Gnashing and Wailing

Posted on June 2, 2025 by fxpoet

The narrative writers are failing
To keep their perspectives prevailing
They want to blame Trump
But if there’s no slump
They’ll find themselves gnashing and wailing

Economists have the same trouble
‘Cause most of their models are rubble
The change that’s been wrought
Requires more thought
Than counting on one more Fed bubble

Investors seem to be growing unhappier by the day as so many traditional signals regarding market movement no longer appear to work. Nothing describes this better, I think, than the fact that forecasts for 10-year Treasury yields by major banks are so widely disparate. While JPMorgan is calling for 5.00% by the end of the year, Morgan Stanley sees 2.75% by then. What’s the right position to take advantage of that type of knowledge and foresight?

One of the most confusing things over the past months, has been the growing dichotomy between soft, survey data and hard numbers. But even here, it is worth calling into question what we are learning. For instance, this week we will see the NFP data along with the overall employment report. That data comes from the establishment survey. It seems that just 10 years ago, more than 60% of companies reported their hiring data. Now, that is down to ~43%. Does that number have the same predictive or explanatory power that it once did? It doesn’t seem so.

Too, if we consider the Michigan Sentiment data, it has become completely corrupted by the political angle, with the current situation being Democrats answering the survey anticipate high inflation and weak growth while Republicans see the opposite. Is that actually telling us anything useful from an economic perspective let alone a market perspective? (see charts below from sca.isr.unmich.edu)

But this phenomenon is not merely a survey issue, it is an analysis issue. At this point, I would contend there are essentially zero analysts of the US economy (poets included) who do not have a political bias built into their analysis and forecasts. Consider that if you are in a good mood generally, then your own perspective on things tends to be brighter than if you are in a bad mood. Well, expand that on a political basis to, if you are a Democrat, President Trump has been defined as the essence of evil and therefore your viewpoint will see all potential outcomes as bad. If you’re a Republican, you will see much better potential. It is who we are and has always been the case, but it appears a combination of President Trump and social media has pushed this issue to heretofore unseen extremes.

There are two problems with this. First, for most consumers of financial information, the decision matrix is opaque. Who should you believe? But perhaps more concerningly, as evidenced by the decline in the response rate to hard data, for policymakers like the Fed and Treasury, what should they believe? Are they receiving accurate readings of the economic realities on the ground? Is the job market as strong (or weak) as currently portrayed? Is the uncertainty in ISM data a result of political bias? And if politics is an issue in these situations, who is to say that answers to questions will be fact-based rather than crafted to present a political viewpoint?

I would contend that the reason the narrative is breaking down everywhere is that the willingness of investors, as well as the proverbial man on the street, to listen to pronouncements from on high has diminished greatly. After all, the mainstream media, which had always been the purveyor of the narrative, or at least its main amplifier, has lost its luster. Or perhaps, they have lost all their credibility. Independent media, whether on X, Substack or simply blogs that are posted all over the internet, have demonstrated far more clarity and accuracy of situations than anything coming from the NYT, WSJ, BBG or WaPo, let alone the TV “news” programs.

We are on our own to determine what is actually happening in the world, and that is true of how markets will perform going forward. I have frequently written that volatility is going to be higher going forward across all markets. President Trump is the avatar of volatility. As someone whose formative years in trading were in the mid 80’s, when inflation was high, and Paul Volcker never said a word to anyone about what the Fed was doing (and even better, nobody even knew who the other FOMC members were), the best way to thrive is to maintain modest positions with limited leverage. The time of ZIRP and NIRP will be seen as the aberration it was. As it fades, so, too, will the ability to maintain highly levered positions because any large move can be existential.

With that cheery opening, let’s take a look at what has happened overnight. Friday’s US session was not very noteworthy with mixed data leading to mixed results but no real movement. Alas, things have taken a turn lower since then. Asian markets were weaker overnight (Nikkei -1.3%, Hang Seng -0.6%, CSI 300 -0.5%) with most other regional markets having a rough go of things as well. Concerns over further tariffs by the US (steel tariffs have been raised to 50%) and claims by both sides of the US – China trade debate claiming the other side has already breached the temporary truce have weighed on sentiment overall. Meanwhile, PMI data from the region was less than inspiring with China, Korea, Japan and Indonesia all showing sub 50 readings for Manufacturing surveys.

In Europe, equity markets are also generally softer (DAX -0.5%, CAC -0.7%) although the FTSE 100 (0.0%) has managed to buck the trend after data this morning showed Housing Prices firmed along side Credit growth. As investors await the US ISM/PMI data, futures are pointing lower across the board, currently down around -0.4% at 7:15.

In the bond market, yields all around the world are backing up with Treasuries (+3bps) bouncing off the lows seen on Friday, although remaining below 4.50%, while European sovereigns have climbed between 3bps and 4bps across the board. JGB’s overnight (+2bps) also rose, although the back end of that curve saw yields slip a few bps. It seems the world isn’t ending quite yet, although there does not seem to be any cure for government spending and debt issuance anywhere in the world.

Commodity prices, though, are on the move as it appears investors are interested in acquiring stuff that hurts if you drop it on your foot. Gold (+1.85%), silver (+0.9%) and copper (+3.6%) are all in demand this morning, the latter ostensibly benefitting from fears that the US will impose more tariffs on other metals thus driving prices higher. But the real beneficiary overnight has been oil (+4.0%) which rose on the back of an intensification of the Russia – Ukraine war as well as the idea that OPEC+ ‘only’ raised production by 411K barrels/day, less than the whisper numbers of twice that amount. As I watch the situation in Ukraine, it appears to have the hallmarks of an imminent peace process as both sides are pulling out all the stops to gain whatever advantage they can ahead of the ceasefire and both recognizing that the ceasefire is going to come soon. But despite the big jump in the price of WTI, you cannot look at the chart below and expect a breakout in either direction. If I were trading this, I would be more likely to fade the rally than jump on board the rise.

Source: tradingeconomics.com

Finally, the dollar is under the gun this morning, falling against pretty much all its major counterparts. Both the euro (+0.7%) and pound (+0.6%) are having strong sessions although JPY (+1.0%) and NOK (+1.3%) are leading the way in the G10. NOK is obviously benefitting from oil’s rally, while there remains an underlying belief that Japanese investors are slowing their international investments and bringing money home. Now, the ECB meets this week and is widely anticipated to be cutting rates 25bps, but my take is, today is a dollar hatred day, not a euro love day. As to the EMG bloc, gains are evident across regions with CZK and HUF (both +1.0%) demonstrating their beta to the euro although PLN (+0.5%) is lagging after the presidential election there disappointed the elites with the Right leaning candidate winning the job and likely frustrating Brussels in their attempts to widen the war in Ukraine. In Asia, CNY (+0.1%) was relatively quiet but KRW (+0.5%), IDR (+0.8%) and THB (+0.9%) all benefitted from that broad dollar weakness. So, too, did MXN (+0.65%) although BRL has not participated.

There is plenty of data this week culminating in the payroll report on Friday.

Today	ISM Manufacturing	49.5
	ISM Prices Paid	70.2
	Construction Spending	0.3%
Tuesday	JOLTS Job Openings	7.1M
	Factory Orders	-3.0%
	-ex Transport	0.2%
Wednesday	ADP Employment	115K
	BOC Rate Decision	2.75% (current 2.75%)
	ISM Services	52.0
	Fed’s Beige Book
Thursday	ECB Rate Decision	2.00% (current -2.25%)
	Initial Claims	235K
	Continuing Claims	1910K
	Trade Balance	-$94.0B
	Nonfarm Productivity	-0.7%
	Unit Labor Costs	5.7%
Friday	Nonfarm Payrolls	130K
	Private Payrolls	120K
	Manufacturing Payrolls	-1K
	Unemployment Rate	4.2%
	Average Hourly Earnings	0.3% (3.7% Y/Y)
	Average Weekly Hours	34.3
	Participation Rate	62.6%
	Consumer Credit	$10.85B

Source: tradingeconomics.com

In addition, we hear from four more Fed speakers over five venues. The thing about this is they continue to discuss patience as the driving force, except for Governor Waller, who explained overnight that he could see rate cuts if inflation stays low almost regardless of the other data.

The trade story remains the topic of most importance in most eyes it seems, although it remains a mystery where things will wind up. The narrative is lost for all the reasons above, but I will say that it appears risk aversion is today’s theme. The new part is that the dollar is considered a risk asset.

