to do so. Certainly, looking at the chart above shows that Japanese yields had been tantamount to zero for a long time prior to 2024, and even then, have only started to show any real value in the most recent few months. Of course, real 10-year yields in Japan remain significantly negative based on the latest inflation reading of 3.0%. The upshot is, rising JGB yields are deemed the cause of Treasury market weakness.
Turning to risk assets, the story is the same for both stocks (which saw US equities decline across the board yesterday) and cryptocurrencies, notably Bitcoin. Ostensibly, the rise in yields, and the prospect of a rate hike by the BOJ (to just 0.75% mind you) has been cited as the driver of an unwinding in leveraged trades as hedge funds seek to get ahead of having their funding costs rise thus crimping their margins.
There is no doubt in my mind that the yen has been a critical funding currency for a wide array of carry trades, that is true. In fact, that has been the case for several decades. But is 25 basis points really enough to destroy all the strategies that rely on that process? If so, it demonstrates a remarkable fragility in markets, and one that portends much worse outcomes going forward.
If we look at the relationship between Bitcoin and 10-year JGBs, it appears that there has been a significant change in tone. For the past two months, while JGB yields have continued to climb, BTC has broken its correlation with JGBs and has fallen dramatically instead. (see below chart from tradingeconomics.com). When it comes to crypto, I am confident that leverage levels are higher than anywhere else, in fact that seems part of the attraction, so it should not be as surprising to see something of this nature. But again, it speaks to a very fragile market situation given there was no discernible change in the Japanese yield trend to drive a Bitcoin adjustment.
The upshot here, too, is that rising JGB yields are claimed to be the reason Bitcoin is declining. In fact, nearly all the commentary of late seems to be focusing on JGBs as the driver of everything. While I concede that Japanese yields are an important part of the USDJPY discussion, it is difficult for me to assign them blame for everything else. I have seen numerous commentators explaining that the Japanese have been selling Treasuries because they don’t trust the US, and this has been ongoing for years. I have also seen commentators explain that because Japanese surpluses had been invested internationally for years and funding so much of the world’s activity, now that they can invest at home, liquidity everywhere will dry up, and asset prices will fall.
Responding to the first issue, especially with new PM Sanae Takaichi, I do not believe that is a concern at all. If anything, I expect that the relationship between the US and Japan will deepen. As to the second issue, that may have more import but the one thing of which we can be sure is that central banks around the world will not allow liquidity to dry up in any meaningful fashion. Remember, the Fed ended QT yesterday and it won’t be long before the balance sheet starts to grow again, adding liquidity to the system. One thing I have learned in my many years observing and trading in markets is, there doesn’t need to be a catalyst for markets to move in an unexpected direction. Certainly not a big picture catalyst.
And with that, let’s look at how markets responded overnight to yesterday’s risk-off session in the US. Looking at the bond market first, yesterday’s rise in yields was nearly universal with European sovereigns all following the Treasury market’s lead. And this morning, across the board sovereigns are higher by 1bp, the same as Treasury yields. While JGB yields didn’t budge overnight, we did see Australia and other regional yields catch up to yesterday’s rise. I fear bond investors are stuck as they see the potential for inflation, but they also see weakening economic activity as a moderator there. As an example, the OECD just reduced its US GDP forecast for 2026 to 2.9% this morning, from 3.2%. Personally, I don’t think anything has changed the run it hot scenario.
In the equity markets, Asian bourses were mixed with Korea (+1.9%) and Taiwan (+0.8%) the notable gainers while elsewhere movement was much less substantial (Japan 0.0%, HK +0.2%, China -0.4%). There was no single story driving things there. As to Europe, things are brighter this morning led by Spain (+1.0%) and Italy (+0.5%) although there is no single driving issue here either. US futures are edging higher at this hour as well, +0.2%, so perhaps yesterday was more like a little profit taking after last week’s strong rally, than anything else.
In the commodity sector, oil (-0.3%) is slipping after yesterday’s rally. I suppose the potential peace in Ukraine is bearish, but that story has been dragging on for a while so I’m not sure when it will come to fruition. In the metals markets, after a gangbusters rally yesterday, with silver trading to $59/oz, we are seeing a modest retracement this morning across the board (Au -0.6%, Ag -1.2%, Pt -2.0%) although copper (+0.4%) is holding its gains. Nothing indicates that these metals have topped.
Finally, the dollar is little changed as I write, giving back some early modest strength. JPY (-0.3%) continues to be amongst the worst performers, and although it has bounced from its recent lows, remains within a few percent of those levels. My take here is we will need to see both a more aggressive Fed and a more aggressive BOJ to get USDJPY back to 150 even, let alone further than that. If we look at the DXY, it is sitting at 99.45, and still well within its trading range for the past 6+ months as per the below. For now, the dollar remains a secondary story.
Source: tradingeconomics.com
On the data front, here’s what comes the rest of this week:
Wednesday
ADP Employment
10K
IP
0.1%
Capacity Utilization
77.3%
ISM Services
52.1
Thursday
Initial Claims
220K
Continuing Claims
1960K
Trade Balance
-$65.5B
Friday
Personal Income (Sep)
0.4%
Personal Spending (Sep)
0.4%
PCE (Sep)
0.3% (2.8% Y/Y)
-ex food & energy
0.2% (2.9% Y/Y)
Michigan Expectations
51.2
Consumer Credit
$10.5B
Source: tradingeconomics.com
As the Fed is in its quiet period, there are no Fed speakers until Powell at the presser next week. Given the age of the PCE data, I don’t see it having much impact. Rather, ADP and ISM are likely the things that matter most for now.
