Tag Archives: #CNY

Literally Dying

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In China the people ain’t buying
Despite all the stuff their supplying
To nations worldwide
Seems Xi sits astride
A country that’s literally dying

Let’s start this morning with a quick look at the economic situation in China, where things are continuing to slide much to President Xi’s chagrin.

Source: tradingeconomics.com

As you can see from the listing above, every one of the key monthly statistics underperformed both last month and market expectations with Retail Sales continuing to shrink and the trend lower remaining steady as you can see in the chart below.

Source: tradingeconomics.com

To put a finer point on it, prior to Covid, the monthly gains were running in the 10% range compared to July’s 0.6% rise.  The ongoing implosion of the property market bubble there (see the Fixed Asset Investment outcome above) continues to weigh on the economy across the board and shows no sign of ending soon.  

The US has many issues in its economy including excessive debt and stickily high inflation, but from an economic activity perspective, the US is in far better shape.  Inward investment continues apace as reshoring of manufacturing and expansion in technology keep growing which will provide opportunities going forward.  That is not the case in China, and while they remain a manufacturing and export powerhouse, their future, especially given the demographic catastrophe that was Deng’s “One-child policy” results in a shrinking population.  After all, Xi has no problems policing his borders as nobody wants to go there, they all want to leave.

Keep in mind that according to the World Bank, the PPP for the Chinese yuan is approximately 3.46 as of 2025 compared to the current market rate of just below 6.74.  Sure, the dollar’s value has been declining steadily vs. the CNY all year, as per the below chart, but ask yourself how much China’s exports would be reduced if the currency traded at 3.50?  I’m guessing their trade surplus would disappear pretty quickly.

Source: tradingeconomics.com

Veering into geopolitics here, it is difficult to believe that China is ever going to make a military incursion into Taiwan, despite all the rhetoric.  I’m confident Xi has learned the lesson of drones being extremely effective defensive weapons, and Taiwan is armed to the teeth.  While Taiwan may decide to reunite on their own, it will not be conquered as China simply doesn’t have the ability to do it.  Especially given the problems Xi has at home.  

And remember, there are strict capital controls in China preventing citizens from getting money out of the country.  Ironically, if they opened that up, the CNY would fall sharply as money fled, even from current levels.  For all the talk of China’s long-term thinking and strategy, never forget they made the largest demographic blunder in history.

Japanese data
Turned up weak as a kitten
Can Ueda hike?

It seems that slowing growth in Asia is not confined to China as Japanese data last night was also softer than expected as you can see below:

Source: tradingeconomics.com

This begs the question regarding the BOJ’s potential rate hike come next month.  After all, if the economy is slowing while inflation remains sticky, will the BOJ be willing to raise rates?  Takaichi-san’s approval ratings are already slipping because of the ongoing inflation there, but if another hike pushes Japan toward recession, that would be a bigger problem, I believe.  

Now according to the OIS swap market, there continues to be a strong belief that Ueda-san will hike next month.  In fact, as you can see from the chart below from rateprobability.com, the market is increasingly sure this will be the outcome despite last night’s data releases.  And maybe that is the case.  But given the probability of a US hike continues to ebb, now down to 30% after Friday’s weaker than expected Retail Sales data (the 4th consecutive weak data point), I’m not so sure a hike is coming.  There continues to be much intrigue in the USDJPY exchange rate.

So, how did equity markets in Asia respond to this?  And elsewhere?  Better than you might have expected with Tokyo (+0.7%) and China (+1.6%) and HK (+1.3%) all showing nice gains.  To my eye, this response seems unusual as the combination of weaker growth and higher rates is typically a bad one for equities, but perhaps this is a new paradigm.  Tech shares led the way in all three markets, and we saw that in Korea (+2.4%) as well.  In fact, generally in Asia equity markets were solid (Indonesia, Thailand, Singapore) although there were a few laggards (Australia, New Zealand, India) though none of the losses were dramatic.

Europe, though, is deeply in the summer doldrums with tiny gains and losses across all the major markets, +/-0.2% or less.  And US futures, if you squint, are slightly higher at this hour (6:40).

In the bond markets, the outlier move was in JGB’s overnight, jumping 6bps to new multi-decadal highs at 2.91%, despite the weak economic data.  Arguably, this is why the probability of a rate hike has been climbing, although it seems to me that the back end of the yield curve can climb without the BOJ hiking.  This story goes back to the carry trade question and whether Japanese investors are bringing money home now that real yields in Japan, at least out the curve, have turned positive.   Alas, a look at USDJPY shows no indication that the post intervention price action has changed.

Source: tradingeconomics.com

As to the rest of the world’s government bonds, yields are basically lower by -1bp across the board this morning.

Despite the latest scare stories in the press, the oil markets remain nonplussed by everything with WTI (+0.5%) edging higher this morning but hanging out in the middle of the range, actually the lower half of that range, since the war began.  I continue to see stories about how soon we will see an escalation in fighting and oil inventories run down, but I keep looking at the price action, as well as the increased production from places like Venezuela, Guyana, Canada, Brazil and Argentina, and have a hard time seeing that outcome.

As to the metals markets, they are rallying further this morning with gold (+0.5%), silver (+1.5%) and copper (+1.2%) all firmly in the green.  Nothing has changed my views about the long-term prospects for these to go higher.

Finally, the dollar is softer this morning overall with the DXY (-0.2%) firmly back in its previous trading range.  Do you remember last year when the dollar happened to decline about 15% during the first six months of the year and the punditry was making a big deal about the decline as a tell on the US simply because of when it happened on the calendar?  If you look at the long-term chart of the DXY below, you can see that in the post-Covid world, the dollar exploded higher and then retraced much of those gains in two relatively short periods in late 2022 and early 2025.  But we have gone nowhere in more than a year and, frankly, at 99.50, the DXY is within 1SD of its long-term average.

Source: tradingeconomics.com

As to individual currencies, the dollar’s weakness is broad based and consistent in the 0.2% to 0.3% range with AUD (+0.6%) the outlier of note, taking advantage of the gains in metals prices.

On the data front, it’s a very slow weak for primary releases:

TodayEmpire State Manufacturing11.0
TuesdayHousing Starts1.35M
 Building Permits1.37M
 IP0.3%
 Capacity Utilization76.3%
WednesdayFOMC Minutes 
ThursdayInitial Claims212K
 Continuing Claims1808K
 Philly Fed25.0
 Leading Indicators0.1%
FridayFlash Mfg PMI53.8
 Flash Services PMI54.0

Source: tradingeconomics.com

The interesting thing to me is that there is not a single Fed speaker on the docket.  Perhaps Chairman Warsh is getting his point across, or perhaps they are all on summer vacation.  Whatever the case, I think that is a benefit, let the data speak.

While analysts will parse the Minutes with a fine-tooth comb, I don’t think anything is going to matter until Warsh speaks at the end of the month.  Until then, absent a major escalation in Iran, I don’t expect very much to happen although nothing seems set to derail the equity rally.