Good luck

Adf

Set Cash On Fire

Posted on May 19, 2025 by fxpoet

On Friday, the Moody’s brain trust
At last said it’s time to adjust
America’s debt
As we start to fret
That it’s too large and might combust

So, Treasury yields are now higher
As pundits explain things are dire
But elsewhere, as well
Seems bonds are a sell
As governments set cash on fire

Arguably, the biggest story of the weekend happened late Friday evening as Moody’s became the third, and final, ratings agency to downgrade US government debt to Aa1 from Aaa. S&P did the deed back in 2011 and Fitch in 2023. The weekend was filled with analyses of the two prior incidents and how markets responded to both of those while trying to analogize those moves to today. In a nutshell, the first move in both 2011 and 2023 was for stocks to fall and bonds to rally with the dollar falling. However, in both of those instances, those initial moves reversed over the course of the ensuing months such that within a year, markets had pretty much reversed those moves, and in some cases significantly outperformed, the situation prior to the downgrade.

Looking at Moody’s press release, they were careful to blame this on successive US administrations, so not putting the entire blame on President Trump, but in the end, it is hard to ignore that the nation’s fiscal statistics regarding debt/GDP and debt coverage are substantially worse than that of other nations that maintain a Aaa rating. As well, their underlying assumption is that there will be no changes in the current trajectory of deficits and so no reason to believe things can change.

The most popular weekend game was to try to estimate how things would play out this time although given the starting conditions are so different in the economy, I would contend past performance is no guarantee of future outcomes. In this poet’s eyes, it is not clear to me that it will have a long-term material impact on any market. We have already been hearing a great deal about how Treasuries are no longer the safe haven they were in the past. I guarantee you that institutions looking for a haven were not relying solely on Moody’s Aaa rating for comfort. In addition, given a key demand for Treasuries is as collateral in the financial markets, and the Aa1 rating is just as effective as a Aaa rating from a regulatory risk perspective, I see no changes coming

As to equities, I see no substantive impact on the horizon. The equity market remains ~~over~~ richly valued and if it were to decline, I don’t think fingers could point to this action. Finally, the dollar has been declining since the beginning of the year and remains in a downtrend. Using the DXY as our proxy, if the dollar falls further, should we really be surprised?

source tradingeconomics.com

To summarize, expect lots more hyperbole on the subject, especially as many analysts and pundits will try to paint this as a failure of the Trump administration. And while bond yields may rise further, as they are this morning, given the fact that yields are rising everywhere around the world, despite no other nations being downgraded, this is clearly not the only driver.

In fact, one could make the case that bond yields are rising around the world because, like the US, nations all over are talking about adding fiscal stimulus to their policy mix. After all, have we not been assured that Europe is going to borrow €1 trillion or more to rearm themselves? That is not coming out of tax revenue, that is a pure addition to the debt load. As well, is not a key part of the ‘US will suffer more than China in the tariff wars’ story based on the idea that China will stimulate the domestic economy and increase consumption (more on that below)? That, too, will be increased borrowing. I might go so far as to say that the increased borrowing globally to increase fiscal stimulus will lead to higher nominal GDP growth everywhere along with higher inflation. I guess we will all learn how things play out together.

Ok, so now that we have a sense of THE big story, let’s see how markets behaved elsewhere. I thought that today, particularly, it would be useful to see how bond markets around the world have behaved in the wake of the Moody’s news. Below is a screenshot from Bloomberg this morning. note that every major market that is open has seen bonds sell off and I’m pretty confident that Canada’s at the very least, will do so when they wake up. Ironically, the European commission came out this morning and reduced their forecasts for GDP growth and inflation this year and next and still European sovereign yields are higher. I have a feeling that this news is not as impactful as some would have you believe.

Turning to equity markets, Friday’s US rally is ancient history given the change in the narrative. And as you can see below from the tradingeconomics.com page, every major market is softer this morning (those are US futures) with only Russia’s MOEX rising, hardly a major market. Again, it appears the fallout from the ratings cut is either far more widespread, or not a part of the picture at all. It seems you could make the case that if European growth is going to underperform previous expectations, equity markets there should underperform as well. The other two green arrows are Canada and Mexico, neither of which is open as of 6:30 this morning.

Commodity markets are the ones that make the most sense this morning as oil (-1.3%) is under pressure, arguably on a weaker demand picture after softer Chinese data was released overnight. While the timing of the impacts of the trade war is unsettled, there is certainly no evidence that China is aggressively stimulating its economy. This was very clear from the decline in Retail Sales, Fixed Asset Investment and IP, although the latter at least beat expectations. But the idea that China is changing the nature of their economy to a more consumption focused one is not yet evident. Meanwhile, metals markets are all firmer this morning with gold (+1.2%) leading the way, arguably as a response to the ratings downgrade. This has dragged both silver (+0.9%) and copper (+1.0%) along for the ride. It is not hard to imagine that sovereign investors see the merit in owning storable commodities like metals in lieu of Treasuries, at least at the margin. But also, given the dollar’s weakness, a rally in metals is not surprise.

Speaking of the dollar’s weakness, that is the strong theme of the day along with higher yields across the board. Right now, the euro (+1.0%) and SEK (+1.0%) are leading the way higher although the pound (+0.9%) is also doing well. Perhaps this has to do with the trade agreement signed between the UK and EU reversing some of the Brexit outcomes at least regarding food and fishing, although not regarding regulations or immigration. JPY (+0.6%) is also rallying as is KRW (+0.75%) and THB (+0.9%) as there is a continuing narrative that stronger Asian currencies will be part of the trade negotiations. Finally, Eastern European currencies are having a good day (RON +2.3%, HUF +1.8%, CZK +1.2%, PLN +1.0%) after the Romanians finally elected a president that was approved by the EU. Yes, they had to nullify the first election and then ban that candidate from running again, but this is how democracy works!

On the data front, there is very little hard data to be released this week, although it appears every member of the FOMC will be on the tape ahead of the Memorial Day weekend. Perhaps they are starting to feel ignored and want to get their message out more aggressively.

Today	Leading Indicators	-0.9%
Thursday	Initial Claims	230K
	Continuing Claims	1890K
	Flash Manufacturing PMI	50.5
	Flash Services PMI	51.5
	Existing Home Sales	4.1M
Friday	New Home Sales	690K

Source: tradingeconomics.com

Actually, as I count, there are three members, Barr, Bowman and Waller who will not be speaking this week, although Chairman Powell doesn’t speak until next Sunday afternoon. In the end, the narrative is going to focus on the ratings cut for a little while, at least for as long as equity markets are under pressure along with the dollar. However, when that turns, and I am sure it will, there will be a search for the next big thing. I have not forgotten about the potential large-scale changes I discussed on Friday, and I am still trying to work potential scenarios out there, but for now, that is not the markets’ focus. Certainly, for now, I see no reason for the dollar to gain much strength.

Good luck

Adf

As Though It Had Fleas

Posted on May 14, 2025 by fxpoet

Well, CPI wasn’t as hot
As most of the punditry thought
But bonds don’t believe
The Fed will achieve
Low ‘flation, so they weren’t bought

But maybe, the biggest response
Has been that the buck, at the nonce
Has lost devotees
As though it had fleas
The end of the Trump renaissance?

Yesterday’s CPI data was released a touch softer than market expectations with both headline and core monthly numbers printing at 0.2%. If you dig a bit deeper, and look out another decimal place, apparently the miss was just 0.03%, but I don’t think that really matters. As always, when it comes to inflation issues, I rely on @inflation_guy for the scoop, and he provided it here. The essence of the result is that while inflation is not as high as it had been post Covid, it also doesn’t appear likely that it is going to decline much further. I think we all need to be ready for 3.5% inflation as the reality going forward.

Interestingly, different markets seemed to have taken different messages from the report. For instance, Treasury yields did not see the outcome as particularly positive at all. While yields have edged lower by -2bps this morning, as you can see from the below chart, they remain near their highest level in the past month.

Source: tradingeconomics.com

There are two potential drivers of this price action, I believe, either bond investors don’t believe the headline data is representative of the future, akin to my views of inflation finding a home higher than current readings, or bond investors are losing faith in the full faith and credit of the US. Certainly, the latter would be a much worse scenario for the US, and arguably the world, as the repudiation of the global risk-free asset of long-standing choice will result in a wild scramble to find a replacement. I continue to see comments on X about how that is the case, and that US yields are destined to climb to 6% or 10% over the next couple of years as the dollar declines in importance in the global trading system. However, when I look at the world, especially given my views on inflation, I find that to be a lot of doomporn clickbait and not so much analysis. Alas, higher inflation is not a great outcome either.

Interestingly, while bond investors did not believe in the idea of lower yields, FX traders took the softer inflation figure as a reason to sell dollars. This is a little baffling to me as there was virtually no change in Fed funds futures expectations with only an 8% probability of a cut next month and only 2 cuts priced for the year. So, if long-dated yields didn’t decline, and short-dated yields didn’t decline, (and equity prices didn’t decline), I wonder what drove the dollar lower.

