Tag Archives: economy

Mugwump

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The feud between Elon and Trump
Show’s Musk has become a mugwump
But though there’s much drama
It’s not clear there’s trauma
As markets continue to pump
 
So, turning our eyes toward today’s
Report about jobs, let’s appraise
The call for recession
That’s been an obsession
Of some for six months of Sundays

 

Clearly the big headlines are all about the escalating war of words between President Trump and Elon Musk.  I guess it was inevitable that two men with immense wealth and power would ultimately have to demonstrate that one of them was king.  But other than the initial impact on Tesla’s stock price, it is not clear to me what the market impacts are going to be here.  After all, President Trump has attacked others aggressively in the past when they didn’t toe his line, and it is not a general market problem, only potentially the company with which that person is associated.  As such, I don’t think this is the place to hash out the issue.

However, I think it is worth addressing one point that Musk raised regarding the Big Beautiful Bill.  The thing about reconciliation is it only addresses non-discretionary spending, meaning Social Security, Medicare, Medicaid and the interest on the debt.  All the other stuff that DOGE made headlines for, USAID etc., could never be part of this bill.  That requires recission packages where Congress specifically passes laws rescinding the previously enacted payments.  So, if this was a part of the blowup, it was senseless.  I will say, though, that the Trump administration did not communicate this fact effectively as I read all over how people are upset that Congress is not addressing these other things.  At any rate, this is not a political commentary, but I thought it was worth understanding because I only learned of this in the past weeks and I don’t believe it is widely understood.

Onward to the major market news today, the payroll report.  As of this morning, according to tradingeconomics.com, here are the forecast outcomes:

Nonfarm Payrolls130K
Private Payrolls120K
Manufacturing Payrolls-1K
Unemployment Rate4.2%
Average Hourly Earnings0.3% (3.7% Y/Y)
Average Weekly Hours34.3
Participation Rate62.6%

Of course, Wednesday’s ADP Employment number was MUCH lower than expected, so the whispers appear to be for a smaller outcome.  As well, the key wildcard in this data is the BLS Birth-Death model which is how the BLS estimates the number of jobs that have been created by small businesses which aren’t surveyed directly.  As with every model, especially post-Covid, what used to be is not necessarily what currently is.  The most accurate, after the fact, representation of employment is the Quarterly Census of Employment and Wages (QCEW) but that isn’t released until 6 months after the quarter it is addressing, so it is not much of a timing tool.  It is also the genesis of all the revisions.  

Here’s the thing, a look at the chart below shows that the BLS Birth-Death model appears to still be substantially overstating the payroll situation.  Given the datedness of its model, that cannot be a real surprise, but I assure you, if there is a major revision lower in that number, and NFP prints negative, it WILL be a surprise to markets.  I am not forecasting such an occurrence, merely highlighting the risk. 

If that were to be the case, I imagine the market reaction would be quite negative for stocks and the dollar, positive for bonds (lower yields) and likely continue to push precious metals higher, although oil would likely suffer.  I guess we will all have to wait and see at 8:30 how things go.

In the meantime, ahead of the weekend, let’s see how markets behaved overnight.  Yesterday’s modest sell-off in the US was followed by a mixed session in Asia (Nikkei +0.5%, Hang Seng -0.5%, CSI 300 -0.1%) but strength in Korea (+1.5%) and India (+0.9%).  Trade discussions still hang over the market and there are increasing bets that both India and Korea are going to be amongst the first to come to the table.  As well, the RBI cut rates by 50bps last night with the market only expecting 25bps, so that clearly supported the SENSEX.  In Europe, no major index has moved even 0.2% in either direction as positive European GDP data was unable to get people excited and there is now talk that the ECB will not cut rates again until September.  As to US futures, at this hour (6:50) they are pointing higher by about 0.3% across the board.  It appears that the Tesla fears are abating.

In the bond market, yields continue to slide with Treasuries falling -1bp and European sovereign yields down between -3bps and -5bps despite the stronger than expected Eurozone data which also included Retail Sales (+2.3%) growing more rapidly than expected.  But this is a global trend as recession discussions increase while we also saw JGB yields slip -2bps overnight.  It feels like the bond markets around the world are anticipating much slower economic activity.

In the commodity space, oil (0.0%) is unchanged this morning and continuing to hang around at its recent highs, but unable to break above that $63+ level.  It strikes me that if slower economic activity is on the horizon, that should push oil prices lower as there appears to be ample supply.  But I read that Spain has stopped importing Venezuelan crude as US secondary sanctions are about to come into effect there.  As to the metals markets, silver (+1.5%) and platinum (+2.6%) have been the leaders for the past few sessions although gold (+0.2%) continues to grind higher.  The loser here has been copper (-0.8%) which if the economic forecasts of slowing growth are correct, makes some sense.  Of course, there is a strong underlying narrative about insufficient copper supplies for the electrification of everything, but right now, payroll concerns are the story.

