The bond vigilantes have spoken
The CPI data was smokin’
For Waller a half
Would not be a gaffe
But rather a TDS token

The dollar responded by soaring
While bonds, everyone were abhorring
Though stocks settled chthonic
It’s not clear it’s chronic
And oil, remarkably’s, boring

On this Veteran’s Day, let me start by thanking all of you who served in the name of this nation, I truly appreciate your efforts and service.  As well, given it is a partial holiday, with banks, and therefore the bond market, closed, I will endeavor to keep this short this morning.

You may recall that yesterday morning we heard from Fed Governor Chris Waller who explained that not only did 25bps make sense, but if yesterday’s CPI data was hot, 50bps should be on the table.  And he got his wish (?), with the headline printing at 0.4% and the core at 0.3% (remember official Y/Y data was absent because of last year’s government shutdown.). Certainly, the bond market got the message with 10-year yields jumping 10bps and 2-year yield exploding 13bps during the session as per the below chart.

Source: tradingeconomics.com

Here’s the thing about the inflation data, at least in my opinion, the current rate has largely been the rate for quite a while.  Broad-based inflation has been running in the 3.5% ish area for a while now, and it certainly doesn’t appear that it will be declining anytime soon.  As the Inflation Guy, Mike Ashton, explains, yesterday’s data showed that there were few outliers, everything is just rising at that pace.

The bigger problem remains that the Fed has this myopic belief that adjusting the short-term interest rate is going to solve the inflation problem while they continue to grow M2.  While my Excel skills seemed to be sleeping this morning, the below two charts are from FRED data showing the last 10 years of M2 growth annualized and Headline CPI.  There is a very clear relationship between the growth in M2 and the subsequent lagged growth in CPI.  The problem is, M2 is growing at a solid 6.0% clip which bodes ill for reducing the rate of inflation anytime soon.

As Mike explains, while higher interest rates may destroy demand, they also raise the costs of supply and do not have a consistent impact on inflation.  Milton Friedman explained many years ago, “inflation is always and everywhere a monetary phenomenon”, but the current neo-Keynesian framework doesn’t like that viewpoint so focuses on interest rates.  Alas!

But this is where we are in central banking circles, so it is unlikely to change in the near term.  It will be very interesting to see if Chairman Warsh can institute meaningful change at the Fed, because if it happens there, it will follow around the world.  We would all be better off if that was the case.

Beyond the bond market, how did things behave?  Surprisingly, at least to me, while stocks were lower, it was hardly a rout, with the NASDAQ (-0.75%) the worst performer in the US and the other major indices lower by -0.35% or so.  And Asia seemed just fine, with gains in Tokyo (+1.3%), China (+0.4%), Korea (+2.6%) and Taiwan (+3.6%) with only HK (-1.0%) lagging on many alleged issues with profit-taking seeming the key driver.  After all, in the past week, it had rallied 8%, so taking some money off the table was reasonable.

Meanwhile, European bourses are generally having a good day (Germany (+0.75%), France (+0.4%), UK (+0.4%) although both Spain (0.0%) and Italy (0.0%) are not taking part.  A dearth of data has left investors to contemplate their own navels this morning.  But whatever fears there were yesterday about rising interest rates, the better than expected Coreweave earnings last night has the US futures on a roll with the NASDAQ (+1.9%) leading the way higher.

Oil prices (+1.1%) are modestly higher this morning but still below $90/bbl and there is still lots of back and forth as to whether talks are ongoing or not.  The one thing I have become far more certain about is that there is plenty of crude around.  Diesel remains a problem, but that is more a Ukraine/Russia thing than an Iran thing I believe.  As to metals, gold (+0.3%) and silver (+2.5%) are both stronger this morning after both sold off hard yesterday on the rate story.  Ultimately, as long as M2 continues to grow quickly, and it is growing faster elsewhere in the world, notably China, precious metals vs. fiat currencies leans in favor of metals.

Finally, the dollar exploded higher yesterday, jumping 0.7% as per the DXY and as you can see in the chart below.

Source: tradingeconomics.com

Interestingly, for the first time in more than a month I read something about the yen, which had been idling on either side of 158 in the wake of the September intervention, but this morning, the yen (-0.3%) has slipped further and is now back to levels not seen since early September with the dollar above 159.00.  However, if one considers that this is not a yen phenomenon, but rather a dollar one, it strikes me there is little reason for the BOJ/MOF to be concerned.  There is nothing they can do about a broad dollar move higher.

Of course, that is the question, are we setting up for a broad dollar move higher?  If you believe in 50bps by the Fed next month and ongoing hawkishness, I can see the case and the futures market is pricing a probability of that now, with 25bps in both December and January the high probability events as per the below from cmegroup.com

Remember, there are still four weeks before the next FOMC meeting with PCE and NFP data coming before that meeting, and all the Congressional machinations that are possible in this lame duck session.  Fundamentally, I see no reason for that much more tightness, but I have been wrong before.

And that’s all today.  There is no data because of the holiday.  Tomorrow, there will be no poetry as we are taking Marvel to another show in the morning.  So, I will be back on Friday and who knows what will have happened by then!

