Tag Archives: #bonds

Venting Spleen

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It used to be data was seen
As noncontroversial and clean
But politics, lately
Has damaged it greatly
With both D’s and R’s venting spleen
 
So, it ought not be a surprise
That yesterday’s NFP rise
Was claimed by the left
To lack any heft
While R’s crowed out loud to the skies

By now, you are well aware that the NFP number was released much higher than the forecasts, printing at 130K vs a consensus forecast of 70K.  The previous two months were revised lower by 17K, so still a huge number, and it was the main topic of conversation in the markets all day. 

To me, the big news was that private sector jobs rose 172K, while government jobs declined by 42K.  In fact, the Federal civilian workforce is back to its smallest count since 1966!  That is an unalloyed positive in my view.  Too, manufacturing jobs increased by 5K, which is the first time we have seen a rise since November 2024.  In fact, if you look at the chart below of manufacturing jobs for the past 5 years, it is easy to see what President Trump is trying to achieve.  One month does not indicate success, but it’s a start.

Source: tradingeconomics.com

The last positive was that the Unemployment Rate fell to 4.3%, so overall, this seems like a pretty good report.  But as with everything these days, it depends on the lens through which you view it.  As with most national data in an economy as large and varied as the US, there were real and perceived negatives.  The BLS made their annual benchmark revisions to the data which removed 403K jobs from 2025’s numbers.  These revisions come as they adjust their birth-death model as well as get updated population statistics.  But for those who seek bad news for this administration, that reduction of 403K jobs is proof that the president’s policies are failing.  Another complaint has been that the bulk of the increase in NFP was in the health care sector, although given the ongoing aging of the population, that cannot be very surprising.

Nonetheless, just like every other piece of data these days, NFP was a Rorschach test of your underlying political beliefs and not so much a description of the economy.  My question is, if the employed population is ~159 million, is an adjustment of 400K really meaningful?  After all. It’s about 0.25% of the working population in a measurement of a dynamic statistic amid people changing jobs and the economy growing.  Perhaps the politics are the signal, and the data is the noise.

Given that there were two very different takes on the data, it ought be no surprise that the S&P 500 finished the day exactly unchanged which is a pretty rare occurrence, happening less than 2% of the time in the past 10 years.  In fact, that lack of movement was the norm with both the NASDAQ and DJIA slipping -0.1%.  Net, I don’t think we learned much new and now markets and the algorithms will focus on tomorrow’s CPI data.

However, the narrative writers had their work cut out for them.  All those who were seeking to pan the government had to change their tune and now they are focused on the fact that there don’t need to be rate cuts if the employment situation is better.  Again, through a political lens this is good if you are anti-Trump because it prevents him getting the rate cuts he has been demanding.  I guess we cannot be surprised that Stephen Miran, in comments yesterday, continues to explain rate cuts make sense, which simply confirms the view that everything is political these days.

So, do we know anything new this morning?  Alas, I don’t think we learned anything to change the big picture yesterday, so let’s see how the data was received around the world.  Tokyo followed the S&P’s lead and was unchanged overnight with China (+0.1%) also doing little.  HK (-0.9%) lagged as traders prepare for the Chinese New Year holiday that runs all next week and took profits.  Korea (+3.1%) continues to perform well while India (-0.7%) continues to waver as the trade deal with the US impacts different parts of the economy very differently there.  Net, a mixed session.  In Europe, Germany (+1.3%) is the leader this morning on the strength of solid earnings reports by key companies as there has been no data released.  France (+0.75%) too is having a good day on earnings although Spain (-0.2%) is lagging.  The UK (+0.1%) is the only place where data made an appearance and it showed that GDP growth has fallen to 1.0% Y/Y there, another problem for the embattled PM Starmer.  It appears his time in office will be ending soon as literally every policy decision he has made has had a negative outcome.  As to US futures, at this hour (7:30) they are firmer by about 0.3%.

Bond markets saw the biggest move yesterday, with Treasury yields rising 4bps, although they have slipped back -1bp this morning and continue to trade in their range of 4.0% – 4.2%.  while we did spend some time above that range, it appears that fears of a bond market meltdown, or that China was going to sell their bonds or something else have faded somewhat.  In fact, globally, 10-year yields this morning are essentially unchanged.

Source: tradingeconomics.com

In the commodity space, the Iran situation continues to be top of mind for oil traders although WTI (-0.3%) is not really moving much this morning.  There was no announcement from the White House regarding the meeting between President Trump and Israeli PM Netanyahu which indicates, to me at least, that nothing was decided.  While a second US aircraft carrier steams toward the Persian Gulf, we are all on tenterhooks as to how this plays out.  Right now, it doesn’t appear that discussions between the US and Iran are leading anywhere.  Meanwhile, metals (Au -0.4%, Ag -1.6%, Pt -1.3%) are giving back some of yesterday’s strong gains with gold firmly back above the $5000/oz level again.  There is much talk of a major shortage on the COMEX for deliveries for March, but we shall see how that plays out.  Certainly, there has been no change in the demand structure for silver, but we just don’t know how much silverware has been sold for scrap to help alleviate the shortage at this point.  