Finally, the dollar is a bit firmer this morning, but only just, with G10 currencies slipping between -0.2% and -0.3% while EMG currencies have shown even less movement.  INR (+0.25%) stands out for being the only currency strengthening vs. the dollar after the rate cut and positive growth story, but otherwise, this is a market waiting for its next cue.

In addition to the payroll report, we get Consumer Credit (exp $10.85B) a number which gets little attention but may grow in importance if economic activity does start to decline.  As well, I cannot ignore yesterday’s Trade data which saw the deficit fall much more than expected, to -$61.6B, its smallest outturn since September 2023.  While I didn’t see any White House comments on the subject, I expect that President Trump is happy about that number.

Are we headed into a recession or not?  Will today’s data give us a stronger sense of that?  These are the questions that we hope to answer later this morning.  FWIW, which is probably not that much, my take is while economic activity has likely slowed a bit, I do not believe a recession is upon us, and as I do believe the reconciliation bill will be passed which extends the tax cuts, as well as adds a few like no tax on tips or Social Security, I expect that will turn any weakness around quickly.  What does that mean for the dollar?  Right now, it is piling up haters so a further decline is possible, but I cannot rule out a reversal if/when the tax legislation is finalized.

Good luck and good weekend

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Gone Astray

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

 

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

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

Source: tradingeconomics.com

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

Source: tradingeconomics.com

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

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

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

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

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

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

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

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

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

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

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

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

Good luck

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Hard to Resolve

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The OECD has declared
That growth this year will be impaired
By tariffs, as trade
Continues to fade
And no one worldwide will be spared
 
The funny thing is, the US
This quarter is showing no stress
But how things evolve
Is hard to resolve
‘Cause basically it’s just a guess

 

The OECD published their latest economic outlook and warned that global economic growth is likely to slow down because of the changes in tariff policies initiated by the Trump administration.  Alas for the OECD, the only people who listen to what they have to say are academics with no policymaking experience or authority.  It is largely a talking shop for the pointy-head set.  Ultimately, their biggest problem is that they continue to utilize econometric models that are based on the last 25-30 years of activity and if we’ve learned nothing else this year, it is that the world today is different than it has been for at least a generation or two.

At the same time, a quick look at the Atlanta Fed’s GDPNow forecast for Q2 indicates the US is in the midst of a very strong economic quarter.

Now, while the US does not represent the entire OECD, it remains the largest economy in the world and continues to be the driver of most economic activity elsewhere.  As the consumer of last resort, if another nation loses access to the US market, they will see real impairment in their own economy.  I would argue this has been the underlying thesis of the Trump administration’s tariff negotiations, change your ways or lose access, and that is a powerful message for many nations that rely on selling to the US.

Of course, it can be true that the US performs well while other nations suffer but that is not the OECD call.  Rather, they forecast US GDP growth will fall to 1.6% this year, down from 2.4% last year and previous forecasts of 2.2%.

But perhaps now is a good time to ask about the validity of GDP as a marker for everyone.  You may recall that in Q1, US GDP fell -0.2% (based on the most recent update received last Thursday) and that the media was positively gleeful that President Trump’s policies appeared to be failing.  Now, if Q2 GDP growth is 4.6% (the current reading), do you believe the media will trumpet the success?  Obviously, that is a rhetorical question.  But a better question might be, does the current calculation of GDP measure what we think it means?

If you dust off your old macroeconomics textbook, you will see that GDP is calculated as follows:

Y = C + I + G + (X – M)

Where:

Y = GDP

C = Consumption

I = Investment

G = Government Spending

X = Exports

M = Imports

In the past I have raised the question of the inclusion of G in the calculation, as there could well be a double counting issue there, although I suppose that deficit spending should count.  But the huge disparity between Q1 and Q2 this year is based entirely on Net Exports (X -M) as in Q1, companies rushed to over order imports ahead of the tariffs and in Q2, thus far, imports have fallen dramatically.  But all this begs the question, is Q2 really demonstrating better growth than Q1?  Remember, the GDP calculation was created by John Maynard Keynes back in the 1930’s as a policy tool for England after WWI.  The world today is a far different place than it was nearly 100 years ago, and it seems plausible that different tools might be appropriate to measure how things are done.  

All this is to remind you that while the economic data matters a little, it is not likely to be the key driver of market activity.  Instead, capital flows typically have a much larger impact on market movements which is why central bank policies are so closely watched.  For now, capital continues to flow into the US, although one of the best arguments against President Trump’s policy mix (and goals really) is that they could discourage those flows and that would have a very serious negative impact on financial markets.  Of course, he will trumpet the real investment flows, with current pledges of between $4 trillion and $6 trillion (according to Grok) as offsetting any financial outflows.  And in fairness, I believe the economy will be better served if the “I” term above is real foreign investment rather than portfolio flows into the S&P 500 or NASDAQ.