Yet here we are this morning with the greenback softer against all its G10 counterparts (JPY +1.0%, NOK +0.6%, EUR +0.5%, CHF +0.5%) and almost all its EMG counterparts (KRW +1.5%, MXN +0.3%, ZAR +0.3%, CLP +0.6%, CZK +0.5%). In fact, the only currency bucking the trend is INR (-0.25%) but given the gyrations driven by the Pakistan issues, that may simply be the market adjusting positions.

From a technical perspective, we are going to hear a lot about how the dollar failed on its break above the 50-day moving average that was widely touted just two days ago. (see DXY chart below).

Source: tradingeconomics.com

But let’s think about the fundamentals for a bit. First, we know that the Trump administration would prefer a weaker dollar as it helps the competitiveness of US exporters and that is a clear focus. Second, the fact that US yields remain higher than elsewhere in the world is old news, that hasn’t changed since the Fed stopped its brief cutting spree ahead of the election last year while other nations (except Japan) have been cutting rates consistently. What about trade and tariffs? While it is possible that the idea of a reduction in trade will reduce the demand for dollars, arguably, all I have read is that during this 90-day ‘truce’, companies are ordering as much as they can to lock in low tariffs. That sounds like more dollars will be flowing, not less.

As I ponder this question, the first thing to remember is that markets don’t necessarily trade in what appears to be a logical or consistent fashion. I often remark that markets are simply perverse. But going back to the first point regarding President Trump’s desire for a weaker dollar, there was a story overnight that a stronger KRW was part of the trade discussion between the US and South Korea and I have a feeling that is going to be part of the discussion throughout Asia, especially with Japan. As of now, I continue to see more downward pressure on the dollar than upward given the Administration’s desires. I don’t think the Fed is going to do anything, nor should they, but I also don’t foresee a change in the recession narrative in the near future. While that has not been the lead story today, it remains clear that concern about an impending recession is everywhere except, perhaps, the Marriner Eccles Building. My view has been a lower dollar, and perhaps today’s price action is a good example of why that is the case.

Ok, let’s touch on other markets quickly. After yesterday’s mixed session in the US, Asia saw much more positivity with China (+1.2%) and Hong Kong (+2.3%) leading the way higher with most regional markets having good sessions and only Japan (-0.15%) missing the boat. In Europe, though, the picture is not as bright with both the CAC (-0.6%) and DAX (-0.5%) under some pressure this morning despite benign German inflation data and no French data. Perhaps the euro’s strength is weighing on these markets. As to US futures, at this hour (6:45), they are basically unchanged.

Away from Treasury markets, European sovereign yields have all slipped either -1bp or -2bps on the day with very little to discuss overall here.

Finally, in the true surprise, commodity prices are under pressure this morning across the board despite the weak dollar. Oil (-1.1%) is slipping, with the proximate cause allegedly being API oil inventory data showed a surprising gain of >4 million barrels. However, given the courteousness of the meeting between President Trump and Saudi Prince MBS, I would not be surprised to hear of an agreement to see prices lower overall. I believe that is Trump’s goal for many reasons, notably to put more pressure on Russia’s finances, as well as Iran’s and to help the inflation story in the US. As to the metals complex, they are all lower this morning with gold (-0.7%) leading the way but both silver (-0.3%) and copper (-0.5%) lagging as well.

On the data front, there is no front-line data to be released, although we do see EIA oil inventories with modest declines expected. However, it is worth noting that Chinese monetary data was released this morning and it showed a significant decline in New Yuan Loans and Total Social Financing, exactly the opposite of what you would expect if the Chinese were seeking to stimulate their economy. It is difficult for me to look at the chart below of New Bank Loans and see any trend of note. I would not hold my breath for the Chinese bazooka of stimulus that so many seem to be counting on.

Source: tradingeconomics.com

Overall, it appears to me the market is becoming inured to the volatility which is Donald Trump. As I have written before, after a while, traders simply get tired and stop chasing things. My take is we will need something truly new, a resolution of the Chinese trade situation, or an Iran deal of some kind, to get things moving again. But until then, choppy trading going nowhere is my call.

Good luck

Adf

Huge Fluctuations

Posted on May 12, 2025 by fxpoet

There once was a war between nations
That led to some huge fluctuations
In markets worldwide
As pundits all cried
The world’s shaken to its foundations

In secret, though, pundits all cheered
‘Cause they all hate Trump, and thus steered
The narrative toward
This Damocles’ sword
That hung o’er the world and was feared

But now, twixt the US and China
There is just a bit less angina
Both sides, tariffs, slashed
And quite unabashed
These pundits said things were just fine-a

The wonderful thing about controlling the narrative is that it doesn’t matter if you are right or wrong at any particular time, because if you are wrong, you simply change the narrative. At least that’s my impression looking here from the cheap seats. At any rate, the news this weekend brought the end to the trade war, or at least a 90-day cease fire, as both the US and China slashed their announced tariffs dramatically, with US tariffs falling to 30% on Chinese goods and Chinese tariffs falling to 10% on US goods. Between now and August, Treasury Secretary Bessent will be leading trade talks with Chinese Vice Premier He to try to come up with a more permanent solution.

In the interim, it will be interesting to see how the narrative evolves. Certainly, I got tired of the different articles I saw explaining that there were no ships crossing the Pacific from China to the US and that store shelves would be empty by summer. I wonder if we will see any of those claims retracted. (I’m not holding my breath). I also wonder why that is the case simply from a mathematic perspective. After all, annual US GDP is ~$28 trillion and imports from China in the twelve months from April 2024 through March 2025 were ~$444 billion, according to the FRED database. So, does that mean that the other $27.56 trillion in economic activity was all services? A look at the charts below created from FRED data shows that not only has the amount of imports from China not been growing lately, as a percentage of GDP, they have been shrinking. I am not saying Chinese activity is unimportant to the US, just that the reduction in relative trade has been happening far longer than President Trump has been in office this time.

While certainly, low priced items could become a bit scarcer, it strikes me that there was more than a bit of hyperbole involved in those claims. Of course, the next question is, will those ships start sailing again? I guess we shall find out soon enough.

But stepping back a bit, I think it is critical to remember that prior to President Trump’s “Liberation Day” tariff announcements, it’s not as though the world trade system was all peaches and cream. In fact, this weekend I listened to an excellent Monetarymatters podcast with guest George Magnus discussing the trade situation and why it was untenable in its current form before President Trump tried to change things. He is far more eloquent and knowledgeable than a mere poet like me, and it is worth listening. In the end, as others have also said, the status quo was unsustainable as both US government spending needs to be cut and the US reliance on China (or any other nation) for things of national security importance could not continue without grave results for our nation.

I contend there is no easy way to change a system that has evolved over 80 years with goals changing during that period. I also contend that the idea that a proverbial scalpel would have been a better method to do things, as it would not have created the market ructions we have all felt for the past few months, would never have worked. Just like in changing the way the federal government works, the inertia in the trade system is far too great to be adjusted by tweaks here and there. To make a lasting change, major disruptions are needed and that is what President Trump has been doing, disrupting things majorly. Whether or not he will ultimately be successful is hard to say, but the odds of a change are greater now than before he started. And almost everybody agreed that things were unsustainable.

One last thing you are sure to hear, especially now that the negotiations have begun is that the only reason is because President Trump “blinked” and couldn’t stand the pain of the market and the slings and arrows of the punditry. However, it remains very difficult for me to look at the data that has been released of late, with Chinese growth slowing rapidly and Chinese stimulus unable to solve the problem and believe that President Xi hasn’t felt enormous pressure to speed up the economy. It is clearly in both sides interest to come to a resolution, and that is what we should focus on going forward.

So, how did markets take the news? Well, it should be no surprise that Chinese (+1.2%) and Hong Kong (+3.0%) shares both rallied sharply given they are the direct beneficiaries of the story. Taiwan (+1.0%) and Korea (+1.2%) also fared well in the euphoria, but perhaps the biggest news in Asia was the ceasefire between India and Pakistan that was brokered by the US. That saw Indian shares (+3.8%) and Pakistani shares (+9.0%) both explode higher. It is certainly better that the explosions are in the relevant stock markets than on the ground! As to the rest of Asia, markets were generally higher but not nearly as ebullient. Meanwhile, in Europe, screens are green (Germany +0.9%, France +1.35%, UK +0.4%) but the gains pale compared to some of the Asian price action. US futures, though, are soaring at this hour (6:50) with gains between 2.4% (DJIA) and 4.0% (NASDAQ).

