Tag Archives: economics

Death For the Trend

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The five-year sale went terrib-ly
So, doomsters are all filled with glee
There was a long tail
Though not quite a fail
They claim, now, the future they see

In fact, they claim, this is the end
That bonds will have nary a friend
And stocks will get smoked
As strong growth evoked
The specter of death for the trend

Well, everybody who has been crowing about the end of the US bond market is feeling their oats today, that’s for sure after yesterday’s terrible 5-year Treasury auction that wound up with a 3.1 basis point tail, extremely long for such a short duration instrument.  (The tail is the difference between the actual outcome and the when-issued trading that takes place in the market prior to the auction.  A long tail implies that demand was weaker than expected.)  The upshot is that Treasuries sold off hard, with yields climbing upwards of 15bps in the 2-year and 11bps in the 10-year as you can see in the below chart.

Source: tradingeconomics.com

The starting point was the release of the much better than expected Flash PMI data where both Manufacturing and Services beat handily with 58.0 handles, but the price pressures indicated got the inflation story back as the key narrative.  The yield peak came at 1:00 when the auction results were announced although they slipped a few bps before the close.  And this morning, the 10-year yield is another 3bps higher along with European sovereign yields where we see France (+5bps) having the worst day but the rest of the continent, and the UK all showing yields climb 2bp to 3bps.  Neither was Japan immune to this price action with 10yr JGBs jumping 9bps overnight.  

It’s funny, for a very long time, the idea that good news was bad would have been ridiculous as a concept.  Strong growth would indicate increased profit opportunities and higher equity values.  But it started with Greenspan, when he first cut rates to, and left them at, 1.0%, for far too long and equity markets decided they liked low interest rates more than company fundamentals.  The GFC and ZIRP increased the intensity of that reaction function, and we are still feeling that pain as higher rates, especially caused by strong economic growth, are now seen as a negative for stocks.  The world is upside down.  It is, however, the world in which we live.

On top of the markets’ hard beating
Both Xi and Trump soon will be meeting
The talks are on trade
While AI is weighed
It’s doubtful, though, deals are completing

In China the ‘conomy’s split
Twixt exports of plenty of sh*t
And people at home
Who live in the gloam
And can’t change their lives e’en one bit

While here in the US the sitch
Is talk of the poor and the rich
Election day’s nearing
And though some are cheering
For Trump it could be a real bitch

While the bond market has taken up most of the space of the financial market analysis, the meeting between Presidents Trump and Xi is clearly of great importance.  Both nations have significant issues they are trying to address although in many ways they are mirror images of each other.  On a macroeconomic scale, given the Chinese mercantilist model and the excess investment into productive capacity there, they build an enormous amount of stuff for export and starve the local economy of consumption.  The result is extremely low inflation, if not deflation, while indicators like Retail Sales turn negative.  Recall, consumption represents just over 50% of the Chinese economy compared to about 70% in the US.

For instance, the below chart shows a comparison between US (gray bars) and Chinese (blue bars) retail sales over the past 3 years.  you can see just how soft Chinese activity has been domestically compared to the US.

Source: tradingeconomics.com

I have long maintained that the biggest weakness China has is that they rely on the US as the buyer of last resort and President Trump (and lately followed by many other nations) has been pushing back by imposing tariffs on much of what China sells, thus reducing those sales.  If China lacks export growth, given the domestic weakness, that becomes a huge problem for Xi.

Meanwhile, the US spends far too much, at least the government does, and while there has been a dramatic increase in investment into the US, that has brought along significant demand for credit, hence higher yields, and demand for things that are scarce, like electricity, where power increases cannot keep up with industrial demand.  The upshot here is that inflationary pressures are rising even without the impact of the large rise in oil prices since March and the Iran war began.  

Of course, Xi’s greatest advantage is he doesn’t have to face the electorate, as there is none over there, while in six weeks, Election Day may prove monumental to President Trump’s plans.  We need to watch more than markets right now as both the wars in Ukraine and Iran along with the politics are going to have major impacts for a while longer, I believe.

Turning to markets beyond the bonds, yesterday saw weakness in the US, although not quite as bad as might have been feared with losses of about -1.0%.  To keep that in perspective, even with this morning’s pre-market futures lower by -0.5%, the S&P 500 is less than 2% from its all-time high set last month as you can see in the chart below.  It’s not Armageddon quite yet!

Source: tradingeconomics.com

But the follow on in Asia was filled with red numbers as although the Nikkei (+0.8%) managed a gain, virtually every other index in the time zone fell including: China (-1.7%), HK (-0.3%), India (-1.7%), Australia (-0.7%) and all of the smaller exchanges as well.  South Korea was on holiday, so no trading there.  Meanwhile, in Europe, the picture is not so dour, although most markets there slid yesterday as well.  This morning, the DAX (-0.5%) and CAC (-0.4%) are the laggards while the other major markets are flat to slightly higher, 0.1%.  And as mentioned above, US futures are under pressure again this morning.

In the commodity markets, oil (+1.0%) is continuing its rebound off the lows from earlier this week as President Trump’s threats of annihilation of Iran has some on edge, although I have read that talks continue to find a way to end the conflict.  But precious metals have no friends right now (gold -0.6%, silver -1.25%) as between higher yields and a rising dollar, fear over debasement has given way to greed for the last basis point of yield.  Copper (+0.4%) though is starting to trade on its own terms as the strength in the US economy continues to underpin demand for the red metal.  In fact, to highlight that economic strength, a look at the Atlanta Fed’s GDPNow estimate for Q3 shows that the data supports a positive view.  It currently sits at 5.1%, far above analyst estimates as per the below chart.

Finally, turning to the dollar, as I mentioned earlier this week, a move to the top of the trading range was quite possible and we are on the way to getting there as you can see in the below chart.  The peak is 101.80, so still 0.5% away from where we are, but the recent trend is strong.

