Tag Archives: #CPI

Under Damocles’ Sword

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It turns out the market ignored
Chair Powell, though many abhorred
The idea the Fed
May soon need to shred
Its views under Damocles’ Sword
 
So, stocks rose and set more new highs
And bonds ignored all the shrill cries
But metals retained
The heights that they gained
How long ere the bears euthanize?


 
Yesterday, of course, the big news was the Powell video describing the subpoenas that he and the Fed received on Friday.  This continues to be seen as an attack on the Fed’s “independence” and the talking heads remain aghast.  I couldn’t help but chuckle at 12 current central bankers from around the world putting out a statement that this was a terrible precedent.  Consider that most people have no idea who any of the signees are, so they hold no reverence for their views, and the people who do know them, are already in the camp.  Of course, I cannot help but remember the statement by 51 former FBI/CIA security apparatus people explaining that Hunter Biden’s laptop had all the earmarks of Russian disinformation.  My point is this type of response is not necessarily the unvarnished truth.  I wasn’t at the Senate committee meeting and do not recall what he said, if I ever heard it, so am in no position to judge what went on.  I guess, that’s what a grand jury is all about, to determine if there are sufficient grounds to go forward with a charge.  Again, this is a Washington DC grand jury, who will be biased against anything President Trump’s administration is doing.  I put it at 50/50 that any charges are even brought.
 
Meanwhile, despite all the angst, equity markets rebounded all day to close higher, bond markets absorbed a 10-year auction with little concern and yields were within 1bp of the morning levels while the dollar, which had initially fallen about -0.4% to -0.5% on the news, clawed back a part of that loss, and is slightly firmer this morning.  The only real outlier here were the precious metals markets where both gold and silver had monster days trading to new highs.  Such was yesterday.
 
Takaichi-san
Like a hungry boa, wants
To tighten her grip

First, my error in yesterday’s note regarding the Japanese stock market on Monday, which was actually closed for Coming of Age Day, but overnight did jump 3.1% on the news that PM Takaichi, she of the 70+% approval rating, is going to call for snap elections to try to consolidate her power more effectively in the Lower House of the Diet.  While the announcement has not officially been made, it has been widely reported that on January 23rd, she will dissolve parliament and seek an election on either February 8th or 15th.

The market response here was quite clear.  Aside from the jump in equity prices based on more government support for her fiscal spending, the yen (-0.5%) fell to its lowest point in more than a year and now, trading near 159, is seen as entering the ‘intervention range’.  A look at the chart below shows that in July of last year, the last time the yen weakened to this level, we did see the BOJ enter the market and it was quite effective in the short run.  If I recall correctly, there was a great deal of discussion then about the end of the carry trade.  Of course, that didn’t happen, and even though the BOJ has increased rates to 0.75% in the interim, I assure you, the carry trade is still out there in very large size.

Source: tradingeconomics.com

I expect that this evening we will hear more from the FinMin and her deputies regarding concerns over ‘one-sided’ moves and the need for the yen to represent fundamentals, but I sincerely doubt that there will be any activity before 160 trades, and maybe even 165.

Perhaps of greater concern for Takaichi-san is that JGB yields rose sharply on the news with the 10yr (+7bps) rising to a new high for this move, while the super long 40-year traded to 3.80%, higher by 9bps and a new all-time high for the bond.  Japan has serious financing issues and has had them for quite some time.  However, two decades of ZIRP and NIRP hid the problems as financing costs were virtually nil.  As a net creditor nation, they also have inherent strengths with respect to international finance, although it remains to be seen if the population there will accept the idea that their savings need to be used to pay down government debt.

As we have seen across many markets, the old rules and relationships don’t seem to apply these days.  The fact that Japanese yields are climbing far more quickly than US yields, with the spread narrowing dramatically, in the past would have seen a much stronger yen.  As well, rising yields tend to undermine equity markets, and yet, they sit at record highs.  This is not the world in which many of us grew up.

Ok, as we await this morning’s CPI data, let’s see how other markets behaved overnight.  While yesterday’s US gains were modest across the board, they were gains after a terrible start.  Meanwhile, in addition to Tokyo’s rally, we saw HK (+0.9%), Korea (+1.5%), Taiwan (+0.5%) and Australia (+0.6%) all rally although both China (-0.6%) and India (-0.3%) lagged.  It appears the latter two suffered from some profit-taking (although Indian shares have not really performed that well) while the gainers all benefitted from the US rally and ongoing excitement over tech shares.  In Europe, though, every major market is softer this morning although only Paris (-0.6%) is showing any substance in the decline. Elsewhere, declines of -0.1% to -0.3% are the order of the day, hardly groundbreaking, and given most of these markets have had a good run, it seems there has been some profit-taking ahead of this morning’s CPI data.  As to US futures, at this hour (7:00) they are basically unchanged.

In the bond market, this morning yields are edging higher everywhere with Treasury yields (+2bps) now touching the top of its forever range at 4.20%.  European sovereign yields are uniformly higher by 2bps as well although there has been no data of note nor commentary to really offer a rationale.  Of course, 2bps is hardly earth shattering.  

In the commodity markets, while precious metals (Au -0.2%, Ag +0.75%, Pt -1.1%, Cu +0.5%) have been the headline story, the oil market has taken a back seat.  Quickly, on the metals side, it seems that the supply scarcity remains the main driver overall, and the fact that there is limited new exploration, let alone new mines coming online, ongoing, my take is these have further to climb.  

But oil is quite interesting.  You all know my view that the trend remains lower, but today, it is bucking that trend with WTI (+1.9%) up nicely and back above $60/bbl for the first time since mid-November.  A look at the chart below shows that using my, quite imperfect, crayon if I ignore the massive Operation Midnight Hammer spike, even after a few solid up days, oil remains well within its down trend.  I am no technician, so others will draw lines as they see fit, but I am looking at longer term views, not day-to-day or intraday.  

Source: tradingeconomics.com

My take is that the Venezuela story has evolved into increased production from there will take quite a long time, so ought not pressure prices lower.  Rather, I would lean toward the ongoing uprising in Iran as the proximate cause for today’s recent gains.  After all, if the regime falls, and the Mullahs exit for Moscow, it is unclear who will fill the power vacuum and what will come next.  As such, it is easy to anticipate a reduction in Iranian supply, which is currently about 3.2mm to 3.5mm barrels/day (according to Grok), and if that goes missing, or even is cut in half, would have a significant short-term impact on the price.  

Regarding this situation, obviously I have no special insight.  However, the most interesting thing I read, and why I believe this will indeed be the end of the theocracy, is that the protestors have burned down 350 mosques, a direct attack on the belief system of the Ayatollah.  This appears quite widespread, and it would not surprise me if the regime falls before the end of the month.  Good luck to the people of Iran.

Finally, the dollar is little changed this morning other than against the yen.  For the dollar bearish crowd, which is quite large as doom porn about the end of the dollar’s hegemony remains quite popular, yesterday’s decline was tiny.  In fact, if we use the DXY as our proxy, it is higher by 0.1% this morning and trading just below 99.00 as I type.  Once again, if we look at the chart below, it has been 9 months since the DXY has traded outside the 97/100 range in any substantive manner and we are basically right in the middle.  Nobody really cares right now.

Source: tradingeconomics.com

Turning to the data this morning, CPI (Exp 0.3%, 2.7% Y/Y) for both headline and core leads the list.  This is December data, so as up to date as we will get.  We also see stale New Home Sales data, but it is hard to get excited about that.  The NFIB Small Business Optimism Index already printed right at expectations of 99.5.

It’s funny, despite all the discussion of the Fed regarding the Powell subpoena, Fed speakers don’t seem to be getting much traction.  Yesterday, three speakers indicated that rates seemed to be in a good place, and, not surprisingly, all defended Chairman Powell.  My view at the beginning of the year was that the Fed was going to become less important to the market dialog and in truth, that remains my view.  Rate cut probabilities have fallen to 5% for this month with the next cut priced for June.  Obviously, that is a long time from now and much can happen, but if the data showing GDP is accurate, it seems hard to understand why there would be a cut at all.  Too, remember one of the key theses behind dollar weakness was Fed dovishness.  If the Fed is not so dovish, tell me again why the dollar should decline.