Finally, the dollar is little changed vs most major counterparts with the two outliers KRW (+0.6%) on the back of strong equity market inflows and CHF (+0.4%) which appears to be the one haven that is behaving like one this morning.  JPY (-0.2%) has strengthened several percent over the past week, and comments from the latest Mr Yen, Atsushi Mimura, make clear they continue to watch the market closely, but for right now, there seems little concern, or likelihood, that intervention is coming soon.

One thing the NFP data did achieve was to alter the Fed funds futures market which now is pricing just a 6% probability of a rate cut at the March meeting with two cuts priced for the year.  I have to say that based on the comments from Logan and Hammack, as well as the NFP data, it certainly doesn’t appear likely that the Fed is going to cut again soon.  Tomorrow’s CPI data may change some opinions there, but we will have to wait to find out.

But riddle me this, if the Fed has finished its loosening cycle, and Kevin Warsh is seen as someone who is keen to reduce the size of the Fed’s balance sheet, why would we think the dollar is going to decline sharply from here?  For now, the buck remains rangebound, but as I watch what is going on elsewhere around the world regarding economic activity, the US continues to lead the way.  I still don’t see the dollar collapse theory making sense, although frankly, I think the administration would be fine with it.  Let me leave you with the entire history of the EURUSD exchange rate since its inception in 1999 and you tell me if you think the dollar is exceptionally weak or strong here.  Remember, a weak dollar is a strong euro, so higher numbers.  Frankly, it feels like we are close to the middle of the range, or if anything, stronger rather than weaker.

Source: data FRED, graph @fx_poet

Good luck

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Dissension

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It seems that there’s still quite some tension
As metals and stocks show dissension
Though Friday both puked
Of late, metals juked
Much higher, to stocks contravention
 
So, what can we learn from this split?
That tech stocks all now trade like sh*t
While silver and gold
Are what folks will hold
And bonds? No one just gives a whit

It seems the government shutdown has ended, just as quickly as it began and the only people impacted are traders who were looking forward to the NFP data on Friday.  Given the shutdown was only for a few days, and that apparently, all the data was already collected, it was the compilation that was being delayed, I presume we will get the numbers next week.  Of course, this is a government bureaucracy, so it may take a bit longer.  Nonetheless, this morning we see the ADP Employment number (exp 48K) and analysts will have to work from that, plus the reports like the ISM hiring data, to give their views of the economy.  It really all does seem like theater, I must admit.

Anyway, away from that, the only other news of note that is impacting markets has been an increase in tensions in Iran after the US shot down an Iranian drone heading toward the US aircraft carrier, Abraham Lincoln.  However, it appears that talks are still scheduled for Friday, so oil (+0.2% today, +1.4% since yesterday morning) is creeping back higher, although remains well below the levels seen last week when concerns over a US attack there were mounting.

Source: tradingeconomics.com

Which takes us to markets and what appear to be the key internal drivers.  Starting today with stocks, the narrative revolves around concern that AI is going to destroy software companies and SaaS models since their user base will no longer need those companies.  As well, there are the lingering concerns about the AI investment bubble and the circular dealing between Nvidia and its customers being an indication of the end of the era.  This is akin to what happened during the tech bubble in 2000-01 and has been highlighted by numerous analysts for several months, although is gaining more traction of late.  Finally, the Business Development Companies (BDC’s) and PE firms are under increasing pressure as their portfolio of loans and positions, many of which are being hurt by AI, are starting to hemorrhage cash.  This trifecta has been weighing on the NASDAQ, preventing any significant strength, although other sectors, notably energy and materials, have been doing pretty well.

The funny thing is, while the NASDAQ (-1.4%) fell yesterday amid widespread US equity weakness, if I look at the chart (below from tradingeconomics.com) it doesn’t seem that negative, rather it seems to be consolidating ahead of another leg higher.  But then, I am no technician, so don’t pay attention to me.

However, the narrative is strong here that the world is about to end because Nvidia hasn’t made a new high in the past three months.  I am no tech stock expert, but my take from the cheap seats is that future equity market outcomes are going to continue to be reliant on the success of the Trump administration’s plans regarding reshoring and changing the nature of trade.  It is likely to be bumpy, especially if the Fed does not cut rates to support equity markets, especially since that has been the MO for the past 40 years.  But I remain positive overall.

Looking around the rest of the world, last night saw a mixed picture, although definitely more green than red.  While Tokyo (-0.8%) slid along with Malaysia and the Philippines, the rest of the region had a nice session led by Korea (+1.6%), China (+0.8%) and Australia (+0.8%).  It appears the tech fears were less concerning there, either that or PE and BDC companies aren’t yet so prevalent.  In Europe, meanwhile, despite mixed PMI Services data, there are more gainers than laggards led by the UK (+1.0%), which does have miners, benefitting from the rebound in metals prices.  But France (+0.9%) and Spain (+0.15%) are also higher although Germany (-0.2%) is lagging after a modest miss in the PMI data. As to US futures, at this hour (7:15), they are pointing higher by about 0.25%.