Source: tradingeconomics.com

This strength is broad based and entirely on the back of the US rate structure and growth story as markets price in a greater likelihood of a rate hike next month, now 70%, and an additional hike next year as you can see in the below cmegroup.com table.

While the movement today has been pretty uniform across both G10 and EMG currencies, we do need to start to watch USDJPY again as it is heading back to the 160 level.  Now, if the dollar is strong against all currencies, there is far less reason for intervention in the yen, but that doesn’t mean it won’t happen.

On the data front, this morning brings the weekly Initial (exp 201K) and Continuing (1750K) Claims data as well as New Home Sales (620K).  Yesterday’s data also included oil inventories, which remain more than adequate.  Something else to remember is that the SPR releases were all executed via swaps, so starting November 1, the SPR is going to get refilled over the ensuing several years and my guess is we will not hear a word about that in the future.  The diesel export ban is a terrible idea, and hopefully cooler heads will prevail.  Diesel prices are high because Ukraine continues to destroy Russian refining capacity, not because the US exports the excess over what we use.

It’s an odd thing this morning.  I have seen many stories about the imminent collapse of the stock market now that bonds are under pressure and maybe that is exactly what will happen.  But I am not getting the same level of fear from the current situation so while a correction is completely viable, I think we need a much bigger disruption to force a major downturn in risk assets.

Good luck

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Doom Was Misspent

Posted on by 
The 10-year yield hit Five Percent
And somehow, despite this event
The nation’s still here
And growth’s still in gear
Perhaps all that doom was misspent

It’s not to say things are all great
And many, til Wednesday will wait
To see if the Fed
And chief talking head, 
Chair Warsh, will then bless a new rate

I’m going to let pictures do much of the talking to start this morning as we are seeing significant moves across the board in various classes.  To start with government bonds, here is this morning’s view from a Bloomberg screenshot.

As you can see, yields have jumped with most nations seeing them climb around 5bps or more.  (Canada, Brazil and Mexico are not yet open, hence the lack of movement). Prior to touching, and now breaking the 5.0% level, the punditry had spilled a great deal of ink regarding how devastating this was going to be for both risk assets and for the US economy.  On the first count, if we look at equity markets around the world this morning, they were correct, selling is the name of the game as you can see in the below screenshot from tradingeconomics.com

There are not many happy equity investors this morning, although energy shares are holding their own better than most other things.  (Again, Canada and Mexico are closed.)  But as to the second point, it remains to be seen how devastating 5.0% yields on the 10-year Treasury are going to be.  And of course, we still have the FOMC meeting starting today with the policy announcement and press conference coming out tomorrow afternoon. 

But here’s the thing to remember about the equity markets, even the NASDAQ, which has had the most discussion as the tech sector has been rerating lower, is only lower by 6.3% from its all-time high seen in early June.  While nobody ever likes to see their portfolios decline in value, prices remain dramatically higher over the past several years and all three major indices are still higher by 10% or more so far in 2026.  It is hard to call the below chart of the NASDAQ bearish!

Source: tradingeconomics.com

Which, I guess, takes us to the Fed and the ongoing discussion about what they will do.  Depending on where you look, the probability priced into markets for the Fed to hike rates tomorrow is 92% (CME futures) or 100% (rateprobability.com).  Looking at the latter’s most recent chart of the six major G10 central banks, market expectations are for interest rates to rise over the next year by at least 100bps across the board.  (Australia just hiked rates last week so that was their first 25bps).

Now, I often make the case that market pricing ought to be the key feature to watch when considering a situation, but I have to admit, when it comes to the Fed funds rate, there is a bit more to the story, namely the politics involved.  

Let me start by repeating my view that I believe a rate hike would be a mistake.  While headline inflation is running above target, it remains largely an energy story, and we all understand that is outside the Fed’s control.  But if you dig deeper into the inflation statistics, things are not great, but not calamitous either.  It is ironic, if Congress were truly worried about inflation, they would cut spending to balance the budget at which point I am highly confident inflation would no longer be a concern.  Martin Armstrong (@StrongEconomics) made an excellent point this morning on X worth repeating here relative to the FOMC meeting.

As to Chairman Warsh, I think he still must be frustrated that the discussion revolves around what the FOMC is going to do but I presume he will take the information of higher yields in the back end into account regarding this decision.  Remember, too, it is not just his decision, 7 voters need to vote for a hike, and while we know there are three that believe it is proper, are there four more?  I guess we will find out tomorrow afternoon.

It’s interesting, even though oil and energy prices remain the key driver of market activity, they get remarkably little press compared to the stock and bond markets.  Sure, there are still stories about how the real energy crisis is about to come, and market pricing is certainly indicating more concern now than several months ago, but the price of Nvidia or Meta or the 10-year is the top story these days.  At any rate, oil (+1.25%) is higher this morning but has stalled just above $100/bbl for now.  Interestingly, NatGas (-0.6%) is softer and the same is true across Europe and the UK.  I find that quite interesting, especially in the latter places, as there is no indication that more supply is forthcoming.  And, not surprisingly, gold (-0.4%) and silver (-0.1%) are slightly softer with the ongoing rally in oil prices.

Finally, the dollar, which had a very strong session yesterday, is continuing to rally this morning.  it seems that even though interest rates are rising around the world, those higher rates only help the dollar.  Perhaps this is one reason that despite all the hate the dollar absorbs from a certain part of the financial community, it remains the haven of choice.  Open capital markets are worth an awful lot to international investors, and none are more open than those in the US.

Perhaps this is a good time to discuss China, a land of closed capital markets,  and what is happening there.  Last night they released some of their key economic statistics and, the idea that domestic demand is being supported is a joke.  

Source: tradingeconomics.com

It is very difficult to look at these numbers and think things are going gangbusters there.  For instance, the housing market, which has been a key destination for private savings has been declining for five years and has been negative for more than four.