It’s a crazy world in which we live.  Hedgers, stay hedged.  The rest of you, play it close to the vest.

Good luck

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What Havoc it Wreaks

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Today, for the first time in weeks
Comes news that will thrill data geeks
It’s CPI Day
So, what will it say?
We’ll soon see what havoc it wreaks
 
The forecast is zero point three
Too high, almost all would agree
But Jay and the Fed
When looking ahead
Will cut rates despite what they see

 

Spare a thought for the ‘essential’ BLS employees who were called back to the office during the shutdown so that they could prepare this month’s CPI report.  The importance of this particular report is it helps define the COLA adjustments to Social Security for 2026, so they wanted a real number, not merely the interpolation that would have otherwise been used.  Expectations for the outcome are Headline (0.4% M/M, 3.1% Y/Y) and Core (0.3% M/M, 3.1% Y/Y) with both still well above the Fed’s 2% target.  As an aside, we are also due Michigan Sentiment (55.0), but I suspect that will have far less impact on markets.

If we consider the Fed and its stable prices mandate, one could fairly make the case that they have not done a very good job, on their own terms, when looking at the chart below which shows that the last time Core CPI was at or below their self-defined target of 2.0% was four and one-half years ago in March 2021.  And it’s not happening this month either.

Source: tradingeconomics.com

Now, when we consider the Fed and its toolkit, the primary monetary policy tool it uses is the adjustment of short-term interest rates.  The FOMC meets next Tuesday and Wednesday and will release its latest statement Wednesday afternoon followed by Chairman Powell’s press conference.  A quick look at the Fed funds futures market pricing shows us that despite the Fed’s singular inability to push inflation back toward its own target using its favorite tool, it is going to continue to cut interest rates and by the end of this year, Fed funds seem highly likely to be 50bps lower than their current level.

Source: cmegroup.com

The other tool that the Fed utilizes to address its monetary policy goals is the size of its balance sheet, as ever since the GFC and the first wave of ‘emergency’ QE, buying (policy ease) and selling (policy tightening) bonds has been a key part of their activities.  As you can see from the chart below, despite the 125bps of interest rate cuts since September of 2024 designed to ease policy, they continue to shrink the balance sheet (tighten policy) which may be why they have had net only a modest impact on things in the economy.  Driving with one foot on the gas and one on the brake tends to impede progress.

But now, the word is the Fed will completely stop balance sheet shrinkage by the end of the year, something we are likely to hear next Wednesday, as there has been much discussion amongst the pointy-head set about whether the Fed’s balance sheet now contains merely “ample” reserves rather than the previous description of “abundant” reserves.  And this is where it is important to understand Fedspeak, because on the surface, those two words seem awfully similar.  As I sought an official definition of each, I couldn’t help but notice that they both are synonyms of plentiful.

These are the sorts of things that, I believe, reduces the Fed’s credibility.  They sound far more like Humpty Dumpty (“When I use a word, it means just what I choose it to mean – neither more nor less.”) than like a group that analyses data to help in decision making.  

At any rate, no matter today’s result, it is pretty clear that Fed funds rates are going lower.  The thing is, the market has already priced for that outcome, so we will need to see some significant data surprises, either much weaker or stronger, to change views in interest rate sensitive markets like bonds and FX.

As to the shutdown, there is no indication that it is going to end anytime soon.  The irony is that the continuing resolution passed by the House was due to expire on November 21st.  it strikes me that even if they come back on Monday, they won’t have time to do the things that the CR was supposed to allow.  

Ok, let’s look at what happened overnight.  Yesterday’s rally in the US was followed by strength in Japan (+1.35%) after PM Takaichi indicated that they would spend more money but didn’t need to borrow any more (not sure how that works) while both China (+1.2%) and HK (+0.7%) also rallied on the confirmation that Presidents Trump and Xi will be meeting next week.  Elsewhere, Korea and Thailand had strong sessions while India, Taiwan and Australia all closed in the red.  And red is the color in Europe this morning with the CAC (-0.6%) the main laggard after weaker than forecast PMI data, while the rest of Europe and the UK all suffer very modest losses, around -0.1%.  US futures, though, are higher by 0.35% at this hour (7:20).

In the bond market, Treasury yields edged higher again overnight, up 1bp while European sovereigns have had a rougher go of things with yields climbing between 3bps and 4bps across the board.  While the French PMI data was weak, Germany and the rest of the continent showed resilience which, while it hasn’t seemed to help equities, has hurt bonds a bit.  Interestingly, despite the Takaichi comments about more spending, JGB yields slipped -1bp.

In the commodity space, oil (+0.7%) continues its rebound from the lows at the beginning of the week as the sanctions against the Russian oil majors clearly have the market nervous.  Of course, despite the sharp rally this week, oil remains in the middle of its trading range, and at about $62/bbl, cannot be considered rich.  Meanwhile, metals markets continue their recent extraordinary volatility, with pretty sharp declines (Au -1.7%, Ag -0.9%, Pt -2.1%) after sharp rallies yesterday.  There seems to be quite the battle ongoing here with positions being flushed out and delivery questions being raised for both futures and ETFs.  Nothing has changed my long-term view that fiat currencies will suffer vs. precious metals, but the trip can be quite volatile in the short run.

Finally, the dollar continues to creep higher vs. its fiat compatriots, with JPY (-.25%) pushing back toward recent lows (dollar highs) after the Takaichi spending plan announcements.  But, again, while the broad trend is clear, the largest movement is in PLN (-0.4%) hardly the sign of a major move.

And that’s all there is today.  We await the data and then go from there.  Even if the numbers are right at expectations, 0.3% annualizes to about 3.6%, far above the Fed’s target and much higher than we had all become accustomed to in the period between the GFC and Covid.  But remember, central bankers, almost to a wo(man) tend toward the dovish side, so I think we all need to be prepared for higher prices and weaker fiat currencies, although still, the dollar feels like the best of a bad lot.

There will be no poetry Monday as I will be heading to the AFP conference in Boston to present about a systematic way to more effectively utilize FX collars as a hedging tool.  But things will resume on Tuesday.

Good luck and good weekend

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Alone in the Wilderness

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Takaichi-san
Alone in the wilderness
No partners will play

 

In a major blow to Japan’s largest political party, the LDP, their long-time partner, Komeito, has withdrawn from the twenty-five year coalition.  Ostensibly, Komeito asked Takaichi for a commitment to address the financing corruption issue that was one of the reasons for the Ichiba government’s collapse and she either could not or would not do so immediately.  There seems to be a bit of he said, she said here but no matter, it is a major blow to the LDP.  While it remains the largest party in both Houses, it doesn’t have a majority in either one and there is the beginning of talk as to how a coalition of other parties may put forward a PM candidate leaving Ms Takaichi on the outside looking in.  

The one thing I have learned over the years is that all politics is temporary, at least when it comes to Western democracies.  So, whatever the headlines blare today, the opportunity for Komeito to rejoin the LDP remains wide open.  Additionally, after twenty-five years sharing power, I am pretty certain that they are unlikely to simply walk away and cede that benefit.  My take, and this is strictly from my observations of how politics works everywhere, is that this spat will be overcome and Takaichi-san will, in fact, become Japan’s first female Prime Minister.  

Japanese equity markets (-1.0%) were already closed ahead of the long weekend there (Japan is closed for Sports Day on Monday) when the news hit the tape, so it is not surprising that Nikkei futures fell further, another -1.25% (see chart below from tradingeconomics.com), but if I am correct, by Tuesday, all will be right with the world again.  As an aside, Japanese share weakness was a follow on from US equity weakness, and that sentiment was pervasive across all of Asia (China -2.0%, HK -1.7%, Thailand -1.8%) with only Korea (+1.7%) bucking the trend as it reopened for the first time in a week and was catching up to the rally it missed.