There is much yet to be written about the way the economy will evolve in 2025.  I remain hopeful but many negative things can still occur to prevent progress.

Ok, let’s take a look at how markets are absorbing the latest data and forecasts.

The barbarous relic and oil
Spent yesterday high on the boil
While bond yields are tame
These rallies may frame
A future where risk may recoil

I’ll start with commodities this morning where we saw massive rallies in both the metals and energy complexes yesterday as gold (-0.8% this morning) rallied nearly 2% during yesterday’s session and both silver (-1.4%) and copper (-1.7%), while also slipping this morning, saw even bigger gains with silver touching its highest level since 2012.  Copper, too, continues to trade near all-time highs as there is an underlying bid for real assets as opposed to fiat currencies.  Meanwhile, oil (+0.3%) rallied nearly 4% yesterday and is still trending higher, although remains in the midst of its trading range.  Given the bearish backdrop of declining growth expectations and OPEC increasing production, something isn’t making much sense.  Lower oil prices have been a key driver of declining inflation readings around the world.  If this reverses, watch out.

Turning to equities, yesterday’s weak US start turned into a modest up day although the follow through elsewhere in the world has been less consistent.  Tokyo was basically flat while Hong Kong (+1.5%) was the leader in Asia on the back of the story that Presidents Trump and Xi will be speaking this week as well as some solid local news.  But elsewhere in Asia, the picture was more mixed with modest gains and losses in various nations.  In Europe, despite a softer than expected inflation reading this morning, with headline falling to 1.9%, equity indices have been unable to gain much traction in either direction.  This basically cements a 25bp cut by the ECB on Thursday, but clearly the trade situation has investors nervous.  Meanwhile, US futures are pointing slightly lower at this hour (7:25), but only on the order of -0.2%.

Bond yields, which backed up yesterday, are sliding this morning with -2bps the standard move in Treasuries, European sovereigns and JGBs overnight.  We did hear from Ueda-san last night and he promised to adjust monetary policy only when necessary, although given base rates there are 0.5% and CPI is running at 3.5%, I’m not sure what he is looking at.  The very big picture remains there is too much debt in the world and the big question is how it will be resolved.  But my take is that won’t happen anytime soon.

Finally, the dollar, which had been under pressure yesterday has rebounded this morning, regaining much of the losses seen Monday.  The euro (-0.5%) and pound (-0.4%) are good proxies for the magnitude of movement we are seeing although SEK (-0.7%) is having a little tougher time.  In fairness, though, SEK has been the best performing G10 currency so far this year, gaining more than 13%.  In the EMG bloc, PLN (-1.0%) is the laggard, perhaps on the election results with the right-wing candidate winning and now calling into question the current government there and its ability to continue to move closer to the EU policy mix.  It should also be noted that the Dutch government fell this morning as Geert Wilders, the right-wing party leader, and leading vote getter in the last election, pulled out of the government over immigration and asylum issues.  (and you thought that was just a US thing!). In the meantime, I will leave you with the following 5-year chart of the DXY to allay any concerns that the dollar is about to collapse.  While we are at the bottom of the range of the past 3 years, we have traded far below here pretty recently, let alone throughout history.

Source: tradingeconomics.com

On the data front, JOLTs Job Openings (exp 7.1M) and Factory Orders (-3.0%, 0.2% ex Transport) are on the docket and we hear from 3 more Fed speakers.  But again, Fed comments just don’t have the same impact as they did even last year.  In the end, I do like the dollar lower, but don’t be looking for a collapse.

Good luck

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Gnashing and Wailing

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The narrative writers are failing
To keep their perspectives prevailing
They want to blame Trump
But if there’s no slump
They’ll find themselves gnashing and wailing
 
Economists have the same trouble
‘Cause most of their models are rubble
The change that’s been wrought
Requires more thought
Than counting on one more Fed bubble

 

Investors seem to be growing unhappier by the day as so many traditional signals regarding market movement no longer appear to work.  Nothing describes this better, I think, than the fact that forecasts for 10-year Treasury yields by major banks are so widely disparate.  While JPMorgan is calling for 5.00% by the end of the year, Morgan Stanley sees 2.75% by then.  What’s the right position to take advantage of that type of knowledge and foresight?

One of the most confusing things over the past months, has been the growing dichotomy between soft, survey data and hard numbers.  But even here, it is worth calling into question what we are learning.  For instance, this week we will see the NFP data along with the overall employment report.  That data comes from the establishment survey.  It seems that just 10 years ago, more than 60% of companies reported their hiring data.  Now, that is down to ~43%.  Does that number have the same predictive or explanatory power that it once did?  It doesn’t seem so.