Source: tradingeconomics.com

But more tellingly to me was the new regulations that were imposed starting today regarding the ability of people in China to simply leave the country on holiday.  The below tweet from journalist Melissa Chen from The Spectator is a telling sign that there is growing stress in that nation.

Again, my point is that as many problems as exist in the US, and we have plenty, it is not as though other nations are killing it.  Rather, they, too, are being killed.  Now, has this impacted the CNY?  Not at all.  It is a completely controlled currency and the PBOC is slowly driving it higher although it remains massively undervalued.  As to the rest of the FX market, the dollar is stronger by somewhere between 0.1% and 0.3% nearly across the board with only KRW (-0.9%) outside that window, but remember, the won has been flying over the past two months, so a little pullback is no surprise.

On the data front, this morning brings Empire State Manufacturing (exp 14.75) and that’s it.  It is also worth mentioning that the German ZEW Sentiment Index was released at a weaker than expected 34.7, just showing that there is a bit of despair all around the world.

I have a feeling today is going to be relatively quiet as all eyes look to the Marriner Eccles Building and Chairman Warsh tomorrow afternoon.

Good luck

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Tossed to the Fates

Posted on by 
The market’s now certain this week
On Wednesday, when Warsh gets to speak
That he’ll have raised rates
And tossed to the fates
Just how much more havoc he’ll wreak

But ask yourself, what would you do
As Fed chair, midst this ballyhoo
A rate hike don’t drill
Instead, it might kill
The growth impulse we’re living through

I guess it’s a done deal, at least in the market’s collective mind, that the FOMC is going to hike rates on Wednesday.  This is according to the Fed funds futures market as you can see below.  In addition, you can see that the futures market is now pricing essentially 4 hikes over the course of the next year.

So, why the change of heart?  Apparently, the ‘hot’ CPI data from Friday combined with higher oil prices this morning has sealed the deal.  Let’s take the two in order.  Below are the reported CPI figures from Friday:

Source: tradingeconomics.com

It seems the fact that the M/M Core result was 0.3% instead of the 0.2% forecast, despite the fact that the Y/Y number was as expected at 2.4%, has been the catalyst for the increased certainty of a hike.  You may recall that Friday before the CPI release the futures market had priced in about a 60% probability of a hike, i.e., still a lot of uncertainty.  Of course, oil prices (+2.6%) are higher this morning as well after the Saudis cut movement through their East-West pipeline once it had been attacked, which has further reduced the flow of oil from the Middle East.  And certainly, if oil prices continue to rise, that will feed into inflation pretty quickly as we saw at the beginning of the summer.  

However, just for a moment, let us consider the rationale behind raising interest rates to address inflation.  The main central bank thesis is that higher interest rates will reduce demand and therefore it will reduce price pressures.  This process takes some time, the so-called long and variable lags of Fedspeak, but this is what it boils down to, reduce demand to reduce prices.  As an aside, history has shown that every economic boom has been ended by the central bank squashing it with higher interest rates.

But now let us consider the current situation.  Higher oil prices are certainly driving up some portion of the overall consumption basket, and that is responsible for the bulk of the rise in measured inflation.  Higher oil prices are also acting as a dampener of demand as money that may have gone toward other things is now being used to pay up for gasoline and diesel.  The natural result is those other things, whether goods or services, have seen demand slip somewhat and the purveyors of those things have limited ability to raise prices, at least those not getting paid directly by governments like healthcare providers.  In other words, higher oil prices are already reducing the demand that the Fed will be trying to address via a rate hike.

If the Fed decides to hike rates this week, they will be reducing demand further and could well push the economy off its current solid growth path to something less positive where companies see further reductions in demand and begin to reduce headcount.  Again, history has shown that central bank rate hikes to address energy price shocks (or really any exogenous price shocks) have been categorical mistakes.  I fear this is where we could be headed.  And the worst part is that if they hike rates, it won’t change oil prices at all. 

As a reminder, a quick look at the Atlanta Fed’s GDPNow Q3 GDP estimate shows things are looking pretty good at 4.4%.

Perhaps this discussion is the reason that I am most positive about Kevin Warsh as chairman.  I don’t know if they will hike or not this week, but the entire idea of the five task forces is to try to change the way the Fed looks at the world.  Their neo-Keynesian view has become destructive, in my mind, given the complexities that have arisen in the economy with globalization dramatically reduced and trade policies no longer moving toward free trade.  As well, the changing demographics of the US, both via an aging population and a reduction in immigration in addition to actual deportations is having a significant impact on the economy and does not appear to have been taken into account in the current Fed models.

Away from this discussion, the other main topic is AI and whether it will, indeed, kill us all, or whether it is simply a very powerful tool that if used well can enhance productivity.  Like most issues these days there doesn’t appear to be any middle ground here.  For me, I have a hard time overcoming the perspective that there is a well-orchestrated campaign now to demonize AI in an effort to get the government, at both state and federal levels, to regulate it more strictly, although I don’t know who benefits from this most so I’m not sure who is funding it.  It’s almost as though the demonization of data centers has been unable to slow the train enough, so they had to up the ante and explain AI is Skynet.

Ok, let’s see how all this new news is impacting markets.  Since commodities seem to be the primary driver right now, if we look beyond oil, we see NatGas (+2.3%) rising this morning but it remains extremely well behaved and substantially cheaper than in Europe and the UK as per the below chart from tradingeconomics.com

In fact, putting all three prices into $/MMBtu, the US is at $2.89, the UK is at ~$27.75 and the EU is at ~$27.99.  In other words, Europe and the UK are paying nearly 10X what we pay for NatGas.  They have serious problems there.  As to the precious metals, they are not that precious this morning as the negative correlation with oil continues (Au -1.3%, Ag -2.1%, Cu -1.9%).