The Bureau of Labor Statistics
Though staffed by what often seems mystics
Has called some folks back
So that they can track
Inflation’s key characteristics

It turns out, the cost-of-living adjustments for Social Security payments are made based on the September CPI data which were originally due to be released on October 15th.  Of course, the government shutdown, which now heads into its second week, resulted in BLS employees being furloughed alongside many others.  However, it now appears that several of them have been called back into the office in order to prepare the report to be released some time before the end of the month, if not on the originally scheduled date.  One added benefit (?) of this is that the Fed, which meets on October 28thand 29th may have the data at the time of their meeting to help with their decision making.  Of course, the market continues to price a very high probability of a cut at that meeting, currently 95%, despite a continued mix of comments from Fed speakers.  Just yesterday, Governor Barr urged caution on further cuts, although we also have heard from others like Chicago Fed president Goolsbee, that the labor situation is concerning and that further cuts are appropriate.  Regarding the Fed, I think the doves outnumber the hawks and a cut is coming, if for no other reason than it is already priced in and they are terrified to surprise markets on the hawkish side.

Away from those two stories, all the market talk yesterday was on the early spikes in precious metals (gold touched $4058/oz, silver $50.93/oz) before they fell back sharply on what seemed to be either serious profit-taking or, more likely, a massive attempt to prevent these metals from rallying further.  There have long been stories that major banks have been manipulating prices, especially in silver, as they run huge short futures positions in their books.  I do not know if those stories are true or apocryphal, but there is no doubt that someone sold a lot during yesterday’s session.

Source: tradingeconmics.com

My friend JJ (Alyosha’s market vibes) made the observation that the price action felt as though suddenly algorithms, which have ignored these markets because they haven’t offered the opportunities that equity markets have, were involved.  If that is the case, it is very possible that we are going to see a very different characteristic to metals markets going forward, with much more controlled price action.  Food for thought.

Ok, let’s recap the rest of the markets ahead of the weekend.  The US equity declines were early with modest rallies into the close that left the major indices only slightly lower on the day.  We have already discussed Asian markets and looking at Europe, price action has been limited although Spain (+0.4%) is having a decent day for no particular reason.  Elsewhere, though, +/-0.2% describes the session.

Treasury yields (-3bps) are leading all government bonds higher (yields lower) with all European sovereigns seeing similar yield declines and even JGBs slipping -1bp.  The only data from the continent was Italian IP (-2.4%) which seems to be following in the footsteps of Germany.  Too, Spanish Consumer Confidence fell to 81.5, which while a tertiary data point, extends its recent downward trajectory.  In this light, and finally, the probability of an ECB cut at the end of the month has moved off zero, albeit just to 1%, but prior to today, futures were pricing a small probability of a rate hike!

Oil (-1.2%) has fallen back to the bottom of that trading range ostensibly because the Middle East peace process seems to be holding.  This is a wholly unsatisfactory thesis in my mind given my observation that the Israel/Gaza conflict seemed to have no impact on prices for a long time because of its contained nature.  Rather, Russia/Ukraine seems like it should have far more impact.  But then, I’m just an FX guy, so oil markets are not my forte.

Finally, the dollar, which continues to rally in the face of all the stories about the dollar’s demise, is consolidating today after a pretty strong week.  Using the DXY as our proxy, this week’s trend is evident as per the below chart from tradingeconomics.com

A popular narrative amongst the ‘dollar is doomed’ set is that a look at dollar reserves at central banks around the world shows a continuing reduction in holdings with central banks exchanging dollars for other currencies, (euros, pounds, renminbi, Swiss francs, etc.) or gold.  Now, there is no doubt that central banks have been buying gold and that has been a key driver of the rally in the barbarous relic’s price.  But the IMF, who is the last word on this issue, makes very clear that any change recently has been due to the FX rate, not the volume of dollars held.  As you can see below, in Q2 (the latest data they have) virtually the entire reduction in USD reserves worldwide was due to the dollar’s first half weakness.

There are many problems in the US, and the fiscal situation is undoubtedly a mess, but as of now, there is still no viable alternative to holding dollars, especially given the majority of world trade continues to be priced and exchanged using the buck.

And that’s all for today.  We do get the Michigan Confidence number (exp 54.2), which is remarkably low given the ongoing rally in equities.  As you can see from the below chart overlaying the S&P 500 (gray line) with Michigan Confidence (blue line), something has clearly changed in this relationship.  This appears to be as good an illustration of the K-shaped economy as any, with the top 10% of earners feeling fine while the rest are not as happy.

Source: tradingeconomics.com

As we head into the weekend, with US futures pointing higher, I have a feeling that yesterday will be the anomaly and the current trends will reassert themselves.

Good luck and good weekend

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Not Blazing

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Inflation was hot, but not blazing
And so, though I am paraphrasing
A 50 bip cut
Is most likely what
We’ll see next week, ain’t that amazing!
 
Though futures are not there quite yet
The Claims data’s seen as a threat
It’s been four long years
Since Claims caused such fears
Seems Trump, what he wants he will get

 

While I spent most of yesterday discussing the CPI data, which came out on the warm side of things with headline rising 0.4% M/M, a tick higher than forecast, although the Y/Y number at 2.9% was as expected, it seems far more attention than normal was paid to the Initial Claims data.  As it happens, the last time Initial Claims printed this high, 263K, was October 2021.

Source: tradingeconomics.com.

Now, we all remember last September, just prior to the Fed cutting 50bps in a surprise move, and as it happens, the Claims data the week before that jumped as well, a one-off blip to 259K.  Of course, the Fed felt it had a political imperative back then to cut as a means of supporting their preferred candidate for President, VP Harris, but that is another story.  Nonetheless, a precedent has been set that a strong claims number with inflation still warm was sufficient to get them to move.  So, will they cut 50bps next week?

Right now, the Fed funds futures market is still pricing just an 8% probability of that move, so apparently that is not the market perception.  However, this is exactly the time where we should be seeing an article from the Fed Whisperer, Nick Timiraos, at the WSJ (aka Nickileaks), which ought to explain that changes in the labor market are sufficient to overcome any concerns about inflation, especially since there is a growing expectation that a recession is coming.  Look for it on Monday.

But let us consider this for another moment.  Based on BLS data, the median reading for Initial Claims since January 1967 is 339K, far more than we saw yesterday.  In addition, if you look at a long-term chart of the Claims data, or even the shorter-term one above, while it is possible this is the beginning of a trend higher in Claims, there is no evidence yet for that, and blips higher are pretty common throughout the data set.

The one caveat here is that if we look at the recessions highlighted in gray in the above chart, the Claims data didn’t really rise until the end of the recession, so there is a chance that we are seeing the beginnings of bigger problems.  Certainly, if Claims data starts to climb further and we see 300K, there will be a stronger case to anticipate a recession.  But we haven’t yet seen that.  Alas, what we do know from Powell’s last press conference is that the Fed has basically abandoned their inflation target, so despite the fact it has been 54 months (February 2021) since core PCE has been at or below 2.0%, and even though the very idea that rate cuts are appropriate is remarkable, it seems the case for 50bps is strengthening.  

Source: tradingeconomics.com

But, as Walter Cronkite used to say, “That’s the way it is.”

So, how have markets been digesting this news?  Well, yesterday saw US equity indices make yet another set of new all-time highs on the prospects of a 50bp cut and that has largely fed to other equity markets around the world.  Bond yields remain quiescent, at least out to 10 years, although the really long stuff is having a tougher time, and the dollar remains range bound.  Aside from equities, the only market really moving is precious metals, which continue to rally nonstop.

Starting in Asia, Tokyo (+0.9%) rallied nicely as a combination of anticipated Fed cuts and the calming of trade tensions with the US has investors there feeling giddy.  It, too, has reached new all-time highs.  Hong Kong (+1.1%) also had a good session although China (-0.6%) didn’t follow through as profit taking was evident after what has been a very strong run in mainland stocks lately.  Elsewhere in the region, only two markets (Singapore and Philippines) lagged, and those were very modest declines of -0.3%.  Otherwise, gains of up to 1.5% were the norm.

