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Dynamited

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Investors don’t seem that excited
‘Bout Germany’s now expedited
Designs to rearm
And that caused much harm
To Bunds, with their price dynamited

 

One of the biggest impacts of President Trump’s recent friction with Ukraine and its security is that European nations now realize that their previous ability to make butter, not guns, because the US had enough guns for everybody is no longer necessarily the case.  Mr Trump’s turn inward, which should be no surprise given his campaign rhetoric and America First goals, apparently was a surprise to most European leaders.  It seems they couldn’t believe the US would change course in this manner.  Regardless, the upshot is that Europe finds itself badly under armed and is now promising to change this.

The country best placed to start this process is Germany, where soon-to-be Chancellor, Friedrich Merz has promised a €500 billion spending spree on new defense items.  However, as the Germans don’t have this money laying around, they will need to borrow it.  The wrinkle in this plan is that enshrined in Germany’s constitution is a debt brake designed to prevent fiscal profligacy, kind of like this.  So, Merz has proposed waiving the debt brake for defense expenditures, but in order to do so, will need a two-thirds majority vote in the Bundestag (German parliament).  Now given AfD has been quite anti-war, it is not clear he will be able to obtain the requisite votes but for now, that is not the concern.

However, the German bund market clearly believes he will be successful as evidenced by the chart below. Overall, German 10-year yields rose 30bps yesterday, a dramatic move, and dragged most European sovereigns along for the ride as the new narrative is that all European nations will increase borrowing to spend on their defense.  It is worth noting, though, that the reason German yields have been so low is because the economy there has been exhibiting approximately 0% growth for more than a year as they continue to commit energy suicide seek to achieve their idealistic greenhouse gas emission goals.

Source: tradingeconomics.com

The trick, though, is that while Germany, with a debt/GDP ratio around 60%, has plenty of fiscal space to follow through, assuming they can alter their constitution, the rest of Europe is in a much more difficult spot with both France and Italy already under EU scrutiny for their budget deficits and debt/GDP ratios.  Recall, a key aspect of the Eurozone’s creation was the regulation designed to keep national budget deficits below 3% of GDP and drive the debt/GDP ratios to 60% or below.  Right now, Germany is the only nation that fits within those parameters. 

While I have no doubt that they will alter the rules as necessary elsewhere in Europe and certainly given the now perceived existential crisis for Europe, those limits are sure to be ignored, the story in Germany remains different because of the constitution.  Markets, though, clearly believe that a lot more debt is about to be issued by European nations, hence the dramatic decline in bond prices and jump in yields.  

But there are other knock-on effects here as well, notably that the euro is climbing dramatically against the dollar, up nearly 4% in the past week, and far ahead of the pound and most G10 currencies with only the SEK (+1.0% overnight, +6.1% in past week) outperforming the single currency.  For a while I have suggested that short-term rates were losing their sway over the FX markets and traders were looking at 10-year yields.  Certainly, the recent price action indicates that remains the case as Treasury yields (+2bps) have bounced off their lows but have risen far less than their G10 counterparts.  In fact, a look at the movement in 10-year government bond yields over the past month and year reveals just how significant these changes have been.

Source: Bloomberg.com

I feel safe in saying that for the next several weeks, perhaps months, this story of European defensive revival and the knock-on effects is going to be top of mind for both investors and pundits.  Only history will determine if these dramatic changes in policy stances will have been effective in reducing the chance of war or not and if they will have been beneficial or detrimental to economies around the world. As much of the current narrative is driven by politics rather than economics, punditry on the latter is going to be worse than usual.  Once again, I harken back to the need for a robust hedging plan for all those with exposures.  As recent price action across all markets demonstrates, volatility is back, and I believe here to stay for a while.

Ok, let’s run down the rest of the markets not yet discussed.  Yesterday’s US equity bounce was widely appreciated by many although this morning, futures markets are all pointing lower by between -0.75% and -1.25%, enough to wipe out yesterday’s gains.  As to Asia overnight, Japan (+0.8%) followed the US and both Hong Kong (+3.3%) and China (+1.4%) are continuing to get positive vibes from the Chinese twin meetings of policymakers.  More stimulus continues to be the driving belief there although China’s history has shown their stimulus efforts have tended to fall short of initial expectations.  As to Europe, this morning only the DAX (+0.5%) is continuing yesterday’s gains as concerns begin to grow that while Germany can afford to spend more money on defense, the rest of Europe is not in the same situation, so government procurement contracts may be less prevalent than initially hoped.  This is evident in the -0.4% to -1.0% declines seen across both the UK and most of the rest of the continent.

We’ve already discussed bonds, although I should mention that JGB yields have risen 10bps as well, up to new highs for the move and finally above 1.50%

In the commodity space, oil (+0.65%) which has had a very rough week, falling more than -5% in the past seven days, seems to be finding a bit of support.  Recall yesterday’s chart showing the bimodal distribution and that we are now in supply destruction territory.  Ultimately, that should support the price, but the timing is unclear.  In the metals markets, this morning sees red across the board, although not dramatically so, with both precious and base metals sagging on the order of -0.5%.

And lastly the dollar continues to decline, albeit not as swiftly as yesterday.  However, while it is considerably weaker vs. its G10 counterparts, versus the EMG bloc, the story is far less clear.  For instance, the only notable EMG currency gaining ground this morning is CLP (+1.2%) while virtually every other major emerging market currency is actually slipping a bit.  Look at this list; CNY -0.2%, MXN -0.25%, PLN -0.3%, ZAR -0.15%, INR -0.3% and HUF -0.5%.  I have a feeling we are going to see more behavior like this going forward, where G10 currencies are now trading on a different basis than EMG currencies.

