Tag Archives: #CPI

Lest ‘Flation Has Spice

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

 

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

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

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

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

Source: finance.yahoo.com

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

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

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

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

Source: tradingeconomics.com

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

Source: tradingeconomics.com

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

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

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

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

Good luck

Adf

Stock-pocalypse?

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

 

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

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

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

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

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

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

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

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

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

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

Source: tradingeconomics.com

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

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

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

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

Good luck

Adf

A Wing and a Prayer

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

 

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

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

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

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

And here are a couple from this morning:

WSJ – Trump Effect Starts to Show Up in Economy

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

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

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

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

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

Source: tradingeconomics.com

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

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

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

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

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

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

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

Good luck

Adf

Misconstrue

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

 

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

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

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

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

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

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

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

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

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

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

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

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

Source: tradingeconomics.com

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

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

Source: tradingeconomics.com

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

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

Good luck

Adf

Quite Dreary

Posted on by

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

 

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

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

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

Source: tradingeconomics.com

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

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

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

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

Source: tradingeconomics.com

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

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

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

Good luck

Adf

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

Rate Cutting Pretension

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The US and China have shaken
Their hands, as trade talks reawaken
And while it’s a start
It could fall apart
For granted, not much should be taken
 
So, markets have turned their attention
To ‘flation with some apprehension
This morning’s report
Might help, or might thwart
Chair Powell’s rate cutting pretension

 

Starting with the trade talks between China and the US, both sides have agreed that progress was made. Here is a quote from a report on China’s state broadcaster, CCTV, last night.  “China and the US held candid and in-depth talks and thoroughly exchanged views on economic and trade issues of mutual concern during their first meeting of the China-US economic and trade consultation mechanism in London on Monday and Tuesday. The two sides have agreed in principle the framework for implementing consensus between the two heads of state during their phone talks on June 5, as well as those reached at Geneva talks. The first meeting of such consultation mechanism led to new progress in addressing each other’s economic and trade concerns.”  I highlight this because it concurs with comments from Commerce Secretary Lutnick and tells me that things are back on track.

Clearly, this is a positive, although one I suspect that equity markets anticipated as they have been rallying for the past several sessions prior to the announcements.  Certainly, this is good news for all involved as if trade tensions between the US and China diminish, it should be a net global economic positive.  While anything can still happen, we must assume that a conclusion will be reached going forward that will stabilize the trade situation.  However, none of this precludes President Trump’s stated desire to reindustrialize the US, so that must be kept in mind.  And one of the features of that process, at least initially, is likely to be upward price pressures in the economy.

Which brings us to the other key story today, this morning’s CPI report.  Expectations for headline (0.2% M/M, 2.5% Y/Y) and core (0.3% M/M, 2.9% Y/Y) are indicating that the bottom of the move lower in inflation may have been seen last month.  However, these readings, while still higher than the Fed’s target (and I know the Fed uses Core PCE, but the rest of us live in a CPI world) remain well below the 2022 highs and inflation seems to be seen as less of a problem.  Yes, there are some fears that the newly imposed tariff regime is going to drive prices higher, and I have seen several analysts explain that we are about to see that particular process begin as of today’s data.  

Of course, from a markets perspective, the key issue with inflation is how it will impact interest rates.  In this case, I think the following chart from Nick Timiraos in the WSJ is an excellent description of how there is NO consensus view at all.

At the same time, Fed funds futures markets are pricing in the following probabilities as of this morning.

Source: cmegroup.com

The thing about the Fed is they have proven to be far more political than they claim.  First, it is unambiguous that there is no love lost between President Trump and Chairman Powell.  Interestingly, the Fed is strongly of the belief that when they cut rates, they are helping the federal government, and more importantly, the population’s impression of what the federal government is doing.  Hence, the 100bps of cuts last summer/fall never had an economic justification, they appeared to have been the Fed’s effort to sway the electorate to maintain the status quo.  With that in mind, absent a collapse in the labor market with a significantly higher Unemployment Rate, I fall into the camp of no Fed action this year at all.  And, if as I suspect, inflation readings start to pick up further, questions about hikes are going to be raised.

