Tag Archives: #CPI

His Denouement

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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

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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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Checkmate

Posted on by 
The talks twixt the States and Iran
Collapsed like a climate straw man
Now there’s a blockade
In Hormuz, arrayed
As Trump pivots to a new plan

The first move in oil was higher
But I would beware as a buyer
If Trump rules the Strait
That could be checkmate
And force a much longer cease fire

As of 8:00pm last night, after the peace talks fell apart in Islamabad and President Trump announced the US would be blockading the Strait of Hormuz so no ships carrying oil, especially Iranian oil, would be able to pass the blockade, the price of oil spiked immediately as the futures markets opened.  You can see the last week’s roller coaster in the below chart from tradingeconomics.com

The question that needs to be answered at this point is, is there a substantive difference between the US blocking traffic in the Strait and Iran doing so?  I would contend there is a huge difference, especially if you are China.  But also, if you are Iran.  After all, you just lost your trump card (pun intended) and not only that, if Iranian oil is not able to be sold, then Iran runs out of money pretty quickly.  Remember, oil revenues represent approximately 90% of Iranian total revenues.  How long can the IRGC last with no money to pay their soldiers?

In the meantime, the Saudis are pumping 7 mm bpd across the East-West pipeline now, and the UAE is pumping 1.5 mm bpd to Fujairah, taking a decent sized bite out of the missing barrels.  I read this morning that upwards of 7mm bpd are now exiting the gulf via pipeline reducing the overall reduction in oil flow.  Granted, it is still a huge disruption but shrinking.  On top of that, if this continues, the Strait loses its strategic importance, which cements Iran’s loss of power.  In the short-run, oil prices can go in either direction in my view, but this has the opportunity to completely emasculate Iran’s ability to have an impact on the global oil markets in the future.  

And I would not be surprised if President Xi is burning up the lines to Washington because he just lost a key source of cheap oil, and oil he paid for in CNY.  (see WSJ chart below.)

There are many twists and turns here, and I’m sure there will be more.  But as of Sunday night, from what I have read, Iran is in a much worse position than they were on Friday.  Of course, things could all go pear-shaped from here, and this could turn out to be a complete failure.  Our goal here is to try to track how markets will evolve.

The remarkable thing, still, to me is that equity markets remain so blithe about the entire situation.  I make this claim based on the VIX Index, which remains relatively docile despite everything that is happening in Iran and the likely eventual knock-on effects.  But look at the chart of the VIX below which shows that markets are nowhere near as stressed as they have been in the past and are actually much nearer their long-term average. (The two spikes are the JPY intervention in August 2024, which lasted for just a few hours, and then the Liberation Day tariffs in April 2025 which quickly reversed as well.  

Source: tradingeconomics.com

It is worth noting that even the oil VIX, is off its highs and, while somewhat elevated, not running away.

Source: finace.yahoo.com

The thing about the VIX indices to remember, though, is that options decay and holding them is a losing proposition if the underlying market is not moving.  So, to maintain a high VIX, we need to see significant intraday as well as day-to-day price movement.

As Iran remains the major storyline for markets, let’s take a look at how things are behaving this morning.  Oil (+8.2%) has maintained its initial gains but not moved since last night.  NatGas (+1.7% in US, +9.0% in Europe) has also been impacted as there is no movement of LNG tankers through the Strait either.  Interestingly, both gold (-0.6%) and silver (-1.7%) while lower are well off the lows seen in the early overnight session as per the below chart of silver.

Source: tradingeconomics.com

I reiterate that the market perception of the current situation has not nearly matched the hysteria evident in much of the commentary.  I’m not sure whether to attribute that to market insight or market ignorance at this point, although I lean toward the former.  The problem with commentary these days is that hysterical takes generate clicks, and that is the goal of many commentators.

Turning to equity markets, Asian markets were generally, though not universally, lower.  Tokyo (-0.7%), HK (-0.9%), Korea (-0.9%) and India (-0.9%) all suffered on the breakdown in talks and the new blockade news.  New Zealand (-1.2%) was the worst performer, largely because their energy situation is deteriorating more quickly than anyone else’s.  But China (+0.2%), Taiwan (+0.1%) and Indonesia (+0.6%) all managed some gains despite the news.  Again, markets appear to be pricing a fairly benign outcome here.  Either the news is going to get better soon, or there is going to be a massive rerating of equity markets.  Something’s gotta give.