In the bond market, yields are soaring everywhere with Treasuries (+7bps) rising a similar amount to all European sovereigns (Bunds +7bps, OATs +6bps, Gilts +8bps) and JGBs (+8bps). It appears that with money flowing rapidly back into the equity markets now that the trade war has ended RISK IS ON baby!!! Either that or the only way to generate this new growth is by spending lots of government money which will require even more issuance. I’ll take the first for now.

But that risk on trade is clear in commodities with oil (+3.6%) soaring higher to its highest level in three weeks and despite the idea that OPEC+ is going to increase production. In fact, there are many things ongoing in the oil market that are far too detailed for this commentary, but in a nutshell, from what I understand, OPEC’s changes are simply catching up to the reality of what members have already been pumping and the market is now focusing on the renewed growth enthusiasm with the trade war on hold. As well, if risk is no longer a concern, you don’t need to hold gold, and the barbarous relic is under huge pressure this morning, tumbling -3.5% and taking silver (-2.1%) with it. Copper (+0.4%), however, is higher on the growth story.

Finally, the dollar is flying this morning. on the one hand, given risk is in such demand, that doesn’t make much sense as historically, risk on markets tend to see the dollar weaken. But my take is that all the stories about the end of American exceptionalism, with respect to US equity markets, got destroyed by the truce in the trade war, and now folks are buying dollars to buy US equities. So, the euro (-1.4%) is under major pressure along with the pound (-1.1%) and the yen (-2.0%) is in more dire straits, as is CHF (-1.8%). Other G10 currencies have also fallen, albeit not as far. In the Emerging markets, only two currencies are rallying this morning, both benefitting from truces; INR (+0.7%) which is obviously benefitting from the military ceasefire and CNY (+0.6%) which is benefitting from the trade ceasefire. As to the rest of the bloc, all currencies are lower between -0.6% and -1.6%.

On the data front, we see the following this week:

Tuesday	CPI	0.3% (2.4% Y/Y)
	-ex food & energy	0.3% (2.8% Y/Y)
Thursday	Initial Claims	230K
	Continuing Claims	1890K
	Retail Sales	0.0%
	-ex autos	0.3%
	PPI	0.2% (2.5% Y/Y)
	-ex food & energy	0.3% (3.1% Y/Y)
	Empire State Manufacturing	-10.0
	Philly Fed Manufacturing	-12.5
	IP	0.2%
	Capacity Utilization	77.9%
Friday	Housing Starts	1.37M
	Building Permits	1.45M
	Michigan Sentiment	53.1

Source: tradingeconomics.com

As well as all the data, we hear from six Fed speakers, including Chairman Powell on Thursday morning. I cannot help but think that things are a bit overdone this morning but perhaps not. It is certainly positive that the US and China are speaking about trade, but it remains to be seen what can be agreed. In the end, while this week is starting off well, I suggest not getting too excited yet. As to the dollar, certainly this is positive news, but I have not changed my view that eventually it will slide.

Good luck

Adf

Quite Excited

Posted on May 7, 2025 by fxpoet

The market is now quite excited
As trade talks have been expedited
With Bessent and He
Now speaking, we’ll see
If buyers last night were farsighted

However, do not ignore gold
Whose price is a thing to behold
The past several days
There’s been quite a craze
As sellers now rue what they’ve sold

Source: tradingeconomics.com

I don’t often lead with a chart, but I think it is worthwhile this morning. I grabbed this picture at 7:00pm last night, shortly after the news hit that Treasury Secretary Bessent and Trade Representative Greer were heading to Switzerland later this week to sit down with He Lifeng, the Chinese Vice Premier and trade negotiator and begin trade talks. Prior to that announcement, the barbarous relic had rallied more than $200/oz over the past four sessions, a pretty impressive move for something that has maintained a low overall volatility. The first explanation of the reversal, which coincided with a sharp gain in equity futures (see chart below) is that all the fear of the world ending with corresponding equity weakness and a need to hold gold, has ended! Hooray!!!

Source: tradingeconomics.com

Alas, just as I never believed the world was ending before, neither do I believe that everything is suddenly better. Seemingly, this is all part of the process. The idea that China could simply accept much of the stuff they produce would not be able to find a home in the US was never going to be the case. I have no idea how things will work out, and they certainly will take a lot of time to come to some agreement, but it is very positive that the dialog has begun.

On the subject of which side blinked, which is a favorite for the punditry, especially those who ~~despise~~ dislike President Trump and believe this shows weakness on his part, I would note that the Chinese are the ones who have recently reported weaker economic data and last night the PBOC cut their 1-week reverse repo rate by 0.1% and reduced their Reserve Requirement Ratio by 50 basis points, both monetary easing measures to address the ongoing weakness in China. Neither side benefits from this process in the short-term, but we will need to see the results of the talks, which will take many months I presume, before we know if goals have been achieved.

Away from the story on trade
The Fed story must be portrayed
Alas, it’s quite dull
As Jay and friends mull
The idea rate cuts be delayed

The only other story of note today is the FOMC meeting where they will release their policy statement at 2:00 this afternoon revealing no change in policy, and very likely almost no change in the wording, and then Chairman Powell will face the press at 2:30. However, given the low probability of any changes, and given nothing regarding trade policy has really changed since they entered their quiet period, it seems unlikely that we will learn anything of consequence from Powell. Today will be a complete non-event.

However, I cannot help but consider why the futures market appears so convinced that there are going to be rate cuts going forward this year. As of this morning, the Fed funds futures are pricing a total of 78 basis points of cuts for the rest of this year, so three 25bp cuts as per the below chart from the CME.

Certainly, the data released thus far this year have not indicated the economy is heading into a tailspin. Of course, there are many analysts calling for a recession to start in Q2 or Q3 as the tariff impacts ostensibly undermine the economy. It is important to note, however, that these are the same analysts who have been calling for a recession for the past three years. The boldest calls are for a period of stagflation, with the tariffs simultaneously killing growth and raising prices.

It is entirely possible that we see a recession this year, especially if government spending decreases given its role in supporting recent growth data. (According to the BEA, Federal government spending in Q1 declined -5.1% while investment in the economy expanded more than 2%.). If this is the path forward, the long-term benefits will be substantial, but they must be maintained. As well, if this is the path forward, total economic activity in the US will expand substantially and it is not clear that rate cuts will need to be part of that mix.

Regardless, it seems that today’s activity is less likely to be impacted by the Fed than by any random headlines regarding trade or other administration maneuvers. So, let’s see how markets have responded to the US-China trade talk news.

The China news came long after the close yesterday so the US markets closed lower on the session, approaching 1% declines, but US futures are currently higher by around 0.7% at 7:15. In Asia, however, we did see some modest gains although the Nikkei (-0.15%) faded a bit, both China (0.6%) and Hong Kong (+0.15%) managed to rally. As to the rest of the region, most markets were modestly higher although in a seeming sympathy move on the China news. In Europe, bourses are softer this morning with the CAC (-0.7%) leading the way and other key indices falling less. The data releases show Construction PMI softening on the continent as well as weak Eurozone Retail Sales (-0.1%), so I imagine that is weighing on investors’ minds today.

In the bond market, Treasury yields are 2bps firmer this morning but have been trading either side of 4.30% for the past several sessions as traders try to estimate the next big thing. I see just as many stories about how yields are going to 10% as I do about how they are headed to 2% amid the depression coming, so my take is, we are going to range trade for a while yet. In Europe, sovereign yields are lower by between -3bps (Germany) and -5bps (Italy) as that softer data is encouraging investors to believe that inflation will continue to decline and the ECB will cut further.

The commodity market has been where the real action is of late with oil (+0.9% today after +2.0% yesterday) rising after comments by two US oil companies that they will not be drilling any more if oil prices stay at these levels. What I don’t understand is, what will they be doing as they are oil companies? At any rate, this will be the tension in markets, who can afford to drill and sell oil at lower prices. I expect we will hear from companies and pundits on both sides of this equation. I discussed gold above, which has bounced slightly from its lowest levels overnight and I don’t believe anything will derail this train for a while yet. However, both silver (-0.75%) and copper (-2.6%) are softer this morning, partly based on gold’s slide and partly on the weaker economy story.

Finally, the dollar is modestly firmer this morning, at least against its G10 counterparts with JPY (-0.6%) the weakest of the bunch, followed by SEK (-0.5%) and AUD (-0.3%). The euro and pound are little changed and NOK (+0.15%) has gained on the back of oil’s strength. In the EMG block, KRW (-1.1%) and TWD (-1.1%) have both rebounded some from their recent highs (dollar lows) in what seems more like a trading reaction than a change in policies. Elsewhere in this bloc, though, MXN (+0.2%) is a touch stronger while ZAR (-0.5%) is a touch weaker and CNY is little changed. There is a story making the rounds today that a well-known currency analyst, Steven Jen, is claiming that there could be as much as $2.5 trillion of excess currency reserves held by Asian nations that they may no longer need. If this is true and these reserves were sold quickly, it would certainly drive the dollar much lower. However, it strikes me that given the enormous amount of USD debt that has been issued by Asian companies and countries, and given these countries do not have access to Fed swap lines in emergencies, there is no reason to sell the dollars. Rather they will simply have a ready supply without having to chase them when repayment and rollovers come due. I would take this story with a large grain of salt.