Turning to bonds, this is the other key discussion point as 10-year yields approach 5.0% in the US.  This morning, Treasury yields are unchanged, although they have climbed 31bps in the past month.  European sovereign yields are all a touch higher with Italy (+4bps) in the worst shape but the rest of the continent seeing yields climb between 1bp and 3bps.  And JGBs, ahead of the BOJ meeting on Friday, have edged higher by 1bp.

In the equity markets, Friday’s US rally (which given all the hype on the Fed tightening seems strange, although oil prices did slide then, has been followed by a mixed picture in both Asia and Europe.  In Asia, the Nikkei (-0.8%) suffered although the broader TOPIX (+0.75%) did not.  HK (+0.5%) rallied as did some of the smaller regional markets (Australia, Singapore, Malaysia) but there was more substantial weakness amongst Korea (-3.25%) and China (-0.7%). Mixed describes it well.  in Europe, there is far more red (Italy -1.1%, Spain -0.85, France -0.7%, Germany -0.3%) than green (UK +0.7%) with the latter benefitting as oil stocks (BP and Shell) both rallied on the back of oil price rises and that has been sufficient to counter the other negativity.  As to US futures, they are all lower this morning with the NASDAQ (-1.5%), leading the way with the others lower by -0.5% or so.

Finally, the dollar is rocking this morning, with DXY (+0.4%) a pretty good indicator of things.  EUR, AUD, NZD, JPY are all lower by about that amount, as is NOK (-0.4%) despite the rise in oil prices.  SEK (-0.8%) is the G10 laggard but it has company with ZAR (-0.8%) on weaker gold prices and CE3 (PLN -0.9%, CZK -0.75%, HUF -0.8%) all demonstrating their high beta to the euro.  In LATAM, MXN (-0.6%) and CLP (-0.6%) are both under pressure on metals weakness and even KRW (-0.3%), which has been on a tear, is softer this morning.  Higher US rates and the prospect for even higher ones seems to be driving market activity.

On the data front, obviously, this week is all about the Fed, but here is the other stuff:

TuesdayEmpire State Manufacturing14.75
WednesdayRetail Sales0.9%
 -ex Autos0.6%
 FOMC Decision4.0% (current 3.75%)
 Brazil Interest Rate Decision13.75% (current 14.0%)
ThursdayInitial Claims205K
 Continuing Claims1775K
 Housing Starts1.31M
 Building Permits1.41M
 Philly Fed32.5
FridayBOJ Interest Rate Decision1.25% (current 1.00%)
 IP0.3%
 Capacity Utilization76.4%
 Leading Indicators0.1%

Source: tradingeconomics.com

So, it all comes down to, will they hike or not.  While I don’t believe it is the right thing to do, the market certainly believes that to be the case.  I wouldn’t be surprised, however, if they do hike, to see a counter reaction, like a buy the rumor, sell the news outcome, especially in the FX markets.

Good luck

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Memories Morose

Posted on by 
A score and five years now have passed
Since evil, near home, struck so close
And I will ne’er forget that blast
Though it brings back memories morose

While I have worked to block it out
We lived through a great deal of stress
And recent events leave no doubt
New York City is still quite the mess

I understand you weren’t there
But absence remains no excuse
To disregard those thoughts and prayers
Of folks who feel torment, profuse

No other day that I recall
Impacted our lives with such woe
And to this day, its darkened pall
Still hides much of life’s radiant glow

On this somber day, remembering the events of that bright and sunny morning, I sincerely hope none of you ever forget what happened.  From my vantage point, a single block away, the devastation was remarkable.  Unfortunately, I lost many friends that day, and they are all in my thoughts this morning.  If ever you wondered how important the markets are, they pale in comparison to the realities of life…and death.

And while I try to keep politics out of this missive, this morning, it pains me greatly that New York City mayor Mamdani, with a history of supporting the very people who perpetrated this heinous crime, will have anything to do with the commemorative ceremony.

Now back to our regularly scheduled programming.

The punditry’s near salivating
As Treasury yields keep inflating
The glee they express
O’er bond market stress
Can fairly be called fascinating

Elsewhere, there’s a new boogeyman
Replacing the war in Iran
AI is Skynet
Much worse than huge debt
As it will destroy all it can

The primary market discussion this morning revolves around government bond yields after yesterday’s dramatic rise virtually across the board.  If you look at the chart below, it shows the yields for US, UK and German 10-year bonds and how they have all risen dramatically in the past week (18bps, 20bps and 15bps respectively) with the bulk of that coming yesterday.  

Source: tradingeconomics.com

There have been many theories as to why things broke yesterday with some pointing to oil’s dramatic rise, some pointing to President Trump’s $5k bonus payment and others pointing to Secretary Bessent’s bond repurchases where he was only able to buy $5.1 billion of the $6.0 billion they tendered for.  As is often the case, all of these likely had some impact, and you can throw in some views of yesterday’s PPI data, which while released at expectations did nothing to cool inflationary ardor.  

If we look at Fed funds futures in the table below from the CME, we can see that the probability of a rate hike next week has risen to 67%, but more interestingly, there is now pricing for a total of 100bps of hikes over the course of the next year.

In fact, if we look across the globe, the number of rate hikes has grown since yesterday.  Compare this morning’s chart from rateprobability.com to the one I published yesterday, and you can see that expectations have risen between 15bps and 25bps across all the major central banks.

Today’s chart.

Yesterday’s chart.

At this point, we are highly confident that Japan is going to raise rates at their meeting later this month because Nikkei News reported it last night, and their track record here is, literally, perfect, never having missed a call.  Of course, the ECB raised rates yesterday, and it appears quite likely that rate hikes are the new normal.  I wonder what will happen, though, if today’s CPI (exp 0.4% Headline, 0.2% Core) comes in cool.  Frankly, I think the market is so convinced that it won’t matter at all.