In Europe, things are a bit worse overall with Spain (-1.4%) leading the way lower although Germany (-1.0%), France (-0.9%) and Italy (-0.8%) are all under real pressure as well.  There has been a lot more press lately about how Spain’s PM Sanchez is cozying up to China as he seems to be pulling Spain away from the EU in several areas.  Of course, he is an avowed socialist, so perhaps this should not be that surprising.  However, this is further proof that NATO is surely going to die soon.

One market that has outperformed, though is Hungary (+2.8%) which is rallying sharply on the weekend’s election results that sent President Victor Orban into retirement.  Certainly, most others in Europe are thrilled as Orban had been a thorn in the side of the EU with respect to their Russia stance, but the economy there has been underperforming so new leadership is widely lauded, for now.  The forint (+1.9%) also benefitted from the election outcome.  

As to US futures, as I type at 7:00, the major indices are lower by -0.3% or so, well off the initial levels seen last night that were as much as -1.4% below Friday’s closing levels.  Again, markets remain sanguine over the weekend changes to the story.

In the bond market, Treasury yields have edged higher by 1bp and in Europe, we are seeing rises of between 1bp and 3bps across the board.  Here, too, it is hard to find panic in the streets.  JGB yields (+2bps) have made a new high for the move and continue to edge higher as concerns over the path of inflation rise given the oil price rise.  Last night, BOJ Governor Ueda gave a speech (actually his deputy did because he is in Washington for the IMF/World Bank meetings) and tried to quash the view that the BOJ was definitely going to hike rates at the end of this month, an outcome that had been priced at a 65% probability prior to his speech as you can see from the Bloomberg chart below.

Finally, in the FX market, other than HUF as described above, and NOK (+0.6%) responding to the oil move the dollar is firmer across the board.  However, the movement is not too large, generally on the order of 0.2% or so across the G10 and perhaps a bit more in the EMG bloc.  The worst performer today is ZAR (-0.8%) which is suffering the dual problems of a lower gold and higher oil price.  The other noteworthy thing is JPY (-0.3%) is creeping back toward the 160 level, which remains the default setting for the market belief as an intervention level.

On the data front, Friday’s CPI was hot, but not quite as hot as forecast, although you can be sure that next month will remain hot.  This week brings the following mostly secondary stuff.

TodayExisting Home Sales4.06M
TuesdayNFIB Business Optimism98.6
 PPI1.2% (4.6% Y/Y)
 -ex food & energy0.6% (4.2% Y/Y)
WednesdayEmpire State Manufacturing-2.0
 Fed’s Beige Book 
ThursdayInitial Claims215K
 Continuing Claims1840K
 Philly Fed9.0
 IP0.1%
 Capacity Utilization76.3%

Source: tradingeconomics.com

As well, we hear from eight different Fed speakers over 10 venues.  An interesting aspect of the commentariat lately is that individual FOMC members are going to be far more important as there is a growing diversity of opinion.  So, the monolithic Fed Chair running things and encouraging a vote in a particular way may evolve into an actual election, where the voters vote their hearts, not the Chairman’s views just to get along.  If this is the case, and I think it would be far better than what we currently have, we will need to listen more closely to the individual speakers and start a scorecard to see who seems hawkish or dovish at any given time.  The problem is, I fear it will encourage all of them to speak more frequently, which is a worse outcome, although any given voice will likely be given far less weight.  We shall see if that is the case.

As to the broad scheme of things. My head tells me that the market is underpricing the risks out there, but my eyes explain that this is the current consensus.  I hope they are right and I am wrong about things.

Good luck

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Humbling

Posted on by 
The ceasefire seemed to be crumbling
And stocks all around started tumbling
Then late in the morning
Trump issued a warning
To Bibi that clearly was humbling

So, Lebanese fighting decreased
Though, so far, it has not yet ceased
The door’s now ajar
For peace near Qatar
Thus, risk appetite rose like yeast

Which takes us to data today
With March CPI on the way
It surely will show
That prices did grow
But how long will increases stay?