Back to metals, which continue to be THE story these days, gold (+2.0%) has reclaimed the $5000/oz level and while it is lower in the past week, remains nearly 17% higher YTD.  Silver (+6.0%) is also rebounding nicely along with platinum (+3.8%) as more and more discussions have ascribed last Friday’s rout to month end delivery and position issues amongst a few very large players who were able to prevent some major damage to their own balance sheets.  However, as I have maintained all along, the fundamentals are unchanged; there is a shortage of silver for industrial use and has been for several years.  As to gold, there is no indication that central banks have stopped buying.  These continue to be long-term plays and will likely drag the entire metals sector along for the ride.

What about bonds, you may ask?  Well actually, nobody is asking about bonds!  They remain mired in a tight range with dueling narratives about the long-term view.  On the one hand, there are those who continue to look at the US debt load, and the expectation of fiscal deficits as far as the eye (or the CBO) can see, and expect supply issues to dominate, forcing the government to seek inflation to create the soft default necessary to pay back the debt.  They will point to the long-term trend, which saw yields decline for 40 years and then reverse back in 2020 (see chart below from finance.yahoo.com) as evidence that yields are going to trend higher for the next decades.

On the other side, you have those who believe the future is deflationary, with AI driving massive increases in productivity and driving down prices, while focusing on Truflation’s recent readings of 1.0% and claiming that is the way.  Personally, I have more sympathy for the former view than the latter, as it is increasingly difficult for me to understand the view that AI will be able to achieve all its currently stated desires without sufficient energy and materials, whose increasing prices are going to limit any downside in inflation.  As well, while a Warsh Fed chairmanship may strive to change the current central bank model of QE whenever needed, there is zero evidence any other central banks are going to follow suit.  

In the meantime, the tension between those two views has kept yields in a very tight range for a while, and we need an exogenous catalyst to break that range.  Peace in Ukraine?  War in Iran?  I’m not sure.

Finally, the dollar is a touch firmer this morning, notably against the yen (-0.6%), which continues to give back its gains from two Friday’s ago when the Fed ‘checked rates’ in the NY session as seen in the chart below.

Source: tradingeconomics.com

However, the point was made this morning, and it is a good one, that while Japanese 10-year yields are at 2.24%, 10-year yields, 10-years forward are about 4.10%, which would be a devastating yield for the Japanese government given its debt/GDP ratio remains above 230%.  It is difficult to get excited about owning the yen with that backdrop, especially given the demographic implosion of population that is ongoing there.  As to the rest of the currency market, Zzzzz.  Aside from the narrative of the dollar is dead, which gets recycled by somebody every day, it is very hard to look at recent price action and think something remarkable is going to happen.  We will need major monetary and fiscal policy changes, which while they may arrive, are going to take quite some time to get here.

And that’s really it this morning.  Aside from ADP, we get the ISM Services (exp 53.5) and we get the Quarterly Treasury refunding announcement, which will garner a great deal of attention only if Secretary Bessent explains he is going to issue more bonds and less bills, which seems unlikely.  Monday’s ISM data was quite strong.  Strength today could well portend that the US economy has a bright future ahead, in the near term, and that should support stocks and the dollar, while commodities will benefit from the increased demand.  Bonds?  Well, we’ll see which side of that argument is correct.  And what happens if the deficits are smaller than expected?  That is the question nobody is asking because the ‘smart’ folks don’t believe it is possible.  Remember, the dollar is still king.

Good luck

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Tired

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Though recently there’s been a ton
Of news, which has led to much fun
The markets today
Have little to say
Though recent trends ain’t been undone
 
Sometimes traders simply get tired
And find, in a rut, they’ve been mired
But you needn’t worry
‘Cause soon they will scurry
To come back with ideas inspired

 

As much activity and new news that has been part of the process over the past several weeks, today is one of those days when it appears we may be able to step back and catch our collective breath.  One thing I have observed throughout my career on trading desks is that no matter the underlying news, narrative or data, traders, even algorithms, can only remain in a frenzy for so long.  Consider it has been nearly two weeks of nonstop news since the US exfiltration of former Venezuelan president Maduro, yet some markets have exploded.  Silver is probably the poster child for this price action and as you can see below, since markets reopened after that news, gold’s little brother has risen nearly 25%, including today’s modest -2.3% retracement.

Source: tradingeconomics.com

But all the precious metals, and base metals as well, have had massive runs and the narrative regarding supply constraints and increased strategic purchases by China along with the US labeling many as critical national defense requirements, has been enough to bring retail into the mix.  But a 25% move in less than two weeks is really exhausting for the folks who are in those markets every day.  

At the same time, the amount of energy that has been consumed regarding Greenland, Iran and Minneapolis (which even though it is not a market related issue, is so widespread in its reporting takes up space in one’s brain) seems to have reached a peak yesterday, at least a local maximum.  I don’t, for a minute, believe that these trends have ended.  But a few sessions of modest net movement as positions are adjusted is a normal response to dramatic movement.  We should welcome the rest!

Reading through as much as I could find this morning, there really is no new story on which to hang your hat, so without further ado, I will review overnight market activity and perhaps ponder how things may evolve going forward.

