Tag Archives: #china

The Strait’s Dead

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The president’s on his way home
And pundits with TD Syndrome
All say that the trip
Did not flip the script
And still see the world in a gloam

But markets, one thing, seemed to hear
That though China wants Hormuz clear
The President said
To him the Strait’s dead
And markets responded with fear

With President Trump on his way back home from his trip to Beijing and meeting with Chinese President Xi, we can now expect reams of stories about all the things that he either did or didn’t accomplish.  Much has been made of Xi’s opening comments about Taiwan and how it is a critical issue that cannot be mishandled or it would impact the relationship between the two nations.  But as I think about Taiwan and China, I certainly understand Xi’s interest in having the island reintegrate into China as it would bring an enormous number of technological skills and abilities in areas currently absent on the mainland.  And, of course, Xi will point to history and claim it has always been part of China, yada, yada, yada.

However, ask yourself why any Taiwanese would want to become part of China.  After all, per capita income in Taiwan is ~$42K annually compared to ~$14K on the mainland.  That is a serious reduction in living standards.  Add to that the ability to vote in free elections and the accompanying belief that one’s voice can be heard, and that is a powerful argument to remain independent.  Now, as TSMC builds out is fabs in Arizona and elsewhere in the world, it seems to me that the US will lose interest in the Taiwan independence issue overall because, especially for President Trump, who views almost everything transactionally, if the US can get its semiconductors from elsewhere with no problems, notably domestically, defending an island on the other side of the world, one that is decidedly not in the Western Hemisphere, seems far less critical. 

Here’s a forecast, by the end of Trump’s term, with TSMC fabs up and running in Arizona, Japan and even Germany, we can see a Taiwan deal similar to the Hong Kong deal, which will sound great but over time China will absorb it in the same way it has done Hong Kong, removing freedoms and its appeal as a manufacturing center.

On to the other part of the trip that has had a much larger impact on markets, when Mr Trump explained, “We don’t need the Strait of Hormuz open.”  While the comments from the trip were that China wants it open and agrees tolls are inappropriate, the last throwaway line is what has markets on edge this morning.  And on edge, they certainly are!

Thus, without further ado, let’s take a look with pictures serving their purpose.  As of 7:15 this morning, here are the major equity index futures from tradingeconomics.com

The caveats here are that Toronto’s TSX and Brazil’s IBOVESPA futures markets are not yet open, but I’m confident both will open lower.  Russia’s MOEX is irrelevant which makes the Swiss Market Index the only equity market anywhere that is not falling.  Perhaps more than the Swiss franc, their stock market has achieved some haven status.

The thing to remember about this sell-off, though, is that we have had a remarkably strong week overall, and so this feels more like a profit taking retracement than the beginning of a new move lower, at least to me.  

In the bond market, sellers are the dominant force with yields higher everywhere around the world as per the below Bloomberg screenshot.

Much has already been written about 10-year Treasury yields trading at their highest level in almost exactly a year, and 30-year Treasury yields now firmly above 5.0% and how that spells the end of the good times in the US.  Maybe that is the case, but I am not convinced.  My take of the biggest problem is in the UK, where PM Starmer is under even more pressure this morning after several moves where a key cabinet member, Wes Streeting, resigned to open his path to run for PM as well as where a Labour party member stepped aside so that the very popular Andy Burnham, who is Mayor of Manchester, can now run for parliament and be in a position to become PM.  The issue here is that since Starmer will do all he can to hold on to his seat, and the Chancellor, Rachel Reeves, is in his corner, we will see even more deficit spending there to try to help Starmer stay in power.  Apparently gilt investors are not impressed with that potential.  Of course, neither is anybody holding pounds as a position as is apparent in the FX markets.

While the pound (-0.25%) is only modestly lower this morning, since Monday, as you can see below, it has fallen 3 cents and does not yet seem to have found a bottom.

Source: tradingeconomics.com

But this is of a piece with the dollar writ large this morning, which is higher virtually across the board.  In fact, as you can see, in what may be my most frequently printed chart to dispel the idea that the dollar is dying, the DXY remains firmly in its range for the past year and is now heading toward the upper band.  If you look at the calculated mean/variance of the DXY, you can see the trend line (the black line in the center) is completely flat, i.e. the dollar is trending neither higher nor lower over the past year.

Source: tradingeconomics.com

Looking at specific currencies, AUD (-1.0%) and NZD (-1.45%) are the worst performers in the G10, although NOK (-0.9%) and SEK (-0.9%) are giving them a run.  Kind of surprising for NOK given oil is much higher this morning.  in the EMG bloc, ZAR (-1.0%), CLP (-1.0%), MXN (-0.8%), and KRW (-0.5%) are the laggards in their respective regions with ZAR suffering from the commodity movements, as is CLP with copper sharply lower this morning.  MXN seems to be reacting to the news that the US has been stepping up its aggressive tactics against the drug cartels there and concerns about how that will end up.

Finally, on to commodities where oil (+3.0%) has responded exactly how you would expect to the Trump comment about his cares about Hormuz.  Meanwhile, the metals are back in full negative correlation mode with oil as all of them are sharply lower this morning (Au -2.0%, Ag -5.9%, Cu -4.3%, Pt -4.0%).  The one thing you have to admit about the commodities markets these days is that they are living up to their reputation of extreme volatility.

On the data front, this morning brings Empire State Manufacturing (exp 7.5), IP (0.3%) and Capacity Utilization (75.8%), none of which typically have a big impact and given the oil/Hormuz fears extant this morning, will almost certainly be completely ignored.  There are no Fed speakers today but I do want to mention one from yesterday, Governor Michael Barr, who directly contradicted everything Chairman Warsh has been saying about the size of the Fed’s balance sheet, explaining that if they move away from their current ‘ample reserves’ model, it could have very negative impacts on the functioning of money markets.

There is an irony here as prior to the ‘ample reserves’ framework, there was a very active Fed funds trading market on an interbank basis and banks were able to borrow from each other whatever they needed for liquidity purposes.  The Fed has usurped that role ever since the GFC and are now clearly concerned (afraid?) about going back.  The thing is, it seems to me that there continues to be a tremendous amount of liquidity around and it would be quite feasible to create an intraday loan market to help alleviate those concerns.  In fact, cash rich corporates (Berkshire Hathaway anyone?) could be part of the market as it would be entirely interbank and those corporates would know the counterparties quite well.  Suffice it to say that Mr Warsh will have quite a time getting his way at this stage.

And that’s what we have going into the weekend.  Gloom and doom about the near future, or profit taking, I’m not sure which.  As I have said all along, play it close to the vest, in think.

Good luck and good weekend

Adf

Prices Ain’t Tame

Posted on by 
The story today is the same
First China, then prices ain’t tame
The meeting twixt Xi
And Trump seemed to be
Successful as both sides will claim

But price data once again soared
Thus, PPI wasn’t ignored
But markets remain
Quite happy to feign
Indifference while traders are bored

China and prices remain the two dominant stories this morning, although despite much angst over yesterday’s MUCH hotter than expected PPI readings (Headline: 1.4% M/M, 6.0% Y/Y; Core 1.0% M/M, 5.2% Y/Y), markets did very little overall.  For instance, Treasury yields edged up 1bp yesterday and this morning have reversed that tiny move.  US equity markets were mixed with the DJIA slipping slightly while the NASDAQ (+1.2%) powered ahead oblivious to any potential negative issues with rising prices.  Oil barely budged, and the same was true with metals and the dollar.  In other words, despite a lot of analyst angst, and there was plenty regarding the data point, investors didn’t seem to care.

Now, while I am personally concerned over the trajectory of prices as I have seen nothing to indicate that governments anywhere are going to reduce their debt-financed spending nor are central banks going to stop supporting that activity, I clearly do not make up the majority view.  With that in mind, I do have a suspicion that something will come along that will shake the investor community’s faith in higher forever equity prices, but I have no idea what it will be.  After all, every other potential catalyst (e.g., oil at $100/bbl, 30-year Treasury yields at 5.00%, two hot wars involving nuclear powers) has been largely ignored.  So, let’s move on to the other story of note, Nixon Trump in China.

It is always interesting to see the framing of a particular story from different news outlets which is obvious based on how they lede a story.  But, trying to get through different versions of the same thing, it is clear that China’s primary concern is Taiwan and that there should be no US interference there.  The US’s primary concern appears to be solving the Iran situation with President Trump looking to President Xi to use his influence to get Iran to see the light.  Both nations agreed Iran should never have a nuke and that the Strait of Hormuz is an international waterway that should not be subject to blockage by one nation.  (China really cares about this because half of their oil also transits the Strait of Malacca, and if the precedent is set in Hormuz that it is not a free waterway, that could easily be extended to Malacca which would be a real problem for Xi.). 

