Tag Archives: #china

More Pain

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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 9th.  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.

TodayTrade Balance-$137.0B
WednesdayFOMC Rate Decision4.50% (unchanged)
 Consumer Credit$9.5B
ThursdayBOE Rate Decision4.25% (-0.25%)
 Initial Claims230K
 Continuing Claims1890K
 Nonfarm Productivity-0.7%
 Unit Labor Costs5.1%

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

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The Future As Fraught

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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 8th.  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

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Be Quite Scared

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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.

TuesdayGoods Trade Balance-$146.0B
 Case-Shiller Home Prices4.8%
 JOLTs Job Openings7.5M
WednesdayADP Employment108K
 Q1 GDP0.4%
 Q1 Employment Cost Index0.9%
 Chicago PMI45.5
 Personal Income0.4%
 Personal Spending0.6%
 PCE0.0% (2.2% Y/Y)
 Core PCE0.1% (2.6% Y/Y)
ThursdayInitial Claims225K
 Continuing Claims1860K
 ISM Manufacturing48.0
 ISM Prices Paid70.2
FridayNonfarm Payrolls135K
 Private Payrolls127K
 Manufacturing Payrolls-5K
 Unemployment Rate4.2%
 Average Hourly Earnings0.3% (3.9% Y/Y)
 Average Weekly Hours34.2
 Participation Rate62.5%
 Factory Orders4.5%

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

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Very Near Future

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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 by

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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The Tariff Watusi

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Undoubtedly, most are confused
And many portfolios bruised
The problem I fear
Is throughout this year
Both bulls and bears will be contused


Right now, it’s the tariff Watusi
With rules that seem quite loosey-goosey
So, traders are scared
While pundits declared
The president’s just too obtuse-y


But will volatility reign
All year with the requisite pain?
Or will, as Trump said
When looking ahead
The outcome be growth once again?

(Before I start, “Ball of Confusion” is brilliant and timeless.  But isn’t Billy Joel’s “We Didn’t Start the Fire” covered and updated by Fall Out Boy, really the same song for a different generation?) Now, back to our regular programming.

  • Tariffs are a tax.  So, say seemingly all the most credentialed analysts and economists around.  
  • Tariffs are inflationary.  So, say many of these same analysts and economists.  
  • Ergo, taxes are inflationary.  So, say…well none of the credentialed analysts and economists.  (H/T to Alyosha for highlighting this idea last week.)  

But it is important to recognize this dichotomy as we listen to the many pundits and analysts who are now telling us that a recession is coming, if not already here, and the world is ending.  It seems to me if you cannot recognize this connection then your views may be colored by something other than strict logic.

We are experiencing a complete regime change in both financial markets and economic outcomes around the world and as old as I am, the last time something like this occurred was long before I was born.  I am very wary of any analyst who demonstrates any certitude in their views at this point.  Frankly, I am more inclined to listen to historians than economists, as they have potentially studied previous regime changes.  Alas, I have not so I am reliant on those who I read.

The current confusion remains over tariffs, their implementation and their impact.  To me, the key point that is missing in most of the tariff discussions is the elasticity of demand for any given product.  If something is highly inelastic and tariffs are added, then the price of that item is very likely to rise.  However, if something has very elastic demand, then a tariff will do one of two things, either the producer will absorb the cost or the volume of sales will drop dramatically, but any price rise will be constrained.

I highlight this because the weekend’s ostensible pause in tariffs on electronic goods from China is the latest discussion point.  It strikes me that under the thesis tariffs are inflationary, then inflation forecasts and expectations should now be declining.  But I haven’t seen that yet.  In the end, though, I don’t believe anybody really knows how things will evolve from here, although I believe the end goal is becoming clearer.  

It appears that President Trump’s goal is seeking to isolate China from much of the developed world.  He wants to create a situation where nations declare they are either with the US or against the US when it comes to economic relations.  I read this morning that 75 nations are in negotiations with the US regarding tariff reductions.  Given that, by themselves, the G10 represent nearly 50% of global GDP, even not knowing which nations are negotiating, the group almost certainly represents upwards of 70% or more of the global economy.  

I would contend it is still very early days with respect to the results of President Trump’s actions.  There is no question he has unleashed a certain amount of chaos in the government and in markets, but I don’t believe he is greatly concerned by that, and in fact he may welcome the process.  Regime changes are always messy, and this one is no different.  Be nimble.

