Tag Archives: #BOJ

One Sixty

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The asymptote nears
Will they act at One Sixty?
Can they afford to?

Yesterday saw the yen edge ever closer to the 160 level, the point at which the MOF/BOJ acted in April.  Frankly, looking at the chart, it reminds me of an asymptotic limit from calculus, but the one thing we know is there is no natural limit, only whatever artificial one is imposed (or tried to be imposed) by the Japanese government.

Source: tradingeconomics.com

The market continues to price a high probability, ~86% according to the OIS market, of a 25bp hike by the BOJ next week, and I’m confident they will do that.  But to me, the question is, will it matter to the FX markets?  Here’s the thing about FX, typically there are two separate, but related, drivers of the relative value of one currency vs. another.  The most common discussion is about short-term interest rate differentials, typically proxied by central bank base rates.  Below is a chart of the past ten years of data for Fed funds (grey line), BOJ base rate (blue line) and USDJPY (brown line).

Source: tradingeconomics.com

It is abundantly clear that there is a strong relationship here, as US rates shot higher in the post-Covid inflation bout and USDJPY shot higher as well.  Now, since the Fed started cutting rates back in September 2024, while Japanese rates have edged higher over the same time frame, it would be reasonable to assume that USDJPY should retreat somewhat.  However, as you can see in the first chart, that is just not happening.  In fact, the pressures are the other way, with far more weakness than strength.

Why, one might ask, is this the case?  This takes us to the other major factor in FX rates, relative capital flows.  Nations that see substantial inflows in capital will typically see their currencies appreciate.  Now, ask yourself, which nation sees the biggest inflows of capital in the world?  Yes, the US, as the capital account surplus is the mirror image of the massive current account deficit that we run.  In fact, if you look at the below chart, it shows the relative current accounts of Japan (grey bars) and the US (blue bars) in percentage of GDP which most recently showed -3.6% for the US and +4.7% for Japan.

Source: tradingeconomics.com

Now, let’s do the math.  US GDP is ~$28.8 trillion while Japanese GDP is ~$4.4 trillion.  3.6% of $28.8 trillion = ~$1.037 trillion of capital inflows.  4.7% of $4.4 trillion = $202 billion of capital outflows.  Of course, we know that everybody in the world is piling into US technology stocks, and that is where the capital is mostly flowing, but in order to do so, they are buying USD.  This is true of Japanese investors as well as others around the world.  

There is a narrative that is developing that claims as the Japanese raise interest rates, the massive, short yen positions that exist to fund many speculative trades will unwind, and with that, the yen will strengthen dramatically as well as we will see many other markets sell off sharply as those positions unwind.  But the NASDAQ is up 21% YTD and 40% in the past year.  If you are an investor and you are funding a speculative position at 0.75% annually that rises to 1.00% while you are returning 40% on the other side, do you really care?

To my eye, for the yen to change course, intervention is irrelevant, and so is a 25bp rate hike.  We need to see a wholesale change in the combination of Japanese fiscal and monetary policies as well as changes in those policies in the US.  Historically, a tight monetary and loose fiscal policy combination will strengthen a currency (something that the US currently has), but can Japan afford to tighten monetary policy that much?  My money is on no, and while 25bps seems pretty certain next week, I would not be looking for USDJPY fall very far, if at all.  And remember, the market is pricing a 50% chance of a Fed hike by the end of the year.  Don’t be taken in by this story in my view.

Away from this issue, it is difficult to find other critical news.  Yes, there was another skirmish in Iran straining the concept of a ceasefire, but all-out war has not resumed.  The elections in California and LA will take several weeks to determine who will be on the ballot in November, which, when you think about it, sums up the incompetence of California governance writ large.  

So, oil is higher along with the dollar and yields, but so are stocks, while metals slip.  Let’s look at the overnight activity.  Another set of equity records in the US was followed in Asia by broad based strength as Tokyo (+2.5%), China (+0.5%), Korea (+0.2%) and Taiwan (+2.0%) all continued to climb. Both HK (-1.6%) and India (-0.4%) were not as robust with the former seeing profit taking after a few strong sessions while the latter felt pressure from those rising oil prices.  One outlier here was Indonesia (-4.5%) which suffered after weaker than expected trade data, higher than expected inflation data, and a weakening rupiah which set another record low (dollar high), touching 18,000.

European bourses, meanwhile, are mostly under pressure after President Trump has devised a new way to impose tariffs on nations that allow “forced labor” which is defined as “all work or service which is exacted from any person under the menace of any penalty for its nonperformance and for which the worker does not offer himself voluntarily.”  One must give the president props for his continuous efforts to impose tariffs, if nothing else.  At any rate, Germany (-0.9%) is leading the way lower, followed by Italy (-0.3%), France (-0.2%) and the UK (-0.2%) although Spain (+0.5%) is bucking that trend on the strength of the earnings for Inditex (Zara clothing parent) which is one of the largest companies in the nation.  US futures, at this hour (6:40) are mixed.

In the bond market, yields are rising again on the back of the oil price rise with Treasury yields (+4bps) gaining alongside the entire European sovereign market, all of which have risen a similar amount.  Last night, JGB yields also rose 6bps, as they respond to the oil market as well as pending rate hikes by the BOJ.

In the commodity market, if you think back to late May, you may recall an announcement that a deal with Iran was close which prompted a gap lower in oil prices as you can see in the chart below.  Well, that gap has now been filled.

Source: tradingeconomics.com

Just as nature abhors a vacuum, markets abhor a gap and seek to fill it whenever possible.  My take here, though, is now that the gap is filled, there is less reason to see oil rally much further and a consolidation before a slow decline is in the cards.  As to metals markets, gold (-0.8%), silver (-1.2%) and copper (-1.1%) are all softer on the day, with their negative correlation to oil intact.