Consider if the BBB is passed and it juices economic activity so nominal GDP accelerates to 6% or 7%, the Fed will be quite concerned about inflation at that point and the market will need to completely reevaluate their interest rate stance.  My point is the fact that rate cuts are currently priced does not make them a given.  Market pricing changes all the time.

So, let’s take a look at how things behaved overnight.  After a modest US rally in equities yesterday, Asia had a solid session, especially China (+0.75%) and Hong Kong (+0.8%) as both responded to the trade news. Elsewhere in the region, things were green (Nikkei +0.5%), but without the same fanfare.  I have to highlight a comment from PM Ishiba overnight where he said “[Japan] should be cautious about any plans that would deteriorate already tattered state finances.  Issuing more deficit financing bonds is not an option.”  That sounds an awful lot like a monetary hawk, although that species was long thought to be extinct in Japan.  It will be interesting to see how well they adhere to this idea.

Meanwhile, in Europe, the only equity market that has moved is Spain (-0.6%) which is declining on idiosyncratic issues locally while the rest of the continent is essentially unchanged.  As to US futures, at this hour (7:30) they are pointing slightly lower, about -0.15% across the board.

In the bond market, the somnolence continues with yields backing up in the US (+2bps) and Europe, (virtually all sovereign yields are higher by 2bps) with only UK Gilts (+5bps) under any real pressure implying today’s 10-year auction was not as well received as some had hoped.  In Japan, yields slipped -1bp overnight and I thought, in the wake of the Ishiba comments above, I would highlight Japan 40-year bonds, where yields have collapsed over the past three weeks.  Recall, back in May there was a surge in commentary about how Japanese yields were breaking out and how Japanese investors would be bringing money home with the yen strengthening dramatically.  I guess this story will have to wait.

Source: tradingeconomics.com

Turning to commodities, oil (+1.5%), which reversed course during yesterday’s session, has regained its mojo and is very close to closing that first gap I showed on the chart yesterday.  Above $65, I understand most shale drilling is profitable so do not be surprised to hear that narrative pick up again.  In the metals markets, gold (+0.2%) now has the distinction of being the second largest reserve asset at central banks around the world, surpassing the euro, although trailing the dollar substantially.  I expect this process will continue.  Silver (-0.8%) and copper (-2.1%) are both under pressure this morning although I have not seen a catalyst which implies this is trading and position adjustments, notably profit taking after strong runs in both.

Finally, the dollar is slightly stronger this morning with the euro and pound essentially unchanged, AUD, NZD and JPY all having slipped -0.25%, and some smaller currencies (KRW -0.55%, ZAR -0.5%) having fallen a bit further.  However, for those who follow the DXY, it is unchanged on the day.  The thing about the dollar is despite a lot of discussion about a break much lower, it has proven more resilient than many expected and really hasn’t gone anywhere in the past two months.  If the Fed turns hawkish as inflation rebounds, I suspect the dollar bears are going to have a tougher time to make their case (present poets included.)

In addition to the CPI at 8:30, we see EIA oil inventory data with a modest build expected although yesterday’s API data showed a draw that surprised markets.  I must admit I fear inflation data is going to start to rebound again which should get tongues wagging about next week’s FOMC meeting.  However, for today, a hot print is likely to see a knee-jerk reaction lower in stocks and bonds and higher in the dollar.  But the end of the day is a long way away and could be very different, especially given the always present headline risk.

Good luck

Adf

Gone Astray

Posted on by

The ADP Labor report
On Wednesday, came up a bit short
Investors decided
That they would be guided
By this and bought bonds like a sport
 
As well, there’s a story today
The BLS has gone astray
It seems that their data
Might have the wrong weight-a
So, CPI’s not what they say

 

It has been another very dull session in most markets although yesterday did see a strong bond market rally after the ADP Employment Report was released much lower than expected at just 37K jobs created.  Certainly, the trend has been lower for the past three years as you can see in the below chart from tradingeconomics.com, so I guess we cannot be that surprised.