Ultimately, I believe more liquidity is going to come to the market via central banks around the world, and that will support risk assets, as well as prices for the things we buy. Nothing has changed in my view of the dollar either.
The zeitgeist, of late, has been leaning Toward welcoming gov intervening Because costs have soared So, folks once abhorred Like Socialists, seem more well-meaning
Perhaps, though, the story’s much deeper And points to a latent grim reaper Elites on one side Claim Trump’s only lied While Populists serve as gatekeeper
Quite frankly, I feel like markets have become very secondary to an understanding of what is happening in the economy, and while there is intrigue over who may be the next Fed Chair, and correspondingly, if Mr Powell will resign from the FOMC when his chairmanship is up, I believe that pales in comparison to much larger macroeconomic issues with which we all have to deal on a daily basis. Once again, my weekend reading has highlighted two key pieces that I believe do an excellent job of explaining much of what is going on, not just in the economy, but in the streets.
Last week, I highlighted Michael Green’s piece regarding a new estimate of what the poverty line looks like, putting paid to the idea that the official government level of $31,500 is appropriate, and that in suburban NJ (Caldwell to be exact) it is more like $140K. Now, you will not be surprised that his piece garnered a great deal of attention given its premise, but I will not go into that. However, he did write a follow-up piece which is worth reading and where he discusses the reaction. In brief, whatever number is correct, it is clear that $31.5K is laughably low. Ultimately, I believe this work has quantified the concept of the “vibecession” which has been making the rounds for a while. People are allegedly making a decent living and yet are living paycheck to paycheck because the cost of living (not inflation) has risen so remarkably over time and priced many folks out of previously ordinary levels of attainment.
Which brings me to the second key piece I read this weekend, this from Dr Pippa Malmgren, which does a remarkable job explaining how the nation (and not just in the US, but we are more familiar here) has (d)evolved into two groups; Elites and Populists. The former are the old guard politicians (both Democrats and Republicans), the global organizations like the World Bank, IMF, UN and WEF, and more perniciously in my mind, the so-called deep state. The latter are personified by President Trump, but include NYC Mayor-elect Mamdani, AfD in Germany, Marine LePen in France and Victor Orban in Hungary, and their followers, to name a few.
The frightening conclusion Dr Malmgren drew was that there is no ability for a nation to continue to operate successfully if the population is split in this manner, and that eventually, one side is going to wind up victorious. I would say this is the very definition of the 4th Turning and we are living through it.
So, we must ask, what are the potential ramifications from a financial markets perspective with this backdrop? I have repeatedly highlighted that the Trump administration is going to “run it hot” going forward, meaning the goal will be to increase nominal GDP fast enough to outweigh the inevitable rise in prices. The idea is if incomes rise quickly enough, people will be able to tolerate rising prices more easily.
But the one thing of which I am increasingly confident is that prices and their rate of change are going to rise under this scenario. As central banks leave policy easy, or ease further in an effort to support their respective economies, that is going to be the outcome. A look at the chart below from the FRED data base of the St Louis Fed shows there is a very strong relationship between CPI and nominal GDP. In fact, I ran the numbers and the correlation for the past 75 years has been 0.975! Prices are going to rise friends, alongside M2.
What does this mean? It means that the debasement of fiat currency is going to continue apace and so commodities, notably precious metals, but also base metals and property are going to be recognized as better stores of wealth. If you wonder why gold (+0.9%) and silver (+2.2%) are continuing to rocket higher, look no further than this. What about equities? For now, I expect they will continue to perform well as all that liquidity will be looking for a home although this morning, not so much as US futures are lower by -0.5% across the board. Bonds? This is a tougher call, and I suspect that the yield curve will steepen further as central banks press short rates lower, but inflation undermines long duration fixed income assets. Finally, the dollar remains, in my view, one of the best of the fiat currencies, but like all of them, will continue to degrade vs. gold and hard assets.
Keeping that in mind, there are two other stories of note this morning, only one of which is impacting markets. The non-impactful one is that apparently President Trump has selected Kevin Hassett, currently the White House Economic Council Director, as the man to succeed Jay Powell in the chair. He is a long-time political operative with deep ties in Washington and I presume will get through the vetting and be confirmed on a timely basis. As I wrote above, it is not clear to me the Fed matters as much as other things in the current environment, although we will continue to hear about it. In this light, the Fed funds futures market is currently pricing an 87.5% probability of a 25bp cut next week and is back to a 58% probability of a total of 100bps of cuts by the end of 2026 as per the below from the CME.
The other story of note, this one definitely impacting markets, is the news that Ueda-san hinted more definitively at a Japanese rate hike later this month, with Japanese swaps market raising the probability of that hike to 80% from about 60% last week. The knock-on effects were that 10-year JGB yields jumped 7bps, to 1.86%, their highest level since 2008 and as you can see from the chart below, continue to trend strongly higher. Of course, given that inflation in Japan remains well above target, it is not that surprising that yields are climbing.
Too, the other outcome here has been the yen (+0.7%) gaining a little ground, as per the below chart from tradingeconomics.com, and perhaps we have seen a short-term low in the currency. Certainly, the increasing probability of US rate cuts is weighing on the dollar overall, so that is part of the story, but it remains to be seen if there are going to be wholesale changes in investment allocations that would be necessary to completely reverse the yen’s remarkable weakness over the past nearly four years.
The move in JGB yields has been blamed for the rise in yields around the world with Treasury and European Sovereign yields uniformly higher by 3bps this morning while some other regional Asian yields climbed between 4bps and 6bps. In the end, inflation remains a problem almost everywhere in the world and I think that is what we are witnessing here.