Good luck

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Feeling Quite Fraught

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The data of late offers nought
To help decide what should be bought
Or sold, so we wait
For CPI’s rate
With risk takers feeling quite fraught

Despite NFP being weak
Some Fed members, when they do speak
Are pining to hike
Into the crude spike
I fear much more havoc they’ll wreak

The below chart from cmegroup.com describing Fed fund futures probability pricing for a rate hike at the September meeting is an excellent description of many markets right now, nobody knows nothin’.  It has been pretty rare of late, really in the past 15 years, that market participants were so uncertain about the future path of short-term interest rates.  And frankly, I think this is exactly what Chairman Warsh wants to see.  If uncertainty is high, then risk-taking recedes and that offers a more robust market framework.

If pressed, I think he would be happy if this were the situation going into every meeting, although obviously, there is no meeting imminent, this is a response to today’s CPI data.  

Current consensus expectations are as follows:

  • CPI M/M: 0.1%
  • CPI Y/Y: 3.4%
  • Core CPI M/M: 0.2%
  • Core CPI Y/Y 2.5%

I have no model nor framework to anticipate whether the outcome will be seen as either hot or cold, but since this is for July, we can look at the price of gasoline during the month and see how much it changed.  I apologize for the chart below but it is the only way I could determine how to show the movement from month end to month end where on June 30, RBOB futures closed at $2.8949/gal and on July 31 they closed at $3.1142/gal so a gain of 7.5%, but if you look at the chart, it does seem like it spent a lot more time above the month end close than below it.  In fact, my best estimate of the average price during the month is ~$3.18/gal, higher still, so energy prices were certainly firmer during the month.

Source: tradingeconomics.com

Of course, the question the market is asking is, will this change the Fed’s generic viewpoint on inflation?  The current downside of Chairman Warsh’s attempts to adjust the way the Fed works is that neither traders nor analysts have a good idea of their current reaction function when it comes to data.  We know that there are a group of FOMC members who are itching to hike, but with a relatively soft NFP report last week, if today’s number is also soft, will that change attitudes?  It is this conundrum that neatly defines why the analyst community is so up in arms, since they seem no longer able to think for themselves, they don’t know what to think!

But that’s where we stand for now, a major data release upcoming and a market that has, arguably, pulled in its risk-taking wings to make sure they can fly afterwards.  As this is the biggest story for the day, let’s take a twirl around markets overnight to see what they did in anticipation of the release.

While yesterday’s US session was lackluster, with all three major indices slipping a bit, overnight saw more winners than losers.  So, Tokyo (+0.8%), China (+0.6%), Korea (+3.7%) and Taiwan (+0.9%) all continue to perform well on the back of the tech story although HK (-0.8%) and Australia (-0.5%) lagged.  As to the smaller, regional exchanges, it was a mixed picture, although certainly not an extremely negative one.  It appears that risk appetite remains reasonable if not gigantic.  Certainly, if we look at the Fear & Greed Index, it demonstrates that point exactly.

Meanwhile, in Europe, equity markets are generally a bit firmer led by the DAX (+0.5%) and Spain’s IBEX (+0.2%) while both France and the UK are essentially unchanged although there has been no data to drive things in either direction.  It appears like these markets are awaiting the CPI data just like US markets.  Speaking of which, futures at this hour (7:10) are pointing slightly higher with the NASDAQ (+0.5%) leading the charge.

In the bond market, despite all the angst, Treasury yields are lower by -2bps this morning and this is dragging the entire bond market down with European sovereign yields all lower between -2bps and -3bps as well.  Is that an indication that a soft number is expected?  The outlier here is Japan where JGB yields (+4bps) rose last night and are now just 5bps below the recent 30-year high level reached in early July.  

Source: tradingeconomics.com

Bloomberg had numerous articles this morning about Japan and the issues they have with the yen, their monetary policy, their relationship with the US and were generally of the opinion that Japan is making all the wrong moves, hence the weakness in the currency.

In the commodity markets, oil (+0.3%) is back above $83/bbl now having gained 11% in the past week.  The ongoing tit for tat comments from both Iran and President Trump have become just background noise to most of the market these days.  Later this morning we get the EIA inventory data with a small draw expected, although that was expected last week and there was a build in inventories.  It has been nearly 6 months since the war started and the Strait became compromised and there is still seemingly plenty of oil and products available to users.  As to the metals markets, this morning they are quite shiny (Au +0.9%, Ag +2.4%, Cu +0.7%).

Finally, the dollar is…well nobody seems to care much about it these days.  It is virtually unchanged vs. almost all its G10 counterparts with NZD (-0.3%) the lone exception.  The best explanation I can see is that employment data last week may be weighing on the belief the RBNZ is going to hike rates at their next meeting, but that is fishing.  It is quite likely there was an order that went through to drive the price.

In the EMG bloc, there is also little to discuss overall as FX markets are generally quiet.  But I want to mention CNY as I read something this morning about which I was unaware.  Mike Nicoletos, a very solid analyst, made the point that banks in China are paying up for USD deposits there, as high as 4% vs. 1% for CNY deposits.  This has been occurring despite the fact that the renminbi has been strengthening steadily all year as per the chart below.

Source: tradingeconomics.com

Now, the renminbi is arguably at least 30% undervalued, even after its recent relative strength, which is one reason that China’s exports continue to grow.  The undervalued currency is a key reason China finds itself the subject of tariffs and trade restrictions all around the world.  But recall, there is a narrative that nobody wants dollars and China is de-dollarizing as they try to move to more local currency trade and settlement.  The very fact that banks in China are paying up so much for USD deposits may tell a different story.  Perhaps there is a significant need for dollars, even in China, and banks have no funding.  Remember, there is no Fed swap line with the PBOC so they have to source their dollars the old-fashioned way, pay up for them.  It is interesting that the renminbi continues to strengthen despite this dollar demand, but I suspect this will continue for a while.  Maybe the de-dollarization narrative has some flaws in it after all.

And that’s really it for today.  A hot CPI number will probably see higher yields and some dollar strength and equity weakness with the opposite true for a soft number.  We shall see.

Good luck

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An Eye Blink

Posted on by 
Last night it appeared a reprieve
Was offered, though I don’t believe
That Trump will delay
Much more than a day
Ere US Marines, wins, achieve

But as of last night, markets think
That peace will come in an eye blink
Thus, futures have rallied
While bond prices dallied
And oil has started to sink

This is the Tuesday night look, which is subject to significant change by the time I wake up tomorrow morning.  But here are the futures prices at 9:30pm:

Source: tradingeconomics.com

As you can see, US futures are higher and the Nikkei 225 is also modestly higher with no indication that there is concern over the US landing on Kharg Island and other Iranian key strongholds.  All this comes after news has filtered out that Ahmad Vahidi, who appears to be the senior most IRGC leader left, has arrested the civilian government members who were scheduled to meet with the US and hammer out a deal.  To my eyes, and from what I have read from what I believe is an excellent source, marines will be on Kharg Island before the week is out.  It strikes me if that is the case, the current equity rally, which has been impressive, will get challenged.

As to bonds, last night they were essentially unchanged with 10-year yields at 4.29%.  Again, this is not the stuff of major concern.  And oil?  Modestly lower and back below $90/bbl.

The early results are confusing
With recent attacks Iran’s choosing
But elsewhere there’s hope
That peace is in scope
Despite lots of, others, accusing

As of 6:20 this morning, although there have been several ships fired upon by Iranian gunboats, the US has not escalated, and the President has indicated he is waiting for news today on the situation.  One of the takes is that the Iranians are going to come to the table and seek a deal, although it is difficult for me to believe that Vahidi is ready to cede power.  But like virtually everybody else, nobody really knows what is happening.