Ok, let’s look at how things behaved overnight.  Friday’s US equity rally was followed by strength throughout most of Asia (Japan +1.2%, Hong Kong +2.4%, China +0.2%, Korea +1.0%, India +1.8%) with Taiwan (-0.1%) the true laggard in the region.  Clearly the tariff reprieve, even if temporary, was welcomed.  In Europe, too, the gains are strong and widespread with the DAX (+2.3%) leading the way but the rest of the Continent and the UK all up at least 1.8%.  And at this hour (6:30) US futures are higher by around 1.0% as well.

But let’s keep things in perspective.  The below chart of the S&P 500 over the past 20 years can help you understand the magnitude (or lack thereof) of the recent decline.  Yes, the index is lower by about 12% from the all-time highs set in February, and yes, uncertainty is rife.  But if you ever wanted to understand what has happened since the Fed’s response to the GFC led to the financialization of the entire economy, the latest minor dip is being described as catastrophic by the punditry.  It’s not!

Source: multpl.com

Next, the Treasury bond market has been the focus of a great deal of angst lately.  Once again, these same analysts and economists claim the world is ending because yields have risen over the past week.  I grant the movement has been sharp, but my experience tells me that when a market as liquid as 10-year Treasuries moves this sharply, it is a position liquidation that is driving the move.  In fact, both the 10-year and 30-year auctions last week seemed to have gone quite well, with strong demand.  So, I am not of the opinion the bond market is about to collapse, nor do I believe that China is liquidating their Treasury holdings.  Rather, hedge funds carrying significant leverage and being forced to unwind seems the most likely culprit here.  Too, remember that 10-year yields are right in the middle of their range for the past six months at 4.43% (-6bps today).

Source: tradingeconomics.com

In fact, European sovereign yields are also retreating this morning led by Italy and Greece (-9bps) with German bunds (-4bps) the laggard of the session.  With equity markets around the world rallying, it doesn’t appear this is safe haven buying.  However, I do believe that there are many investors who are pushing at least some of their equity portfolios into fixed income amidst overall uncertainty.

Turning to commodities, oil (+1.25%) seems to have found a bottom, at least in the short-term, just below $60/bbl.  While a recession doesn’t necessarily drive inflation lower, I am very comfortable with the idea that it reduces demand for energy and oil prices can slip.  Is the recent move a harbinger of recession?  I think there is too much noise to discern the signals the market is giving us right now, although a recession, which has been long awaited by many analysts, certainly seems possible.  

As to the metals markets, while both gold (-0.7%) and silver (-0.3%) are a bit softer this morning, one need only look at their performance in the past week (both higher by more than 7%) to recognize that there is a great deal of growing demand for precious metals.  Dr Copper (+0.9%), like oil today, is not indicating that a recession is coming as it, too, rose 7% last week and is higher by 15% YTD.  Again, there is a lot of noise to get through to find the signal.

Finally, the dollar, is lower again today and is back at levels last seen…in September 2024.  And before that in July 2023 and March 2022.  In fact, if you look at the chart of the DXY below, I challenge you to show me that this decline was more dramatic than any of the three other major declines we have lived through in the past 3 years.

Source: tradingeconomics.com

Net the dollar has declined by about 10% since its recent peak in February, not insubstantial, but not unprecedented by any stretch.  In fact, over the long-term, the dollar is within spitting distance of its long-term average, which as measured by the DXY is about 104.  Looking at individual currencies, there is a strange grouping of currencies that have fallen vs. the greenback this morning, BRL (-0.85%), TRY (-0.5%), CHF (-0.5%) and CNY (-0.4%).  Given the pause in tariffs on Chinese electronic goods, CNY is confusing, as is CHF, which might imply havens are out of favor (but then why is JPY stronger?).  TRY is its own case and BRL is quite confusing.  Commodity prices have held their own or risen lately, and BRL is nothing, if not a commodity currency.  I need to search further here.  Perhaps we are seeing some carry trades being unwound.

I apologize as once again my Monday missive has grown too long for comfort.  I will highlight the data tomorrow with Retail Sales on Wednesday as the most important data release this week and the BOC and ECB meetings on Wednesday and Thursday respectively with the market looking for no change and a 25bp cut respectively.

The world is a messy place right now, with armed conflict now being joined by economic conflict.  Opinions are hardening along political lines, and I don’t see how this changes in the short run.  If you are managing risk, maintain your hedges, even if they seem expensive.  There are too many opportunities for large movements that can be costly.