Other than the Fed, we see EIA oil inventory data where some drawdowns are anticipated and that is really the day. We are all awaiting the trade negotiation outcomes and I would say nobody has an inside track there. Bigger picture, though, I do think the dollar has further to slide.

Good luck

Adf

More Pain

Posted on May 6, 2025 by fxpoet

The data from China reflected
That tariffs have hurt, as expected
It’s likely more pain,
On China, will rain
As both nations are so connected

Meanwhile, in a German surprise
Herr Merz failed to get his allies
To name him to lead
Which seemed guaranteed
Could this presage his quick demise?

In the battle being waged between the US and China via tariffs, the first data indications have shown that the US is faring a bit better. Yesterday’s ISM Services data was stronger than expected, remaining well above the 50 level although arguably slightly below the recent average reading.

Source: tradingeconomics.com

Meanwhile, last night, the Chinese Caixin Services PMI fell to 50.7, missing expectations and continuing its drift lower over time.

Source: tradingeconmics.com

Are things really worse in China than the US, at least from the perspective of data releases? I think both nations will suffer during this period as the impacts of the tariffs and reduced trade bleed into the data over the next months, but so far, it seems the US is holding its own. One of the problems with analyzing the issue is that as the WSJ pointed out yesterday, when the data in China gets bad, they simply stop releasing it, so it may be difficult to see.

Now, last night, Chinese shares did manage a nice rally with the CSI 300 higher by 1.0% but that follows six consecutive down sessions, albeit of modest size.

Source: tradingeconomics.com

As to the renminbi, after a 1% gain last Friday, it has done little and remains very much in line with its levels of the past year. The thing about China is that nothing there moves quickly, so absent a policy announcement of some type, I expect this activity will continue to gradually adjust to the realities as they become clear to the market. If President Trump reduces tariffs, as he implied he would eventually, things could work better, but again, given the time lags of moving products across the Pacific, we have a lot of time between now and whatever the new normal turns out to be.

But the more interesting story to me overnight was that Friedrich Merz, the ostensible winner of the German elections last month failed to achieve the votes to be named Chancellor despite his coalition having a 12-seat majority in the Bundestag. As it was a secret ballot, nobody knows who didn’t support him, but this outcome certainly calls into question both his ability to lead Germany effectively, and correspondingly, Germany’s ability to lead Europe in the new world order.

Recall, Germany remains keen to support Ukraine in its ongoing war with Russia and even destroyed their once sacrosanct fiscal responsibility in order to be able to pay for that support. But if they do not have an effective leader, one who can command their parliament to enact his policies, it is not clear why other European nations would follow their lead on anything. It should not be surprising that the DAX (-1.3%) fell sharply when the news was released, and that has helped drag most European shares lower (CAC -0.7%, IBEX -0.3%, Poland -3.3%). As to the euro, you can see from the below chart that the response, when the news was announced, that it slipped about 0.5%, basically wiping out the gains it had achieved prior to the vote.

Source: tradingeconomics.com

Will this matter in the long run? I believe that a weakened Germany, which is likely the outcome of this situation, will simply undermine the euro’s value. As such, while I still believe the dollar has further to decline, the euro will probably not be a major winner. Look for other currencies to outperform the euro going forward.

Ok, I think those are the real stories as we head into today’s session with most market participants remaining tentative in the face of the ongoing confusion over policies, counter policies and macroeconomic data. Remember, too, we have the Fed tomorrow and the BOE on Thursday, so despite the fact that fiscal policy has been the driver, the Fed’s opinions still carry weight amongst the fixed income community, at the very least.

Looking at the price action overnight, the Nikkei (+1.0%) gained on some solid earnings data from Japanese companies as well as increased hopes that the US-Japan trade talks will be successfully completed by June. Apparently, there is also some faith that the US and China will begin talking soon on this subject. Hong Kong (+0.7%) also benefitted from these discussions, but the rest of the region showed very little movement overall, with gains or losses on the order of 0.3% or less. As we have already discussed Europe, a look at US futures shows they are pointing lower by about -0.5% at this hour (7:10).

Bond markets remain very dull these days with Treasury yields edging higher by 1bp this morning after climbing 3bps yesterday. European sovereign yields are also higher. By 1bp to 2bps although there is neither data nor a story that seems to have had much impact. The Services PMI data that was released this morning was very much in line with expectations and continues to hover around 50.0 for the continent as a whole. Meanwhile, JGB yields were unchanged last night and sit at 1.25%, well below the levels seen back in late March and having really gone nowhere for the past month. It strikes me that JGB yields will respond to any trade deals but are likely to be quiet in the interim.

Commodity prices are rallying this morning with oil (+2.2%) rebounding from its level yesterday which happen to come quite close to touching the lows from April 9^th. It should be no surprise that there are up days in this market, but if the Saudis and OPEC are going to continue increasing production, I expect that prices have further to fall. In the metals markets, gold (+1.4%) is having another blockbuster day, now having gained $150/oz in the past three sessions and bouncing off the correction lows. Demand for the barbarous relic continues to come from Asia mostly with all signs showing that US investors are not interested in this trade. As to silver (+1.7%) and copper (+0.6%), they are both still along for the ride.

It should be no surprise with the commodity markets showing strength that the dollar is under pressure this morning. while we’ve discussed the euro already, the pound (+0.5%) is looking quite solid as it continues its rally from the lows seen in mid-January. But the yen (+0.5%), SEK (+0.45%) and NOK (+0.35%) are all gaining today as well. Interestingly, the impact in emerging markets is far less noticeable with none of the major EMG currencies moving even 0.2% this morning.

On the data front, there is very little hard data this week although we do have the Fed on Wednesday and then a whole bunch of Fed speakers on Friday.

Today	Trade Balance	-$137.0B
Wednesday	FOMC Rate Decision	4.50% (unchanged)
	Consumer Credit	$9.5B
Thursday	BOE Rate Decision	4.25% (-0.25%)
	Initial Claims	230K
	Continuing Claims	1890K
	Nonfarm Productivity	-0.7%
	Unit Labor Costs	5.1%

Source: tradingeconomics.com

Today’s trade data is for March, prior to the tariff impositions, so will reflect significant tariff front-running. But really, it’s about the Fed this week, and since they have lost much of their cachet lately, I think the market is really going to continue to look to the White House for trade news and react to that. Net, I continue to believe that the dollar’s FX rate will be part of many trade discussions, like we saw with Taiwan (which by the way did reverse 3% of yesterday’s gain overnight) and that means further weakness is in our future.

Good luck

Adf

The Future As Fraught

Posted on May 5, 2025 by fxpoet

Though I’ve been away near a week
From what I read things are still bleak
Two months have gone by
Since stocks touched the sky
And traders all want a new peak

Meanwhile, GDP fell ‘neath nought
And lots see the future as fraught
The popular claim
Is Trump is to blame
And rue all the things he has wrought

I worked hard not to pay close attention to markets while I was away last week in an effort to get some true relaxation. And now that I’m back at my desk, I can see that I didn’t miss anything at all. The narratives remain the same, the split between those who believe everything the president says/does is a disaster and those who believe everything he says/does is brilliant has not changed at all. In other words, life continues as do all the arguments.

A review of the data last week showed two key outcomes, the labor market remains far more resilient than the recessionistas will accept and jobs continue to be created. For some reason, that seems like good news to me, but then I am not a highly paid economist with a narrative to stoke. On the other hand, Q1 GDP printed at -0.3%, the first negative print in 3 years, but also one that is easily explained by the rush of imports that occurred prior to the imposition of tariffs in early April. Remember, imports subtract from Gross DomesticProduct. However, a look under the hood of this number shows that the positive news was government activity declined while private sector investment exploded higher. It strikes me that this is the best possible direction for the US economy going forward.

In China, it seems Xi’s decided
That data has been too one-sided
So, henceforth they’ll furnish
Just data to burnish
The views Xi and friends have provided

Turning to the more recent stories, though, the WSJ had a very interesting take on the fact that China’s statistical output is shrinking quite rapidly as data that has been trending lower suddenly stops being produced. The below chart from the article on National Land Sales is an excellent depiction of things, and likely an indication that land sales, which are critical to local government finances, have become even a bigger problem over the past three years than when the property market first started melting down in early 2021.