On the data front, this morning brings Initial (exp 235K) and Continuing (1880K) Claims as well as the Trade Balance (-$127.4B) and Nonfarm Productivity (1.2%) and Unit Labor Costs (3.0%) all at 8:30.  We also hear from two more Fed speakers, Waller and Bostic later in the day.  Yesterday’s ADP employment data was much weaker than expected, falling to 77K, while the ISM Services data held up well although the prices paid piece did rise.  In addition, there has been a change in tone from the Fed speakers as we are now hearing mention of the possibility of stagflation due to the Trump tariffs, although there was no indication as to which way they will lean if that is the economic path forward.

I continue to highlight volatility as the watchword for now and the near future at least.  As long as politics has become the key driver, and as long as President Trump is that driver, given his penchant to shake things up, the one thing of which I am sure is we have not seen the last dramatic change in perception.  With that in mind, my view is the dollar will remain under pressure for a while yet.

Good luck

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Deceit

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

 

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

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

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

Source: tradingeconomics.com

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

Source: tradingeconomics.com

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

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

Source tradingeconomics.com

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

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

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

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

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

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

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

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

Good luck and good weekend

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All Goes to Hell

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The Turning is coming much faster
Than forecast by every forecaster
Now Syria’s fallen
And pundits are all in
Iran will soon be a disaster
 
However, the impact on trading
Is naught, with no pundits persuading
Investors to sell
As all goes to hell
Is narrative power now fading?

 

The suddenness of the collapse of Bashar Al-Assad’s control of Syria was stunning, essentially happening in on week, maybe less.  But it has happened, and it appears that there are going to be long-running ramifications from this event.  At the very least, the Middle East power structure has changed dramatically as Russia and Iran both abandoned someone who had been a key ally in their networks.  Russia is clearly otherwise occupied and did not have the wherewithal to help Assad, but it is certainly more interesting that Iran did not step up.  Rumors are that the government there is growing concerned that an uprising is coming that may change the Middle East even more dramatically.

I have previously discussed the idea of the Fourth Turning when events arise that shake up the status quo, and this is proof positive that Messrs. Howe and Strauss were onto something when they published their book back in 1997.  The thing is, even those who believed the idea and did their homework on the timing of events have been caught out by the speed of recent activities.  Most of the punditry in this camp, present poet included, didn’t expect things to become unruly until much closer to the end of the decade.  And maybe it will be the case that the collapse of Syria is just an appetizer to a much larger conflagration.  (I sincerely hope not!). But my take is these events were not on many bingo cards, certainly not in the financial punditry world.

Now, the humanitarian situation in Syria has been a disaster for the past 13 years, ever since the civil war there really took shape and fomented the European migration crisis.  Alas, it seems likely to worsen for the unfortunate souls who still live there.  But for our purposes, the question at hand is will this have an impact on markets?

Interestingly, the answer, so far, is none whatsoever.  The obvious first concern would be in oil markets given the proximity to the major oil producing regions in that part of the world.  However, while oil (+1.4%) is a bit higher this morning, it remains well below $70/bbl and while I am no technical analyst, certainly appears to be well within a downtrend as per the below chart.

Source: tradingeconomics.com

Next on our list would be the FX markets, perhaps with expectations that haven currencies would be in demand.  Yet, the dollar is sliding against most of its counterparts this morning, with the notable exception of the yen (-0.3%) which is the one currency under more pressure.  That is the exact opposite behavior of a market that is demonstrating concern over future disruptions.  As to securities markets, they are much further removed from the situation and while US futures are edging lower at this hour (6:20), slipping about -0.15%, overnight activity showed no major concerns and European bourses are mixed, but all within 0.3% of Friday’s closing levels.  

Finally, bond markets are essentially unchanged this morning, with Treasury yields higher by 1bp and European sovereigns almost all unchanged on the day.  We did see yields slip a few bps in Asia, likely on the back of the weaker than forecast Chinese inflation data, but the bond market is certainly showing no signs of concern over the geopolitics of the moment.

On Sunday the Chinese did meet
And promised they’d finally complete
Their stimulus drive
And therefore revive
The growth that has been in retreat

A story that has had an impact on markets this morning is the Chinese Politburo’s comments that they are going to implement a “more proactive” fiscal policy in the upcoming year along with “moderately loose” monetary policy as President Xi scrambles to both improve the growth impulse and prepare for whatever President-elect Trump has in store for China once he is inaugurated.  Now, we have heard these words before and to date, each effort has been, at the very least, disappointing, if not irrelevant.  But hope is a trader’s constant companion and so once again we saw specific markets respond to the news.

Interestingly, mainland Chinese shares did not respond as enthusiastically as one might have expected with the CSI 300 actually slipping -0.2%.  But the Hang Seng (+2.75%) embraced the news warmly.  In the FX markets, early weakness in CNY was reversed although the renminbi closed the onshore session essentially unchanged on the day.  The big winners were AUD (+0.9%) and NZD (+0.5%) as traders bid up the currencies of the two nations likely to benefit most given their export profiles of commodities to China.  But beyond those market moves; it is hard to make a case that anyone was listening.

Ok, let’s look at the rest of the overnight session and see what we can anticipate in the week ahead. Japanese shares (Nikkei +0.2%) were little changed overnight while the big mover in Asia was Korea (-2.8%) as the ructions from the brief interlude of martial law last week continue to weigh on the short-term future of the government and economy there.  However, away from those markets, the rest of Asia saw movement of just +/- 0.3% or less, hardly newsworthy.  In Europe, the story is also mixed with the CAC (+0.5%) leading the way higher, perhaps on the back of the successful reopening of the Notre Dame cathedral, or more likely on the back of hopes that the luxury goods sector would improve based on Chinese stimulus supporting that economy.  As to the rest of the continent, more laggards than winners but movement has been small, 0.2% or less, although the FTSE 100 (+0.4%) is also higher this morning led by the mining shares in the index, also related to Chinese stimulus.