Good luck

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Tariff’s Predations

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The White House said seventy nations
Are seeking to have conversations
With President Trump
Avoiding the thump
That comes amid tariff’s predations


But China is not on the list
As Xi claims that he’ll raise his fist
To “fight to the end”
And try to defend
His nation from being dismissed

Last week, risk was anathema to one and all.  President Trump’s tariffs were upending the world economy, recession was coming to the US, and possibly the world.  I couldn’t help but be reminded of this classic on the potential outcomes.  

Leading up to the tariff announcements, nations around the world were puffing out their metaphorical chests and claiming all the things they would do to respond.  But the reality is that as I have repeatedly said, the US is the consumer of last resort, and most nations cannot afford to lose access without significantly damaging their own economies.  As such, it is not that surprising that such a long list of nations has reached out immediately, indicating a willingness to change their own policies in order to prevent these tariffs.  Arguably, China is the one outlier here, with President Xi claiming they will “fight to the end” in this trade war.

Already, a number of nations have promised to reduce their tariffs on US goods to 0.0% if that is what is required, although thus far, the President has not accepted those deals.  It is a fair question to ask what he is seeking, since apparently, it is not simply free access.  Granted, there are also numerous non-tariff barriers that are in play, and perhaps he is focused on those as well.  Or perhaps he really is looking at tariffs as a key revenue source and doesn’t want to give up that revenue opportunity.  Or perhaps he is simply waiting for enough nations to bend the knee before one large announcement when all these deals are accepted.  The latter idea would be in keeping with the idea that he is trying to isolate China.

These are just three possibilities of the many, and nobody other than President Trump himself knows how this will end up.  I find it encouraging that Treasury Secretary Bessent is leading the discussions with Japan, a key ally and trade partner, as I have great faith in his understanding and abilities.  However, in the end, it is the President’s decision so…who knows?

Of course, the end of last week brought mayhem to risk markets with equities around the world falling sharply in price.  While there had been numerous voices explaining that equity valuations in the US were far too high and unsustainable, many of those same voices were screaming the loudest at the repricing.  But, as I said yesterday, markets have a great deal of trouble trading in that manner for too long as traders and investors simply get tired and stop trading at all.  

But what was interesting was that US markets turned around after the incredibly weak opening in futures markets Sunday night, and closed mixed on the day, with the NASDAQ actually managing a tiny gain.  I’m not sure exactly what to ascribe as the cause of that reversal, maybe bargain hunters, maybe short covering, or maybe much of the forced selling from margin calls had been completed.  In the morning, there was a rumor that Trump would delay the imposition of tariffs by 90 days, but that was squelched very quickly.  You can see that price action on the chart below.

Source: tradingeconomics.com

The bounce, though, is continuing and we saw substantial rebounds overnight throughout Asia as well as in Europe this morning and with US futures pointing higher as well.  As much fear as was felt on Friday, it seems just the opposite today.  Interestingly, the Fear & Greed Index is still sitting at its all-time lows of just 4 as of this morning.  Perhaps that is the indicator driving the buying.

Source: cnn.com

To recap, many nations are offering to change their tariff policies with the US, although none of those offers have yet been accepted.  Tariffs are due to be enacted starting tomorrow, and there is still a great deal of concern around, but equity markets worldwide are rebounding from their worst levels.  For anyone who thought markets made sense, I dare you to put this puzzle together!

But let’s see how big the bounces were.  Tokyo (+6.0%) exploded higher, recouping much of Friday’s losses, although still down net since this began.  Surprisingly, China (+1.7%) and Hong Kong (+1.5%) showed much less bounce, although they didn’t fall as sharply either.  However, I have to assume that President Xi cannot be very happy as the Chinese plunge protection team was active last night, buying more than $5.7 billion in ETF’s to support the market and there was verbal support as well from the government.  Too, the yuan is sliding more aggressively but we will cover that below.  As to the rest of Asia, the picture was mixed with Taiwan, Vietnam, Thailand and Singapore falling sharply while India, Australia and New Zealand all had nice bounces.  

In Europe, there is a rebound as well, albeit not so dramatic with the FTSE 100 (+1.9%) leading the way and the DAX (+1.4%) and CAC (+1.3%) having solid sessions.  One of the offers was from the EU, saying they will take the tariffs on manufactured goods to 0.0% if the US would reciprocate, although that offer was not accepted, at least not yet.  US futures are all firmer this morning, up between 1.25% and 2.0% at this hour (7:15).  I think the message here is that nobody really knows anything else yet, and short-term trading is the driver.