However, markets appear to have made up their mind that the worst is over and there is no reason to panic any further.  In fact, it appears they are getting excited about the opportunities that will come about because of all the post-war reconstruction that will be necessary and will certainly be profitable for those companies engaged.

The other story from yesterday was the confirmation hearings for Fed Chair nominee Kevin Warsh.  I imagine it went about as largely expected with every Democrat despising him and every Republican liking him, but until the DOJ case against Powell regarding the reconstruction of the Eccles Building is finished, Senator Thom Tillis has said he will not allow a floor vote.  Warsh did consistently explain that the Fed has lost its way and has not achieved its goals so it is time to start thinking of new approaches.  And it is certainly true, as the below chart shows, that the Fed has been a failure with respect to its inflation target of Core PCE at or below 2.0%, a number last seen in February 2022 (the left=most bar on the chart).

Source: tradingeconomics.com

And with that in mind, let’s turn to markets this morning and see how things played out overnight and are evolving right now at 7:00.  US futures are virtually in the same place they were last night as per the below screenshot from tradingeconomics.com

Asian markets were mixed overall with Tokyo (+0.4%), China (+0.7%) and Taiwan (+0.7%) all having a decent day while HK (-1.2%) and Australia (-1.2%) led the way lower for those regional exchanges that were under pressure.  But in truth, it was about 50:50 with respect to gainers and losers.  Certainly, there was no strong theme.  Meanwhile, in Europe, markets have drifted a bit lower, but the CAC (-0.3%) and Spain’s IBEX (-0.3%) seem to be the worst of it.  Net, it is hard to get too excited about anything in the equity space right now.

Similarly, bond markets are somnolent with Treasury yields edging lower by -1bp and similar price action in European sovereigns with the entire continent, and the UK, showing small yield declines of between 0bps and -2bps.  Overnight, JGB yields were unchanged as well.  While we continue to get inflation reads that include the war and the sharp rise in energy prices, there is no indication prices are running away yet.  For example, the UK (3.3% headline, 3.1% core) released CPI this morning as did South Africa (3.1% headline, 3.2% core).  Frankly, if you look at the chart below showing headline CPI for both nations (South Africa in blue, UK in grey), you would be hard-pressed to attribute any price pressure to the war given what has been going on in both places for the past three years.

Source: tradingeconomics.com

Turning to the commodity markets, oil (+0.8%) has rebounded from last night’s levels, but not that much, although WTI is back above $90/bbl, barely.  NatGas (+1.15%) remains the absolute bargain in the energy world with US prices at $2.72/MMBtu, vastly cheaper than oil on a per unit basis of energy.  Interestingly, in the metals markets, the recent negative correlation between gold and oil has broken down this morning with the shiny stuff rallying and taking all its friends along for the ride (Au +0.8%, Ag 2.0%, Pt +2.5%, Cu +0.7%).

Finally, the dollar doesn’t really care about anything right now, virtually unchanged against most of its counterparts this morning.  There are a few outliers, notably NOK (+0.9%) which continues to benefit from the oil story, CLP (+0.3%) which is higher on copper’s rally and NZD (+0.3%) which continues to gain on rising expectations of higher rates there.  One other amusing thing was a story in Bloomberg this morning about CNY and how its recent strength, it has gained more than 6% over the past year as the below chart highlights, is causing problems for Chinese exporters.

Source: tradingeconomics.com

Of course, this has been a US (and global) complaint for a long time, that the renminbi has been manipulated to remain excessively weak to provide a competitive advantage for Chinese exporters.  In fact, according to the OECD, the CNY’s PPP value is approximately 3.303 vs. its current level of 6.82, meaning it is trading in markets at half its appropriate value.  

Source: ceicdata.com

My sense is that TEMU would not be able to sell all that sh*t so cheaply if that was the exchange rate, just saying.  In fact, this is something President Trump has been bashing the Chinese on for years.  But Bloomberg managed to offer a sympathetic tone for those “poor” Chinese companies who have seen the CNY gain 6% in a year.

Off the soap box and on to data where the only releases are the EIA oil inventories with a modest expected crude oil draw.  This comes after the API indicated a 4.1-million-barrel draw last week.  There are no Fed speakers on the docket with the FOMC meeting coming up next week, so my take is today will be all about the ongoing earnings releases, which thus far have been quite positive, and waiting for President Trump, who ostensibly will be speaking at 3:00pm this afternoon.  It is hard to have a strong opinion in this market, that’s for sure.  Unchanged seems to be the best bet absent a major headline announcement.

Good luck

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Not Existential

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The story that has the most traction
Continues to be the reaction
To stories AI
Will force firms to try
To profit from worker subtraction
 
The tech nerds see naught but potential
For robots plus, workers, essential
But history’s shown
Employment has grown
And new tech’s threat’s not existential

Block, the payments processing company announced during its earnings call that it would be laying off 4000 employees, nearly half its workforce, by the end of Q1 this year.  This was not a response to weak performance, but rather the founder, Jack Dorsey’s, belief that AI has reached the point where his company can be more effective with much fewer staff.  Of course, this is the entire AI argument compressed into a single event.

Recall Monday’s note and market response to the Citrini Research article that explained one scenario from AI adoption would be massive layoffs, a recession and a major stock market decline by 2028 as companies eliminated people from their processes.  This brought about a tremendous amount of back and forth with economists and historians explaining that every major technology creation (e.g. electricity, the automobile, the internet) was both disruptive but instrumental in expanding economic activity.  This morning’s WSJ had a nice summation by Greg Ip of the entire discussion.

It strikes me that this discussion is only beginning and we are going to hear from proponents of both sides for many months to come, although I imagine it will not be the top story every day.  As I consider the issue, I think back to John Maynard Keynes forecast in 1930 that the rapid advancement of technology would lead to a 15-hour workweek as all our needs could be met with much less effort.  Obviously, that was not his best forecast.  Rather, Jevon’s Paradox comes to mind, which states that as technology increases the efficiency with which a resource is used, the total consumption of that resource increases, it doesn’t decrease.  In this discussion, that resource is human labor.

FWIW, my view is AI is a remarkable tool for certain things but is neither sentient nor capable of breakthroughs on its own.  It is a wonderful research tool, and a wonderful computer programming tool, but as my experience taught me, people like to deal with people, not with machines, even when there are machines available to do the job.  Economic dislocation in certain areas is likely going forward, but not collapse, at least not because of greater usage of AI tools.

I highlight this because, while Block’s stock price rallied sharply in the aftermarket, up more than 20%, US futures are lower this morning by -0.5% or so as there continue to be fears about the dystopian outcome.  Remember, Nvidia had terrific earnings and the stock fell as well.  Of course, this could also be a response to the fact that the price of many equities is extremely rich on a P/E basis or a P/S basis, and we are simply seeing a little reversion to the mean.  

At any rate, as no war in Iran has begun and there have been no other changes on the geopolitical map, let’s tour markets to see how things look as we head into the weekend and month end.