We have already discussed the bond market, which has been extremely quiet ahead of this week’s CPI and next week’s FOMC meeting so let’s turn to the commodity markets, where not only is oil rallying, perhaps more related to China than the Middle East, but we are seeing metals markets rally as well with both precious (Au +0.9%, Ag +2.2%) and industrial (Cu +1.6%, Zn +2.0%) performing well.  Surprisingly, aluminum (-0.25%) is not playing along this morning but if the China story is real, it should follow suit.

Finally, the rest of the currency story shows KRW (-0.5%) continuing to feel the pain, along with its stock market, from the politics last week.  At the same time, we are seeing solid gains in ZAR (+1.1%) on the metals moves and NOK (+0.4%) on the back of oil’s rally.  Elsewhere, while the dollar is broadly softer, it is of a much lesser magnitude, maybe 0.2% or so.

On the data front, this week brings two central banks (BOC and ECB) and a bunch of stuff, although CPI on Wednesday will be the most impactful.

TuesdayNFIB Small Biz Optimism94.2
 Nonfarm Productivity2.2%
 Unit Labor Costs1.9%
WednesdayCPI0.2% (2.7% Y/Y)
 -ex food & energy0.3% (3.3% Y/Y)
 BOC Meeting3.25% (current 3.75%)
ThursdayECB meeting3.0% (current 3.25%)
 Initial Claims220K
 Continuing Claims1870K
 PPI0.3% (2.6% Y/Y)
 -ex food & energy0.2% (3.3% Y/Y)

Source: tradingeconomics.com

Last week saw what appeared to be stronger payroll data on the surface, with the NFP rising 227K and upward revisions, while the Unemployment Rate rose the expected 1 tick to 4.2%.  As well, Average Hourly Earnings rose more than expected, to 4.0%.  And yet, the Fed funds futures market raised the probability of a rate cut next week to 87% (it was over 90% for a while in the session).  Now, there has been a group of analysts who have been claiming that the headline payroll data is very misleading and actually the jobs market is much weaker than the administration is portraying, and it seems they got a bit more traction in their case last week.  Nonetheless, it is hard for me to look at the data and justify another rate cut by the Fed, at least if their objective is to push inflation back to 2.0%.  Of course, that is another question entirely!

Mercifully, the Fed is in their quiet period so we will not hear from them until they pronounce things at the FOMC meeting a week from Wednesday.  Until then, I expect that the China story, as well as assorted Trump related stories, will drive things although keep a wary eye on the Middle East for anything more explosive.  As to the dollar, I have consistently explained that if the Fed eases in the face of rising inflation, that will undermine the greenback.  It will be very interesting to see how things play out this week and next as a set-up for 2025.  For now, I don’t see a good reason for a large move, but if I were a hedger, I would make sure that I am as hedged as I am allowed to be.

Good luck

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Growth Stank

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Three score and a year have now passed
Since flags in the States flew half-mast
In honor of Jack
Who wouldn’t backtrack
On his goal of world peace at last

 

It has been sixty-one years since President John F Kennedy was assassinated in Dallas.  This was one of the most dramatic and impactful events in the history of the US with many still of the belief that it was an inside job.  One needn’t wear a tin-foil hat all the time to recognize that the government has done nothing but grow dramatically since then, with the defense complex the leader of the pack.  Perhaps in his second term, President Trump will release the case files in an effort to shine a light on the underbelly of the government.  This poet has no idea what occurred that day (although I did recently visit the 6th floor museum in Dallas, a quite interesting place) and I would guess that all these years later, there are very few, if any, people who may have been involved that are still alive.  Of course, the risk is that powerful organizations like the CIA and FBI could be forever tarred with this if they were involved, and that would have dramatic implications going forward, hence their desire to maintain secrecy.  I highlight this simply as another potential flashpoint in the upcoming Trump presidency.

The data from Europe revealed
That if there is growth, it’s concealed
The PMI’s sank
And German growth stank
Thus Christine, her razor, will wield

Let us now discuss the Eurozone.  Not only do they have an increasingly hot war on their border and not only are they being inundated by a major blizzard interrupting power and transportation throughout France, Germany and Scandinavia, but their economies appear to be slowing down far more rapidly than previously anticipated.  But that inflation was slowing as quickly!

This morning the Flash PMI data was released for Germany, France and the Eurozone as a whole, as well as the UK.  It did not make for happy reading if you are a politician or policymaker in any of these nations.

IndicatorCurrentPrevious
 Germany 
Manufacturing PMI43.243.0
Services PMI49.451.6
Composite PMI47.348.6
 France 
Manufacturing PMI43.244.5
Services PMI45.749.2
Composite PMI44.848.1
 Eurozone 
Manufacturing PMI45.246.0
Services PMI49.251.6
Composite PMI48.150.0
 UK 
Manufacturing PMI48.649.9
Services PMI50.052.0
Composite PMI49.951.6

Source: tradingeconomics.com

One needn’t look too hard to see that the economic situation in Europe is ebbing toward a recession or at least toward much slower growth (German GDP was also released at a slower than expected 0.1% Q/Q, -0.3% Y/Y).  While the ECB is very aware of this situation, the problem is that like most other central banks, their strong belief that inflation is going to reach their 2.0% goal has not yet been realized let alone shown an ability to stay at that level over time.  However, the ongoing comments from ECB members is that more rate cuts are coming with only the timing and size in question.  There is still a strong belief that interest rates in Europe (and the UK) are well above ‘neutral’.

Of course, it will not surprise you to see the chart of the EURUSD exchange rate given this information as the single currency collapses continues its sharp decline.