In the bond market, there was a massive reversal yesterday with Treasury yields spiking more than 30bps from bottom to top during the session and closing near the highs. (see below)

Source: tradingeconomics.com

We saw similar price action throughout European sovereigns as well, although the rise was not quite as dramatic, a bit more than 20bps in German bunds although 30bps in UK gilts.  This morning, however, after all that price movement, yields are within 1bp of yesterday’s closing levels as traders and investors try to figure out what to do next.  JGB yields did rally 16bps yesterday, which given their level, was commensurate with the Treasury movement.  Arguably, looking at the chart above, what we have seen is a reset to pre-tariff levels.

In the commodity markets, oil (+0.25%) managed to close above $60/bbl, although the trend there remains lower in my eyes.  I have had a bearish overall view on oil for more than a year as I explained back in January 2024 that there was plenty of oil around, and  it was political decisions that was restricting its availability, not physical ones.  As such, it is no surprise to me that the trend here is lower, especially with President Trump’s energy policy to drill, baby, drill, and OPEC increasing production as well.  It is hard to get excited about major price rises here.  Meanwhile, gold (+1.0%) and silver (+1.0%) are rebounding, with gold back above the $3000/oz level after its short profit taking foray below that key psychological level.  Copper is still under pressure as the growth story remains uncertain, at best, for now.

Finally, the dollar is a bit softer this morning, but with some notable exceptions.  While G7 currencies are all firmer, ranging from NZD (+1.1%) down to NOK (+0.1%) and everything in between, in the EMG bloc, CNY (-0.25%) is back to the weakest levels (dollar strength) since early January and prior to that since September 2023.  

Source: tradingeconomics.com

Xi is now caught in a tough spot as given the US tariffs, which total to about 104% on Chinese imports, the natural response is to allow the yuan to depreciate.  However, he has made a big deal about the yuan being a stable store of value, so if he lets it slide, that will undermine that argument.  My money is on a weaker CNY going forward.  Elsewhere in Asia, KRW (-0.6%) and INR (-0.4%) led the way lower.

On the data front, the NFIB Small Business Optimism Index was released at a softer than expected 97.4 this morning, but there is nothing else on the calendar other than an afternoon speech by SF Fed president Daly.  

It cannot be a surprise that we had a rebound from last week’s dramatic declines.  The question, of course, is have we now seen the bottom.  My take is that is not the case, and while we may hold tight for a few sessions, further declines are still in the offing.  At least absent a major change where Mr Trump announces that he has accepted the reduction in tariffs elsewhere around the world.  Remember, even after the declines, US equities are still richly valued.  As to the dollar, that is a much harder question, and I sense that there will be much more idiosyncratic movement rather than bloc dollar movement going forward.

Good luck

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Quite Miffed

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By now, each of you is aware
More tariffs, the Prez did declare
Some nations will scream
While others will scheme
To Trump, though, in war all is fair
 
The market reaction was swift
With equities in a downshift
While Treasuries rallied
Pure gold, lower, sallied
And everyone worldwide’s quite miffed

 

Once again, President Trump did exactly what he told us he was going to do from the start.  He applied reciprocal tariffs on virtually every nation in the world, although at a rate claimed to be ~50% of their tariffs on the US, (as calculated by the White House and which included quotas and non-tariff barriers as well.)  In addition to Israel, which pledged to reduce tariffs to 0% on US goods if the US would do the same, it appears Canada has also agreed that deal.  I expect that we will hear different responses from nations all around the world, but remember, the one thing the president has made clear is that retaliation by other nations will be met with a significantly higher response from the US.  I expect that smaller nations may find themselves in very difficult straits, although larger ones have more potential to respond.  But, in the end, the US remains the consumer of last resort, and every nation on the list realizes that losing the US market will not help their economies.

The market response was immediate with US equity futures plummeting on the open of the evening session and sharp declines in Asian equities as well.  Treasury yields fell along with the dollar, while gold after an initial rally, reversed course and is now lower on the day as well.

Analysts around the world are out with early forecasts of the “likely” impacts of these tariffs although I would take them with a grain of salt.  Remember, analyst macro models have been pretty useless for a while, ever since the underlying conditions changed as I described earlier this week, so it is not clear to me that applying broken models to a new event is likely to offer accurate estimates of future activity.  However, there is a pretty clear consensus, which is that inflation is going to rise while economic activity is going to decline, probably into a recession.  Personally, I am confused by this analysis as every one of these analysts continues to believe that a recession drives prices lower and reduces inflation, but I’m just reporting on what I have seen.