Finally, the dollar is firmer this morning, keeping in line with its recent relationship with other markets.  However, the movement remains relatively muted with most G10 currencies softer by -0.2% or so as only SEK (-0.6%) and NOK (+0.1%) really buck that trend.  NOK is clearly benefitting from the oil price rise while SEK seems to be suffering from a slightly higher beta to the broad dollar move.  In the EMG bloc, KRW (-0.9%) is the laggard as it continues under pressure and trading to its lowest levels (highest dollar) since 2009.

Source: tradingeconomics.com

But otherwise, most of these currencies are slipping a similar amount to the G10 bloc, on the order of -0.2% or so.

On the data front, this morning brings ISM Services (exp 53.8) as well as Factory Orders (4.6%, 0.8% ex-Transport) and then the EIA crude oil inventories with another sizable draw anticipated.  At 2:00, the Fed’s Beige Book is released which should make for some interesting reading.  Yesterday’s JOLTs data was surprising in that it showed a significant jump in job openings, 700K more than expected which does not portray a weakening labor market.

Overall, equity markets seem to be disconnected from the impact of oil prices, something that very few analysts would have forecast in February.  But the dollar remains closely linked to those prices for now.  As we all sit here, waiting for the next headline, I cannot help but look at the US data and consider that the economy continues to tick over pretty well.  Ultimately, I believe that bodes well for the dollar over time, or at least until some other major economy shows it can perform well.

Good luck

Adf

Tough Call

Posted on by 
The peace talks have yet to conclude
And yesterday, both sides pursued
A little more fighting
Despite the gaslighting
Which helped push the price up in crude

But it still remains far below
The levels where it needs to go
To foster more drilling
And help in refilling
The buffers from which barrels flow

As we start the week, oil prices have rebounded from last week’s close (as per the below chart) as progress on the peace talks remains slow, at best, and there was another series of military attacks by both sides, with each side claiming defensive maneuvers. 

Source: tradingeconomics.com

Now, I am not a military scholar, but firing missiles at another nation doesn’t sound defensive, rather I would use the word retaliatory.  And there is no way we can know who initiated what during the latest exchange, as both sides claim the other did and there is no neutral arbiter.  But my take is that there is still a way to go before this is over.  Certainly, the IRGC seems committed to the last man, at least for now, and President Trump has indicated he is in no hurry.  Personally, I am still thinking a July 4th resolution timeline.

I did, however, see an increase in the discussion about the imminent collapse of supplies and the estimates that oil prices will finally (?) head up to the $150-$200/bbl level that a number of pundits have forecast.  But looking through these X posts, they are retweeting the comments I posted on Friday from the Exxon SVP Neil Chapman.  Time will tell if they are correct and the changes in the system have not been sufficient, at least not yet, to address the reduction of available oil from the Gulf.  But so far, whatever calculations have been made regarding demand destruction and additional production elsewhere, plus the rerouting of oil away from the Strait has been sufficient to prevent the worst-case scenarios that have been painted since this began back in March.  Plus, the one thing of which I am highly confident is that going forward, the Strait of Hormuz will not be nearly as strategic as it currently seems.  Production elsewhere and pipelines will reduce its importance dramatically.

The BOJ meets
In two weeks’ time.  Do rate hikes
Still matter? Tough call.

Two weeks from tomorrow, the BOJ meets to discuss monetary policy with the backdrop that the yen is essentially back to the levels seen in April just before the most recent bout of intervention.

Source: tradingeconomics.com

The swaps market is pricing in a 78% probability of a 25bp rate hike, which would take the base rate to 1.00%, still amongst the lowest in the world, but its highest level since September 1995 as you can see below in the chart from tradingview.com

Think about that for a moment, interest rates in Japan have been below 1.0% for more than 30 years.  That is an extraordinary situation.  Consider the bubble that was blown in the US by having rates that low for ‘only’ a decade following the GFC, or for an even shorter time post-Covid.  I guess we need to ask why Japanese equities never inflated the same way.  Perhaps that is the best evidence of the financialization of the US economy vs. that of Japan.  Liquidity in Japan didn’t lead to FOMO of the latest investment thesis.

Nonetheless, my take is there is a modest fear about the yen weakening much further and so the BOJ will hike rates.  Alas, since the market is already priced for that outcome, it is not clear it will do much to moderate the yen’s weakness, at least if they only go 25bps.  Now, if they hike 50bps and explain more hikes are on the way, that will matter.  The problem with that theory is that the latest CPI reading in Japan was 1.4%, well below their 2.0% target, and it has been that way since January as per the below chart.  It seems it could be tricky for Ueda-san to explain a very aggressive rate hike with the current inflation reading.

Source: tradingeconomics.com

Ok, I think those are the stories of note so let’s review market activity overnight.  let’s finish with commodities where oil’s gains (+3.6%) are not having the typical response in the metals markets with gold ‘only’ lower by -0.8% and silver (+0.6%) and copper (+2.5%) higher.  I don’t believe we are at the point where these markets are truly independent, but perhaps some of this negative correlation has been overdone.

In the FX markets, the dollar is modestly higher vs. most of its G10 counterparts with NZD (-0.6%) the laggard, but the rest of the group mostly softer by between -0.1% and -0.2%.  In other words, not too significant, and this includes the yen (-0.1%).  I believe all the yen talk is based on the idea that the BOJ meeting is close enough that it is a topic of conversation in a dull market.  Now, if the yen were to weaken dramatically ahead of the meeting, that would certainly change some views.  As to the EMG bloc, it is a bit more mixed although movement, overall, remains muted.  BRL (+0.4%) is the biggest winner with no particular newsworthy events to note, but when looking at the chart, it really hasn’t done too much since the middle of last month when the news about Lula’s competition broke with Bolsonaro fils suddenly less likely to compete for president.

Source: tradingeconomics.com

But otherwise, it is a mix of gainers and laggards on the order of 0.1% to 0.3% in either direction.

In the bond market, yields have ticked higher everywhere following oil’s rebound with Treasury yields higher by 2bps and most of Europe higher by 4bps.  US yields continue to drive the global situation, certainly directionally, if not in magnitude.  

