Tag Archives: economy

Too Potent a Force

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The headline today’s NFP
As pundits will try to agree
On whether the Fed
When looking ahead
Will like what it is that they see
 
But, too, the Supreme Court is due
To rule whether tariffs imbue
Too potent a force
For Trump, to endorse
Or whether they’ll let them go through

 

As the session begins in NY, markets have been relatively quiet as traders and algorithms await the NFP data this morning.  Recall, Wednesday’s ADP number was a touch softer than forecast, but still, at 41K, back to a positive reading.  Forecasts this morning are as follows:

Nonfarm Payrolls60K
Private Payrolls64K
Manufacturing Payrolls-5K
Unemployment Rate4.5%
Average Hourly Earnings0.3% (3.6% y/Y)
Average Weekly Hours34.3
Participation Rate62.6%
Housing Starts1.33M
Building Permits 1.35M
Michigan Sentiment53.5

Source: trading economics.com

Regarding this data point, there are two things to remember.  First, last month Chairman Powell explained that he and the Fed were coming to the belief that the official data was overstating reality by upwards of 60K jobs due to concerns over the birth/death portion of the model.  That is the factor the BLS includes to estimate the number of new businesses started vs. old ones closed in any given month.  Historically, at economic inflection points, it tends to overstate things when the economy is starting to slow and understate when it is turning up.  

The second thing is that given the changes in the population from the administration’s immigration policy, with net immigration having fallen to zero recently, the number of new jobs required to maintain solid economic growth is much lower than what we have all become used to, which in the past was seen as 150K – 200K.  So, 60K, or even 40K, may be plenty of new jobs to absorb the growth in the labor market, which will come from people re-entering the market who had previously quit looking for a job.

The ancillary data, like ADP and the employment pieces of ISM were both stronger in December than November, so my take is, the estimates are probably reasonable.  I have no strong insight into why it would be dramatically different at this point.  The question is, how will markets respond?  My take is this could well be a ‘good news is bad’ situation where a strong print will see pressure on bonds and stocks as the market reduces its probability of a Fed rate cut (currently 14% for January, 45% for March) even further.  The dollar would benefit, as would oil on the demand story, but I think metals will do little as that story is not growth oriented.  A weak number would see the opposite.

Of course, the other big potential news today is the Supreme Court ruling on the legality of Trump’s tariffs.  The odds markets are at ~70% they will overturn them, but there is the question of whether it will require the government to repay the tariffs or simply stop them.  As well, most of them will be able to be reimposed via different current laws, so net, while a blow to the administration I don’t believe it will have a major long-term impact with repayment the biggest concern.  This particular issue is far too esoteric for a simple poet to prognosticate.

And those are the market stories of note, although we cannot ignore the growing protests in Iran as videos show buildings burning in Tehran and there is word that the Mullahs are at the airport, which if true tells me that the regime is on the edge.  While this would be a great victory for the people of Iran, it would also have a dramatic impact on oil markets and specifically on China.  While sanctions could well be lifted, thus depressing the price as more comes to market, China currently benefits from buying sanctioned oil at a massive discount, and that discount would disappear.

As we await all the news, let’s review the overnight activity.  A mixed US session was followed by strength in Tokyo (+1.6%) as the Japanese government surprised one and all by reporting a stronger 30-year JGB auction than anticipated as well as an uptick in spending by households.  Too, nominal GDP growth has been outpacing deficit growth driving the net debt ratio lower, exactly what the US is seeking to do.  As to the rest of the region, both China (+0.45%) and HK (+0.3%) managed gains, as did Korea and Malaysia but India (-0.7%) continues to lag as it has all year.  Data from China showed inflation fell less than expected, although the Y/Y number remains at just 0.8%.

In Europe, gains are also the norm with France (+0.9%) leading the way with both the UK (+0.55%) and Germany (+0.4%) having solid sessions.  Retail Sales data from the Eurozone was firmer than expected at 2.3%, a rare positive outcome, but showing some support.  As to the US futures market, at this hour (7:30) all three major indices are higher by about 0.15%.

In the bond market, while yields have edged higher by 2bps this morning, as you can see from the chart below, they remain within, albeit at the top, of the recent 4.0% – 4.2% trading range.  

Source: tradingeconomics.com

The most interesting data point from yesterday was the dramatic decline in the Trade deficit, which fell to -$29B, its lowest level since 2009.  Recall that a long-time issue has been the twin deficits, with the budget and trade deficits linked closely.  I wonder, are we going to see Trump’s efforts at reducing government’s size and reach result in a smaller budget deficit?  Most pundits dismiss this idea, but I’m not so sure.  As to the rest of the world, European sovereigns are essentially unchanged this morning as investors everywhere await the US data and tariff ruling.

In the commodity markets, oil (+0.9%) is creeping higher but remains in its downward trend.

Source: tradingeconomics.com

Wednesday, we saw a large draw in crude inventories abut a massive build in both gasoline and distillates which feels mildly bearish.  The narrative is the Iran story is getting people nervous for potential short-term disruption, but I remain overall bearish for now.  As to the metals markets, gold (-0.3%) is slipping after having recovered early morning losses yesterday and finishing higher, while silver (+0.6%) is still bouncing along with copper (+1.8%) and platinum (+0.4%). Metals are in demand and supply is short.  Price here have further to rise I believe.

Finally, the dollar continues to rebound off its recent lows with the DXY back to 99 again this morning.  it has rallied in 11 of the past 13 sessions, not typical price action for a trading vehicle that is in decline.

Source: tradingeconomics.com

In fact, the greenback is firmer against virtually all its G10 and EMG counterparts this morning with the largest declines seen in JPY (-0.5%), KRW (-0.5%) and NZD (-0.5%) with others typically sliding between -0.1% and -0.3%.  again, it is hard to watch recent price action and see impending weakness.  We will need to see much weaker US data to change my view.  And along those lines, the Atlanta Fed’s GDPNow number just jumped to 5.4% for Q4 after the Trade data yesterday, again, atypical of further weakness in this sector.

And that’s really all as we covered data up top.  To me, the wild cards are Iran and the USSC.  While I do believe the regime will fall in Iran (they just shut down the internet to try to prevent a further uprising) my take on the Supremes is they may stop further tariffs but will not force repayment.  Net, that won’t change much at all and given the prediction markets are pricing a 70% probability of an end to tariffs, if it happens, it’s already in the price!

Good luck and good weekend

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Spinning More Heads

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The speed of the change underway
In global relations today
Is spinning more heads
And tearing more threads
Than ever before, one might say
 
For markets, the question of note
Is how will investors all vote
Are bulls still in charge
Or bears now at large
Who seek, excess profits, to smote

 

It is becoming increasingly difficult to focus only on market activity given the extraordinary breadth of important, non-market activities that are ongoing.  When I think back to previous periods of significant market volatility and uncertainty, it was almost always driven by something endogenous to finance and the economy.  Going back to Black Monday in 1987, or the Thai baht crisis in 1997 or the Russia Default in 1998, the dot-com crash in 2000, and the GFC in the wake of the housing bubble (blown by the Fed) in 2008-09, all these periods of significant market volatility were inward looking.

But not today.  Trump 47 has become the most significant presidency since Ronald Reagan with respect to changing both domestic and international realities.  The key difference is that Mr Reagan worked within the then consensus view of international relations, merely pushing them to the limit while Mr Trump sees those views as constrictions needing to be removed.

In fairness, the world was a very different place in the 1980’s, notably for the fact that China was not a major player in any sphere of economic activity and was essentially ignored.  That is no longer the situation, and the entry of another power player has complicated things.  Arguably, this is why the president sees the old rules as obsolete, they were built for a different time with a different cast of characters.  Regardless, for those of us paying attention to markets, it is imperative to widen our view to include international relations as well as international finance.

With that as preamble, a look at today’s headlines reminds us that keeping up with the news is not for the faint of heart.  Starting with Venezuela and the impact on oil (+1.6%), news sources are littered with articles explaining why the US acted as we did and the potential implications for energy markets and energy producing countries.  From what I can tell, Venezuela recognizes that they are completely beholden to US demands at this point with respect to their oil industry (mining as well I presume although that gets less press).  And you can be sure that means they will be expected to pump more, with US corporate help, and direct their sales to the US, as opposed to Cuba, China and Iran.