You will also not be surprised that this data brought out the recessionistas as they jumped all over the release to make their case that recession was just around the corner, and quite possibly stagflation.  Adding to their case was the ISM Services data which also disappointed at 49.9 and has also been trending lower for the past three years.  As well, they were almost gleeful in their description of the Prices Paid sub index rising to 68.7, its highest print since November 2022.  Alas, while Pries Paid have been rising for the past year or so, a look at the trendline shows they are continuing to retreat from the highs seen during the Bidenflation of 2022.

Source: tradingeconomics.com

In the end, although this data was unquestionably disappointing, it feels a bit too early, at least to me, to declare the recession has arrived.  But not too early for the bond market where 10-year yields tumbled 11bps on the day and almost all the damage was done in the first hour after the ADP release although the ISM helped things along as well.

Source: tradingeconomics.com

Perhaps we are going into a recession, or even already in one, but overall, the data so far are just showing the beginnings of that.  I imagine opinions will be strengthened one way or another tomorrow when the NFP report is released, but for now, the recessionistas appear to have the upper hand, at least in the bond market.

The other story that is getting a response, at least amongst the Twitterati (X-eratti?) is the WSJ article about how the BLS, due to President Trump’s hiring freeze, is suddenly calling into question the accuracy of their statistical releases, notably the CPI report due next week.  I will let my friend, The Inflation Guy™, Mike Ashton, explain why this is a nothing burger. [emphasis added]

“WSJ story about how staff shortages at BLS are affecting how many estimates the staff has to make instead of collecting actual data. It is very hard to make these errors accumulate to as much as 1-2bps on the monthly number.

UNLESS: there is bias in the estimating, or there are very large categories affected, or there are HUGE errors in some categories. Lots of random errors increases the overall error but is unlikely to affect the mean. And be honest. Do you have any idea what the MSE (mean standard error) of the CPI is?

People really should care about the error bars but even most economists almost never do. Unless it’s an opportunity to complain about budget cuts to economists, which is what this is. Nothing to see here.”

Otherwise, folks, another day in paradise with nothing else new, at least on the market front.  At some point, domestic politics, or geopolitics or war or something else is going to catch the fancy of the algos and change trading, but right now, that does not appear to be the case.  Perhaps Friday’s NFP data will be the catalyst to start a serious change in attitudes but I’m not holding my breath.

In the meantime, let’s survey market activity.  Yesterday’s US session was quite dull with limited movement and low volumes. Asia saw a mixed picture with the Nikkei (-0.5%) slipping, ostensibly, on concerns that a weaker US would negatively impact their export sector, tariffs be damned.  Hong Kong (+1.1%) though, rallied on Chinese PMI data holding on to recent levels rather than slipping further.  The rest of the region was far more positive, led by Korea (+1.5%) although the gains were more on the order of +0.5%.  Europe is all green this morning, with the CAC (+0.5%) leading the way, although the DAX (+0.4%) and FTSE 100 (+0.3%) are also holding up well on the back of positive German Factory orders data and solid UK Retail Sales.  Meanwhile, at this hour (7:00), US futures are ever so slightly firmer, +0.15% or so.

In the bond market this morning, after the big rally yesterday discussed above, Treasury yields this morning have edged lower by 1bp and European sovereigns have seen yields slide by between -3bps and -5bps as inflation data on the continent continues to soften encouraging the belief that the ECB, later this morning, may even consider more than the 25bp cut that is priced in.

The one true consistency lately has been gold (+0.8%) which has no shortage of demand, especially in Asia, and certainly feels like it is going to test, and break, the previous high of $3500/oz, which is now just $100 away.  But this has encouraged silver (+4.0%), copper (+2.65%) and now even platinum (+3.8%) has been invited to the party.  Regardless of the macroeconomic statistics, the ongoing global monetary policy of fiat debasement seems set to continue which can only help these metals.  As to oil (+0.3%), it continues to sit near its recent highs with not much activity in either direction.  It feels like we will need a major event/pronouncement of some sort, whether wider war in the Middle East or a change in OPEC policy to move this thing.

Finally, the dollar can best be described, again, as mixed.  While the euro and pound are marginally higher, the yen is marginally weaker.  In the EMG bloc, both KRW (+0.4%) and ZAR (+0.5%) are showing gains this morning, but nothing else of note is moving.  And when looking at the broad DXY, unchanged is where it’s at.  As with most markets right now, metals excepted, doing nothing seems the best choice.