If pressed, I expect that we will see several nations reduce their tariff structures in response to this, similar to Canada and Israel, and US tariffs will decline there as well.  Other nations will dig in their heels and trade activity between the US and those nations will decline.  But I will not even hazard a guess as to which nations will do what.  Political pain is a funny thing, and different leaders respond differently.

My sincere hope is that now that the tariffs have been imposed, we can move on with our lives and discuss other issues because frankly, I am really tired of this topic.

Masked by the tariff mania was news that the US Senate has moved forward on its budget resolution bill which if passed and combined with the House, will allow the process to start to legislate for fiscal year 2026.  Both versions maintain the 2017 tax cuts, both seek unspecified spending reductions and while each has a different price tag, my take is this process will be completed before too long.  It would truly be miraculous if Congress actually submitted department spending bills on a timely basis, rather than the omnibus bills that have been the norm for quite a while.  That would be true progress in how the government works.

Anyway, let’s see where things stand this morning.  The one thing we know is that despite President Trump’s constant discussion on tariffs, market participants were not prepared.  Ironically, yesterday saw modest gains in US equity indices but as of now (6:40) US futures are sharply lower (NASDAQ -3.8%, SPX -3.6%, DJIA -2.6%).  Of course, the damage has been significant everywhere with equities lower worldwide.

In Asia, Vietnam (-7.2%) was the worst hit index, actually the worst in the world, as tariffs there rose to 46%.  Given Vietnam has been a way station for exports from China to the US, I expect that we will see some swift action by the government there to address the situation.  But elsewhere in Asia, while the losses were universal, they were not as bad as might be expected.  Tokyo (-2.6%) led the way lower with Chinese shares (Hang Seng -1.5%, CSI 300 -0.6%) also falling, but not collapsing.  Korea (-0.8%) and India (-0.4%) fell but were also not devastated.

In Europe, though, the pain is more consistent and larger, net, than Asia as per the below snapshot from Bloomberg.  This will be the most interesting thing to watch as there has been a great deal of huffing and puffing about a response, but will European nations, who sell a great deal into the US, risk a worse outcome, or will they reduce their own tariffs?

Something else that has declined sharply is bond yields around the world.  Treasury yields are lower by a further -6bps, and that is the basic decline seen across Europe as well.  Asia saw even greater drops in yields with JGB’s (-12bps) breaking the trendline that had been in place since the BOJ first started hiking rates last year and Governor Ueda made clear his intention to continue to do so.  

Source: tradingeconomics.com

It appears that investors are anticipating a global recession, at least based on the movements in government bond yields around the world.

In the commodity space, oil (-4.7%) has reversed much of its recent gains as the recession narrative has eclipsed the Iran war/sanctions narrative.  However, despite the sharp decline, oil remains nearly $3/bbl above the lows seen at the beginning of March, just one month ago.  In the metals market, gold, which initially traded to new highs on the tariff announcement reversed course about lunchtime in Asia and is now down by more than -2.0%.  My take is this is a short-term impact as investors sell liquid assets with gains to cover margin calls, rather than any negative feelings about gold in the wake of the news.  Instead, I suspect that the barbarous relic will regain its footing shortly as the ultimate haven asset in difficult times, and clearly many now see difficult times ahead.  Silver (-3.9%) and copper (-0.4%) are also softer, much more on the economic concerns than the risk concerns.

Finally, the dollar, shockingly, is broadly lower this morning.  While we have been consistently informed that a very clear response to the US imposing tariffs would be other currencies weakening vs. the dollar to offset the impact, apparently that model is also broken.  Versus it’s G10 counterparts, the dollar is under severe pressure today.  EUR (+1.75%), JPY (+1.7%), CHF (+2.1%), SEK (+2.1%) and even NOK (+1.1%) despite the collapse in oil prices, have all moved to within 1% of the dollar’s lows seen last September.  But to keep things in perspective, I don’t know that I would call the dollar “weak” here.  The below chart of DXY shows that even over the past 20 years, the dollar has been MUCH lower and only spent a relatively small amount of time above current levels.  

Source: Koyfin.com

Interestingly, other than the CE4, which track the euro closely, most EMG currencies have not seen the same boost vs. the dollar, although most are somewhat higher.  MXN (+0.6%), KRW (+0.6%) and INR (+0.5%) have all gained modestly.  ZAR (0.0%) and CNY (-0.2%) are the only currencies that have bucked the trend and followed the economic theory.  

