Tag Archives: #CPI

Beguiled

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It turns out, inflation of late
Did not start to accelerate
Instead, it was mild
With doves now beguiled
But not yet declaring checkmate

The odds of a hike keep on sliding
But ere the Committee’s deciding
In two weeks, we’ll hear
Chair Warsh try to steer
The narrative with gentle (?) chiding

The fears over rising inflation have been allayed for the moment after yesterday’s CPI data was released right on expectations with monthly increases of 0.1% headline and 0.2% core and Y/Y results of 3.4% and 2.5% respectively.  For all those who have been pining for that rate hike ASAP, this was unwelcome news.  The below table from cmegroup.com shows how things have changed over the past month.

On July 13, markets were pricing a 75% probability of a hike in September with thoughts of a 50bp hike a reality.  This morning, the probability of that September rate hike has fallen to just 36%.  You may recall that I have been consistent in my views that there would be no rate hikes this year, and that continues to be my view.  If we look at the entire Fed funds futures curve, as per the next table, we now have one hike priced for December only, compared with two plus hikes several months ago.

This is not to say I believe that inflation is dead, just that it is not accelerating away.  As my friend The Inflation Guy points out in his piece on yesterday’s CPI, the data was boring, “Boring, right on expectations. The bad news is that it is boring and right on expectations…at 3%.”  This is still a far cry from the Fed’s self-defined 2% target, but fears of “Amerizuela” type outcomes are vastly overblown.  (However, you still want to protect you purchasing power and one effective way to do that is via USDi, the only inflation tracking cryptocurrency.)

Now, we still have a bunch more data before the next FOMC meeting, including today’s PPI, PCE at the end of the month and another NFP and CPI reading in September.  As well, we cannot forget that Chairman Warsh will have the opportunity to clarify his thinking at the Jackson Hole soiree on Friday morning, August 28th.

So, has anything really changed that much after the CPI report?  While the reality hasn’t shifted, it does appear that market participants are beginning to adjust their views a bit.  One number does not a trend make, nor will it have bolstered Warsh’s credibility, assuming that is in question, either.  This is a saga that will continue to play out over time.  It seems to me that if the Fed really wanted to fight inflation effectively, they would be digging much deeper into why they continue to hold >$1.9 trillion in MBS on their balance sheet and run an ample reserves framework.  Going back to scarce reserves allows the market to drive interest rates, something clearly on Chairman Warsh’s wish list.  But that will have to wait for the task force reports.

Ok, let’s see how markets other than Fed funds have responded to this news and data.  Since we are on the rates subject, let’s start there this morning with bonds which have seen yields slip -2bps in Treasuries and between -1bp and -3bps in Europe.  Oil prices (-2.1%) are slipping this morning so that appears to be the proximate cause of the yield move, a bit less concern over inflation.  Yesterday, after the CPI data, we also saw Treasury yields drop -2bps, so for now, fears of an imminent test of 5.0% on 10-year Treasuries seem overblown.  JGB yields, though, continue to creep higher, another 2bps overnight and are now just 3bps below their multi-decade high of 2.90% as per the chart below.

Source: tradingeconomics.com

Speaking of Japanese rates, Bloomberg has an article this morning explaining that the Takaichi administration is ok with the BOJ raising rates sooner, a change in the market’s perspective if not an outright change of view there.  Alas for those looking for a stronger yen and the end of the carry trade, the impact of the report was essentially nil as you can see in the chart below.  The three large, red candles just to the right of center represent the immediate aftermath of the release of the report.  Net, USDJPY is virtually unchanged on the day and the trend since the intervention remains for the dollar to move higher.  My sense is perceptions of Fed rate activity is going to have a bigger impact than the BOJ for now.

Source: tradingeconomics.com

As to the rest of the FX market, +/- 0.2% covers the gamut for both G10 and EMG blocs.  It wasn’t just the CPI report that was boring, so are FX markets overall.

Turning to equities, yesterday’s US market response was benign with only the NASDAQ showing much life, gaining 0.5%.  In Asia, though we did see Tokyo (+1.1%) rise despite talk of the BOJ being more aggressive.  Of course, the real price action remains in Korea (+3.6%), which is redefining what equity index volatility actually means.  Otherwise, there were some gainers (Taiwan, New Zealand, India) and more laggards (China, HK, Australia, Malaysia, Indonesia) but none of these moves topped 1% in either direction.  

European bourses, however, are feeling a bit better this morning led by Spain (+0.7%) and Germany (+0.5%) as earnings seem to be the driver here helping Spanish shares despite the tick higher in inflation there.  UK shares (-0.2%) are lagging after GDP and production data was on the disappointing side while the Trade Deficit expanded further.  And at this hour (7:30) US futures are little changed to slightly higher.

Finally, turning to commodities, oil’s decline seems to be attributable to the IEA reducing its global oil demand outlook (although they have been wrong about this for several years as they try to push a peak oil, transition to wind/solar narrative that is just not happening) as well as the fact that yesterday’s EIA data showed a 17+mm barrel build, a far cry from the slight draw expected and another blow to the tank bottoms story.  As to the precious metals, the luster is gone (Au -0.5%, Ag -0.6%, Cu -0.5%) although copper remains quite close to its all-time highs, and both gold and silver remain in short-term uptrends after seemingly having bottomed back in July.

On the data front, this morning brings the weekly Initial (exp 202K) and Continuing (1800K) Claims data along with PPI (0.2%, 4.9% Y/Y) and core PPI (0.3%, 4.2% Y/Y).  It strikes me that neither of these releases are going to be major market movers.

It is summer, and I assure you trading desk vacation schedules are far more important than secondary economic data releases.  I suspect another boring day overall here.  In fact, I suspect that until Warsh speaks in two weeks, we may see very little activity across most markets.

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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They Mostly Confuse

Posted on by 
We’re back to the Strait of Hormuz
As driver to all traders’ views
Both Trump and Iran
Have proffered a plan
But really, they mostly confuse

The, otherwise, story of note
Is coming as CPI’s quote
If hot, Chairman Warsh
Will field comments, harsh
If cool, he’ll be able to gloat

Oil prices (+1.5%) are higher again this morning and have now been up five consecutive sessions, rising 10% in that run as you can see in the chart below.

Source: tradingeconomics.com

There is a theory that the rhetoric in Iran increases when they have oil to sell so need higher prices, but once those cargoes have been sold, they talk peace again.  I don’t think you can rule out that hypothesis although I certainly have no corroborating evidence it’s true.  The one thing I did note yesterday is an Iranian comment that as long as sanctions remain, diplomacy cannot happen which tells me that economic sanctions are biting harder.  Whatever, the situation on the ground (or water) is over there, I have no insight per se. 