On the data front, this morning brings the weekly Initial (exp 235K) and Continuing (1910K) Claims as well as the Trade Balance (-$94.0B) which if correct will almost certainly bring on a lot of White House crowing but is likely inconsequential with respect to the overall scheme of things.  We also see Nonfarm Productivity (-0.7%) and Unit Labor Costs (+5.7%) a combination of expectations that does speak to stagflation.  The ECB meeting will get some eyeballs, but unless they cut 50bps, a very low probability event based on current market pricing, it is hard to see much impact there either.

We are in a rut for now.  Whatever the catalyst that is required to change views substantially, it is not obvious at this point.  Bigger picture, nothing indicates any government is going to slow their spending or their money printing.  There is too much debt to ever be repaid, so a slow inflationary debasement is very likely our future.  I still think the dollar slides further, but it could be a few months before the current range breaks.

Good luck

Adf

As Though It Had Fleas

Posted on by

Well, CPI wasn’t as hot
As most of the punditry thought
But bonds don’t believe
The Fed will achieve
Low ‘flation, so they weren’t bought
 
But maybe, the biggest response
Has been that the buck, at the nonce
Has lost devotees
As though it had fleas
The end of the Trump renaissance?

 

Yesterday’s CPI data was released a touch softer than market expectations with both headline and core monthly numbers printing at 0.2%.  If you dig a bit deeper, and look out another decimal place, apparently the miss was just 0.03%, but I don’t think that really matters.  As always, when it comes to inflation issues, I rely on @inflation_guy for the scoop, and he provided it here.  The essence of the result is that while inflation is not as high as it had been post Covid, it also doesn’t appear likely that it is going to decline much further.  I think we all need to be ready for 3.5% inflation as the reality going forward.

Interestingly, different markets seemed to have taken different messages from the report.  For instance, Treasury yields did not see the outcome as particularly positive at all.  While yields have edged lower by -2bps this morning, as you can see from the below chart, they remain near their highest level in the past month.  

Source: tradingeconomics.com

There are two potential drivers of this price action, I believe, either bond investors don’t believe the headline data is representative of the future, akin to my views of inflation finding a home higher than current readings, or bond investors are losing faith in the full faith and credit of the US.  Certainly, the latter would be a much worse scenario for the US, and arguably the world, as the repudiation of the global risk-free asset of long-standing choice will result in a wild scramble to find a replacement.  I continue to see comments on X about how that is the case, and that US yields are destined to climb to 6% or 10% over the next couple of years as the dollar declines in importance in the global trading system.  However, when I look at the world, especially given my views on inflation, I find that to be a lot of doomporn clickbait and not so much analysis.  Alas, higher inflation is not a great outcome either.

Interestingly, while bond investors did not believe in the idea of lower yields, FX traders took the softer inflation figure as a reason to sell dollars.  This is a little baffling to me as there was virtually no change in Fed funds futures expectations with only an 8% probability of a cut next month and only 2 cuts priced for the year.  So, if long-dated yields didn’t decline, and short-dated yields didn’t decline, (and equity prices didn’t decline), I wonder what drove the dollar lower.  

Yet here we are this morning with the greenback softer against all its G10 counterparts (JPY +1.0%, NOK +0.6%, EUR +0.5%, CHF +0.5%) and almost all its EMG counterparts (KRW +1.5%, MXN +0.3%, ZAR +0.3%, CLP +0.6%, CZK +0.5%).  In fact, the only currency bucking the trend is INR (-0.25%) but given the gyrations driven by the Pakistan issues, that may simply be the market adjusting positions.

From a technical perspective, we are going to hear a lot about how the dollar failed on its break above the 50-day moving average that was widely touted just two days ago. (see DXY chart below).

Source: tradingeconomics.com

But let’s think about the fundamentals for a bit.  First, we know that the Trump administration would prefer a weaker dollar as it helps the competitiveness of US exporters and that is a clear focus.  Second, the fact that US yields remain higher than elsewhere in the world is old news, that hasn’t changed since the Fed stopped its brief cutting spree ahead of the election last year while other nations (except Japan) have been cutting rates consistently.  What about trade and tariffs?  While it is possible that the idea of a reduction in trade will reduce the demand for dollars, arguably, all I have read is that during this 90-day ‘truce’, companies are ordering as much as they can to lock in low tariffs.  That sounds like more dollars will be flowing, not less.