Despite today’s rally, it remains my strong opinion that the price of oil has further to decline.  The trend continues to be sharply lower, as per the below chart, and the domestic political demand of reducing gasoline prices is going to keep this particular trend intact, I believe.

Source: tradingeconomics.com

News overnight indicated that two more shadow fleet tankers have been apprehended which is simply all part of the same plan, bring Venezuela back online legitimately with a focus to sell to the US.  The other global issue that is going to weigh on the price of oil are the ongoing protests in Iran which if ultimately successful at overthrowing the Ayatollah’s theocracy, will almost certainly bring Iran back into the brotherhood of nations, and see the end of sanctions on Iranian oil.  While that is bad news for China (and India) who buy a lot of cheap sanctioned oil, it will increase production and weigh on market prices.

The other sector of the commodity markets, metals, have been their own roller coaster of late, with far more volatility than any other product, cryptocurrencies included.  It cannot be a surprise that we are seeing prices retrace after the extraordinary price action over the past several months.  The silver (-4.4%) chart below is the very definition of a parabolic move and history has shown that moves of this nature tend to see, at the very least, short-term sharp reversals, even if the ultimate trend is going to continue.  

Source: tradingeconomics.com

The underlying features in these markets remain supply shortages, meaning that there is more industrial demand for utilization than there is new supply that comes to market each year.  In silver, the number apparently is ~100 million ounces, and deliveries of physical metal remain the norm these days.  That is a telling feature of the market as historically, cash settlement was sufficient.  Given the recent run, it is no surprise that gold (-0.8%) and platinum (-6.5%) are also declining sharply, but nothing has changed my view that these will trend higher this year.  One last thing about silver (h/t Alyosha), the Bloomberg commodity index (BCOM) is rebalancing next week and given the huge moves in precious metals, along with the lack of change in percentage allocation, there will be significant selling over the course of the next week, upwards of 70 million ounces of silver, which will go a long way to satisfying the shortage this year.  It will be interesting to see if demand remains intact. 

If we turn to the dollar, rumors of its death remain exaggerated.  Certainly, the price action thus far this year, and even over the past six months, points to gradual strength (see chart below from tradingeconomics.com).

Again, I have a hard time understanding the argument that the dollar will decline this year based on the fact that the US economy continues to outperform the rest of the G10, there are substantial inward investment promises that are beginning to be seen (shipbuilding, semiconductors, steel) and the US interest rate structure remains higher than the rest of the G10.  While I understand markets look forward, it is becoming increasingly difficult for me to see the benefits of European monetary policy as a driver for owning the euro, and given their industrial/energy policies are disastrous, I don’t see the rationale.  The same can be said for the pound, I believe.

In today’s session, while the movement is mostly marginal (EUR 0.0%, GBP -0.1%, SEK -0.3%, AUD -0.4%), the trend remains intact and the movement is broad with almost all G10 and EMG currencies slipping a bit further.  Money goes where it is best treated, and I am hard pressed to find other nations that treat money better.  Although…

The equity markets are a bit shakier this morning after two presidential tweets yesterday regarding institutional ownership of housing (he wants to end that for single family homes) and defense company spending priorities (he wants defense companies to end stock buybacks and dividends and invest in R&D and production).  It is not clear to me whether he can successfully force these actions, but his bully pulpit is significant.  These resulted in sharp declines in directly impacted companies, but regarding defense, he also came out of a meeting with Congressional leaders and said he wants to budget there to grow to $1.5 trillion.  

The upshot is confusion here which was evidenced by more weakness than strength in the US session and similarly, declines in Asia (Japan -1.6%, China -0.8%, HK -1.2%).  Elsewhere in the region, India (-0.9%) continues to be the laggard, but there was more red than green overall.  In Europe, red is also today’s color, albeit not as bright as in Asia.  The DAX (-0.2%), CAC (-0.25%) and FTSE 100 (-0.3%) are emblematic of the situation as investors dismissed better than expected German Factory Order data (+5.6%) although the rest of the data released was mostly at expectations.  I guess the question is does Europe treat money better than the US?  I would argue not, but that’s just my view.  Meanwhile, at this hour (7:55), US futures are down slightly, about -0.1% across the board.

Finally, the bond market remains an afterthought almost everywhere.  Perhaps the most amazing thing President Trump has accomplished is to remove the focus on the latest tick in the 10-year bond as a key metric for the economy.  So, this morning, its 1bp rise just leaves it right in that 4.0% – 4.2% range that has existed for months.  Most European sovereign yields edged higher by about 3bps with Germany (+7bps) the outlier here after that strong Factory Orders data.  Also worth noting is that JGB yields slipped -5bps overnight as the market prepares for the first 30-year JGB auction of the year.  Recent 10-year auctions have been received quite well, hence the anticipation of something good here.

On the data front, Initial (exp 210K) and Continuing (1900K) Claims lead the way along with the Trade Balance (-$58.9B) and then Consumer Credit ($10.0B) this afternoon.  Yesterday’s ADP data was a touch softer than expected but the JOLTS data was much worse, showing a decline in job openings of 300K and falling well short of expectations of 7.6M.  At this point, though, to the extent that people are paying attention to the data, tomorrow’s NFP is of far more import I believe.  

The hardest thing about these markets is the White House bingo card and its surprises that can change working assumptions.  Absent something new there, I see the dollar drifting higher helped by both its recent trend and the short-term pullback in metals.  

Good luck

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Overrun

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We’ve not even gone through a week
Yet Trump, so much havoc did wreak
This poet will claim
That in this ballgame
It’s top first, one down, so to speak
 
The impact of what has been done
Is widespread and hits everyone
So, please understand
Whatever you’ve planned
May, by events, be overrun

 

Venezuela continues to be the primary discussion point in both the media and the markets.  Mostly along political lines there are calls that the weekend’s action was illegal or not, and as Brent Donnelly, a very good follow on X (@donnelly_brent), explained after reading voluminous material, the raid was either all about the oil or had nothing to do with the oil. I feel like that sums things up pretty well.

While this poet has views on the ongoing issues, they are set from afar with no inside knowledge so keep that in mind.  But ultimately, my take is the opportunity for real change has come to Venezuela, something that did not exist while Maduro was still there.  If nothing else, the ability for the US to exfiltrate him must have made a strong impression on acting president Rodriguez and the generals overseeing the army and police forces there and ought push decision making in a positive direction, at least for a while.  What seems abundantly clear, however, is that most of the population is ecstatic at his removal and have hope for a future, something missing for decades.

As to the oil, it is heavy, sour crude, something Gulf coast refineries are tuned to use, but the infrastructure there is a disaster.  My take is the one thing that is underestimated is just how remarkable the technology of oil exploration and production has become, and its ability to solve problems in efficiency to reduce the cost of extraction.  I will take the under on the time it takes to increase production there, although a key bottleneck is the electric grid which must be addressed as well.  Nonetheless, despite the rise in oil prices during yesterday’s session, I maintain my view that the trend is lower.

Other than domestic political news there seems little else to discuss but market activity, so let’s go there.  A strong session in the US yesterday was followed by plenty of strength in Asia with Japan (+1.3%), China (+1.6%) and HK (+1.4%) all having excellent outcomes.  Too, Korea (+1.7%) and Taiwan (+1.6%) had strong showings with many more gainers than losers in the region.  The one market that has not partaken in the early year rally is India (-0.4%), which I can only ascribe to the fact they may be losing a source of cheap oil.  Or perhaps, more accurately, all the buyers of sanctioned oil may find themselves in more difficult straits, paying full price, as the dark fleet of tankers is suddenly having more trouble making the rounds.

On this note, one other place to watch is Iran, where it appears that the regime may be set to collapse as protests grow and some cities may have been completely taken over by the protesters.  If the theocracy falls, I would expect that, too, will pressure oil prices lower, as sanctions could be swiftly lifted.