Much has been made over the fact that the SPR is at its lowest level since 1983 and has fallen below 300 million barrels with all the attendant pearl clutching while simply ignoring the fact that the SPR releases have been oil swaps with the back ends starting to come back in the next several months in greater amounts than have been released.  Maybe the end is nigh regarding oil, and the doomsters will get their $200/bbl outcome, but I would still take the under there.

In sync with the oil price rise we have seen yields rise, as well (see chart below), around the world.  But here, it appears that Chairman Warsh is the favored scapegoat for all the world’s inflation problems.  To hear his critics explain, if only he would give us forward guidance, everything would be fantastic.  Hedge funds could load up on leverage and increase their profits, real money investors would be comfortable that future real returns would be acceptable and, most importantly, the punditry would be able to explain all this to us plebes and burnish their beliefs in their own brilliance.

Source: tradingeconomics.com

But I wonder if there is not another explanation for rising yields that has nothing to do with the Fed, the idea that debt issuance, from both government and private sources, is growing dramatically and all that supply is weighing on prices, hence driving up yields.  We already know that governments around the world continue to issue debt willy-nilly, so there is nothing to discuss there.  But now the AI hyper scalers are issuing massive amounts of debt to pay for all the GPUs and data centers and power as the race to “win” in AI continues at an increasing pace.  

It is, of course, this last issue which has many pundits explaining that QE will soon reemerge as the only viable way for all that debt to get bought.  If central banks buy government debt that will leave funds for private investors to buy AI related debt.  And maybe that is the way it will work out although Chairman Warsh has thus far only discussed shrinking the balance sheet, not expanding it.

Please understand I am not ignoring the many serious problems that exist within the current fiscal and monetary frameworks around the world.  Government spending remains excessive as evidenced by the fact that virtually every nation in the world is running significant budget deficits as per the below table from tradingeconmics.com (notice China, a country that seems to get a pass on this score from the punditry).

All I am saying is that the idea that all of this is going to fall apart quickly is highly improbable.  As much as purists would like for there to be consequences for bad policy decisions, governments everywhere have an enormous number of tools to delay the pain, and they use them all the time.  Whether that is subsidies or tax cuts or regulations prohibiting competition, all these things substitute short-term gains for long-term problems.  But they will still be used regularly.

So, to recap, increasingly hawkish rhetoric on the Iran situation has driven oil prices higher which is increasing inflation concerns.  Adding to that is the ongoing fiscal profligacy of virtually every major government which is also weighing on bond prices and driving yields higher in sync.  And basically, the punditry has decided it’s all Kevin Warsh’s fault.  Too much will be made of tomorrow’s CPI report, whether it is hot or cool, that is the one things of which I am certain.

Ok, yesterday’s lackluster US session with all three major indices slipping a bit was followed by weakness in China (-0.8%) and HK (-1.1%) but elsewhere in Asia, things were mixed with Korea (+0.7%) gaining and the other regional bourses generally +/-0.5% or so.  Tokyo was closed for Mountain Day and the only other news of note from the region was the RBA left rates on hold at 4.35%, as expected, but expressed concerns about both slowing growth and future inflation.  Interestingly, Australian stocks were slightly higher despite that news, +0.2%.

In Europe, Spanish stocks (+0.5%) are the leader on the strength of Banco Santander’s share repurchase announcement while the rest of the continent and the UK are little changed.  As to US futures, at this hour (7:35) they are little changed.

While we have broadly discussed bond yields rising, and yesterday they were higher by 4bps-5bps in the US and Europe, this morning they are unchanged across the board.  Now, they were higher again this morning when I started to write, but it seems there was just a comment from Pakistan that the US and Iran are close to an agreement which has turned things around.  Oil prices, too have slipped back to unchanged on the day from an hour ago.

In the metals markets, gold (-0.2%) and silver (-0.9%) are backing off solid sessions yesterday and copper (+0.8%) continues to march higher.

Finally, the dollar is, net, little changed this morning, although we cannot ignore the fact that the yen fell -1.0% during yesterday’s session.  In fact, a look at the yen chart continues to show the market response to intervention, an immediate rally and a gradual decline resuming.

Source: tradingeconomics.com

As to the rest of the space, KRW (+0.3%) is the actual largest mover today, and that is not enough of a move to spin any story.  The DXY remains just below 100 and firmly within its yearlong trading range and some pundits are saying the fact that it is not rallying during the current conditions, with yields rising and fear all about, is an indication that the dollar is losing its status.  However, I am confident if you offered those same pundits payment in dollars, they would grab them as greedily as possible!

On the data front, this is inflation week plus a few more things as follows:

TodayExisting Home Sales4.05M
WednesdayCPI0.1% (3.4% Y/Y)
 Ex food & energy0.2% (2.5% y/Y)
ThursdayInitial Claims202K
 Continuing Claims1800K
 PPI0.2% (4.9% Y/Y)
 Ex food & energy0.3% (4.2% Y/Y)
FridayRetail Sales0.1%
 -ex autos0.2%
 Michigan Sentiment54.5

Source: tradingeconomics.com

Obviously, all eyes will be on CPI tomorrow as investors and analysts look for clues as to how the Fed may behave going forward.  Speaking of the Fed, Cleveland Fed president Hammack said in an interview yesterday that she thought the Fed needed to raise rates more than 25bps to get inflation under control.  But as I think about the Fed and its dual mandate, of maximum employment and stable prices, I cannot help but wonder what they consider maximum employment.  While they have defined stable prices (incorrectly in my view) as Core PCE rising 2.0% per annum, they have never tied themselves to a number on employment.  So, here’s a thought.  Look at the Labor Force participation rate, which as per the data last Friday fell to 61.4%, that is the lowest level since 1975 (excepting Covid) as per the below chart from FRED.

That hardly seems maximal, but then, I’m just an FX guy, not a Fed PhD.  After all, if we take the plain meaning of the word maximum, as per the American Heritage Dictionary, I cannot look at the chart above and conclude they have achieved that part of their mandate either.

But that’s just me.  Anyway, if there is going to be movement on the Iran story, that will drive the immediate market movements, but you can be sure that in the current environment, it will all come back to the Fed and whatever they may do going forward.