Turning to the data, this morning brings the weekly Initial (exp 225K) and Continuing (1860K) Claims as well as the Trade Balance (-$123.5B) at 8:30.  Then at 10:00 we see ISM Services (53.0).  The thing about this data is it ought to have no impact whatsoever as last night’s tariff announcements completely changed the playing field.  So whatever things were, they are not representative of the future, at least the near future.  There are also a couple of Fed speakers, but again, there is no way they can determine how they will react until the real economic effects of these tariffs start to play out.

There have been many analysts who continue to believe that President Trump will not be able to tolerate a substantial decline in the equity market despite the fact that he has not discussed it at all, and he, along with Treasury Secretary Bessent have consistently said their goal is a lower yield on 10-year Treasuries.  Well, they are getting their wish right now, regardless of the reason.  

The president has done virtually everything he said he was going to do regarding the border, government efficiency and now tariffs.  There are many skeptics who believe that he is out to force economic change on the backs of the bottom 90% of earners to benefit himself and others in the top 1%.  But he has consistently said his goal is to help the middle class.  His view of reindustrialization and more self-sufficiency while reduced international adventures continues to be the driving force of his policies.  There is no reason to believe he is going to change that view.  Do not look for a reversal of what he has done simply because the S&P 500 declines.  I think the trend is going to be for the dollar to continue to decline along with interest rates, while commodities rally.  Equity markets are going to be a tale of two markets, likely with previous highflyers suffering and previously overlooked companies benefitting.  

The world is changing a lot, so the best thing you can do is maintain your hedges to mitigate the impact.

Good luck

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Fast or Slow Death?

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As markets all take a deep breath
Concerns are that, just like Macbeth
The President will
The ‘conomy kill
The question is, fast or slow death?

 

Personally, I am hopeful that we can stop discussing tariffs after today.  It’s not that they will decrease in importance, but they will no longer be the primary topic.  Instead, they will be a secondary explanation for anything that anybody decides is wrong with the economy, or the country or the world.  Recession? Tariffs are the cause.  Inflation? Tariffs are the cause.  War? Tariffs are the cause.  Duke loses in the semis?  Tariffs are the cause.  

FWIW, which is probably not that much, my view is the market has absorbed this conversation and the correction we have seen over the past weeks in the equity market is the result of growing expectations of much slower growth or a recession.  Arguably, the biggest concern should be that US equity markets continue to trade at historically rich valuations and any negative catalyst can serve to both depress future expectations and compress multiples, and that’s how you get large equity market declines.

The thing about the tariff story is that while later today we will all find out the details, the actual impacts will take months, at least, to be determined.  For instance, the story that Israel has just decided to drop all tariffs on US made products, thus avoiding them on Israeli products is something I suspect we may see more frequently than now assumed.  Perhaps there would be no greater irony for all the naysayers than if this ‘end of free trade’ moment actually inspired a significant reduction in tariffs around the world as nations seek to retain access to the US.  I’m not saying this will be the case, but given the US is the consumer of last resort, running a nearly $1 trillion trade deficit, pretty much every other nation relies on the US as a market for some portion of their production.

Along these lines, I must ask, why is it that other nations, who apply tariffs and other non-tariff barriers like quotas or regulatory restrictions, to US products do so if tariffs are such a great evil?  Apparently when the French, for example, seek to protect their industries and farmers, it is healthy for the economy, but when the US does, it is world-ending.  Just sayin’

So, is the dip now to be bought?
Or are things still overly fraught?
The overnight session
Did naught for that question
As no one knows what Trump has wrought

Since there are literally no other stories to discuss regarding finance and markets right now, let’s turn to the overnight and see how markets are behaving in the runup to the Liberation Day announcement.  Yesterday’s mixed, but mildly positive, session in the US led to a mixed session in Asia with no real trend.  Even within a nation (Nikkei +0.3%, TOPIX -0.4%) there was no clarity.  Chinese shares were basically flat, Korea and Singapore fell while India and Malaysia rallied.  No movements approached even 1.0% so it is probably fair to say we didn’t learn anything.  However, European bourses are under pressure across the board this morning led by the DAX (-1.3%) and FTSE 100 (-0.9%).  Clearly, there is significant concern that the US tariffs, which are set to come into force immediately upon their announcement, will have a significant negative impact on European companies.  Certainly, German auto makers, who rely greatly on the US market, are likely to be negatively impacted, but as I said, it remains to be seen what actually occurs.  I guess considering that European shares have been performing well of late, with gains on the order of 10% or more YTD, some investors have decided to take their money and run.  

source: tradingeconomics.com

Meanwhile, US futures are pointing lower at this hour (7:10) down about -0.5% across the board.