Yesterday’s desultory equity performance in the US was followed by a mixed picture in Asia with the Nikkei (+0.2%) and Hang Seng (+1.0%) closing the month higher, but China (-0.3%), Korea (-1.0%) and India (-1.2%) all falling.  Malaysia (-1.4%), too, stands out for a poor session but the rest of the region was mixed with much smaller moves.  Given the tech heavy makeup of most of these nations’ bourses, I suspect that volatility will be the main feature going forward.  As to Europe, it’s a sleeper with continental bourses all +/- 0.2% or less while the UK (+0.35%) managed a modest rally after a by-election resulted in PM Starmer’s Labour party coming in 3rd place in a seat they have held for 100 years.  This appears to be adding pressure on Starmer to do something, or on Labour to remove him, but a key concern is they will move further left, something which I doubt will help the UK economy or stock market.

Turning to the bond market, yields are declining all around the world with Treasuries slipping -5bps yesterday and another -2bps this morning, now below the 4.00% level.  In fact, a look at the chart below shows a pretty strong trend lower in yields.

Source: tradingeconomics.com

But we saw European sovereign yields slide yesterday and continue lower by another -1bp to -2bps this morning and last night, JGB yields fell -4bps and showing a very similar trend to Treasury yields as per the below.  It seems that concerns over too much debt issuance driving yields higher have been put on the back burner for now.

Source: tradingeconomics.com

In the commodity space, it appears that Iran fears are making a comeback as oil (+2.1%) has rebounded sharply from the levels seen in the wake of the massive inventory build I described yesterday morning. It sure looks like somebody bought a lot of oil yesterday morning at around 9:45am, although I have no guess as to who it would have been.

Source: tradingeconomics.com

Interestingly, the news from Geneva is that the talks are going to continue next week, so while both sides are disputing the other’s version of things, the fact they are still speaking is a huge positive.  I fear given the military buildup, some type of action will occur, but we can be hopeful. 

Meanwhile, in the metals space, gold (+0.1%) is little changed for the past several sessions, consolidating just below the $5200/oz level.  Whatever the narrative may be here, regarding central bank buying and the end of the dollar system, this tells me that the market is tired and needs some R&R before moving forward.  I remain bullish, but not today.

Source: tradingeconmics.com

Silver (+1.7%) is showing very similar price action to gold, albeit with a bit more daily volatility.  The story here about a short squeeze for COMEX delivery is fading from the FinTwit feeds, but the structure remains not enough of the stuff for industrial usage going forward.

Finally, the dollar, this morning is, net, doing very little.  But there are two stories to note.  The first is CNY (-0.2%) where the PBOC changed its risk reserve rules for foreign exchange holdings for Chinese banks, reducing the required reserve to 0% from 20%.  In practice, this means that Chinese banks can run forward positions without a capital charge and allows them to be more competitive pricing forward sales of CNY for local hedging counterparts.  Obviously, this is a huge adjustment and speaks to the fact that they must be getting a bit uncomfortable with the speed with which the renminbi has been rising over recent months.  Ironically, there was a Bloomberg article highlighting how options traders were paying up for 6.50 CNY calls/USD puts anticipating further CNY strength.  Perhaps the PBOC didn’t like that!

The other story is from Hong Kong, where the currency is usually not an issue as it is pegged in a very tight band to the USD, allowed to trade between 7.75 and 7.85.  The HKMA (HK’s central bank) is committed to buying and selling HKD as necessary to maintain that band.  This has been a key feature of Hong Kong’s financial attractiveness for the past decades.  The way this operates is there is an exchange fund that is designed to be used only for FX intervention, and it has ~HKD 4 trillion in balances (~$510 billion) which, given their GDP is only $400 billion or so, seems like plenty.  Well, as always seems to be the case, the government there is proposing taking some of that money to use for financing a government project, a technology hub being built, and since they don’t want to raise taxes, they thought raiding that fund would be the answer.  The concern is the precedent it sets as if that goes through, what is the next project that will be determined to need the funding.  If we know one thing about governments it is that if they find a pot of money they can tap to spend more without raising taxes, they are going to do it!  The amount in question is a small fraction, just $19 billion, so would not likely impact the HKD peg.  But this is something to watch as it will not be a positive if we see this a second time.

Otherwise, NOK (+0.5%) is gaining on oil’s gains while KRW (-0.5%) is slipping on the equity market decline and foreign sales.  Beyond that, nothing.

On the data front, this morning brings headline PPI (exp 0.3%,2.6% Y/Y) and core (0.3%, 3.0% Y/Y) as well as Chicago PMI (52.8).  Regarding the last, a look at the chart below shows that last month’s reading was the highest since November 2023 and is arguably a good sign that we are seeing increased industrial activity in the middle of the country.  Recall, the Chicago number is often seen as a precursor for the economy as a whole.

Source: tradingeconomics.com

And that’s it.  Given equity market performance this month has been flat to slightly negative, it seems unlikely there will be large rebalancing flows.  I continue to look for quiet markets although the trend in bonds does seem like it is building up some steam.

Good luck

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No Desire

Posted on by

Some days markets have no desire
To move, lacking seller or buyer
But don’t be concerned
The one thing we’ve learned
Is narratives always point higher

While it is clearly not summer as I look out my window and see a snow-covered yard, the doldrums seem to be the best description of markets right now.  A dearth of data, and in truth, a lack of commentary by all the usual players, at least new commentary, has both investors and traders looking elsewhere for signals.

Now, this is not to claim that there is nothing happening in the world, but right now, it all seems to be on hold.  With the SOTU behind us, we have had nothing new from the White House regarding virtually anything, tariffs, taxes, Iran, you name it.  Nvidia earnings last night beat expectations, but apparently not by enough to get people excited.  And virtually every other story is a warmed-over version of things we already know.

I think the most interesting market related news that I saw this morning was that the most hawkish member of the BOJ, Hajime Takata, said the BOJ needed to raise rates to fight Japan’s “heated” inflation.  This seemed a response to Takaichi-san appointing two doves to the board there.  However, the market response was essentially nil, as it should be, with the yen (+0.2%) edging higher while JGB yields (+2bps) also edged higher.  

Other than that, seriously, I cannot find a single thing that seems to matter to markets.  And it’s not like we have that much to look forward to today in the US, with Initial Claims the only data, so there is no reason to go on too long.

Here is a recap of the overnight session.  As I touched on JGB’s above, I will start with the rest of the government bond markets. What we see is that yields are literally unchanged this morning from yesterday’s closing levels.  All of them!  I am hard-pressed to describe a less exciting market than this.

Turning to equities, yesterday’s solid US performance was followed by mixed outcomes in Asia (Tokyo +0.3%, HK -1.4%, China -0.2%) in the major markets while most other regional bourses saw modest gains or losses with no driving stories.  The exception to this was Korea (+3.7%) which has been on an amazing tear lately, as the two largest market cap stocks there, Samsung and SK Hynix, continue to explode higher on demand for memory chips.  In fact, I think it is worthwhile to visualize this move as it is rare for equity markets to go parabolic like this.

Source: finance.yahoo.com

Of course, remember what happens to parabolic markets.  We just saw that in silver one month ago as per the below, so traders beware!