Turning to Europe, does anybody really care anymore?  No, seriously, markets there are mixed this morning with France (-0.4%) lagging while the UK (+0.7%) is gaining on the back of BP and Shell and the general euphoria about the oil majors now.  Meanwhile, other major markets have seen modest gains (Italy +0.4%, Spain +0.3%, Germany +0.2%) but there is one outlier, Denmark (+2.1%) which, given all the talk of the US seeking to take control of Greenland, seems odd to me.  I can find no specific news either for the economy or any companies (Novo Nordisk being the only one of note), but something is going on.  As to US futures, at this hour (6:50) they are little changed.

Turning to the bond market, the below chart of the 10-year offers a great picture of what it means when traders say nothing is going on.  Since early September, the bond has been trading within a 20 basis point range despite all the huffing and puffing of the punditry and the FOMC’s rate cuts.

Source: tradingeconomics.com

If bond investors are the “smart” money, I would argue that right now they have no opinion, or perhaps their opinion is that the economy is going to continue to tick along at a decent rate, with limited extra inflationary pressure.  To that last point, an article in the WSJ this morning explained that several recent studies, one by the SF Fed, demonstrated that tariffs have virtually no inflationary impact.  That probably doesn’t help Powell’s talking points.  While I continue to be concerned that inflation will maintain a 3+% level, I also believe the Fed is going to suppress interest rates going forward, net, bonds don’t seem that exciting.  As to the overnight price action, Treasury yields backed up 2bps, while European sovereigns slipped between -1bp and -2bps.  I couldn’t help but also notice that yesterday saw a massive issuance of USD bonds by non-US corporates, over $60 billion, an indication to me, at least, that calls for the death of the dollar are somewhat premature.

Commodities continue to be where all the action is, or perhaps more accurately, metals markets.  After massive rallies yesterday, we are seeing follow through with gold (+0.4%), silver (+2.4%), copper (+1.0%) and platinum (+3.2%) all strong again.  Unlike the bond market, and truly FX, which is also dull and boring, the below chart shows just how much things in the metals space have changed over time. 

Source: tradingeconomics.com

My take is that investors are still trying to figure out the implications of the fact that old relationships like the dollar falling when metals rise, or metals falling when real interest rates rise, are broken and what that implies for the future.  The reality is that other than gold, which is the calmest of them all, these metals are indicating actual shortages for users.  Consider that, according to Grok, the typical catalytic converter uses between 0.1 and 0.25 troy ounces of platinum, so at today’s price, between $230 and $575.  Given the average price of a new car is ~$50K, paying up for platinum is not going to change the equation that much, certainly relative to not having the platinum and therefore not being able to complete and sell the vehicle.  I suspect that metals, while likely to be volatile in their price action, have much further to run higher.

Lastly, the dollar…is still there.  Using the DXY as my proxy this morning, you can look at the chart below for the past year and see, it has basically not moved since it stopped declining in late April 2025.  It is hard to get excited about things right now.  However, I maintain that the US will remain the cleanest dirty shirt and benefit accordingly over time.

Source: tradingeconomics.com

On the data front, Services (exp 52.9) and Composite (53.0) PMI are released this morning with both expected lower than last month, but still in expansion territory.  We also hear from Richmond Fed governor Barkin, but it seems the Fed has taken a back seat to Venezuela lately, at least with respect to what is driving markets.  As of this morning, there is just a 16% probability of a rate cut priced in for the end of the month with a 53% probability priced for the March meeting.  But two more cuts are seen as a certainty by September, although if GDP continues to perform like it has, I imagine that will change.  According to the Atlanta Fed’s GDPNow model, Q4 is forecast at 2.7%.  We shall see how that evolves over time.

Summing it all up, the dollar is an afterthought in markets right now and seems unlikely to move very much in the near term.  Metals remain the place to be, and nothing indicates those trends have ended.

Good luck

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First Black Swan

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‘Ought Twenty-Six barely got started
And Trump has already departed
From previous norms
Of post-Cold War forms
Now socialists are broken-hearted
 
Their man in Caracas is gone
With outrage from Beijing to Bonn
But folks on the street
Believe it’s a treat
Please welcome this year’s first black swan

 

I certainly didn’t have the exfiltration of Venezuelan strongman Nicholas Maduro from his palace in the middle of the night on my bingo card, did you?  But that is what we all woke up to Saturday morning.  In a way, we cannot be surprised as President Trump indicated several weeks ago that he spoke with Maduro, told him if he left, he could have safe passage, and be left alone, but ostensibly Maduro turned him down.  I’m guessing old Nick is questioning that decision right now.

As this all took place Saturday morning, no financial markets, other than cryptocurrencies, are open and based on Bitcoin’s movement of 0.1% as I type, it appears the issue is not seen as a major concern.  There is much discussion regarding what will happen to the price of oil, as unquestionably, Venezuelan oil was part of the decision equation.  But the Venezuelans have been producing less than 1 million bpd, far below their pre-socialist levels, and given they sit on the largest known oil reserves on the planet, far below what their ultimate capabilities can be.  If you’re Chevron’s CEO, you must be thrilled this morning, as they are already operating in country there.

Too, remember that Venezuelan crude is heavy and sour, which is what most Gulf Coast refineries are tuned to utilise to distill diesel, gasoline and other products.  It is too early to know what will happen to oil prices in the short run, but I would suggest that the longer-term view has to be lower prices going forward.  Consider that the US already is the largest producer of oil and oil equivalents (about 20mm bpd) in the world.  I would expect that Venezuela will be exiting OPEC under a new administration there, and with US oil expertise, will be seeking to expand that sector as rapidly as possible.  In fact, achieving 10mm bpd within a few years does not seem unrealistic. 

Now consider that by the end of the decade, the Western hemisphere could well be producing half the world’s oil supply, as already, despite degradation of capabilities in both Venezuela and Mexico, it produces more than one-third of the oil pumped.  That would certainly put a crimp in Russia’s war machine as the price seems far more likely to head toward $50/bbl than $80/bbl or higher, and by all accounts, that would be hard on Russia’s budget.

Too, consider the geopolitical ramifications if China were suddenly paying full price rather than whatever discounts they currently get for sanctioned oil purchases.  As well, what does a lower price do to the Iranian regime’s finances?  Probably not very helpful.

It is way too early to know how things will evolve, but between growth in production in Guyana and Argentina, and the prospects for significant growth in Venezuela going forward, it should become cheaper to fill up your tank going forward.

We will see how markets open Sunday night, and I would not be surprised to see oil rally at the start, but I would contend the politics points to lower prices not higher ones.  

Source: visualcapitalist.com

Note that neither Venezuela nor Argentina make this list individually.   I would wager that by 2027, both will be prominent producers, along with Guyana.

Welcome to 2026!  It is going to be an interesting year.

Good luck

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A Vision For ‘Twenty-Six

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(With apologies to Clement Clarke Moore)

Tis the first day of trading in Ought Twenty-Six
With too much attention on raw politics
At home, eyes have turned to the mid-term elections
To see if results will force mid-course corrections
In Europe, they’re going all-in on Ukraine
With more billions promised, though that seems insane
Meanwhile, Mr Xi is convinced he can fix
The problems at home with his policy mix
And this, my friends, just skims the surface of things
As pols everywhere suffer arrows and slings
Remember, though, markets are what I’m about
And while I could err, I am never in doubt.

Let’s start at the top with Growth here in the States
Which likely will show more than marginal rates
In fact, Four percent seems a viable goal
As inward investment and tax cuts take hold
Remember, for Trump, if there’s one thing he’s not
It’s timid, and so he’ll demand, “Run it hot!”
Thus, growth will expand, though inflation might gain
And for the elections, that could be a pain
The problem is Jay, and whoever comes next
Have come to believe two percent’s just subtext
The greatest unknown is on government spending
And whether it grows or, at last, starts descending

The punditry’s certain the government fisc
Is going to increase inflation’ry risk
If true, CPI of near Four percent’s apt
If not, then Inflation ‘neath Three, could be capped

And what about elsewhere, in Europe? Japan?
In markets, emerging, do they have a plan?
Will they grow their ‘conomies, drawing investment?
Or will we soon witness a large reassessment?