In the bond market, while there is a lot of huffing and puffing that tariffs will be inflationary, yields are sliding this morning with Treasury yields (-2bps) declining to their lowest levels since last October, and a similar amount to most European sovereigns.  I suppose bond investors are more concerned over the mooted recession than the inflationary impact of tariffs.  Too, JGB yields slid -3bps, back to their lowest level in a month as questions remain about the BOJ’s future path as well as Japanese growth prospects in the new trade regime.

Turning to commodities, oil (-0.35%) has slipped a bit further but remains well up on the week as a story regarding the US moving more military assets toward the Middle East from Asia makes the rounds.  We cannot forget that President Trump has already initiated secondary sanctions on Venezuelan crude, and threatened to do so on Russian crude if Putin doesn’t agree to the ceasefire.  Meanwhile, Iran is always in Trump’s crosshairs while they remain a perceived threat to go nuclear.  As to the metals markets, gold (+0.1%) continues to edge higher with any pullbacks both short term and modest.  One look at the chart below shows how many more green days there have been than red ones over the past 6 months.  I see nothing to stop this trend.  As to the other metals, they are higher this morning and continue to trade well overall.  I believe the case can be made that going forward, commodity markets, and the shares of companies in the space, are set for some real outperformance in the new world order.

Source: tradingeconomics.com

Finally, the dollar is mixed as well, with some widely disparate movements seen.  For instance, NZD (+0.9%) is having a good day, perhaps because direct trade with the US is di minimus, or perhaps because it has been weakening so much for the past 6 months, down nearly 10% even after today’s rally, over that period, that it is a simple bounce.  At the same time, ZAR (-1.0%) is sliding despite the ongoing gold rally, although there are growing concerns over the outcome of the budget there and how it will be funded and impact the economy.  But in truth, as I look across the board, there are probably more currency gainers than losers this morning, which ironically is exactly the opposite of the forecast impact of tariffs by the US.  Just remember, as Yogi Berra allegedly explained, “in theory, there is no difference between theory and practice, in practice there is.” Detailed market outcomes based on economic theories rarely hold up.

On the data front, this morning brings ADP Employment (exp 105K) and Factory Orders (0.5%, 0.7% ex-Transport) as well as the EIA oil inventories.  Yesterday afternoon’s API inventories showed a large build, but expectations are for draws today.  We also hear from Adriana Kugler, Fed governor, but ironically, all the Fed talk is now about tariffs and not about monetary policy.

Today is a crapshoot, with no way to even guess how things will evolve.  Also, beware the initial reaction as it may not represent a new view, but rather the unwinding of current positions.  Until further notice, though, I still think the dollar has a slow decline in its future.

Good luck

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Aren’t Just Rumors

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Give plaudits to President Xi
Who’s trying to show it is he
That’s offering deals
To help grease the wheels
Of trade, which he claims will be free
 
The problem is Chinese consumers
Have not been in very good humors
And history shows
The Chinese impose
Restrictions that are aren’t just rumors

 

Market activity can well be described as lackluster, with equity indices generally slipping lower while bond markets wobble and the dollar retraces some of its recent losses.  In fact, the only markets really showing a trend right now are gold (+0.4%), silver (-0.1%) and copper (-0.2%), all of which have rallied sharply over the past month and year.  Obviously, the major discussion point is President Trump’s tariff policy and how that will impact economies around the world.  Recent focus has been on how other nations will respond with a variety of poses taken by different leaders, from conciliatory to combative.

So, it is with great interest that we see another impact of the Trump administration, the sight of China’s communist party leader, Xi Jinping, trying to convince foreign company CEO’s that investing in China is a good deal.  A lead article in Bloomberg this morning describes a large gathering in China where President Xi hosted CEO’s of numerous companies from around the world in an effort to portray China’s policies as investment friendly.

This makes sense given the trend in foreign direct investment toward China over the past years.  As can be seen in the chart below from the Bloomberg article, it has not been a pretty sight.  And remember, this all occurred before President Trump was elected.  Clearly, there were concerns prior to Mr Trump escalating the trade conflicts with the US.  