Then there were trade talks, and discussion of fentanyl precursors and oil and agricultural trade as well as semiconductors, the usual stuff.  FWIW, which may not be much, I see this as the first major step to serious de-escalation between the two nations.  But here’s an interesting tidbit, and a critical piece of the Trump rationale behind tariffs on Chinese manufactured goods.  The below table from Nikkei News shows how much major Chinese companies (all listed on their stock exchanges) are getting in state subsidies.  This is, of course, the very definition of “cheating” on trade.

Ask yourself why profitable public companies that focus on exports would need state support.  This appears to be just another reason that Chinese manufactured goods are relatively cheap compared with elsewhere in the world.

Ok, enough about those stories as traders don’t seem to care about them.  In fact, right now, traders don’t seem to care about much.  But let’s look at the markets this morning.

Since there is not that much ongoing across all markets right now, I’m going to start in the FX world as yesterday saw a noteworthy move in the Brazilian real (-2.4%) as you can see in the chart below.

Source: tradingeconomics.com

While thus far this morning it has rebounded ever so slightly, +0.25%, the story is that Flavio Bolsonaro, former president Jair’s son and a leading candidate in the upcoming presidential election, has been caught up in a local financing scandal which may impact his electoral prospects and leave Lula, and his socialist policies, in charge.  Now, it must be remembered that this is a one-day movement but has done nothing to change the trend, as you can see below.  BRL has gained more than 21% in the past 18 months as real interest rates remain quite high and are drawing in carry traders from around the world.

Source: tradingeconomics.com

But away from that story in Brazil, FX is sound asleep across both G10 and EMG blocs.

Mixed is the only way to describe Asian equity markets last night with Tokyo (-1.0%), China (-1.7%) and Indonesia (-2.0%) all under pressure while Korea (+1.75%), India (+1.1%) and Taiwan (+0.9%) all rallied nicely.  As to the rest of the region, it was +/- a lot less movement.  Data overnight showed Chinese financing shrinking slightly, a surprising outcome, but one in sync with the reality on the ground there that the combination of a still imploding property market and a significant reduction in local government financing on the back of that is weighing on the economy overall.  They claim they will grow GDP at 4.5% to 5.0% this year, and I’m sure they will “meet” that target when the official data is produced, but all is not well there.

European bourses, though, are having a much better day with the DAX (+1.2%) leading the way higher although solid gains in France (+0.6%) and Spain (+0.8%) as well.  Everything I read about this price action this morning points to excitement over AI, but given Europe is virtually absent from the AI universe, I am not sure what they are implying.  It doesn’t seem likely there will be a European AI champion anytime soon, if ever.  But that’s the story I see.  Meanwhile, US futures continue to trade modestly higher at this hour (7:30).

In the bond market, while JGB yields continued higher overnight by 4bps, making yet further 19-year highs, European sovereign bonds have all seen yields slide between -4bp and -5bps this morning, allegedly on optimism that the Trump-Xi meeting will lead to pressure on Iran to reopen the Strait and reduce oil prices.  But that seems misplaced in the short-term in my view.  Nonetheless, that’s the story.

Earlier this week I discussed the political sh*t show in the UK and how PM Starmer appears to be on his last legs.  One of the reasons for this is that his policies have not exactly helped the nation’s economy.  For instance, this morning, preliminary GDP figures were released, and the Y/Y number was a better than expected 1.1%.  Now, the fact that 1.1% annual growth is better than expected is a major part of the problem.  A look at UK GDP growth for the past 5 years gives a sense of why the people there are so unhappy.  Of course, hamstringing yourself with the worst energy policies on the planet are a big part of this outcome, and that defines the Starmer administration.

Source: tradingeconomics.com

Finally, a turn to commodity markets shows…almost no movement.  Both oil (-0.1%) and gold (+0.1%), the leaders in the category, are going nowhere right now.  We have seen other commodities sink a bit (silver -0.8%, copper -0.7%), but given their volatility, those are also limited moves in reality.  When it comes to the oil market, there is an enormous amount of discussion regarding the imminent collapse of the global economy as the shuttering of the Strait is going to lead to a virtual energy apocalypse.  But to my eye (and I am not an oil trader) I cannot help but look at the below chart and see a market that has found a pretty good balance between supply and demand at around $100/bbl.  

Source: tradingeconomics.com

It is also important to remember that the oil market remains in a steep backwardation which tells us that supply issues over time are not a great concern.  In fact, I read this morning that with the overall curve at current levels, some oil drillers are considering expanding operations to take advantage of the higher prices, yet another reason to expect that the fears of $200/bbl oil are massively overblown.  They ain’t coming, I think.

On the data front, this morning brings the weekly Initial (exp 205K) and Continuing (1790K) Claims data as well as Retail Sales (+0.5%, +0.6% ex-autos) and Business Inventories (+0.8%).  We hear from a few more Fed speakers but, again, I don’t think they are of much importance right now.  The market is not pricing in any Fed funds movement for the rest of the year, and then a 25bp hike is the new view after that.  But the one thing we know about Fed funds futures is they are subject to major changes based on policy comments.  I’m sure we are all anxiously awaiting Chair Warsh’s first meeting next month.

And that’s it for today.  Quiet markets and no reason to think that will change right now.  Remember, fiat currencies are still crap, but nothing has changed my view that the dollar is the best of the bunch.

Good luck

Adf

Massive Divides

Posted on by 
On Friday, the Payrolls were strong
So, pessimists mostly were wrong
This week it’s inflation
That might change narration
Of how things are coming along

As well, this week Trump and Xi meet
And pundits, for good takes, compete
One side says Trump’s hand
Is nought but grandstand
The other cites Xi’s self-deceit

And last, but not least, all the talk
Of some kind of deal on the block
Was trashed by both sides
With massive divides
Twixt what each will offer…or walk

Last week ended on a very positive note in markets.  The payroll report, at least to my eyes, was solid with NFP higher than forecast, although Manufacturing payrolls shrank slightly, and overall, things seemed pretty solid.  Certainly, the equity markets were comforted as all three major indices closed higher with new record highs for both the S&P 500 and the NASDAQ.  Oil prices slipped on Friday, along with bond yields and the dollar while gold and silver finished the day higher.  The Iran narrative was that there were proposals going back and forth and folks were generally in a good mood.

Ahhh, the good old days.  While thus far, this morning is no disaster, there has clearly been a change in tone as hopes for a peace deal collapsed after President Trump declared that the Iranian response was “TOTALLY UNACEPTABLE!”  Not surprisingly, the first move in markets was oil (+2.5%) rising along with the dollar (DXY +0.1%) and Treasury yields (+3bps) while stocks (S&P -0.15%, NASDAQ -0.3%) and gold (-1.1%) fell.  This is all of a piece with recent correlations and relationships.

So, what are we to make of the current situation?  On the ground, at least in the US, things have not changed very much.  While energy prices remain higher than before the war, there are no shortages of any type for consumers, although that is not the case in many other nations.  India has gotten a lot of press this morning after PM Modi suggested that more people there work from home and that they stop buying gold as that exacerbates the shrinking FX reserve situation while the rupee continues to slide. 

Now, the thing about the rupee is that it has been sliding for a very long time.  Since 2003, as you can see in the below chart from Yahoo finance, the currency has more than halved in value vs. the dollar.  Perhaps the trajectory has steepened a little lately, but my take is this is more about the big round number of 100 rupee/dollar than the fact that the currency is weakening.

Of course, the issue for them becomes a weakening rupee amid rising commodity prices results in rising inflation, and that never helps an elected government.

I raise the point because it is a lead article in the WSJ and I have seen discussions on Substack blogs as well this morning, so it has a little oomph.  But look at that chart and ask has anything really changed?  The more important fact is that India is merely the avatar of what is happening around the world, especially in developing nations as they try to cope with the current situation.

Which begs the next question, when might this change?  Here the answer is far more difficult.  Clearly, there needs to be a cessation of hostilities in Iran for things to begin to return to normal and while I am encouraged that, at least, the US and Iran are swapping proposals, no matter how far apart the terms, it implies that there is a goal to end the situation.  One other thing that I continue to read is that the world hasn’t really felt the full impact of the war as the buffers of products that flow through Hormuz were significant and haven’t been run down yet, but there are many analysts explaining its just a matter of days/weeks/months before a total collapse occurs.  And maybe they are correct, but so far it has just not been the case.

Which takes us to the key event this week, the Trump-Xi meeting and what may result.  China is one of Iran’s few allies and likely has real pressure points there to help (force?) them to come to the table.  And, of course, there is a great deal of economic and trade stress between the two nations.  However, it is clearly in both nations’ best interest to come to an accord of some nature and de-escalate.  I am far more hopeful of a positive outcome on that front than on Iran, but we shall see.