Good luck

Adf

Some Heartburn

Posted on by 
Chairman Warsh, to the House, testified
And explained that his tolerance died
For higher inflation
Throughout this great nation
And ‘bout this, he will not backslide

But prior to his starlike turn
Investors and markets did learn
That CPI fell,
Though not a death knell,
And caused, for rate hawks, some heartburn

It is better to remain silent and be thought a fool than to speak and remove all doubt. – Abraham Lincoln

The attributed saying above, while not certain that it was uttered by President Lincoln, still makes its point eloquently, as well as somewhat humorously.  And I strongly believe that every member of the FOMC should take it to heart before they speak.  In fact, they should be thanking Chairman Warsh for his efforts to shut them up, because then they won’t sound quite so foolish.

For instance, just Monday, Governor Waller, in a speech in New York, finished with the following line, “But I don’t take the inflationary signals I have discussed today lightly. If we get another hot reading on core inflation this week, then the FOMC will need to consider tightening monetary policy in the near term.”  Oops!

And this is one of the issues because many believe that the FOMC gets the data earlier than the release date and so have inside information.  Thus, when Waller talks about the risk of a hot print, many think he knows something.  And this is yet another reason that ending forward guidance and reducing the commentary of the FOMC will be valuable.  

By now, I am sure you are aware that yesterday’s CPI reading was the largest downside miss since Covid in 2020, with the headline number falling -0.4% on the month and the annual slipping back to 3.8% while the core number was flat with the annual falling to 2.6%.  Now, as the Inflation Guy explains, this was the product of numerous subcomponents declining, not just the price of oil/gasoline and this is not the venue to discuss them (read the link).  

But it certainly helped Chairman Warsh in the timing of his testimony as nobody there could ‘blame’ him for still rising prices, at least for now.  As expected, several House members tried to get interest rate information from him, but he remains firm that the Fed’s mission is to drive inflation lower and this will be done through both interest rate and balance sheet policy changes, not through forward guidance.

It is not surprising that the market responded dramatically with the following chart from Polymarket (taken from Kobeissi on X) showing an impressive change of heart.

While I use the Fed funds futures chart from the CME as my guidepost, there is something to be said for the wisdom of crowds here.  Remember, this is a binary call, not a gradient one.  But even the futures markets adjusted significantly, and rightly so, with the probability of a July hike there falling to 16% from 40% when I wrote yesterday morning.  As well, while there is still more than one rate hike priced for 2026, the calculated change has declined to 33bps from 43bps yesterday morning.

Source: cmegroup.com

Skepticism remains rife regarding Chairman Warsh and his attempt to change the way things are done at the Fed, but personally, I am quite optimistic that he is attacking the real problems.  Remember, the Fed is a 114-year-old institution with an extremely long memory and a staff that, like most of government, believes they know what is best for others.  I strongly subscribe to the monetarist view that printing more money leads to more inflation, but making a change that dramatic all at once is just not possible.  Let us be thankful that Chairman Warsh appears to have a better understanding and is working to change things.  And remember, he has only been in the Chair for two months, give him some time.

As I start to recap markets, it is quite interesting that the price of oil seems to have decoupled from the war in Iran.  I say this because as I type at 7:15, a bit more than an hour after CentCom explained they had instituted another wave of military attacks on Iran, WTI is largely indifferent to the news.  While it has edged higher by 0.7%, a look at the chart below of the past 24-hours shows essentially no response.

Source: tradingeconomics.com

So, let’s turn to equities, which rallied on the CPI data in the US yesterday and saw follow through in Asia with Tokyo (+1.5%), HK (+1.4%) and Korea (+6.25%) all having strong sessions as did almost every market in the region.  However, there was an exception, China (-0.2%) which while not disastrous, substantially lagged other markets.  Arguably, the proximate cause of that disappointment was the disappointing data released last night as per the below:

Source: tradingeconomics.com

Certainly, GDP at 4.3%, below even Xi’s reduced target must be concerning and Fixed Asset Investment (housing) continues to crumble.  It is very difficult to look at this data, as well as their monetary data which, for instance, shows loan growth not merely trending lower, but doing so at an accelerating rate as per the below chart and conclude things are going will there for the economy or the equity markets.

Source: tradingeconomics.com

Europe, though, continues to lag with all the major bourses lower as the DAX (-0.8%) leads the way followed by Spain (-0.6%) and then France and the UK both slipping -0.2%. (I guess World Cup results are not indicative of their equity markets!). As to US futures, at this hour (7:25) they are all up very slightly.

Bond yields fell yesterday, notably the 2yr slipping -6bps, while the 10yr only fell -3bps.  This morning, though, yields are edging back higher with Treasury yields up 2bps and European sovereign yields higher by between 3bps and 4bps.  While equity markets remain sanguine about Iran, it seems bond markets are having a tougher time.  JGB yields (-2bps) are bucking the trend as there are still those who are looking for Japanese pension funds to start bringing more money home.

While the metals markets rallied yesterday, this morning they are under pressure again with gold (-0.6%) and silver (-1.2%) giving back yesterday’s gains while copper (-0.3%) is consolidating after jumping a dime yesterday.

Finally, the dollar is sidelined this morning with no notably large movements in either the G10 or EMG blocs.  A brief word on the yen, which has certainly been the subject of much digital ink spillage lately, as it seems all those thoughts of the pension fund support for the yen are not part of the FX conversation.  We remain less than 50 pips from the peak seen back on June 30 and I see very little reason for the broader trajectory to change.  The BOJ is not going to waste its reserves in this process, and given the gradual movement, I don’t think they are that upset.  As long as PM Takaichi is planning to spend more money, whether on infrastructure or investment, given they are borrowing all of it, a strong yen seems highly improbable.

On the data front, this morning brings PPI (exp 6.2% headline, 5.2% core) and the Empire State Manufacturing Index (8.8) at 8:30.  Then, at 9:45 the BOC will most likely leave their base rate on hold at 2.25% and at 10:00, Chairman Warsh will testify to the Senate Banking Committee.  We also get the Fed’s Beige Book this afternoon, EIA oil inventories and three more Fed speakers, although with Warsh speaking, will anybody care?  Especially since they continue to make fools of themselves with their own forward guidance.

The most remarkable thing to me is how insouciant market participants have become despite increased hostilities in the Gulf.  But both oil and equity traders have seemingly decided that other things matter more.  With that in mind, it is hard to get excited about too much these days.  Unless we see markets breaking their recent ranges, in either direction, I suspect that the weight of summer, and reduced liquidity is going to prevent anything substantial from happening anytime soon.