However, Europe didn’t get that memo this morning with continental bourses all under pressure (DAX -0.3%, CAC -0.5%, IBEX -0.7%) amid a growing realization that the ECB may have finished its cutting cycle, at least according to Madame Lagarde’s comments yesterday expressing confidence the bank is in a “good place”.  However, under the rubric bad news is good, UK stocks (+0.3%) are edging higher after data showed GDP flatlined in July with the Trade deficit rising, and IP falling sharply (-0.9%) as traders are becoming more convinced the BOE will cut rates despite much stickier inflation than their target level.  Remember, too, the BOE’s mandate is entirely inflation focused, but these days, none of that matters!  Finally, US futures are either side of unchanged as I type (7:00).

In the bond market, yields remain in their longer-term downtrend in the US although have edged higher by 1bp overnight.  European sovereign yields are higher by 3bps across the board as there are still growing concerns over French fiscal deficits and the fact that the ECB has finished cutting implies less support there.  It is interesting to look at the difference in performance between US and French 10-year bonds as per the below, as despite much angst over the US fiscal profligacy, which is well-deserved, investors still feel far more comfortable with Treasuries than with OATs.

Source: tradingeconomics.com

In the commodity markets, oil (+1.3%) is rebounding from yesterday’s decline and, net, continues to go nowhere.  Whatever the catalyst is that will change this view, it has not made an appearance yet.  Meanwhile, like the broken record I am, I see gold (+0.5%) and silver (+1.9%) continuing to rally as more and more investors around the world flock to the precious metals as they fear the destruction of the value of their fiat currencies.  And they are right because there is not a single central bank around (perhaps Switzerland and maybe Norway) that is concerned about inflation as evidenced by the fact that despite the fact inflation rates are running far higher than they had pre-Covid, every central bank is in a cutting cycle except Japan, and they have stopped hiking despite CPI there running at 3.4%!

Finally, the dollar is modestly firmer as I type, although it had been a bit softer overnight, and basically going nowhere fast.  If I look at the movement in the major currencies over the past month, only NOK (+3.0%) stands out on the back of higher than anticipated inflation readings and growing expectations that the Norges Bank, which did cut rates a few months ago, will soon have the highest interest rates in the G10 after the Fed cuts next week and they remain on hold.  As to today’s movement, JPY (-0.35%), NZD (-0.4%) and NOK (-0.3%) are the largest movers, with the EMG seeing even smaller movement than that.  Again, it is difficult to find a compelling short-term story here.

On the data front, this morning brings Michigan Sentiment (exp 58.0) and that’s it.  No Fed speakers ahead of the meeting next week, so we will be reliant on either the White House making some new, unexpected, announcement, or the dollar will take its cues from the equity markets.  It is interesting that the precious metals complex continues to perform well despite the dollar edging higher.  To me, that is the biggest story around.

Good luck and good weekend

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Falling Fast

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His swords were words he wielded well
He spoke his truths, but would not yell
His followers enrapt
His enemies then snapped
And undeservedly he fell
 
RIP Charlie Kirk
 
A score plus four of years have passed
Since thousands died, we were aghast
No logic could be found
For those at, zero, ground
Society is falling fast


 
A generation after the horrific events of September 11, 2001, it appears that memories have faded.  Personally, having observed those events from one block away, it is indelibly imprinted on my brain.  But now, in the course of a week we have seen several senseless murders make the news as whatever decorum may have existed at the turn of the century is long gone.  Messrs. Howe and Strauss were always quite clear that the 4thTurning involved chaos and the destruction of institutions.  I fear the process is accelerating.  I also fear that it must play out to get through to the other side.  Civil war feels excessive as a description, but as I have forecast for the past year or two, one of the major political parties was likely to explode.  Right now, it feels like the Democrats are on that path.  I don’t know what will replace it, but something must, and it would behoove us all if there is some coherence in their policies when it appears.  I remain confident that Socialists are not the answer, nor will they be embraced across the nation. 
 
The reason I discuss this, which seems outside the bounds of my market perspective, is that it is going to impact markets even more than it already has.  The ongoing politicization of the media, businesses and entertainment does not lead to kumbaya, but rather volatility and distress.  If you wonder why gold continues to perform well, look no further.  Whatever the data, whatever the Fed does, whatever Trump and his administration do, or what Congress tries to do, gold has a history of maintaining value for the past 5 millennia.  Everything else is new and prices are all relative to gold.  Remember that as you approach your day job and your investments, whether you hedge for a living, or simply are trying to make a living.
 
There are now two things on the docket
That could lead risk assets to rocket
First, CPI comes
The Jay and his bums
Decide what gets put in our pocket

Considering these very serious issues, it seems almost ridiculous to discuss markets, but they will continue to trade and the ability to keep your eye on that particular ball is still critical to financial outcomes.  So, let us turn to the two stories (well, maybe two and a half stories) that have the potential to change some viewpoints.  The first is today’s CPI, then next week’s FOMC meeting with a half nod given to today’s ECB meeting.

Regarding the least important, the ECB is almost certainly going to leave policy unchanged.  The only opportunity for anything new will come from Madame Lagarde’s press conference and if she displays a new tone, whether hawkish (I doubt) or perhaps more dovish as European data continues to ebb.

But let’s move on to CPI.  After yesterday’s much lower than expected PPI data, where the M/M numbers for both headline and core were -0.1% compared to +0.3% expected, there has been some talk on the margins that we could see much softer CPI data.  However, it is worth knowing that for the inflation cognoscenti (e.g., @inflation_guy) PPI data is seen as a random number generator with very little direct impact on the consumer data.  (In fact, after my look at NFP data, aren’t all the data points random?)  With that in mind, current median expectations remain as they were earlier in the week (0.3% M/M for both headline and Core with the Y/Y numbers expected at 2.9% and 3.1% respectively).  

Given the market is currently pricing a full 25bp cut with an 8% probability of 50bps, my take is the only way to change things would be for CPI to also print like the PPI data as negative numbers.  If that were to be the case, and I do not anticipate that outcome by any stretch, it would give Chairman Powell ample opportunity to cut 50bps with the market welcoming the outcome along with President Trump.  On the flip side, I don’t think CPI can print a high enough number to remove the 25bp cut.  As a reminder, below are the cumulative probabilities for future Fed funds rates based on the CME’s futures contract.  A total of 75bps remains the default view for the rest of 2025.

We will learn about the outcome at 8:30 this morning and I have no particular insight into whether those median forecasts are high, low or on the money.  This is a wait and see situation.

As to the FOMC meeting, it has the opportunity to be far more impactful.  While 25bps is currently baked in the cake, I remain of the opinion that 50bps is a very viable outcome.  Recall, the most recent Fed discussions were about the importance of the employment portion of their mandate as opposed to the inflation portion.  With the newly revised reduction in NFP over the past twelve months, characterizing the employment situation as solid or strong seems unreasonable.  Weakening would seem a more apt description and should have the discussion be between 25bps or 50bps.  We already know there are at least two governors, Bowman and Waller, who wanted to start cutting last time, and it appears that Stephen Miran, Trump’s current head of the CEA, is going to get approved by the Senate in time to sit in the meeting next week.  One would assume that is a vote for easier policy.   

ITC Markets has a very nice table on the perceived hawkishness/dovishness of FOMC members, and it shows that the governors, as a whole, live in the dovish camp with only a few regional presidents as known hawks.  In fact, one of the remarkable things about the entire Lisa Cook affair is that she was always one of the more dovish members of the board and the fact that she was not pushing for cuts never made any sense.  At least based on her background and history.  However, if you take politics into account, and the idea that she didn’t want to cut because President Trump wanted a cut, it begins to become clearer.  At any rate, it strikes me that based on this table, which feels reasonable, 50bps is in play.

With all that in mind, let’s take a quick turn around the markets to see what is happening ahead of this morning’s data.  As seemingly always, equity markets rallied in the US yesterday, well mostly.  The DJIA slipped, but the other indices managed to continue their hot streaks.  It is very hard to link economic activity to equity market outcome these days, at least to my eyes.