Finally, equity markets appear quite sanguine regarding the oil price rise as Asian markets saw a mix of gainers (Tokyo +0.9%, HK +0.9%, Korea +3.7%! Taiwan +1.4%, Singapore +1.0%) and laggards (China -1.0%, India -0.7%) although clearly far more positive than negative.  Meanwhile, in Europe, the picture is mixed but with much less movement as Germany (+0.4%) and France (+0.1%) edge higher while Spain (-0.2%) and the UK (-0.2%) both slipped.  The news here was the PMI data which largely declined from last month, but not quite as far as forecast.  At this hour (7:30) US futures are all pointing higher between 0.2% and 0.6%.

On the data front, as it is the beginning of a new month, we get plenty including the NFP report on Friday.

TodayISM Manufacturing53.0
 ISM Prices Paid85.5
TuesdayJOLTs Job Openings6.82M
WednesdayADP Employment110K
 ISM Services53.7
 Factory Orders4.6%
 -ex Transport0.8%
ThursdayInitial Claims213K
 Continuing Claims1790K
 Nonfarm Productivity0.8%
 Unit Labor Costs2.3%
FridayNonfarm Payrolls85K
 Private Payrolls78K
 Manufacturing Payrolls0K
 Unemployment Rate4.3%
 Average Hourly Earnings0.3% (3.4% Y/Y)
 Average Weekly Hours34.3
 Participation Rate61.7%
 Consumer Credit$16.0B

Source: tradingeconomics.com

The labor market is certainly confusing compared to what many of us have known throughout our careers.  It is obvious the change in immigration stance by this administration has had a major impact, but so, too, has AI and company responses to that.  I continue to read bifurcated takes on AI either destroying everybody’s jobs or creating many new ones with both sides absolutely certain of the outcome.  One thing I will note is that while the BLS NFP numbers have been subject to major revisions given the inadequacies of the birth/death model for small businesses, I wonder about the ADP data, which I understand is a count of all the paychecks they distribute.  But that data also gets revised, so there is no perfect solution.  What I do think is clear is that less new jobs are necessary to maintain the Unemployment Rate at levels which, in the past, would have been deemed a huge success for the Fed and government.

As to today, headline bingo remains the biggest risk, but there is an awful lot of belief that the equity train rolls on and with it, so too with the dollar’s broad strength in my view as funds flow into the US to hop on board.

Good luck

Adf

Close to a Deal

Posted on by 
Said Bessent, we’re close to a deal
Though not yet the President’s seal
Both sides have agreed
That two months they’ll need
To see if this outcome is real

It can, though, not be too surprising
That stock markets have resumed rising
While oil has slipped
And bond yields, down, dipped
All told, risk is quite appetizing

The major story, although it has been questioned by many, is that there is positive movement toward a deal to end the conflict in Iran.  While I’m sure you will have seen the terms, a quick recap shows that there is to be a 60-day ceasefire to work out the final details.  One of the things I saw this morning was that Iran would send its nuclear material to China, rather than the US, as a compromise, and frankly, that seems like a fine solution.  After all, China enriches the stuff all the time, has many nukes and has never used one.  While we may have disagreements with China on a geopolitical basis, Xi Jinping is not a religious fanatic.  While Treasury Secretary Bessent made the announcement yesterday, he cautioned that President Trump has not yet agreed the details, but it is certainly a hopeful situation.  

Of course, you know who saw it as a hopeful situation?  Risk takers.  The Bloomberg screenshot below is indicative of how things are going, with gains everywhere except China, where it appears that concerns over China-EU trade tensions are weighing on companies there.  With the US having dramatically reduced its market for Chinese exports, Europe had effectively become the major dumping ground, and now that Europe is starting to push back, the question is what will become of all the stuff they continue to produce.  Beggar thy neighbor policies are tougher to inflict on nations that also utilize those same policies.  Just sayin’.

Of course, you won’t be surprised that oil prices have fallen further this morning on the news, down another -1.6% and firmly below $90/bbl, actually below $88/bbl as I type as per the chart below.

Source: tradingeconomics.com

Now, clearly, prices are still substantially above levels seen prior to the Iran conflict, but as of now, the most apocalyptic predictions have simply not materialized.  I saw two interesting comments on this subject this morning with very opposite takes.  First, Javier Blas, the Bloomberg energy analyst/reporter, posted the following chart for jet fuel in Europe.  You may recall that early on, there were many forecasting Europe would run out of fuel and planes would stop flying.

The price action does not indicate a market concerned by imminent shortages of the stuff.  In fact, my understanding is that refineries are cracking so much oil to make jet fuel, that there is actually “excess” gasoline being produced, which would help explain my point yesterday about falling gasoline prices as you can see in the below chart.  Since May 18, wholesale prices have slipped 19%.

Source: tradingeconomics.com

However, there is another side to the argument, the apocalyptic side, which was recently made by Neil Chapman, an Exxon SVP at a conference as per the below X post.

Here’s the thing about comments like this.  First, I have no doubt that Mr Chapman is highly competent and explaining what he sees happening.  I would never suggest he has any motive other than conveying information he believes is important.  But I also have learned, over many years of experience, that arguing with the market is a very painful thing to do.  As Mr Keynes reputedly said almost 100 years ago, “markets can remain irrational a lot longer than you and I can remain solvent.”

So, what to think?  No matter the pedigree of the individual calling for a significantly different outcome than is current, it is very difficult for me to side with the apocalypse if the market disagrees.  And clearly the market disagrees with this thesis.  My understanding is refineries are running flat out right now, which means they have plenty of oil to process.  If, and it’s a big if, the Iran conflict is truly coming to an end, $70/bbl oil and $3.50/gallon gasoline will be with us by Labor Day.  At least that’s my view, and I’m pretty positive on it.

Looking elsewhere, it can be no surprise that bond yields around the world are slipping with Treasuries sliding -4bps yesterday, although they are unchanged this morning.  European sovereign yields were also softer yesterday but are now struggling between the positive idea of the end of the Iran conflict and the negative reality that inflation in Europe continues to rise as reported this morning (Italy 3.3%, Germany 2.6%, Spain 3.6%, France 2.8%), which has the ECB set to hike rates at their meeting as per their own market watch tool.