Too, if we consider the Michigan Sentiment data, it has become completely corrupted by the political angle, with the current situation being Democrats answering the survey anticipate high inflation and weak growth while Republicans see the opposite.  Is that actually telling us anything useful from an economic perspective let alone a market perspective?  (see charts below from sca.isr.unmich.edu)

But this phenomenon is not merely a survey issue, it is an analysis issue.  At this point, I would contend there are essentially zero analysts of the US economy (poets included) who do not have a political bias built into their analysis and forecasts.  Consider that if you are in a good mood generally, then your own perspective on things tends to be brighter than if you are in a bad mood.  Well, expand that on a political basis to, if you are a Democrat, President Trump has been defined as the essence of evil and therefore your viewpoint will see all potential outcomes as bad.  If you’re a Republican, you will see much better potential.  It is who we are and has always been the case, but it appears a combination of President Trump and social media has pushed this issue to heretofore unseen extremes.

There are two problems with this.  First, for most consumers of financial information, the decision matrix is opaque.  Who should you believe?  But perhaps more concerningly, as evidenced by the decline in the response rate to hard data, for policymakers like the Fed and Treasury, what should they believe?  Are they receiving accurate readings of the economic realities on the ground?  Is the job market as strong (or weak) as currently portrayed?  Is the uncertainty in ISM data a result of political bias?  And if politics is an issue in these situations, who is to say that answers to questions will be fact-based rather than crafted to present a political viewpoint?

I would contend that the reason the narrative is breaking down everywhere is that the willingness of investors, as well as the proverbial man on the street, to listen to pronouncements from on high has diminished greatly.  After all, the mainstream media, which had always been the purveyor of the narrative, or at least its main amplifier, has lost its luster.  Or perhaps, they have lost all their credibility.  Independent media, whether on X, Substack or simply blogs that are posted all over the internet, have demonstrated far more clarity and accuracy of situations than anything coming from the NYT, WSJ, BBG or WaPo, let alone the TV “news” programs.

We are on our own to determine what is actually happening in the world, and that is true of how markets will perform going forward.  I have frequently written that volatility is going to be higher going forward across all markets.  President Trump is the avatar of volatility.  As someone whose formative years in trading were in the mid 80’s, when inflation was high, and Paul Volcker never said a word to anyone about what the Fed was doing (and even better, nobody even knew who the other FOMC members were), the best way to thrive is to maintain modest positions with limited leverage.  The time of ZIRP and NIRP will be seen as the aberration it was.  As it fades, so, too, will the ability to maintain highly levered positions because any large move can be existential.

With that cheery opening, let’s take a look at what has happened overnight.  Friday’s US session was not very noteworthy with mixed data leading to mixed results but no real movement.  Alas, things have taken a turn lower since then.  Asian markets were weaker overnight (Nikkei -1.3%, Hang Seng -0.6%, CSI 300 -0.5%) with most other regional markets having a rough go of things as well.  Concerns over further tariffs by the US (steel tariffs have been raised to 50%) and claims by both sides of the US – China trade debate claiming the other side has already breached the temporary truce have weighed on sentiment overall.  Meanwhile, PMI data from the region was less than inspiring with China, Korea, Japan and Indonesia all showing sub 50 readings for Manufacturing surveys.

In Europe, equity markets are also generally softer (DAX -0.5%, CAC -0.7%) although the FTSE 100 (0.0%) has managed to buck the trend after data this morning showed Housing Prices firmed along side Credit growth.  As investors await the US ISM/PMI data, futures are pointing lower across the board, currently down around -0.4% at 7:15.

In the bond market, yields all around the world are backing up with Treasuries (+3bps) bouncing off the lows seen on Friday, although remaining below 4.50%, while European sovereigns have climbed between 3bps and 4bps across the board.  JGB’s overnight (+2bps) also rose, although the back end of that curve saw yields slip a few bps.  It seems the world isn’t ending quite yet, although there does not seem to be any cure for government spending and debt issuance anywhere in the world.

Commodity prices, though, are on the move as it appears investors are interested in acquiring stuff that hurts if you drop it on your foot.  Gold (+1.85%), silver (+0.9%) and copper (+3.6%) are all in demand this morning, the latter ostensibly benefitting from fears that the US will impose more tariffs on other metals thus driving prices higher.  But the real beneficiary overnight has been oil (+4.0%) which rose on the back of an intensification of the Russia – Ukraine war as well as the idea that OPEC+ ‘only’ raised production by 411K barrels/day, less than the whisper numbers of twice that amount.  As I watch the situation in Ukraine, it appears to have the hallmarks of an imminent peace process as both sides are pulling out all the stops to gain whatever advantage they can ahead of the ceasefire and both recognizing that the ceasefire is going to come soon.  But despite the big jump in the price of WTI, you cannot look at the chart below and expect a breakout in either direction.  If I were trading this, I would be more likely to fade the rally than jump on board the rise.