In the meantime, let’s look at how markets have behaved overnight as we await, prior to the Trump-Xi summit, CPI tomorrow.

In the equity markets, overall, Tokyo was mixed although the Nikkei (-0.5%) finished the day lower.  Other laggards of note were, not surprisingly, India (-1.7%) along with Australia (-0.5%), Indonesia (-0.9%) and Thailand (-0.6%).  However, on the flip side, Korea (+4.3%) continues to be the biggest beneficiary of the semiconductor craze and setting yet another closing record.  As you can see from the chart below from Bloomberg.com, the market is going parabolic right now.  For those who are long, this is great, but history has shown that these moves will revert to the mean over time, and likely pretty quickly when it happens (remember gold and silver in late January?).  Beware here.  Meanwhile China (+1.6%) was amongst the other half of markets there with gains, although no others had substantial movement. 

In Europe, there is broad weakness on the continent, but only France (-1.0%) has shown any movement of note. Otherwise, major bourses here are +/- 0.25% or less.

In the bond markets, yields are higher across the board, with European sovereigns following Treasury yields and all higher by between 2bps and 4bps.  The UK (+6bps) is the outlier here after BOE member, Greene, in an interview explained that all the inflation risks were to the upside in the UK.  Right now, I suspect that is the case around the world.

In the commodity markets, perhaps the surprising feature today is not that gold is lower amid higher oil prices, but that silver (+0.25%) and copper (+1.4%) are both firmer.  In fact, copper is pushing back to its all-time trading highs set in a spike in late January.  But as you can see from the chart below from tradingeconomics.com, this move is gaining some strength.

Finally, the dollar is a bit stronger this morning, although hardly running away.  Other than the rupee discussed above and KRW (-0.65%) which is odd given the equity performance there, the bulk of the movement has been dollar strength on the order of 0.1% to 0.2% against both G10 and EMG currencies.  The dollar is not driving the market bus right now.  For those who follow the DXY, it is right at 98.00, again in the middle of its year long range.

On the data front, it is inflation week around the world with China reporting last night higher than forecast numbers of 1.2% Y/Y and PPI of 2.8% Y/Y with the latter, as you can see in the chart below, the highest number since July 2022.  Perhaps China’s long deflationary slog is over.

Source: tradingeconomics.com

Here are this week’s offerings:

TodayExisting Home Sales4.05M
TuesdayNFIB Small Biz Optimism96.1
 CPI0.6% (3.7% Y/Y)
 -ex food & energy0.4% (2.7% Y/Y)
WednesdayPPI0.5% (4.9% Y/Y)
 -ex food & energy0.3% (4.3% Y/Y)
ThursdayInitial Claims205K
 Continuing Claims1775K
 Retail Sales0.5%
 -ex autos0.6%
FridayEmpire State Manufacturing7.8
 IP0.3%
 Capacity Utilization75.9%

Source: tradingeconomics.com

As well, we get inflation readings from Germany, India, Brazil, France, Spain and Italy this week.  There are several Fed speakers, five in total, but they just don’t seem to matter that much right now.

And that’s what we have, everybody is waiting on the next Iran conflict news with hope for a resolution seeming to ebb slightly.  Frankly, until there is more clarity there, it is difficult to determine what comes next.

Good luck

Adf

Completely Reversed

Posted on by 
The market response was, at first
That things moved from bad to now worst
But by session’s end
The short-term downtrend
Was over, completely reversed

The narrative now making rounds
Is by starting naval lockdowns
Trump’s turned Iran’s table
And thus, may be able
To finish the goal he expounds

The irony, to me, of the entire Iranian situation is that, generically, the US shouldn’t need to care about Iran anymore.  Back in 1979, when the US imported a majority of its oil, everything in the Middle East was critical for the economy as a whole, and therefore politically.  But that is no longer the case, and if the Iranian leadership had simply wanted to repress its own people and espouse its Muslim fundamentalism, without sponsoring terrorism around the world, Iran would have faded from the view of the US establishment.  While there would have undoubtedly been some who would say it was a terrible humanitarian crisis, and the US should do something about it, unfortunately those situations are rampant around the world.  

Don’t get me wrong, I think the Iranian regime has been one of the cruelest and most repressive on the planet, I’m simply highlighting that to the US, it was an oil source throughout history.  Now that it’s no longer a key oil source for the US, it has no political constituency in the US.  And yet, here we are with 3 aircraft carrier groups in the vicinity doing incalculable damage to the nation because that leadership was not satisfied to simply repress its own people but felt it was their mission to destroy other nations, notably Israel and the US.  That’s all I will say about the rationale for the current events.

But speaking of current events, it seems that President Trump’s decision to blockade the Strait of Hormuz has shown early signs of being quite effective.  Two stories have made that point, first that the Chinese have suddenly made their first comments about the war, explaining that free navigation through the Strait is an imperative and second, that the Iranians appear to be quite interested in a second set of discussions after the ones last weekend fell apart.

The interesting thing about markets is their ability to anticipate the way things work out, as despite the early panic over the weekend regarding the talks failing and the blockade being enforced, price action yesterday was entirely positive, reversing all the Sunday night fears.  Once again, the oil chart for the past week shows the continued ups and downs, with the latest leg back down.  This morning, WTI is lower by a further -2.3% and back well below $100/bbl.

Source: tradingeconomics.com

In truth, we cannot be surprised at either of these stories as the Iranian leadership knows it cannot live without its oil exports, nor the Chinese without its access to that oil.  While it is still unclear how things will evolve from here, a successful conclusion of the war, with Iran giving up its enriched uranium and pledging to stop trying to go nuclear is seemingly closer to fruition than before all this started.  Certainly, the market believes that is the case given the S&P 500 has traded back above its pre-war level and is now within 100 points of its all-time high just above 7000.

Source: tradingeconomics.com

And here’s the thing about the oil market.  As we know, every shortage is followed by a glut.  Every non-Gulf producer has been going full bore since this began and oil prices spiked, and this was alongside the massive releases from strategic petroleum reserves around the world.  If you add up the amount of oil that is sitting in tankers in the Persian Gulf, along with the amount that is in storage there, and the amount of both Russian and Iranian oil that had been in transit and unsanctioned, the numbers are staggeringly high.  The math I saw from Alyosha (Market Vibes) is somewhere around 600 million barrels are going to come flooding into the market in fairly short order once the Strait is reopened, and it will be reopened, of that I am certain.  At the same time, the war has reduced revenues of the gulf nations for the past 6 weeks, and they will want to be pumping as much as possible, at any price (remember, in Saudi Arabia, the cost per barrel to pump oil is estimated to be between $3 and $6, so $30/bbl oil is still profitable.). While this is not an investment discussion nor advice of any type, I have exited all my oil focused positions at this point.

There is another related story here as well, this about the Chinese economy.  Last night they released their trade data, and it was substantially worse than expected.  As you can see from the chart below, the surplus barely topped $50 billion, compared to a consensus estimate of $112 billion with not only a massive increase in imports, 27.8% and likely highly energy related, but a significant decline in exports, just a 2.5% rise there.  Again, if you wonder why suddenly President Xi is interested in reopening the Strait of Hormuz, the fact that it seems to be having a direct impact on the Chinese economy is one of the reasons.

Source: tradingeconomics.com

(A note about the data above shows that each February, the export numbers decline as a result of the Chinese New Year celebrations but always rebound strongly in March.  And this was March data released that fell so sharply, a far more concerning outcome for Xi.)

So, with all this in mind, how have other markets fared?  Well, equity investors around the world are over the moon as you can see from the Bloomberg screen shot below.  ‘Nuff said.

Bond yields have also fallen across the board as the decline in the price of oil, plus the idea that the war may end sooner than some had expected, thus reducing the inflationary pressures greatly, has bond investors grabbing for yield.  Yesterday saw Treasury yields slip -2.5bps though this morning they are unchanged.  In Europe, sovereign yields are all lower by between -3bps and -6bps while JGB yields fell -4bps overnight with even larger declines in the rest of Asia.  Fear is clearly not a factor this morning.

It should not be surprising that precious metals prices have rallied as well, between lower yields and a growing belief that forced sales have stopped.  So, gold (+0.5%), silver (+2.5%) and platinum (+0.5%) are all having a good day.  But so are the base metals with copper (+0.8%) not only recouping its war-related losses, but actually back within spitting distance of its all-time highs set in January above $6.00/lb.