As well, the JGB move was seen as the cause for Japanese equities’ (-1.9%) very weak performance which also dragged down some other regional markets (Taiwan, Australia, Philippines) but was not enough to undermine the rest of the region. The flip side of that weakness was China (+1.1%) and HK (+0.7%) where it appears that hopes for a Fed rate cut more than offset weaker than forecast PMI data from China. Another interesting story from the mainland was that the monthly Housing price data that was compiled by two key private companies was squashed by the Chinese government after China Vanke, one of the largest Chinese property companies, explained they would be late on an interest rate payment. One can only imagine what that data looked like!
Meanwhile, in Europe, red is the color led by Germany’s DAX (-1.5%) although with weakness across the board (CAC -0.8%, IBEX -0.6%, FTSE MIB -0.9%). Apparently, the story that progress has been made regarding peace talks in Ukraine is not seen as a positive there. After all, if there is peace, will European governments still be so keen to build out their military, spending billions of euros at local defense and manufacturing firms? It seems after a very strong close to the month in November, there is a bit of profit taking underway this morning.
In the commodity space, oil (+1.3%) is bouncing back to its trend line after OPEC confirmed it will not be increasing production in Q1 next year at a meeting yesterday. I would expect that a real peace deal would be negative for this market as some part of that would be the relaxation of sanctions, I would assume. But maybe I’m wrong there. However, I continue to believe the trend is modestly lower going forward as there is far more supply available. As to the other metals, both copper (+0.6%) and platinum (+1.5%) are continuing their runs higher with no end currently in sight.
Finally, the dollar is softer overall this morning, and while the yen (+0.7%) is the leader, the euro (+0.3%), SEK (+0.3%) and CHF (+0.25%) are also nicely up on the day with the rest of the G10 little changed. The real movement, though, has been in the EMG bloc with CZK (+0.75%), HUF (+0.5%), PLN (+0.5%), and CLP (+0.4%) all benefitting from the Fed rate cut story as well as Chile’s benefits from copper’s rally. While a cut seems highly likely, I suspect the real dollar story will be about the dot plot and SEP as well as Powell’s presser next week.
I’ve already run too long so will just mention that ISM Manufacturing (exp 48.9) is due this morning and I will review the week’s data expectations tomorrow.
The world is changing and I expect that we will continue to see volatility across markets as investors come to grips with those changes, whether simple central bank rate decisions or more complex social movements and electoral outcomes that lead to major policy changes. Be careful out there.
But this is the first step in their typical seven step plan before intervention. And I get it, the combination of Chairman Powell suddenly sounding hawkish on Wednesday afternoon, telling us a December rate cut was not a foregone conclusion and the BOJ continuing to sit on its hands despite inflation running at 2.9%, the 42nd consecutive month (see below) that it has been above their 2.0% target (sound familiar?), indicates that the current policy stances will likely lead to further dollar strength vs. the yen.
Source: tradingeconomics.com
There is something of an irony in the current situation in Japan. Recall that for years, the Japanese economy was in a major funk, with deflation the norm, not inflation, as government after government issued massive amounts of debt to try to spend their way to growth. In fact, Shinzo Abe was elected in 2012, his second stint as PM, based on his three arrows plan to reinflate the economy because things were perceived so poorly. If you look at the chart below, which takes a longer-term view of Japanese inflation, prior to 2022, the two positive spikes between 1992 and 2022 were the result of a hike in the Japanese VAT (they call it the Goods and Services Tax) which raised prices. In fact, during that 30-year period, the average annual CPI was 0.25%. And the Japanese government was desperate to raise that inflation rate. Of course, we know what HL Mencken warned us; be careful what you wish for, you just may get it…good and hard. I have a sense the Japanese government understands that warning now.
Data source: worldbank.org
Net, it is hard to make a case that the yen is going to reverse course soon. For receivables/asset hedgers, keep that in mind. At least the points are in your favor!
So, now that a trade deal’s agreed Can China reverse from stall speed? The data last night Sure gave Xi a fright More stimulus is what they need!
The other noteworthy macro story was Chinese PMI data coming in weaker than expected with the Manufacturing number falling to 49.0, vs 49.8 last month, with all the subcategories (foreign sales, new orders, employment and selling prices) contracting as well. The Chinese mercantilist model continues to struggle amid widespread efforts by most developed nations to prevent the Chinese from dumping goods into their own economies via tariffs and restrictions. The result is that Chinese companies are fighting on price, hence the deflationary situation there as too many goods are chasing not enough demand (money).
There have been many stories lately about how the Chinese have the upper hand in their negotiations with the US, and several news outlets had stories this morning about how the US got the worst of the deal just agreed between Trump and Xi. As well, this poet has not been to China for a very long time, so my observations are from afar. However, things in China do not appear to be going swimmingly. While there continues to be talk, and hope, that the government there is going to stimulate domestic consumer spending, that has been the story for the past 3 or 4 years and it has yet to occur in any effective manner. The structural imbalances in China remain problematic as so many people relied upon their real estate investments as their nest egg and the real estate bubble continues to deflate 3 years after the initial shock. Chinese debt remains extremely high and is growing, and while they certainly produce a lot of stuff, if other nations are reluctant to buy that stuff, that production is not very efficient for economic growth.
Many analysts continue to describe the US-China situation as China is playing chess while the US is playing checkers, implying the Chinese are thinking years ahead. If that is so, please explain the one-child policy and the decimation of their demographics. Just sayin.