Source: tradingeconomics.com

Finally, the dollar is under the gun this morning, falling against pretty much all its major counterparts.  Both the euro (+0.7%) and pound (+0.6%) are having strong sessions although JPY (+1.0%) and NOK (+1.3%) are leading the way in the G10.  NOK is obviously benefitting from oil’s rally, while there remains an underlying belief that Japanese investors are slowing their international investments and bringing money home.  Now, the ECB meets this week and is widely anticipated to be cutting rates 25bps, but my take is, today is a dollar hatred day, not a euro love day.  As to the EMG bloc, gains are evident across regions with CZK and HUF (both +1.0%) demonstrating their beta to the euro although PLN (+0.5%) is lagging after the presidential election there disappointed the elites with the Right leaning candidate winning the job and likely frustrating Brussels in their attempts to widen the war in Ukraine.  In Asia, CNY (+0.1%) was relatively quiet but KRW (+0.5%), IDR (+0.8%) and THB (+0.9%) all benefitted from that broad dollar weakness.  So, too, did MXN (+0.65%) although BRL has not participated.

There is plenty of data this week culminating in the payroll report on Friday.

TodayISM Manufacturing49.5
 ISM Prices Paid70.2
 Construction Spending0.3%
TuesdayJOLTS Job Openings7.1M
 Factory Orders-3.0%
 -ex Transport0.2%
WednesdayADP Employment115K
 BOC Rate Decision2.75% (current 2.75%)
 ISM Services52.0
 Fed’s Beige Book 
ThursdayECB Rate Decision2.00% (current -2.25%)
 Initial Claims235K
 Continuing Claims1910K
 Trade Balance-$94.0B
 Nonfarm Productivity-0.7%
 Unit Labor Costs5.7%
FridayNonfarm Payrolls130K
 Private Payrolls120K
 Manufacturing Payrolls-1K
 Unemployment Rate4.2%
 Average Hourly Earnings0.3% (3.7% Y/Y)
 Average Weekly Hours34.3
 Participation Rate62.6%
 Consumer Credit$10.85B

Source: tradingeconomics.com

In addition, we hear from four more Fed speakers over five venues.  The thing about this is they continue to discuss patience as the driving force, except for Governor Waller, who explained overnight that he could see rate cuts if inflation stays low almost regardless of the other data.

The trade story remains the topic of most importance in most eyes it seems, although it remains a mystery where things will wind up.  The narrative is lost for all the reasons above, but I will say that it appears risk aversion is today’s theme.  The new part is that the dollar is considered a risk asset.  

Good luck

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A New Paradigm

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No matter the asset you trade
For weeks, every move’s been a fade
As headlines decry
Each thing Trump does try
Investors are feeling betrayed
 
They want to go back to the time
When markets did, every day, climb
But that time has passed
And I would forecast
We’ve entered a new paradigm

 

The following onslaught of charts from tradingeconomics.com are meant to highlight that for the past several weeks, basically nothing has gone on in markets.  Every day is like every other, and the only trend is a horizontal line.

Now, this is not to say that each movement is identical, just that any longer-term trends that may exist are not evident lately.  For traders, this can be terrific because there has been volatility which can be captured.  Of course, since much of the volatility has been headline bingo, that reduces the appeal.  But for longer term investors, it is a more difficult situation as those same headlines can call into question the underlying thesis of any or every trade.

Are the tariffs here to stay?  Or will they be overruled?  Is the “Big Beautiful Bill” going to be a benefit?  Or are there too many things hidden within that will impact the economy, markets and investor behaviors?  Is there going to be a Russia/Ukraine peace?  Is Iran going to sign a deal?  Will the US and China agree a trade deal?  Obviously, there are many very large issues currently outstanding with no clear resolutions in any of them as of now.  When you consider not only that the future is uncertain (which is always true) but the potential outcomes are diametrically opposed, it is easier to realize why markets are stuck in the mud.  But hey, nobody ever said trading was supposed to be easy!

There is, however, one issue I think worth highlighting that has seen an increase in discussion, and that is Section 899 of the reconciliation bill.  It is titled, “Enforcement of Remedies Against Unfair Foreign Taxes” and Bloomberg has a solid description here.  The essence of this clause is it increases taxes on nations, and individuals in those nations, who discriminate against US companies.  The idea is that Europe, especially, is busy enacting “Digital Services Taxes” which are designed to extract revenue from the large US tech companies that dominate particular spaces, like Meta, Google and Microsoft.  But these tax laws have thresholds such that essentially no other companies will be impacted.  This is the US response.  

Much of the discussion thus far has focused on the idea that this will discourage investment in US financial assets, potentially reducing the market for Treasury bonds and adding to the destruction of American exceptionalism in financial markets.  And it may well do that.  However, the thing to consider is that one of the reasons that the US has drawn so much investment is that there are so many investable securities here in the US, and that property rights remain sacrosanct.  Yes, taxation matters, but if you are a sovereign wealth fund with $100 billion in assets or more, where are you going to invest that money if not in the US, at least in some part?  And remember, this is only to be focused on nations with discriminatory taxes vs. US companies.  So, the Saudis, for example, or the Japanese need not worry.  It strikes me that at the margin, this could have a modest impact on prices, perhaps softening the dollar some and reducing future gains, but this is unlikely to end investment into the US.