In Europe, they claim they’ll be building more guns
To help them defend all their daughters and sons
As well, they’re committed to helping Ukraine
Continue to fight, despite so many slain
They’re planning to borrow a cool 90 Bill
But energy costs, these grand plans could well kill
Meanwhile, M Lagarde claims that rates are just right
And given growth there’s One Percent, I won’t fight
So, weak growth and low rates and energy blues
Lead me to believe that come year-end, the news
Will be that the Euro is failing to thrive
Do not be surprised when it hits One oh-Five

In England and Scotland and all the UK
Just like in the EU, they can’t make much hay
The budget’s a wreck yet they want to raise taxes
Though history shows growth will wane ere it waxes
As well, they continue their crack down on speech
While crimping their energy industry’s reach
So, power is costly, and billionaires flee
From here, ‘cross the pond, this is what I foresee
A ‘conomy heading right into stagflation
As long as Kier Starmer is leading the nation
For markets, the Pound will lose all its allure
With One-Ten the Boxing Day screen price du jour

A turn to the East where the Sun Also Rises
Will teach us that, really, there are no surprises
To date you’ve heard much ‘bout the rise in yen rates
With pundits opining the Carry Trades’ fates
This year, so they say, look for much stronger yen
As local investors buy yen bonds again
Thus, all the hedge funds who’ve been funding their trades
By borrowing yen, and they’ve done so in spades,
Will need to buy back all that Japanese Money
The outcome, for yen shorts, will not be so sunny
But what if this idea of yen heading home
Is wrong?  This implies quite a different syndrome

At this point there’s no sign the government there
Is ready, more spending and debt, to forswear
Instead, what seems likely is more of the same
More government spending in all but its name
So, debt will continue to rise without end
And up to One-Eighty the buck will ascend

As well as Japan, in the continent vast
Of Asia, it’s China we come to at last
“Poor” President Xi has a problem at home
Consumption is not in the Chinese genome
For decades, the model’s been, build and export
Which helps explain why local usage falls short
But lately the rest of the world’s of a mind
That Chinese imports are a troublesome kind
So, Xi needs his people to learn how to spend
Else all that production may come to an end
But if they consume, what will that do to growth?
Its rate will decline, something for which Xi’s loath

Thus, GDP 5 means a weaker yuan
Well above Seven you can depend on
But if, against odds, Xi gets Chinese to spend
Six-Fifty is where yuan will be at year end.

Let’s shift our perspective to Treasury debt
A market of critical import, and yet
A market that’s been in a range for a while
So, what must occur for a change in profile?
The popular view is that deficit spending
Will drive an outcome of, high yields, never-ending
But Trump and his team are, quite hard, pushing back
Explaining that policy’s on the right track
Twixt tariffs and growth, tax receipts have been flying
While RIFs in the government are underlying
The idea that deficits soon will be shrinking
In truth, this is not what the punditry’s thinking
But one thing is clear that will keep yields from climbing
QE, which is back, is designed for pump-priming
So, Jay and his heir will keep buying and buying
And 10-Years at Four Percent seems satisfying

It’s not just the government, though, that’s in debt
Those corporates who borrowed at ZIRP, have not yet
Refinanced the trillions they owe, to this day
And now they’re competing with Bessent and Jay
While Scott will find buyers, if not least the Fed
For corporates that path may be flashing bright red
If credit spreads widen will companies fail?
And will that unravel the stock markets’ tale?
Right now, spreads for IG sit near one percent
And Junk’s above eight with investors content
However, the biggest risk this year could be
The absence of corporate debt liquidity
If IG spreads widen 200 bps more
The outcome could be a GFC encore

This takes us to stocks, both at home and abroad
Which last year saw rallies we all did applaud
But will this year bring us some more of the same?
Or have things been altered?  Is there a new game?
If my crystal ball is in any way clear
The outcome could well be a frightening year
Remember, the driver of last year’s returns
Was government spending which lacked all concerns
Thus, Cantillon nailed it with where cash would go
And stocks were the winner, of that much we know
But this year the mountain of debt coming due
Could well force decisions of what will ensue
And too, don’t forget if the deficit shrinks
It’s likely to be a great stock market jinx
So, don’t be surprised if December this year
A 10% fall ‘cross all stocks does appear

And what of that black, sticky stuff that they drill
Which powers the global economy still
When its price increases, it causes much pain
For most everyone, it can be quite the bane
Consumers, instead, like those prices to sink
But drillers, in that case, cause output to shrink
So, which will it be, will Trump’s mantra come true
Or will, new production, most drillers eschew
I think what is missed is technology’s traction
And how costs per barrel will tend toward contraction
As well, nations worldwide, at last understand
That Carbon Dioxide just cannot be banned
Come Christmas, next, we will see growth in supply
With Fifty per barrel the price we’ll espy

The last place to look is at bright things that shine
Which saw prices move in a vertical line
While gold was the starter, by year end t’was clear
That silver and platinum said, wait, hold my beer
The latter two rising thrice fifty percent
With neither responding to any event
Which brings us to this year, can these trends maintain?
Or are we now set up for infinite pain?
It seems to me that til the summer at least
All three will continue to rise, as with yeast
But when we reach solstice do not be surprised
If views on their future become bastardized
In other words, look for corrections in price
With early year gains given back in a trice
But still, by the end of the year I believe
Five Thousand in Gold is what we will perceive
For Silver, One Hundred could well be the spot
And Platinum, Three Grand, would not be too hot.

To all of my readers and friends, please forgive
My musings if they got too ruminative
This year will see change across many degrees
And some will be painful, while others will please

In sum, I think President Trump can succeed
In changing behavior, though not corporate greed
Reducing the number of government staff
As well as with regs, he can cut those in half
Inward investment will focus on stuff
Instead of on stocks, for the markets that’s rough
Dollars will still be in greater demand
While Treasury yields will be stuck in the sand
IG and Junk are unlikely to win
As rising expenses cut margins quite thin
And still, through it all, precious metals will gain
Though G7 central banks all will abstain
Come Christmas next, nothing will look quite the same
And maybe my views can help you build a frame.

Thank you all for tolerating my punditry and I hope that you all have a wonderful, healthy and successful year ahead.

Adf

Talk of the Town

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Two things have been talk of the town
First, silver ne’er seems to go down
But also, of late
The Dow’s in a state
Where it wears the daily stock crown
 
But if we dig deeper, we find
Industrials, as they’re defined
Don’t build many things
Instead, they pull strings
As finance and tech are combined

 

Before I start, this will be the last poetry of 2025.  I want to thank all my readers for continuing to read and I certainly hope I both amused you and highlighted one view of what is driving the zeitgeist in markets these days.  FX poetry will return on January 5th with my annual long-form poetic prognostications.  Merry Christmas, Happy Chanukkah and Happy New Year to you all.

So, I was reading my friend JJ’s evening wrap up from yesterday and he highlighted the fact that the DJIA (+1.3%) made a new all-time high in trading and it was led by…Goldman Sachs.  

Source: tradingeconomics.com

Now, I have nothing against Goldman Sachs, per se, but it struck me as odd that Goldman Sachs, an investment bank, was a member of the Dow Jones Industrial Average.  It’s not that I wasn’t aware of the fact, but for some reason, this mention stuck out.  So, I thought I might look at the current membership of the Dow and see just how industrial it is.

While you will likely not be surprised that it has several non-industrial, service-based companies in the index, you might be surprised by just how many.  For instance, aside from Goldman, JPMorgan, American Express and Visa are in there as well as United Health and Travelers from the insurance space.  There are major retailers like Walmart, Home Depot, Amazon and McDonalds, along with tech and telecom/media names like Microsoft, Salesforce, Disney and Verizon.  

This is not to say that these are misplaced with respect to their relative importance in the US economy, clearly all are major corporations with long histories of profitability.  But it seems odd to list them as industrial.  I would contend that nothing explains the financialization of the US economy better than the fact that 14 out of the 30 members of the DJIA are service companies rather than producers of stuff.  Maybe they should rename it the Dow Jones Major Corporate Index.