Source: tradingeconomics.com

Turning to Europe, France (+0.9%) is rallying on some earnings data from key companies, but the rest of the continent, and the UK, are doing little (Germany +0.4%, Spain -0.2%, UK +0.1%).  Fittingly, US futures are also unchanged at this hour (7:00).

In the commodity space, oil (-1.7%) has softened substantially this morning as the absence of a war in Iran weighs on long positions, but more importantly, I believe, yesterday’s EIA data showed a massive build of inventories of 16mm barrels, far higher than expected and the largest build since February 2023.  Back then, it appeared to be the residual response to the Russian invasion of Ukraine as there was a scramble for barrels.  Perhaps this is a signal that in the event of a war, there is supply around.  If you look at the inventory chart below, we have certainly seen a net build over the past three years.  Again, it is hard for me to look at things like this and see significantly higher prices in the future.

Source: tradingeconomics.com

In the metals markets, gold is unchanged this morning, though trading well above the $5000/oz level and seems like it is consolidating before moving higher.  Silver (-2.5%) is sliding as there continues to be a discussion regarding deliveries into COMEX contracts with the first notice day for the March contracts tomorrow.  There are many pundits who claim there is insufficient silver available to handle the likely deliveries which, if true, would likely cause a significant short squeeze.  However, I have no insight into how this will play out.  My longer-term view remains that there is a structural shortage of the stuff for industrial applications and the price trend will continue higher, but we have learned how volatile it can be.

Finally, the dollar is modestly stronger this morning with the yen’s rise the exception in the G10 space (EUR -0.1%, GBP -0.2%, AUD -0.2%, CHF -0.3%, NOK -0.3%).  In the EMG bloc, we are seeing similar modest weakness across the board (PLN -0.2%, ZAR -0.3%, MXN -0.2%) with the outlier here being CNY (+0.2%).  Regarding the renminbi, the Chinese have been marching it slowly higher for the past year, as per the below chart.  My take is President Xi is very focused on convincing others the CNY is a viable reserve currency candidate despite all the capital flow restrictions.  I’m not sure how that would work, but that is the best I can come up with.

Source: tradingeconomics.com

And that’s all we have in markets this morning.  On the data front, Initial (exp 215K) and Continuing (1860K) Claims are the only releases and we hear from Fed governor Bowman, although to the best of my knowledge, nobody is listening to Fedspeak right now.  The market continues to price just one 25bp cut for 2026 at this point, although that seems likely to change once we get a better idea as to what Mr Warsh would like to do when he gets the Chair.

My guess is that if there is going to be an attack on Iran, it will happen this weekend, so until then, given the absence of data, I think we drift in all markets and wait for Monday.  Today, and tomorrow, ought to be quiet.

Good luck

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Hold My Beer

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For months, I was calmly assured
A weak dollar must be endured
The US had peaked
And money had leaked
Elsewhere, so it could be secured
 
But suddenly, it’s not so clear
The end of the dollar is near
Instead, other nations
Have seen expectations
Decline, saying, here, hold my beer

The long holiday weekend is behind us now and with China on holiday all week, it seems there may be fewer interesting stories to consider.  However, one of the things that tickled my fancy is the sudden, recent adjustment in several pundits’ views on the dollar.  

By now you are all aware that I have been more bullish than consensus on the basis of the US economic situation relative to that of Europe and the UK (Japan may have changed their stripes in the wake of Takaichi-san’s recent landslide election, so we will need to revisit that).  After all, the combination of stronger GDP growth, higher interest rates and ostensibly calming inflation in the US relative to Europe and the UK (as well as numerous other nations) seemed to offer better investment opportunities, and therefore more demand for the dollar.  And this was outside the need for dollars simply to service the enormous amount of USD debt outstanding around the world, estimated at between $60 trillion and $80 trillion.

I will use the euro (-0.1%) today, rather than the DXY (+0.35%), as my dollar proxy because there is some deliciously ironic news from Bloomberg on the single currency.  But below, you can see the past year’s trading pattern, where, like the DXY, it has largely been range bound since June.  Sure, we saw a little spike up at the end of January, during the metals/equity market correction, but that story has passed.

Source: tradingeconomics.com

But I couldn’t help but chuckle at the following two headlines on Bloomberg.com this morning, literally right next to each other.

Briefly, the first story describes how the FinMins throughout the Eurozone want to expand the use of the euro globally and are considering offering swap lines to other nations that have difficulty accessing the single currency (although I cannot imagine why they would have such difficulty).  The second story highlights the French explaining that if the first story is true, the euro might gain strength and that would hurt their export industries, something the current government can ill afford right now.  It’s almost as if there is no agreement at all.  

Just remember, Eurozone GDP is growing at ~1.0%, its base rate is 2.0% and inflation is at 2.3%.  In the US, GDP is growing at 3+%, its base rate is 3.75% and inflation was just released at 2.4%.  Add to this the fact that energy costs in Europe, which is a price taker producing less than 15% of its energy needs domestically, are more than 2X higher than in the US, and in some countries, 3X higher, and it becomes increasingly difficult to say, damn, euros are the place to be!

And for the UK, where this morning they reported the highest Unemployment Rate in five years (see chart below) with wages slipping, slowing growth and a worse inflation and energy picture, arguably, things are even worse.

Source: tradingecomomics.com

It continues to be difficult for me to understand the relative merits of owning euros or pounds (-0.5%) in the current macroeconomic environment.  The fact that equity multiples remain lower there than in the US has certainly peaked some investor interest, but prospects just don’t appear that great.

There are certainly emerging markets whose currencies had been extremely weak, and which have significantly higher real interest rates than in the US (Mexico, Brazil, South Africa) where I can see the attraction, although this morning’s South African Unemployment report (31.4%!) might still give one pause as to the prospects.

One other place where the currency has been strengthening is China, where the PBOC has been walking the renminbi higher (dollar lower) for the past year (see below), as President Xi seems to want to show the world the renminbi is a strong and stable currency. 

Source: tradingeconmics.com

And of course, a large part of this particular currency discussion is that the Chinese are ‘dumping’ US assets, notably Treasuries.  Alas, recent data as per the below from two of the best-informed analysts regarding China and its activities shows that the PBOC has basically been offloading Treasuries to State owned Chinese banks and their US assets are, in fact, growing.  The CNY is a completely managed currency and can be set at any level the PBOC chooses.  Exclaiming the dollar is falling against it is not a very good representation.

Ok, I will stop repeating myself regarding my view on the dollar and turn to other markets.  In equities, Asia was very quiet as numerous nations observed the lunar new year so really, all we saw was Japan (-0.4%), India (+0.2%) and Australia (+0.2%), with China, Korea and Taiwan all closed.  I would argue we did not learn very much from the session.  Europe, though, is edging higher this morning with Spain (+0.6%) and the UK (+0.45%) leading the way.  The latter seems to be benefitting from the bad news is good scenario, as the weak employment data has investors looking for a BOE rate cut at the next meeting, while Spain has not seen any economic data to help drive things.  Perhaps, the ZEW data, where both Germany and the Eurozone printed at lower levels than last month and much lower levels than expected, has more belief in an ECB cut coming forward.  Net, however, activity here is muted.  As to US futures, at this hour (7:25), they are softer with the NASDAQ (-0.7%) the laggard by far.