Ok, let’s look at markets overnight. While yesterday’s US markets were blah, at best, strong earnings from Amazon and Apple has futures rocking this morning with NASDAQ higher by 1.3% at this hour (7:40). Those earnings, plus the euphoria over the Trade deal with the US sent Japanese shares (+2.1%) to another new all-time high which dragged along Korea (+0.5%) and New Zealand (+0.6%) but that was all. The rest of Asia was under pressure as the weak Chinese PMI data weighed on both HK (-1.4%) and mainland (-1.5%) indices and that bled to virtually every other market. Meanwhile, European bourses are all somewhat lower as well, albeit not dramatically so, as the tech euphoria doesn’t really apply here. So, declines between -0.1% (Spain) and -0.4% (UK) are the order of the day.
In the bond markets, yields have essentially been unchanged since the FOMC response with treasury yields edging 1bp higher this morning, now at 4.10%, while European sovereign yields are either unchanged or 1bp higher. The ECB was a nothingburger, as expected, and going forward, all eyes will be on the data to see if any stances need change.
The commodity markets continue to be the place of most excitement with choppiness the rule. Oil (-0.25%) is a touch softer this morning but continues to hover around the $60/bbl level. I’m not sure what will get it moving, but right now, neither war nor peace seems to matter. Regime change in Venezuela maybe?
Source: tradingeconomics.com
In the metals markets, volatility is still the norm with gold (-0.45%) lower this morning after a nice rebound yesterday and currently trading just above $4000/oz. Silver and copper are unchanged this morning with platinum (-0.9%) following gold. However, regardless of the recent market chop, the charts for all these metals remain distinctly bullish and the theme of debased fiat currencies is still alive. Run it hot is still the US playbook, and that is going to support all commodity prices.
Finally, the dollar, after another step higher yesterday, is little changed this morning. Both the euro and yen are unchanged and the rest of the G10 has slipped by between -0.1% and -0.2%. In truth, today’s outlier is ZAR (-0.4%). Now, let’s look at two ZAR charts, the past year and the long term, which tell very different stories. In fact, it is important to remember that this is often the case, not merely a rand situation. First, the past year shows the rand with a strengthening trend as per the below from tradingeconomics.com. That spike was the response to Liberation Day.
But now, let’s look at a longer-term chart of the rand, showing the past 21 years.
Source: finance.yahoo.com
Like most emerging market currencies, the rand has been steadily depreciating vs. the dollar for decades. It’s not that we haven’t seen a few periods of modest strength, but always remember that in the big picture, most EMG currency’s slide over time. This is merely one example, and it is a BRICS currency. The demise of the dollar remains a long way into the future.
On the data front, Chicago PMI (exp 42.3) is the only release, and we hear from three more Fed speakers. It appears every FOMC member wants to get their view into the press as quickly as possible since there seem to be so many differing views. In the end, I continue to think the Fed cuts in December, and nothing has changed. But for now, there is less certainty as this morning, the probability of a cut is down to 66%. I guess we’ll see. But regardless, I still like the dollar for now.
Ahead of the FOMC The pundits were sure they would see A cut come December As every Fed member Saw joblessness to some degree
But turns out, dissent did abound And Jay, to the press, did expound December’s not destined “Far from it”, when pressed, and The bond market fell to the ground
The Fed cut the 25bps that were priced and they said they would end QT, the balance sheet runoff beginning December 1st. As well, they indicated that as MBS matured, they would be replaced with T-bills. So far, all pretty much as expected. But…the vote was 7-2 for the cut. One dissent was Stephen Miran, once again looking for 50bps but the real shocker was KC Fed president Jeffrey Schmid, who wanted to stand pat! During the press conference, Powell explained [emphasis added], “there were strongly different views about how to proceed in December. A further reduction in the policy rate at the December meeting is not a foregone conclusion. Far from it!”
The Fed funds futures market jumped on that comment and as of this morning, the December probability fell from 92% to 70% with only a 3/4 probability of another cut after that by April, down from a near certainty by March previously.
You won’t be surprised by the fact that the bond market sold off hard, with yields rising 10bps on the day, with seven of those coming in the wake of the press conference.
Source: tradingeconomics.com
Stocks struggled, with the DJIA under modest pressure and the S&P 500 unchanged although the NASDAQ managed to rise yet again to a new high, as NVDA doesn’t pay attention to gravity.
So much has been written about this that I don’t think it is worth going into more detail. FWIW, my view is the Fed is still going to cut in December, and that will become clearer as the government reopens (which I think happens by the end of the week) and data starts to trickle out again. The employment situation remains their main focus, and it just doesn’t seem that positive right now. I suspect next year, when the OBBB policies begin to be implemented and we see the fruits of the dramatic increase in foreign investment in the US, that situation can change, but things feel slow for now.
In effect, that is why they are going to run the economy as hot as they can to try to prevent any recession and hopefully make it to the point where the government can back off and the private sector picks up the slack. At least, that’s my read for now. For the dollar, that means more support. For stocks, the same. And the inflation prospects will keep the precious metals supported. Bonds feel like the worst place to be.
In other central bank news, the Bank of Canada cut 25bps, as expected, and in their commentary explained rates were now “at about the right level” for the economy based on their projections. The market demonstrated they cared about this story for about 3 hours, as the initial move was modest CAD strength that evaporated as soon as Powell started speaking.
Source: tradingeconomics.com
The BOJ also met last night and left rates on hold, as widely expected, with the same two votes for a rate hike as the last meeting. During the press conference, Ueda-san explained, “We held today as we want to see more data on domestic wage-setting behaviors, while uncertainty remains high in overseas economies. If we’re convinced, we’ll adjust rates regardless of the political situation.” The yen (-0.6%) fared somewhat poorly, responding to Ueda-san’s comments regarding the relative lack of strength in the Japanese economy. Ultimately, as you can see in the below chart, the yen fell to its weakest point since last February, although I suspect if I am correct regarding the Fed continuing its policy ease, that weakness will abate somewhat.