Source: tradingeconomics.com

Since the end of September, the single currency has declined ~7.0% in a quite steady fashion.  All the technical levels that had been in play have been broken with the next noteworthy level to consider being parity.  I have been clear for a while that I expected the dollar to continue to perform well and nothing has changed that view.  The combination of an increase in fear amid the escalation of tensions in Ukraine and Russia’s intimation that the US and NATO have entered the war already and the very divergent paths of the US and Eurozone economies can only lead to the conclusion that the euro is going to continue to decline for a while.  And remember, this price action has very little to do with potential Trump tariff or other policies as they remain highly uncertain.  The euro is simply a victim of its own leaders’ ineptitude on both the economic and diplomatic/military fronts.  Any Trump tariffs that are imposed on Europe will simply add to the pain.

Before we head to other asset classes, let’s take a quick look beyond the euro in the FX markets.  It should be no surprise that the dollar is broadly higher, although not universally so.  Versus the rest of the G10, even the yen has not been able to find enough haven demand to hold up as the greenback rallies against them all with the euro (-0.6%) and pound (-0.6%) sharing honors as the laggards.  However, in the EMG bloc, the picture is more mixed with CE4 currencies all sliding but ZAR (+0.4%) rallying amid the ongoing rebound in the price of gold (+1.2%) which is also benefitting from increased fear and risk disposition.  As to Asian currencies, most were somewhat weaker but other than KRW (-0.4%) the moves were unimpressive.

On the commodity front, oil (-0.6%) is slipping a bit heading into the weekend but it has had an excellent week, rallying more than 4%.  There are many cross tensions in this market as on one side we have fears that the Russia/Ukraine situation will impact supply, or that Iran will react to Israel’s ongoing campaign in Lebanon and do something about the Strait of Hormuz.  These are obviously bullish for crude.  But the flip side is that Trump has made very clear his desire to open up far more land for drilling and is seeking to increase supply substantially, a negative price signal.  

Turning to bond markets, there is demand everywhere as the combination of risk aversion and weaker Eurozone growth have brought the buyers out of the woodwork.  Treasury yields have slipped -4bps and in Europe, the entire continent is seeing yields decline between -7bps and. -8bps.  After the PMI data this morning, the Euribor futures market upped pricing for a December ECB rate cut from a 15% to a 50% probability.  Add to that comments from ECB members Stournaras and Guindos and it seems quite likely that rates in Europe are going to decline.

Finally, equity markets have shown very little consistency.  Yesterday’s strong US rally was followed by strength in Japan (+0.7%) but massive weakness in China (CSI 300 -3.1%, Hang Seng -1.9%) as concerns over those Trump tariffs continue to weigh on investors there.  However, it was only China that suffered as pretty much every other market in the region saw gains, with some (India +2.55, Taiwan +1.6%, New Zealand +2.1%) quite substantial.  European shares, however, are more mixed with most continental bourses showing modest declines although the UK (+0.8%) has managed to buck that trend despite the weak PMI data and weak Retail Sales data as investors seem to be prepping for a BOE rate cut next month.  As to US futures, at this hour (7:30) they are little changed.

Yesterday’s data showed Initial Claims sliding but Continuing Claims rising to their highest level, above 1.9M, in three years.  It appears that while layoffs aren’t increasing, finding a job once you are unemployed is much tougher.  Philly Fed was also softer than forecast and that seemed to help the Fed funds futures market push up the probability of a December cut to 59% this morning, up from 55% yesterday.  This morning, we see the Flash PMI data here (exp Mfg 48.5, Services 55.0) and then Michigan Sentiment (73.7).  There are no Fed speakers on the schedule so I expect that this morning’s trends may run for a little longer, but as it is Friday, I would not be surprised to see a little reversal amid week ending profit taking.  However, the dollar has further to go, mark my words.

Good luck and good weekend

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A Brand-New World

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Even in Japan
Incumbency is questioned
It’s a brand-new world

 

Yesterday’s elections in Japan brought about the downfall of yet another incumbent government as people around the world continue to demonstrate they are tired of the status quo.  Recently appointed PM, Shigeru Ishiba called for a snap election within days of his appointment following the resignation of previous PM Kishida on the heels of a funding scandal.  Ishiba’s idea was to receive a fresh mandate from the electorate so he could implement his vision.  Oops!  It turns out that his vision was not in sync with the majority of the population.  Ultimately, the LDP and its key ally, Komeito, won only 215 seats in the Diet (Japan’s more powerful Lower House), well below the 233 necessary for a majority and even further from the 293 seats they held prior to the election.  The very fact that this occurred in Japan, the most homogenous of G10 nations, is indicative of just how strong the anti-incumbent bias has grown and just how tired people are of current leadership (keep that in mind for the US election).

Now, turning to the market impact, the tenuous hold any government formed from these disparate results means that Japan seems unlikely to have a clear, coherent vision going forward.  One of the key issues was the ongoing buildup in defense expenditures as the neighborhood there increasingly becomes more dangerous.  But now spending priorities may shift.  Ultimately, as the government loses its luster and ability to drive decisions, more power will accrue to Ueda-san and the BOJ.  This begs the question of whether the gradual tightening of monetary policy will continue, or if Ueda-san will see the need for more support by living with more inflation and potentially faster economic growth.The yen’s recent decline (-0.25% today, -8.5% since the Fed rate cut in September) shows no signs of slowing down as can be seen from the chart below.  As the burden of policy activity falls to the BOJ, I expect that we could see further yen weakness, especially when if the Fed’s rate cutting cycle slows or stops as December approaches.  If this process accelerates, I suspect the MOF will want to intervene, but that will only provide temporary respite.  Be prepared for further weakness in the yen.