Good luck

Adf

Now, some have suggested the gov
Is showing the stock market love
Supporting the bulls
With deep pocketfuls
Of cash, lest the bears, too hard, shove

But who in the market will chance
Their own cash, if asked to advance?
The Fed’s not permitted
So who benefitted
From rallies?  At least at first glance

Which brings us to ‘flation today
And whether more views it can sway
A hot print may thrust
Funds up, when discussed
Next month as the politics fray

Starting with the stock market’s movement over the past several sessions, wow is all I can say.  There have clearly been some changes in opinions, at the very least, as evidenced by the massive rally, then decline, then rally again.  The horizontal red line on the chart is the closing level of the S&P 500 on November 2, the day before the election, at 7555.  With all the gyrations of the post=-election hysteria, the market is in exactly the same place after last night’s close.

Source: tradingeconomics.com

Certainly, the immediate post-election rally made no sense to me, but the word is that the sharp sell-off the next day was led by deleveraging of ETF positions and some forced closures of smaller hedge funds.  I have no insight into that, but it is certainly possible.  But it has been hinted by some that both the Wednesday rally, as well as Friday’s and yesterday’s are part of a concerted government campaign to support the stock market.  The thing about this story is I cannot comprehend the mechanism.  Who is buying?  Arguably, the Democratic victors would want to show the market approves of them, but they have no government tools to do so, and we know the Fed is not legally allowed to touch equities.  I’m confident Secretary Bessent wouldn’t be part of that either.  Did they get Soros and Gates to pony up on their own?  Those two won’t spend 2 nickels of their own money for anything.  China has an organized process, their national team, where insurance companies and banks are told to buy, and they do.  That seems hard to believe here.  I need proof to change my mind on this one.

So, what was the driver?  Well, the one thing we know is that sometimes markets can be quite volatile, especially when they really don’t know what is coming up.  The reading of Articles of Impeachment against Secretary of War Hegseth cannot help as it indicates things could get messy very quickly, well before the Democratic majorities are sworn in, and damage can be done with the current lame-duck session already destroyed.  But that would be a distinct negative for stocks, so the rebound makes no sense.  There are pieces to this puzzle that are very well hidden, I believe, so be careful.

But ask yourself who really benefits from this rally.  What was a big issue in a number of races?  Personal profits made by members of Congress.  It is not hard to believe that they would impose as much pressure as possible on any players capable of buying to push things higher for their personal benefit.  I don’t know how they can do it, but that doesn’t mean they can’t although I still need proof.  Keep in mind though, sometimes stocks go up and other times they go down and it’s as simple as that.

The other story today is, of course, the CPI release.  It is important, though, to frame the discussion based on new information we have from Fed Governor Waller who explained this morning in London, “However, if inflation comes in substantially higher than I expect, more robust action by the FOMC may be called for.”  Now, he didn’t say what he expected, so there is some wiggle room, but he also indicated that 50bps might be appropriate.  That’s a far cry from voting for no change last month.

Forecasts for this morning are as follows: 0.3% headline and 0.2% core M/M with the Y/Y expectations missing because last year, you may remember, we were in the middle of the government shutdown and no data was printed.  Of course, 0.3% still annualizes to ~3.7%, well above target.  But this is all a story of the past.  Arguably, the FOMC is supposed to address the future.  So, what is one of the biggest drivers of CPI?  Gasoline prices.  If we look at the RBOB contract, the two red vertical lines represent the end of September and the end of October.  In the interim, gasoline fell by 3.2% and as of this morning, has fallen substantially further on the latest word that President Trump indicated talks were going well and there is no need to escalate fighting in Iran.

Source: tradingeconomics.com

Oil prices (-1.0% today, -10.5% in the past week) are continuing to decline and that will surely have a positive impact on inflation, i.e. reducing price pressures.  And I think this is exactly the point with respect to why the Fed, and basically every central bank, does things poorly.  They respond to history that cannot be changed while ignoring what is happening at the current time (anybody remember transitory inflation?).

The fatal flaw in most current monetary policy is central banks seem to ignore money, ironically, with the virtually universal view amongst that set being Keynesian, or neo-Keynesian, which means they look entirely at the demand side.  The other day I highlighted that M2 is growing quickly again and that is going to keep upward pressure on inflation regardless of the price of gasoline.

So, wrapping up, it appears that Governor Waller has highlighted today’s CPI print as THE critical piece of information in his next FOMC vote, the Fed funds futures market has moved back to a 99% probability of a hike in December after his comments and 2-year Treasury yields have jumped 6pbs on the Waller comments.  See if you can determine what time he spoke this morning from the below chart.  FYI, that was a 5-minute move.

Source: tradingeconomics.com

There is no shortage of moving pieces in the market right now and generating a coherent story as to the narrative has become difficult even for the narrative writers themselves.  In the meantime, let’s tour the markets.

While 2-year yields jumped sharply on the Waller comments, 10-year yields are only higher by 1bp, and European sovereign yields are lower by between -1bp and -3bps across the board as per the below Bloomberg screenshot.  These yields are more directly following the oil price, I believe.

Turning to equities, yesterday was a spectacular day with rallies almost everywhere in the world.  Again, a (Bloomberg) picture is worth 1000 words here.

The regional Asian bourses didn’t disappoint either with Korea (+4.4%) and Taiwan (+2.5%) both up strongly on the rebound in tech and AI shares.  However, as I type at 7:00, US futures are mixed with NASDAQ (-0.3%) slipping a bit although DJIA (+0.4%) are gaining a bit.  All eyes are on the CPI number.