Ok, before I run down markets, I must comment on the increased chatter regarding AI.  Let me start by saying, I am not an expert on AI, although I have a pretty good feel for human behavior.  The recent comments from the Anthropic scientist who left and explained that AI was going to kill us all were remarkable.  But what is more remarkable is the call for ‘government experts’ to oversee AI’s ongoing evolution. Every time I hear of government experts I hearken back to the end of “Raiders of the Lost Ark” when Indiana Jones tells the army intelligence men that the Ark needs to be studied, and they reply it is being studied.  When queried ‘by who?’ they reply, top…men.

My point is there are likely zero AI experts who work in the government as all of them are working for companies building AI.  Congress has proven itself to be uniquely incompetent across virtually every sphere of thought and action, so having Bernie Sanders or Hakeem Jeffries or Josh Hawley say they need to be involved does not inspire confidence.  Here’s the thing, we have heard this before.  After all, wasn’t global warming or climate change or Covid going to kill us all if we didn’t do exactly what government said?  It is almost as if they are running the same playbook on AI and it is becoming pretty tiresome.  Perhaps AI is developing into Skynet, but like virtually everything else, early hysteria is regularly misplaced.

Which takes us to markets.  Oil (-3.2%) may have been a tad overdone yesterday during its $6.50 rally.  Threats and counter threats between the US and Iran continue to be the backdrop, and Saudi Arabia did announce they produced their least amount of oil since 1991, but the US is producing record amounts, and Venezuela is coming back faster than expected and there still appears to be a surfeit of the stuff around.  While EIA oil stocks had a very modest draw of 390K, gasoline stocks rose > 1mm barrels and there is no indication supplies are gone.  However, while refinery runs in the US are consistently near 98% of capacity, the lack of refining in Russia and the Gulf continue to drive prices.  I guess the question is how long can the IRGC withstand the very clear economic pressure the blockade and newer sanctions have imposed?  I have no answers.

As to metals, yesterday saw sharp declines across the board as both interest rates and oil prices rallied, but this morning they are rebounding a bit (gold +0.5%, silver +0.5%) although copper is still under some pressure (-0.25%).

In the equity markets, in truth, despite all apocalyptic talk, the major US indices were only lower by about -0.6% across the board, not great but not devastating.  Asia, however, had a rougher go of things with Tokyo (-1.9%), China (-0.8%) and HK (-0.6%) leading the way with most of the rest of the region also in the red (Korea -1.8%, Taiwan -1.6%, Australia -0.9%, etc.). But at some point overnight, things turned brighter as European bourses are higher by between 0.6% and 0.7% across the board with the only data release UK GDP and Production data, all coming in stronger than expected.  Perhaps the idea is that if the UK can grow despite extraordinarily bad economic and energy policies, so can the rest of Europe!  As to US futures, at this hour (7:30) they are higher by 0.6% across the board.

As we’ve already discussed bonds at length, it leaves us to the FX markets which continue to garner limited interest from the trading community.  While the dollar is a touch firmer this morning, DXY +0.1%, if we use that as the proxy, over the past month, as you can see from the below chart, it has traded within a 1.5% range (98.50 – 100.00) and that is with a key piece of the index, JPY having shown a substantial move.

Source: tradingeconomics.com

Someone on X this morning was claiming that this market is setting up for a big move lower with many attendant impacts if that is to be the case, but while he is a very smart guy (Tavi Costa) whose views I respect, he is looking at a VERY long-term chart.  Perhaps he is right, and I guess if we see major destruction in the bond market with yields exploding higher, that could be correct, but it is so hard to get excited about FX right now.  It continues to be a background event.

In addition to the CPI data, we also see the preliminary Michigan Sentiment (exp 51.0) Survey but that’s it.  My take on CPI is if the data is cool, it will have very limited impact, but if it comes in hot, we will see another wave of selling in bonds, and probably stocks, so an asymmetric outlook in my view.

Good luck and good weekend

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Like Love Unrequited

Posted on by 
Said Trump, we can all use $5K
To help with our life’s day-to-day
So, vote for the R’s
And your cookie jars
Will fill up with this bonus pay

The pundits are clearly united
That this idea’s crazy and blighted
But of more concern
Is buyers will spurn
The 10-year like love unrequited

I guess we cannot be but so surprised that populist President Donald Trump has said he will hand out $5000 to every adult US citizen if the Republicans retain both the House and the Senate during the mid-term elections.  He is, after all, a populist.  And that is what populists do; they promise things to the people to get elected.  While this may be abhorrent to the alleged ‘hard’ money analysts on Wall Street, it strikes me that this is a brilliant way to get those leaning Socialist to vote for the Republicans.  After all, their entire MO is to get money for no work, and that’s exactly what this is.  It is laughable to me that there is now concern that if this were to go forward, it would cost ~$1 trillion and ‘where would the money come from?’ is now the big question.  The money would come from where all the money for government spending comes from, more Treasury issuance.  

Which brings us to a more important question regarding markets, if there is a new line item in the 2027 budget, $5000 bonuses, how will the bond market respond?  Here the situation is very clear, yields continue to rise.  If you look at the chart below comparing 10-year yields with their counterpart TIPS yields, you can see that inflation is edging higher as a concern (nominal yields are rising more quickly than real yields).

Source: tradingeconomics.com

While I don’t believe this is a direct response to the Trump bonus plan, rather to the ongoing climb in oil and related energy prices, I’m confident the bonus plan is not helping the situation.  

This dovetails nicely with the other key topic of discussion in the market; how the Fed will respond to this information as well as the PPI/CPI data to be released later today and tomorrow.  I chuckled at the WSJ headline, A Tiny Shift in the Inflation Rate Could Decide the Fed’s Next Move as the implication is that if the M/M reading for core CPI is 0.2%, the Fed will stand pat but if it is 0.3% it will hike.  And maybe that is the way things will work out.  But if that is the case, it sure seems to me like they would be missing the forest for the trees.  This is especially so since Chairman Warsh was explicit in that he wanted to see the underlying trend, and as we all know, a single data point does not a trend make.