Source: tradingeconomics.com

Finally, the dollar is giving back more of its war-related gains and lower across the board this morning, with G10 currencies gaining on the order of 0.3% to 0.4% across the board, while EMG currencies show similar gains with one major outlier, INR (+1.4%) easily explained by the fact that India has been the hardest hit economy from the war, and so the prospects it is ending have had a very beneficial impact on the rupee.  But to be clear regarding the dollar, all we have seen is that it has moved back to the middle of its yearlong trading range between 96.50 and 100.00 based on the DXY as per the below.

Source: tradingeconomics.com

On the data front, yesterday’s Existing Home Sales numbers were weaker than forecast and many pundits have been claiming that as a signal of much greater economic weakness.  We shall see.  This morning we have already seen the NFIB Business Optimism Index released at a weaker than forecast 95.8, not a great sign, but as you can see below, still well above levels of a few years ago.

Source: tradingeconomics.com

We also get PPI (exp 1.1% M/M, 4.6% Y/Y headline, 0.5% M/M, 4.1% Y/Y core) and a few more Fed speakers.  With CPI already having been released, PPI loses much of its luster, although it helps economists estimate PCE a bit better.  One cannot be surprised that Governor Miran explained he expected to see inflation back to target by this time next year, but I am not holding my breath for that outcome.

Summing it all up this morning, risk is back baby!!!  If ever you were curious about whether markets anticipate events, today is exhibit A.  I certainly hope the market is correct and we are about to wind down the Iran war but be wary as it ain’t over til it’s over.  If it has ended, look for previous narratives to be resurrected regarding markets, notably the dollar’s demise, but I am not holding my breath over that either.

Good luck

Adf

A Different Scapegoat

Posted on by 
The war in Iran rages on
But markets are starting to yawn
Initial concern
Led traders to spurn
Risk assets each dusk until dawn

But now, just a few days have passed
And fear mongers all seem downcast
Most stocks have rebounded
And that has confounded
The bears who, gross shorts, had amassed

In fact, today’s story of note
Is China’s decision to float
A lower growth rate
To be their new fate
As Xi seeks a different scapegoat

This morning is the sixth day of the military action in Iran and depending on the source, the US is either kicking ass or setting up for the greatest collapse of all time.  Perhaps the most interesting statistic of this war is the number of casualties reported thus far, which when summed across all the theaters, appears to be somewhere between 1000 and 1200.  It seems to me that given the ferocity of the attacks on both sides, that is a remarkably low number.  I certainly hope it stays low, for everyone’s sake.

In the meantime, market participants have absorbed the ongoing information and much of the initial FUD has been ameliorated.  I only say this because yesterday and overnight, equity markets are almost universally higher, and in some cases, by substantial amounts.  Arguably, this is a bigger disaster for the Iranians than almost anything else.  If financial markets continue to motor along despite the war, it removes a potential pressure point on President Trump to deescalate.  In fact, the only market that is continuing to demonstrate any price concerns is the oil market, where WTI (+2.6%) and Brent (+2.2%) are both back close to the highest levels seen in the first days.

Source: tradingeconomics.com

The Strait of Hormuz continues to be effectively closed, and that remains a problem for both Europe and Asia, especially China.  In fact, this morning I read that China has ceased exporting refined products amid concerns of how long this war will continue.  

Now, permanently higher oil prices would definitely have severe negative consequences for the global economy if that were to be the outcome.  But I don’t see that as the outcome.  Rather, the world is awash in oil as the US and Canada and Venezuela and Brazil and Argentina continue to pump like crazy.  As well, Saudi Arabia has two major pipelines that ship oil to the Red Sea rather than require transit of the Strait, so I am not hugely concerned about a much higher price.  All of the fears of $100/bbl or higher oil in the event of a closure of the Strait of Hormuz have not come to pass, at least not yet, and I see no reason for that to be the case going forward.

But away from oil, things are remarkably ordinary in markets, so much so that the real story of the day, I believe, is that China has targeted GDP growth of ‘just’ 4.5%. – 5.0% for this year.  The WSJ had a very nice graph of the trajectory of Chinese GDP since 1985 showing a 4.5% outcome would be the lowest (excluding Covid) since 1991.

For a good explanation of things regarding the Chinese economy, it is always worthwhile to turn to @michaelxpettis on X and he didn’t disappoint this morning.  In a nutshell, his point is that while the statement claims they will be focusing more on domestic consumption in their effort to rebalance the economy, that has been the stated aim for at least 5 years, and we know that hasn’t happened.  President Xi’s problem is that if that goal were to be achieved, it would result in GDP growth somewhere on the order of 2%, and that is not acceptable.  For my money, nothing has changed there.  Chinese companies will still over produce, prices in China will still be pressured lower and the Chinese trade surplus will remain well in excess of $1 trillion.

And that’s really what we have today.  I am not a war correspondent, so will not be highlighting anything there.  Rather, let’s turn to the markets and see what happened overnight.  under the guise of a picture is worth 1000 words, I give you major equity market performance in the past 24 hours below from Bloomberg.

Of course, this doesn’t consider Korea (+9.6%) which was the biggest winner overnight, and recouped most of the previous day’s losses as per the below.

Source: finance.yahoo.com

But virtually every market in Asia rallied overnight with Taiwan, Indonesia and Thailand all higher by 2% or more.  As to Europe, the euphoria is not as high, but still fear is not evident and at this hour (7:10), US futures are flat to -0.15%, so basically unchanged.

The bond market is having a tougher time around the world with Treasury yields rising yesterday by 4bps and up another 2bps this morning.  European sovereign yields are all higher by between 6bps and 8bps as inflation fears start to get built into investment theses.  Remember, Europe is probably the worst hit regarding the oil/LNG supply disruptions and prices there are likely to climb further than in the US or Western Hemisphere.  Too, JGBs (+4bps) are feeling a little strain, despite (because of?) Ueda-san and his cronies expressing concern over the war’s impact on inflation in Japan and maintaining that a rate hike in April is still a possibility.

Speaking of inflation, the Fed’s Beige Book was released yesterday as well as a NY Fed survey on prices in their region and both pointed to much more underlying inflation than the CPI data currently implies.  Wolf Richter had an excellent write-up here, and the numbers are eye opening.

In the metals markets, gold (+0.6%) really has a remarkable amount of support under all conditions.  Whether I look at a mechanically drawn trend line or the 50-day moving average, the barbarous relic remains in demand and shows no signs of breaking lower.  I continue to believe that the recent volatility and liquidations were the result of leveraged traders in other products needing to sell something to make margin calls, and gold was available for the job.

Source: tradingeconomics.com

As to the other metals, silver (+1.1%) and platinum (+0.9%) are both modestly firmer while copper (-1.3%) is bucking the trend, although I see no good reason for it to decline.  One interesting thing to note is that silver in the COMEX vaults continues to decline which many see as a potential point of supply issues going forward.  Nothing has changed that story.

Finally, the FX markets are once again hewing toward dollars with the DXY (+0.15%) back around 99.00.  The worst performer today is CLP (-1.1%) which is feeling the pressure from copper’s struggles, but ZAR (-0.9%) is also under pressure despite gold’s rebound.  Interestingly, NOK (-0.2%) cannot seem to gain any ground despite oil’s rally, although arguably, the dollar itself has become a major petrocurrency with a positive correlation to oil.  This space is not that interesting right now.

On the data front, I neglected to mention ADP Employment yesterday, which wound up at a better-than-expected 63K.  Too, oil inventories in the US rose again last week.  This morning, Initial (exp 215K) and Continuing (1850K) Claims are due as well as Nonfarm Productivity for Q4 (1.9%) and Unit Labor Costs (2.0%).  But does the data really matter right now?  Perhaps tomorrow’s NFP will have impact, but with the war and higher oil prices, it is very difficult for me to see a scenario where the Fed will impose itself here, not where the market will care that much, at least not the stock market. Bonds would react I suppose.  But it ain’t gonna happen, so don’t worry about it.

Absent a change in the war’s current trajectory, I think investors are going to focus on trying to estimate how long oil prices will remain elevated as that is really the big question for most markets.  I can only hope it doesn’t take that much longer for a conclusion.

Good luck

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Memory-Holed

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Since Thursday, the world has adjusted
Its views about what can be trusted
The safety of gold
Is memory-holed
As retail becomes more disgusted
 
Perhaps we should not be surprised
That China has now advertised
A latent desire
The yuan should move higher
As status, reserve’s, emphasized
 
And one last thing, can it be true
That markets have taken their cue
From Fed Chair-select
I am circumspect
I guess, though, that’s what traders do

Wow!  It has been a remarkable couple of trading sessions, that’s for sure.  As we start this morning, precious metals remain the story, with both gold (-2.25%) and silver (-1.25%) still sliding, although both have rebounded from their worst levels of the overnight session as you can see in the chart below.