A key sign of the slower activity was yesterday’s US equity markets where modest declines were the order of the day.  That was followed by a mixed session in Asia with some gainers (China +0.2%, Australia +0.5%, Korea +1.6%) and some laggards (Tokyo -0.4%, HK -0.3%, Taiwan -0.4%, India -0.3%).  Other than Korea’s strong session, which was inspired by central bank and government efforts to get investment to come back home to support the won, it appears traders are now biding their time ahead of the next major event.

European bourses are also mixed (Germany -0.1%, France -0.3%, Spain -0.1%, UK +0.4%) with the UK benefitting from a stronger than expected GDP report where growth jumped to 0.3% on the month, well above expectations of a 0.1% increase.  But a look at the chart below indicates one ought not get too excited about the economic growth in the UK with 14 negative months in the past 3 years.

Source: tradingeconomics.com

As to US futures, at this hour (7:10) they are pointing higher, currently almost exactly offsetting yesterday’s declines.

In the bond market…ZZZZZZ is the story of the day week month past four months as evidenced by the chart below.

Source: tradingeconomics.com

There are a number of conflicting narratives here with one story that the economy is going into a tailspin as a look beneath the headline data shows weakness everywhere (housing, employment, manufacturing) and the result is rates will fall along with inflation because of the coming recession.  Another narrative is that the ongoing debt expansion to fund unending budget deficits in the US is going to lead to the collapse of the dollar and much higher long-term rates as investors require far more payment to hold this much riskier than previously assumed asset.

Right now, neither of these seem to be living up to their promises.  Yesterday’s Retail Sales print was much stronger than expected at +0.6%, which hardly portends a recession.  Now, the CPI data has been polluted by the missing October numbers and is biased downward based on the BLS methodology, but you can be confident that it will recoup those losses in a few months’ time.  Meanwhile, there is no indication the Fed is going to do anything in two weeks, and my take is there is significant uncertainty over the future direction of the economy, with both positive and negative pieces.  Until we get indications that growth is either truly cratering along with rises in unemployment, or that things are exploding higher, remaining in the range seems the most likely outcome.  Remember, too, the OBBB is going to goose economic activity right away and running it hot remains the mantra.  

As to European sovereign yields, they have edged higher by 1bp this morning with one outlier, Portugal (+13bps) which seems to be reacting to the prospect of a runoff in the presidential election this Sunday, in the race between a populist outsider and a Socialist party insider, with the populist seen a slight favorite.  As to JGB yields, they have slipped back -2bps as the market becomes accustomed to the idea of the snap election.

In the commodity space, oil (-3.6%) has ceded most of its recent gains after President Trump indicated that there would be no bombing by the US, and the Mullahs ostensibly promised no executions of protestors.  Added to that was a massive build in inventories reported yesterday and supply concerns have abated.  In the metals markets, we are seeing that breather across the board (Au -0.25%, Ag -2.3%, Cu -0.8%, Pt -0.6%) which is very clearly profit taking after we saw record highs in all metals yesterday.  Nothing has changed the fundamentals here, so higher is still the way, IMO, but a few days of chop ought not be surprising.

Finally, the dollar appears to have found a comfortable home at 99.00 in the DXY.  There has been limited movement across the board with even JPY unchanged on the day as traders wait before trying to push the currency lower again.  KRW (-0.3%) is the worst performer today as it has been weakening steadily for a year.  Adding to the discussion above, the Korean government is trying to internationalize the won to some extent in their effort to get Korea taken out of the emerging market bucket for markets.  This relaxing of restrictions has seen capital outflow, but my take is this will be temporary as the country remains in very good fiscal and economic condition and will attract investment in my view.  Otherwise, there is nothing of note.

On the data front today, we get the weekly Initial (exp 215K) and Continuing (1890K) Claims as well as Empire State Manufacturing (1.0) and Philly Fed (-2.0) all at 8:30.  We hear from 3 more Fed speakers and it seems the hymnal now contains a single talking point, Fed independence is crucial and the subpoenas to Powell are lawfare and inappropriate.  Only Steven Miran is not singing that tune, but given he is Trump’s appointee, that is no surprise.

As commodities, and really metals, have driven the entire narrative lately, if they are going to have a quiet day, look for quiet all over.  Longer term, nothing has changed, but nothing goes up in a straight line, and that is what we are witnessing today.

Good luck

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A Vision For ‘Twenty-Six

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(With apologies to Clement Clarke Moore)

Tis the first day of trading in Ought Twenty-Six
With too much attention on raw politics
At home, eyes have turned to the mid-term elections
To see if results will force mid-course corrections
In Europe, they’re going all-in on Ukraine
With more billions promised, though that seems insane
Meanwhile, Mr Xi is convinced he can fix
The problems at home with his policy mix
And this, my friends, just skims the surface of things
As pols everywhere suffer arrows and slings
Remember, though, markets are what I’m about
And while I could err, I am never in doubt.

Let’s start at the top with Growth here in the States
Which likely will show more than marginal rates
In fact, Four percent seems a viable goal
As inward investment and tax cuts take hold
Remember, for Trump, if there’s one thing he’s not
It’s timid, and so he’ll demand, “Run it hot!”
Thus, growth will expand, though inflation might gain
And for the elections, that could be a pain
The problem is Jay, and whoever comes next
Have come to believe two percent’s just subtext
The greatest unknown is on government spending
And whether it grows or, at last, starts descending

The punditry’s certain the government fisc
Is going to increase inflation’ry risk
If true, CPI of near Four percent’s apt
If not, then Inflation ‘neath Three, could be capped

And what about elsewhere, in Europe? Japan?
In markets, emerging, do they have a plan?
Will they grow their ‘conomies, drawing investment?
Or will we soon witness a large reassessment?