As I ponder this question, the first thing to remember is that markets don’t necessarily trade in what appears to be a logical or consistent fashion.  I often remark that markets are simply perverse.  But going back to the first point regarding President Trump’s desire for a weaker dollar, there was a story overnight that a stronger KRW was part of the trade discussion between the US and South Korea and I have a feeling that is going to be part of the discussion throughout Asia, especially with Japan.  As of now, I continue to see more downward pressure on the dollar than upward given the Administration’s desires.  I don’t think the Fed is going to do anything, nor should they, but I also don’t foresee a change in the recession narrative in the near future.  While that has not been the lead story today, it remains clear that concern about an impending recession is everywhere except, perhaps, the Marriner Eccles Building.  My view has been a lower dollar, and perhaps today’s price action is a good example of why that is the case.

Ok, let’s touch on other markets quickly.  After yesterday’s mixed session in the US, Asia saw much more positivity with China (+1.2%) and Hong Kong (+2.3%) leading the way higher with most regional markets having good sessions and only Japan (-0.15%) missing the boat.  In Europe, though, the picture is not as bright with both the CAC (-0.6%) and DAX (-0.5%) under some pressure this morning despite benign German inflation data and no French data.  Perhaps the euro’s strength is weighing on these markets.  As to US futures, at this hour (6:45), they are basically unchanged.

Away from Treasury markets, European sovereign yields have all slipped either -1bp or -2bps on the day with very little to discuss overall here.

Finally, in the true surprise, commodity prices are under pressure this morning across the board despite the weak dollar.  Oil (-1.1%) is slipping, with the proximate cause allegedly being API oil inventory data showed a surprising gain of >4 million barrels.  However, given the courteousness of the meeting between President Trump and Saudi Prince MBS, I would not be surprised to hear of an agreement to see prices lower overall.  I believe that is Trump’s goal for many reasons, notably to put more pressure on Russia’s finances, as well as Iran’s and to help the inflation story in the US.  As to the metals complex, they are all lower this morning with gold (-0.7%) leading the way but both silver (-0.3%) and copper (-0.5%) lagging as well.

On the data front, there is no front-line data to be released, although we do see EIA oil inventories with modest declines expected.  However, it is worth noting that Chinese monetary data was released this morning and it showed a significant decline in New Yuan Loans and Total Social Financing, exactly the opposite of what you would expect if the Chinese were seeking to stimulate their economy.  It is difficult for me to look at the chart below of New Bank Loans and see any trend of note.  I would not hold my breath for the Chinese bazooka of stimulus that so many seem to be counting on.

Source: tradingeconomics.com

Overall, it appears to me the market is becoming inured to the volatility which is Donald Trump.  As I have written before, after a while, traders simply get tired and stop chasing things.  My take is we will need something truly new, a resolution of the Chinese trade situation, or an Iran deal of some kind, to get things moving again.  But until then, choppy trading going nowhere is my call.

Good luck

Adf

No Longer Concern

Posted on by

Seems tariffs no longer concern
The markets, as mostly they yearn
For Jay and the Fed,
When looking ahead
To cut rates when next they adjourn
 
Alas, there’s no hint that’s the case
As prices keep rising apace
In fact, come this morning
There could be a warning
If CPI starts to retrace

 

I am old enough to remember when President Trump’s actions on tariffs combined with DOGE was set to collapse the US economy.  I’m sure that was the case because it was headline news every day.  Equity markets fell sharply, the dollar fell sharply, gold rallied, and the clear consensus was the “end of American exceptionalism” in finance.  That was the description of how investors around the world flocked to the US equity markets as they held the best opportunities.  But the punditry was certain President Trump had killed that idea and were virtually licking their lips writing the obits for the US economy and President Trump’s plans.  In fact, I suspect all of you are old enough to remember that as well.  The chart below highlights the timing.