It is worth noting that in this trade war between the US and China, while much of the punditry continues to insist that China has the upper hand as the stuff they sell to the US is more critical and less replaceable than the stuff the US sells to them, I have maintained things are not necessarily that easy. The US is facing a supply shock, and will need time to work it through, but the US economy is the most dynamic in the world, and these issues will be resolved. China faces a demand shock, which in economic theory should be easier to address, but which in China’s reality has not proven to be the case. Consider that Xi and the CCP have been creating fiscal stimulus plans since Covid without any serious success. In fact, the Chinese have openly stated that they are seeking to shift the production/consumption mix of the nation closer to Western standards of 60%-70% consumption from their current 45%-50% level. It hasn’t worked yet, and I see no reason to believe that is going to change. We must never forget the US is the consumer of last resort, and if China doesn’t have access to this market, it is a major problem for them.

I have no inside knowledge of how things are evolving on this issue, but here’s my take; while Xi doesn’t need to worry about being elected, he still needs to ensure that China’s economy grows sufficiently to increase the well-being of his population. Whatever the official statistics have shown, it is clear that things in China are not what they would have the rest of the world believe and that is a problem for Xi. Meanwhile, Trump will not face another election and was elected with a pretty broad mandate. I believe given the timing of the mid-term elections, he has another 9-12 months to get things done and will play hardball with China to do so. In fact, I have a feeling that Trump may have the upper hand. This will be settled by the autumn is my view.

Ok, let’s turn to markets and what happened in the overnight session. Looking first at currencies for a change, I couldn’t help but notice the following chart.

Source: tradingeconomics.com

I also couldn’t help but notice the following comment from the Taiwanese central bank in response to a question about whether the FX rate is on the table in the trade negotiations. (As an aside, @PIQSuite is an excellent follow on X. Key market headlines on a real-time basis with other things available as well.)

The question of whether FX rates would be part of the trade talks seems to have been answered, and the answer is yes. Perhaps there will not need to be a Mar-a-Lago accord after all regarding revaluing gold and terming out bonds. Instead, the pressures will be relieved on a country-by-country basis with each trade deal.

While the TWD revaluation of 10% over the past 2 sessions is the most dramatic, the dollar is generally lower this morning against both G10 and EMG currencies. In the G10, AUD (+0.85%) leads the way but JPY (+0.7%), NOK (+0.6%) and CHF (+0.5%) are all pushing higher. This must be music to President Trump’s ears. As to the emerging markets, KRW (+2.5%), is the next biggest mover although they admitted that FX rates were part of the trade discussions. SGD (+0.8%) has also seen a relatively large move and INR (+0.4%) is moving in that direction. It seems clear that Asia is the focus of both the administration and the markets this morning. The rest of the EMG bloc has seen much smaller gains, between +0.25% and +0.5%, with CNY (+0.15%) really doing very little.

Turning to the equity markets, last week clearly finished on a strong note and, in fact, since I last wrote, the S&P 500 has rallied a bit more than 2% and is higher by more than 14% since April 8^th. Apparently, the world has not yet ended, but there hasn’t been a new high in the stock market in more than 3 months, and people are edgy! As to the overnight session, the Nikkei (+1.0%) rallied along with the Hang Seng (+1.75%) although Mainland shares (CSI 300 -0.1%) showed little life. Elsewhere in the region, Taiwan (-1.25%) and Australia (-1.0%) felt the most pressure and the rest were mixed with much smaller movements. In Europe, indices are mixed as earnings data from each country are the drivers amid a lack of broad-based news. So, the UK (+1.2%) and Germany (+0.6%) are firmer while France (-0.6%) is lagging on the back of some weaker earnings numbers. As to the US, futures are pointing lower by about -0.7% across the board at this hour (7:15).

In the bond market, last week saw Treasury yields jump sharply after the better-than-expected payroll report, finishing the day 9bps higher, although still within the middle of the trading range since February and lower on the year. This morning, they are basically unchanged while European sovereign yields have slipped by about -2bps across the board. The picture there continues to focus on the uptick in fiscal spending that is expected and the borrowing that will be needed to pay for it. However, there is still a strong view that the ECB will be cutting rates going forward.

Lastly, in the commodity markets, oil (-1.15%) is sliding again as OPEC+ has promised to continue to increase production. There are two takes on this activity, both of which probably have some truth. First is the idea that President Trump has made a deal with MBS in Saudi Arabia to increase production and drive prices lower. Remember, lower energy prices are a boon to the US (and the world). But added to that is the idea that MBS agreed so he can help force fracking production to pull back and regain market share for OPEC+. However, regardless of the rationale, nothing has changed my view that oil prices are heading lower, and I still like the $50/bbl level as a target. As to the metals, gold (+2.3%) which has been under pressure for several weeks in a correction, seems to have found support below $3300/oz and could well be setting up for another leg higher. This has taken silver (+1.3%) and copper (+.8%) along for the ride. If the dollar is going to continue lower, metals prices should remain quite firm.

On the data front, today only brings ISM Services (exp 50.6), but really, all eyes will be on the FOMC meeting on Wednesday. I will highlight the rest of the week’s data tomorrow morning.

The past month has seen significant volatility in markets as participants did not correctly estimate the potential moves in trade policy. At this point, it seems those questions are being answered, with President Trump even hinting some deals could be finalized this week. I believe we are going to see trade announcements that include new FX goals, and they will be pushing the dollar lower across the board. While I don’t see a collapse coming, that is the trend for now.

Good luck

Adf

Be Quite Scared

Posted on April 28, 2025 by fxpoet

The pundits have now all declared
That everyone should be quite scared
It will be a bummer
When shelves, come this summer
Are empty, so please be prepared

As well, a recession’s in view
Although, that seems like déjà vu
For three years at least
The pundits increased
The odds that this bill would come due

Apparently, the only thing you need to know this morning is that by summertime, shelves across the country will be barren as imports from China halt. The upshot, at least according to the sources that I have read, is that you should blame President Trump and join the media chorus in hating the man and his policies.

Now, I am no logistics expert, but the concern stems from the significant decline in shipping as evidenced by port activity in both China and the US. As you can see from the chart below, there has certainly been a significant decline in the number of ships leaving China on their way to the US.

I guess the question is just how much of what is on store shelves comes from China? Much will depend on what kind of store one considers. Certainly, toy stores seem likely to have less inventory, as will Best Buy with electronics potentially suffering, although as I recall President Trump exempted electronics initially. Arguably, clothing shelves and racks may be sparser as well. But based on official data, Chinese imports (~$463B) accounted for approximately 1.7% of the US’s $26.9T GDP in 2024. This may be an overreaction.

Potentially a bigger issue will be the impact on intermediate goods that are imported from China and elsewhere and incorporated into products finalized in the US. However, I cannot calculate that, nor have I seen any data of this issue, although I have read many stories about the end of this particular world as well.

One of the things to remember about the punditry is that they make their living describing the worst possible outcome because that gets them recognition. However, I’m confident we all remember that a recession was forecast for 2022, 2023 and 2024 by much of the punditry and yet one was never officially declared by the NBER. In fact, you may recall that in Q1 and Q2 of 2022, US Real GDP growth was -0.2% for both quarters, thus two consecutive quarters of negative growth. Historically, that has defined a recession. However, subsequent data revisions did remove that as you can see below with Q2 revised higher.

Source: tradingeconomics.com

The one thing I do know is that there is a group of analysts/economists who have been forecasting the next recession consistently for several years. They point to data like changes in the housing market, the JOLTs Quits rate shrinking and various other secondary and tertiary data points and sources, all of which have been pointing in that direction for several years. And I grant, reading that ~40% of GenZ is using BNPL to buy their groceries, and then run late on payments, is a frightening statistic (although perhaps one that highlights financial illiteracy more than economic reality).

In the end, what you need to know is you should be terrified because the punditry is almost certain that this time, they have it right. But our concern is how will this scenario impact markets.

Basically, despite all this huffing and puffing, it appears markets are whistling past this particular graveyard. Friday’s US equity rally was followed by general strength in Asia and strength this morning in Europe. Last night, Tokyo (+0.4%), Mumbai (+1.3%), Taiwan (+0.8%) and Australia (+0.4%) all had solid performances although neither Hong Kong (-0.1%) nor China (-0.15%) could find any real buying support. A less reported story is that China is exempting a number of US imports from its 125% tariffs on the US as clearly, this trading relationship is deep and complex.

As to Europe, all markets are ahead this morning, with the UK (+0.4%) the laggard and most of the continent higher by between 0.7% and 0.8%. There are headlines around as to how the ECB is preparing to cut rates further on the assumption that global economic activity is going to slow and thus hurt Europe, while the consistent message is that US tariffs will be deflationary in Europe, so less concerns about their inflation mandate. Finally, US futures are pointing slightly softer (-0.2%) at this hour (6:45).