Source: tradingeconomics.com
 
This weekend’s Israeli response
To missile attacks from Iran-ce
Left bulls long of oil
In massive turmoil
As prices collapsed at the nonce

The other major market story this morning was the oil market’s response to Israel’s much anticipated retaliation to the Iranian missile barrage from several weeks ago.  The precision attacks on military assets left the energy sector untouched and may have the potential to de-escalate the overall situation.  With this information, it cannot be surprising that more risk premium has been removed from the price of oil and this morning the black, sticky stuff has fallen by nearly 6% and is well below $70/bbl.  This has led the entire commodity sector lower in price with not only the entire energy sector falling, but also the entire metals sector where both precious (Au -0.6%, Ag -0.9%) and base (Cu -0.2%, Al -1.1%) have given back some of their recent gains.  While declining oil prices will certainly help reduce inflationary readings over time, at least at the headline level, I do not believe that the underlying fundamentals have changed, and we are likely to continue to see inflation climb slowly.  In fact, Treasury yields (+3bps) continue to signal concern on that very issue.

Which takes us to the rest of the overnight activity.  Friday’s mixed session in NY equity markets was followed by a lot more green than red in Asia with the Nikkei (+1.8%) leading the way on the back of both lower energy prices and the weaker yen, while Chinese stocks (+0.2%) managed a small gain along with Korea (+1.1%) and India (+0.8%).  However, most of the other regional markets wound up with modest declines.  In Europe, mixed is the description as well, with the CAC (+0.25%) and IBEX (+0.4%) in good spirits while both the DAX and FTSE 100 (-0.1%) are lagging.  Given the complete lack of data, the European markets appear to be responding to ECB chatter, which is showing huge variety on members’ views of the size of the next move, and questions about the results of the US election, with President Trump seeming to gain momentum and traders trying to figure out the best way to play that outcome.  As to US futures, this morning they are firmer by 0.5% at this hour (7:20).

Although Treasury yields have continued their recent climb, European sovereign yields are a touch softer this morning, although only by 1bp to 2bps, as clarity is missing with respect to ECB actions, Fed actions and the US elections.  My sense is that we will need to see some substantial new news to change the current trend of rising yields for more than a day.

Finally, the dollar is net, a little softer today although several currencies are suffering.  We have already discussed the yen, and we cannot be surprised that NOK (-0.4%) is weaker given oil’s decline, but we are also seeing MXN (-0.3% and back above 20.00 for the first time since July) under pressure as that appears to be a response to a potential Trump electoral victory.  But elsewhere, the dollar is under modest pressure with gains on the order of 0.1% – 0.3% across most of the rest of the G10 as well as many EMG currencies.  There are precious few other stories of note this morning.

On the data front, it is a very big week as we see not only NFP data but also PCE data.

TuesdayCase-Shiller Home Prices5.4%
 JOLTS Job Openings7.99M
 Consumer Confidence99.3
WednesdayADP Employment115K
 Q3 GDP3.0%
ThursdayInitial Claims233K
 Continuing Claims1880K
 Personal Income0.2%
 Personal Spending0.4%
 PCE0.1% (2.1% Y/Y)
 Core PCE 0.1% (2.7% Y/Y)
 Chicago PMI47.5
FridayNonfarm Payrolls180K
 Private Payrolls160K
 Manufacturing Payrolls-35K
 Unemployment Rate4.2%
 Average Hourly Earnings0.3% (4.0% Y/Y)
 Average Weekly Hours34.2
 Participation Rate62.5%
 ISM Manufacturing47.5
 ISM Prices Paid48.2

Source: tradingeconomics.com

Of course, with the FOMC meeting next week, we are now in the Fed’s quiet period, so there will be no more official commentary.  The one thing to watch is if something unexpected occurs, then look for an article from the Fed whisperer, Nick Timiraos of the WSJ.  But otherwise, this is shaping up as a week that starts slowly and builds to the back half when the data comes.

Regardless of the election outcome, I expect that the budget situation will only devolve into greater deficits.  I believe that will weigh on the bond market, driving yields higher and for now, I think that will likely help the dollar overall, but not too much.  It remains difficult for me to see the dollar reverse course lower absent a much more aggressive FOMC, and that just doesn’t seem to be on the cards.

Good luck

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This is the Vibe

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In DC, the IMF tribe
Is meeting, and this is the vibe
Leave China alone
While they all bemoan
Das Trump to whom, problems, ascribe
 
Meanwhile in Beijing, Xi’s delayed
His policies as he’s afraid
If Trump wins the vote
More tariffs, he’ll float
Reducing Xi’s winnings in trade

 

With the US election fast approaching, it appears that virtually every aspect of life now hinges on the outcome.  This is even true in ostensibly neutral NGOs like the IMF.  As an example, the title of this Bloomberg article, Trump 2.0 Haunts World Economy Chiefs Gathering in Washington Before Vote is enough to make you question the neutrality of both Bloomberg and the ongoing activity at the IMF.  Briefly, in this article, the authors quote several meeting participants explaining that a Trump victory could disrupt the current global “stability” in trade.  (I’m not sure why they think the current situation is stable given the ongoing increases in tariffs already being implemented by the Eurozone as well as the US vs. Chinese manufactured goods, but they all are certain it will be a problem only if Trump is elected.)

In fact, earlier this week, the IMF explicitly said that a Trump victory would be negative for the global economy and that his policies would be worse for the US as well when compared to Harris’s policies.  My first thought is, how do they know Harris’s policies as she hasn’t been able to articulate any, but second, the idea that a supranational organization would express its electoral preferences leading up to a major national vote is remarkable.  Clearly the concept of neutrality no longer exists.

At any rate, as I explained yesterday, the US election remains THE topic on both investors’ and traders’ minds.  As well, it is THE topic on every other government’s mind around the world.  As such, arguably until the vote is complete and a victor declared, I suspect that all markets will see plenty of volatility with each change in the polls but limited additional secular movement.