To conclude the equity portion of our discussion, yesterday saw the NASDAQ (-0.25%) decline in the face of a broad overall equity rally as there appears to be a rotation of investors from AI into other things like financials (as hopes of another Fed rate cut spring eternal) and power producers as the power needs of AI keep getting estimated ever higher.  This rally was followed pretty much everywhere around the world as regardless of one’s religion, it appears investors are all counting on Santa to deliver higher prices.  In Asia, Tokyo (+1.4%). HK (+1.75%), China (+0.6%), Australia (+1.2%), Korea (+1.4%) and virtually every other market rallied.  The only data of note here was Japanese IP which came in a tick higher than its preliminary forecast, but to counter that, Nikkei reported that the BOJ, when they meet next week, are definitely going to raise the base rate by 25bps to 0.75%, the highest level since 1994.  That doesn’t seem that bullish, but then, I’m not Japanese.

In Europe, the gains are also universal, albeit less impressive with Spain (+0.5%) and France (+0.5%) leading the way and Germany and the UK both only marginally higher.  The most interesting news here is about the EU’s efforts to confiscatethe Russian assets that have been frozen since they invaded Ukraine, but which are being blocked by Belgium where they reside under SWIFT.  And as I type (7:45) US futures are mixed with the Dow (+0.2%) still in favor while NASDAQ (-0.5%) continues to lag.

But the other story that is getting press, and arguably more press, is precious metals.  Silver (+0.9% today, +10% this week, +122% this year) is the leader and is now trading above $64/oz.  This is the very definition of a parabolic move, which is obvious when you look at the silver chart for the past 5 years.

Source: tradingeconomics.com

Referring back to JJ’s note, it is important to understand he is a commodity trader of long standing (remarkably even longer than my time in FX) and he discussed silver from an insider’s perspective.  The essence of the issue here is that there are quite a few paper short positions that have existed for a long time.  The rumor has long been that JPMorgan has been preventing silver from rising by playing in futures markets.  But now, real demand, between industrial users (solar panels and electronics) and Asian retail demand from both India and China is far higher than new supply or recovery from scrap, to the tune of 120 million oz/year, and those shorts cannot find the metal to deliver.  The last time there was a squeeze, when the Hunt’s tried to corner the market in 1980, people lined up at stores to sell their silver tea services, bringing metal to the market.  But those are all gone.  I’m not sure what will change this in the short run, but it cannot go up forever.  With that in mind, though, I think precious metals have much further to run as the ongoing debasement of fiat currencies simply adds further to demand.  

Silver managed to drag gold (+1.1% today, +3.0% this week, +65% this year) and platinum (+3.6% today, +7.2% this week, +98% this year) along for the ride and I expect this will continue across the board.  Meanwhile oil (0.0%) is unchanged this morning but has fallen -4.0% this week.  The news that the US boarded a Venezuelan oil tanker and took control in an effort to pressure Maduro didn’t seem to concern anyone in the market.  This trend remains clear.  

As to the bond market, this morning yields are higher by 2bps, pretty much across the board of Treasuries and all European sovereigns.  But with that in mind, the 10-year Treasury is still yielding 4.18%, below its worst level immediately following the FOMC meeting, and as I mentioned above, there appears to be a growing belief that Powell’s concern about the labor market will result in more cuts sooner rather than later.  While that is not really playing out in the futures market yet, as you can see below with the next cut priced for April with a 76% probability, that is the narrative that is being promulgated in FinX.  

Source: cmegroup.com

Next week we will get the November NFP report (exp 35K) and all the data we missed in October.  I can assure you if that comes in weak, the idea of a rate cut will explode onto the scene once again.  Too, on Wednesday evening, the WSJpublished an article indicating that Chairman Powell is concerned the employment data is overstating things because of the flaws in the birth/death model.  The point is he may be far more inclined to cut if next Tuesday’s report is weak.

Finally, the dollar is…still here.  It sold off after the Fed, and as I showed yesterday, has fallen back to the middle of its trading range of the past 6 months.  I keep reading how the dollar is the key, but quite frankly, I’m not certain what that key will unlock.  We need out of consensus activities to change the current situation.  After all, the underlying demand for dollars because of the trillions of dollars of debt outstanding outside of the US makes it difficult to get too bearish without a major reason.  If the Fed cut 50bps intermeeting, that would do it, but I’m not holding my breath.

And that’s really it my friends.  There is no data today although we do hear from three Fed speakers.  Given the dissent on the FOMC, I expect that we are going to be need to keep score as to views for a while when these folks speak. 

In the meantime, as I said above, have a wonderful holiday all

Adf

Crazier Still

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There once was a time when the Fed
When meeting, and looking ahead
All seemed to agree
The future they’d see
And wrote banal statements, when read
 
But this time is different, it’s true
Though those words most folks should eschew
‘Cause nobody knows
Which way the wind blows
As true data’s hard to construe
 
So, rather than voting as one
Three members, the Chairman, did shun
But crazier still
The dot plot did kill
The idea much more can be done

 

I think it is appropriate to start this morning’s discussion with the dot plot, which as I, and many others, expected showed virtually no consensus as to what the future holds with respect to Federal Reserve monetary policy.  For 2026, the range of estimates by the 19 FOMC members is 175 basis points, the widest range I have ever seen.  Three members see a 25bp hike in 2026 and one member (likely Governor Miran) sees 150bps of cuts.  They can’t all be right!  But even if we look out to the longer run, the range of estimates is 125bps wide.

Personally, I am thrilled at this outcome as it indicates that instead of the Chairman browbeating everyone into agreeing with his/her view, which had been the history for the past 40 years, FOMC members have demonstrated they are willing to express a personal view.

Now, generally markets hate uncertainty of this nature, and one might have thought that equity markets, especially, would be negatively impacted by this outcome.  But, since the unwritten mandate of the Fed is to ensure that stock markets never decline, they were able to paper over the lack of consensus by explaining they will be buying $40 billion/month of T-bills to make sure that bank reserves are “ample”.  QT has ended, and while they will continue to go out of their way to explain this is not QE, and perhaps technically it is not, they are still promising to pump nearly $500 billion /year into the economy by expanding their balance sheet.  One cannot be surprised that initially, much of that money is going to head into financial markets, hence today’s rally.

However, if you want to see just how out of touch the Fed is with reality, a quick look at their economic projections helps disabuse you of the notion that there is really much independent thought in the Marriner Eccles Building.  As you can see below, they continue to believe that inflation will gradually head back to their target, that growth will slow, unemployment will slip and that Fed funds have room to decline from here.

I have frequently railed against the Fed and their models, highlighting time and again that their models are not fit for purpose.  It is abundantly clear that every member has a neo-Keynesian model that was calibrated in the wake of the Dot com bubble bursting when interest rates in the US first were pushed down to 0.0% while consumer inflation remained quiescent as all the funds went into financial assets.  One would think that the experience of 2022-23, when inflation soared forcing them to hike rates in the most aggressive manner in history, would have resulted in some second thoughts.  But I cannot look at the table above and draw that conclusion.  Perhaps this will help you understand the growth in the meme, end the fed.

To sum it all up, FOMC members have no consensus on how to behave going forward but they decided that expanding the balance sheet was the right thing to do.  Perhaps they do have an idea, but given inflation is showing no signs of heading back to their target, they decided that the esoterica of the balance sheet will hide their activities more effectively than interest rate announcements.

One of the key talking points this morning revolves around the dollar in the FX markets and how now that the Fed has cut rates again, while the ECB is set to leave them on hold, and the BOJ looks likely to raise them next week, that the greenback will fall further.  Much continues to be made of the fact that the dollar fell about 12% during the first 6 months of 2025, although a decline of that magnitude during a 6-month time span is hardly unique, it was the first such decline that happened during the first 6 months of the year, in 50 years or so.  In other words, much ado about nothing.  