In the bond market, 10-year Treasury yields have fallen 30bps in the past two and one-half weeks, sliding 5bps on Friday before bouncing 3bps overnight. However, the recent trend does seem lower.

Source: tradingeconomics.com

But yields are climbing in Europe as well today, higher by 5bps across the board on the continent, although UK Gilts have only edged higher by 2bps. It’s funny, despite all the doom and gloom regarding the economy because of US tariffs, as well as growing expectations of an ECB rate cut at the early June meeting, investors appear to be growing concerned about something. Perhaps they have pivoted back to the promised fiscal spending increases as their driver today.

In the commodity markets, oil (-0.35%) continues to trade in its recent $60 – $63/bbl range with limited signs that this will soon change. Peace in Ukraine does not seem at hand yet and reports are that the initial discussions between the US and Iran, while constructive, still have a ways to go before completion. Both of those seem likely to weigh on oil prices if completed. However, the more unusual thing to me is that with the rising chorus of recession calls, oil’s price has not fallen further. To date, markets have not yet agreed with the economists’ view that recession is imminent. In the metals markets, gold (-1.0%) is continuing its rough week, although remains nicely higher on the month. You may recall my view a week ago Friday that the move seemed parabolic and due for a correction. Recent price action is exactly that, corrective, as I believe the underlying thesis to own the barbarous relic remains intact. The other main metals are a touch softer this morning, but really nothing to discuss.

Finally, the dollar is mixed this morning with modest strength against the euro (-0.15%) but softness vs. the pound (+0.15%) and those size moves are representative of most of the price action across both G10 and EMG currencies this morning. The outlier is KRW (-0.4%), which seems to be suffering from comments that no trade deal will be completed before June’s election there.

Overall, despite ongoing doom and gloom by much of the punditry, it is not obvious to me that investors are anticipating major changes. Perhaps they are wrong, and the pundits are correct. But as yet, there is no evidence to support that conclusion.

Ok, let’s turn to the data this week, which starts slowly but ends on NFP.

Tuesday	Goods Trade Balance	-$146.0B
	Case-Shiller Home Prices	4.8%
	JOLTs Job Openings	7.5M
Wednesday	ADP Employment	108K
	Q1 GDP	0.4%
	Q1 Employment Cost Index	0.9%
	Chicago PMI	45.5
	Personal Income	0.4%
	Personal Spending	0.6%
	PCE	0.0% (2.2% Y/Y)
	Core PCE	0.1% (2.6% Y/Y)
Thursday	Initial Claims	225K
	Continuing Claims	1860K
	ISM Manufacturing	48.0
	ISM Prices Paid	70.2
Friday	Nonfarm Payrolls	135K
	Private Payrolls	127K
	Manufacturing Payrolls	-5K
	Unemployment Rate	4.2%
	Average Hourly Earnings	0.3% (3.9% Y/Y)
	Average Weekly Hours	34.2
	Participation Rate	62.5%
	Factory Orders	4.5%

Source: tradingeconomics.com

As well as NFP, we get the PCE data, which looks like it has changed to a 10:00am release from its traditional 8:30am time. The Fed is in its quiet period, but nobody has been listening to them anyway. Secretary Bessent, along with President Trump, has been the most important voice lately. Again, for now, the data has not indicated recession, although Q1 GDP is slated to be soft. Markets, too, have been unwilling to get behind the recession call completely.

Ultimately, the one thing we know is that the nature of the global economy has changed since President Trump’s election. Globalization is in retreat and mercantilism is the new normal. It is not clear to me that existing econometric models will accurately portray how that works, so I need to see more data before recognizing the end of times. In the meantime, these myriad views are a sign that hedging for risk managers remains the only path forward.

Good luck

Adf

Very Near Future

Posted on April 23, 2025 by fxpoet

The “very near future” is when
The US and China, again
Will restart their talks
Assuming no balks
By either of these august men

That’s all that the market required
For buyers to get so inspired
Can this idea last?
Or will it have passed
Ere market resolve has expired

While all and sundry have been very confident that President Trump’s attempt to alter the structure of the global economy and world trade to a more beneficial one, in his view for the US, will fail dismally and that we are doomed to stagflation as prices rise and the economy sinks, it seems these same economic analysts have forgotten that there are two sides to the supply/demand equation. I have written before that despite all the slings and arrows that have been aimed at Trump, the US has a very strong hand in the trade game given it is THE CONSUMER OF LAST RESORT. Virtually every nation in the world has built an economy designed to be able to manufacture stuff cheaply and sell it into the largest economy in the world.

And US consumers are remarkable in their ability to continue to consume at high levels despite what appear to be significant headwinds, whether high financing costs, limited savings or slowing economic activity. But a funny thing is happening on the way to this mooted US stagflation, it’s not happening yet. In fact, as described by economist Daniel Lacalle in his most recent post, it seems that the biggest problem is not that Americans cannot find what they want to buy, it is that they only bought all this stuff because it was cheap. They will not accept significant price rises and so inventory is building up at factories while ships are stuck with containers full of stuff nobody wants, at the price. Could it be that President Trump read the room better than the economists?

I use this as preamble to yesterday’s massive equity rebound which was, ostensibly, triggered by comments from Treasury Secretary Bessent that substantive trade talks with China would begin in the “very near future.” Subsequent soothing comments by the President indicated that the days of 125% tariffs were numbered but there would be tariffs in place. As well, Mr Trump explicitly said he has no intention to fire Fed Chair Powell, despite his recent diatribe that Powell is always late to the party and should cut rates. Certainly, I agree the Fed is, and will always be, late to the party as long as they use a data driven approach. After all, by the time economic change is reflected in the data, whatever is going to change has already done so. However, I don’t yet see the rationale for cutting rates given the current economic data and the fact that inflation remains a problem.

As of this morning, following significant equity rallies around the world, one might come to believe that all the world’s problems have been successfully addressed. The fact that one would be wrong in that belief is the best example of ‘the market is not the economy’. But, hey, let’s take the rallies when they come!

From a market perspective, that was really the big story yesterday and continuing into today. Flash PMI data is not that exciting, and all the other headlines revolve around the ongoing immigration/deportation issues plus RFK Jr’s edict to remove petroleum-based food coloring from foods. So, let’s look at the markets and recap the action.

The 2.5% to 3.0% gains in the US were followed by Tokyo (+1.9%) and Hong Kong (+2.4%) performing well but nothing like Taiwan (+4.5%). The laggard last night was China (+0.1%) with other regional exchanges showing gains between 0.5% and 1.5%. Net, I suppose everybody was happy. In Europe this morning, the screens are green as well, with Germany (+2.6%) leading the way followed by France (+2.2%) and the UK (+1.3%). Again, the trade story appears to be the leading driver. And, adding to the joy, US futures are also higher between 2.0% (DJIA) and 3.0% (NASDAQ) this morning as of 6:50. And to think, just two days ago I was assured that the end was nigh. A quick look at the S&P 500 chart below does give a flavor for just how much volatility we have seen on a day-to-day basis and how narrative changes continue to have huge impacts.

Source: tradingecomics.com

At the same time, Treasury yields have been retracing, lower by -8bps this morning with UK gilts (-6bps) also performing well, although continental European sovereigns are not seeing the same demand with bunds (+3bps) the laggard despite the weakest PMI readings with both Manufacturing and Services below 50.0, lower than last month and far lower than forecasts. The narrative of money leaving the US and heading back to Europe is certainly appealing, and seems quite reasonable as a long-term metric, but it is not clear to me that it will be driving daily price action in any market.

In commodities, oil (+1.0%) continues to edge higher although it has not yet come close to filling that massive gap lower from the beginning of the month.

Source: tradingeconomics.com

From a fundamental perspective, fears of a US recession, which remain high, as well as the IMF recently reducing their global growth forecast seem to be undermining the demand side of the equation. Meanwhile, the opportunity for significant new supply (Iran deal, Russia peace) seems quite real. I’m no oil trader but it strikes me the risk-reward here is for a further drop in prices. As to the metals markets, gold (-0.4%) fell more than $100/oz yesterday, so perhaps my view that the parabolic move was too much was correct. However, I believe this is a short-term, and much needed, correction with the long-term story fully intact. Meanwhile, silver (+1.4%) and copper (+0.4%) are modestly higher after quiet sessions yesterday.

Finally, the dollar is firmer this morning against most of its counterparts, but this is not a universal situation. While both the euro and pound have fallen -0.25%, AUD (+0.6%) is showing some oomph as it figures to be one of the key beneficiaries of a trade agreement between the US and China, no matter how far in the future. Other key gainers are KRW (+0.6%) and CNY (+0.3%), with both clearly benefitting from that same trade story. But otherwise, the dollar is mostly ascendent.