Source: tradingeconomics.com
While Spinal Tap got to eleven Said Trump, t’was a twelve, not a seven The deal that he struck To get things unstuck With China, it’s manna from heaven
The last big story was the long-awaited meeting between Presidents Trump and Xi last night, where the two sat down and agreed to cool the temperature regarding trade. Key aspects include the US reducing tariffs on China, especially those regarding fentanyl, as well as rolling back the broad restrictions on Chinese companies, while China will purchase “tremendous amounts” of soybeans and pause their restrictions on the sale of rare earth minerals. Tiktok came up, and that will be settled and overall, it appears that a great deal of progress was made. This was confirmed by the Chinese as they announced the same things.
Clearly, this is an unalloyed positive for the global economy and while the situation is not back to its pre-Trump days, it offers the hope of some stability for the time being. But the surprising thing about these announcements was how little they seemed to help financial markets. For instance, both the Hang Seng (-0.25%) and CSI 300 (-0.8%) slipped during the session, as did India (-0.7%) and Australia (-0.5%) with the rest of the region basically unchanged. That is a disappointing performance for what appears to be a very positive outcome. I suppose it could be a ‘sell the news’ response, but in today’s markets, especially with the ongoing influx of central bank liquidity, I would have expected more positivity.
Turning to European markets, they are lower across the board led by Spain (-1.1%) and France (-0.6%) as the US-China trade deal had little impact, and investors responded to a plethora of data on GDP and inflation. The odd thing about this is that the Q/Q GDP data was better than expected across the board (France 0.5%, Netherlands 0.4%, Germany 0.0%, Eurozone 0.2%) which was confirmed by positive confidence data and modest inflation. While those growth numbers are hardly dramatic, at least they are not recessionary. You just can’t please some people! Meanwhile, at this hour (6:30) US futures are little changed to slightly softer.
If we turn to the bond markets, yesterday’s dramatic rise in Treasury yields is consolidating with the 10-year slipping -1bp this morning. In Europe, sovereign yields are higher by 3bps across the board as they catch up to yesterday’s Treasury move. At this hour, though, bond markets are doing little as investors and traders await Madame Lagarde’s announcements at 9:15 EDT although there is no expectation for any rate move. In fact, looking at the ECB’s own website, there is currently a 5% probability of a rate hike! (That ain’t gonna happen, trust me.)
In the commodity markets, oil (-0.5%) is softer this morning but is still right around $60/bbl with yesterday’s EIA inventory data showing a larger draw on inventories than expected. That is what helped yesterday’s modest gains, but those have since been reversed. In the metals markets, price action remains quite choppy, but this morning sees gold (+1.3%), silver (+1.0%) and platinum (+0.35%) all bouncing although copper (-0.2%) is a touch softer. Nothing has changed my longer-term views here, but it does appear that there is a lot more choppiness that we will need to work through before the trend reasserts itself.
Finally, the dollar, which rose yesterday on the relatively hawkish Fed commentary is mixed this morning as it shows strength vs. the yen (now -0.8%), ZAR (-0.4%), KRW (-0.35%), and INR (-0.4%) with even CNY (-0.2%) following suit, although the rest of the currency universe has moved only +/-0.1% from yesterday’s closes. Again, my view is the dollar is confined to a range, has been so for many months, and we will need to see some policy changes to break out in either direction. Right now, those policy changes don’t seem to be imminent.
With data still MIA, the only things to which we can look forward are the ECB and the first post-meeting Fed speak with Governor Bowman and Dallas Fed president Logan up today. I would have thought risk assets would be in greater demand this morning, but that is clearly not the case. Perhaps, as we approach month-end, we are seeing some window dressing, but despite the ostensible hawkish outcome from yesterday’s FOMC, I don’t think anything has changed with their future path of more rate cuts no matter what. As equity markets had a broadly positive October, rebalancing flows would indicate sales, but come Monday, I think the rally continues. As to the dollar, there is still no reason to sell that I can discern.
A century hence The BOJ’s equities May well have been sold
But policy rates Were left unchanged yet again What of inflation?
Finishing up our week filled with central bank meetings, the BOJ left rates untouched last night, as universally expected, and really didn’t indicate when they might consider the next rate hike. Ueda-san has the same problem as Powell-san in that inflation continues to run hotter than target while the economy appears to be struggling along. In addition, the political situation in Tokyo is quite uncertain as PM Ishiba has stepped down and a new LDP leadership election is set to be held on October 4th with the two leading candidates espousing somewhat different views of the future. If I were Ueda, I wouldn’t do anything about rates either. Interestingly, there were two dissents on the BOJ board with both calling for another rate hike.
But there was a policy change, albeit one that does not feel like it is going to have a significant impact for quite some time. The BOJ has decided to start to sell its equity and ETF holdings, which currently total about ¥37.2 trillion, at the annual rate of…¥330 billion. At this pace, it will take almost 113 years for the BOJ to unwind the “temporarily” purchased equities acquired during the GFC to support the market. While the Nikkei initially fell about 2% after the announcement, it rebounded over the rest of the session to close lower by a mere -0.6%. However, in a strong advertisement for the concept of buy and hold, a look at the below chart shows when they started buying and how well the BOJ has done.
Source: finance.yahoo.com
There is no indication that the BOJ has unrealized losses on their balance sheet like the Fed does!
What of USDJPY you might ask? And the answer is, nothing. It is essentially unchanged on the day and in truth, as you can see from the chart below, it has done very little for the past 5+ months, trading at the exact same level as prior to the Liberation Day tariff announcements. While there was an initial decline in the dollar then, that was a universal against all currencies, but we are back to where we were.