In Europe, they claim they’ll be building more guns
To help them defend all their daughters and sons
As well, they’re committed to helping Ukraine
Continue to fight, despite so many slain
They’re planning to borrow a cool 90 Bill
But energy costs, these grand plans could well kill
Meanwhile, M Lagarde claims that rates are just right
And given growth there’s One Percent, I won’t fight
So, weak growth and low rates and energy blues
Lead me to believe that come year-end, the news
Will be that the Euro is failing to thrive
Do not be surprised when it hits One oh-Five

In England and Scotland and all the UK
Just like in the EU, they can’t make much hay
The budget’s a wreck yet they want to raise taxes
Though history shows growth will wane ere it waxes
As well, they continue their crack down on speech
While crimping their energy industry’s reach
So, power is costly, and billionaires flee
From here, ‘cross the pond, this is what I foresee
A ‘conomy heading right into stagflation
As long as Kier Starmer is leading the nation
For markets, the Pound will lose all its allure
With One-Ten the Boxing Day screen price du jour

A turn to the East where the Sun Also Rises
Will teach us that, really, there are no surprises
To date you’ve heard much ‘bout the rise in yen rates
With pundits opining the Carry Trades’ fates
This year, so they say, look for much stronger yen
As local investors buy yen bonds again
Thus, all the hedge funds who’ve been funding their trades
By borrowing yen, and they’ve done so in spades,
Will need to buy back all that Japanese Money
The outcome, for yen shorts, will not be so sunny
But what if this idea of yen heading home
Is wrong?  This implies quite a different syndrome

At this point there’s no sign the government there
Is ready, more spending and debt, to forswear
Instead, what seems likely is more of the same
More government spending in all but its name
So, debt will continue to rise without end
And up to One-Eighty the buck will ascend

As well as Japan, in the continent vast
Of Asia, it’s China we come to at last
“Poor” President Xi has a problem at home
Consumption is not in the Chinese genome
For decades, the model’s been, build and export
Which helps explain why local usage falls short
But lately the rest of the world’s of a mind
That Chinese imports are a troublesome kind
So, Xi needs his people to learn how to spend
Else all that production may come to an end
But if they consume, what will that do to growth?
Its rate will decline, something for which Xi’s loath

Thus, GDP 5 means a weaker yuan
Well above Seven you can depend on
But if, against odds, Xi gets Chinese to spend
Six-Fifty is where yuan will be at year end.

Let’s shift our perspective to Treasury debt
A market of critical import, and yet
A market that’s been in a range for a while
So, what must occur for a change in profile?
The popular view is that deficit spending
Will drive an outcome of, high yields, never-ending
But Trump and his team are, quite hard, pushing back
Explaining that policy’s on the right track
Twixt tariffs and growth, tax receipts have been flying
While RIFs in the government are underlying
The idea that deficits soon will be shrinking
In truth, this is not what the punditry’s thinking
But one thing is clear that will keep yields from climbing
QE, which is back, is designed for pump-priming
So, Jay and his heir will keep buying and buying
And 10-Years at Four Percent seems satisfying

It’s not just the government, though, that’s in debt
Those corporates who borrowed at ZIRP, have not yet
Refinanced the trillions they owe, to this day
And now they’re competing with Bessent and Jay
While Scott will find buyers, if not least the Fed
For corporates that path may be flashing bright red
If credit spreads widen will companies fail?
And will that unravel the stock markets’ tale?
Right now, spreads for IG sit near one percent
And Junk’s above eight with investors content
However, the biggest risk this year could be
The absence of corporate debt liquidity
If IG spreads widen 200 bps more
The outcome could be a GFC encore

This takes us to stocks, both at home and abroad
Which last year saw rallies we all did applaud
But will this year bring us some more of the same?
Or have things been altered?  Is there a new game?
If my crystal ball is in any way clear
The outcome could well be a frightening year
Remember, the driver of last year’s returns
Was government spending which lacked all concerns
Thus, Cantillon nailed it with where cash would go
And stocks were the winner, of that much we know
But this year the mountain of debt coming due
Could well force decisions of what will ensue
And too, don’t forget if the deficit shrinks
It’s likely to be a great stock market jinx
So, don’t be surprised if December this year
A 10% fall ‘cross all stocks does appear

And what of that black, sticky stuff that they drill
Which powers the global economy still
When its price increases, it causes much pain
For most everyone, it can be quite the bane
Consumers, instead, like those prices to sink
But drillers, in that case, cause output to shrink
So, which will it be, will Trump’s mantra come true
Or will, new production, most drillers eschew
I think what is missed is technology’s traction
And how costs per barrel will tend toward contraction
As well, nations worldwide, at last understand
That Carbon Dioxide just cannot be banned
Come Christmas, next, we will see growth in supply
With Fifty per barrel the price we’ll espy

The last place to look is at bright things that shine
Which saw prices move in a vertical line
While gold was the starter, by year end t’was clear
That silver and platinum said, wait, hold my beer
The latter two rising thrice fifty percent
With neither responding to any event
Which brings us to this year, can these trends maintain?
Or are we now set up for infinite pain?
It seems to me that til the summer at least
All three will continue to rise, as with yeast
But when we reach solstice do not be surprised
If views on their future become bastardized
In other words, look for corrections in price
With early year gains given back in a trice
But still, by the end of the year I believe
Five Thousand in Gold is what we will perceive
For Silver, One Hundred could well be the spot
And Platinum, Three Grand, would not be too hot.