Currently, the Fed funds futures market is back to pricing a 64% probability of a rate hike next week, although as per the below chart from rateprobability.com, you can see that the Fed appears to be one of the most dovish central banks around.

The ECB is virtually guaranteed to hike 25bps this morning and are priced to hike 3 more times during the next 10 months.  I keep wondering how they reconcile a Eurozone economy that is barely growing with hiking rates to reduce demand, and by extension, inflation.  This is where Keynesianism has a really hard time.  In fact, one of the big benefits of Kevin Warsh not having a PhD in economics is that he has never been indoctrinated into that school of thought.

In fact, if you recall Warsh’s first press conference, he lauded the bond market for doing the Fed’s job, raising the cost of funding so the Fed didn’t need to move.  Well, after a lull, the bond market is doing the hard work again.

As an aside, Secretary Bessent’s bond buybacks will take place today and, certainly in no surprise to me, the amount has been increased to $6 billion.  (Remember the ‘at least double’?). In truth, I expect that this program will increase in size each week going forward and ultimately become meaningful with respect to the size of the bond market.  Of course, looking at the bond market’s pricing today, with yields rising another 2bps, the punditry is once again calling out Bessent for not being able to do what he explained.  Funnily, though, they have stopped talking about the yen continuing to decline even though they were quick to dismiss Bessent’s activities there as well.  Personally, I’m going to wait a little longer before I declare the program a success or failure!

Ok, let’s turn to markets this morning.  Oil (+1.7%) continues to climb as the Iran conflict is showing no signs of cooling off.  It is not hard to see the trend in the chart below, and it is not clear what will alter this trend absent a major change in Iran.

Source: tradingeconomics.com

At the same time, the metals markets are under pressure this morning, with copper (-4.75%) leading the way lower and taking gold (-0.3%) and silver (-2.2%) down as well.  I don’t believe anything has changed with respect to the long-term prospects of metals, but they are quite volatile and always have been.  Copper has been subject to tariffs and the LME – COMEX spread and arbitrage is a key part of the price action there, dwarfing fundamentals right now.

But higher energy prices have weighed on risk appetite everywhere with equity markets struggling in most places around the world.  Yesterday’s US weakness was followed by a general decline throughout Asia (China -0.5%, HK -1.3%, Australia -1.0%, Taiwan -0.5%, Indonesia -1.3%) with only Tokyo (+0.2%) bucking the trend.  The only real news came from Down Under where two RBA members were explicitly hawkish, essentially promising a rate hike at the end of this month and the market has priced in two more going forward, a tightening of expectations.

In Europe, though, despite (because of?) the imminent rate action by the ECB today, equity markets are mixed with some gainers (Italy +0.4%, Spain +0.3%) and some laggards, (UK -0.4%) with Germany essentially unchanged.  There has been no data to alter any views, but I guess we will need to hear what Madame Lagarde has to say later this morning.

Quickly, European sovereign yields are little changed this morning but broadly continue to follow Treasury yields higher and JGB yields (+3bps) bounced after their recent dip.  Recall, I mentioned this pattern yesterday.

Finally, the dollar remains generally quiet, although in the last few hours, we have started to see a bit of dollar strength.  JPY (-0.4%) is edging lower as are NOK (-0.7%) despite rising oil prices and ZAR (-0.45%) because of declining metals prices.  However, most other currencies remain +/-0.1% from yesterday’s closing levels.

On the data front, we get a bunch today.

Initial Claims205K
Continuing Claims1780K
PPI0.4% (5.3% Y/Y)
Core PPI0.3% (4.6% Y/Y)
Existing Home Sales3.98M

Source: tradingeconomics.com

We also see the EIA oil inventory data with a slight draw expected.  I suspect that the ECB is likely to be a nonevent and that PPI, unless it is dramatically different than forecasts, will also have a limited impact.  Oil prices are back in the driver’s seat so we will have to see if this rally continues, or it is, like we have seen in both bonds and yen, speculative driven.

Good luck

Adf

Feeling Quite Fraught

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

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

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

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

Current consensus expectations are as follows:

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

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

Source: tradingeconomics.com

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

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

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

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

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

Source: tradingeconomics.com

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

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

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

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

Source: tradingeconomics.com

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

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

Good luck

Adf

They Mostly Confuse

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

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

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

Source: tradingeconomics.com

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

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

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

Source: tradingeconomics.com

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

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

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

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

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

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

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

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

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

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

Source: tradingeconomics.com

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

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

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

Source: tradingeconomics.com

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

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

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

Good luck

Adf

The Score

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

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

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

Source: tradingeconomics.com

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

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

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

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

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

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

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

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

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

Source: tradingeconomics.com

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

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

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

Source: tradingeconomics.com

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

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

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

Good luck

Adf

A Warshach Test

Posted on by 
While narrative writers obsessed
For some this was a Warshach test
The doves and the hawks
Each messaged their flocks
That Warsh, to their views, acquiesced

Meanwhile, in Iran bombs are falling
And President Trump is name calling
However, despite
The restarting fight
Risk assets keep on, higher, crawling

So, the FOMC Minutes were released, and they were hawkish dovish irrelevant.  The best expression of this came from Bloomberg’s Joe Weisenthal when he posted this on X,

Two simultaneous takes on the release that he received.  And I confess, I read those Minutes and didn’t learn anything at all.  It seems that the decision to leave rates on hold was unanimous although several committee members would have voted for a hike as well.