But on to Asia, where Japan (+1.2%) had a solid session on the back of the remarkable rise in Oracle shares and the idea that Japanese tech companies will benefit.  China (+2.3%) was the beneficiary of the story that President Xi is now looking to have banks prop up local governments that have stopped paying contractors now that their property sale gravy train has derailed.  It seems that they have figured out if you don’t pay people, they don’t consume anything.  So, upwards of CNY 1 trillion will be injected into local government coffers specifically to pay these late bills and try to kickstart consumption.  But, as I look through the rest of the region, it was a much more mixed picture with some gainers (Korea, Indonesia, Thailand), some laggards (HK, Malaysia, Australia) and many markets that barely moved.

In Europe, all the major markets are green this morning led by the CAC (+0.85%) and UK (+0.5%) with the others showing much smaller gains (DAX +0.2%, IBEX +0.25%).  There is no obvious reason for the gains as expectations for the ECB remain static and there has been no data of note released.  Meanwhile, US futures are higher by 0.25% at this hour (7:30).

Bond markets remain frozen as Treasury yields have edged higher by just 1bp and European sovereign yields are +/-1bp from yesterday’s close.  As you can see from the chart below, the range on 10-year Treasuries has been fairly narrow for the past week.  Perhaps today’s CPI will shake things up.

Source: tradingeconomics.com

In the commodity space, oil (-1.25%) is giving back the gains it saw earlier in the week but basically remains unchanged overall.  If fears grow that a recession is upon us, I could see a rationale for oil to decline, but it is hard to get excited about the market right now.  Gold (-0.6%) is backing off its most recent all-time high, but is still firmly above $3600/oz.  Given the recent run, it is no surprise it takes a breather here and there is no reason to believe that precious metals are topping out.  In fact, a look at the charts tells me that there is plenty of upside left across the space.

Source: tradingeconomics.com

Finally, the dollar is a bit firmer this morning, probably one reason the precious metals are under some pressure, but here too, if we use the DXY as our proxy, the range is pretty clear.

Source: tradingeconomics.com

JPY, INR and ZAR are the largest movers this morning, each declining -0.4%, while the rest of the world is mostly softer by -0.1% to -0.2%.  Broad based dollar strength but no depth whatsoever.  We shall see how things behave after the CPI release.

And that’s really it.  For now, the big picture remains the same, where the prospects of an easier Fed will weigh on the dollar and support commodities.  Equities will like that for now, at least until inflation picks back up, and bonds feel subject to manipulation so I’m just not sure.

Good luck

Adf

Lest ‘Flation Has Spice

Posted on by

The market absorbed CPI
And equities started to fly
Though Core prices rose
T’was Headline, I s’pose
Encouraged investors to buy
 
As well, Fed funds futures now price
The Fed will cut rates this year thrice
The upshot’s the buck
Is down on its luck
Beware though, lest ‘flation has spice

 

Core prices rose a bit more than forecast in yesterday’s CPI report although the headline numbers were a touch softer.  The problem for the Fed, if they are truly concerned about the rate of inflation, is that the strength of the numbers came from core services less shelter, so-called Supercore, a number unimpeded by tariffs, and one that has begun to rise again.  As The Inflation Guy™ makes clear in his analysis yesterday, it is very difficult to look at the data and determine that 2% inflation is coming anytime soon.  I know the market is now virtually certain the Fed is going to cut in September, but despite President Trump’s constant hectoring, I must admit the case for doing so seems unpersuasive to me.

Here are the latest aggregated probabilities from the CME and before you say anything, I recognize the third cut is priced in January, but you need to allow me a little poetic license!

However, since I am just a poet and neither institutions nor algorithms listen to my views, the reality on the ground was that the lower headline CPI number appeared to be the driver yesterday and into today with equities around the world rallying in anticipation of Fed cuts.  As well, the dollar is under more severe pressure this morning on the same basis.  However, it remains difficult for me to look at the situation in nations around the world and conclude that the US economy is going to underperform in any meaningful way over time.  

So, to the extent that a currency’s relative value is based on long-term economic fundamentals, it is difficult to accept that the dollar’s relative fiat value will decline substantially, and permanently, over time.  I use the euro as a proxy for the dollar, which is far better than the DXY in my opinion as the Dollar Index is a geometric average of 6 currencies (EUR, JPY, GBP, CAD, SEK and CHF) with the euro representing 57.6% of the basket.  And I assure you that in the FX markets, nobody pays any attention to the DXY.  Either the euro or the yen is seen as the proxy for the “dollar” and its relative value.  At any rate, if we look at a long-term chart of the euro below, we see that the twenty-year average is above the current value which pundits want to explain as a weak dollar.  Too, understand that back in 1999, when the euro made its debut, it started trading at about 1.17 or so, remarkably right where it is now!

Source: finance.yahoo.com

My point is that the dollar remains the anchor of the global financial system, and given the current trends regarding both economic activity and the likely ensuing central bank policies, as well as the ongoing performance of US assets on a financial basis, while short-term negativity on the dollar can be fine, I would be wary of expecting it to lose its overall place in the world.

Speaking of short-term views, especially regarding central bank activities, it appears clear that the market is adjusting the dollar’s value on this new idea of the Fed cutting more aggressively.  If that is, in fact, what occurs, I accept the dollar can decline relative to other currencies, but I really would be concerned about its value relative to things like commodities.  And that has been my view all along, if the Fed does cut rates, gold is going to be the big beneficiary.

Ok, let’s review how markets have absorbed the US data, as well as other data, overnight.  Yesterday’s record high closings on US exchanges were followed by strength in Tokyo (+1.3%), Hong Kong (+2.6%), China (+0.8%) despite the weakest domestic lending numbers in the history of the series back to 2005.  In fact, other than Australia (-0.6%) every market in Asia rallied.  The Australian story was driven by bank valuations which some feel are getting extreme despite the RBA promising further rate cuts, or perhaps because of that and the pressure it will put on their margins.  Europe, too, is rocking this morning with gains across the board led by Spain (+1.1%) although both Germany (+0.9%) and France (+0.6%) are doing fine.  And yes, US futures are still rising from their highs with gains on the order of 0.3% at this hour (7:45).

In the bond market, Treasury yields have slipped -3bps this morning, with investors and traders fully buying into the lower rate idea.  European sovereigns are also rallying with yields declining between -4bps and -5bps at this hour.  JGBs are the exception with yields there edging higher by 2bps, though sitting right at their recent “home” of 1.50%.  as you can see from the chart below, 1.50% appears to be the market’s true comfort level.

Source: tradingeconomics.com

In the commodity space, oil (-0.6%) continues to slide as hopes for an end to the Russia-Ukraine war rise ahead of the big Trump-Putin meeting on Friday in Alaska.  Nothing has changed my view that the trend here remains lower for the time being as there is plenty of supply to support any increased demand.

Source: tradingeconomics.com

Metals, meanwhile, are all firmer this morning with copper (+2.6%) leading the way although both gold (+0.4%) and silver (+1.7%) are responding to the dollar’s decline on the day.

Speaking of the dollar more broadly, its decline is pretty consistent today, sliding between -0.2% and -0.4% vs. almost all its counterparts, both G10 and EMG.  This is clearly a session where the dollar is the driver, not any particular story elsewhere.

On the data front, there is no primary data coming out although we will see the weekly EIA oil inventory numbers later this morning with analysts looking for a modest drawdown.  We hear from three Fed speakers, Bostic, Goolsbee and Barkin, with the latter explaining yesterday that basically, he has no idea what is going on and no strong views about cutting or leaving rates on hold.  If you ever wanted to read some weasel words from someone who has an important role and doesn’t know what to do, the following quote is perfect: “We may well see pressure on inflation, and we may also see pressure on unemployment, but the balance between the two is still unclear.  As the visibility continues to improve, we are well positioned to adjust our policy stance as needed.”  

And that’s all there is today.  The dollar has few friends this morning and I see no reason for any to materialize today.  But longer term, I do not believe a dollar weakening trend can last.

Good luck

Adf

Stock-pocalypse?

Posted on by

Inflation is on traders’ lips
As rate cuts now lead all their scripts
But what if it’s hot
And questions the plot?
Will that lead to stock-pocalypse?
 