To all of my readers and friends, please forgive
My musings if they got too ruminative
This year will see change across many degrees
And some will be painful, while others will please

In sum, I think President Trump can succeed
In changing behavior, though not corporate greed
Reducing the number of government staff
As well as with regs, he can cut those in half
Inward investment will focus on stuff
Instead of on stocks, for the markets that’s rough
Dollars will still be in greater demand
While Treasury yields will be stuck in the sand
IG and Junk are unlikely to win
As rising expenses cut margins quite thin
And still, through it all, precious metals will gain
Though G7 central banks all will abstain
Come Christmas next, nothing will look quite the same
And maybe my views can help you build a frame.

Thank you all for tolerating my punditry and I hope that you all have a wonderful, healthy and successful year ahead.

Adf

Under Real Threat

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The PCE data was warm
And still well above Powell’s norm
The problem for Jay
Despite what folks say
Is tariffs ain’t causing the storm
 
Instead, service prices keep rising
With wages not yet stabilizing
And so, long-date debt
Is under real threat
As traders, those bonds, are despising

 

Under the rubric, economic synchronization remains MIA, I think it is worth looking at the performance of 30-year bond yields across all major nations as per the below chart.  While the actual rates may be different, the inescapable conclusion is that yields across the board continue to rise to their highest levels in more than five years and the trend remains strongly in that direction.  Regardless of central bank actions, or perhaps more accurately because of their attempts to keep rates low, it is increasingly clear that confidence in government debt, the erstwhile safest assets around, continues to slide.  

Arguably, this is a direct response to the fact that despite their vaunted independence, central banks around the world have very clearly abandoned their inflation targets and are now doing all they can to support their respective economies with relatively easy money.  Friday’s PCE data is merely the latest in a long line of data points showing that although most of these banks are allegedly targeting 2.0% Y/Y inflation, the outcomes have been higher than target, yet excuses to cut rates are rife.  If you are wondering why gold continues to rally, look no further than this.

Source: tradingeconomics.com

In fact, this morning’s Eurozone CPI reading of 2.1%, 2.3% core, is merely another chink in the armor as it was a tick higher than expected.  One of the problems, I believe, is that there remains a very strong belief that the key driver of inflation is economic growth, not money supply growth, despite all evidence to the contrary.  But it is a Keynesian fundamental belief, and every central bank around the world is convinced that slowing economic activity will result in declining inflation rates.  Alas, as long as central banks continue to support their domestic government bond markets, inflation will remain.  

This is where the synchronicity, or lack thereof, of the economy is having its biggest impact.  The fact that certain parts of the economy, notably AI investment, continues to run at record pace and continues to support excess demand for certain things offsets weakness in other parts of the economy, for instance, commercial property, which is looking at a significant deterioration in its finances.  A look (see chart below) at Commercial Mortgage-Backed Securities (CMBS) for office buildings shows that the delinquency rate has reached an all-time high, higher even than the GFC, as the changes in the US working population and the increase in work-from-home have devastated the value of many office buildings.

Perhaps more interesting is the fact that multifamily CMBS (financing for apartment buildings) is also suffering despite a housing shortage and rising rents.  While delinquency rates have not reached GFC levels, as you can see, they are rising rapidly as well.

So, which is it?  Are yields rising because growth is driving inflation higher (the Keynesian view of the world)?  How does that accord with rising delinquencies if growth is the driver?  In the end, there is no single, simple answer to explain the dynamics of an extraordinarily complex system like the economy.  I do not envy policymakers’ current situation as there are no correct answers, merely tradeoffs (just like all economics).  But it is increasingly clear that investors are losing their interest in holding onto government debt as they seemingly lose faith in governments’ ability to manage their respective finances.  Which brings us to one more chart, the barbarous relic (which for those of you who don’t know, was Keynes’ term of derision for gold).  I thought it might be instructive to see how gold and 30-year Treasury yields seem to have the same trajectory as the shiny metal regains its all-time highs this morning.