The problem with this is that economic activity across the continent continues to slow (GDP in Italy 0.8% Y/Y, France 0.9% Y/Y), and hiking rates on the back of a supply shock, especially one that has a fair chance of ending soon, would seem to be a catastrophic error in the making.  Of course, Madame Lagarde is no stranger to catastrophic errors, so, we should assume they will, indeed, hike rates in two weeks’ time.  Even the Fed, no stranger to catastrophic errors, is not prepared to hike rates, although cuts appear to be off the table for now.

Elsewhere, precious metals (Au +0.8%, Ag +0.1%) appear to have put in a short-term bottom while copper (-0.5%) is consolidating after its continued remarkable run.  

And finally, the dollar is stronger this morning, not aggressively so, and not universally, but on net I would say.  NZD (+0.5%) is bucking that trend as further hawkish comments from the RBNZ Governor have traders looking for a rate hike there while INR (+0.9%) has been the biggest beneficiary from the decline in oil prices as India has been one of the most severely impacted nations from the conflict.  Lastly, a note about the yen, where the MOF disclosed that they spent ¥11.73 trillion (~$73.6 billion) intervening in the FX markets last month, a larger amount than had been assumed by the market.  Here’s the problem, as evidenced by the chart below, it didn’t do much good, from the peak print of 160.72 on April 30th(the wick of the huge red candle), the yen is not even 1% stronger as of this morning.  As well, looking at the chart, you can see their subsequent minor interventions as the spikes down.  As I have repeatedly said, if they don’t change policy, the currency will continue to weaken.

Source: tradingeconomics.com

Otherwise, FX is dull and boring today.

Turning to the data, this morning brings the Goods Trade Balance (exp -$86.5B) and then Chicago PMI (50.5).  We also hear from 3 more Fed speakers, but it is hard to believe there is any change in viewpoint there.  Yesterday’s data was, on the whole, better than expected, I would say.  While GDP was a touch soft, Durable Goods was quite robust at 7.9% headline, 1.1% ex Transports.  PCE was as expected to a tick softer, although remains well above 3%, let alone the Fed’s alleged 2% target.  The biggest concern was Personal Income was flat, although Spending (+0.5%) continues apace.  Much has been made by analysts about how the savings rate is collapsing and this presages an economic collapse.  But these are the same folks who keep telling us that oil prices are going to explode as inventories collapse.  Maybe they are right, but as of now, there is no evidence that is the case, at least based on the data.

What to make of it all?  The idea that the Iran conflict is on course to end is clearly the top issue for the market and the economy.  I expect that if this is the case, things will get back to “normal” far more quickly than the pessimists insist as the one thing we have learned is that the ability to resume economic activity is quite robust.  If risk is warmly embraced, then one would assume that yields will decline and the dollar with them, at least for now.  But that also implies that funds will continue to flow into the US markets, which will prevent any significant decline.  And I cannot help but look at Europe with the prospect of hiking rates into an economic slowdown and wonder, again, why anybody wants to hold the euro.

Good luck and good weekend

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Still on Hold

Posted on by 
Despite faster growth
The yen continues to sink
Are rate hikes anon?

It’s funny, in Japan, there is a great deal of angst amongst government officials that the economic situation is under significant duress, and they appear uncertain how to act.  Now, in fairness, the ongoing Iran conflict is clearly problematic for a country that imports essentially 100% of its oil, and most of it travels through the Strait of Hormuz.  But if we look at the data, Japan is holding up remarkably well.  For instance, below is a chart of annual GDP which was released last night showing 2.1% annualized growth in Q1.

Source: tradingeconomics.com

Granted, this is not a chart of an extraordinary expansion, but it is also, relative to its European counterparts, a chart to be envied.  For instance, the below chart of German GDP growth (and I use the term growth loosely) shows that after the Covid reopening, things have basically gone into stagnation.

Source: tradingeconomics.com

My point is that things in Japan seem to be moving along relatively well, with solid growth, especially when one considers that the population in Japan is shrinking, so given GDP = # people working x output/person, it is hard to grow the economy with a shrinking population.  Meanwhile, inflation in Japan remains sticky, although because of government subsidies to ameliorate the costs of electricity and fuel in the wake of the Iran conflict, it is below the 2% target for now.  However, apparently it remains a concern amongst the population there.

Source: tradingeconomics.com

Which brings me to the true market related question, what of the yen?  You may recall a few weeks ago when the BOJ intervened because the yen had traded through the 160 level vs. the dollar and then there seemed to be a few mini interventions in the days that followed.  Yet this morning, as you can see in the below chart, the yen is once again marching toward 160, although I have not seen any commentary from the BOJ or MOF on the subject.

Source: tradingeconomics.com

Bringing it all together, the question I would ask is, why is the BOJ even concerned about raising rates at their next meeting in a few weeks?  Ueda-san has been around a long time and understands the only way to address persistent currency weakness is via policy changes.  Especially now that markets have begun to price rate hikes as the next move in the US (I personally don’t believe that will be the case but that is a different story), the yen will continue to slide unless the BOJ moves.  Yet, with GDP growing decently, and underlying price pressures extant, a rate hike should be an easy call.  Currently, the probability appears to be about 75% that they will hike in June, but certainty they will hike by July, at least according to rateprobability.com as per the below table.  I’m not sure why it is even a question.

The war in Iran’s still on hold
As prices for crude stay controlled
But dollars are bid
And equities skid
While nobody wants any gold

As to the Iran situation, President Trump announced he was delaying, for two or three days, any renewed military action at the behest of the UAE and Qatar who claim that substantive negotiations are underway.  Once again, I make no claims of knowledge about what is actually happening there, although that admission is one that most of the punditocracy seems unwilling to make.  