We’ve discussed oil already, but Governor Waller’s biggest impact may have been on gold (-1.6%) and silver (-2.0%) as both responded immediately to the call for higher US rates.  Despite the Waller comments, though, we are still a long way from the next meeting, 29 days to be exact, and a lot can happen between now and then.  Interestingly, the next CPI will be released the day after the FOMC meeting, but word is they get that info ahead of time, so perhaps they will know.

Finally, despite all the gyrations elsewhere, the dollar is still asleep this morning.  Other than NOK (-0.5%) which is sliding on the oil price decline, the rest of the FX market is +/-0.25% or less relative to yesterday’s closing prices.  Again, my view is that FX is decoupling, at least for now, from the broader market narrative.  As an aside, the below chart of NOK vs Brent Crude offers proof of the petrocurrency status of the krone.  It is so strong it is remarkable.

Source: tradingeconomics.com

And that’s really it for the day.  We hear from a bunch more Fed speakers, Logan, Bowman, Schmid and Bowman again, and my take is there will be more hawkishness than dovishness, especially if this morning’s CPI is hot.  The question becomes, if CPI is hot, will that push stocks lower?  After all, the prospect of higher rates is seen as a negative for equity markets, but the ability of companies to raise prices is a clear positive for earnings.  Which one matters more?

We have seen significant volatility already recently and there is nothing indicating that is going to slow down.  I still don’t think a rate hike is in order, but I am not on the FOMC so they don’t care.  And in their framework, they are suddenly terrified.  (As I asked before, though, if they start hiking rates more aggressively and the economy slows, will the newly empowered Democrats be happy?)

Good luck

Adf

The blood on exchanges is real
As traders and markets now feel
The future may not
Be all that they thought
When Trump wrote “The Art of the Deal”

It’s clear there was leverage, excess,
And that’s what has driven this stress
So, when might it end
This big new down trend?
An answer’d be naught but a guess

It was certainly ugly if you owned stocks yesterday, that’s for sure.  Ironically, while I had bought portfolio protection for an event of this nature post-election, Wednesday’s rally convinced me that the Democratic sweep had been priced into the markets already, and following my trading rules, I sold out the puts at a small loss.  Oops!  The lesson is that sometimes, trading discipline can result in decisions that don’t work out the way you expect, but that doesn’t mean trading discipline is a mistake.

As of 6:15 this morning, this is how futures markets around the world were behaving, and you can already see that there is a bounce in the NASDAQ as some dip buyers are jumping back into the market.

Source: tradingeconomics.com

The real outlier is India, where equities rose 2.2% overnight on the back of somewhat lower oil prices and, I think more realistically, a place where international fund managers believe the AI fallout is not going to be as significant.  But it is also worth noticing the YTD performances, where despite the angst generated by yesterday’s price action, long-term holders of equities remain in the green everywhere except China (and Russia, but that doesn’t count as a real market).  And you wonder why the Chinese National Team, as they call it, or the plunge protection team, as it is more colloquially known, is on the case.  In fact, Bloomberg had an interesting article on the subject this morning.

So, is the world ending?  That feels like an aggressive statement at this point.  Were some market excesses washed out yesterday?  That seems very clear.  Is the US economy going to fall into a recession?  That is a much harder question to answer, and the answer depends on your timeline.  Eventually, I suspect that will be the case, but it certainly doesn’t appear to be a near-term probability.  After all, look at the data we saw yesterday, where Initial Claims fell to 189K, a 57-year low while Continuing Claims have also been trending steadily lower since the middle of last year.  Something else to consider on the Initial Claims result is 57 years ago, the US population was 203 million or so, compared to today’s 340 million.

Perhaps just as importantly, the productivity data yesterday rose to 3.6% Q/Q in Q3, and as you can see below, continues to point to positive economic outcomes going forward.  After all, productivity growth is the key to economic growth, especially given the slowdown in population growth.  Maybe AI’s benefits are starting to show up after all.

Source: tradingeconomics.com

All this is a way of saying that yesterday was not, in my opinion, the beginning of the end of the equity market’s long-term rally.  I remain of the opinion that the upcoming gridlock between Congress and the Administration is going to prevent very much from happening at all, and generally, that is a net benefit to the economy and markets.

Attention now turns to the tape
And whether employment’s shipshape
The trend has been lower
Which could mean growth’s slower
But many misread that landscape

To finish off a week full of significant news, we get the payroll report this morning with the following expectations:

Source: tradingeconomics.com

For those of us who have been following markets for a long time, an NFP number of 65K would be considered near recessionary, which makes the Unemployment Rate at 4.2% that much harder to understand.  But as has been identified over the past two years, the Trump administration’s crackdown on illegal immigration has dramatically changed the nature of this data, as confirmed by several Fed working papers on the subject.  The result is that previous estimates of the need for between 150K and 200K new jobs every month to prevent the Unemployment Rate from rising have been whittled down to between 0 and 50K.  With that in mind, the recent NFP trend may not seem as concerning.

Source: tradingeconomics.com

In fact, it is this dichotomy, the fact that the labor market seems to be in very good shape according to the data, and the overall economic angst that clearly exists across the nation, which remains difficult for many to understand.  But that is where we are.

With all the other things ongoing, we have not heard anything about the Fed lately, and I must imagine Chairman Warsh is thrilled with that.  Are they still going to hike rates next month?  The UK just hiked, as did Australia, the ECB and the BOJ while the Fed paused last week although markets are pricing a 70% probability of a December hike.  But with oil starting to retreat, and more importantly gasoline prices retreating as per the below chart, are inflationary pressures really extant?