Good luck

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The Score

Posted on by 
Hormuz is blockaded once more
The latest response in the war
So, crude prices rose
While both sides expose
Their relative views of the score

Now after a month of some peace
Seems tensions are set to increase
So, what about stocks?
The sales are in blocks
While buyers, few bids will release

After a brief respite for markets, where oil had seemed to be drifting out of the headlines, the events of the past weekend plus the US reimposition of the blockade of the Strait of Hormuz has changed the narrative dramatically, and rightly so.  The benign attitude of an eventual conclusion to this situation has been tossed aside and the oil bulls and war hawks are both back in the ascendancy.  Yesterday ultimately saw oil prices rise 9.4% and this morning they are a further 3.2% higher, and perhaps more importantly, back above the psychological level of $80/bbl.

Source: tradingeconomics.com

There doesn’t seem to be any short-term solution to this situation.  There are clearly enough hard-liners still with power in Iran to prevent any move toward a negotiated solution.  As long as this maintains, the outlook for oil will tilt higher.  However, as I have written before, and is very clear now, the effort to reroute oil shipments from the Gulf nations away from the Strait is intensifying and will continue to do so.  As well, alternative sources of supply including additional US production, Brazil, Argentina, Guyana, Venezuela and Canada are satisfying demand.  While uncertainty remains high, especially in the short run, by the end of next year, my take is less than 8% – 10% of the world’s oil will need to transit the Strait.  However, in the meantime, given that everybody who was long oil as the war initially ramped up has sold out, there are few sellers left to cap the price.  I imagine a move toward $90/bbl is quite possible in the next weeks.

As well as the story on crude
Two other themes will be pursued
First CPI’s print
Will offer a hint
Then Warsh will discuss why he’s screwed

If we turn our attention away from the oil market now, the two main events today are the CPI release at 8:30 this morning followed by Chairman Warsh testifying to the House Financial Services committee in his semi-annual trip to Congress.  Starting with CPI, expectations are for a decline from last month as headline (exp -0.1% M/M, 3.8% Y/Y) and core (0.2% M/M, 2.8% Y/Y) are due.  From what I can tell, there are a number of analysts who are calling for a relatively hotter number, although I’m not sure on what basis they believe that.  Certainly, oil prices, and energy prices across the board, declined significantly in June and that will be reflected in the reading.  Looking at the home price data, that doesn’t appear to have risen dramatically, and other commodity prices have also slipped.  I don’t’ rule out any outcome, but on the surface, expectations seem reasonable.  

Of course, with oil prices rising, talk of more rate hikes is all the rage and according to the Fed funds futures market, as per the below CME table, you can see that expectations have risen to a 40% probability of a hike this month and a two-thirds probability of two hikes before the end of the year.  My personal view, FWIW, remains that there will be no hikes this year, although with the resumption of hostilities in the Gulf, I think a cut is off the table as well.  Remember, too, that if oil prices remain elevated that will negatively impact economic activity, so hiking rates into that scenario doesn’t seem to make much sense.  But then, I’m not on the FOMC.

Now, I have long maintained that FOMC members should shut up, but it seems Mr Warsh will have a hard time getting them to do so.  I’m not sure if they think they are helping, or they are just enamored with their own voices.  But yesterday, Governor Waller spoke and explained that if the CPI data was hot, a rate hike would be an appropriate response.  And remember, we hear from another 7 or 8 of these folks just this week, four today!  

While I expect that Warsh’s testimony will be dry, and that most of the questioning will be either long-winded preening by some idiot member, or an attempt at a gotcha question, I am confident that Chairman Warsh will continue to avoid discussing his views of where policy should go and reiterate forcefully that the Fed’s goal is to reduce inflation, full stop.  I am also confident that he will not be dragged into any discussions of other issues like global warming or DEI and simply repeat that ending inflation is the only job he has.  We shall all find out shortly.

On to the markets.  It should be no surprise that equity markets were under pressure yesterday in the US with the jump in oil prices.  This added to the chorus of those who believe the AI bubble is popping as the NASDAQ led the way lower, falling -1.5%.  But a funny thing happened in Asia.  Despite the jump in oil prices and declines in US equity markets, Tokyo (+0.75%), HK (+0.5%) and China (+2.15%) all rallied nicely last night.  In fact, so did Korea (+0.7%) and Malaysia (+1.3%) although we did see declines in India (-0.7%) and Taiwan (-1.4%) with the rest of the region moving far less.  This is a surprising outcome to me, especially as Asia is the region most negatively impacted by rising oil prices.

Europe though is trading true to form with declines across the board ranging from Spain (-1.1%) to the UK (-0.4%) and everywhere in between.  There has been precious little data overnight to drive things, and this appears to be entirely oil related.  Of course, Europe’s suicidal energy policy, notably the UK’s ban on drilling for oil in the North Sea, remains one of the key reasons that the area will continue to struggle.  As to US futures, this morning DJIA futures are lower (-0.8%) but the other two major markets are little changed at this hour (7:25).

In the bond market, 10-year Treasury yields jumped 6bps yesterday although are little changed this morning.  However, as you can see from the chart below, they are pushing back up toward the highs seen in late May.

Source: tradingeconomics.com

There is a lot of talk about how Warsh should hike rates aggressively this month to gain bond market credibility in his fight against inflation, but I sense that is a lot of people talking their books.  I continue to believe that there will be no Fed action ahead of task force reports.  As to other nations, yields are generally firmer in Europe today, ranging between +1bp (Germany) and +3bps (Italy) with the UK worst of all (+4bps) as 10-year Gilts now yield more than 5.0% again, also pushing back to late-May highs.  The one exception is Japan (JGBs -5bps) where the latest ploy by Katayama-san is to propose JGBs be allowed to be invested in tax-free accounts for individuals in Japan.  Given the long history of zero rates there, a tax-free return of 2.7% with no currency risk could well be quite attractive, I think.

In the metals markets, it is no surprise that both gold and silver fell yesterday with the jump in oil prices, but despite oil’s continued rally this morning, both gold (+0.7%) and silver (+0.7%) are finding support, with gold seeming to hold the $4000/oz level for now.  Copper (+1.6%) is also holding up well, but its relation to the precious sector seems to be waning.  Perhaps the precious metals story is less about oil and more about the dollar.

Turning to the dollar, yesterday it put in a strong performance with the DXY rallying about 0.3% from Friday’s closing levels as you can see in the chart below.