One of the ongoing activities that passes for analysis these days is the forecasting of future bond yields or equity returns based on the winner.  This is generally explained as this market will rise if one wins and fall if the other does, or vice versa.  My take is this is simply another way for analysts to proffer their political views under the guise of economic analysis and as such, while I get a chuckle from these earnest descriptions of the future, I certainly don’t see them as rigorous analysis.  

But really, this week, that is all that is happening.  Next week, we do see a lot of data, including the NFP report as well as PCE readings and the BOJ’s interest rate decision, so perhaps there will be more market focused discussion.  But right now, virtually everything you read revolves around the election and the possible results.

So, with that in mind, let’s take a look at what happened overnight.  Yesterday’s mixed US session, with the DJIA slipping while the other major indices rallied a bit, led to a mixed picture in Asia as well.  Japanese shares (-0.6%) suffered a bit as Japan, too, is heading toward a general election and questions about whether new PM Ishiba will be able to win a majority in the Diet are very real this time.  Apparently, even in a homogenous society like Japan, there are questions about the ruling party and how much it is focused on helping the population.  As to the rest of Asia, both China (+0.7%) and Hong Kong (+0.5%) managed modest gains, but there are still many questions as to exactly how much stimulus China is going to inject into the economy there.  In fact, you can see the market asking those questions by the chart below, where the spike was the initial euphoria that something was going to be done, and the retracement is the realization that it was hope and not policy that drove things.

Source: tradingeconomics.com

The numbers show that after a >30% rally in a few sessions, investors have unwound about one-third of the climb as they await the outcome of the National People’s Congress meeting to see if a new fiscal package will be approved.  (Cagily, they have set the dates for the meeting to be November 4-8 to make sure that they can encompass the outcome of the US election in their decisions.  The rest of Asia saw a mix of gainers (Taiwan, Philippines, Australia) and laggards (India, Singapore, Malaysia) with other markets barely moving.

Meanwhile, in Europe, this morning is a down day, although the losses are quite modest (CAC -0.3%, IBEX -0.4%, FTSE 100 -0.2%) as traders head into the weekend with limited confidence on how things will play out going forward.  As to the US, at this hour (7:30), futures are pointing slightly higher, 0.2% or so.

In the bond market, Treasury yields (-2bps) have backed off their highs from earlier in the week but remain far above the levels seen prior to the Fed’s rate cut in September.  A view growing in popularity is that the 10yr yield will rise above 5.0% if Trump is elected while it will decline to 3.5% in a Harris victory.  Personally, I cannot see any outcome that doesn’t boost yields as there seems to be scant evidence that either side will slow spending and the Fed has made it clear that higher inflation is ok, at least by their actions, if not yet by their words.  As an aside, I couldn’t help but notice comments from Secretary Yellen explaining that the budget deficit was getting out of hand and “something” needed to be done about it, as though she had no part in the situation!  Meanwhile, European sovereign yields are mostly edging higher this morning, but only by 1bp or 2bps, as they continue to hold onto the gains that came alongside the Treasury market.  In the end, Treasury yields remain the key global driver.

In the commodity markets, oil (+0.7%) is bouncing slightly this morning after yesteray’s decline.  The talk in the market is that the Saudis are considering opening a price war to regain market share after they have withheld so much production.  That would certainly be a different tack than their recent activities and I imagine that President Putin would not be pleased, but that is one rumor.  As to the metals markets, they are under pressure this morning with all the major metals somewhat softer (Au -0.2%, Ag -0.9%, Cu -0.2%) as we continue to see profit taking in the space after a very large run higher over the course of the entire year.

Finally, the dollar is little changed overall this morning with no G10 currency having moved even 0.2% since the close yesterday although we have seen a couple of EMG currencies (KRW -0.7%, ZAR +0.3%) with a little dynamism.  The won fell further after weaker than forecast GDP encouraged traders to look for further rate cuts by the BOK while the rand’s movement appears more trading than fundamentally focused as there was neither data nor commentary to drive things.

On the data front, this morning brings Durable Goods (exp -1.0%, ex Transport -0.1%) and Michigan Sentiment (69.0).  As explained above, the data doesn’t seem to matter right now with all eyes on the election.  There are no Fed speakers scheduled but it is not clear that all their chatter this week had any impact.  The market is still pricing a 25bp cut in November and a 75% probability of another one in December, which is what it has been doing for a while.

It is very difficult to observe recent market activity and come away with a strong directional view.  My take continues to be that the December rate cut will lose its support based on the data and the dollar will appreciate accordingly.  But right now, that is a minority view.

Good luck and good weekend

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Inflation’s Not Dead

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It turns out inflation’s not dead
Despite what we’ve heard from the Fed
Will Jay now admit
His forecasts are sh*t
Or are there more rate cuts ahead?
 
To listen to some of his friends
They’re still focused on the big trends
Which they claim are lower
Though falling much slower
If viewed through the right type of lens

 

I guess if you squint just the right way, the trend in inflation remains lower.  I only guess that because that’s what we heard from three Fed speakers yesterday, Williams, Goolsbee and Barkin, but to my non-PhD trained eye, it doesn’t really look that way.  Borrowing the chart from my friend @inflation_guy, Mike Ashton, below are the monthly readings for the past twelve months for Core CPI.

As I said, and as he mentioned in his CPI report yesterday, it is much easier to believe that the outliers are May through July than the rest of the series.  But remember, I am not a trained PhD economist, so it is entirely possible that I simply don’t understand the situation.

At any rate, both the core and headline numbers printed higher than forecast which saw bonds sell off and the dollar rally while stocks edged lower.  Arguably, the big surprise was that commodity prices raced ahead with oil (+3.0% yesterday) and gold (+0.75% yesterday) both showing strength.  It seems that both of these markets, though, benefitted from rumors that Israel is getting set to finally retaliate against Iran for the missile bombardment last week, and fears of a significant disruption in oil markets, as well as a general rise in the level of uncertainty, has been sufficient to squeeze out a bunch of recent short positions.