Source: tradingeconomics.com

Thinking through the Fed’s Keynesian framework, I would expect they could well see a change on the horizon.  Of course, the fact that this framework has been wrong for decades will not dissuade them from believing it.  Alas, as long as they continue to increase the size of their balance sheet, which they have been doing despite talking up rate hikes, I fear they will not arrive at their desired 2.0% PCE outcome anytime soon.

Source: tradingeconomics.com

A resumption of the previous downtrend would be a far more effective methodology for them to rein in inflation.  Maybe Chairman Warsh will get his way one day.

As to other markets, bond yields saw another sharp decline yesterday but this morning, they are bouncing a bit, (US +3bps, Germany +2bps, UK +5bps, France +4bps) ahead of the NFP data.  However, over the past month, Treasury yields are now lower by 50bps in pretty much a straight line as per the below chart.  For now, at least, Treasuries remain a place to hang your hat if you are an investor.

Source: tradingeconomics.com

Perhaps more interestingly, despite the decline in yields, the dollar is firmer across the board this morning, with the euro (-0.4%) under pressure, albeit not as much as the Antipodeans (AUD -0.7%, NZD -0.8%).  As yields everywhere are following the US lead, this must be something else.  It is entirely possible that this short-term move is the embodiment of the haven trade as investors bought dollars to buy Treasuries, but if they were liquidating their US equities, they already had those dollars.  One cannot rule out the idea that the relative macroeconomic stories between the US and the rest of the world remain heavily in favor of the US.  Certainly, this is not indicative of an immediate slowdown of the inward investment to the US in the wake of the election, but it is early days.

Lastly, if we look at commodity markets, oil (0.0%) has been chopping back and forth during the session as everybody is trying to figure out whether Mr Trump is going to resume attacks on Iran or if a deal is coming soon.  Crack spreads, (the value able to be retrieved from a barrel of oil), have fallen substantially from where they were just a month ago as per the below chart from data4thepeople.com, although they remain elevated in the long-term scheme of things.

In the metals markets, gold (-0.4%) has regained the $4000/oz level after significant month end selling last week and seems to be stabilizing here.  Silver (+0.6%) is in the same boat, having weathered the sub-$50/oz storm.  Until we see changes in fiscal policies and the ensuing monetary profligacy that always follows, I believe that these metals will retain their value.  But commodities have always been extremely volatile, after all, they are the very epitome of the boom-bust cycle.  Yet over time, inflation has eroded fiat currencies universally.

And that’s all I’ve got.  I’m happy it is the end of the week, as it has been more than enough to think about.  My sense is that with the election now behind us, focus will return to more market internals and the Fed, but for now, I expect that most folks just want to get to the weekend!

Good luck and good weekend

Adf

This poet was totally wrong
Expecting a ‘publican throng
At polls yesterday
But one can’t downplay
The message delivered was strong

The question we now must address
Is, is this a plus or a mess?
The early returns
Show few new concerns
And nothing approaching distress

The election results are very clear and now we move on to the more difficult stage, governing.  Certainly, this was a rejection of President Trump’s agenda, or at least some of his actions, with the Iran war resulting in much higher energy costs a significant issue for the electorate.  However, in many ways, this is the best possible outcome for markets as political gridlock has historically been a net positive for the economy.  If Congress cannot pass new laws, that is generally a good thing.  And this was made clear last night as you can see in the chart below of the S&P 500, which saw losses early in the evening and then a complete reversal to where futures are now higher by 1.1% as of 6:10 this morning.

Source: tradingeconomics.com

The other statistic I keep reading is that in the year following a midterm election, equities have been higher for the past 18 midterms.  Of course, the breakdown of which industries and market sectors improve is unclear, and the past is not prolog, but it has certainly been a highlight amongst the early commentators.

At any rate, as this is not a political discussion, let’s turn our focus to things economic and financial.  On the economy, the US data continues to be solid as per yesterday’s JOLTs data which showed more job openings, but perhaps just as importantly, more Quits, which implies that there is a greater willingness for people to leave their job as they believe their prospects of finding a new, better one are improving.  That has historically been a sign of a strong labor market.  If we look at the below chart from FRED of the Quits data this century, it is not hard to make the case that we have bottomed after the Covid induced market disruptions and beginning to trend back higher.  Given the slowing population growth and the ongoing illegal immigration crackdown, it is easy to believe that job prospects are improving for those in the workforce.

This morning we get the ADP Employment number (exp 69K) and, of course, Friday brings the latest NFP data.  Again, the US data continues to demonstrate an economy that is growing in many areas.  When I compare this with the economic data elsewhere in the world, I continue to have difficulty seeing the appeal elsewhere.  With that in mind, though, it will be interesting to see just how much of the inward investment promised over the past two years will pan out given the changes in Washington.

So, let’s see how the rest of the world responded to the US elections, assuming that was the driver.  In equity markets, Europe is virtually giddy over the outcome with all the major bourses much higher led by Spain (+2.8%) but with large gains across the board (France +1.5%, Germany +1.5%, UK +1.25%).  And US futures, as mentioned above are stronger with both the NASDAQ (+0.9%) and DJIA (+1.5%) also doing well.  Asia, though, saw things a little less positively.  Japan (-1.4%) slipped along with Taiwan (-0.8%) and Australia (-0.6%) although there were positives as well.  For instance, the Chinese plunge protection team was active last night increasing both loans and direct support as the CSI 300 rose 2.3% dragging the Hang Seng (+1.7%) along for the ride.  Too, Korea (+0.6%) benefitted from yesterday’s relief in the tech space.  But overall, equity markets are nonplussed this morning, if not genuinely happy.