I find it somewhat ironic, though, that Xi is trying to promote Chinese policy as an island of stability in the world.  Consider how he has capriciously destroyed the private education market, or even the tech market until reversing course after the DeepSeek announcement, all while the housing market continues to implode.  Given the rest of the world has lost patience with China’s mercantilist policies and the flood of cheap goods they produce with government support, I am at a loss to understand the appeal of investing in China.  Using it as an export base is a nonstarter, and history has shown that nearly every foreign company that looked at China’s population as a great untapped market for their products has been hugely disappointed.  The exceptions are the luxury goods makers, where the global brand and cachet were too strong for domestic competitors to overcome.  But that is a small segment of the market.  

Instead, the usual outcome is forced technology transfer which results in a state-supported competitor for their products around the rest of the world.  I am confident there will be companies that choose to invest, if for no other reason than to curry favor with Xi and open the doors to further potential sales, but the trend of late is not promising.  Ultimately, property laws and their enforcement are the keystone for inward investment into any nation and China has no history of treating foreign companies fairly, or domestic ones for that matter.

But really, the flow of direct market news and economic data has been secondary with far more political news leading conversations.  The impact of tariffs on economic activity and inflation, as well as on market performance remains unclear with arguments being made on both sides as to potential benefits or detriments.  FWIW, which is probably not much, my take is the impacts will be very unevenly spread, and how that impacts broad based numbers is unknowable at this time.  I fear we will all need to be reactive for now, although for those with outstanding exposures, there is no better argument for maintaining robust hedge ratios given the overall uncertainty.

Ok, let’s take a look at the overnight action in markets.  After yesterday’s US declines, we saw much of Asia follow suit with Tokyo (-1.8%) particularly hard hit as PM Ishiba thought that he was making headway with President Trump but found out that Japanese auto manufacturers were going to be subject to those tariffs as well.  Adding to the pressure were the “Minutes” from the last BOJ meeting which implied further rate hikes are on the horizon. Both Hong Kong (-0.65%) and China (-0.45%) also slipped and, in fact, almost every major market in Asia (Korea, India, Taiwan, Malaysia, Singapore and Thailand) also fell, some quite sharply.  Apparently, Xi’s efforts at creating that stability haven’t yet been successful.  

In Europe, red is also the dominant color with most continental bourses lower by around -0.6%, also on the tariff story.  The one exception here is the UK, which released a passel of data showing growth was modestly firmer than expected at 1.5% led by Retail Sales growing 1.0%, rather than declining by -0.3% as expected.  As to US futures, at this hour (7:15) they are pointing slightly lower, about -0.2%.

In the bond market, yields are backing off around the world with Treasuries (-3bps) lagging European price action where sovereigns have seen yields decline between -4bps and -6bps.  Even JGB yields have slipped -4bps.  In Europe, inflation data from France and Spain came in softer than expected which has encouraged the move there, and we even heard arch ECB hawk, Robert Holzmann, explain that funding defense spending via bond purchases (i.e. QE) was viable.

In the commodity markets, oil (-0.2%) which rallied yesterday to touch the elusive $70/bbl level is slipping back a bit, but the trend remains clearly higher as per the below.

Source: tradingeconomics.com

Finally, in the currency markets, the dollar is firmer once again with modest rallies vs. the euro (-0.3%) and pound (-0.2%) as well as strength against the Scandies (SEK -0.6%, NOK -0.3%).  However, the picture in the EMG bloc is more mixed with ZAR (+0.35%) showing strength alongside gold’s rally, and INR (+0.2%) bucking the trend after having agreed to reduce tariffs on US products.  Throughout the rest of the bloc, there has been generally little change.

Turning to the data this morning, there is plenty that will be keenly watched.  Personal Income (exp 0.4%), Personal Spending (0.5%) and the PCE data (headline 0.3%, 2.5% Y/Y and core 0.3%, 2.7% Y/Y) all get released at 8:30.  Then at 10:00 we see Michigan Sentiment (57.9) and you can be sure people will be talking about the Inflation Expectations piece (1yr 4.9%, 5yr 3.9%), especially if it syncs with their narrative.  There are two more Fed speakers, Governor Barr and Atlanta Fed president Bostic, but nothing any Fed speaker has uttered has mattered at all, maybe since Trump was inaugurated.

My read on overall sentiment is that investors are wary of the future, but not yet ready to abandon the stocks only go up narrative.  Regarding the dollar, the recent trend remains modestly lower, as per the below, but it is hard to get excited about large moves, at least for today.  Again, Trump clearly wants it lower and seems likely to get his way, at least to some extent.  The one thing I truly do like is commodities, which I believe will remain well bid overall.

Source: tradingeconomics.com

Good luck and good weekend

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