What does this say about the state of things?  I am very hopeful that we are on our way to a Fed that is less intrusive in market activities, both by reducing its balance sheet size, something that Chairman Warsh has expressly indicated as a goal, and by hearing less from committee members.  As @inflation_guy, Mike Ashton explains here, if forward guidance is dead, then why do we need to hear from any FOMC members about anything?  All those speeches were simply each member’s way to get their opinion out there and try to influence markets.  As I have frequently written, we would be much better off if the Fed were opaquer in their decision making as it would reduce risk and leverage and that would enhance financial market stability.  For everyone who wants Warsh to be Volcker redux, remember, back then, there were probably fewer than 10 people on Wall Street, let alone anywhere else, who could name a single member of the FOMC other than Mr Volcker himself.  That is an aspirational goal!

How did the market respond to the Minutes?  They basically ignored them.  Equity markets, which had opened much lower, were already in the process of reclaiming those losses when the Minutes were released and edged higher from there, with no meaningful change in trajectory as you can see in the below chart of the S&P 500.

Source: tradingeconomics.com

How about bonds?  Well, here is the 10-year chart and you tell me if the Minutes had an impact.

Source: tradingeconomics.com

I guess the real question is will the rest of the world’s central banks follow Mr Warsh’s lead and seek to end forward guidance and simply go about their job of managing inflation?  One can always hope.

Which takes us to the other story of note, the apparent end of the ceasefire in Iran and the question of what is now happening in the Strait of Hormuz.  First, let’s be clear, nobody really knows as the fog of war remains thick.  Obviously, yesterday saw a sharp rise in the price of oil as concerns over future transits of the Strait rose dramatically.  However, as of this morning, while WTI (+0.6%) has edged slightly higher from yesterday’s closing levels, as you can see from the chart below, it seems to have found a new short-term home here around $74/bbl.

Source: tradingeconomics.com

Scrolling through X this morning, the $200/bbl analysts were back at it, explaining that this time, with all those inventories having already been used up, we are going to see much higher prices.  But weirdly, yesterday’s EIA data showed an inventory build of 3 million barrels.  I keep seeing charts of the US SPR and how it is at its lowest level since 1982 implying that we are on the cusp of running out like this one from Bob Elliott.  Now, Bob Elliott is a really smart guy, but I feel like the piece of the puzzle that is missing in these analyses is that right now, the US is producing just under 14 million bpd of oil, plus another ~7.5 million bpd of natural gas liquids and 110 billion cubic feet/day of dry natural gas.  In fact, we are a massive exporter of oil and products, so perhaps a better question is, why do we need an SPR anymore?  After all, it was created when we were at the mercy of the Middle East and producing just 8.6 million bpd.  That is no longer the case.

My take is the world can run perfectly well on $75/bbl oil and there is plenty of supply at that level.  In addition, we have seen numerous announcements of how Gulf oil producers are building new methods of transport away from the Strait, and over time, that will no longer be a choke point with any meaning.  War is exciting to market participants for about two weeks, at which point they get bored and move on to the next big thing.  After all, the Ukraine war has been ongoing for 4 years and it doesn’t get a mention in market commentary.  Next week we start to see earnings releases for Q2 and that will be much more interesting for equity, and likely all other, markets.

In the meantime, let’s see what happened overnight.  Based on the mix of information, we cannot be surprised that there were mixed outcomes in equity markets around the world.  Yesterday’s US split (DJIA -1.1%, NASDAQ +0.2%) was followed by gains in Tokyo (+1.4%), China (+2.5%), Korea (+0.6%) and India (+0.3%) while HK (-0.7%), Taiwan (-0.8%) and the Philippines (-0.8%) all slid a bit.  There was no rhyme or reason here.  The only data of note overnight was Chinese inflation data where CPI fell to +1.0%, while PPI rose to +4.1%.  It strikes me that Chinese companies will continue to see pressure on their margins.

In Europe, things are also mixed with Spain (+0.8%), Italy (+0.7%) and France (+0.3%) all higher while the UK (-0.6%) is slipping and Germany is little changed.  As to US futures, they are leaning higher at this hour (7:50).

Bond markets seem to have stopped selling off as yields this morning are little changed (Treasury +1bp, Bunds +1bp, Gilts -3bps, OATs -3bps).  JGBs were unchanged overnight.  The 10-year auction yesterday went pretty well with a bid-to-cover ratio of 2.59, although with yields at 4.58%, it is not that surprising there was real demand.  I will say this, bonds, too, are a market with some smart folks with diametrically opposed views of the future outcome.  Both 3% and 6% are seen as the next major destination depending on the analyst.

Interestingly, metals markets are showing some life this morning with gold (+0.8%), silver (+1.4%) and copper (+2.2%) all bouncing off recent lows.  This is a bit out of character compared to recent price action relative to oil, but maybe we are putting in some bottoms here.

Finally, the dollar is, net, little changed this morning.  In the G10, NZD (+0.65%) is the big mover, which continues on the back of their rate hike from yesterday.  But otherwise, +/-0.1% is the norm here.  In the EMG bloc, KRW (-0.5%) is giving back some of its recent gains but continues to hover near multi-decade lows.  The recent gains have been on the back of a record current account surplus, but it remains an interesting conundrum that despite the massive gains in the Korean stock market, the currency has not attracted more buying interest.  Otherwise, modest EMG gains on the order of +0.1% are today’s story.

On the data front, we see Initial (218K) and Continuing (1820K) Claims as well as Existing Home Sales (4.20M) today.  In addition, there are two Fed speakers as I imagine getting them to shut up will take some time.  However, I wonder, will they really add to the discussion?

Oil continues to be the driving force in markets, but right now, my sense is eyes are turning to upcoming earnings releases.  Of course, we also get CPI next week, which will be a critical number for markets, at least for now.  