Meanwhile pundits keep on complaining
That everything Trump does is straining
Their efforts to force
A narrative course
And so, their impact keeps on waning

 

It is CPI Day and there are several different stories in play this morning.  Naturally, the first is that President Trump’s dismissal of BLS head McEntarfar calls into question the veracity of this data, which has already been questioned because of a reduction in the headcount at the BLS.  While we cannot be surprised at this line of attack by the punditry, it seems unlikely that anything really changed at the BLS in the past week, especially since there is no new head in place yet.  

But the second question is how will this data impact the current narrative that the Fed is set to cut rates at each of the three meetings for the rest of this year?  At this hour (6:30) the probability, according to the CME futures market, of a September cut has slipped to 84.3% with a 72% probability of two cuts by year end as per the below table courtesy of cmegroup.com.

Interestingly, the market remains quite convinced that the trend in rates is much lower as there is a strong expectation of a total of 125 basis points of cuts to be implemented by the end of 2026.  I’m not sure if that is pricing in much weaker economic growth or much lower inflation, although I suspect the former given the ongoing hysteria about tariff related inflation.

To level set, here are the current median estimates for today’s release:

  • Headline: 0.2% M/M, 2.8% Y/Y
  • Core:         0.3% M/M, 3.0% Y/Y

Now, we are all well aware that the Fed uses Core PCE in their models, and that is what they seek to maintain at 2.0%.  But, historically, PCE runs somewhere between 0.3% and 0.5% below CPI, so no matter, they have not achieved their goal.  However, we continue to hear an inordinate amount of discussion and analysis as to why the latest NFP report signals that a recession is pending.  And in fairness, if one looks at indicators like the ISM employment indices, for both manufacturing and services they are at extremely low levels, 43.4 and 46.4 respectively, which have historically signaled recessions.  At the same time, concerns over inflation rising further due to tariffs and other policy changes remain front and center in the narrative.  In fact, one of the key discussion points now is the idea that the Fed will be unable to cut rates despite a weakening labor market because of rising inflation.  I’m not sure I believe that to be the case although the last time that situation arose, in the late 1970’s, Chairman Volcker raised rates to attack inflation first.  However, that doesn’t seem likely in the current environment.

Remember this, though, when it comes to the equity market, the bias remains bullish at all times.  In fact, I would suggest that most of the narratives we hear are designed with that in mind, either to attack a policy as it may undermine stocks, or to cheerlead something that is pushing them higher.  I suspect that the major reason any pundits are concerned over higher inflation is not because it is a bad outcome for the economy, but because it might delay Fed funds rate cuts which they have all concluded will lead to higher equity prices. After all, isn’t that the desired outcome for all policy?

Ok, as we await the data this morning, let’s see how things behaved overnight.  Yesterday’s lackluster US session was followed by a lot of strength in Asia.  Japan (+2.15%) led the way on a combination of stronger earnings from key companies and the news about tariff recalculations.  (remember, they were closed Monday).  China (+0.5%) and Hong Kong (+0.25%) benefitted from news that President Trump has delayed the tariff reckoning with China by 90 more days as negotiations remain ongoing.  Australia (+0.4%) was higher after the RBA cut rates 25bps, as expected, while Governor Bullard indicated further easing is appropriate going forward.  There was one major laggard in Asia, New Zealand (-1.2%) as tariffs on their exports rose to 15% and local earnings results were softer than forecast.

In Europe, the picture is mixed with Germany (-0.45%) the laggard after much weaker than expected ZEW Economic Sentiment data (34.7, down from 52.7 and below the 40.0 forecast).  As to the rest of the region, there are modest gains and losses, on the order of 0.15% or less with talk about what will come out of the Trump-Putin talks on Friday in Alaska and how that will impact the European defense situation.  As to US futures, at this hour (7:15) they are unchanged.

In the bond market, Treasury yields are unchanged this morning, remaining below 4.30% although still well below the recent peak at 4.50% in seen in mid-July.

Source: tradingeconomics.com

European sovereign yields are edging higher by 2bps across the board as investors show caution ahead of both the US CPI data as well as the uncertainty of what will come from the Trump-Putin talks.  However, UK gilts (+4bps) responded to better-than-expected payrolls data there, although the Unemployment Rate remained unchanged at 4.7%.

In the commodity markets, oil (-0.35%) is still in the middle of a narrow trading range as it seeks the next story, arguably to come from Friday’s talks, but potentially from this morning’s CPI data if it convinces people that a recession is imminent.  Metals markets are little change this morning, consolidating yesterday’s declines but not showing any bounce at all.

Finally, the dollar remains generally dull with the euro (-0.1%) unable to spark any life at all lately.  We did see AUD (-0.4%) slip after the rate cuts Down Under and in the EMG bloc, there is a bit of weakness, albeit not enough to note.  There was an amusing comment from Madame Lagarde as she tried to explain that now is the time for the euro to shine on a global reserve basis because of the perceived troubles of the dollar.  Not gonna happen, trust me.

And that’s really it for today.  Another summer day with limited activity as we all await both the data and the next story from the White House, as let’s face it, that is the source of virtually all action these days.  A soft print today ought to result in a rally in both equities and bonds while the dollar might slide a bit as the prognosis for a rate cut increases.  But a hot print will see the opposite as fear of stagflation becomes the story du jour.  Remember, too, two more Fed speakers, Barkin and Schmid, will be on the tape later this morning so watch for any dovishness there as both have been very clear that patience is their game.

Good luck

Adf

A Wing and a Prayer

Posted on by

The CPI data was hot
Or cool, all depending on what
It is that you buy
Though pundits will try
To tell you that Trump’s a tosspot
 
But stock markets don’t really care
Though bond markets are quite aware
Inflation’s not dead
Which means that the Fed
Relies on a wing and a prayer

 

These were the headlines yesterday in the wake of the CPI report:

WSJ – Inflation Picks Up to 2.7% as Tariffs Start to Seep Into Prices

NY Times – U.S. Inflation Accelerated in June as Trump’s Tariffs Pushed Up Prices

Washington Post – Inflation picked up in June as tariffs began to lift prices across the economy

And here are a couple from this morning:

WSJ – Trump Effect Starts to Show Up in Economy

Bloomberg – US Trade Wars Will Hit Households Worldwide, BOE’s Bailey Warns

As I forecast yesterday, the higher inflation would be blamed on President Trump’s actions regardless of the outcome.  In fairness, that was not a hard prediction to make given the current state of the mainstream media and their general views of the president.  But is that an accurate representation?  As always, on matters of CPI I turn to @inflation_guy, Mike Ashton, to get his take, which has generally been the least hysterical and most cogent of analysts around.  Here is his summary of yesterday’s CPI data.  

In essence, the higher Y/Y readings are partially due to base effects (the number twelve months ago that is leaving the calculation was very low so even a moderate number will result in a higher print) and partially due to ongoing price changes in the economy.  Goods prices did rise, but services prices were not as affected.  Notably lodging away from home (i.e. hotels) saw prices fall -2.5% on the month, likely perhaps a result of less illegal immigrants being housed in cities around the country.  In the end, as Mike explains, median inflation has been running at ~3.5% annually for the past several years and shows no signs of declining much further.  I fear, that is the new normal for inflation going forward.

(This is a good time to mention that one way to maintain the purchasing power of your money is to own USDi, the only inflation-linked stable coin around which accretes the rise in CPI to its price on an ongoing basis.  Below is a chart showing how this has performed (and by extension what has happened to inflation) since the coin was initiated on March 1st of this year.  (And yes, we know exactly where the price will be going forward through the rest of the summer based on the mechanics of the way CPI is reported.)

But the US is not the only place where inflation is starting higher.  Exhibit A here is the UK, which reported its CPI figures this morning where they rose to 3.6% headline and 3.7% core.  Now, looking at the chart of CPI in the UK, it is abundantly clear that prices have been consistently rising for the past twelve months, at least.  Interestingly, while the Starmer government has demonstrated remarkable incompetence across many factors, they have not been imposing tariffs on all their trade partners and yet inflation is still rising.  Perhaps tariffs are not necessarily the inflation driver that the punditry is keen to describe.  But a look at the last five years of core inflation in the UK shows pretty clearly that price rises, while having slowed from their fastest levels in the wake of the pandemic, have bottomed and appear to be accelerating again.  (Arguably, that is why BOE Governor Bailey was explaining Trump was to blame for his failures.)