In the bond market, right now, the inflationistas are having a hard time explaining the decline in yields.  Treasury yields (-2bps and back to 4.03%) have been marching lower for the past two weeks as per the below, and we have seen similar price action elsewhere.

Source: tradingeconomics.com

European sovereign yields have also slipped -2bps across the board while UK gilt yields have fallen -4bps.  But the big winner is Japan (-8bps) where investors apparently no longer fear unfunded spending and aggressive fiscal policy by PM Takaichi, as the 5-year auction last night was extremely well received and investors are looking forward to the 20-year auction later this week.

In the commodity bloc, oil (+1.5%) has moved up after Iran closed part of the Strait of Hormuz, restricting traffic there.  This seems odd to me as they desperately need that to remain open to deliver their oil, but perhaps they are trying to show their strength.  A second round of discussions are ongoing between the US and Iran as I type, so we shall see what happens here.  Meanwhile, in the metals markets, with China on holiday, and given they have been the source of the most demand, it cannot be surprising that all are lower this morning (Au -1.0%, Ag -0.75%, Cu -1.3%, Pt -1.7%).  My take is these markets are likely to spend the next several months consolidating before any leg higher (and I believe that is the direction) will be evident.  

Finally, we discussed the dollar above and the only noteworthy move beside the pound is SEK (-0.6%) which appears more to be a function of its higher beta to the rest of Europe than any specific news.

On the data front, this week brings a bunch as follows:

TodayEmpire State Manufacturing6.0
WednesdayHousing Starts1.33M
 Building Permits1.40M
 Durable Goods-2.0%
 -ex Transport0.3%
 IP0.4%
 Capacity Utilization76.5%
 FOMC Minutes 
ThursdayInitial Claims225K
 Continuing Claims1870K
 Trade Balance-$56.0B
 Phiily Fed9.3
FridayQ4 GDP3.0%
 Personal Income0.3%
 Personal Spending0.4%
 PCE0.3% (2.8% Y/Y)
 -ex food & energy0.3% (2.9% Y/Y)
 Flash Mfg PMI52.6
 Flash Service PMI53.0
 Michigan Confidence57.0
 New Home Sales730K

Source: tradingeconomics.com

In addition, we hear from 5 more Fed speakers, but as I have consistently said, I don’t think they matter that much at this point.  Overall, my take is that sector rotation in the equity markets is the key activity there, that bond markets are beginning to get more comfortable with a lower inflation outlook since the recent data has been pointing in that direction, and that the dollar, despite its many detractors, is not dead yet.  We have seen an awful lot of volatility for the past several weeks.  As I have repeatedly reminded you, that cannot continue forever.  While I am sure that we will see more bouts of volatility this year, it does feel like for the next several sessions, things will be pretty quiet.  Let’s be thankful for that.

Good luckA

Memory-Holed

Posted on by

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

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

Source: tradingeconomics.com

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: tradingeconomics.com

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

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

Good luck

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The Specter

Posted on by

On the horizon
The specter of BOJ
Intervention climbs

 

For those of you who don’t know, the genesis of this note was a daily update during my time covering US corporates for their FX hedging needs.  The poetry was episodic… until it wasn’t.  At any rate, this is the reason I sometimes harp on particular currencies rather than markets more generally.  And right now, while the dollar, writ large, is not that interesting, as I have been explaining for months, the yen (+0.3%) is becoming interesting in its own right as its recent spate of weakness has opened the door to intervention.  Last night, I would say we took a half-step forward on this journey as, while the BOJ did not check rates, FinMin Katayama was more explicit in her discussion about the yen’s weakness, even discussing the fact that the ‘agreement’ that her predecessor made with Treasury Secretary Bessent has no restrictions on intervention if deemed appropriate.

Following are her remarks from last evening, “We can take decisive measures against sudden movements that do not reflect fundamentals. This refers to intervention, and there are no constraints or restrictions on this.  I have repeatedly stated that we will take bold action including all the different measures available.  We shared the view that recent moves have been excessive and do not reflect fundamentals.” Then, she followed that up by referring back to her discussions with Bessent in Washington on Monday. “For many years before I took office, the Treasury secretary has held the personal view that monetary policy has been behind the curve.”

The chart below shows that for now, jawboning is the preferred measure to prevent further yen weakness, but as jawboning is only ever a temporary solution, it seems clear to me that there will be intervention at some point.  In fact, given Monday is a bank holiday in the US, implying less liquidity as banks run skeleton staffs, that may be an ideal time to get the most bang for their buck.

Source: tradingeconomics.com

But remember, even if/when they intervene, the impact will only be temporary.  Perhaps keeping a floor underneath the currency for a month or two.  Ultimately, though, it will follow the fundamentals, and if those are such that the US continues to grow rapidly and receive investment flows, unless the BOJ raises rates dramatically to moderate those flows, the yen will ultimately weaken further.   Now, ask yourself if you think the BOJ can raise rates aggressively given the combination of Japan’s 250% debt/GDP ratio and the fact that Takaichi-san’s policy mix is to borrow more and run things as hot as possible.

Away from the mess in Japan
A story of note is Iran
But tensions have waned
And thus, it’s explained
The oil complex can, down, stand

Looking elsewhere for news of note, there continues to be an enormous amount of energy focused on Minneapolis, which has no market impact.  Remarkably, Venezuela has become an afterthought to the markets as the new narrative is their natural resources are not economically retrievable at current prices.  Iran remains a hot topic in the oil market, but the concerns registered by traders early in the week have ebbed overall, although this morning, Texas tea is higher by 1.5% and back over $60/bbl. 

Looking at other markets, bonds remain somnolent, with yields up 1bp this morning, reversing yesterday’s decline of -1bp but still firmly within the 4.00% – 4.20% range.  European sovereign yields have edged higher by 2bps this morning and overnight JGB yields rose 3bps.  However, it remains difficult to see any significant pattern over the past month as evidenced by the chart below of French and German 10-year yields.  Net movement has been a handful of basis points overall.

Source: tradingeconomics.com

Even the metals markets, which have been THE story for the past months, have calmed down a bit as they consolidate their recent remarkable gains.  This morning, gold (-0.25%), silver (-2.1%), copper (-1.5%) and platinum (-3.2%) are all softer, but all remain higher on the week and over the past month, with silver having gained 37% since this time in December, and sitting above $90/oz.

Equity markets in the US rebounded yesterday, seemingly on some decent earnings data, but overnight, there was little love with Japan (-0.3%), China (-0.4%) and HK (-0.3%) all slipping from recent highs.  Elsewhere in the region, though, there was much more positivity as Korea (+0.9%), India (+0.25%), and Taiwan (+1.9%) all rallied with the latter benefitting from the agreement of a trade deal with the US that cut tariffs on Taiwanese exports in exchange for a $250 billion commitment of investment into the US.

In Europe, France (-0.8%) is the laggard du jour as ongoing budget negotiations in the government are no closer to completion and showing signs of breaking down.  As to the rest of the continent, modest declines are the order of the day while the UK is unchanged.  US futures at this hour (7:40) are pointing higher, however, led by the NASDAQ at +0.7%.