As you can see from the below chart showing oil (inverted) and the S&P 500, about 11:00 yesterday morning, the news hit that Israel was going to stop its ongoing fighting against Hezbollah in Lebanon, which the Iranians claimed was a violation of the ceasefire and had undermined general, and market, belief that the ceasefire would hold at all.  The impact was instant with a substantial rally in the S&P, 1% within an hour, while oil prices tumbled about 6% in the same span (given oil’s volatility is so much higher, that discrepancy is not surprising at all.)

Source: tradingeconomics.com

This is the lead-in to the first face-to-face talks between the US and Iran that are due to occur today in Karachi, Pakistan.  Hopefully, they will lead to a lasting peace with the upshot that Iran will no longer be a sponsor of terrorism, but I must admit, I’m not holding my breath for that outcome.  The overnight market reaction was pretty much exactly what you would have expected with a generally positive view of risk almost everywhere in the world.  Obviously, if the talks lead to a peace and a reopening of the Strait of Hormuz, the strong belief is that things will eventually revert to the prewar stance, at least from an energy and economic perspective.  We shall see.

Which takes us to the other piece of news that markets are going to need to absorb this morning, the March CPI data.  Yesterday we saw the February PCE data and while it was released at expected levels, those levels (2.8% Headline, 3.0% Core) are already far above the Fed’s 2.0% target.  In fact, as you can see from the chart below, it has been a full five years since Core PCE was at or below their target.

Source: tradingeconomics.com

And now, we get March CPI this morning which will include a substantial rise in oil prices as the average in February was $64.51/bbl vs. March’s $93.58/bbl.  Obviously, that is going to have a major impact on headline CPI, but the question is just how much of an impact will it have on core?  Expectations are for Headline to rise 0.9% M/M and 3.3% Y/Y, while the Core rises just 0.3% M/M and 2.7% Y/Y.  Now, we are coming halfway through April and oil prices have not retreated yet, so we are likely going to see continued upward pressure on core prices going forward as those high oil prices feed their way into other things.  But that is for the future.  For today, all eyes are on the data to see if it will be enough to concern central bankers.

In fact, next week is World Bank / IMF week in Washington DC and Kristalina Georgieva, the IMF’s Managing Director, expressed concern that the global economy is going to slow down because of the impact of higher oil prices, but implored central bankers around the world to be patient and not hike rates right away, while asking governments not to subsidize fuels and increase demand.  It is, of course, much easier for her to make these comments as she doesn’t face an electorate that is angry about rising prices.

At any rate, other than the virtually infinite number of takes on the Iran war and the CPI data, there’s not much else to discuss, so let’s see how markets have responded to the latest and where they sit ahead of the data.

Yesterday’s early declines in the US were reversed, as per the chart at the top with all three major indices rallying more than 0.6%.  in Asia, weirdly just Australia (-0.15%) and New Zealand (-0.7%) were the outliers on the downside with the rest of the region all in the green, some substantially so.  Tokyo (+1.8%), China (+1.5%), Korea (+1.4%), Taiwan (+1.6%) and India (+1.2%) all had very strong sessions.  Arguably, the weakness Down Under may be a reflection of their energy policies heading into the Iran war as neither nation has a substantial reserve (fossil fuels were deemed bad so their governments didn’t want to buy them) and both economies could suffer far worse than anyone else because of those decisions.  

In Europe, markets are higher across the board although the gains are far more muted with France (+0.5%) the leader followed by Germany (+0.4%) and Italy (+0.4%) then the UK (+0.2%).  While, certainly better than losses, they are hardly inspirational.  As to US futures, at this hour (7:15), they are also pointing slightly higher, about 0.2% or so.

In the bond market, yields are backing up this morning with Treasuries (+2bps) the least impacted while European sovereign yields are higher between 5bps (Germany) and 8bps (Italy) with the rest of the continent somewhere in between.  It is difficult to ascribe a particular story here other than rising concerns about general inflation being higher due to elevated energy costs.  The market is pricing about 59bps of rate hikes by the ECB this year, perhaps a sign that investors don’t believe energy prices in Europe are going to decline as much as they will elsewhere.  Given the continent-wide energy policies they have in place, I believe they are correct.

Turning to commodities, oil (0.0%) is unchanged this morning after sliding on the Lebanon news yesterday morning.  The truly interesting thing is to watch NatGas (-0.6%) which continues to slide. Back toward its multi-year lows as it continues to be produced as an associated product alongside all the oil drilling that is ongoing.  