Source: tradingeconomics.com

However, as you can also see in the chart, this morning the greenback is under pressure despite the rise in oil prices and yesterday’s increase in yields.  The biggest outlier is NZD (+0.9%) as the RBNZ continues to make hawkish statements about the need for further rate hikes.  And of course, NOK (+0.7%) is benefitting from the oil price rise.  But the rest of the G10 are all firmer, and so is most of the EMG bloc with only INR (-0.5%) standing out as underperforming.  That story appears to be based on higher oil prices and concerns, or thoughts at least, that the RBI will not be aggressively hiking rates to protect the rupee.  Otherwise, most currencies have moved higher vs. the dollar on the order of +0.15% to +0.25%.

And that’s really it today with CPI the only data release other than the already released NFIB Small Business Optimism index (97.4, exp 95.8), but that predates the change in the Gulf.  Chairman Warsh has his work cut out for him to get his colleagues to shut up.  I wonder if he can fine them if they speak.

We are in a narrative transition right now, but longer term, I remain bullish the US and the dollar.  

Good luck

Adf

Frankly, Outré

Posted on by 
The rate of inflation expanded
Though core came out more evenhanded
The war in Iran
Ain’t going to plan
But oil’s not over demanded

However, the story today
Is SpaceX shares soon on their way
To stock market listing
Though some are insisting
Its value is, frankly, outré

It’s a funny thing lately, there has been quite a bit of market activity, but the narrative storylines are changing so quickly that they don’t seem to have a real impact.  So, every day there is some new thesis as to why prices are behaving in whatever manner they are.  It is almost as if the market is trying on different stories to see which one fits best.

As I am wont to do, I always like to step back and take a longer-term view on things as regardless of the daily wiggles, my experience is that those very big picture issues are what drive markets over time.  So, let’s review what I see as the key long-term drivers;

  • FX – ultimately, the combination of monetary and fiscal policies is critical in this space with a good rule of thumb being tight monetary and loose fiscal policy strengthen a currency while the opposite settings tend to weaken them.  When both policies are on the same setting, it is far less clear, although I would err on the side of monetary policy being the driver.  Key to this is that monetary policy tends to drive short-term flows.
  • Equities – earnings are still the ultimate issue here as, remember, shares represent ownership in a company (although the recent gamification of markets has certainly obscured that view).  Too, equities tend to be forward-looking, anticipating how future earnings are going to evolve.  The biggest change in this space has been the steady growth of passive investing, though, which represents more than 50% of the market now.  Passive investing simply means that as money flows into funds, like 401K’s, the funds buy stocks with the S&P 500 the most popular destination regardless of earnings and prospects.  So, flows are the other critical issue, just like in FX.
  • Bonds – despite much recent angst, Treasuries remain a haven asset and benefit from that status.  However, especially as you move out the maturity ladder, inflation expectations are the primary driver in an unencumbered market.  While much hay has been made regarding the extraordinary size of the US outstanding debt, now approaching $40 trillion, I do not believe we have reached a point where anyone believes they will not get their money back, albeit money that has been devalued by inflation.
  • Commodities – this is the space where supply and demand remain paramount, and really, it’s current supply and demand.  As such, the fact that oil is back below $90/bbl this morning tells us that a combination of increased non-OPEC supply plus some measure of demand destruction has found a new equilibrium level.  This remains far below the levels anticipated by many after the closure of the Strait of Hormuz, and there are still many analysts calling for a sharp move higher when all the mitigating factors that have prevented a much bigger move run out. This morning, Javier Blas at Bloomberg had an excellent piece describing his view of why oil prices aren’t higher despite the war.

Every narrative is an attempt to either describe or hide the longer-term issue, with much more hiding than describing in my experience.  But I stand by these concepts.

Which takes us to today’s narratives.  CPI yesterday was largely as expected, actually the core number at 0.2% M/M came in a bit light, but that stopped mattering about 2 minutes after the release.  Inflation has become a favorite subject about which to bitch, but very few do anything about it.  (if you want to do something, go to www.usdicoin.com and you can buy some USDi which is a fully backed inflation tracking cryptocurrency).  

There was a short resumption of military activity in the Gulf after a US helicopter was shot down by Iran and the US retaliated.  Frankly, I didn’t even read the details as they just don’t matter to the big picture.  It is unclear whether negotiations are ongoing, but the stalemate continues.

And finally, the truly big story, the SpaceX IPO this evening.  It is the one thing that has the most tongues wagging in the markets and if you read X, it appears there are many more analysts who believe the price is absurdly high than that it represents value.  I have no opinion on the deal but anecdotally, I did speak with someone last evening who just put money into a Fidelity VC fund that has stakes in all the big names (SpaceX, Anthropic, OpenAI) and a 10-year lockup and is very excited.  

So that’s where I see things this morning.  Yesterday’s US equity declines were followed by more weakness (China, HK, India, Australia, New Zealand) than strength (Korea, Singapore) in Asia.  Tokyo was essentially unchanged.  However, in Europe this morning things are much brighter with solid gains across the board.  US futures, too, are higher this morning by about 0.7% across the board as I type at 7:15.

In the bond market, yields have edged back down with Treasuries (-3bps) leading the way and European sovereigns right there with them.  Whatever longer term concerns about inflation exist are not showing up aggressively at this point.

In the commodity markets, oil (-1.1%) continues to underperform all the calls for catastrophe and another anecdote, I saw diesel below $5.00/gallon yesterday for the first time in several months.  Products are available.  As to the metals, they are uniformly hated although this morning both gold (+0.4%) and silver (+0.6%) have edged a touch higher.  However, the trend here in gold (and silver) is clearly back down for now. 

Source: tradingeconomics.com

Nothing has changed my longer-term concerns over fiat debasement, but for now, gold is not the play.

Finally, the dollar is somnolent this morning, with the euro, pound and yen all basically unchanged but sticking near recent dollar highs.  No matter how I slice it, I cannot come up with a significant dollar down story despite many having that view.  The US economy, by most measures, continues to drive global growth and I suspect that will remain the case for a while yet.

On the data front, this morning brings the weekly Initial (exp 219K) and Continuing (1780K) Claims data as well as PPI (0.7% M/M, 6.4% Y/Y) and core (0.5% M/M, 5.4% Y/Y).  We also hear from the ECB shortly, with a near universal belief that they will be hiking 25bps in order to drill for more oil push back against the recent energy induced price rises.  The beginnings of a major error in my view.