Source: tradingeconomics.com

Certainly, the debasement trade had gotten awfully crowded, but ask yourself, do you believe that people suddenly decided fiat currencies are great again?  Me neither.  As we have learned many times in the past, markets overshoot in both directions when something changes sentiment.  Which brings me to my second question, is this really all about Kevin Warsh?  If so, what a harsh introduction to his new role.  I understand the idea that Warsh’s perceived hawkish bias runs contra to how the narrative had evolved, but my experience is that it is rarely a single catalyst that causes a market adjustment of the type we have just seen.  The one time that comes to mind was the Plaza Accord, but at that time, the G7 nations all came out and declared they were adjusting monetary policy toward a particular goal.  Assuming a new Fed chair is going to make changes of that nature seems aggressive.

Nonetheless, this is where we are.  Thursday’s narratives have all been destroyed and new ones have yet to be written.  So, for now, I anticipate choppy trading, although nothing has changed the underlying fundamentals for metals, the dollar or the economy, at least not yet.

Which brings me to another interesting development over the weekend.  Apparently, back in 2024, Chinese President Xi Jinping made a speech to a group of provincial officials, that had heretofore not been publicized, where he declared his ambition to have the yuan become a reserve currency.  This is an interesting idea, but one that I believe will be very difficult for him to achieve, at least given his apparent desire to control every aspect of the Chinese economy.  After all, for other nations to hold a currency as part of their reserves, they will want complete, unfettered access to convert it at any time they desire.  Otherwise, as a reserve manager, why would you even consider holding it as part of your national wealth.  

One thesis is that China is going to back the CNY with gold, but I challenge that thesis.  Let’s do a little thought experiment here.  

  1. China claims CNY is gold backed, so it is safer than USD which is backed only by the full faith and credit of the US government.
  2. Saudi Arabia sells China lots of oil and gets paid in CNY
  3. Since the Saudis can’t really do anything with their CNY, they go to the PBOC and say, here’s your CNY, give me gold.
  4. China says
    1. no problem, or
    1. no way

Which do you think is more likely, a) or b)?

China claiming that CNY is backed by gold because they have bought a bunch lately is no different than the US claiming the USD is backed by gold because we hold a bigger bunch in Ft Knox.  It is meaningless unless those who hold bank notes, or their digital form, can convert it.  Even at the government level, and I find it difficult to believe that China will ever permit that type of transaction.  But it sure makes for good headlines to offset the debasement trade debacle that just played out!

As we have observed over the past months, things do change quickly these days, so who knows what tomorrow will bring.  But for now, let’s look at how the rest of the markets behaved overnight.

I’m going to start with bonds because they are the easiest.  Virtually nothing has happened for weeks.  Treasury yields (-1bp) have slipped slightly, as have JGB yields (-1bp) while European sovereign yields have edged higher by 1bp across the board.  I would think if risk views had really changed, there would be more activity here.  Perhaps the biggest surprise is JGB’s where the most recent poll for the election coming Sunday has her LDP coalition winning a landslide 300 seats.  If that is the case, based on the earlier concerns of her apparent willingness to increase unfunded spending, I would have thought JGB’s would suffer.  But not today.

Turning to stocks, while Friday’s US performance was lackluster, it was a virtual star relative to the metals space.  As to Asia last night, it was ugly with Japan (-1.25%), China (-2.1%), HK (-2.2%) and Australia (-1.0%) all under pressure as it appears a combination of fears over changing global dynamics mixed with weakness in mining company shares after the metals rout.  Korea (-5.3%) meanwhile, really took it on the chin with a sharp reversal of recent gains that had outpaced almost all other major markets.  Indonesia (-4.9%) also got crushed, but then they have had problems since the threat of reduced status.  India (+1.2%) was the only market gainer of note.

Europe, though, has neither tech nor mining companies of note and so is higher across the board this morning, led by Spain (+0.8%) and Germany (+0.6%) after very slightly better than expected PMI data this morning. As to US futures, at this hour (7:30) they are slightly softer with the NASDAQ (-0.5%) the laggard.

Oil (-4.75%) is backing off significantly this morning as there appears to have been a reduction in the rhetoric between President Trump and Iran, with negotiations mooted for some time this week or next, ostensibly in Turkey.  Nat Gas (-17.1%) is giving back some of its recent gains as US temperatures exit the polar vortex and come back to more normal winter temps.

Finally, the dollar is doing little this morning.  Friday saw a solid rebound across the board, about 1%, but today, the biggest movers are ZAR (+0.8%) which is shocking given the move in gold, MXN (+0.5%), where traders believe the Banco de Mexico is likely to be a bit more hawkish than previously thought and CNY (+0.25%) I guess on the reserve currency story.  But the G10 are all little changed and the one other thing of note is that Secretary Bessent ruled out US intervention in the yen, although it remains little changed on the session near 155.00.

On the data front, as it is the first week of the month, we finish off with NFP.  Here’s what else is coming:

TodayISM Manufacturing48.5
 ISM Prices Paid60.5
TuesdayJOLYs Job Openings7.1M
 Economic Optimism Index47.9
WednesdayADP Employment40K
 ISM Services53.5
ThursdayInitial Claims210K
 Continuing Claims1825K
FridayNonfarm Payrolls70K
 Private Payrolls60K
 Manufacturing Payrolls-10K
 Unemployment Rate4.4%
 Average Hourly Earnings0.3% (3.6% Y/Y)
 Average Weekly Hours34..2
 Participation Rate62.3%
 Michigan Sentiment55.8

Source: tradingeconomics.com

In addition, we hear from 5 more Fed speakers, but quite frankly, I expect that the only Fed voice that is going to matter for a while is Warsh, and he is not on the slate that I can see.  

We have seen a dramatic change in market mindset since Thursday, but we have not seen any change at all in policy or economics.  At this point, it is clear the market was overdone (remember, trees don’t grow to the sky), but that doesn’t mean the underlying thesis was wrong.  I still think that the need for commodities is substantial, and we will see prices go higher.  As to the dollar, there is no indication it is about to collapse, nor would I expect it.  Until such time as other nations are clamoring to own CNY, the dollar remains the only game in town.  Big picture, I still like it vs. other fiat currencies.

Good luck

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Too Potent a Force

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The headline today’s NFP
As pundits will try to agree
On whether the Fed
When looking ahead
Will like what it is that they see
 
But, too, the Supreme Court is due
To rule whether tariffs imbue
Too potent a force
For Trump, to endorse
Or whether they’ll let them go through

 

As the session begins in NY, markets have been relatively quiet as traders and algorithms await the NFP data this morning.  Recall, Wednesday’s ADP number was a touch softer than forecast, but still, at 41K, back to a positive reading.  Forecasts this morning are as follows:

Nonfarm Payrolls60K
Private Payrolls64K
Manufacturing Payrolls-5K
Unemployment Rate4.5%
Average Hourly Earnings0.3% (3.6% y/Y)
Average Weekly Hours34.3
Participation Rate62.6%
Housing Starts1.33M
Building Permits 1.35M
Michigan Sentiment53.5

Source: trading economics.com

Regarding this data point, there are two things to remember.  First, last month Chairman Powell explained that he and the Fed were coming to the belief that the official data was overstating reality by upwards of 60K jobs due to concerns over the birth/death portion of the model.  That is the factor the BLS includes to estimate the number of new businesses started vs. old ones closed in any given month.  Historically, at economic inflection points, it tends to overstate things when the economy is starting to slow and understate when it is turning up.  

The second thing is that given the changes in the population from the administration’s immigration policy, with net immigration having fallen to zero recently, the number of new jobs required to maintain solid economic growth is much lower than what we have all become used to, which in the past was seen as 150K – 200K.  So, 60K, or even 40K, may be plenty of new jobs to absorb the growth in the labor market, which will come from people re-entering the market who had previously quit looking for a job.

The ancillary data, like ADP and the employment pieces of ISM were both stronger in December than November, so my take is, the estimates are probably reasonable.  I have no strong insight into why it would be dramatically different at this point.  The question is, how will markets respond?  My take is this could well be a ‘good news is bad’ situation where a strong print will see pressure on bonds and stocks as the market reduces its probability of a Fed rate cut (currently 14% for January, 45% for March) even further.  The dollar would benefit, as would oil on the demand story, but I think metals will do little as that story is not growth oriented.  A weak number would see the opposite.

Of course, the other big potential news today is the Supreme Court ruling on the legality of Trump’s tariffs.  The odds markets are at ~70% they will overturn them, but there is the question of whether it will require the government to repay the tariffs or simply stop them.  As well, most of them will be able to be reimposed via different current laws, so net, while a blow to the administration I don’t believe it will have a major long-term impact with repayment the biggest concern.  This particular issue is far too esoteric for a simple poet to prognosticate.