But here’s a thought.  If you were Ahmad Vahidi, the ostensible leader of Iran, and you have spent the last 3 months in spider holes, caves and basements, moving every 8-12 hours lest someone leaks your location to the Israelis or Americans, how comfortable are you in your position?  After all, one of the reasons that people aspire to lead nations is for all the trappings that come with the job. Not only do you get a nice place to live, but you command respect from the people, at least a significant portion of them.  Is it impossible to believe that Vahidi is actually looking for a way out as well, perhaps willing to give up his nuclear ambitions for the removal of the price on his head?  I know that does not fit the narrative for many folks, and is pure speculation on my part, but is it really that far-fetched?

Ok, in the meantime, as we await the next news from Iran, let’s look at market activities.  Starting in the bond market, yields continue to climb higher pretty much all around the world as inflation concerns remain high and there is a growing concern that government bond issuance is going to grow even faster going forward as countries everywhere seek to rearm quickly.  So, Treasury yields (+3bps) are pushing back to the levels seen in January 2025, although remain 15bps below those levels as per the below Bloomberg chart.

And as has been the case for quite a while now, Treasury yields are leading the global yield market with European sovereign’s all higher by about 2bps and JGB yields jumping 6bps last night after the GDP data.  Certainly, JGB traders believe the BOJ is going to hike rates.

In the equity markets, though, risk appetite remains remarkably robust through all the complexities of the war and economic data.  Yesterday’s US session, which started off deeply in the red, rallied back so the DJIA actually closed higher while the other two major indices dramatically reduced their losses.  This morning, futures markets are pointing slightly lower with the NASDAQ (-0.8%) the laggard as questions continue to arise about how long AI will drive the thesis there.  As to the rest of the world, Asia was mixed with the Nikkei (-0.4%) slipping, although every other index in Tokyo rose, China (+0.4%), HK (+0.5%) and Australia (+1.2%) all gaining.  Korea (-3.25%) and Taiwan I-1.75%), though, had rough sessions as those two markets have been driven by semiconductor companies just like the NASDAQ.  The only other noteworthy move was in Indonesia (-3.5%) as investors are concerned about the central bank raising rates after their meeting concludes tonight.

Europe is in fine fettle this morning with gains across the board led by the DAX (+1.4%) and followed by the CAC (+0.8%), FTSE 100 (+0.7%) and Spain’s IBEX (+0.4%).  I keep reading that there is optimism that an agreement will be reached as the rationale for these moves, but I guess that is the way things go.  Never forget this perfect illustration of how market information is passed.

Turning to oil markets, this morning has seen that war ending optimism here as well with WTI (-0.4%) and Brent (-0.9%) both slipping a bit.  Interestingly, metals markets are not behaving as they have recently as they, too are lower; gold (-0.65%), silver (-2.1%), copper (-1.1%).  In the end, like every market, movement here is entirely dependent on the Iran situation, at least in the short run.

Finally, the dollar is flexing this morning rising against virtually all its major counterparts.  In the G10, AUD (-0.7%) is the laggard, but the euro (-0.3%) and pound (-0.2%) are both under continued pressure with both trading near recent lows as per the tradingeconomics.com chart below.

The rest of the block has not fallen as much but is uniformly lower.  In the EMG bloc, KRW (-1.3%) suffered after the sharp decline in the equity markets there and ZAR (-0.5%) continues to suffer on the back of weaker gold prices.  The one outlier is BRL (+0.3%) which is benefitting despite a weaker economic outlook after some soft data yesterday continues to encourage the potential for further rate cuts there.

And that’s really it for today.  There is no data today although there are 3 Fed speakers, including Governor Waller who many have come to believe is a critical voice for the FOMC.  Broader movement continues to be all about Iran and how things evolve there.  With renewed military engagement on hold, I suspect that the speculators are going to buy stocks again in hopes of a positive outcome.

Good luck

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Less Than Ideal

Posted on by 
Some mornings the quiet is real
With limited news of appeal
But traders still need
Their families, to feed,
A story far less than ideal

Yes, oil prices have traded a bit higher overnight and this morning, albeit amid extremely low volumes.  In fact, it is the volumes that speak to how little people seem to care about markets right now.  We are seeing extremely low volumes across oil, gold, stocks, bonds and even FX markets are quiet.  It’s not that they haven’t moved a bit, it’s just that there is no conviction amongst the trading community as to where things should be heading.  

Of course, this is never true of the narrative community, who will spin up something to get clicks, but frankly their stuff, which is often the thinnest of gruel, has even less traction now.  Arguably, reading through as much as I could this morning, the most noteworthy thing was the following clip I saw on X (and it is a worthwhile use of 13 seconds, I assure you) showing Representative Ilhan Omar discussing World War Eleven.  I wish there was more to say, but since there is not, let’s head to the markets.

The most relevant argument in markets right now is how long can Iran hold out while their revenue stream is stopped by the US naval blockade and correspondingly, how long before they have to start shutting in production?  How full is their storage?  I have seen estimates from what I believe are credible sources of between half full and 80% full which would mean, even in the best case for them, they have about another 2 weeks before shut-ins begin.  And if that happens, they are looking at the permanent destruction of upwards of half their current output.  In other words, this war is not merely existential for the IRGC and their grip on power, but potentially for Iran’s longer-term future as an economy.

In the meantime, oil prices (+3.3%) continue to grind higher on limited volumes as you can see in the chart below with the lower bars indicating volumes.

Source: finance.yahoo.com

As consumers, we are all feeling the pain of this price action, but BP just reported record profits, and we can expect similar outcomes from all the oil majors, making hay while the sun shines as all corporates do.  At the same time, gold (-1.6%) and silver (-3.2%) continue their direct negative correlation to oil.  This relationship seems quite robust at this point.  It appears that the ongoing dollar strength on the back of the rise in oil prices is undermining the status of gold as a haven asset.  I continue to believe this is a temporary phenomenon, but for those long gold, it is nonetheless a painful reminder of how markets can remain perverse.