And that’s really it.  It has been getting more difficult to find interesting things to discuss, that’s for sure, and as we head deeper into the summer, the doldrums have a history of keeping things dull.

Good luck

Adf

Stoke Some More Fear

Posted on by 
The word of the day is inflation
As data from many a nation
Appears, still, to show
It has room to grow
With fears this is no aberration

But are things as bad as we hear
From media outlets who cheer
More pain, as they make
Their case Trump will break
The nation, and stoke some more fear

It’s CPI day here in the US and similarly, we got readings from various nations around the world overnight.  To level set, expectations for this morning’s numbers are:

  • Headline – 0.5% M/M, 4.2% Y/Y
  • Core – 0.3% M/M, 2.9% Y/Y

On an annual basis, as you can see in the below chart from tradingeconomics.com, 4.2%, while much higher than some recent data and much higher than we would like, was seen as recently as April 2023 during the “transitory” phase from the Covid years.

And don’t get me wrong, I am as sensitive to inflation as all of you as I go to the supermarket or Costco and see prices and fill up my car’s gas tank as well.  In fact, speaking of gasoline, there is no question it is much higher than it was prior to the beginning of the Iran conflict.  Looking at the chart I drew from FRED data below shows that, nominally, it is back at levels from the immediate aftermath of Russia’s invasion of Ukraine in 2022.  But look at the other line on the chart, that is the price of a gallon of unleaded adjusted for CPI starting back in 1990.  It is remarkable that the latest reading, while still obviously higher than a few months ago, is just $1.635/gallon in real terms.

Somebody else pointed out that gasoline is one of the few things that seems rarely to be described in real terms, arguably because it hasn’t really risen all that much over time and those who describe things in real terms are frequently trying to make the point that inflation is far too high.  Arguably, though, this is further proof of famed economist Julian Simon’s thesis that commodity prices all head lower over time as the ability to produce them in abundance, and their relative abundance in the earth, drive those prices lower.

As to elsewhere in the world, last night China reported that CPI (blue bars) remained at 1.2% but PPI, which may be a better indication of price activity there, rose to 3.9%.  This implies that Chinese corporate profits are under increasing pressure.  It also represents a sea change in China as can be seen in the below chart where PPI (grey bars) was negative for the 3 years prior to April.  

Source: tradingeconomics.com

As with all inflation analysis, the real question is who absorbs the price pressures.  In the US, the recent experience from Covid, when the government helicoptered $5 trillion into the economy so people had money to spend, businesses raised prices and continue to believe they can do so.  Apparently in China, that is not the case.  To finish the discussion, below is a chart of 17 of the G20 nations and their most recent headline CPI readings (I left out Argentina, Turkey and Russia as I couldn’t fit them all on the screenshot).  Interestingly, only 11 of these 17 nations have seen CPI rise in the past month.  I wonder, is inflation the global phenomenon that some make it out to be.

Country Last. Previous Date

Ok enough on that.  Let’s move on to market activity.  For the past several days, the oil story did not seem quite as important as despite a few random missiles being fired, it appeared that the Iran conflict was quieting down.  This allowed the focus to turn to important things like AI and the SpaceX IPO coming tomorrow after the close.  For example, when I sat down this morning around 5:00, oil was around $87.50/bbl and had slipped slightly lower compared to yesterday’s close.  However, in the interim, President Trump tweeted out the following:

But despite these comments, while oil has jumped as per the below chart, it is just barely at $90/bbl, hardly a sign the market believes something dramatic is on its way.

Source: tradingeconomics.com

In the meantime, there continue to be multiple articles that we are heading to the cliff for oil inventories and prices will skyrocket soon.  You know my opinion on those as I take the market’s side things are not as dire as some believe.

But if things heat up in Iran and the Gulf, I expect that we will see a downdraft in equities and bonds while the dollar moves higher.  And that is what we are currently seeing.  Below is a screenshot of equity futures markets as of 7:45 this morning.

source: tradingeconomics.com

Not a lot of happy faces there.  As well, overnight saw weakness throughout most of Asia after yesterday’s modest US declines.

In the bond market, Treasury yields are backing up 3bps and European sovereign yields are also higher this morning, between 3bps and 5bps across the entire continent.  So despite my statements above that inflation may not be as big a deal as some explain, bond investors are at least a bit uncomfortable this morning.

As to the metals markets, that break below the 200-day moving average in gold is seeing real follow through as old long positions and new short momentum plays pile on with the barbarous relic (-2.5%) tumbling as well as silver (-1.9%) and copper (-1.2%).  The key here is that whatever the short-term price action is, I think the one unalloyed truth is that fiat currencies will continue to get printed like there is no tomorrow and precious metals will regain their form.  But it could take a while.  In that vein, there was a Bloomberg article this morning explaining that more government bonds have been sold at this point in the year, ~$504 billion, than the first half of 2020 with Covid.  If my short-term inflation thesis is wrong, this is the reason why.

Finally, the dollar has edged higher this morning but is generally little changed.  The noteworthy thing is that USDJPY is at 160.50, above the supposed line-in-the-sand for the MOF, but as you can see from the below chart, the movement has been extremely gradual, with very little volatility.  Remember, one of the things the MOF focuses on is that volatility, so if the dollar continues to creep higher, they are likely to hold off for a while before feeling the need to intervene.

Source: tradingeconomics.com

But otherwise, most currency movement has been modest overnight.

Aside from CPI, and the oil inventory data, we do hear from the Bank of Canada, which is likely to leave policy rates on hold.

It feels like the market is getting increasingly concerned over an uptick in activities in the Gulf, which will have a negative impact on financial assets but support the dollar.  We shall see.

Good luck

Adf

The Narrative Shatter(ed)

Posted on by 
For months data just did not matter
Twas oil that drove all the chatter
But Friday that changed
As NFP ranged
So high that the narrative shatter(ed)

Now suddenly, eyes have all turned
To data, with many concerned
Their previous views
Will naught but confuse
All efforts, more cash, to be earned

Since the Iran conflict began on the 1st of March, pretty much the only key variable in financial markets has been the price of oil.  As you can see in the chart below, the price gapped higher that Monday morning and has been the major topic of conversation ever since.

Source: tradingeconomics.com

There continues to be a large contingent of analysts who, once the Strait of Hormuz was closed, have been calling for a substantial rise in the price of the stuff, but here we are this morning, back below $90/bbl and lower by -2.3% on the day.  Stories about declining reserves, floating reserves, demand destruction and new production are all available on any given day, and all certainly have facts to support them.  But the big picture, at least so far, has been that the market has found a clearing price between the release of strategic reserves and some amount of demand destruction, which has kept prices in check.