Ok, let’s quickly run through the lack of overall movement last night.  Yesterday’s early US equity gains (triggered by the tariff ruling) faded all day and markets here closed very modestly higher.  In Asia, gains from yesterday were largely reversed as an appeals court stayed the ruling, so the tariffs remain in place as of now.  Thus Japan (-1.2%), Hong Kong (-1.2%) and China (-0.5%) basically reversed yesterday’s closings.  In Europe, though, things are a bit brighter. With gains across the board as inflation data released showed that it continues to drift lower across the continent.  This has encouraged traders to believe that more ECB rate cuts are coming, which was confirmed by the Bank of Italy’s Fabio Panetta, an ECB Governing Council Member, who exclaimed that inflation is nearly beaten.  Meanwhile, bank economists are now warning that further rate cuts need to come more quickly.  All this, of course, is music to equity investors’ ears.  As such, gains range from +0.3% (France) to 1.0% (Germany) and everywhere in between.  As to US futures, they are unchanged at this hour (7:30).

In the bond market, Treasury yields are unchanged this morning after sliding 8bps yesterday.  Interestingly, European sovereign yields, which also fell yesterday, have rebounded 3bps this morning despite the happy talk of more ECB rate cuts and the imminent death of inflation.  Too, last night saw yields decline in Japan (-3bps) and Australia (-11bps), following in the footsteps of yesterday’s Treasury market.

In the commodity markets, oil (+1.3%) is higher after EIA data yesterday showed modest inventory draws while gold (-0.75%) is giving back yesterday’s gains which came on the back of a weak dollar.  But as mentioned at the beginning of this piece, in the end, trends in both directions are on hold for now.

Finally, the dollar is firmer this morning, unwinding some of yesterday’s declines which grew throughout the day.  Right now, in the G10, the euro (-0.3%) is a pretty good proxy for the entire bloc, although JPY (+0.15%) is sticking out like a sore thumb.  In the EMG bloc, we see declines on the order of -0.5% (KRW, PLN, ZAR) although MXN (+0.2%) is also an aberration this morning.  Alas, I see no particular reason for this move.  However, as mentioned above, the recent trend is flat, although I cannot get over the idea that the dollar has further to decline going forward.

On the data front, this morning brings Personal Income (exp 0.3%), Personal Spending (+0.2%), PCE (0.1%, 2.2% Y/Y), and Core PCE (0.1%, 2.5% Y/Y) as well as the Goods Trade Balance (-$141.5B) all at 8:30.  Then we see Chicago PMI (45.0) and Michigan Consumer Sentiment (51.0) at 10:00.  There is one final Fed speaker this week, Atlanta’s Bostic this afternoon.  However, when it comes to the Fed, again yesterday we heard that patience is the watchword with no hurry to adjust policy right now.  As well, we learned that Chairman Powell had lunch with President Trump yesterday, where Trump asked him to lower rates, and Powell said they are following their long-proscribed tasks of responding to economic outcomes. 

There is nothing that seems likely to excite anyone today, so I look for a quiet session overall.  It seems unlikely that anything of note will be resolved, whether on a political or international relations basis, so look for a quiet session and a relatively early close as traders and investors head out for a summer weekend.

Good luck and good weekend

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Eighty-Sixed

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The data remains rather mixed
But traders are still all transfixed
By tariffs and trade
As JGBs fade
And new ideas get eighty-sixed
 
Despite signs that peace in Ukraine
Is further away and hopes wane
It seems all that matters
Is whether Huang flatters
Investors, so stock markets gain

 

Apparently, at least based on yesterday’s equity market performance, concerns over the eventual outcome of the current global fiscal and monetary regimes remains far down everyone’s list of worries.  Rising inflation?  Bah, doesn’t matter.  Increasing tensions between Presidents Trump and Putin as Russia continues, and arguably increases its aggression?  No big deal.  But you know what has tongues wagging this morning?  Nvidia earnings are to be released after the close, and as we all know, if they are strong (everyone is counting on Jensen Huang, the CEO), then every other concern pales in significance.  After all, a global conflagration is no match in the imagination compared to your stock portfolio increasing in value!

Once upon a time, investors in the stock market sought companies that had good business models and good management who were able to grow their businesses.  These investors were buying a piece of a business in which they believed.  Analysts looked at metrics like P/E ratios and book value to determine if the price paid offered future opportunities as an investment, but the underlying company was the focus.  Of course, that is simply a quaint relic of times long ago, pre GFC.  Today, there is only one metric that matters, ‘NUMBER GO UP’!  While this concept was originally ascribed to Bitcoin and the crypto universe, it has spread across virtually all financial markets.  Nobody cares what a ticker symbol represents, they only care if the number next to the ticker symbol rises, and how rapidly it does so.  Welcome to the future.