Source: tradingeconomics.com
Consider, too, that over the course of the past year, the Fed has cut Fed funds by 125bps while the BOJ has raised their base rate by 60bps, and yet spot USDJPY is effectively unchanged. Perhaps, short-term interest rate differentials aren’t always the driver of the FX market after all.
In fact, there is a case to be made that the driver in USDJPY is the capital flowing out of Japan by fixed income investors as they seek a less chaotic situation than they have at home. This could well be the reason for the ongoing rise in long-dated JGB yields to record after record, while Treasury yields seem to have found a top. Recall, in the latest 10-year auction, dealers took down only 4% of the auction with foreign interest rising to 71%. While there has been much discussion amongst the punditry of how nobody wants to buy Treasuries and they are no longer the haven asset of old, the nobody of whom they speak are foreign central banks. But foreign private investors seem pretty happy to scoop them up and are doing so at a remarkable pace. I think there are a few more years left before the dollar disappears.
Ok, let’s tour the markets here as we reach the end of the week. Record highs across the board in the US yesterday as investors apparently decided that the Fed was just like Goldilocks, not too hawkish and not too dovish. And the hits keep on coming this morning as futures are all higher by about 0.25% at this hour (7:15). As to Asia, we discussed Japan already, and both China and HK were unchanged. But elsewhere in the region, the euphoria was not apparent as Korea, India, Taiwan, Singapore and Thailand all fell by at least -0.3% or more while Australia, New Zealand and Indonesia were the only gainers, also at the margin on the order of 0.3% or so.
Europe this morning is also mixed with the DAX (-0.2%) lagging after weaker than expected PPI data indicated that economic activity is slowing more rapidly than anticipated, while both the CAC (+0.2%) and IBEX (+0.4%) are edging higher absent any new data. There was a comment by an ECB member, Centeno from Portugal, that the ECB needs to be wary of “too low” inflation, a particularly tone-deaf comment after the past several years! But I guess that is the first hint that the ECB is ready to cut again.
In the bond market, Treasury yields have been bouncing since the FOMC meeting and are now higher by 13bps since immediately after the FOMC statement. Again, my view is this is a case of selling the news after the market was pricing in the rate cut ahead of the meeting. I would argue that no matter how you draw the trend line of the decline in yields over the past several months, we are nowhere near testing it.
Source: tradingeconomics.com
And in what cannot be a surprise, European sovereign yields are all rising alongside Treasuries, with today’s bump up of another 1bp to 2bps adding onto yesterday’s 5bp to 7bp raise across the board. As well, we cannot ignore JGBs which have jumped 4bps after the BOJ meeting last night. I guess Japanese investors didn’t get any warm and fuzzy feelings about how Ueda-san is going to fight inflation.
Turning to commodities, oil (-0.4%) remains firmly within its recent range, ignoring Russai/Ukraine news as well as inventory data and economic statistics. I don’t know what it will take to change this equation, but it certainly seems like we will be in this range for a while yet. Peace in Ukraine maybe does it, or a major escalation there. Otherwise, I am open to suggestions. Gold (+0.2%) continues to be accumulated by central banks around the world as well as retail investors in Asia, although Western investors appear oblivious despite its remarkable run. Silver (+0.7%) too is rallying and has been outperforming gold of late. Perhaps of more interest is that the precious metals are doing so well despite the dollar’s rebound in the FX markets.
Speaking of which, this morning the dollar is firmer by 0.25% to 0.4% vs most of its G10 counterparts although some of the Emerging Market currencies are holding up better. So, the euro (-0.25%), pound (-0.5%), AUD (-0.25%), CHF (-0.35%) and SEK (-0.6%) are defining the G10 with only the yen (0.0%) bucking the trend. As to the EMG currencies, HUF (-0.65%), KRW (-0.6%) and PLN (-0.3%) are the laggards with the rest showing far less movement. However, while short dollar positions are rife, there is not much joy there lately. I grant that the trend in the dollar is lower, and we did see a new low for the move print in the immediate aftermath of the FOMC meeting, but it appears that people have not yet abandoned the greenback entirely. Perhaps the lure of more new record highs in the stock market is enough to get foreigners to reconsider their “end of American exceptionalism” idea.
There is no data today nor are any Fed speakers on the calendar. Perhaps the most notable data we have seen is UK Public Sector Net Borrowing, which fell to -£17.96B, a massive jump from last month and much worse than expected. As you can see from the chart below, while there is much angst over US budget deficits, at least the US has the reserve currency on which to stand. The UK has nothing, and the fiscal situation there is becoming more dire each day. Yet another reason that the Starmer government can fall sooner rather than later.
Source: tradingeconomics.com
It is hard to look at that chart and think, damn, I want to buy the pound!
For all the hate it gets, the dollar is still the cleanest dirty shirt in the laundry, and while it may trade somewhat lower in the near term, it will find its legs and rebound.
The president left in a flash Completing a quick dine and dash But so far, no word On what, this move, spurred Though I’ve no doubt he’ll make a splash
Then last night the BOJ passed On hiking, though none was forecast And Germany’s ZEW Implied there’s a view That growth there will soon be amassed
I have to admit that when I awoke this morning, I expected there to have been significantly more news regarding the Iran/Israel conflict based on President Trump’s early departure from the G-7 meeting. But, from what I see so far, while markets have reversed some of yesterday’s hope that a ceasefire was coming soon, my read is we are back to overall uncertainty in the situation. Of course, the concept of the fog of war is well known, and I expect that we will not find out very much until those in control of the information, whether the IDF or the US military, or Iranian sources, choose to publicize things. The one thing we know is that everything we learn will be biased toward the informants’ view, so needs to be parsed carefully. I do think that Trump’s comments to the press when he was leaving the G-7 about seeking “an end. A real end. Not a ceasefire, an end,” to the ongoing activities is telling. It appears the Israelis planned on a 2-week campaign and that is what they are going to complete.