The greatest irony to me is that all the discussion regarding the long-term damage high oil prices are going to inflict on the economy seems to ignore the cardinal rule of commodities; the cure for high prices is high prices.  Last week I highlighted comments from an Exxon SVP about the coming crisis.  If that is Exxon’s corporate belief, they will be drilling like there is no tomorrow as their costs are far below current price levels, let alone the mooted rise to $150/bbl.  However, if we look at the one source of data that discusses drilling, the Baker Hughes oil rig count, you can see in the below chart that while it is a few rigs off its recent lows, there is still limited oil industry belief that the price is going to remain this high for any extended length of time.

Source: tradingeconomics.com

I think what last Friday’s very surprising employment report has done is to change some of the thinking of investors, turning their attention from exclusively oil to the rest of the economy and, now that we are 3+ months into this adventure, to how the rest of the economy is behaving.

This brings us to the two key pieces of information that are upcoming in the US, tomorrow’s CPI report and then next Wednesday’s FOMC meeting.  But it also has market participants going back to their more regular processes with discussion of market technicals, earnings, and global policy decisions.  So, let’s look in those areas this morning.

On the policy front, a few things happened overnight.  First, Bank Indonesia raised their base rate 25bps, to 5.50%, in an emergency meeting as the rupiah continues to decline to record lows, although in the wake of the rate hike, it rebounded some 0.8% as per the below chart.  Another data point is the fact that their FX reserves have fallen by >$1 billion in the past month indicating that they are actively intervening to prevent a further decline.  Too, this comes after a 50bp hike just two weeks ago.

Source: tradingeconomics.com

Elsewhere on the central bank front, Nikkei news reported that the BOJ will be raising its base rate by 25bps, to 1.00%, the highest level since 1995, when it meets next Monday night (recall, Nikkei has a perfect track record when calling these moves).  This has been widely expected in the market, and so there was no reaction in the FX market, although with USDJPY hovering just above 160.15 this morning, I imagine there is a bit of nervousness at the Ministry of Finance there.  Interestingly, the word from Nikkei is also that they may end the tapering of the balance sheet next year, which certainly detracts from the hawkishness of the rate move.

Moving on to data, the noteworthy datapoint overnight was the Chinese Trade Balance ($105.4B), which while somewhat larger than expected is right in line with recent activity as per the below chart.  It seems that demand for semiconductors has been significant and while trade with the US continues to remain moderate, the rest of the world is getting inundated with Chinese stuff.

Source: tradingeconomics.com

The one other major topic of conversation is the SpaceX IPO set for Thursday and the fact that OpenAI filed to go public as well.  I expect that those discussions are going to be a large part of the equity market narrative for a while yet, but that is well outside the purview of this note.

So, let’s look at market behavior and then see what is on tap for the week data wise.  Friday’s equity declines in the US were like a bad dream, they felt terrible but now it seems everybody has awakened and the world did not end.  Yesterday saw a steady climb from opening lows all day with the NASDAQ closing higher by +0.9%.  The upshot is that Asian markets broadly followed that movement with Japan (+2.2%), China (+1.9%), Korea (+8.2%!), Taiwan (+2.8%) and Indonesia (+7.6%!) all shaking off fears and rebounding sharply.  While HK (-0.4%) and Australia (-0.2%) both lagged, the other regional markets were broadly positive.  I continue to be amazed at the idea that Asia is in the worst energy shape and yet its equity markets are screaming higher.

In Europe, there is also a positive vibe with Spain (+1.2%), France (+0.9%) and Germany (+0.7%) all having solid sessions.  In fact, only the UK (-0.2%) is lagging this morning and not based on any data, but it seems more like some idiosyncratic stories regarding pharma companies there.  As to US futures, at this hour (7:20), they are firmer by 0.5% or so across the board.

In the bond market, yields, which have been moving higher for the past week, have backed off a bit with Treasury yields down -2bps while European sovereign yields have also slipped, mostly by -1bp or -2bps.  Last night, JGB yields (-4bps) fell after the story about the rate hike.  Perhaps investors believe Ueda-san is going to be more hawkish.  But it seems they missed the story about ending QT.

In the commodity space, with oil lower, as discussed above, it is no surprise that gold (+0.5%), silver (+0.6%) and copper (+1.7%) are all higher.  In the gold market, much has been made of the fact that technically, gold closed below its 200-day moving average Friday and has stayed there so far.  If this continues, it will be seen as a negative medium-term signal.  (my chart is showing the 40-week as I cannot get a long-term chart of the 200-day, but it is essentially the same thing.)

Source: tradingeconomics.com

Finally, in the currency markets, the dollar has backed off its recent highs this morning with the DXY (-0.3%) back below 100 and its decline a pretty good proxy for most of the G10 currency’s movements.  This is in no way a rout, but a correction after a strong move higher over the past month as you can see in the below chart.

Source: tradingeconomics.com

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

TodayTrade Balance-$56.1B
 Existing Home Sales4.07M
WednesdayCPI0.5% (4.2.% Y/Y)
 Ex-food & energy0.3% (2.9% Y/Y)
ThursdayInitial Claims219K
 Continuing Claims1780K
 PPI0.7% (6.4% Y/Y)
 Ex-food & energy0.4$ (5.3% Y/Y)
FridayMichigan Sentiment46.0

Source: tradingeconomics.com

So, all eyes will be on CPI tomorrow as Fed speakers are now in their quiet period ahead of next week’s meeting.  Certainly, there is very little I have seen that is going to moderate inflation in the near term, but perhaps, if we do see an end to the Iran conflict, that will remove a key price support, although I imagine it will take time to feed through.  But inflation is highly dependent on how much money is around, and that is what makes the FOMC next week so critical.  Until then, it feels like a limited price action day today as we all await CPI tomorrow.

Good luck

Adf

His Denouement

Posted on by 
In England and Scotland and Wales
Without getting into details
The PM has lost
Support, and will be tossed
But Labour, so far’s, moved like snails

Until the time comes when he’s gone
And Keir reaches his denouement
Both gilts and the pound
Will fall toward the ground
But they’ve no one to settle on

While the stalemate in the Gulf continues, although there is clearly less optimism that things are going to end quickly according to the oil market (+3.0% and back to $101/bbl), there are a few other things that are ongoing in the world that are impacting markets.  This morning, the most obvious is in the UK, where PM Keir Starmer, he of the <20% approval rating, is seeing his grip on power slip away, but like most politicians, he will hold on as tightly as possible for as long as possible regardless of the negative impact that has on his constituency, which in this case is the entire nation.