In the bond market, yields are lower this morning and I must admit, I don’t understand the logic.  Now, if you look at the chart below of the past 24 hours, you can see that this has not been a straight-line process, but here we are with 10-year yields lower by -3bps as I write.

Source: tradingeconomics.com

I read one blurb explaining the market was anticipating lower deficits going forward but I fail to understand how that will work.  There is zero evidence that a Democrat led congress will pass an austerity budget, and I expect that President Trump would veto any bills that raise taxes, so I am at a loss as to the source of that deficit reduction, at least on the surface.  Perhaps the ongoing crackdown on fraud will be sufficient to reduce the deficit, but that seems a stretch.  And if everything becomes a continuing resolution, that is not going to reduce expenditures.  However, yields around the world are largely lower with Europe benefitting from the Treasury market’s lead as the weaker European credits (France, Italy, Spain, UK, Greece) all enjoy bond rallies with yields slipping -4bps or so across the board.  As it happens, German bund yields are unchanged this morning.

In the commodity space, oil (-1.0%) continues to slide although I have seen nothing indicating that a deal to end the war in Iran was imminent.  In fact, the WSJ this morning had an article about how Iran was desperately trying to stop the flow of oil and using guerilla tactics but having limited success doing so.  Iran’s bigger problem is now that the election is past, President Trump has a pretty free hand in doing what he wants there, and the evidence continues to show that the blockade is really hurting the Iranians.  As I said yesterday, my sense is this is going to end before long.

With oil continuing its recent decline, and yields lower, it should be no surprise that metals markets have benefitted, but the magnitude is surprising.  Gold (+2.8%) and silver (+4.4%) have recouped all of their declines of the past week, as per the below chart.

Source: tradingeconomics.com

Will this rally hold going forward?  Much depends on the dollar’s performance, which today is much lower, and how the interest rate structure evolves.  If lower yields are on the horizon, perhaps this is just the beginning.

And yet, if we look at the CME Fed funds futures market, the probability of a hike in December rose in the wake of the election, which seems at odds with that narrative.

So, let’s look at the dollar this morning.  It is lower across the board, and by a decent amount virtually everywhere.  if you look at the table below from tradingeconomics.com, you can see that the only exceptions are RUB, which isn’t really a tradable currency, CNY, which didn’t move and BRL, which despite the dollar weakness can find no strength as investors continue to exit the economy there.  Otherwise, it’s pretty unanimous, nobody wants dollars today.

Will this continue?  Positioning in the dollar heading into the election was net long, so I expect much of this movement is simply the beginnings of unwinding those positions.  But as I frequently highlight, the dollar is merely in the middle of its long-term range, neither especially rich nor cheap here, so its future will depend on the fundamentals.  Perhaps today’s Eurozone inflation data, which printed at 4.0%, has traders looking for a more hawkish ECB but there is no evidence of that based on implied probabilities from futures and swaps markets as you can see below in the chart from rateprobability.com.

While the BOE is set to hike rates tomorrow, other than the RBA, which looks like it is done, the trajectory of future rate hikes appears pretty similar across the board.

I see no reason for the dollar to collapse, although it is possible that inward investment will diminish, which will slow any significant rise in the greenback.

On the data front, along with ADP Employment mentioned above, we see the Trade Balance (exp -$108B) and ISM Services (54.8) as well as the EIA oil inventories with a small build expected.  I expect that we are setting up for more range trading in the dollar with the chance of a strong trend in either direction vanishingly small right now.

Good luck

Adf

Seems markets are not paying heed
To France where the riots proceed
Instead, it’s AI
And bonds gone awry
Where fears are replacing past greed

So, is this the end of the run
Which two decades past had begun?
Or is this a blip
Which soon will round-trip
As recent downdrafts are undone?

While there are always a group of voices singing a song of doom right around the corner, Keynes’ saying that markets can remain ‘wrong’ longer than you can remain solvent continues to be the reality.  One need only look at the barchart.com 20-year chart of the NASDAQ below to realize that since the GFC, while there have been two pretty sharp blips along the way, Covid and the Liberation Day, with the latter really short-lived, this is a chart that has been largely unidirectional.  Everyone who has explained that valuations are too high, and that earnings are shaky and that rising interest rates will undermine the structure of the market has basically been wrong for nearly 20 years.  I understand that there were calls for another Black Monday today, as this is the 39^th anniversary of that remarkable day, but is this time different?

Those four words are the most dangerous in markets, there is no question about that.  You can make the case that AI has changed everything about the economy and that the old rules are no longer valid, but whatever AI’s capabilities may turn out to be over time, it’s still people who control the money, and the one thing of which I am certain is that people haven’t changed in the past 20 years.

Now, last week was a tough one for the Pollyannas who have been cheerleading the rally, and you can see that in the history of the CNN Fear & Greed Index below.  It has fallen quite sharply, from 46 to 18 in just a week.