Good luck

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Rise Like the Sea

Posted on by 
So, let’s take a sec to discuss
Inflation, and why it’s a plus
At least for some folks.
In gentle broad strokes,
Though most of us see it and cuss

For those who hate Trump it’s a key
To help destroy his legacy
For Congress, they need
Inflation to plead
That taxes must rise like the sea

And what of the Fed and their role
To keep it in check, on the whole
Now, if they’re successful
T’would truly be stressful
For everyone on their payroll

If you were a government and wanted to design the perfect process by which to extract more money from your citizens allowing you to spend more money on the things you wanted, whatever their views, all while explaining that their lying eyes were deceiving them when they complained, it would be hard to come up with a better process than the official inflation figures.  Of course, today we get more of those figures with PCE and its variants set to be released at 8:30.  While I am here, these are the current market median estimates: PCE (0.5%, 4.1% Y/Y), Core PCE (0.3%, 3.4% Y/Y) although I see no forecast for the Dallas Fed Trimmed Mean reading, the one that Chair Warsh says he wants to focus on.  Too, it is key to remember that they are May numbers.  How many of you can remember what happened in May?

For instance, looking at the easiest one, oil (-1.0% today), as per the below chart, you can see that WTI ranged between 86.50 and 106.50 during May, mostly sliding, bur arguably averaging in the low 90’s.

Source: tradingeconomics.com

This morning, it is trading below $70/bbl, back to the price on March 2nd, the first market day of the Iran conflict.  The BLS indicated that upwards of 60% of the rise in CPI was driven by the rise in energy prices, which tells me that whatever today’s numbers are, they are ancient history and next month’s are going to be lower.  I don’t know about you, but I am quite happy that energy prices are falling back to pre-war levels as, a) it makes life more affordable, and b) cheap and abundant energy leads to significant economic output, something good for us all.

But here’s the thing, with energy prices declining, those who benefit from high inflation need a new story, and there is none better than semiconductors.  The top headline in the WSJ this morning is The Data-Center Boom Is Sparking a Third Wave of Inflation, right on time for the next big inflation scare.  The big winner, at least today, Micron Technology, which had blowout earnings last night and jump-started a serious Techquity™ rally overnight with Tokyo (+4.6%), China (+1.6%) and Korea (+5.4%) leading the way.  HK (-1.4%) lagged and the rest of Asia was mixed, but that gives you an idea.

But the point of the article was that we all need to be prepared and accept that higher inflation is coming because the massive resource demands to build AI are coming along before the productivity gains can moderate the price impact.  And I have no doubt that the resource demands are going to support prices.  I remain uncertain over how quickly AI’s impact will be deflationary, even disinflationary.

And here’s the thing, my lived experience, plus my frequent conversations with The Inflation Guy, Mike Ashton, have me in the camp that CPI is going to live in the mid to high threes for a while to come, regardless of the metrics the Fed uses to measure things.

But I have begun to discern that there is a large community that benefits from rising inflation because it helps them achieve their goals.  After all, we know that governments love inflation as it devalues the real value of their outstanding debt, so a steady depreciation is their best friend.  As well, Congress’s baseline budgeting ruse, which starts each year from the previous year’s expenditures, not from zero, is a huge beneficiary of inflation.  I understand that since about 1980, the BLS has adjusted the CPI calculation somewhere between 30 and 40 times and you can guess the direction of most of those adjustments.  Of course, companies that sell products are a big fan as well, as they tend to adjust prices to both include new costs, and increase margins.  And they have a natural scapegoat; CPI is out of their hands.

All I’m saying is that while there appears to be a strong effort to fight inflation, I’m not a believer.  (And here I should highlight that I use the term ‘inflation’ in the manner it has become understood, rising prices, and not in its classical form of an increase in the money supply, which is 100% the Fed’s doing.)

One other thing.  My friend JJ who writes Market Vibes, posted a chart of 1yr breakevens as of yesterday and I reproduce it below.

This is not a signal that the market expects prices to rise, but rather is following the decline in oil prices pretty well.  Once again, I will ask, please explain given market signals, why everyone is so sure the Fed is going to hike.  I maintain my one cut by year end view which is at least 50bps below the current Fed funds futures market pricing.  Ask yourself how the FOMC ‘hawks’, and I use that term loosely, will be able to argue for higher rates if oil continues its trajectory and inflation readings decline.  Precautionary?  How about they will simply say, we want to screw Trump, at least they would be honest then.

Ok, on to other markets overnight.  European bourses are all higher this morning, but since none of them have any real tech exposure, they are not running away.  Rather, 0.3% to 0.7% encompasses the magnitude of movement we have seen.  As to US futures, at this hour (7:25), NASDAQ (+2.0%) is leading the way, but the whole group is higher.

In the bond market, yesterday saw yields decline about -8bps in the 10-year Treasury and -6bps in the 2-year.  this morning they are little changed, consolidating those price gains.  As to European sovereigns, yields there also slipped yesterday, but not as dramatically, about -4bps, and this morning they are largely unchanged.  Overnight, JGB yields fell -3bps as declining oil prices are feeding through to inflation expectations.

The precious metals complex continues to get hurt, with gold (-0.6%) and silver (-0.5%) still under pressure and at new lows for the year, but copper (+1.25%) seems to have found a short-term floor at $6.00/lb.

And finally, the dollar, which has been en fuego lately, rising for the past six consecutive sessions, as per the below chart, is consolidating for now.

Source: tradingeconomics.com

Nothing has changed the yen story, where the dollar creeps ever so slightly higher each day, now just below 162.00 but overall, today’s movement has been quite muted, about +0.15% in the dollar against most currencies, as the focus turns to inflation, at least for today.

On the data front, in addition to the PCE data we get a bunch more as follows:

Initial Claims225K
Continuing Claims1800K
GDP Q1 Final1.6%
Personal Income0.4%
Personal Spending0.6%
Durable Goods-4.5%
-ex Transport0.6%
Chicago Fed National Activity0.12

Source: tradingeconomics.com

Will anyone care about this data?  I doubt it, Core PCE is THE thing today, so we will watch and see how that comes out. But mark my words, if it is soft, the hawkish Fed narrative is going to come under real pressure as stocks rally and yields and the dollar slip.

Good luck

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