Source: tradingeconomics.com

With that cheery thought after a beautiful Labor Day weekend, let’s see how markets are behaving now that September is upon us.  Friday’s selloff in the US (a disappointing way to end the month) was followed by a mixed session in Asia with the Nikkei (+0.3%) managing to rally although China (-0.75%) and Hong Kong (-0.5%) followed the US lower despite a slightly better than expected RatingDog (formerly Caixin) PMI of 50.5 released Sunday night.  Elsewhere in the region, Korea (+0.95%) was the big winner with modest losses almost everywhere else in the region.  As to Europe, the DAX (-1.25%) is the worst performer, although Spain’s IBEX (-0.95%) is giving it a run for its money as the higher Eurozone inflation squashed hopes that the ECB may cut rates again soon.  Interestingly, French shares are unchanged this morning, significantly outperforming the rest of the continent despite continued concerns over the status of the French government which seems likely to collapse next week after the confidence vote on Monday.  Perhaps the idea that the government will not be able to do anything is seen as a benefit!  As to US futures, negative is the vibe this morning, with all the major indices pointing lower by at least -0.6%.

In the bond market, based on my commentary above, you won’t be surprised that Treasury yields are higher by 6bps this morning and European sovereign yields are all higher by between 4bps and 6bps.  The big story here is that French yields are rising to Italian levels as the former’s finances are crumbling while Italy has stabilized things for the time being.  Of course, all this pales compared to UK yields (+4bps) where 30-year yields have climbed to their highest level since 1998 and the 10-year yields are now nearly 200 basis points higher than during the ‘Liz Truss’ moment of 2022 as per the below.  It is not clear to me if the UK or France will collapse first, but I suspect that both may be begging at the IMF soon!

Source: tradingeconomics.com

Oil prices (+1.8%) continue to rise as Russia and Ukraine intensify their fighting with Ukraine attacking Russian refining capacity, apparently shutting down up to 17% of their output.  However, while we have seen oil rebound over the past several weeks, the longer-term trend remains lower.

Source: tradingeconomics.com

As to metals, this morning gold (+0.2%) continues to set new highs while silver (-0.4%) is backing off of its recent multi-year highs, although remains well above $40/oz.  Precious metals are in demand and likely to stay that way for a long time to come in my view.

Finally, the dollar is much firmer this morning with the pound (-1.25%) the laggard across both G10 and EMG currencies as investors flee from the ongoing policy insanity there (between the zeal with which they are trying to reduce CO2 and the crackdown on free speech, it seems the government is trying to alienate the entire native population.). But the euro (-0.7%), Aussie (-0.7%), yen (-1.0%) and SEK (-0.75%) are all under pressure in the G10 bloc.  The UK is merely the worst of the lot.  As to the EMG bloc, MXN (-0.7%), ZAR (-0.7%) and PLN (-0.9%) are also sharply lower although Asian currencies (KRW -0.2%, INR -0.2%, CNY -0.15%) are faring a bit better overall.

On the data front this week, we have a bunch culminating in payrolls on Friday.

TodayISM Manufacturing49.0
 ISM Prices Paid 65.3
WednesdayJOLTS Job Openings7.4M
 Factory Orders-1.4%
 Fed’s Beige Book 
ThursdayInitial Claims230K
 Continuing Claims1960K
 Trade Balance-$75.3B
 Nonfarm Productivity2.7%
 Unit Labor Costs1.2%
 ISM Services51.0
FridayNonfarm Payrolls75K
 Private Payrolls75K
 Manufacturing Payrolls-5K
 Unemployment Rate4.3%
 Average Hourly Earnings0.3% (3.7% Y/Y)
 Average Weekly Hours34.3
 Participation Rate62.1%

Source: tradingeconomics.com

In addition, we hear from four Fed speakers with NY Fed president Williams likely the most impactful.  The current probability for a Fed funds cut according to CME futures is 92%.  A weak print on Friday will juice that and get people talking about 50bps to start.  A strong number will stop that talk in its tracks.  But until then, it is difficult to look at the messes everywhere else in the world and feel like you would rather own other currencies than the dollar (maybe the CHF).

Good luck

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Quite Frail

Posted on by

While everyone’s waiting to see
How high or low payrolls might be
The news from elsewhere
Is starting to wear
Quite thin, look at China’s Zhongzhi
 
This bankruptcy sounds the alarm
That others there might come to harm
The soft-landing tale
Which still is quite frail
Has started to lose its quaint charm

Before we start on the payroll report, I think it is important to mention a significant issue that was revealed last night in China, where Zhongzhi, one of the largest non-bank financial and investment companies on the mainland, filed for bankruptcy and liquidation.  It has been missing both interest and principal payments for the past several months and it simply became too great a problem to ignore any longer.  The data released indicates that the company had ~$31 billion more in liabilities than assets and has become one of the largest bankruptcies in China’s history.  

The company was a major player in the property market there, although its main business was high yielding investment products, essentially structured notes, where much of the property backed collateral has fallen dramatically in value and where cash flows that had underpinned the notes have now ceased amid the property collapse.  This is hardly an advertisement for the Chinese economy and another sign that things there remain in a downtrend.  While the renminbi is marginally firmer this morning, up 0.2%, that is a consequence of the PBOC establishing the CFETS fixing at a much stronger than expected level in their effort to prevent substantial weakness in the currency.  

The upshot is that the Chinese economy remains in difficult straits, and the government’s reluctance to increase fiscal support is being felt everywhere.  (On the other hand, the PBOC has added $600 billion in liquidity to the economy in the past week.)  Ongoing weakness in Europe is another problem for Chinese exporters and the ongoing disagreements and tariff wars with the US simply add additional pressure to President Xi.  Next Saturday the first big election of 2024 will be held, in Taiwan, and if the incumbent party retains control, currently the betting favorite, Xi may find himself with quite a few problems to address this year.  A weak economy, rising geopolitical tensions globally and a rejection of his entreaties to the people of Taiwan is a bad look for a megalomaniacal dictator like Xi.  Just sayin’.