Speaking of the dollar, yesterday’s modest declines have been reversed this morning with the greenback gaining on the order of 0.25% this morning across the board.  The biggest news here was the BOJ meeting last night where, as expected, Ueda-san left policy unchanged, although the vote was 6-3, with the three dissents seeking a rate hike.  From what I can tell, Ueda-san prattled on for an hour in his press conference without giving any clear direction as to the future, confusing one and all by explaining they may not reach their objectives but may raise rates anyway.  You can see in the chart below when Ueda started speaking as it initially sounded hawkish, but here we are, 7 hours later and it was as though he never opened his mouth.

Source: tradingeconomics.com

The overriding concern in the yen is whether it will weaken through (dollar above) the 160 level, which it briefly touched back in late March, but has since been trading just below.  That is perceived by many as the ‘line in the sand’ regarding intervention.  However, if we go back to the summer of 2024, when the BOJ last intervened, USDJPY was pushing 162 before they pulled the trigger as you can see below.  It certainly suits them that the market is afraid of pushing this envelope, but my take is it will happen before too long.

Source: tradingeconmics.com

As to the rest of the FX space, zzzzz is the story.  Perhaps the other interesting thing is that NOK (-0.15%) is weaker despite oil’s climb.  Everything else is softer vs. the dollar by -0.2% and -0.4% with no real outliers.  FX is just not that interesting, like most markets these days.

In the equity space, yesterday’s US performance was uninspiring, but we saw more weakness (Tokyo -1.0%, HK -1.0%, China -0.3%, India -0.5%, Australia -0.6%) than strength (Korea +0.4%, Malaysia +0.7%) across Asia.  However, there are no new stories to drive things here with the Iran war and energy prices the only topic of note.  In Europe, markets are feeling better this morning with gains across the board led by Spain (+1.0%) and the UK (+0.6%). I must admit I am confused by the Spanish performance as the only data point of note released this morning was Spanish Unemployment which jumped to 10.83% (such precision), far above last month’s 9.93% and a full point above economists’ forecasts.  But I guess if you look at the longer-term history of Spanish Unemployment, this is still far better than it has been in the past and the trend remains intact.

Source: tradingeconomics.com

Meanwhile, US futures are pointing lower at this hour (7:25) with OpenAI having missed its own targets for user acquisition undermining the overall AI thesis thus far this morning.  Plenty of time for that to change though, at least based on how buying remains the default position.

Finally, bond markets have sold off with yields continuing to edge higher across the board.  While it’s not really a rout, as you can see from the Bloomberg screenshot below, every European sovereign yield is higher along with treasuries, although JGB’s managed to remain unchanged overnight.

Certainly, there is nothing new in the bond market right now, although I imagine as the Iran war drags on, we will see increased government borrowing across the board which ought to pressure yields higher.

And that’s it, really, for this morning.  We see the Case-Shiller Home Price Index (exp 1.1%) at 9:00 this morning and Consumer Confidence (89.0) at 10:00.  Neither of these is going to matter to traders anywhere, not even algos.  

Until there is a change in the situation in Iran, it is hard to see more than lackluster interest across most markets.  I imagine that if this extends for weeks, the offsetting forces of reduced supply and demand destruction will find an equilibrium point, which may well have already been found around $100/bbl.  Remember this with respect to the dollar, since oil is priced in dollars almost universally, there is going to continue to be demand for the greenback everywhere in the world.  It is hard for me to make a significant bearish case for the dollar right now, at least in the medium or long-term.  In the short term, who knows?

Good luck

Adf

Checkmate

Posted on by 
The talks twixt the States and Iran
Collapsed like a climate straw man
Now there’s a blockade
In Hormuz, arrayed
As Trump pivots to a new plan

The first move in oil was higher
But I would beware as a buyer
If Trump rules the Strait
That could be checkmate
And force a much longer cease fire

As of 8:00pm last night, after the peace talks fell apart in Islamabad and President Trump announced the US would be blockading the Strait of Hormuz so no ships carrying oil, especially Iranian oil, would be able to pass the blockade, the price of oil spiked immediately as the futures markets opened.  You can see the last week’s roller coaster in the below chart from tradingeconomics.com

The question that needs to be answered at this point is, is there a substantive difference between the US blocking traffic in the Strait and Iran doing so?  I would contend there is a huge difference, especially if you are China.  But also, if you are Iran.  After all, you just lost your trump card (pun intended) and not only that, if Iranian oil is not able to be sold, then Iran runs out of money pretty quickly.  Remember, oil revenues represent approximately 90% of Iranian total revenues.  How long can the IRGC last with no money to pay their soldiers?

In the meantime, the Saudis are pumping 7 mm bpd across the East-West pipeline now, and the UAE is pumping 1.5 mm bpd to Fujairah, taking a decent sized bite out of the missing barrels.  I read this morning that upwards of 7mm bpd are now exiting the gulf via pipeline reducing the overall reduction in oil flow.  Granted, it is still a huge disruption but shrinking.  On top of that, if this continues, the Strait loses its strategic importance, which cements Iran’s loss of power.  In the short-run, oil prices can go in either direction in my view, but this has the opportunity to completely emasculate Iran’s ability to have an impact on the global oil markets in the future.  

And I would not be surprised if President Xi is burning up the lines to Washington because he just lost a key source of cheap oil, and oil he paid for in CNY.  (see WSJ chart below.)

There are many twists and turns here, and I’m sure there will be more.  But as of Sunday night, from what I have read, Iran is in a much worse position than they were on Friday.  Of course, things could all go pear-shaped from here, and this could turn out to be a complete failure.  Our goal here is to try to track how markets will evolve.

The remarkable thing, still, to me is that equity markets remain so blithe about the entire situation.  I make this claim based on the VIX Index, which remains relatively docile despite everything that is happening in Iran and the likely eventual knock-on effects.  But look at the chart of the VIX below which shows that markets are nowhere near as stressed as they have been in the past and are actually much nearer their long-term average. (The two spikes are the JPY intervention in August 2024, which lasted for just a few hours, and then the Liberation Day tariffs in April 2025 which quickly reversed as well.  

Source: tradingeconomics.com

It is worth noting that even the oil VIX, is off its highs and, while somewhat elevated, not running away.