Source: tradingeconomics.com

I cannot look at the above chart and reconcile the massive energy advantage the US has with basically the rest of the world and conclude that the US economy is going to be at any disadvantage with other economies going forward, and hence the dollar seems very likely to remain in good stead going forward.  Meanwhile, metals, too, are little changed this morning (gold 0.0%, silver +0.4%, copper +1.3%) with the latter a bit of a surprise after Argentina just passed legislation that will allow for more drilling in the Andes where Chile’s major copper deposits lie.  That is a long-term prospect though, I must admit.

Finally, the dollar is mixed this morning, with very few significant movers in either direction.  In the G10, +/-0.2% is the name of the game with the most noteworthy thing, I think, the yen (-0.25%) which is back above 159 this morning, although not yet threatening the perceived line in the sand of 160.  In the EMG bloc, KRW (-0.6%) and ZAR (-0.4%) are the laggards although it is hard to ascribe specific news to either move.  Rather, looking at the recent trading action, where both currencies have been rebounding sharply, these moves look like position squaring ahead of the weekend.

In addition to CPI, we also see Michigan Sentiment (exp 52.0) and Factory Orders (-0.2%) at 10:00.  There are no Fed speakers so today is shaping up to be data dependent unless we hear something from the talks in Pakistan.  However, it seems far too early for anything of substance there.  I imagine if core CPI is firm, that could be an equity negative as that would encourage more thought of the Fed hiking, but I have a feeling that despite the broader importance of the number, markets are not going to do much today.

Good luck

Adf

Analyst Glory

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On Friday, the Payrolls release
Described a much greater increase
Than pundits had thought
Thus, stocks were all bought
As well there was new hope for peace

This morning the story of note
Is ‘bout a cease fire anecdote
As well, there’s a story
‘Bout analyst glory
And how he learned much in a boat

Quickly, let’s recap Friday’s NFP report which showed payrolls jumped 178K, far greater than the 60K expected, although, as has been the case for a while, there was a revision lower to last month’s data.  Net, however, given the labor market dynamics discussed on Friday, where zero net job growth appears to equate to a stable, relatively low, unemployment rate, the data was indicative of solid economic activity.  Manufacturing Payrolls rose 15K, showing, as per the below chart from tradingeconomics.com, their strongest growth since November 2023 and hopefully the beginning of a trend back toward the levels seen in the wake of the Covid restart.  Perhaps President Trump’s reshoring efforts are beginning to pay off.

The Unemployment Rate also ticked lower, to 4.3%, although earnings data was on the soft side, 3.5% annual growth. (My favorite part was government employment fell again, taking the federal, non-military, workforce to its smallest level since the mid 1960’s, a healthy trend I believe.)

The upshot is that Friday saw equity markets rebound from weaker opening levels, Treasury yields rise and oil prices jump along with the dollar while gold prices slid.  Of course, in today’s world, that news is completely out of date.

As I type Monday morning, with all of Europe closed for Easter Monday, and most of Asia having been closed as well, the two stories around are 1) talks about a 45-day cease-fire in the war, and 2) an analyst report from Citrini Research describing the traffic through the Strait of Hormuz being much greater than previously believed based on the tracking of ship transponders.

Regarding the first, it is always difficult to understand exactly what is happening with this administration during its conduct of the Iran war.  I don’t say that pejoratively, rather I believe it is entirely part of the plan of strategic ambiguity based on President Trump’s overall style.  Much of the weekend focused on the remarkable and successful rescue of the 2nd fighter pilot that was shot down late last week, and deservedly so.  But there are stories about the US, Iran and regional mediators (Pakistan? Egypt?) trying to get to a 45-day cease-fire that could lead to the end of the war.  Of course, we also had President Trump threaten to destroy all of Iran’s infrastructure if they don’t reopen the Strait of Hormuz.  As of now, the war continues apace with the latest key news being the killing of the IRGC’s spy chief in an Israeli attack.  

But it is the second story that has more punch, and that is that Citrini Research, recently noted for its late February report that described a fictional scenario in 2028 regarding major negative outcomes from the ongoing AI adoption and its impact on employment, the economy writ large, and markets, published a note where they had sent an analyst to the Strait of Hormuz who recorded what was happening there.  The upshot is that the activity through the Strait is far greater than had been reported as a number of ships have turned off their transponders and are transiting near the Omani coast.  