Arguably, part of that has been the movement in the price of oil (-0.6%), which while modestly lower this morning, has rallied >14% during the past two weeks as Iran has increased its attacks on ships in the Strait of Hormuz while the Houthis have increased their attacks on Saudi Arabia.  It appears they are trying to goad President Trump to respond in an effort to help the Democrats take control of the House and the Senate, but so far, Trump has let things play out.  I suspect that no matter who wins the election, come November 4^th, things in the Persian Gulf are going to intensify.  In fact, it would not surprise me if the Democrats win that the military campaign will be that much more intense.

Adding to the pressure of higher oil prices were hotter than expected inflation data last week with both CPI and PPI printing at higher-than-expected numbers.  But a funny thing happened, bond yields stopped climbing, at least for the moment, as it seems investors are both far more comfortable with the current yield structure as real yields reach multi-year highs, and the riots in France, that seem to be spreading elsewhere in Europe, have investors turning away from European sovereigns as an alternative.  After all, 10-year Treasury yields are down by 30bps from the highs reached just two weeks ago.

Source: tradingeconomics.com

This is not to imply that things are great, clearly multiple problems and concerns remain, but I still cannot see the end of days.  So, let’s turn to the market behavior from last night and this morning as we open.

Friday’s weakness in the US raised concerns that we were on the cusp of the end of the bull market run.  But as we have consistently seen over the past many years, those fears have abated just as quickly as they arrived.  Overnight, equity markets were mixed in Asia as while the Nikkei (-0.6%) slid a bit and that weighed on India (-1.2%), Taiwan (-0.6%) and several other smaller regional markets, China (+0.5%), Korea (+1.7%) and Australia (+0.4%) all managed gains.  As an aside, recall I mentioned the Jakarta Index last week?  Well, as you can see below, investors are still fleeing the country with the index now down -15% in the past three sessions.

Source: tradingeconomics.com

However, there is a region that is feeling the heat from the rioting in France, and that is Europe.  The below screenshot is eloquent in its depiction of today’s trading on the continent.

Apparently, there are several concerns, notably the fact that growth continues to be anemic while fiscal spending grows uncontrollably, but then the rioting in France, which seems to be spreading is adding pressure to governments across the continent.  As to the US, both SPX (+0.6%) and NASDAQ (+1.1%) futures are higher as I type (6:45am), hardly the stuff of Black Monday.

Perhaps the bond market is making a better case for apocalypse today.  Alas for those seeking such an outcome, other than French OATs (+8bps and now the widest spread vs. Germany since the Eurozone crisis in 2012, see below) which have dragged Italian BTPs (+4bps) higher as well, the rest of the continent has seen only a marginal movement today, +1bp or 2bps.

Turning to the commodity sector, while oil, as mentioned above, is pretty benign this morning, a note about Natural Gas, (+1.0%) which is seeing increased demand as the weather cools off.  Now, even though we have seen prices here increase nearly 20% since early August, that is a seasonal outcome entirely expected.  And let’s face it, $3.15/MMBtu is still an order of magnitude lower than European prices of nearly $30/MMBtu.  If you wonder why European growth is stagnating, look no further than this.  As to the metals sector, modest gains this morning are the order of the day, (Au +0.1%, Ag +1.2%, Cu +0.3%).  Nothing has changed my longer-term view that the supply-demand imbalance in metals markets remains firmly in the lack of supply situation.  Ironically, in oil, it is just the opposite, with ample oil around, it is simply the politics of war that is creating this price event.

Finally, the dollar is mixed this morning, with commodity currencies like AUD (+0.6%), CAD (+0.4%), NOK (+0.25%) and ZAR (+0.25%) all gaining while the euro (-0.15%) and yen (-0.1%) slip a bit.  It doesn’t feel to me like FX is the focus right now.  Rather bond markets and the question of the next Black Monday have a lot more press.  I imagine the euro will be an interesting case study going forward depending on how the ECB responds to the ongoing unrest in Europe.  Can more fiscal spending supported by more ECB bond buying be far away?  I have a feeling the euro may be setting up for another leg lower.

On the data front, it is an extremely quiet week:

Source: tradingeconomics.com

With the FOMC meeting a week from Wednesday, there are no Fed speakers this week.  Interestingly, despite the higher-than-expected inflation readings last week, the market is pricing only a 15% probability of a hike although there is virtual certainty that there will be a hike in December.  One other data issue to note was last night’s Chinese data as follows:

The situation there remains one of weak domestic activity alongside excess manufacturing capacity with China’s growing Trade Surplus becoming an issue in more and more nations around the world.  Alas for President Xi, the two choices to achieve his GDP goals are the current mercantilist process or a true effort to focus resources on the Chinese people.  I don’t see any changes coming despite some lip service to the contrary.  Even the WSJ wrote about it this morning.

My view remains that while there are many problems extant around the world, both economically and politically, we will get through this period just like we have made it through tough times in the past.  And undoubtedly, the US remains extremely well positioned to continue its economic strength given the willingness to utilize its natural resources.  While there are political divisions here, they don’t rise to the level of what we are currently witnessing in Europe.  Overall, it is hard not to like the dollar as the cleanest dirty shirt in the laundry for a while yet.

Good luck

Adf

Seems I just can’t leave you alone
Lest havoc and fear you’ll have sown
So, now that I’m back
Let’s try to change tack
And work on a positive tone

But seriously, what I read
Is doomsters in screed after screed
All preening and bragging 
That all their chin-wagging
Was right while the markets recede

All I can say is, it’s so good to be home.  While the past three weeks have been enjoyable and traveling across half the country by car offers a great perspective on just how amazing this nation really is, I’m sure all of you will agree that there is nothing more comfortable than sleeping in your own bed.  And this is just as true for Marvel, as it is for the rest of us.