For instance, a quick look at the gilt market shows that yields there, this morning, have jumped 12bps in the 10-year, up to their highest level, at 5.11%, since April 2008, as per the below chart from marketwatch.com.

Perhaps, of more concern for the UK Treasury and the BOE is the fact that the spread between US Treasuries and UK Gilts has jumped 9bps this morning and, at 67bps, is now pushing back toward its upper quartile, also not seen since 2008 as per the below chart from worldgovernmentbonds.com.

The pound (-0.5%) is faring no better this morning, lagging the rest of the G10 while UK stocks suffer alongside with the FTSE 100 (-0.6%) adding to the overall pressure on Starmer. 

Now, in fairness to poor Keir, he has failed in essentially every aspect of government, notably as to his promises when elected, so this cannot be a surprise.  The question becomes; how much longer will he try to fight this very clear outcome to the detriment of his nation?  From a fiscal perspective, I imagine he will be seeking to offer money to specific constituencies in an effort to buy more time, but my take is the die is cast here.  For now, I expect UK assets and the pound are going to underperform and likely will until he is gone, regardless of his replacement.

However, aside from the war in Iran, where there is nothing new of note today, the next biggest stories are that President Trump is on his way to Beijing to meet with President Xi and this morning’s CPI report.  Since I can offer nothing of note on the summit meeting, let’s turn to inflation.

Expectations this morning are for the headline number to print 0.6% M/M and 3.7% Y/Y while the core (ex-food & energy) number is expected at 0.3% M/M and 2.7% Y/Y.  Below is a chart showing headline CPI for the past 10 years, which I believe is informative of the national mood.  In it, you can see both the annual rate of inflation (the red line, RH axis) and the steady growth of the underlying CPI index published by the BLS (blue bars, LH axis).  To get the full sense of things, though, make sure you look at the index level on the left, which has grown, in aggregate, 38.7% over the past 10 years.  It is this feature which drives the nation’s unhappiness with prices, I would contend, not the monthly data, but the cumulative nature of the problem.

Data: Fred, graphics: @fx_poet

All of us remember the peak inflation in the immediate post-Covid years.  In addition, I’m sure we all remember the government shutdown and the missing data point because of the inability to collect data and the known assumption that if data were not collected, it would be assumed to be 0.0%.  Well, not only is the Iran war having a direct impact on inflation, but that missing data is starting to leave the calculations, so the red line is going to continue to head higher.  I must admit, that if I were to guess how things arise this morning, I would suspect the estimates to be on the low side, but we shall see in a few hours.  The question here is; will the markets respond to this or are they focused on other issues?  I also suspect that this depends on the outcome.  If CPI is higher than forecast, it does not bode well for Treasury prices, nor likely stocks.  But, if it is softer than forecast, I would look for the equity rally to continue.

Ok, let’s see how markets are behaving as we await the data.  Yesterday’s nondescript and modest US rally was followed by a lot of nondescript trading in Asia (Tokyo +0.5%, HK -0.2%, China -0.1%), although both Korea (-2.3%) and India (-1.9%) had a bit more action with the former seeming a reaction to its recent moonshot rise while the latter continues to try to deal with a steadily weakening currency and the government’s efforts to address that without raising interest rates.  Otherwise, in the region there were both winners and laggards but nothing else noteworthy.

In Europe, though, red is the only color I see with the DAX (-1.1%) leading the way down despite a better than expected, although still negative, ZEW report of -10.7.  But Spain (-0.9%), Italy (-0.8%) and France (-0.6%) are all under pressure with only Norway (+0.6%) showing any life as its energy-centric market performs well with oil prices back up again this morning.  As to US futures, they, too, are red with the NASDAQ (-1.1%) the worst of them at this hour (7:10).

We’ve already discussed Gilt yields but yields around the world are higher this morning with US Treasuries (+2bps) adding to yesterday’s 5bp rise.  In Europe, and in Japan, yields are higher by 4bps to 5bps across the board.  This appears to be a combination of concerns over both increased supply as nations spend more than they tax and rising inflation.  It’s a pretty toxic combination for bonds.

Yesterday was a bit of an anomaly in the precious metals markets as despite the rise in oil prices we saw, gold, silver and copper all rally as well.  Recently, we would have expected the metals to trade lower in that circumstance.  And this morning, with oil (+3.0%) higher again, they are with gold (-0.9%) and silver (-3.3%) both under pressure although copper (+0.4%) continues to rise to new records.  It turns out, the electrification of everything, and the massive power requirements for data centers along with rebuilding aging electricity grid infrastructure will require a lot of copper, likely more than will be mined at the current prices.  It feels like this chart will continue to go higher.

Source: tradingeconomics.com

Finally, the dollar is back in form this morning against virtually all its counterparts in both the G10 and EMG blocs.  In fact, it is easier to discuss the outliers which are NOK (+0.3%) and BRL (+0.4%) both benefitting from rising oil prices (as is the dollar!) while the rest of the world collectively suffers.  The DXY (+0.35%) continues to ignore all the calls for its collapse and today’s weakest performers are KRW (-1.0%) and ZAR (-0.6%).  The latter continues to be buffeted by the combination of higher oil and lower gold prices, although remains well above the lows (below dollar highs) seen at the beginning of the war that started this price action as per the below chart.

Source: tradingeconomics.com

KRW, though, is a bit more confusing to me as while weakness overnight alongside the KOSPI, makes sense, it has, in truth, performed terribly compared to the KOSPI’s remarkable rally.  It would have made a great deal of sense to see significant foreign inflows to the won as investors jumped on that bandwagon, but I guess not.

There is nothing other than the CPI data released in the US this morning so that will be the driver for now.  I would be remiss if I didn’t highlight, again, that the best way to manage inflation risk for us all is to own USDi, the fully backed, inflation-tracking cryptocurrency that is returning 12.588% annualized this month and depending on the exact CPI print this morning, set to return something on the order of 8% or so in June.  Remember, Treasury bills return 3.6% annualized, so this is a way to keep up with prices.  Check out www.usdicoin.com for more information and the ability to mint your own!

Good luck

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Massive Divides

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: tradingeconomics.com

Here are this week’s offerings:

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

Source: tradingeconomics.com

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

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

Good luck

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