From a market perspective, as we have already seen in the price of oil, and generally all asset classes, absent a significant escalation, something like a tactical nuclear strike by the Israelis to destroy the Iranian nuclear bomb-making capabilities, I expect choppiness on headlines, but no trend changes. At some point, the fighting will end, and markets will return their focus to economic and fiscal concerns and perhaps central banks will become relevant again.
So, let’s turn to that type of news which leads with the BOJ leaving policy rates on hold, although they did reduce the amount of QE to ¥200 billion per month, STARTING IN APRIL 2026! You read that correctly. The BOJ, which has been buying ¥400 billion per month of JGBs while they raised interest rates in their alleged policy tightening, has decided that ten months from now it will be appropriate to slow the pace of QE. Yes, inflation has been running above their 2.0% target for more than three years (April 2022 to be exact) as you can see in the below chart, but despite a whole lot of talk, action has been slow to materialize.
Source: tradingeconomics.com
You may recall about a month ago when Japanese long-end yields, the 30-year and 40-year bonds, jumped substantially, to new all-time highs and there was much discussion about how there had been a sea change in the situation in Japan. Expectations grew that we would start to see Japanese institutions reduce their holdings of Treasuries and bring their funds home to invest in JGBs, leading to a collapse in the dollar. The carry trade was going to end, and this was another chink in the primacy of the dollar’s hegemony. Well, if that is the case, it is going to take longer than the punditry anticipated, at the very least, assuming it happens at all. As you can see from the charts below of both USDJPY and the 40-year JGB, all that angst has at the very least, been set aside for now.
Source: tradingeconomics.com
Elsewhere, the German ZEW data released this morning was substantially stronger than both last month and the forecasts for an improvement. As you can see from the chart below, it is back at levels that are consistent with actual economic growth, something Germany has been lacking for several years. It appears that a combination of the continued tariff truce, the promises of massive borrowing and spending by Germany to rearm itself and the ECB’s easy policy have German business quite a bit more optimistic that just a few months ago.
Source: tradingeconomics.com
Ok, while we await the next shoe to drop in Iran or Israel, let’s see how markets have behaved overnight. Yesterday’s nice rally in the US was followed by a mixed picture in Asia with the Nikkei (+0.6%) gaining after the BOJ showed that tighter policy is not coming that soon. Elsewhere in the region, China, HK and India were all down at the margin, less than 0.4% while Korea and Taiwan managed some gains with Taiwan’s 0.7% rise the biggest mover overall. In Europe, though, the excitement about a truce in Iran is gone with bourses across the continent lower (DAX -1.25%, CAC -1.05%, IBEX -1.5%, FTSE 100 -0.5%). Apparently, there is fading hope of trade deals between the US and Europe and concerns are starting to grow as to how that will impact European activity. I guess the ZEW data didn’t do that much to help. US futures at this hour (7:00) are all pointing lower by about -0.5%, largely unwinding yesterday’s gains.
In the bond market, Treasury yields, which backed up yesterday, are lower by -3bps this morning, essentially unwinding that move. However, European sovereign yields have all edged higher between 1bp and 2bps with Italy’s BTPs the outlier at +3bps. Quite frankly, it is hard to have an opinion as to why bond yields move such modest amounts, so I’m not going to try to explain things.
In the commodity space, fear is back in play as oil (+1.7%) is rallying as is gold (+0.4%) which is taking the rest of the metals complex (Ag +2.3%, Cu +0.3%, Pt +3.0%) with it. These are the markets that are most directly responding to the ongoing ebbs and flows of the Iran/Israel situation, and I expect that will continue. In the end, I continue to believe the long-term trend for oil is toward lower prices while for gold and metals it is toward higher prices, but on any given day, who knows.
Finally, the dollar doesn’t know which way to turn with modest gains and losses vs. different currencies in both G10 and EMG blocs. The euro, pound and yen are all within 0.1% of yesterday’s closing levels while we have seen KRW (-0.4%) and INR (-0.3%) suffer and NOK (+0.4%) and SEK (+0.4%) both gain on the day. However, those are the largest movers across the board, so it is difficult to make a case that anything of substance is ongoing.
On the data front, yesterday’s Empire State Manufacturing index was quite weak at -16, not a good look. This morning, we see Retail Sales (exp -0.7%, +0.1% ex-autos), IP (0.1%), and Capacity Utilization (77.7%). As well, the FOMC begins their meeting this morning with policy announcements and Powell’s press conference scheduled for tomorrow. Helpfully, the Fed whisperer, Nick Timiraos, published an article this morning in the WSJ to explain why the Fed was going to do nothing as they consider inflation expectations despite the lack of empirical evidence that those have anything to do with future inflation. But it is a really good sounding theory.
For now, the heat of the Iran/Israel situation will hold most trader’s attention, but I suspect that this will get tiresome sooner rather than later. The biggest risk to markets, I think, is that the Iranian regime collapses and a secular regime arises, dramatically reducing risks in the Middle East and reducing the fear premium in oil substantially. If that were to be the case, I expect the dollar would suffer as abundant, and cheap, oil would help other nations more than the US on a relative basis given the US already has its own supply. But a major change of that nature would have many unpredictable outcomes. In the meantime…
It wasn’t all that long ago That folks really wanted to know What Jay and the Fed Implied was ahead And if more cuts were apropos
But later today when they break Their words are unlikely to shake The narrative theme That whate’er they deem Important, is just a mistake
Presidents Trump and Putin spoke at length yesterday, but no solution was achieved so the Ukraine War will continue unabated for now. While talks are better than not, certainly this is a disappointment to some. As well, the astronauts who have been stranded in space for the past 8 months are safely back on earth. I mention these things because they are seemingly far more important than central banks these days, and today, that is all we have to discuss regarding financial markets.