But seriously, I appreciate your patience as it is tough to keep up while driving 10 hours a day.  But now that I’m back, I think it is worthwhile to take a look at how things have moved since I first left back in late September.  Between closing on Friday, September 25 and last night at 9:00pm, these are the moves across major markets that I discuss.

Frankly, it is hard to look at this and conclude that the world is ending.  In fact, despite constant discussion about how the AI (or is it SI?) trade is imploding, the NASDAQ has fallen just -2.5% over the past three weeks and is less than 5% from its all-time highs.  I don’t see the reason for all the excitement.  In fact, the biggest mover, by far, has been silver, which is the least liquid and least important of all these markets.  Despite the end of days discussion about Treasuries, yields have slipped, as have JGB and Bund yields.  One other thing to note is the decline in gasoline prices given the political implications.  I’m confident the White House would like to see them fall further, but there is no indication there is a supply issue there.

I’m just trying to level set here.  I’m sorry if I’m not breathlessly describing the apocalypse, but I just don’t see it. Perhaps I’m simply blind.  But the data continues to lean toward economic growth, not weakness, at least based on the Retail Sales and Initial Claims data we saw yesterday, as well as the ISM and other numbers.  And inflation, to the extent that growth is a driver of that, remains well above the Fed’s 2% target, although based on its causes (read the Inflation Guy’s blog to really understand it), hiking rates is not going to be the solution to inflation, although it certainly has the opportunity to impede growth.

Anyway…

The rules of the road used to be
That nothing defied gravity
But Elon replied
We oughtn’t be tied
To earth, and his car, he set free!

I am sure there is a parable in the contrast between the doom and gloom that consistently dominates the discussion, the vibe as it were, and the fact that the richest man in the world continues to build extraordinary things.  I’m sure you have all seen the video clip of the new Tesla roadster that actually flies, but if not, it’s right there.  No matter your view of the man, you cannot dismiss his extraordinary genius when it comes to building things.  I guess the question is, will the flying car be a metaphor for the economy?  The markets? Or will it crash a burn?

So, now let’s turn to the markets, and I feel like bonds are the right place to start.  The below chart of the 10-year over the past week is remarkable given the CPI, PPI and Retail Sales data released.

Source: tradingeconomics.com

The huge gap was the immediate response to Wednesday’s CPI release which came in a tick hotter than forecast.  Yet much higher-than-expected PPI and Retail Sales data saw yields decline sharply.  Ostensibly, I continue to read about a flight to safety trade, but that seems at odds with the idea that Treasury debt is going to implode because there is so much of it.  I wish the punditry would get their stories straight.  No matter the cause, yesterday saw a complete reversal of the yield rally from Wednesday.  Maybe, and I’m just spit balling here, the punditry doesn’t have any idea about the way things work but simply try to drive a preferred narrative.  And given the underlying visceral hatred of the US administration, specifically President Trump, are very keen to do all in their power to make things worse for him.

Regardless, it appears that despite the higher-than-expected inflation data, yields at current levels represent an attractive opportunity to some investors.  While this morning, 10-year yields have bounced 4bps from yesterday’s closing levels, as I showed above, they are still lower on the month.  And it is no surprise that European sovereign yields have also rebounded this morning, although more on the order of 2bps across the board.  Frankly, it seems to me there is far more risk in owning Bunds or OATs or BTPs than in owning Treasuries.  At least the US is growing pretty well compared to the utter lack of growth in Europe.  Exactly how are the French going to repay their debt, or maybe more importantly service their debt, if growth remains <1%?

As to equities, they, too, have stopped tumbling for now with markets higher yesterday in the US and almost the entirety of Asia and Europe this morning with the one glaring exception of Indonesia (-10.8%) which suffered from MSCI explaining they could downgrade the country to standalone market status (a decisive negative outcome regarding the lack of transparency and liquidity) offering the potential for significant capital outflows.  I understand that there are AI names that have had problems and the banking sector, despite mostly strong earnings, has underperformed, but the end has not shown itself yet.

Gold (+0.2%) is another market that seems confused, or at least the trading of it seems so, as its relationship with oil (+0.1%), which had a very clear negative correlation for quite a while, arguably since the beginning of the Iran war, (although according to Grok, the numbers show that correlation to be -0.1% to -0.15% over the past year, hardly a strong relationship), are both higher this morning.  But looking at the chart below, the direction of travail since the summer has been largely opposite directions.

Source: tradingeconomics.com

Obviously, oil is a far more important commodity than gold, which can be seen as a sentiment indicator more than anything else.  But despite the recent rebound in oil prices, economies around the world seem to be figuring out how to cope.  Now, the recent uptick in Iranian and Houthi attacks on ships in Hormuz and Saudi infrastructure are having a clear impact and given the fact that the IRGC literally wrote an open letter to the US to elect Democrats to try to impede President Trump’s ongoing campaign, I have to believe things are getting a lot tougher over there.  It is not impossible to believe that after the election, especially if the Republicans hold both Houses of Congress, that the Iran conflict may end soon.  It does seem that the blockade has starved Iran of the one thing they need, capital, and that is running out quickly.