Source: tradingeconomics.com

But that is such old news it seems a mistake to even mention it.  The headlines this morning are all about how the stock market is now set to make new highs!  Bloomberg led with, Traders Model Bullish Moves for S&P 500 With Tariff Tensions Easing, although it is the theme everywhere.  So, is the world that much better today than a month ago?  Well, certainly the tariff situation continues to evolve, and we have moved away from the worst outcomes there it seems.  But recession probabilities remain elevated in all these econometric models, with current forecasts of 35%-50% quite common.  

Is a recession coming?  Well, the same people who have been telling us for the past 3 years that a recession was right around the corner, and some have even said we are currently living through one, are telling us that one is right around the corner.  Their track record isn’t inspiring.  In fact, these are the same people who are telling us that store shelves will be empty by the summer.  Personally, I take solace in the fact that the underlying numbers from the Q1 GDP data showed that despite a negative outcome, the positives of a huge increase in private investment and a reduction in government spending, were far more important to the economy than the fact that the trade deficit grew as companies rushed to stock up before the threatened tariffs.  Less government spending and more private investment are a much better mix for the economy’s performance going forward.  Let’s hope it stays that way.

But what about prices?  This morning’s CPI data (exp 0.3%, 2.4% Y/Y Headline, 0.3%, 2.8% Y/Y Core) will give us further hints about how the Fed will behave going forward.  As of now, there is no indication that the Fed is concerned about a growth slowdown of such magnitude that they need to cut rates.  In fact, Fed funds futures have reduced the probability of a June cut to just 8% and have reduced the total cuts for 2025 to just 2 now, down from 3 just a week ago.  Yesterday, Fed Governor Adriana Kugler reiterated the old view that tariffs could raise prices and reduce growth although gave no indication that cutting rates was the appropriate solution.  Arguably of more importance to the market will be Chairman Powell’s comments when he speaks Thursday morning.  My take here, though, is that the rate of inflation has bottomed and that the Fed is going to remain on hold all year long.  In fact, as I wrote back in the beginning of the year, I would not be surprised to ultimately see a rate hike before the year is over.  A rebound in growth and inflation remaining firm will change the narrative before too long, probably by the end of summer.  Of course, remember, I am just a poet and not nearly as smart as all those pundits, so take my views with at least a grain of salt.

Ok, let’s look at how markets have behaved in the new world order.  Yesterday’s massive US equity rally did not really see much follow through elsewhere although the Nikkei (+1.4%) had a solid session.  In fact, the Hang Seng (-1.9%) saw a reversal after a string of 8 straight gains as both profit-taking and some concerns about slowing growth in China seemed to be the main talking points there.  Elsewhere in the region, Malaysia and the Philippines had strong sessions while India lagged.  

In Europe, other than Spain’s IBEX (+0.8%), which has rallied purely on market internals, the rest of the continent and the UK are virtually unchanged this morning.  The most interesting comment I saw was from Treasury Secretary Bessent who dismissed the idea that a trade deal with the EU would be coming soon, “My personal belief is Europe may have a collective action problem; that the Italians want something that’s different than the French. But I’m sure at the end of the day, we will reach a satisfactory conclusion.”  That sounds to me like Europe is not high on the list of nations with whom the US is seeking to complete a deal quickly.  Finally, US futures are a touch softer this morning, although after the huge rallies yesterday, a little pullback is no surprise.

In the bond market, Treasury yields have backed off 2bps this morning, but in reality, they are higher by nearly 30bps so far this month as you can see below.

Source: tradingeconomics.com

This cannot please either Trump or Bessent but ultimately the question is, what is driving this price action?  If this is a consequence of investors anticipating faster US growth with inflation pressures building, that may be an acceptable outcome, especially if the administration can slow government spending.  But if this is the result of concern over the full faith and credit of the US government, or a liquidation by reserve holders around the world, that is a very different situation and one that I presume would be addressed directly by the Trump administration.  As to European sovereign yields, today has seen very modest rises, 1bp or 2bps across the board.  The biggest news there was the German ZEW survey which, while the Current Conditions Index fell to -82, saw the Economic Sentiment Index jump 39 points to +25.2, far better than expected.  It seems there is a lot of hope for the rearmament of Germany and the economic knock-on effects that will may bring.