The latest spin, though, is look for the dollar to decline sharply after the rate cut.  I have a hard time with this concept for a few reasons.  First, given the obvious uncertainty of future Fed activity, as per the dot plot, it is unclear the Fed is going to aggressively cut rates from this level anytime soon.  And second, a look at the history of the dollar in relation to Fed activity doesn’t really paint that picture.  The below chart of the euro over the past five years shows that the single currency fell during the initial stages of the Fed’s panic rate hikes in 2022 then rallied back sharply as they continued.  Meanwhile, during the latter half of 2024, the dollar rallied as the Fed cut rates and then declined as they remained on hold.   My point is, the recent history is ambiguous at best regarding the dollar’s response to a given Fed move.

Source: tradingeconomics.com

I have maintained that if the Fed cuts aggressively, it will undermine the dollar.  However, nothing about yesterday’s FOMC meeting tells me they are about to embark on an aggressive rate cutting binge.

The other noteworthy story this morning is the outcome from China’s Central Economic Work Conference (CEWC).  I have described several times that the President Xi’s government claims they are keen to help support domestic consumption and the housing market despite neither of those things having occurred during the past several years.  Well, Bloomberg was nice enough to create a table highlighting the CEWC’s statements this year and compare them to the past two years.  I have attached it below.

In a testament to the fact that bureaucrats speak the same language, no matter their native tongue, a look at the changes in Fiscal Policy or Top Priority Task, or even Real Estate shows that nothing has changed but the order of the words.  The very fact that they need to keep repeating themselves can readily be explained by the fact that the previous year’s efforts failed.  Why will this time be different?

Ok, a quick tour of markets.   Apparently, Asia was not enamored of the FOMC outcome with Tokyo (-0.9%) and China (-0.9%) both sliding although HK managed to stay put.  Elsewhere in the region, both Korea (-0.6%) and Taiwan (-1.3%) were also under pressure as most markets here were in the red.  The exceptions were India, Malaysia and the Philippines, all of which managed gains of 0.5% or so.  

In Europe, things are a little brighter with modest gains the order of the day led by Spain (+0.5%) and France (+0.4%) although both Germany and the UK are barely higher at this hour.  There was no data released in Europe this morning although the SNB did meet and leave rates on hold at 0.0% as universally expected.  There has been a little bit of ECB speak, with several members highlighting that ECB policy is independent of Fed policy but that if Fed cuts force the dollar lower, they may feel the need to respond as a higher euro would reduce inflation.  Alas for the stock market bulls in the US, futures this morning are pointing lower led by the NASDAQ (-0.7%) although that is on the back of weaker than expected Oracle earnings results last night.  Perhaps promising to spend $5 trillion on AI is beginning to be seen as unrealistic, although I doubt that is the case 🤔.

Turning to the bond market, Treasury yields have slipped -2bps overnight after falling -5bps yesterday.  Similar price action has been seen elsewhere with European sovereign yields slipping slightly and even JGB yields down -2bps overnight.  Personally, I am a bit confused by this as I have been assured that the Fed cutting rates in this economy would result in a steeper yield curve with long-dated rates rising even though the front end falls.  Perhaps I am reading the data wrong.

In the commodity markets, the one truth is that there are no sellers in the silver market.  It is higher by another 0.5% this morning and above $62/oz as whatever games had been played in the past to cap its price seem to have fallen apart.  Physical demand for the stuff outstrips new supply by about 120 million oz /year, and new mines are scarce on the ground.  This feels like there is further room to run.

Source: tradingeconomics.com

As to the rest of the space, gold (-0.2%) which had a nice day yesterday is consolidating, as is copper.  Turning to oil (-1.1%) it continues to drift lower, dragging gasoline along for the ride, something that must make the president quite happy.  You know my views here.

As to the dollar writ large, while it sold off a bit yesterday, as you can see from the below DXY (-0.3%) chart, it is hardly making new ground, rather it is back to the middle of its 6-month range.  

Source: tradingeconomics.com

This morning more currencies are a bit stronger but in the G10, CHF (+0.45%) is the leader with everything else far less impactful.  And on the flip side, INR (-0.7%) has traded to yet another historic low (USD high) as the new RBI governor has decided not to waste too much money on intervention.  Oh yeah, JPY (+0.2%) has gotten some tongues wagging as now that the Fed cut and the BOJ is ostensibly getting set to hike, there is more concern about the unwind of the carry trade.  My view is, don’t worry unless the BOJ hikes 50bps and promises a lot more on the way.  After all, if the Fed has finished cutting, something that cannot be ruled out, this entire thesis will be destroyed.

On the data front, Initial (exp 220K) and Continuing (1950K) Claims are coming as well as the Trade Balance (-$63.3B).  There are no Fed speakers on the docket, but I imagine we will hear from some anyway, as they cannot seem to shut up.  

It would not surprise me to see the dollar head toward the bottom of this trading range, but I think we need a much stronger catalyst than uncertainty from the Fed to break the range.

Good luck

Adf

All But Assured

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A cut has been all but assured
Though since last time we have endured
Some fears Jay’s a hawk
So, when he does talk
Will this cut, at last, be secured?
 
And now there’s a narrative view
Though rates will fall, what he will do
Is try to convey
Now it’s out the way
Another one may not come through

 

Good morning all and welcome to Fed Day.  The question, of course, is will this be a frabjous day?  As I write this morning, the Fed funds futures market continues to price a roughly 90% probability of a 25bp cut this afternoon, but the prospects for future rate cuts have greatly diminished as you can see in the table below from the CME.

It wasn’t long ago when the market was pricing 100bps more of rate cuts by the end of 2026, meaning a Fed funds rate of 2.50% – 2.75%.  However, the narrative has shifted over the past several weeks after very mixed signals from FOMC speakers and data releases that have indicated the economy is not cratering (e.g. yesterday’s JOLTS data printing at 7.658M, >400K higher than expected).  You may recall that shortly after the last FOMC meeting at the end of October, the probability of today’s rate cut had fallen to just 30%.

It appears that the new discussion point is this will be a hawkish cut, an idiom similar to jumbo shrimp.  At this point, the bulk of the discussion has been around how many dissents will be recorded with the subtext being, what will Chairman Powell have to promise potential dissenters in order to bring them along to his side of the ledger.  My take is if you thought the last press conference was hawkish, you ain’t seen nothin’ yet.  In fact, I would not be surprised to see a virtually categoric call to this being the end of the cutting cycle for the foreseeable future.

Remember, we also will see the new dot plots and SEP which will help us understand the broad picture of where FOMC members currently stand on the matter.  Personally, I expect to see a wide disparity between the ends of the distribution, and it wouldn’t surprise me to see some expectations of no rate changes for 2026 with other calls for 150bps of cuts and no consensus view at all. 

At this point, all we can do is wait.  However, the market discussion has centered on the fact that 10-year Treasury yields (+1bp) have been climbing lately, and that this morning they have touched 4.20% again while, at the same time, 2-year Treasury yields (no change) have been slipping as per the below chart I created from FRED data.

The steepening yield curve, which now appears to be turning into a bear steepener (when long dated yields rise more quickly than short-dated yields) is ringing alarm bells in some quarters.  The narrative is that there are growing concerns over both the quantity of debt outstanding and its rate of growth as well as the fact rate cuts will engender future inflation.

A key part of the discussion is the fact that what had been a synchronous system of global central bank policy easing is now starting to split up.  While we have known the BOJ is in a hiking cycle, albeit a slow one, today, the BOC is not only expected to leave rates on hold but explain they have bottomed.  We have heard that, as well, from the RBA earlier this week, and the commentary from the ECB may be coming along those lines.  So, is the US the outlier now?  And will that weaken the dollar?  Those are the key questions we will need to address going forward.

But before we move on, there is one market I must discuss, silver, which exploded to new historic highs yesterday, trading through $60/oz and is higher again this morning by 0.6% and trading at $61/oz.  someone made the point yesterday that for the second time in history, you need just 1 ounce of silver to buy one barrel of WTI.  The first time was back during the silver squeeze in January 1980, but that was quite short-lived (see chart below from macrotrends.com).  This one appears to have legs.  

I don’t know that I can find another indicator that better expresses my views of fiat currency debasement alongside an expanding availability of oil.  To my mind, both these trends remain quite strong, and this is the embodiment of them both combined.