Source: finace.yahoo.com

The thing about the VIX indices to remember, though, is that options decay and holding them is a losing proposition if the underlying market is not moving.  So, to maintain a high VIX, we need to see significant intraday as well as day-to-day price movement.

As Iran remains the major storyline for markets, let’s take a look at how things are behaving this morning.  Oil (+8.2%) has maintained its initial gains but not moved since last night.  NatGas (+1.7% in US, +9.0% in Europe) has also been impacted as there is no movement of LNG tankers through the Strait either.  Interestingly, both gold (-0.6%) and silver (-1.7%) while lower are well off the lows seen in the early overnight session as per the below chart of silver.

Source: tradingeconomics.com

I reiterate that the market perception of the current situation has not nearly matched the hysteria evident in much of the commentary.  I’m not sure whether to attribute that to market insight or market ignorance at this point, although I lean toward the former.  The problem with commentary these days is that hysterical takes generate clicks, and that is the goal of many commentators.

Turning to equity markets, Asian markets were generally, though not universally, lower.  Tokyo (-0.7%), HK (-0.9%), Korea (-0.9%) and India (-0.9%) all suffered on the breakdown in talks and the new blockade news.  New Zealand (-1.2%) was the worst performer, largely because their energy situation is deteriorating more quickly than anyone else’s.  But China (+0.2%), Taiwan (+0.1%) and Indonesia (+0.6%) all managed some gains despite the news.  Again, markets appear to be pricing a fairly benign outcome here.  Either the news is going to get better soon, or there is going to be a massive rerating of equity markets.  Something’s gotta give.

In Europe, things are a bit worse overall with Spain (-1.4%) leading the way lower although Germany (-1.0%), France (-0.9%) and Italy (-0.8%) are all under real pressure as well.  There has been a lot more press lately about how Spain’s PM Sanchez is cozying up to China as he seems to be pulling Spain away from the EU in several areas.  Of course, he is an avowed socialist, so perhaps this should not be that surprising.  However, this is further proof that NATO is surely going to die soon.

One market that has outperformed, though is Hungary (+2.8%) which is rallying sharply on the weekend’s election results that sent President Victor Orban into retirement.  Certainly, most others in Europe are thrilled as Orban had been a thorn in the side of the EU with respect to their Russia stance, but the economy there has been underperforming so new leadership is widely lauded, for now.  The forint (+1.9%) also benefitted from the election outcome.  

As to US futures, as I type at 7:00, the major indices are lower by -0.3% or so, well off the initial levels seen last night that were as much as -1.4% below Friday’s closing levels.  Again, markets remain sanguine over the weekend changes to the story.

In the bond market, Treasury yields have edged higher by 1bp and in Europe, we are seeing rises of between 1bp and 3bps across the board.  Here, too, it is hard to find panic in the streets.  JGB yields (+2bps) have made a new high for the move and continue to edge higher as concerns over the path of inflation rise given the oil price rise.  Last night, BOJ Governor Ueda gave a speech (actually his deputy did because he is in Washington for the IMF/World Bank meetings) and tried to quash the view that the BOJ was definitely going to hike rates at the end of this month, an outcome that had been priced at a 65% probability prior to his speech as you can see from the Bloomberg chart below.

Finally, in the FX market, other than HUF as described above, and NOK (+0.6%) responding to the oil move the dollar is firmer across the board.  However, the movement is not too large, generally on the order of 0.2% or so across the G10 and perhaps a bit more in the EMG bloc.  The worst performer today is ZAR (-0.8%) which is suffering the dual problems of a lower gold and higher oil price.  The other noteworthy thing is JPY (-0.3%) is creeping back toward the 160 level, which remains the default setting for the market belief as an intervention level.

On the data front, Friday’s CPI was hot, but not quite as hot as forecast, although you can be sure that next month will remain hot.  This week brings the following mostly secondary stuff.

TodayExisting Home Sales4.06M
TuesdayNFIB Business Optimism98.6
 PPI1.2% (4.6% Y/Y)
 -ex food & energy0.6% (4.2% Y/Y)
WednesdayEmpire State Manufacturing-2.0
 Fed’s Beige Book 
ThursdayInitial Claims215K
 Continuing Claims1840K
 Philly Fed9.0
 IP0.1%
 Capacity Utilization76.3%

Source: tradingeconomics.com

As well, we hear from eight different Fed speakers over 10 venues.  An interesting aspect of the commentariat lately is that individual FOMC members are going to be far more important as there is a growing diversity of opinion.  So, the monolithic Fed Chair running things and encouraging a vote in a particular way may evolve into an actual election, where the voters vote their hearts, not the Chairman’s views just to get along.  If this is the case, and I think it would be far better than what we currently have, we will need to listen more closely to the individual speakers and start a scorecard to see who seems hawkish or dovish at any given time.  The problem is, I fear it will encourage all of them to speak more frequently, which is a worse outcome, although any given voice will likely be given far less weight.  We shall see if that is the case.

As to the broad scheme of things. My head tells me that the market is underpricing the risks out there, but my eyes explain that this is the current consensus.  I hope they are right and I am wrong about things.

Good luck

Adf

A Future, Dystopic

Posted on by

On Monday, an analyst wrote
His thoughts how AI might promote
A future, dystopic
Though somewhat myopic
And offering no antidote
 
Although prior views had explained
That once AI’s suitably trained
Most labor would suffer
And lacking a buffer
Folks’ politics would be quite strained

This is the research report that got tongues wagging on Wall Street yesterday and the fear it allegedly engendered was impressive.  In essence, it said that by 2028, AI would replace vast swaths of the labor force, notably white-collar workers, and that it would lead to a massive recession, and more importantly to the Street, a significant decline in stock prices.  The back and forth on X was amusing all day as there were those who hyperventilated over the coming tragedy, and those who fought back.

It is important to understand this was not a prediction, per se, but one of the scenarios they came up with, although clearly the most dramatic one.  It certainly gained a lot of clicks and notoriety, and let’s face it, isn’t that the idea these days?