While overall, the dollar remains dull, an underreported story is the CNY (0.0% today) which has been appreciating steadily for the past year and is now at its strongest level since May 2023.  In the beginning of the year my view was if Xi actually got Chinese consumers to raise their spending and back away from the mercantilism that has been the driver of the Chinese economy since the beginning, we would see CNY strength, calling for 6.50 by the end of the year.  Well, a look at the chart below helps keep things in perspective as while CNY has appreciated about 5% in the past year, it remains far below (dollar higher) levels seen post pandemic.  However, I need to see the data indicate Chinese domestic demand is growing before I become a true believer!  Note, too, that the pace of this move is hardly remarkable.

Source: finance.yahoo.com

And that’s all I got today.  Today’s data brings IP (exp 0.2%) and Capacity Utilization (76.0%) with a few more Fed speakers as well.  Remarkably, despite the Fed trotting out virtually every member this week, nothing of note has been said given the current focus on defending Chairman Powell regarding the renovations at the Eccles Building.  

One other thing I have been wondering, and this has been for a long time, is the meaning of the Capacity Utilization reading.  On its surface, it tells us that only three-quarters of the US currently available manufacturing, mining and drilling capacity is being utilized.  But that seems like a low count based on the economy and the narrative.  I wonder, how much of what is considered available capacity is actually obsolete?  Undoubtedly, as you can see from the chart below from the FRED database, the trend is falling.  

But do companies really build so much capacity they don’t use and it sits idle?  Seems a tough way to make a living in a highly competitive world.  I understand that globalization undermined US manufacturing ever since China entered the WTO in 2001.  And maybe that is all this reflects.  But given the dramatic buildout in AI infrastructure, as well as growth in LNG and power production of late, if nothing else, I have to believe this trend is set to reverse in the near future.  After all, isn’t that Trump’s goal?

Meanwhile, I feel like we are all awaiting the next headline to determine the next move.  The underlying trend in commodities remains in place, and mostly, bonds and the dollar have no reason to go anywhere.

Good luck and good long weekend

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The Doctrine, Donroe

Posted on by

There once was a time in the past
When Vene-zu-ela was cast
As queen of the ball
With Maduro’s fall
But life around Trump moves so fast
 
He’s already moved to expand
His target to Denmark’s Greenland
The EU’s gone crazy
And called Trump fugazy
While claiming that they’ll take a stand
 
But really, the Doctrine, Donroe
Explains that the US most grow
Its regional strength
And keep at arm’s length
It’s foes from Beijing to Moscow

 

It is truly difficult to keep up with all the things that are ongoing in the world these days as so much is happening so quickly.  It is very easy to understand Lenin’s quote, “there are decades where nothing happens; and there are weeks where decades happen” given recent events.  This is clearly one of the latter weeks.

So, Trump, after successfully taking down Maduro has turned his sights on Greenland, something he has discussed from Day 1 of this administration, but apparently now, there seems to be a willingness to discuss things on the other side.  At the same time, from what I read on X, the city of Abadan in Iran has basically ‘fallen’, at least with respect to the Iranian regime’s control as the police are marching with the protestors now.  The rumors are that the Ayatollah has already made escape plans to Moscow.

From a geopolitical perspective, if Iran sees a regime change, which appears increasingly likely, and if the US throws its support behind the replacement regime, it would appear to be a significant power play against China.  After all, if sanctioned Iranian and Venezuelan oil was no longer being sold on the cheap to China, two places where they receive a significant amount of their daily requirements, (between 20% – 25% according to Grok) it would be a major blow.  

But from our lens in markets, if the Iranian regime falls and sanctions are lifted, suddenly there is much more unsanctioned oil available, and its price is likely to decline further.  This morning, oil (-0.6%) is slipping further after a sharp decline yesterday with Monday’s rally a wispy memory.  I have maintained the trend here remains lower, and that was without government changes in sanctioned nations.  As you can see from the chart below, nothing about this story has changed.

Source: tradingeconomics.com

In the meantime, be prepared for all those who had just shown their new bona fides about Venezuela to be explaining the Greenland story from their newly acquired “deep” knowledge.  This poet certainly doesn’t know enough about Greenland to make any prognostications, but it would not surprise me if within a matter of weeks, we reach an accord with the territory where the US plays a much greater role in its activities while increasing its military presence on the island.  

And to think, we are just finishing the first week of 2026.  Do not be surprised if, as the year progresses, there are more government changes in Europe as the current leadership there has been shown to be weak and ineffective, and an increasing number of people are unhappy with the situation.  While fears over the fall of NATO are rife now, if Germany, France and the UK wind up having snap elections, a distinct possibility at this point, and the new regimes are AfD, RN and Reform UK led, there could well be much greater agreement on the way forward for the alliance.

However, like most of you, I am neither a politician nor geopolitical analyst, I’m just a poet who watches the world and tries to make sense of how it impacts markets.  So, let’s go down that road.

After another strong equity session in the US, where both the DJIA and S&P 500 made new all-time highs, the story in Asia seemed to be one of some early profit-taking after strong rallies.  So, Japan (-1.1%), China (-0.3%) and HK (-0.9%) all slipped during the session with generally less excitement seen overnight than earlier in the week.  India (-0.1%) continues to lag, and while Korea (+0.6%) managed to maintain its upward momentum, the rest of the region was relegated to +/- 0.4% or less in their movement.  

As to Europe, only the DAX (+0.6%) is showing any positivity this morning, mostly on defense names still performing well, while the UK (-0.6%) is lagging after weaker than expected Construction PMI data (40.1 vs. 42.5 exp) and the rest of the continental bourses are little changed overall.  Eurozone inflation was confirmed at 2.0%, cementing the idea that the ECB will remain on hold, so I suspect opportunities here will rely on global trends.  As to US futures, at this hour (7:10) they are mixed, but with movement less than 0.2% in either direction.

In the bond market, yields are sliding around the world, perhaps on the understanding that oil prices are likely to slide given the potential for new, unsanctioned supply hitting the market.  Certainly, there is no indication that government spending anywhere in the world is going to slow down, so that avenue is still closed.  But, recapping, Treasury yields (-3bps) are not declining as much as most of Europe (-4bps to -5bps) or the UK (-8bps after the weak data).  I continue to believe that this year is going to be extremely dull in bond land as central bank support is going to offset additional issuance.

We’ve already discussed oil, but metals, which is where the real action has been, are all lower this morning, very clearly on profit taking activity.  Consider that gold (chart below from tradingeconomics.com) has been the least remarkable and still rallied 4% since the beginning of the year, so slipping -1.2% this morning can be no surprise.

Meanwhile platinum (-6.1%) which is the least liquid of all the precious metals, saw a nearly 20% gain this week prior to today’s decline.  The chart below is not for the faint of heart!

Source: tradingeconmics.com

Silver (-3.1%) is somewhere in between these two, but the story has not changed at all.  There continues to be significant demand for physical metals with paper futures no longer able to control the price action.  One way to follow this is to look at the price on the Shanghai Futures Exchange where it is all delivery settlement and where the price trades at a substantial premium to the COMEX, on the order of $3-$4/oz.

Finally, the dollar is still there, and vs. most of its counterparts, doing very little this morning.  the outlier today is ZAR (-0.5%) which is obviously hurting on the back of gold and platinum’s weakness.  In fact, it is worth looking at the relationship between ZAR and gold, as per the below chart, to help you understand just how closely tied is the price action between the two.