And those are the market stories of note, although we cannot ignore the growing protests in Iran as videos show buildings burning in Tehran and there is word that the Mullahs are at the airport, which if true tells me that the regime is on the edge.  While this would be a great victory for the people of Iran, it would also have a dramatic impact on oil markets and specifically on China.  While sanctions could well be lifted, thus depressing the price as more comes to market, China currently benefits from buying sanctioned oil at a massive discount, and that discount would disappear.

As we await all the news, let’s review the overnight activity.  A mixed US session was followed by strength in Tokyo (+1.6%) as the Japanese government surprised one and all by reporting a stronger 30-year JGB auction than anticipated as well as an uptick in spending by households.  Too, nominal GDP growth has been outpacing deficit growth driving the net debt ratio lower, exactly what the US is seeking to do.  As to the rest of the region, both China (+0.45%) and HK (+0.3%) managed gains, as did Korea and Malaysia but India (-0.7%) continues to lag as it has all year.  Data from China showed inflation fell less than expected, although the Y/Y number remains at just 0.8%.

In Europe, gains are also the norm with France (+0.9%) leading the way with both the UK (+0.55%) and Germany (+0.4%) having solid sessions.  Retail Sales data from the Eurozone was firmer than expected at 2.3%, a rare positive outcome, but showing some support.  As to the US futures market, at this hour (7:30) all three major indices are higher by about 0.15%.

In the bond market, while yields have edged higher by 2bps this morning, as you can see from the chart below, they remain within, albeit at the top, of the recent 4.0% – 4.2% trading range.  

Source: tradingeconomics.com

The most interesting data point from yesterday was the dramatic decline in the Trade deficit, which fell to -$29B, its lowest level since 2009.  Recall that a long-time issue has been the twin deficits, with the budget and trade deficits linked closely.  I wonder, are we going to see Trump’s efforts at reducing government’s size and reach result in a smaller budget deficit?  Most pundits dismiss this idea, but I’m not so sure.  As to the rest of the world, European sovereigns are essentially unchanged this morning as investors everywhere await the US data and tariff ruling.

In the commodity markets, oil (+0.9%) is creeping higher but remains in its downward trend.

Source: tradingeconomics.com

Wednesday, we saw a large draw in crude inventories abut a massive build in both gasoline and distillates which feels mildly bearish.  The narrative is the Iran story is getting people nervous for potential short-term disruption, but I remain overall bearish for now.  As to the metals markets, gold (-0.3%) is slipping after having recovered early morning losses yesterday and finishing higher, while silver (+0.6%) is still bouncing along with copper (+1.8%) and platinum (+0.4%). Metals are in demand and supply is short.  Price here have further to rise I believe.

Finally, the dollar continues to rebound off its recent lows with the DXY back to 99 again this morning.  it has rallied in 11 of the past 13 sessions, not typical price action for a trading vehicle that is in decline.

Source: tradingeconomics.com

In fact, the greenback is firmer against virtually all its G10 and EMG counterparts this morning with the largest declines seen in JPY (-0.5%), KRW (-0.5%) and NZD (-0.5%) with others typically sliding between -0.1% and -0.3%.  again, it is hard to watch recent price action and see impending weakness.  We will need to see much weaker US data to change my view.  And along those lines, the Atlanta Fed’s GDPNow number just jumped to 5.4% for Q4 after the Trade data yesterday, again, atypical of further weakness in this sector.

And that’s really all as we covered data up top.  To me, the wild cards are Iran and the USSC.  While I do believe the regime will fall in Iran (they just shut down the internet to try to prevent a further uprising) my take on the Supremes is they may stop further tariffs but will not force repayment.  Net, that won’t change much at all and given the prediction markets are pricing a 70% probability of an end to tariffs, if it happens, it’s already in the price!

Good luck and good weekend

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Crazier Still

Posted on by

There once was a time when the Fed
When meeting, and looking ahead
All seemed to agree
The future they’d see
And wrote banal statements, when read
 
But this time is different, it’s true
Though those words most folks should eschew
‘Cause nobody knows
Which way the wind blows
As true data’s hard to construe
 
So, rather than voting as one
Three members, the Chairman, did shun
But crazier still
The dot plot did kill
The idea much more can be done

 

I think it is appropriate to start this morning’s discussion with the dot plot, which as I, and many others, expected showed virtually no consensus as to what the future holds with respect to Federal Reserve monetary policy.  For 2026, the range of estimates by the 19 FOMC members is 175 basis points, the widest range I have ever seen.  Three members see a 25bp hike in 2026 and one member (likely Governor Miran) sees 150bps of cuts.  They can’t all be right!  But even if we look out to the longer run, the range of estimates is 125bps wide.

Personally, I am thrilled at this outcome as it indicates that instead of the Chairman browbeating everyone into agreeing with his/her view, which had been the history for the past 40 years, FOMC members have demonstrated they are willing to express a personal view.

Now, generally markets hate uncertainty of this nature, and one might have thought that equity markets, especially, would be negatively impacted by this outcome.  But, since the unwritten mandate of the Fed is to ensure that stock markets never decline, they were able to paper over the lack of consensus by explaining they will be buying $40 billion/month of T-bills to make sure that bank reserves are “ample”.  QT has ended, and while they will continue to go out of their way to explain this is not QE, and perhaps technically it is not, they are still promising to pump nearly $500 billion /year into the economy by expanding their balance sheet.  One cannot be surprised that initially, much of that money is going to head into financial markets, hence today’s rally.

However, if you want to see just how out of touch the Fed is with reality, a quick look at their economic projections helps disabuse you of the notion that there is really much independent thought in the Marriner Eccles Building.  As you can see below, they continue to believe that inflation will gradually head back to their target, that growth will slow, unemployment will slip and that Fed funds have room to decline from here.

I have frequently railed against the Fed and their models, highlighting time and again that their models are not fit for purpose.  It is abundantly clear that every member has a neo-Keynesian model that was calibrated in the wake of the Dot com bubble bursting when interest rates in the US first were pushed down to 0.0% while consumer inflation remained quiescent as all the funds went into financial assets.  One would think that the experience of 2022-23, when inflation soared forcing them to hike rates in the most aggressive manner in history, would have resulted in some second thoughts.  But I cannot look at the table above and draw that conclusion.  Perhaps this will help you understand the growth in the meme, end the fed.

To sum it all up, FOMC members have no consensus on how to behave going forward but they decided that expanding the balance sheet was the right thing to do.  Perhaps they do have an idea, but given inflation is showing no signs of heading back to their target, they decided that the esoterica of the balance sheet will hide their activities more effectively than interest rate announcements.

One of the key talking points this morning revolves around the dollar in the FX markets and how now that the Fed has cut rates again, while the ECB is set to leave them on hold, and the BOJ looks likely to raise them next week, that the greenback will fall further.  Much continues to be made of the fact that the dollar fell about 12% during the first 6 months of 2025, although a decline of that magnitude during a 6-month time span is hardly unique, it was the first such decline that happened during the first 6 months of the year, in 50 years or so.  In other words, much ado about nothing.  

The latest spin, though, is look for the dollar to decline sharply after the rate cut.  I have a hard time with this concept for a few reasons.  First, given the obvious uncertainty of future Fed activity, as per the dot plot, it is unclear the Fed is going to aggressively cut rates from this level anytime soon.  And second, a look at the history of the dollar in relation to Fed activity doesn’t really paint that picture.  The below chart of the euro over the past five years shows that the single currency fell during the initial stages of the Fed’s panic rate hikes in 2022 then rallied back sharply as they continued.  Meanwhile, during the latter half of 2024, the dollar rallied as the Fed cut rates and then declined as they remained on hold.   My point is, the recent history is ambiguous at best regarding the dollar’s response to a given Fed move.

Source: tradingeconomics.com

I have maintained that if the Fed cuts aggressively, it will undermine the dollar.  However, nothing about yesterday’s FOMC meeting tells me they are about to embark on an aggressive rate cutting binge.

The other noteworthy story this morning is the outcome from China’s Central Economic Work Conference (CEWC).  I have described several times that the President Xi’s government claims they are keen to help support domestic consumption and the housing market despite neither of those things having occurred during the past several years.  Well, Bloomberg was nice enough to create a table highlighting the CEWC’s statements this year and compare them to the past two years.  I have attached it below.

In a testament to the fact that bureaucrats speak the same language, no matter their native tongue, a look at the changes in Fiscal Policy or Top Priority Task, or even Real Estate shows that nothing has changed but the order of the words.  The very fact that they need to keep repeating themselves can readily be explained by the fact that the previous year’s efforts failed.  Why will this time be different?