Ok, so as we await the FOMC, let’s see if anybody is doing anything in financial markets of note.  As testament to the fact that virtually everybody is awaiting the Fed this afternoon, US equity markets barely moved yesterday, and Asian markets were similarly quiet, with only Taiwan (+0.8%) moving more than 0.4% in either direction.  The large markets were +/- 0.2% overall.  In Europe, the movement has been slightly larger, but still not impressive with Germany (-0.4%) the laggard of note while the UK (+0.3%) is the leader.  A smattering of data released from the continent doesn’t seem to be having any real impact, nor did comments by Madame Lagarde claiming the rates are in a good place and displaying some optimism on future GDP growth.  Of much greater concern is the headlong rush to a digital euro CBDC, where they are seeking to exert control over the citizenry.  If for no other reason, I would be leery of expecting great things from the Eurozone going forward.  Not surprisingly, at this hour (7:30) US futures are little changed ahead of the meeting.

In the bond market, yields are creeping higher all around the world with European sovereign yields higher between 2bps and 4bps this morning.  Perhaps investors are taking Madame Lagarde’s views to heart.  Or perhaps the fallout from the recently released US National Security Strategy, where the US basically dismisses Europe as strategic, has investors concerned that European governments are going to be spending that much more on defense without having the financial wherewithal to do so effectively, thus will be borrowing a lot and driving yields higher.  At this point, European sovereign yields have risen to levels not seen since the Eurozone bond crisis in 2011, but it feels like they have further to climb (see French 10-year OAT yields below from Marketwatch.com).

In the commodity market, oil (+0.5%) cannot get out of its own way.  While it is a touch higher this morning, it sits at $58.50/bbl, and that long-term trend remains lower.  We’ve already discussed silver and gold (-0.25%) continues to trade either side of $4200 these days, biding its time for its next move (higher I believe).  Copper (+1.4%) is looking good today, although it is hard to find economic news that is driving today’s price action.

Finally, the dollar is a touch softer this morning, about 0.1% in the DXY as well as virtually every major currency in the G10.  Interestingly, today’s outlier is SEK (+0.4%) which is rallying despite data showing GDP (-0.3%) slipping on the month while IP (-6.6%) fell sharply.  As to the EMG bloc, there is very little movement of note with the biggest news this evening’s Central Bank of Brazil meeting where they are expected to leave their overnight SELIC rate at 15.0% as inflation there, released this morning at a remarkably precise 4.46% continues to run at the top of their target range of 3.0% +/- 1.5%.

Ahead of the FOMC, we only see the Employment Cost Index (exp 0.9%), a number the Fed watches more closely than the market, and we hear from the BOC who are universally expected to leave Canadian rates on hold at 2.25%.

And that’s really it.  I wouldn’t look for much movement ahead of the 2pm statement release and then the fireworks at 2:30 when Powell speaks can drive things anywhere.  The most compelling story will be the number of dissents on the vote, as there will almost certainly be several.  According to Kalshi, 3 is the majority estimate.  With President Trump continuing to discuss the next Fed chair, I have a feeling there will be 4 and that will be a negative for bonds (higher yields) and a short-term negative for the dollar.  In fact, it is just another reason to hold precious metals.

Good luck

Adf

It Won’t End Well

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From Europe, we’re hearing some squawks
They’ve not been included in talks
‘Bout war and Ukraine
So, to inflict pain
They’ve threatened a US detox
 
It seems they believe if they sell
All Treasuries held we would yell
Please stop, it’s too much
And lighten our touch
Methinks, for them, it won’t end well

 

Markets continue to be dull these days.  While we are clearly not in the summer (it is 15° here in NJ this morning), doldrums certainly seem to be descriptive of the current situation.  Equities bounce back and forth each day, neither trading to new highs, nor falling sharply.  The same is true with the dollar, with oil, with gold of late and even, on a slightly longer-term view, of Treasury bonds.  I guess that could be the exception, depending on your horizon, but as you can see from the chart below, it has been several months since 10-year yields have traded outside the 4.0% – 4.2% range.

Source: tradingeconomics.com

Now, much digital ink has been spilled trying to explain that the latest 15bp rise in yields is a signal that the US economy is about to collapse under the weight of its $38+ trillion in debt, but I sense that is more about reporters trying to get clicks on their articles than a reflection of reality.

However, this morning I saw a story that I think is worth discussing, even though it is only a hypothetical.  Making the rounds is the story that Europe and the UK are extremely unhappy with President Trump’s approach to obtaining a peace in Ukraine and so have threatened their so-called ‘nuclear option’ of selling all their Treasury holdings to crash the US bond market and the US economy alongside it.  From what I have seen, if you sum up all the holdings in Europe and the UK it totals $2.3 trillion or so, although it is not clear if that is controlled by the governments, or there are private holdings included.  My strong suspicion is the latter, although I have not yet been able to confirm that.

But let’s assume those holdings are completely under the control of European central banks and governments and they decide that’s what they want to do.  What do you think will happen?  Arguably, much depends on how they go about selling them.  After all, it’s not as though there is anybody, other than the Fed, who can step up and show a bid on the full amount.  So how can they do this?  I figure there are only two viable options:

  1. They can sell them slowly and steadily over time, perhaps $200 billion/day (FYI daily Treasury market volume averages about $900 billion).  That would clearly put significant downward pressure on prices and push yields higher but would likely encourage the hedge fund community to double up on the bond basis trade thus slowing the decline.  However, if they did that for 11 days, US yields would undoubtedly be higher.  Too, remember that if the market started to get unstable, the Fed would step in and absorb whatever amount they deemed necessary to prevent things from getting out of hand.
  • Perhaps, since their ostensible goal is to destabilize the US bond market, they would literally all coordinate their timing and try to sell them all at once.  At that point, since nothing happens in the bond market without the Fed being aware, it would likely have an even smaller impact as the Fed would certainly step in and take down the entire lot.  After all, through QT, their balance sheet has shrunk about $2.3 trillion over the past 18 months, so they have plenty of capacity.

My point is, I believe this is an empty threat, as it seems most European threats tend to be.  Consider that the Eurodollar market remains the major source of funding throughout Europe, and it requires collateral (i.e. Treasury bills and bonds) in order to function.  If Europe no longer had that collateral, it feels like they might have a lot more problems funding anything on the continent.  

Another issue is that if we assume they successfully sell all their Treasuries, that means they will be holding $2.3 trillion in cash.  Exactly what are they going to do with that?  If they convert it into euros and pounds, the dollar will certainly fall sharply, meaning both the euro and pound will rise sharply.  Please explain how that will help their economies and their exporters.  They are getting killed right now because their energy policies have made manufacturing ridiculously expensive.  See how many cars VW or Mercedes sells overseas if the euro rallies 15%.

Now, the article linked above is from the Daily Express, not a website I trust, but they reference a WSJ article.  However, despite searching the Journal, and asking Grok to do the same, I can find no actual article that mentions this idea.  Ostensibly, if you want to search, it came out on December 1st, although if that is the case, why is it only getting press now?

It is a sign of the absence of market news that this is a story at all.  With market participants inhaling deeply so they may hold their breath until 2:00 tomorrow afternoon when the FOMC statement is released, they need something to do.  I guess this was today’s distraction.  As I said above, this is clickbait, not reality.

Ok, let’s tour markets. US equity market slipped a bit yesterday and Asian markets were dull as well with modest gains and losses almost everywhere.  The exception was HK (-1.3%) which suffered based on concern the FOMC will provide a ‘hawkish’ cut tomorrow and that will be the end of the road.  But China (-0.5%) was also soft despite hopes that when the Politburo meets in the next weeks, they will focus on more domestic stimulus (🤣🤣) just like they have been saying for the past three years.  Australia (-0.5%) slipped as the RBA left rates on hold and sounded more hawkish, indicating there were no cuts in the offing.