The other currency that has been trending steadily is CNY, with it breaching the 7.00 level at the end of 2025 for the first time since September 2024.  While this trend has been steady for the past year, a look at the longer-term chart shows the renminbi is nowhere near an extreme in either direction. 

Source: tradingeconomics.com

I maintain my view that if China really does create domestic demand for its products, the renminbi will continue this rally and strengthen further.  But we have heard this same story of Chinese government support for the domestic economy for at least a decade, and it hasn’t shown up yet.

On the data front, ADP Employment (exp 47K), JOLTs Job Openings (7.6M), ISM Services (52.3) and Factory Orders (-1.2%, -0.3% ex Transport) are the key releases this morning.  we also get EIA oil inventory data with expectations for a decent build.  There is only one Fed speaker, Governor Bowman, but the Fed just doesn’t seem as important this year as last.

The dollar is not the focus right now, neither are bonds.  Metals remain top of mind with oil a close second.  While recent price action in the former has been extremely volatile, nothing has changed my view that the long-term trend remains higher there.  Similarly for oil, the long-term trend remains lower with recent events simply adding to the weight.

Good luck

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The American Dream

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To aid the American Dream
The most recent Trumpian scheme
Is new Trump Accounts
In proper amounts
To help stocks become more mainstream
 
One likely effect of this act
Is stocks will be forcefully backed
Though problems extant
May come back to haunt
For now, bearish plays will get whacked

 

Financial market news remains mostly uninspiring these days as the Fed story has largely gone back to a cut is coming next week (89.2% probability) thus the hawkish phase has passed.  AI is still the magical future, while precious metals continue to garner support overall as concerns rise about the ongoing debasement of fiat currencies.  Elsewhere, the war in Ukraine rages on as peace talks in Moscow were described as ‘constructive’ but have yet to resolve the issues.

The other piece of the Fed story, regarding the next Chair, has taken a modest turn as a series of interviews by the finalists in the process (allegedly Hassett, Warsh and Waller) with VP Vance, were suddenly canceled for no apparent reason.  As well, the president continues to hint that Mr Hassett is going to be the one.

But one of President Trump’s strengths is his ability to keep his ideas in the news, and nothing exemplifies that better than the new Trump Accounts.  This is the idea that the government should start investing in the next generation by way of establishing investment accounts in the name of children at birth with $1000 of seed money from the government.  If these accounts are invested in the S&P 500, for instance, with a historically average return of roughly 10%, by the time the child turns 18, the initial investment will have grown more than 5-fold.  As well, these accounts are eligible for additional contributions each year, up to $5000, so can really build some value in that circumstance.  

In addition, the news that Michael and Susan Dell will be donating $6.25 billion to add $250 to those accounts, tax free to the recipient, is another boon.  Estimates are that the total could rise to $4 billion/year of outlays, all of which will be required to go into the stock market.  It’s almost as though President Trump wants the government to support the stock market, but I’m sure that is a secondary consideration!

But away from that, the news has been sparse, so let’s look at market activity overnight.  yesterday’s US session played out like the opening, modest gains, and futures at this hour (7:15) indicate more of the same is on the way today.  In Asia overnight, while Tokyo (+1.1%) had a solid session, China (-0.5%) and HK (-1.3%) were far less fortunate.  Chinese PMI data continues to be soft but perhaps of more import is the fact that the yuan (+0.15%) continues to gradually strengthen, as it has been for the past year (see chart below).

Source: tradingeconomics.com

In fact, the yuan has reached its strongest level since September 2024.  The thing about a strong CNY is that it has definitive negative impacts on Chinese exporters.  While there has been very little discussion of the yuan regarding the trade talks between the US and China, the steady appreciation of the currency will certainly hurt Chinese company earnings, and by extension stock prices there.  One thing to note is that despite its recent strength, the yuan remains undervalued vs. the dollar based on a Real Effective Exchange Rate calculation by the World Bank as per the below chart, with the current USD value at 130.6 while the CNY sits at 113.1.  That is a substantial undervaluation that, if corrected, would likely have a significant impact on the respective economies of each nation as well as, maybe, the political rhetoric.

Elsewhere in the region, India was little changed even though the rupee (-0.4%) traded through 90.00 for the first time as the RBI has decided not to waste more reserves on supporting the currency.  It appears that capital outflows are driving the rupee, but that does not bode well for stocks there.  The rest of the region was mixed with more gainers (Korea, Taiwan, Australia, New Zealand) than laggards (Philippines, Thailand, Malaysia).

In Europe, both Spain (+1.5%) and Italy (+0.7%) are having solid sessions although much of the rest of the continent is less robust.  The story is that European defense companies have benefitted today based on the absence of a peace agreement, although Eurozone inflation readings coming in a tick hotter than forecast have put paid to any idea of an ECB cut anytime soon.

Moving on to bonds, Treasury yields (-3bps) have backed off a touch from highs yesterday and that has dragged European sovereigns down with them, with the entire continent seeing yields decline -1bp or so.  Overnight, JGB yields ticked up another 3bps, to further new highs for the move, as there is no indication that government spending is going to slow down while expectations of a BOJ hike remain in full force.

Commodity markets continue to show the most volatility with both oil (+1.3%) and NatGas (+2.3%) rising this morning, the former on the lack of peace talks, the latter on the expanding polar vortex which is driving cold weather in the Northeast.  Too, I would be remiss if I didn’t mention that European demand for US LNG is running at record rates as they try to wean themselves from Russian gas supplies.  FYI, NatGas is back to its highest level since late 2022, where it skyrocketed in the wake of the initial Russian invasion.  In the metals markets, after a bit of profit taking in yesterday’s session, both gold and silver have edged higher by 0.1% this morning as both continue to be accumulated by Asian central banks and Asian investors although Western investors don’t seem to believe in the idea.  Something to note is that silver has risen 102% so far in 2025, that’s a pretty big move!  Copper (+1.45%) has jumped on the back of news that Chinese smelters have reduced activity and inventories at the LME are limited.  Add to that the underlying electrification story, and demand seems likely to be pretty robust for a while yet.

Finally, the dollar is under pressure this morning with the DXY, though still in its range, trading below 99.00 for the first time in 3 weeks.  But looking at actual currencies, the euro (+0.4%), pound (+0.7%), NOK (+0.6%), SEK (+0.5%) and CHF (+0.4%) are all nicely higher this morning.  The rest of the G10 are in a similar state, albeit with slightly smaller gains.  In the EMG bloc, CLP (+0.5%) is climbing on the back of copper’s rise, while the CE3 are all following the euro higher rising in step.  ZAR (+0.1%), BRL (+0.1%) and MXN (+0.2%) are underperforming this morning, likely because the metals markets, other than copper, are underperforming.

Turning to the data, this morning brings ADP Employment (exp 10K), IP (0.0%), Capacity Utilization (77.3%) and then ISM Services (52.1) at 10:00.  Given the IP data is old, I expect ADP to be the number with the most possible influence.  But, given the market is already assuming a cut next week, it would have to be a dramatic negative number to change any views.

The big picture remains the same, run it hot, fiat currency debasement and the dollar should be the best of a bad lot, but on any given day, much can happen that doesn’t fit that story.  Today is one of those days.

Good luck

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