Source: tradingeconomics.com

In the end, though, the market adjusted to the inflation data yesterday and overnight things have been far more muted.  This is true, even in the UK, where gilt yields have edged up only 2bps and the pound (+0.1%) is barely higher after having fallen more than 2% since the beginning of July.  In fact, my take is that markets are just not that interested in very much these days as evidenced by the much-reduced volumes that we see across all markets.

So, with that in mind, let’s see how things behaved overnight.  Starting with the bond market, treasury yields have slipped -1bp this morning, but that is after having gained 6bps yesterday after the data.  As well, Fed funds futures are now pricing less than a 3% probability of a rate cut at the end of this month with far less discussion about the Waller and Bowman comments regarding those cuts.  Meanwhile, in Europe, away from the UK, yields have also slipped -1bp across the board, although yields there did rise about 3bps after the US CPI report.  Remember, all these bond markets are tightly linked.  As to Asia, JGB yields edged higher by 1bp overnight.

In the equity markets, yesterday’s broad down session in the US (Nvidia rose on China sales news which propped up the NASDAQ) was followed by modest weakness throughout most of Asia (China -0.3%, HK -0.3%, Korea -0.9%, Australia -0.8%) although Japan was essentially unchanged.  European shares, though, are mostly a touch firmer led by the IBEX (+0.5%) although the DAX (+0.3%) and FTSE 100 (+0.2%) are also in the green despite there being no obvious catalysts here.  US futures are essentially unchanged at this hour (7:10).

In the commodity space, oil (-0.9%) has been dragging lower over the past several sessions and is now down -3.5% in the past week.  This is a reversal of the recent price action and accords far better with the fundamentals of supply coming on from OPEC with the still strong belief that economic activity is set to slow given the Trumpian tariff impact around the world.  Metals markets continue to range trade as well, with gold (+0.3%) higher this morning, although it gave back yesterday morning’s gains and based on the way it has been trading, seems likely to do that again today.  In fact, the entire metals complex has been showing similar behavior, gains overnight that retrace in the US.

Finally, the dollar is little changed this morning although it has been trending ever so slightly higher over the past several weeks.  I haven’t discussed yen in a while, but all thoughts of the end of the carry trade have been banished as the yen has declined by more than 3% since the beginning of the month and is now back to levels last seen in April.  On the day, as I look across the screen, NOK (-0.5%) is the largest mover in either G10 or EMG space, arguably responding to the fact that oil has been sliding over the past week.  But here, as in the other markets, there is no excitement.

On the data front, this morning brings PPI (exp 0.2%,2.5% headline, 0.2%, 2.7% core) as well as IP (0.1%), Capacity Utilization (77.4%) and then the Fed’s Beige Book this afternoon.  We also hear from three more Fed speakers today although yesterday’s group gave no indication that a move was in the offing.  Instead, the only speaker with a differing opinion than the group, Waller, talked about stablecoins, not monetary policy.

I sincerely doubt that anything of note will happen today from either the data or market internals as pretty much the only thing that moves markets these days are White House announcements.  And I have no idea if any of those are coming.  Look for another quiet session overall.

Good luck

Adf

Misconstrue

Posted on by

Ahead of today’s CPI
The markets continue to fly
Though prices keep rising
The pace is surprising-
Ly slower than pundits decry
 
Perhaps now it’s time to review
How old models all misconstrue
The world of today
As their results stray
From outcomes we’re all living through

 

Let’s start with this morning’s CPI data where expectations are for M/M rises of 0.3% for both headline and core readings which translate to 2.7% and 3.0% for the annual numbers.  In both cases, that would be the highest reading since February and will put a crimp in the inflation slowing trend as both the 3-month and 6-month trend data will stop declining.  I assure you that the immediate culprit will be defined as the tariffs, although it is probably still too early to make an accurate reading on that.  Nonetheless, you can be sure that, especially if the bond market sells off, the cacophony will be extreme as to President Trump’s policies are destroying the nation.

Personally, I would disagree with that take.  In fact, something I theorized last week was that a likely impact of the tariffs was that corporate margins would be hit, not necessarily that prices would rise.  Apparently, somebody much smarter than me agrees with that view, a well-respected analyst, @super_macro on X, who made that point this morning.  But all we can do is wait and see the data and response.

Yesterday, as well, I touched on how bond yields around the world were rising which remarkably seems to be a theme in the mainstream media this morning.  I wonder if they’re secretly reading fxpoetry?

Ok, but let’s move on.  I have consistently expressed my view that the current macroeconomic models in use, which are almost entirely Keynesian based, are simply no longer relevant to the world as it currently exists.  I made the point about economic statecraft, as defined by Michael Every (@TheMichaelEvery), the Rabobank analyst who has been far more accurate in his forecasts of likely political outcomes.  Well, in the financial space, another Michael, Green (@profplum99), is also ahead of the pack in my view.  He was on a podcastlast week that is well worth the hour (40 minutes if you listen at 1.5X speed).  

The essence of his work is that the rise in passive investing has had major consequences for equity markets, and by extension other financial markets.  When John Bogle founded Vanguard with the goal of popularizing passive index investing, it represented a tiny fraction of the market and so, its low fees made it an excellent source of capturing market beta unobtrusively.  However, in the ensuing 50 years, and especially in the last 20 when 401K plans were flipped from opt-in to opt-out by government regulation, things have changed dramatically.

This is the most recent chart I can find showing how passive investments (e.g., index funds and target date funds) have grown dramatically in size relative to the overall market (notice the inflection in 2006 when the opt-in regs changed).  In fact, they currently represent about 50% of equity market assets.

The reason this matters is because the term passive is no longer very descriptive of what these funds do.  As Mr Green explains, they work on the following algorithm, if funds flow in, they buy more stocks and if funds flow out they sell them.  Since they are following cap weighted indices, they basically reflect that since funds flow from every 401K into the market throughout every day, they continue to buy the largest stocks (Mag7) out there regardless of any concept of value.  If you think this through, the main factor in the markets is no longer how a company performs, but how many people have jobs where they have some portion of their incomes allocated to 401K plans.  So, as long as people have jobs, and if employment is growing, equity prices have a price-insensitive base of support.  The upshot is equity markets are no longer forward-looking systems, as has been the belief since early financial market theories, but rather they are indicators of the employment situation.  And it is key to remember that the unemployment rate is a lagging macroeconomic indicator

This matters because the Fed, and frankly most major financial institutions and analysts, continue to model the economy with an input from equity markets.  Consider the Index of Leading Economic Indicators, which has the S&P 500 explicitly in the calculation as an example.  Now, if the Fed is looking at models which discount changes in the equity market, clearly a part of their process, it means they are looking in the rear-view mirror.  This is a very cogent explanation as to why the Fed’s models have grown so out of touch with reality, which if you consider how important they are to monetary policy, and by extension the economy as a whole, is quite concerning.  

Concluding, Mr Green has eloquently explained what I have observed over the past months and years, the Fed’s (and most of Wall Street’s) models are simply no longer fit for purpose.  Add to this the concept of fiscal dominance, where government spending overwhelms monetary policy as has been the case for the past several years, and we all can see why the Fed is flying blind.  

With that cheery thought, let’s see how markets are behaving.  Yesterday’s modest US rally was followed by some strength in Asia (Nikkei +0.55%, Hang Seng +1.6%) although mainland shares were unchanged.  Chinese data overnight surprised on the upside regarding GDP, with an annualized outcome of 5.2%, and it saw IP rise 6.8% Y/Y, also better than expected but Retail Sales (4.8%) and Fixed Asset Investment, which is housing driving (2.8%) both disappointed.  The upshot is that domestic demand continues to flag although they have been working hard to export lots of stuff.  The rest of the region saw a very positive day with almost all markets gaining.  In Europe, the picture is more mixed as tariff concerns continue to weigh on nations there with today’s price action a mix of small gains (CAC, DAX) and losses (IBEX, FTSE 100) and nothing more than 0.3%.  US futures, though, are pointing higher at this hour (7:20) by 0.5% or so.