OK, let’s turn to this morning’s big story, the NFP report.  Here are the analyst consensus estimates according to tradingeconomics.com:

Nonfarm Payrolls170K
Private Payrolls130K
Manufacturing Payrolls5K
Unemployment Rate3.8%
Average Hourly Earnings0.3% (3.9% Y/Y)
Average Weekly Hours34.4
Participation Rate62.7%
ISM Services 52.6
Factory Orders2.1%

Now, yesterday we saw two other pieces of employment data, the ADP (164K and much higher than expected) and Initial Claims (202K and much lower than expected).  These numbers have many in the market looking for a strong print although the correlation between ADP and NFP has been underwhelming for quite a while.  While we can discuss the merits of the estimates and the overall strength of the economy, I think we are better served, this morning, to focus on the potential impacts of a given number and how that has been evolving so far this week/year.

This morning, the 10-year yield is up to 4.04%, some 25bps above the lows touched post-Christmas, and starting to indicate that some people are having second thoughts on the idea of the Fed aggressively cutting rates this year.  As an example, while I never believed there to be a chance of a rate cut at the end of January, the market was pricing a 17.5% chance of that just a week ago.  This morning the probability is down to 4.7%.  As well, just last week the market was pricing in 6 rate cuts in 2024.  That is now down to 5 cuts and fading. One of the big stories around this morning is that someone has put on a very large option position expiring later today that the 10-year yield will be above 4.15%.  To profit, this trade will require one of the largest yield moves seen in months.

The point is that the nirvana belief set that had been driving markets since the beginning of November is clearly under a significant amount of pressure here.  After all, the NASDAQ has had 5 consecutive negative closes, bond yields, as mentioned, have rallied sharply and are breaking through short-term technical resistance, the dollar is rallying, and the bulls are feeling quite unloved.

Is this the end of the bull story?  Frankly I don’t believe that is the case.  However, risk assets got a bit overexuberant during November and December and have come a long way in a short time.  It is not surprising to see a retracement of prices to help unwind some of the froth.  Ultimately, I believe the question that matters in the medium and long term is the state of the economy and whether the recent growth trajectory will continue, or if we have peaked for now.

One of the things that has me concerned in the medium term is the fact that the government continues to run a massive fiscal deficit despite what appears to be a reasonably strong economy.  Recall, Keynes instructed governments to spend during recession, but tighten their belts during good times.  However, the new mantra is far more in line with Modern Monetary Theory, which is spend as much as you can at all times.  

A quick thought experiment regarding the underlying economy might look like this: GDP = $27 trillion, Federal spending = $10 trillion, Federal deficit = $1.7 trillion.  What if the government didn’t run a deficit, but was neutral?  Removing that much stimulus from the economy would have a significant negative impact on the US economy’s growth trajectory, which is the reason no politician wants to do that.  But the question at hand is how healthy is the economy on its own?  And are growth prospects there really that substantial?  One of the keys to the recent employment picture is that government jobs continue to grow rapidly (look at the gap between NFP and private payrolls).  As long as the US government can continue to borrow money cheaply to fund its profligate ways, it is completely realistic to expect the economy to continue to grow.  However, the reason the bond market story is so important is that the bond market is the place where it will become clear if this is possible.  If Treasury yields continue their recent climb, the pressure on the economy will increase, and the pressure from the government on the Fed to support the bond market will increase.  Forget ending QT.  If the Fed were to find itself in a place where they needed to restart QE to support the bond market, that would be an incredibly important signal that inflation was going to accelerate again, and likely commodity prices would follow.  That would also be a very negative sign for the dollar.  So, lower bonds, lower dollar, higher commodities and likely a nominal rise in equities, at least initially.  My point is there is much about which we need be concerned and wary.

In the quickest of recaps possible, equities around the world have mostly been under pressure with only Japan managing to rally but weakness in China and across all of Europe.  The same is true with US futures, all in the red this morning by about -0.3%.

Bond yields are also rising around the world (except in Japan) with gains on the order of 6bps-8bps across the continent, similar to what we saw in Australia overnight. 

Oil prices are rebounding this morning, up 1.3%, despite much larger than expected inventory builds shown in yesterday’s IEA data, but the metals markets are continuing under pressure for now with the base metals weak and gold edging lower.

And finally, the dollar is continuing its rebound led by USDJPY, where the yen is down a further 0.4% and back above 145 for the first time since early December.  In the G10 space, I would say the movement has been about -0.3% overall, but in the EMG space, things are a bit more active with average declines here of about -0.7% across the three main geographic blocs.

That’s really it.  Now we just wait for the payroll report and later this morning the ISM Services number, and then we get to hear from Tom Barkin again, but it would be shocking if his view changed from just two days ago.  For some reason, I have a feeling the payroll data will fall short this morning, but that’s just a feeling.

Good luck and good weekend

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