As to the FX market, I find it interesting that even though yields are rising around the world, the dollar has been the main beneficiary here.  In the wake of the CPI and PPI data, the probability of a rate hike at the end of the month has jumped to 85%, as per the below cmegroup.com table.

At the same time, Chairman Warsh spoke last night at the IMF meeting in Bangkok but once again, refused to discuss potential Fed moves going forward. “I don’t prejudge meetings. I don’t believe in saying now what I might do at the meetings we have in the balance of this year. It’s a new chapter at the Fed, and we’re not in that business anymore.” While virtually every other member of the FOMC likes the fame/notoriety they get by speaking, Warsh has remained true to his initial comments.  I guess the question is, has the data been sufficient to drive another hike?  It all depends on the membership’s view of economic activity.  If they see strength, I imagine that is what we will get despite the fact it is unlikely to do anything positive for the economy.

Back to the dollar, while it has backed off a bit this morning, with the DXY (-0.85%) the leading decliner despite the fact its components haven’t moved nearly that much (EUR -0.35, JPY unchanged), I guess broadly it is following the 10-year yield.  It is worth noting that while most currencies have not done very much in my absence, (MXN +0.1% today, -5.6% since Sept 25) has suffered on expectations that Banxico is going to cut rates further, thus reducing one of its key supports, the carry trade.

On the data front, this morning we see IP (exp 0.4%) and Capacity Utilization (76.5%).  Those tend not to be market movers so as is frequently the case, the FX market will take its cues from equities and bonds.  Right now, equity futures are essentially unchanged, so if the positivity we saw yesterday fades, perhaps the dollar will rally back some on that flight to safety trade.

Good luck and good weekend

Adf

The poet is back to his pen
And thinking ‘bout euros and yen
And oil and gold
As bonds all get sold
While indices rise yet again

Remarkably, o’er the past week
Though headlines, to havoc, did speak
The movement of note
Showed oil got smote
While dollars have reached a new peak

I have not been keeping close tabs on markets overall during my road trip, although am back to focusing again.  But first, the news from Topeka was that, while Marvel showed beautifully, we did not get placed amid very stiff competition.

Plus, as in every judged event, there is a measure of politics involved, and I am just not politically correct!

One other issue is that today is the first day I’ve had viable Wi-Fi to work with as the previous places I stayed just didn’t have it.

So, with all that in mind, I will be brief this morning.  Prior to leaving, I left myself records of where markets closed on September 25^th so I could see how much things changed.  And the truth is, not all that much, at least on net since I last wrote.

In the equity markets, while the NASDAQ made new all-time highs, it is just 2% higher than when I left.  The S&P managed a much smaller gain, 0.7% and the DJIA actually slipped a bit during the period.   Elsewhere in the equity space, Japan (+7%) was the big winner while France (-2.5%) cannot keep up as the student riots and the fiscal problems, which are bad enough to garner a top WSJ story this morning, are obviously weighing on things there.  

Of course, all the equity moves are happening within the context of the bond market, which continues to see yields climb around the world.  US yields (+11bps) are the talk of the market, but Japanese yields (+3bps and up to yet more 30+nyear highs) are also still climbing.  But arguably, the biggest news is Brazil, which in the wake of the surprising first round lead in the presidential election by Flavio Bolsonaro (son of previous president Jair Bolsonaro) where we have seen Brazilian yields collapse (-115bps) while the Brazilian stock market rocketed 7.7% in the wake of the election results

Source: tradingeconomics.com

Elsewhere, both oil (-5.1%) and gold (-2.9%) have slipped as the former continues to seesaw based on comments about the amount of oil coming out of the Strait of Hormuz, although it is clear product prices are not falling, while the latter has just lost its appeal.  Gold is a funny thing, it is a wonderful long-term store of value and has been so for millennia, but it cares not a whit about day-to-day movements in prices.  Arguably, gold has done its job as that store of value as many holders have utilized their reserves to shore up their own financial situation, thus selling the barbarous relic.  However, it remains difficult for me to look at the fiscal policies extant around the world and think that fiat currencies are going to be embraced.  

Speaking of fiat currencies, while the dollar is just that, fiat, it is also the currency of the strongest current economy around, so despite all its flaws, and all the questions about the Fed and whether they will be hiking again and what that means, and despite all the angst over the selloff in Treasuries, the dollar continues to be the safest play around.  For instance, the euro, saddled with French misery and Germany fiscal and energy incompetence (as well As Spanish insanity regarding housing policy) has slipped -1.3% over the past week while the DXY has rallied a similar amount.  Despite the Nikkei’s rally, the yen (-0.6%) has slipped as well.  In fact, the only currency of note that has performed well is, not surprisingly, BRL (+3.5%) as money is flowing to the country in anticipation of a Bolsonaro win in the runoff election at the end of the month.  That, my friends, is a serious gap opening!

Source: tradingeconomics.com 

And that’s really all I have this morning, but I will be back going forward, most days, I believe.

On the calendar, there is not a ton this week after last week’s disappointing payroll report.

Source: tradingeconomics.com

The payroll report served to reduce the probability of a Fed hike this month dramatically and it is now down to 21% from above 60% when I left.  I still don’t think they need to hike more, although the market remains convinced they will do so in December.  But December is a long time from now and much can happen in the interim.  As to the dollar, it remains the cleanest dirty shirt around.

Good luck

Adf