In China, investors are waiting
For details on how stimulating
The plans Xi’s unveiled
Will truly be scaled
And if they’ll be growth generating

The other topic du jour is China, where tomorrow, FinMin Lan Fo’an is due to announce the details of the fiscal stimulus that was sketched out right before the Golden Week holiday, and which has been a key driver in the extraordinary rise in Chinese equities since then.  Alas, last night, as traders and investors prepared for these announcements, selling was the order of the day and the CSI 300 (-2.8%) fell sharply amid profit taking.  I find it telling that they are waiting to make these announcements while markets are not open, a sign, to me at least, that they are likely to be underwhelming.  Current expectations are for CNY 2 trillion (~$283 billion) of fiscal stimulus, which while a large number, is not that much relative to the size of the Chinese economy, currently measured at about $17 trillion.  And unless they address the elephant in the room, the decimated housing market, it seems unlikely to have a major positive impact over the long term. 

That said, Chinese stocks have become one of the hottest themes in the market with many analysts claiming they are vastly undervalued relative to US stocks.  However, I saw a telling chart this morning on X, showing that flows into Chinese stocks from outside the nation, the so-called northbound flows from Hong Kong, especially when compared to flows from the mainland to Hong Kong, have been awful, despite this recent rally.  As with many things regarding the Chinese economy and markets, the headlines can be deceiving at times in an effort to make things look better than they are.

While we did see the renminbi rally sharply after those initial stimulus announcements, it has since retraced most of those gains.  I cannot look at the situation there without seeing an economy that has serious structural imbalances and a terrible demographic future.  Meanwhile, the biggest problem is that President Xi has spent the past decade consolidating his power and eliminating much of the individual vibrancy that had helped the nation grow so rapidly.  Ultimately, I see CNY slowly depreciating as it remains the only relief valve the Chinese have on an international basis.

With that in mind, let’s take a look at how markets responded to the US CPI data and what other things may be having impacts.  Ultimately, US equity markets regained the bulk of their early losses yesterday to close marginally lower.  We’ve already mentioned China’s equity woes and Hong Kong was closed last night for a holiday.  Tokyo (+0.6%) managed a small gain, tracking the weakness in the yen (-0.25%) while the bulk of the region drifted modestly lower.  It seems many traders are awaiting this Chinese news to see how it will impact the rest of Asia.  As to European bourses, the movement here has also been di minimus with the FTSE 100 (-0.2%) the biggest mover after its data releases showing that GDP continues to trudge along slowly, growing only 1.0% Y/Y.  Continental exchanges are +/- 0.1% from yesterday, so no real movement there.  US futures, too, are essentially unchanged at this hour (7:00).

In the bond market, yields continue to edge higher with Treasuries gaining 3bps and European sovereigns all looking at gains of between 3bps and 5bps.  An interesting interest rate phenomenon that has not gotten much press is that the fact that at the end of September, the General Collateral Repo rate surged through the upper bound of the Fed funds rate, a condition that describes a potential dearth of liquidity in the markets.  

Source: zerohedge.com

The implication is that QT may well be ending soon in order for the Fed to be certain that there are sufficient bank reserves available for banks to meet their regulatory targets and not starve the economy of capital.  It has always been unclear how the Fed can start cutting rates while continuing to shrink the balance sheet as that was simultaneously tightening and easing policy, but it appears that we are much closer to universal policy ease, something else that will weigh on the dollar and support commodity prices over time.

Speaking of commodities, after yesterday’s rally, this morning, the metals complex is continuing modestly higher (Au +0.3%, cu +0.4%) but oil (-0.8%) is backing off a bit.  So much of the oil trade appears linked to the Middle East it is very difficult to discern the underlying supply/demand dynamics right now.

Finally, the dollar, after several days of strength, is consolidating and is little changed to slightly higher.  The DXY is trading right at 103 and the euro is hovering just above 1.09 with USDJPY at 149.00.  Several weeks ago, these numbers would have seemed ridiculous given the then current view of the Fed aggressively cutting rates.  But now, all that bearishness is fading, and it is true vs. almost every currency, G10 or EMG this morning.

On the data front, PPI leads the way this morning although given we already got the CPI data, it will have virtually no impact I would expect.  Estimates are for headline (0.1% M/M, 1.6% Y/Y) and core (0.2% M/M, 2.7% Y/Y).  As well, we get Michigan Sentiment (70.8) at 10:00 and we will hear from several more Fed speakers, including Governor Bowman, the dissenter at the FOMC meeting who looks quite prescient now.  One thing to note is yesterday’s Initial Claims data was much higher than expected at 258K, but that was attributed to the effects of Hurricane Helene, and now that Hurricane Milton has hit, I expect that those claims numbers will be a mess for a few more weeks before all the impact has passed through.

While Fedspeak remains far more dovish than the data, my take is if the data continues to show economic strength, especially if the next NFP release, which is just before the FOMC meeting, is strong again, the Fed will be hard pressed to cut even 25bps then.  For now, good economic news should support the dollar and weigh on bonds.

Good luck and good weekend

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New Calculation

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The markets in China retraced
One-fifth of their rally post-haste
Not everyone’s sure
The promise du jour
Is where traders’ trust can be placed
 
In Europe, attention’s now turned
To lesson’s the ECB’s learned
Their new calculation
Shows Europe’s inflation
No longer has members concerned

 

Let’s take a trip down memory lane.  Perhaps you can remember the time when the Chinese economy seemed to be faltering, and the Chinese stock markets were massively underperforming their peers.  That combination of events was enough to get President Xi to change his tune regarding stimulus and over the course of several days, first the PBOC and then the government announced a series of measures to support both the economy and the stock market specifically.  In fact, way back on September 24th I described the measures taken in this post.  Yep, that was two whole weeks ago!  The initial response was a rip-roaring rally in Chinese equity markets (~34%), and substantial strength in the renminbi.  Analysts couldn’t sing Xi’s praises loudly enough as they were certain that the government there was finally doing what was necessary to address the myriad issues within the Chinese economy.