An aside here on the yen (-0.4%) which just two days ago traded below the key psychological level of 140 and this morning is back above 142. It strikes me that this is the first currency that will be reactive to any trade deal. As you can see from the below, long-term chart of the yen, it has spent the bulk of its time at far higher (dollar lower) levels. I suspect that any trade deal will include an effort to revalue the yen higher vs. the dollar, perhaps to its longer-term average of around 120.

Moving on to today’s data, we have New Home Sales (exp 680K) and then the Fed’s Beige Book at 2:00pm. I’m not sure when the surveys were taken for the Beige Book, but you can be sure they will express a great deal of uncertainty and discuss how it will reduce economic activity. You can also be sure that this will be hyped in the press. But now that everything is better (just look at the stock market) is this old news?

If we try to look past the daily gyrations to the bigger picture, I would contend the following is the case. Equity markets remain overvalued and are likely to weaken, the dollar is likely to slide as well as foreign investors slowly reallocate funds away from the US. Quite frankly, the Treasury story is much harder as the interplay between inflation and potential reduced government expenditure is highly uncertain right now, although one will eventually dominate. Finally, commodities remain far more important than their current relative weight in the global asset basket and I believe they have much further to climb in price. One poet’s views.

Good luck

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The Tariff Explosion

Posted on April 16, 2025 by fxpoet

In China, Xi’s ‘conomy grew
Quite nicely, but now in Q2
The tariff explosion
Ought lead to erosion
Of growth, lest we see a breakthrough

Chinese economic data was released last night, and the numbers were far better than expected, well most of them were. The below table from tradingecoomics.com highlights the big numbers showing strength in GDP, IP and Retail Sales although Capacity Utilization was soft.

But this is Q1 data, and pretty early at that, just two weeks past the end of the quarter. As well it reflected activity prior to the tariffs imposed by President Trump, and subsequently the Chinese themselves. Just as we saw massive increases in the trade deficit here, as companies were front-running the tariff threat, I imagine we saw a lot more activity brought forward by the Chinese to both satisfy that front-running, as well as some front-running of their own. I guess the question to ask is, how much information does this data provide regarding potential future outcomes and I suspect the answer is, not much.

Already we are seeing global economists reducing their forecasts for Chinese annual GDP growth this year, with the lowest number I have seen at 3.5% (Goldman). That is far below the ‘about 5%’ that President Xi targeted back in February and clearly assumes tariffs will remain in place. And perhaps that is the biggest unknown. The current state of play between Trump and Xi is that Trump said, call me, maybe and we can talk while Xi has said, show some respect and we can talk.

At this point, it is all theater, with both men playing to their bases and trying to show strength. I do believe that Trump is seeking to isolate China, but the ultimate end game may well be to get them to alter their behavior. If history is any guide, I imagine that this won’t be settled quickly, but that by summer, both sides will be feeling the heat on the economy. Alas, that’s a long time from now and there is ample opportunity for significant market gyrations between now and then.

Like Fujiyama
Successful trade talks will be
A beautiful thing

On the other side of the tariff sheet is Japan, which is priority number one for the US. PM Ishiba has sent his chief trade negotiator, Ryosei Akazawa, to the US to sit down with Treasury Secretary Bessent who has been named the lead in these negotiations. While there is much discussion on autos, another very sticky subject is rice, on which Japan imposes a very high tariff. President Trump claims it is 700%, others say less, more like 400%, but whatever it is, clearly the Japanese are protecting their rice farmers. Ironically, Japan is in the middle of a rice shortage and has been pulling from strategic stockpiles to prevent prices there from rising too sharply. Meanwhile, the US has ample export capacity. It seems like a win-win opportunity, but politics is convoluted and from what I have read, the Japanese farmers don’t want to cede any market share to imports.

Nonetheless, I expect that this will be a successful outcome as it is too important to fail. While President Trump continues his bluster, he needs a win economically, and if Japanese talks are successful, we will see many more versions completed within the 90-day period in my view. Things won’t go back to the way they were before Liberation Day, but if trade questions are answered, all eyes will turn to the budget, which is going to be a different kind of messy. As I have written before, the greatest potential irony from this tariff war is that we could see lower tariffs around the world, something that all that WTO hobknobbing could never obtain.

One other mooted issue between the US and Japan is the exchange rate, which, while the yen has strengthened more than 10% since its low (dollar high) back just before the inauguration, remains far above levels seen before the Covid inspired inflation resulted in the Fed tightening policy aggressively. The chart below is quite clear in displaying just how weak, relative to the past 30 years of history, the yen remains. That last little dip is the move so far this year.

Of course, given the yen’s most recent bout of weakness dates from 2022, when US interest rates started to climb, if Treasury Secretary Bessent is successful in getting rates lower, that will be a natural driver of a weaker dollar, stronger yen. Especially if Ueda-san does tighten policy further.

We have much to anticipate as the year progresses. Ok, let’s turn to the overnight session and see what’s happening. Yesterday’s lackluster US equity performance was followed by a terrible earnings discussion for Nvidia and much more extended weakness in Asia. The Nikkei (-1.0%) and Hang Seng (-1.9%) fell sharply as did Korea (-1.2%) and Taiwan (-2.0%). China (+0.3%), however, bucked the trend likely on the support of the plunge protection team there buying to prevent a rout. Certainly, the positive data didn’t hurt, but I doubt that was enough. In Europe, screens are all red as well, with declines on the order of -0.3% (UK and Spain) to -0.6% (Germany and France). It is, however, universal with every market there declining. As to US futures, while the DJIA is unchanged, both the NASDAQ and SPX are down sharply on that Nvidia news.

In the bond market, yields have been edging lower despite (because of?) all the tariff anxiety. While Treasuries are unchanged this morning, they drifted off 3bps yesterday. European sovereign yields are all lower by -2bps to -3bps and the big news was JGB yields tumbling -10bps last night. There continues to be a great deal of discussion about China using its Treasury holdings as a weapon, but I find that highly unlikely. Unless they could literally find a bid for all of them at once, to prevent further losses, it would self-inflict too much damage. My take is they are essentially performing their own version of QT, allowing Treasuries to mature and slowly replacing them with other things, Bunds, gold, oil, copper. One of the biggest problems is there are precious few asset classes that are large enough to absorb all that money, so they will continue to hold Treasuries in some relatively large amount, probably forever.

Turning to commodities, oil (+1.0%) continues to trade quietly and hang around just above $60/bbl. It feels to me like there is a lot more room on the downside than the upside, but that is just me. In the metals markets, gold (+1.5%) is glittering again, making yet another new all-time high this morning. Remember a week ago when the market was correcting and there was discussion about gold losing its luster? Me neither!

Source: tradingeconomics.com

This chart is a perfect example of the idea that nothing goes up in a straight line. But the trend here is strong. Silver (+1.6%) is following in gold’s footsteps today but copper (-0.4%) is lagging. No matter, I continue to think commodities have more strength ahead.

One of the reasons is that the dollar remains under pressure. Last night, further weakness was manifest with the euro trading back close to the highs touched on Friday at the 1.14 level. Prior to Friday, the last time the euro was here was in February 2022. But again, like the yen chart above, the euro’s strength is a very recent, short-term phenomenon. A look at the chart below demonstrates just how “weak” the dollar is vs. the single currency on a long-term basis. The answer is not very.

But overall, the dollar is weaker this morning across the board against both G10 and EMG currencies. I do agree with the idea that foreign investors have been liquidating their US equity holdings slowly and repatriating the funds home. If that continues, and it could, a continued decline in the dollar, especially if US yields slide, is likely.

On the data front, Retail Sales (exp 1.3%, 0.3% ex-autos) is the headliner at 8:30 then IP (-0.2%) and Capacity Utilization (78.0%) at 9:15. We also hear from the BOC, although they are expected to leave their base rate on hold at 2.75%. EIA oil inventory data is due later this morning with a decent sized draw of more than 5mm barrels across products expected. There are Fed speakers including Chair Powell at 1:30 this afternoon, but they have just not had much sway lately, and I think they are ok with that.

Putting it all together, at least in the FX framework, my take is the dollar has further to fall. There is no collapse coming, but steady weakness seems realistic. However, given the overall uncertainty at the current time, I would be maintaining hedges rather than anticipating that weak dollar.

Good luck

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fxpoetry

Explaining the rhyme and rhythm of the FX markets each day

Tag Archives: #china

Gnashing and Wailing

Set Cash On Fire

As Though It Had Fleas

Huge Fluctuations

Quite Excited

More Pain

The Future As Fraught

Be Quite Scared

Very Near Future

The Tariff Explosion