If one ever doubted the wisdom of the markets, this may be the best indication that markets really are an amazing source of information.  Consider the fact that despite the Strait of Hormuz being ostensibly closed, the waterway where ~20% of the world’s oil and LNG transits, the price for both products has been remarkably calm.  I am not denying oil (WTI -1.1% this morning) has risen significantly from pre-war levels, just that the fact it has not reached the levels of the Russian invasion spike, let alone the pre-GFC spike, even on a nominal basis, is incredible.  

Source: finance.yahoo.com

Russia did not interrupt 20% of the global oil flow.  At the margin, if 20% of global oil was not flowing, and given the inelasticity of demand for oil in the short run (estimated at just -0.05 to -0.3 according to Grok), prices above $150/bbl would seem to be more likely.  But here we are this morning at $110/bbl.  That tells me that the Strait is not shut, although the flow has slowed significantly.  But, if 20% of the regular traffic gets through, which seems to be what the Citrini report implies, and both the Saudis and Emiratis have the ability to pipe oil as well, to the tune of an extra 5mm-6mm/bpd, that means the shortage is half the initial fears.  (20% of 20mm/bpd + 5mm to 6mm piped).  It turns out the world, as a whole, is more resilient than many thought.  Certainly, there are nations that are going to suffer because they cannot compete with energy prices this high, but overall, my sense is that the global impact is going to be less than initially feared.

I am not trying to downplay the seriousness of the situation, but from a markets perspective, we need to recognize that perhaps the world is not about to end.  This is not to say that things cannot get worse, just that the starting point is probably better than we thought.

Ok, let’s tour the few markets that were open overnight before we’re done.  In equity markets, Tokyo (+0.6%) had a pretty good session all things considered as did Korea (+1.4%) and India (+1.1%), which were the major markets open.  The picture amongst the other regional exchanges was mixed, although probably a little more red than green.  Of course, Asia is the area most negatively impacted by the oil situation.  With Europe closed, a quick look at US futures shows that at this hour (8:10) they are modestly firmer.

In the bond market, Treasury yields have backed up another 2bps after climbing 4bps on Friday.  The only other market open was Japan, with JGB yields rising 3bps and trading at a new high for this move, thus the highest since January 1997 as per the below from Investing.com

We’ve already discussed oil prices with the real interest, to me, the fact that WTI is higher than Brent Crude, an indication that there is increased demand given its availability to any place in the world.  As to the metals markets, gold (-0.1%) and silver (+0.2%) are not really telling us much today.  There certainly doesn’t seem to be any new information to drive these markets right now.

Finally, the dollar is softer this morning in thin trading, which given the moves in oil and stocks, is not that surprising.  But the DXY remains basically right at 100.00 and the yen has been hovering just below the 160 “line in the sand” for the past three weeks as per the below chart from tradingeconomics.com

But with most European centers closed, as well as Canada, I expect that there will be little movement from current levels with very narrow liquidity.  Don’t try to do something large today.

Which takes us to the data this week, as follows:

TodayISM Service 550
TuesdayDurable Goods-0.5%
 -ex Transport0.5%
WednesdayFOMC Minutes 
ThursdayInitial Claims209K
 Continuing Claims1832K
 Q4 GDP (final)0.7%
 Personal Income (Feb)0.3%
 Personal Spending (Feb)0.5%
 PCE (Feb)0.4% (2.8% Y/Y)
 Core PCE (Feb)0.4% (3.0% Y/Y)
 Real Consumer Spending (Q4)2.9%
FridayCPI0.9% (3.3% Y/Y)
 Ex food & energy0.3% (2.7% Y/Y)
 Michigan Sentiment52.0
 Factory Orders0.0%

Source: tradingeconomics.com

Mercifully, there are only two Fed speakers this week, but again, who is listening to anything they say these days?  Certainly, other than Chair Powell, I don’t think they matter at all.  PCE and CPI are the big numbers this week, at least from the perspective of how markets are going to anticipate future outcomes, whether monetary policy or fiscal policy.  But still, the war is the thing that matters.  A cease fire ought to be quite bullish in the short term, for stocks, bonds and gold, while oil and the dollar fall.  But it’s anybody’s guess if something like that is going to happen.  I wish I had something better to say than play it close to the vest.  We are still in a hugely volatile environment with many potential exogenous factors.

Good luck

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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

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