Ok, a quick tour of markets.   Apparently, Asia was not enamored of the FOMC outcome with Tokyo (-0.9%) and China (-0.9%) both sliding although HK managed to stay put.  Elsewhere in the region, both Korea (-0.6%) and Taiwan (-1.3%) were also under pressure as most markets here were in the red.  The exceptions were India, Malaysia and the Philippines, all of which managed gains of 0.5% or so.  

In Europe, things are a little brighter with modest gains the order of the day led by Spain (+0.5%) and France (+0.4%) although both Germany and the UK are barely higher at this hour.  There was no data released in Europe this morning although the SNB did meet and leave rates on hold at 0.0% as universally expected.  There has been a little bit of ECB speak, with several members highlighting that ECB policy is independent of Fed policy but that if Fed cuts force the dollar lower, they may feel the need to respond as a higher euro would reduce inflation.  Alas for the stock market bulls in the US, futures this morning are pointing lower led by the NASDAQ (-0.7%) although that is on the back of weaker than expected Oracle earnings results last night.  Perhaps promising to spend $5 trillion on AI is beginning to be seen as unrealistic, although I doubt that is the case 🤔.

Turning to the bond market, Treasury yields have slipped -2bps overnight after falling -5bps yesterday.  Similar price action has been seen elsewhere with European sovereign yields slipping slightly and even JGB yields down -2bps overnight.  Personally, I am a bit confused by this as I have been assured that the Fed cutting rates in this economy would result in a steeper yield curve with long-dated rates rising even though the front end falls.  Perhaps I am reading the data wrong.

In the commodity markets, the one truth is that there are no sellers in the silver market.  It is higher by another 0.5% this morning and above $62/oz as whatever games had been played in the past to cap its price seem to have fallen apart.  Physical demand for the stuff outstrips new supply by about 120 million oz /year, and new mines are scarce on the ground.  This feels like there is further room to run.

Source: tradingeconomics.com

As to the rest of the space, gold (-0.2%) which had a nice day yesterday is consolidating, as is copper.  Turning to oil (-1.1%) it continues to drift lower, dragging gasoline along for the ride, something that must make the president quite happy.  You know my views here.

As to the dollar writ large, while it sold off a bit yesterday, as you can see from the below DXY (-0.3%) chart, it is hardly making new ground, rather it is back to the middle of its 6-month range.  

Source: tradingeconomics.com

This morning more currencies are a bit stronger but in the G10, CHF (+0.45%) is the leader with everything else far less impactful.  And on the flip side, INR (-0.7%) has traded to yet another historic low (USD high) as the new RBI governor has decided not to waste too much money on intervention.  Oh yeah, JPY (+0.2%) has gotten some tongues wagging as now that the Fed cut and the BOJ is ostensibly getting set to hike, there is more concern about the unwind of the carry trade.  My view is, don’t worry unless the BOJ hikes 50bps and promises a lot more on the way.  After all, if the Fed has finished cutting, something that cannot be ruled out, this entire thesis will be destroyed.

On the data front, Initial (exp 220K) and Continuing (1950K) Claims are coming as well as the Trade Balance (-$63.3B).  There are no Fed speakers on the docket, but I imagine we will hear from some anyway, as they cannot seem to shut up.  

It would not surprise me to see the dollar head toward the bottom of this trading range, but I think we need a much stronger catalyst than uncertainty from the Fed to break the range.

Good luck

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Cold Growth

Posted on by

Winter approaches
Both cold weather and cold growth
Plague Japan’s future

 

It’s not a pretty picture, that’s for sure.  A raft of Japanese data was released early Sunday evening with GDP revised lower (-0.6% Q/Q, -2.6% Y/Y) and as you can see from the Q/Q chart below, it is hard to get excited about prospects there.

Source: tradingeconomics.com

Of course, this is what makes it so difficult to estimate how Ueda-san will act in a little less than two weeks’ time.  On the one hand, inflation remains a problem, currently running at 3.0% and showing no signs of declining.  Recall, the BOJ has a firm 2.0% target, so they are way off base here.  Add to that the fact that inflation in Japan had been virtually zero for the prior 15 years and the population is starting to get antsy.  However, if growth is retreating, how can Ueda-san justify raising rates?

In the meantime, the punditry is having a field day discussing the yen and its broad weakness, although for the past three weeks, it has rebounded some 2% in a steady manner as per the below chart,

Source: tradingeconomics.com

As well, much digital ink has been spilled regarding the 30-year JGB yield which has traded to historic highs as per the below chart from cnbc.com.

There are many pundits who have the view that the Japanese situation is getting out of control.  They cite the massive public debt (240% of GDP), the fact that the BOJ holds 50% of the JGB market, the fact that the yen has declined to its lowest level (highest dollar value) since a brief spike in 1990 and before that since 1986 when it was falling in the wake of the Plaza Accord.

Source: cnbc.com

Add in weakening economic growth and growing tensions with China and you have the makings of a crisis, right?  But ask yourself this, what if this isn’t a crisis, but part of a plan.  Remember, the carry trade remains extant and is unlikely to disappear just because the BOJ raises rates to 0.75% in two weeks.  This means that Japanese investors are still enamored of US assets, notably Treasuries, but also stocks and real estate, as a weakening yen flatters their holdings.  Too, it helps Japanese companies compete more effectively with Chinese competitors who benefit from a too weak renminbi as part of China’s mercantilist model.  Michael Nicoletos, one of the many very smart Substack writers, wrote a very interesting piece on this subject, and I think it is well worth a read.  In the end, none of us know exactly what’s happening but it is not hard to accept that some portion of this theory is correct as well.  The one thing of which I am confident is the end is not nigh.  There is still a long time before things really become problematic.

And the yen?  In the medium term I still think it weakens further, but if the Fed gets very aggressive cutting rates, that will likely result in a short-term rally.  But much lower than USDJPY at 145-150 is hard for me to foresee.

Turning to the other noteworthy news of the evening, the Chinese trade surplus has risen above $1 trillion so far in 2025, with one month left to go in the year.  This is a new record and highlights the fact that despite much talk about the Chinese focusing more on domestic consumption, their entire economic model is mercantilist and so they continue to double down on this feature.  While Chinese exports to the US fell by 29% in November, and about 19% year-to-date, they are still $426 billion.  However, China’s exports to the rest of the world have grown dramatically as follows: Africa 26%, Southeast Asia 14% and Latin America 7.1%.  Too, French president Emanuel Macron just returned from a trip to Beijing, meeting with President Xi, and called out the Chinese for their export policies, indicating that Europe needed to take actions (raise tariffs or restrict access) before European manufacturing completely disappears.  (And you thought only President Trump would suggest such things!)

So, how did markets respond to this?  Well, the CSI 300 rose 0.8% (although HK fell -1.2%) and the renminbi was unchanged.  But I think it is worth looking at the renminbi’s performance vs. other currencies, notably the euro, to understand Monsieur Macron’s concerns.

Source: tradingeconomics.com

It turns out that the CNY has weakened by nearly 7.5% vs. the euro this year, a key driver of the growing Chinese trade surplus with Europe (and now you better understand the Japanese comfort with a weaker JPY).  My observation is that the pressure on Chinese exports is going to continue to grow going forward, especially from the other G10 nations.  Expect to hear more about this through 2026.  It is also why I see the eventual split of a USD/CNY world.

Ok, let’s look around elsewhere to see what happened overnight.  Elsewhere in Asia, things were mixed with Tokyo (+0.2%) up small, Korea (+1.3%) having a solid session along with Taiwan (+1.2%) although India (-0.7%) went the other way.  As to the smaller, regional exchanges, they were mixed with small gains and losses.  In Europe, it is hard to get excited this morning with minimal movement, less than +/- 0.2% across the board.  And at this hour (7:25) US futures are little changed.

In the bond market, yields are continuing to rise around the world.  Treasury yields (+2bps) are actually lagging as Europe (+4bps to +6bps on the continent and the UK) and Japan (+3bps) are all on the way up this morning.  This is Fed week, so perhaps that is part of the story, although the cut is baked in (90% probability).  Perhaps this is a global investor revolt at the fact that there is exactly zero evidence that any government is going to do anything other than spend as much money as they can to ensure that GDP continues to grow.  QE will be making another appearance sooner rather than later, in my view, and on a worldwide basis.

When we see that, commodity prices seem likely to rise even further, at least metals prices will and this morning that is true across the precious metals space (Au +0.3%, Ag +0.3%, Pt +1.2%) although copper is unchanged on the day.  Oil (-1.2%) though is not feeling the love this morning despite growing concerns of a US invasion of Venezuela, ongoing Ukrainian strikes against Russian oil infrastructure and the prospects of central bank rate cuts to stimulate economic activity.  One thing to note in the oil market is that China has been a major buyer lately, filling its own SPR to the brim, so buying far more than they consume.  If that facility is full, then perhaps a key supporter of prices is gone.  I maintain my view that there is plenty of oil around and prices will continue to trend lower as they have been all year as per the below chart.