In the bond market, yesterday’s modest rise in yields is seeing a reversal with Treasury yields slipping -1bp, but European sovereigns having a good day with yields down between -5bps and -6bps.  Inflation data from Spain confirmed that the overall inflation situation there is ebbing, and market participants are now pricing one more rate cut by the end of this year which would take the ECB rate down to 1.75%.  As it happens, JGB yields were unchanged overnight, but there is still growing angst over their recent rise.

In the commodity arena, oil (-0.5%) reversed course yesterday and sold off more than $2/bbl as per the below chart.

Source: tradingeconomics.com

This makes more sense to me given the apparent growth in supply, but there seems to be an awful lot of calendar and crack spread activity in the market, most of which I do not understand well enough to describe, but which can impact pricing of the front futures contract.  I would suggest looking on substack at market vibesfor a real education.  I keep trying to learn.  However, from a macro view, I continue to believe that prices have further to decline than rise from current levels.  As to the metals markets, gold (+0.5%) and silver (+0.4%) continue to find consistent support and I see no reason for them to reverse course anytime soon.

Finally, the dollar continues to do very little overall.  For now, the more aggressive downtrend appears to have been halted, as per the chart of the DXY below, but it is hard to get too excited about a significant rebound based on the macro data and interest rate outlook.  The one thing working in the favor of a dollar rebound is the extreme short dollar positions that exist in the hedge fund and CTA communities.

Source: tradingeconomics.com

In addition to the CPI data, we will see the Empire State Manufacturing Index (exp -9.0) and we will hear from four Fed speakers today (Bowman, Barr, Collins and Logan).  Absent a major shock in the CPI data, it strikes me that there is limited reason for any of these speakers to change their personal tune.  So, Bowman is calling for cuts, while the other three have not done so, at least not yet.  In fact, if we start to hear a more dovish take from any of them, that would be news.

And that’s it for this morning.  Market activity is pretty dull overall, and trends remain in place.  Remember, the trend is your friend.

Good luck

Adf

Quite Dreary

Posted on by

While pundits expected inflation
Would rise with Trump as the causation
The data has not
Shown prices are hot
Since tariffs joined the conversation
 
In fact, there’s a budding new theory
That’s made dollar bulls somewhat leery
If Powell cuts rates
While Christine, she waits
The dollar might soon look quite dreary

 

Well, it turns out measured inflation wasn’t quite as high as many had forecast, even if we ignore those whose views are completely political.  Yesterday’s readings of 0.1% for both headline and core were lower despite all the tariff anxiety.  The immediate response has been, just wait until next month, that’s when the tariff impact will kick in, you’ll see.  Maybe that will be the case, but right now, for a sober look, the Inflation_Guy™, Mike Ashton, offers a solid description of what happened and some thoughts about how things may be going forward.  Spoiler alert, tariffs are not likely the problem, let’s start thinking about money supply growth.

However, the market, as always, is seeking to create a narrative to drive things (or does the narrative follow the market?  Kind of a chicken and egg question) and there is a new one forming regarding the dollar.  Now, with inflation appearing to slow in the US, this is an opening for Chair Powell to cut rates again, despite the fact that inflation on every reading remains above their target.  Meanwhile, the uncertainty that US policy is having on economies elsewhere, notably in Europe as the tariff situation is not resolved, means Madame Lagarde is set to pause, (if not halt), ECB rate cuts for a while and voilà, we have the makings of a dollar bearish story.  

That seems likely to have been the driver of today’s move in the euro (+1.0%) which has taken the single currency back to its highest level since November 2021.

Source: tradingeconomics.com

Now, if you are President Trump and are seeking to reduce the trade deficit while bringing manufacturing capacity back to the US, this seems like a pretty big win.  Lower inflation and a lower dollar both work towards those goals.  Not surprisingly, the president immediately called for the Fed to cut rates by 100 basis points after the release.  As much as FOMC members seem to love the sound of their own voices, perhaps this is one time where they are happy to be in the quiet period as no response need be given!

At any rate, the softer inflation data has had a significant impact on the dollar writ large, with the greenback sliding against all its G10 counterparts, with SEK (+1.3%) leading the way, although CHF (+1.1%), NOK (+0.9%) and JPY (+0.8%) have also been quite strong.  However, the biggest winner was KRW (+1.3%) as not only has there been dollar weakness, but new president, Lee Jae-myung, has proposed tax cuts on dividends to help support Korean equity markets and that encouraged some inflows.  Other EMG currencies have gained as well, although those gains are more muted (CNY +0.3%, PLN +0.6%) and some have even slipped a bit (ZAR -0.5%, MXN -0.1%).  Net, however, the dollar is down.

Yesterday, I, and quite a few other analysts, were looking for more heat in the inflation story.  Clearly, if that is to come, it is a story for another day.  With this in mind, we shouldn’t be surprised that government bond yields have also fallen around the world with Treasuries (-5bps) showing the way for most of Europe (Bunds -6bps, OATs -5bps, Gilts -6bps) and even JGBs (-2bps) are in on the action.  

Earlier this week, the tone of commentary was that inflation was coming back, and a US stagflation was inevitable.  This morning, that narrative has disappeared.    Interestingly, I would have thought the combination of the cooler CPI and the trade truce between the US and China would have the bulls feeling a bit better.  Alas, the equity markets have not responded in that manner at all.  Despite the soft inflation readings, US equity markets yesterday edged lower, albeit not by very much.  But that weakness was followed in Asia (Nikkei -0.65%, Hang Seng -0.4%, CSI 300 -0.1%) with India, Taiwan and Australia all under pressure although Korea (+0.45%) bucked the trend on that dividend tax story.  And Europe, this morning, is also unhappy with the DAX (-1.1%) leading the way lower followed by the IBEX (-.9%) and CAC (-0.7%).  The FTSE 100 (-0.1%) is faring a bit better as, ironically, weaker than expected GDP data this morning (-0.3% in April) has reawakened hope that the BOE will get more aggressive cutting rates.  US futures are in the red as well this morning, -0.5% across the board.  Perhaps this is the beginning of the long-awaited decline from overbought levels.  Or perhaps, this is just a modest correction after a strong performance over the past two months.  After all, the bounce in the wake of the Liberation Day pause has been impressive.  A little selling cannot be a surprise.

Source: tradingeconomics.com

Lastly, we turn to commodities where the one consistency is that gold (+0.5%) has no shortage of demand, at least in Asia.  It seems that despite a 29% rise year-to-date in the barbarous relic, US investors are not that interested.  Those gains dwarf everything other than Bitcoin, and yet they have not caught the fancy of the individual investor in the US.  However, I believe that demand represents an important measure of the diminishing trust in the US dollar, at least for the time being.  The other metals are less interesting today.  As to oil (-1.9%), it has rallied despite alleged production increases from OPEC and weakening demand regarding economic activity.  Some part of this story doesn’t make any sense, although I don’t know which part yet.

This morning’s data brings Initial (exp 240K) and Continuing (1910K) Claims as well as PPI (0.2%, 2.6% Y/Y headline; 0.3%, 3.1% core).  While there are no Fed speakers, there is much prognostication as to how the CPI data is going to alter their DOT plot and SEP information next week at the Fed meeting.  

Finally, the situation in LA does not appear to have improved very much and it is spreading to other cities with substantial protests ostensibly planned for this weekend.  However, market participants have moved on as nothing there is going to change macroeconomic views, at least not yet.  If inflation is quiescent, the Fed doesn’t have to cut to have the tone of the conversation change.  That is what we are seeing this morning and this can continue quite easily.  When I altered my view on the strong dollar several months ago, I suggested a decline of 10% to 15% was quite viable.  Certainly, another 5% from here seems possible over the next several months absent a significant change in the inflation tone.

Good luck

Adf

PS – having grown up in the 60’s I was a huge Beach Boys fan and mourn, with so many others, the passing of Brian Wilson.  In fact, I wanted to write this morning’s rhyme as new lyrics to one of his songs, either “Fun, Fun, Fun” or “Surfin’ USA” two of my favorites.  But I realise that I have become too curmudgeonly as both of those are wonderfully upbeat and I just couldn’t get skeptical words to work.