In the commodity markets, oil (+0.6%) continues to grind higher as it looks set to test the recent highs near $64/bbl and from a technical perspective, may have put in a double bottom just above $56/bbl.  There is still a huge gap above the market that would need to be filled (trading above $70/bbl) in order to break this downtrend, at least in my mind.  But that doesn’t mean we can’t chop back and forth between $60 and $65 for a long time.  As to gold (+0.7%) after a sharp decline yesterday as the world was no longer scared about the future, it is bouncing back.  Whether this is merely technical, and we are heading lower, or yesterday’s price action was the aberration is yet to be determined.  Meanwhile, silver (+1.3%) and copper (+1.0%) are both having solid sessions as well.

Finally, the dollar is giving back a tiny bit of yesterday’s massive gains.  The euro (+0.2%) and pound (+0.25%) are emblematic of the overall movement although we have seen a few currencies with slightly stronger profiles this morning (SEK +0.8%, AUD +0.6%, CHF +0.5%).  In the EMG bloc, the movement has actually been far less impressive with ZAR (-0.45%) and KRW (-0.4%) bucking the trend of dollar softness but gains in MXN (+0.4%) and CZK (+0.4%) the best the bloc can do.  

One thing I will say about this administration is they have the ability to really change the tone of the discussion in a hurry.  If they are ultimately successful in reordering US economic activity away from the government and to the private sector, that is going to destroy my dollar weakness thesis.  I freely admit I didn’t expect anything like this to happen, but the early evidence points in that direction.  We will know more when Q2 GDP comes out and we find out if private sector activity is really increasing like the hints from Q1.  If that is the case, then the idea of American exceptionalism is going to make a major comeback in the punditry, although I suspect markets will have figured it out before then.

Other than the CPI, there is no other data and there are no Fed speakers on the docket.  While the dollar is soft this morning, I expect that any surprises in CPI will be the driver.  Otherwise, as I just mentioned, I am becoming concerned about my dollar weakness view.

Good luck

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Lost In Translation

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The data today on inflation
Will help tweak the latest narration
But arguably
There’s little to see
As CPI’s lost in translation
 
And too, central bankers have learned
Their comments leave folks unconcerned
Today’s BOC
Where rate cuts will be
The outcome will ne’er be discerned

 

It is Donald Trump’s world, and we are all just living in it.  Virtually everything that happens in any financial market these days is a result of something that President Trump has either said or done.  Obviously, tariffs are a major player, but so are the peace talks in Ukraine (good news that Ukraine has agreed a cease fire to get things started) and his domestic initiatives regarding DOGE and the shake up that has come to government from that project.  You cannot look at a business journal without reading a story about how corporate America’s CEO’s are very concerned because of all the activity as they are having difficulty planning their strategies.

While this poet endeavors to track the macroeconomic issues and how they impact markets, and one can argue that tariffs are a macro issue, the ongoing back and forth as to which products will get tariffed and when is occurring far more rapidly than is worth reporting on a daily outlook.  After all, nobody has any idea what today will bring on that front.

With that in mind, one of the other things I have discussed has been the demotion of central bankers from their previous preeminence in the world of financial markets.  Now, every one of them is simply left to respond to whatever President Trump says that day.  Consider, the Fed entered their quiet period last Friday and the fact that we have not heard a word from them is entirely inconsequential.  The Fed funds futures market is currently pricing just a 3% probability of a rate cut next week and a total of 75bps of cuts by the end of the year, but that has been true for the past several weeks.  Despite an increase in the talk of a US recession, the markets are not indicating that is a concern.

Now, that doesn’t mean that other central banks aren’t doing things, but when the BOC cuts rates by 25bps this morning, taking their base rate to 2.75%, 150 basis points below the US, nothing is going to happen in the market.  It is already widely assumed.  I guess it is possible that Governor Macklem could make some comments of note, but given that Canada remains a bit player on the world stage, does whatever he says really matter?  In fact, the only reason people are discussing Canada now is because of President Trump and his trolling former PM Trudeau and calls to make it the 51st state.  Let’s face it, the economy there is ticking along fine for now, although if their exports to the US are impaired by tariffs it will definitely hurt them.  Meanwhile, other than a huge housing bubble, nobody really notices them.  After all, their economy is roughly $2.3 trillion, smaller than that of Texas.