I highlight this because it has become increasingly clear that the macroeconomic landscape is an anachronism for analyzing financial markets.  At this point, whether or not a recession is on the horizon, or inflation is rising, or unemployment is rising or falling seems to have only a fleeting impact on market movements.  Rather, the true driver appears to be the flow of all that money that has entered the global financial system since the GFC.  The below chart from streetstats.finance shows the last 10 years of the growth in the global money supply and the corresponding move in the S&P 500.  You may not be surprised at the tight correlation.

My point is that all the news items that draw our attention may not matter at all in the broad scheme of things.  As long as money continues to be printed and injected into the financial system, while some assets will outperform others, the trend remains sharply from the lower left to the upper right.  Going back to my discussion yesterday, since the overriding goal of every global central bank is to ensure that their governments can issue bonds to finance their spending, I see no end to this trend.  While the speed of the increase may ebb and flow slightly, the direction will only change under the most egregious circumstances, something like the aftermath of WWIII.

In a funny way, this highlights that FX markets have the opportunity to be the most interesting trading markets going forward given the relativity of their underlying basis.  Assets, whether debt, equity or commodity, are all priced on demand functions while FX is priced on relative demand for each side of the cross.  Perhaps FX will be the last bastion of macroeconomic analysis.

But not today!  Starting with FX, the dollar is little changed to slightly higher this morning, consolidating yesterday’s gains but things are quiet.  In fact, across the main markets, the largest movement in either direction is NZD (+0.25%) after the RBNZ cut rates as expected by 25bps, but the market reduced the probability of another rate cut in July.  But away from that move, +/-0.1% is the norm today.  Discussion about tariffs continues to be the major talking point, but as of now, it appears nobody has a clue as to how things will evolve, so everybody is just hunkering down.  

Turning to equities, while yesterday saw a very large rally in the US, that sentiment was absent overnight with Asian markets generally drifting slightly lower although New Zealand (-1.7%) was clearly unhappy with the RBNZ mild hawkish view.  But elsewhere, movement was far less than 1.0%.  In Europe, it is a similar tale, very modest declines across the board as data showed German Unemployment rising slightly, Eurozone Consumer Inflation Expectations also rising slightly while French GDP disappointed on the downside, just 0.6% Y/Y.  You can appreciate the lack of enthusiasm there, although the story that Madame Lagarde is considering stepping down from the ECB to take over WEF should put a spring in the step of European investors as perhaps the next ECB president will understand economics and central banking.  As to US futures, they are little changed at this hour (7:35).

In the bond market, after a session where yields slid across the board yesterday, this morning brings a modest reversal with Treasuries (+2bps) right in line with most of Europe (+1bp across the board) although JGB’s (+5bps) suffered after another lousy long-dated auction last night where 40-year JGBs saw pretty weak demand overall.  The Japanese bond market remains a serious issue for many and a potential signal for the timing of next big move.  While risk assets rallied yesterday, nothing changed my description of the problems that exist globally.

Finally, in the commodity markets, oil (+0.7%) is modestly higher this morning but continues to trade within its range and shows no sign of breaking out in the near term.  Metals markets, which sold off aggressively yesterday have stopped falling, but are hardly rebounding, at least as of now.  

Let’s look at the data for the rest of the week though.

TodayFOMC Minutes 
ThursdayInitial Claims230K
 Continuing Claims1900K
 Q1 GDP (2nd estimate)-0.3%
FridayPersonal Income0.3%
 Personal Spending0.2%
 PCE0.1% (2.2% Y/Y)
 Core PCE0.1% (2.5% Y/Y)
 Goods Trade Balance-$141.5B
 Chicago PMI45.0
 Michigan Sentiment51.0

Source: tradingeconomics.com

In addition to the data, with all eyes really on Friday’s numbers, we hear from six more Fed speakers, although, again, will they really change their tune about patience in watching what the impact of tariffs are going to be on the economy?  I think not.  In the Fed funds futures market, the probability of a cut in June has fallen to just 2% while the market is now pricing just 47bps of cuts this year, the lowest amount in forever.  Unless the data completely fall off the map, I don’t see why they would cut at all, and that has just not happened yet.

The summer is upon us (although you wouldn’t know by the weather in the Northeast) and that typically leads to a bit less activity overall.  At this point, much depends on Congress and its ability to complete the budget bill to move the legislative process along.  Then the hard part of spending bills will be the next topic and you can expect a lot of screaming then.  In the meantime, though, I expect that we will hear of a number of other trade deals getting completed and a good portion of the trade anxiety ebbing from market views.  Alas, the peace/war equation is far more difficult to handicap as so many in power clearly benefit from war.

The prevailing view in the market is that the dollar has further to decline going forward as I think a majority of players are anticipating a recession in the US and the Fed to respond.  Under that scenario, a softer dollar feels right.  But is that the right scenario?