But a funny thing happened on the way to this new nirvana, investors realized that all the hype was just that and the announced measures, while likely to help at the margins, were not going to change the big picture.  Ultimately, China remains in a difficult situation as its entire economic model of mercantilistic practices is running into populist uprisings everywhere else in the world.  And since domestic Chinese demand remains lackluster given the estimated $10 trillion that has evaporated in the local property markets, people at home are never going to be able to be a sufficiently large market for all the stuff that China makes.  

As this realization sets in, there is no better picture of this change of heart than the chart below showing the recent performance of the CSI 300.

Source: tradingeconomics.com

Last night’s 7% decline, which followed a similar one in Hong Kong the night before, has certainly stifled some of the ebullience that existed two weeks ago.  Now, the market has still gained a very healthy 25% from its lows last month, certainly nothing to sneeze at, but are the prospects really that great going forward?  Only time will tell, but I am not confident absent another significant bout of fiscal stimulus, something on the order of a helicopter money drop.  And that doesn’t seem like Xi’s cup of tea.

Turning to Europe, the economy there remains in the doldrums with some nations far worse off than others. Germany remains Europe’s basket case, as evidenced by this morning’s Trade Balance release there.  While the balance grew to €22.5B, that was because imports fell a larger than expected -3.4%, a signal that domestic activity is still lagging.  With the ECB set to meet next week, the market is currently pricing a 90% probability of a 25bp rate cut with talk of another cut coming at the following meeting as well.

You may remember that Madame Lagarde was insistent that there was no guaranty that the ECB would be cutting rates at every meeting once they started, rather that they would be data dependent.  But with the combination of slowing economic activity, especially in Germany, and the ensuing political angst it has created amongst the governments throughout Europe, it seems that many more ECB members have seen the inflation light and have declared a much higher degree of confidence that it will be at, or even below, their 2% target soon enough.  And maybe it will be.  However, similar to the Fed’s prognosticatory record, the ECB has a horrific track record of anticipating future economic variables.  A key problem for Europe is the suicidal energy policies they continue to promulgate.  Granted, some nations are figuring out that wind and solar are not the answer, but Germany is not one of them, at least not yet.  And as long as these policies remain in place and electricity prices continue to rise (they are already the highest in the world) then inflation pressures are going to continue.

Bringing this conversation around to more than macroeconomic questions, the market impact of recent data is becoming clearer.  While the US economy continues to show resilience, as evidenced by that blowout NFP report last Friday, and Europe continues to falter, the previous assumptions on rate movements with the Fed being the most aggressive rate cutter around are changing.  The result is the euro, which has slipped more than 2% in the past two weeks, is likely to continue to fall further, putting upward pressure on Eurozone inflation and putting the ECB in a bind.

Ok, those seem to be the drivers in markets today as we all look forward to tomorrow’s US CPI report.  A tour of the rest of the overnight session shows that Japan (+0.9%) continues to rebound from its worst levels a month ago as worries of aggressive monetary policy tightening continue to abate.  The latest view is the BOJ won’t move until January at the earliest.  The rest of Asia was mixed with the biggest gainer being New Zealand (+1.7%) which responded to the RBNZ cutting rates by 50bps, as expected, but explaining that further cuts were in line as they expected inflation to head below the middle of their 1% – 3% target range.  In Europe, the picture is mixed with more gainers than laggards but no movement of more than 0.3%, a signal that not much is happening.  US futures are similarly little changed at this hour (7:45) this morning.

In the bond market, Treasury yields have edged higher by 1bp and continue to trade above 4.00%, a level that had been seen as critical when the market moved below that point.  Given the overall lack of activity today, it should be no surprise that European sovereigns are also within 1bp of yesterday’s closing levels while JGB yields, following suit, rose a single basis point overnight.  It feels like the market is awaiting the CPI data tomorrow to make its next moves.

Oil prices were clobbered yesterday, falling nearly 6% at one point on the session before a modest late bounce.  This morning, they are slipping another -0.5% as market participants seem tired of waiting for a Middle East conflagration and instead have focused on the fact that more supply is coming on the market amidst softening demand.  Libya is back to full output of 1.2mm bpd and OPEC is still planning to increase production while China and Europe show softer growth.  That China story continues to undermine copper (-1.6%) although the precious metals, after downdrafts yesterday, are little changed this morning.

Finally, the dollar continues to find support on the strength of reduced Fed rate cut expectations alongside growing expectations for cuts elsewhere.  NZD (-1.0%) is today’s laggard though the rest of the G10 are all showing declines.  In the EMG bloc, the dollar is also higher universally, but the moves here are more modest.  In fact, away from NZD, the next largest declines have been seen in NOK (-0.6%) and SEK (-0.5%), but LATAM, APAC and EEMEA are all softer as well.

On the data front, this morning brings EIA oil inventories, with a net draw expected and then at 2:00 we see the FOMC Minutes from the last meeting.  But those are stale given the payroll report.  Instead, we hear from seven more Fed speakers today which will set the tone.  Yesterday’s speakers seemed to have been on the same page as Monday’s, with caution the watchword but rate cuts described as necessary despite the payroll report.  Whatever there mental model is, it is clearly pointing to rate cuts are necessary.

It feels like today is going to be quiet as markets await tomorrow’s CPI data.  The dollar seems likely to retain its bid, though, as the US is still the ‘cleanest shirt in the dirty laundry’ and global investors seem determined to own assets here.

Good luck

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