Given that the tariff story has now become too complex for anyone to truly understand, and while we all await the denouement in Iran, this appeared to be the best thing to occupy time amongst the trading community.  Personally, I spent the entire morning shoveling snow, but then, I’m no longer a trader.

The upshot is that the major indices all fell more than 1% while gold and silver rallied and bond yields fell.  Fear was palpable.  But will it last?

Last month’s yen rate checks
Came not from Ueda-san
But Bessent, himself

The other story of note was almost an aside, although it helps outline recent movement in USDJPY.  We all remember last month when the yen rallied very sharply during a Friday session in NY as word got out the Fed was “checking rates”.  As a reminder, this is when the Fed calls out to bank FX desks and asks for prices, although doesn’t actually deal.  However, the signal is strong as all the banks recognize the opportunity for intervention, and the news quickly spreads through the market with the effect you can see in the chart below.  During the next three sessions, the yen rallied 4.5%.

Source: tradingeconomics.com

During my career, I had never heard of this activity driven by anyone other than the BOJ, as they were always the most concerned with the yen’s value.  Certainly, they may have been responding to US pressure, but it was always their call.  Now the news comes out that Treasury Secretary Bessent did this on his own last month, a clear indication that the administration is not happy with an over weak yen.  This sets an interesting precedent regarding who controls any given currency.  Now, I doubt we will see this type of thing frequently, but we need to keep it in the back of our mind.  Meanwhile…

Seems Takaichi
Told Ueda, higher rates
Are not helping her

Last night, in a surprise to many in the market, news of a meeting between PM Takaichi and BOJ Governor Ueda resulted in Takaichi-san imploring Ueda-san to leave rates alone, rather than continue raising them.  Higher rates are not helping her growth agenda, and I imagine her belief set is that if the yen weakens too far, she can always intervene, and now that we know about Bessent’s actions, she can count on the US to help.  But I cannot observe this and think anything other than the market is going to test 160 and do so before long.  One poet’s opinion.

Ok, let’s see how markets traded overnight.  First off, last night was the first that all of Asia was back at work so overall liquidity was improved.  However, the results were mixed with Tokyo (+0.9%) ignoring the AI driven US rout while the Hang Seng (-1.8%) fell right alongside the US.  China (+1.0%) rallied in its first day back but consider that simply offset the decline of their last session and, like most other markets, it remains relatively unchanged over the period.  Meanwhile, the tech sense was strong with Korea (+2.1%) and Taiwan (+2.75%) both up nicely while India (-1.3%) suffered under the AI fear umbrella.  Elsewhere in the region, there was no pattern of note with both gainers and losers.

In Europe, the largest markets (UK, Germany and France) are basically unchanged this morning while both Spain (-0.7%) and Italy (-0.4%) are under some pressure.  There is talk of tariff issues, but I’m not sure why only those two markets are taking the heat.  As to the US, at this hour (7:00), all three major indices are higher by about 0.2%.

In the bond market, after a -4bp decline in Treasury yields yesterday they are unchanged this morning while European sovereigns are seeing yields slip -1bp across the board.  Too, JGB yields (-2bps) have continued their slow descent as it appears investors have acclimatized to the risks of Takaichi-nomics.  I think we will have to see inflation figures there to get a better sense.  Regarding Treasury yields, I’m not sure I can explain why I feel this way, but given how bearish sentiment is for bonds, (leveraged players are short >1 million futures contracts), it feels to me like we could see a short-term continuation of the recent rally with yields heading back to test the 3.8% level at least.  I understand both the fiscal argument and the technical argument (see long-term chart below) but neither rules out a short-term rally to inflict pain.  After all, that is what markets do best!  (full transparency, I bought some June TLT call spreads yesterday, so I am talking my book!)

Source: finance.yahoo.com

In the commodity markets, oil (+0.3%) continues to hold its recent Iran inspired gains as the world awaits the outcome of Friday’s meetings between the US and Iran.  I have no insight as to the potential outcome here other than what I read, but it does seem like there will be some type of military action as I do not see Iran ceding anything.  As to the precious metals, gold (-1.0%) is giving back yesterday’s gains but remains in its recent uptrend after the end-January crash, although it has yet to regain the old highs.  I imagine this will take more time, but it also seems quite likely to happen. This is still a quite bullish chart in my view.

Source: tradingeconomics.com

Interestingly, silver is little changed this morning as there continues to be much talk of delivery questions at the COMEX given the apparent lack of available ounces relative to outstanding contracts.  My take is things will get rolled as they usually do, but if not, beware a major spike higher on Friday!

Finally, the dollar continues to be the least interesting space there is with today’s JPY (-0.8%) move the exception that proves the rule.  Having already touched on that situation, there is literally nothing else to describe in either G10 or EMG currencies as +/-0.15% describes the entire session.

As to data this week, here’s what we have coming:

TodayCase Shiller Home Prices1.4%
 Consumer Confidence87.0
ThursdayInitial Claims216K
 Continuing Claims1872K
FridayPPI0.3% (2.6% Y/Y)
 -ex food & energy0.3% (3.0% Y/Y)
 Chicago PMI52.5

Source: tradingeconomics.com

In addition to this bit, we hear from seven more Fed speakers across nine venues, but I still don’t think anybody cares.  The market has priced out any rate cuts before Powell leaves, although there is still one cut priced for the year, expected in October.  

Frankly, it is not surprising that markets have calmed down so much given how much activity we saw in January.  As I wrote then, markets have a great deal of difficulty maintaining high volatility as traders and investors simply get tired and tune out.  We will need a new catalyst to get things going, either an attack on Iran or some new China news in my view.  Tariffs are no longer interesting, and frankly I think Iran and AI have both lost some pizzazz.  Maybe the UFO releases will get things going again!

Good luck

Adf

Yen Reprobates

Posted on by

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.

Have a good evening

Adf

Six or Seven?

Posted on by

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.

Good luck and good weekend

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The Specter

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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.

Good luck and good long weekend

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