European bourses are mixed, although starting to lean lower.  The CAC (-0.6%) is the laggard here although Italy and Spain are also softer while Germany (+0.2%) leads the gainers after a slightly better than expected Trade Balance was reported this morning.  The hiccup here is that the balance improved because imports fell (-1.2%) so much more than exports rose (0.1%).  Hardly the sign of economic strength.

We’ve discussed bonds on a big picture basis, and recall, yields rose yesterday in both the US and Europe.  This morning, though, yields are little changed in the US and in Europe, with sovereign yields, if anything slightly lower.  JGB yields also slipped -1bp last night and the big mover was Australia after the RBA, with yields climbing 5bps.

In the commodity markets, while the trend remains slightly lower in oil (+0.3%), as you can see from the chart below, $60/bbl is home.  As I have written before, absent an invasion of Venezuela or peace in Ukraine, it is hard to see what changes this for now.  I guess if China stops filling up its SPR, demand could shrink and that would accelerate the decline.

Source: tradingeconomics.com

In the metals markets, $4200/oz has become gold’s (+0.3%) home lately while silver (+0.9%) has found comfort between $58/oz and $59/oz.  Neither is seeing much in the way of volatility or new interest, but both trends remain strongly higher. 

Finally, the dollar, which rallied a bit yesterday, is little changed this morning.  USDJPY is interesting as it has traded back above 156 this morning, contradicting all that talk of a Japanese repatriation trade.  Again, it is difficult for me to look at the yen chart below and conclude the dollar has peaked.

Source: tradingeconomics.com

Elsewhere in the space, this is one of those days where 0.2% is a major move.  Historically, December is not a time when FX traders are active.

On the data front, the NFIB report rose to 99.0 this morning, its highest reading in three months and the underlying comments showed a modest increase in optimism with many businesses looking to hire more people but having trouble finding qualified candidates.  This is quite a juxtaposition with the narrative that small businesses are firing workers that I have read in several different places and is backed by things like the recent Challenger Gray survey which indicated that US businesses have fired more than 1.1 million workers so far this year.  This lack of clarity is not going to help the FOMC make decisions, that’s for sure.  As to the rest, the ADP Weekly Survey is due to be released as well as JOLTS Job Openings (7.2M) and Leading Indicators (-0.3%) at 10:00.

The very fact that the biggest story I could find was a hypothetical is indicative of the idea that there is nothing going on.  Look for a quiet one as market participants await Powell and friends tomorrow.

Good luck

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Nothing is Clear

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Though next week the Fed will cut rates
The bond market’s in dire straits
‘Cause nothing is clear
‘Bout growth, and Jay’s fear
Is he’ll miss on both his mandates

 

In the past week, 10-year Treasury yields have risen 13bps, as per the below chart, even though market pricing of a Fed rate cut continues to hover around 88%.  Much to both the Fed’s and the President’s chagrin, it appears the bond market is less concerned with the level of short-term rates than they are of the macroeconomics of deficit spending, and total debt, as well as the potential for future inflation.

Source: tradingeconomics.com

I don’t think it is appropriate to describe the current bond market as being run by the bond vigilantes, at least not in the US (Japan may be another story) but it is unquestionable that there is a growing level of discomfort in the administration.  This morning, we will see the September PCE data (exp 0.3%, 2.8% Y/Y headline; 0.2% 2.9% Y/Y Core) which will do nothing to comfort those FOMC members who quaintly still believe that inflation matters.

It’s funny, while the President consistently touts how great things are in the economy, both he and Secretary Bessent continue to push hard for lower interest rates, which historically had been a sign of a weak economy.

But as I have highlighted before, the data is so disparate, every analyst can find something to support their pet theory.  For instance, on the employment front, the weak ADP reading on Wednesday indicated that small businesses were under pressure, yet the Initial Claims data yesterday printed at a remarkably low 191K, which on the surface indicates strong labor demand.  Arguably, that print was impacted by the Thanksgiving holiday so some states didn’t get their data in on time, and we will likely see revisions next week.  But revisions are not nearly as impactful as initial headlines.  Nonetheless, for those pushing economic strength, yesterday’s Claims number was catnip.

So, which is it?  Is the economy strong or weak?  My amateur observation is that we no longer have an ‘economy’ but rather we have multiple industrial and business sectors, each with its own dynamics and cycles, some of which are related but others which are independent.  And so, similar to the idea that the inflation rate that is reported is an average of subcomponents, each of which can have very different trajectories than the others (as illustrated in the chart below), the economy writ large is exactly the same.  So, an analogy might be that AI is akin to Hospital Services in the below chart while heavy industry is better represented by the TV’s line.

But, when we look at the Atlanta Fed’s GDPNow forecast below, it continues to show a much stronger economic impulse than the pundits expect.

And quite frankly, if 3.8% is the real growth rate, that is quite strong, certainly relative to the last two decades in the US as evidenced by the below chart I created from FRED data.  The orange line represents 4% and you can see that other than the Covid reopening, we haven’t been at that level for quite a while.

What is the reality?  Everybody has their own reality, just like everybody has their own personal inflation rate.  However, markets have been inclined to believe that the future is bright, which given my ongoing view of every nation ‘running it hot’ makes sense, so keep that in mind regardless of your personal situation.

Ok, let’s look at how markets behaved overnight.  Yesterday’s nondescript day in the US was followed by a mixed Asian session with Tokyo (-1.0%) slipping on concerns that the BOJ is going to raise rates.  I’m not sure why that is news suddenly, but there you go.  However, China (+0.8%), HK (+0.6%), Korea (+1.8%), India (+0.5%) and Taiwan (+0.7%) all continued their recent rallies.  The RBI did cut rates by 25bps, as expected, but that doesn’t seem to have been the driver.  Just good vibes for now.

In Europe, screens are also green this morning, albeit not dramatically so.  Frankfurt (+0.6%) leads the way but Paris (+0.3%), Madrid (+0.2%) and London (+0.1%) are all on the right side of the ledger.  Eurozone growth in Q3 was revised up to 0.3% on the quarter, although that translated into an annual rate of 1.4%, lower than Q2, but the positive revision was enough to get the blood flowing.  That and the idea that European defense companies are going to come back into vogue soon.  And as has been their wont, US futures are higher by 0.2% at this hour (7:35).

In the bond market, Treasury yields are higher by 2bps this morning and European sovereign yields are getting dragged along for the ride, up 1bp to 2bps across the board.  JGB yields also continue to climb and show no sign of stopping at any maturity.  A BOJ rate hike of 25bps is not going to be enough to stop the train of spending and borrowing in Japan, so I imagine there is much further to go here.

In the commodity space, silver (+1.8%) has been getting a lot more press than gold lately as there are ongoing stories about big banks, notably JPM, having large short futures positions that were designed to keep a lid on prices there, but the structural shortage of the metal has started to cause delivery questions on the exchanges all around the world.  So, while it has not yet breached $60/oz, my take is that is the direction and beyond.

Source: tradingeconomics.com

Gold’s (+0.4%) story has been told so many times, it is not nearly as interesting now, central bank buying and broader fiat debasement concerns continue to be the key here.  Copper (+1.8%) is also trading at new highs in London and the demand story here knows no bounds, at least not as long as AI and electrification are part of the mix.  As to oil (-0.25%), it is a dull and boring market and will need to see something of note (regime change in Venezuela or peace in Ukraine seem the most likely stories) to wake it up.

Finally, the dollar is still there.  The DXY is trading at 99, below its recent highs but hardly collapsing.  Looking for any outliers today ZAR (+0.4%) is benefitting from the gold rally (platinum rallying too) but otherwise there is nothing of note.  INR (-0.2%) continues to trade around its new big figure of 90.00, but has stopped falling for now, and everything else is dull.

As well as the PCE data, we get September Personal Income (exp 0.3%), Personal Spending (0.3%) and Michigan Sentiment (52.0) with only the Michigan number current.  We are approaching the end of the year and while with this administration, one can never rule out a black swan, my take is positions are being lightened up starting now, and when the December futures contracts mature, we may see very little of interest until the new year.  In the meantime, nothing has changed my big picture view.  For now, absent a very aggressive FOMC cutting rates, the dollar is still the best of a bad bunch.

Good luck and good weekend

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