To begin, last night the BOJ left rates on hold as universally anticipated. The initial market response was for the yen to weaken through 150 briefly, but then Ueda-san spoke and discussed the expected wage increases and how the economy was doing fine, and the new market assessment is that the BOJ will hike rates by 25bps in May at their next meeting. The market response was to buy back the yen, at least for a little while, although right now, USDJPY seems to be attracted to the 150 level overall.
Source: tradingeconomics.com
It is worth understanding, though, that the last time short-term interest rates were that high in Japan was back in July 2008. And they have not been above that level since August 1995. The below chart from FRED database speaks volumes about just how low interest rates have been in Japan over time, and as an adjunct, just how long the opportunity for shorting JPY on the carry trade has been around. That dotted line is the Fed funds rate compared to the Japanese overnight rate.
Along the central bank thesis, Bank Indonesia, too, met last night and left policy on hold with their policy rate at 5.75%. Governor Warjiyo explained that he felt falling inflation and improving growth would help prevent rupiah weakness despite the fact that the currency has been the worst performing Asian currency this year and is trading at historic lows.
But on to the FOMC meeting which will conclude at 2:00 this afternoon with the policy statement (no change expected although some tweaking of the verbiage is likely) and the release of the latest dot plot. You have probably forgotten that at the December meeting, the FOMC reduced the median expectation of rate cuts for 2025 from 4 prior to the election to just 2. In the interim we have seen Fed funds futures trade to where barely one rate cut was priced in, although we are now back to three cuts, seemingly on the idea that tariffs will cause significant economic weakness, and the Fed will need to respond. At least that’s what the punditry maintains.
Here is the last dot plot for information purposes and it will be interesting to see just how much things have changed. will longer run rates continue to move higher? Will 2 rate cuts still be the median outcome for 2025? All this we get to learn at 2:00.
Source: federalreserve.gov
But arguably, of far more import will be Chairman Powell’s press conference beginning at 2:30. Prior to the Fed’s quiet period, the broad assessment was that patience in future rate moves was appropriate and they were happy with the current situation. However, I am confident there will be numerous questions regarding the potential impact of tariffs on monetary policy responses, as well as other things like DOGE and an audit of the Fed. Will any of it matter? Maybe at the margin, but for most markets, I suspect that fiscal issues will remain dominant. The one exception is the FX market, where unalloyed hawkishness could change views on the dollar’s recent weakness (although it is firmer this morning) while a dovish tone will almost certainly undermine the greenback. So, with no other data of note to be released beforehand, it is clearly the day’s major event.
Ahead of that event, let’s see how markets have behaved overnight. Following a weak session in the US, where all three major indices were lower by about -1.0% on average, Asia had a mixed picture. The Nikkei (-0.25%) found no love from Ueda-san and drifted lower. Both Hong Kong (+0.1%) and China (+0.1%) edged higher but continue to doubt the benefits of the mooted Chinese stimulus program while the rest of the region was mixed with some gainers (Indonesia, Korea, India) and some laggards (Taiwan, Australia, Malaysia). In Europe, too, the picture is mixed with the DAX (-0.4%) lagging while the CAC (+0.5%) is gaining. In Germany, the historic breech of the debt brake is not having the positive impact anticipated, or perhaps this is just selling the news. Overall, though, shares in Europe seem to be awaiting the Fed’s actions, or comments, rather than focusing on anything else. As to US futures, at this hour (7:30), they are pointing slightly higher, about 0.25% across the board.
In the bond market, Treasury yields have edged up 1bp this morning but continue to hang around 4.30%. European sovereign debt has seen yields slip -1bp to -2bps, arguably on the Eurozone inflation data released 0.1% lower than forecast at 2.3%. This continues the idea that the ECB will be cutting rates again at their next meeting. As to JGBs, they are unchanged yet again, seemingly affixed at 1.50%.
Commodity prices show oil (-0.2%) continuing yesterday’s decline. From the time I wrote to the end of the session, WTI fell $2/bbl, perhaps on the idea that the Putin/Trump phone call was bringing the war closer to an end. Regardless, if economic activity is slowing, that will lessen demand everywhere, a clear price negative. As to gold (+0.25%) it continues to trade higher undaunted by any news on any front. While silver is little changed this morning, copper (+0.7%) has now crested $5.00/lb and is pushing to the all-time highs seen back in May 2024.
Finally, the dollar is rallying this morning, higher against all its G10 counterparts by between 0.2% and 0.4%. This looks to me like a trading correction, not a new trend. The same price action is true in the EMG bloc with one real outlier, TRY (-4.2%) which actually traded down by as much as -10% earlier in the session (see chart below) on the news that President Erdogan had his key political rival, Istanbul mayor Ekrem Imamoglu, arrested on charges of fraud and terror, while his university diploma was revoked, seemingly in an effort to prevent him from running for president in the future. Thank goodness we never have things like that happen in this country!
Source: tradingeconomics.com
There is no data released today other than EIA oil inventories where a modest net build across products is currently expected. So, until the Fed, I would anticipate very little net movement. After that, it all depends. However, Powell will need to by extremely hawkish to shake any of my view that the dollar is headed lower overall.
fxpoetry 