Source: tradingeconomics.com

Finally, nobody really cares about the FX markets this morning with the DXY exactly unchanged and all major markets, other than KRW (+0.5%) within 0.2% of Friday’s closing levels.  There is a lot of central bank activity upcoming, and I suppose traders are waiting for any sense that things may change.  It is worth noting that a second ECB member, traditional hawk Olli Rehn, was out this morning discussing the potential need for lower rates as Eurozone growth slows further and he becomes less concerned about inflation.  Expect to hear more ECB members say the same thing going forward.

On the data front, things are still messed up from the government shutdown, but here we go:

TuesdayRBA Rate Decision3.6% (unchanged)
 NFIB Small Biz Optimism98.4
 JOLTS Job Openings (Sept)7.2M
WednesdayEmployment Cost Index (Q3)0.9%
 Bank of Canada Rate Decision2.25% (unchanged)
 FOMC Rate Decision3.75% (-25bps)
ThursdayTrade Balance (Sept)-$61.5B
 Initial Claims221K
 Continuing Claims1943K

Source: tradingeconomics.com

There is still a tremendous amount of data that has not been compiled and released and has no date yet to do so.  Of course, once the FOMC meeting is done on Wednesday, we will start to hear from Fed speakers again, and Friday there are three scheduled (Paulson, Hammack and Goolsbee).

As we start a new week, I expect things will be relatively quiet until the Fed on Wednesday and then, if necessary, a new narrative will be created.  Remember, the continuing resolution only goes until late January, so we will need to see some movement by Congress if we are not going to have that crop up again.  In the meantime, there is lots of talk of a Santa rally in stocks and if I am right and ‘run it hot’ is the process going forward, that has legs.  It should help the dollar too.

Good luck

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The Narrative’s Turned

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Last Friday it certainly seemed
The bears had achieved what they’d dreamed
Most bulls were in hell
As stock markets fell
While bears felt that they’d been redeemed
 
But since then, the narrative’s turned
And short-sellers all have been burned
In fact, round our sphere
Investors all cheer
For Jay to cut rates, Fed hawks spurned

 

The holiday spirit is alive and well this morning, and in truth has been all week.  And not just in the US, but around the world.  Literally, I am hard-pressed to find a stock market that has declined in the past twenty-four hours, with most on multi-day rallies.  And so, I must wonder, has everything really gotten that much better in the world?

A quick tour around the world of problems extant includes:

  • Russia/Ukraine war
  • Chinese property deflation
  • Net zero insanity
  • TDS
  • K-shaped economies
  • Rise of Socialism
  • Excessive global debt/leverage
  • Cost of living

I’m sure there are others, but I just wanted to touch on a few and try to figure out why investors have turned so positive.  After all, a look at the S&P 500 chart below shows that we are less than 2% from the historic highs set back on October 29th.

Source: tradingeconomics.com

So, let’s run through the list.

  • The war in Ukraine continues apace, although we cannot ignore the uptick in ostensible peace talks that have been occurring in the past week.  I’m game to accept those talks as a positive.
  • The Chinese economy continues to overproduce amid weakening domestic demand as property prices show no signs of bottoming.  This is one of the major reasons for the massive global imbalances we have experienced over the past two decades and President Xi has basically proven that they only model he understands is mercantilism.  With President Trump addressing that directly, this will continue to generate uncertainty and volatility, so there will be up days, but also plenty of down ones.
  • The ongoing waste of resources in this Quixotic effort, especially by the Europeans will serve only to further depress their economies while adding debt to pay for their ill-advised policies.  As long as this continues, Europe will be poorer in the future and that doesn’t bode well for their equity markets.
  • Nothing will change TDS but its bifurcation of the population, and not just the US but globally, is likely to be a net negative for everything.
  • The K-shaped economy is a major problem, and not one restricted to the US.  As long as this remains the case, it will breed social unrest, as we continue to see, and have encouraged policies that have proven time and again to be disastrous, but sound good to those in the bottom leg of the K, i.e. Socialism.  I assure you, Socialism will not enhance market capitalization.
  • See above
  • The global debt problem continues to hang over the global economy like the Sword of Damocles, ready to decimate economies with just the right (wrong?) catalyst.  Of course, this is why rate cuts are so favored, and QE more so, but while those may be solutions for government accounts, they will simply exacerbate the last on this list
  • I specifically point to the cost of living since the economists’ concept of inflation, the rate of change of prices, is irrelevant to most people.  The price level is the key, and there is no world where the price level will decline absent a major depression, which is why run it hot is the favored plan.  If growth can be raised sufficiently so that people believe life is affordable again, it will alleviate the K-shaped problem as well as the socialism problem.  But that is a big IF.

And yet, as you can see from this screenshot from Bloomberg.com, as I type, every market is in the green.

My conclusion is that either investors have grown to believe that the key short-term problems, like Russia/Ukraine will be effectively addressed, or under the guise of YOLO, they are all in on AI and the stock market and see it as the only way forward.  I wish I could be so sanguine, but then I am just an old misanthrope.  I hope they are right!

Ok, well, absent any real new news, and leading up to the Thanksgiving holiday here in the US, market signals are telling me everything is right with the world.  You see the equity markets above, and US futures are higher as well at this hour (7:30), albeit only about 0.2%.  

In the meantime, with risk in such demand, it is no surprise that bond yields are edging higher with Treasuries +2bps, after trading below 4.0% during yesterday’s session on a weak ADP weekly employment report (-13.5K) as well as PPI data that seemed less concerning.  European sovereign yields have all edged higher by 1bp this morning, again synchronous with risk on, and JGB yields also edged higher by 1bp after the government there explained they would be borrowing ¥11.5 trillion (~$73.5 billion) in extra debt to fund Takaichi-san’s supplementary budget.  The big outlier is Australia, where AGBs rose 10bps after CPI rose a hotter than expected 3.8% in October, not only putting paid any thoughts of a further rate cut but bringing rate hikes back into view.

In the commodity markets, oil (-0.2%) continues to slide lower, now below $58/bbl, and following its recent trend as per the below tradingeconomics.com chart.

Javier Blas, the widely respected Bloomberg oil analyst, put out an op-ed this morning explaining that he saw higher oil prices in the future.  That is at odds with my view, but I have linked it here so you can help determine if his reasons make sense.  I believe he underestimates both the impact of technology making it ever cheaper to get oil, and the political incentives to drill for more of the stuff by those nations that have it.  Net zero will not survive much longer in my view.

In the metals markets, prospects for lower interest rates have helped encourage further buying and this morning we see the entire complex higher (Au +0.7%, Ag +1.5%, Cu +1.3%, Pt +1.0%).  To the extent that the leverage story remains, and governments are going to continue to print money to pay their debts, metals prices across both precious and base, should continue to appreciate in price.

Finally, the dollar, which slipped a bit yesterday, is mixed this morning.  the yen (-0.3%) is sliding along with KRW (-0.6%), but really, there seem to be more gainers than that.  The biggest mover was NZD (+0.8%) after the RBNZ cut its base rate, as expected, but indicated the cutting cycle is over.  AUD (+0.3%) has also rallied on that inflation report.  I haven’t focused much on the renminbi (+0.1%) lately, largely because the daily movement is typically small, but if you look at the chart below, you can see that the trend has been steady all year, with CNY appreciating nearly 4% since the beginning of the year.  There are many analyses that indicate the renminbi is massively undervalued, so perhaps this is part of the trade deal with the US.  But it will be difficult for Xi to countenance too much strength as it will negatively impact his mercantilist policies.

Source: tradingeconomics.com

Lastly, the pound is gyrating this morning as Chancellor Rachel Reeves offers her budget.  The highlights are a larger than expected fiscal buffer of £22 billion achieved by raising taxes by more than £29.8 billion on gambling and real estate.  However, the recent history of tax hikes in the UK, as they try to tax the wealthy, is that the wealthy simply leave and the result is tax deficits.  Maybe it really is different this time!

And that’s what we have going into the weekend.  Data today brings September Durable Goods (exp 0.3%, 0.2% ex transport), Initial Claims (225K), Continuing Claims (1975K) and Chicago PMI (44.3).  I see no reason for this recent rebound to end as clearly everybody is feeling good into the holiday.  As I highlighted above, there remain myriad problems around, none of which will be solved soon, but apparently, that doesn’t matter.  So go with it!

There will be no poetry tomorrow or Friday so Monday, we will see how things have evolved.

Good luck and have a great holiday weekend

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