We have also heard from Madame Lagarde recently as she tries to calm European leaders’ nerves while the ECB tries to manage their policy around US fiscal gyrations.  However, the most concerning information from there has been her confirmation that the ECB is pushing forward with their central bank digital currency (CBDC) project, looking to get things started in October of this year.  This contrasts with President Trump’s EO that the US will not pursue a CBDC and there is currently legislation in Congress to enshrine that into law.  My personal view is a CBDC would be very concerning given its inherent reduction in individual liberties.  While the current setup is for the euro to rise relative to the dollar, it is not clear to me that will remain the case in the event the digital euro comes into being.  In fact, it would not surprise me if many Europeans decided that holding dollars was a much better idea than holding euros in that environment.  But that is a story for the future.

As to today, CPI is set to be released with the following median expectations; headline (0.3%, 2.9% Y/Y) and core (0.3%, 3.2% Y/Y).  Both of those annualized numbers are one tick lower than last month’s outcomes, so would help the Fed narrative that inflation is falling back to their target.  But again, absent a major discrepancy, something like a 0.1% or 0.5% reading on the core number, I don’t think it will have any market impact across any market.  Data is just not that important these days.

Let’s turn to the overnight session to see how things are behaving in the wake of yesterday’s late US equity rebound, where while the indices all finished lower, they were well off the daily lows.  In Asia, the picture was very mixed with some major gainers (Korea +1.5%, Indonesia +1.8%, Taiwan +0.9%) and some major laggards (Thailand -2.5%, Malaysia -2.3%, Australia -1.3%, Hong Kong -0.8%) with both Japan and mainland China showing little movement.  In Europe, after a down day yesterday, this morning is seeing a solid rebound across most major markets with the DAX (+1.8%) leading the way followed by the CAC (+1.4%) and FTSE 100 (+0.6%).  Some solid earnings reports and ongoing hope belief that European defense spending will ramp up seems to be the drivers.  As to US futures, at this hour (7:30) they are firmer by 0.8% ish across the board.

In the bond market, after Treasury yields climbed 7bps yesterday, this morning they have edged a further 1bp higher.  The big domestic story is the continuing resolution which was just passed by the House and now sits at the Senate.  If it is not passed by Friday, the government will shut down, although it is not clear to me how that can be more disruptive than the way things have been operating for the past 6 weeks!  Meanwhile, European sovereign yields are also edging higher with German bunds (+4bps) leading the way as the ongoing discussion over breeching the debt brake continues and concerns over massive new issuance remain front and center.   Elsewhere in Europe, yields have risen as well, but generally by only 1bp or 2bps.  Last night, JGB yields didn’t move at all.

In the commodity bloc, oil (+1.1%) is continuing to bounce along the bottom of its trading range as per the below chart.

Source: tradingeconomics.com

A look at the trend line there shows that, at least based on the past 6 months, there has not been any net movement of note.  The question of whether the Ukraine war ends and that allows Russian oil back into the market, out in the open, is also current, with no clear answer in sight.  Meanwhile, the metals markets continue to ignore the recession calls with silver (+0.7%) and copper (+2.3%) both strong although gold is unchanged on the day.

Finally, the dollar is bouncing slightly this morning after declining sharply in 5 of the past 7 sessions with the other two basically unchanged.  This has all the hallmarks of a trading pause as there is nothing that has altered the idea that President Trump wants the dollar lower, and his policies are going to push it in that direction.  The one big outlier this morning is CLP (+0.9%) which is tracking copper’s rally, but otherwise, the yen (-0.6%) is the only mover of note, and that also seems a trading response, certainly not a fundamental change.

And that’s really it.  CPI is the only data for the day and there are no Fed speakers.  Of course, tape bombs are the new normal and we never have any idea what President Trump or Secretary Bessent may say at any given time.  However, with that in mind, the bigger picture remains intact.  I remain negative the equity space overall as changes continue, while the dollar is likely to remain under pressure as well.  This should help the bond market, and commodities.

Good luck

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