Good luck

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So Mind-Blowing

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On one hand, the chorus is growing
That US debt is so mind-blowing
The ‘conomy will
Slow down, then stand still
As ‘flation continues its slowing
 
But others remind us the data
Does not show a slowing growth rate-a
And their main concerns
Are Powell still yearns
For rate cuts to help market beta

 

As many of us enjoyed the long weekend, it appears it is time to put our noses back to the proverbial grindstone.  I know that as I age, I find the meaning of the Memorial Day holiday to grow in importance, although I have personally been very fortunate having never lost a loved one in service of the nation.  However, as the ructions in the nation are so evident each day, I remain quite thankful for all those that “…gave the(ir) last full measure of devotion” as President Lincoln so eloquently remarked all those years ago.

But on to less important, but more topical things.  A week ago, an X account I follow, The Kobeissi Letter, posted the following which I think is such an excellent description of why we are all so confused by the current market gyrations.  

Prior to President Trump’s second term, I would contend that the broad narrative had some internal consistency to it, so risk-on days saw equity markets rally along with commodities while bond prices would fall (yields rise) and the dollar would sink as well.  Similarly, risk-off days would see pretty much the opposite.  And it was not hard to understand the logic attached to the process.  

But here we are, some four plus months into President Trump’s term and pretty much every old narrative has broken into pieces.  I think part of that stems from the fact that the mainstream media, who were purveyors of that narrative, have been shown to be less than trustworthy in much of what they reported during the Biden Administration, and so there is a great deal of skepticism now regarding all that they say, whether political or financial.

However, I think a bigger part of the problem is that different markets have seen participants focusing on different idiosyncratic issues rather than on the bigger picture, and so there are many mini narratives that are frequently at odds.  Add to this the fact that there continues to be a significant dichotomy between the soft, survey data and the hard, calculated data, with the former pointing toward recession or stagflation while the latter seems to be pointing to stronger economic activity, and the fact that if you ask twenty market participants about the impact of President Trump’s tariff policies, you will receive twenty-five different explanations for why markets are behaving in a given manner and what those policies will mean for the economy going forward.

It is at times like these, when there are persuasive short-term arguments on both sides that I step back and try to look at bigger picture events.  In this category I place two things, energy and debt.  Energy is life.  Economic activity is simply energy transformed and the more energy a nation has and the cheaper it is, the better off that economy will be.  President Trump has made no bones about his desire to cement the US as the number one energy producer on the planet and to allow affordable energy to power the economy forward.  As that occurs, that is a medium- and long-term bullish backdrop.

On the other hand, we cannot forget the debt situation, which is an undeniable drag on economic activity.  Forgetting the numbers per se, the fact that the US debt/GDP ratio is at wartime levels during peacetime (well, US peacetime) with no obvious end to the spending is a key concern.  But it is not just the US with a growing debt/GDP ratio.  Here is a listing from tradingeconomics.com of the G20’s ratios.  (Russia is the bottom of the list but not relevant for this discussion.)

And remember what has been promised by Germany and the Eurozone with respect to defense spending? More than €1 trillion for Germany and it sounds, if my addition is correct, like upwards of €1.7 trillion across the continent.  And all of that will be borrowed, so that is another 22% in Germany alone.  The point is the global debt/GDP ratio remains above 300% for public and private debt.  As government debt grows above 100%, at some point, we are going to see central banks, in sync, clamp down on longer-term yields.  

However they couch it, and however they do it, whether actual yield curve control, through regulations requiring banks and insurance companies to hold more government bonds on their balance sheets with no capital charges, or through adjustments to tax driven accounts like IRA’s and 401K’s, requiring a certain amount of government debt in the portfolio to maintain the tax deferred status, I expect that is what we are going to see.  And even with oil prices declining, which I think remains the trend, inflation is going to be with us for a long time to come as debt will be monetized.  It is the only solution absent a depression.  And every central bank will be in on the joke.  Which takes us to this morning…

As yields were soaring
The BOJ kept quiet
Until yesterday

Apparently, the bond vigilantes have spent the past decades learning Japanese.  At least that is what I conclude from the price action, and more importantly, the BOJ’s recent response in the JGB market. As you can see in the chart below, there has been a significant reversal in 30-year JGB yields with similar price action in both the 20-year and 40-year varieties.

Source: tradingeconomics.com

You may recall that last week, the Japanese government issued 20-year bonds, and the auction went quite poorly, with yields rising sharply (that was the large green candle six sessions ago). Well, it seems that the BOJ (along with the Ministry of Finance) have figured out that the bond situation in Japan is reaching its limits. After all, in less than two months, 30-year JGB yields rose 100 basis points from a starting point of about 2.2%.  That is an enormous move.  Now, if we look at the table above, we are reminded that Japan’s debt/GDP ratio is the highest in the developed world at well over 200%.  In addition, the BOJ owns more than 53% of all JGBs outstanding.  Quite frankly, it is easy to make the case that the BOJ has been monetizing Japanese debt for years.  

As it happens, last week the BOJ held one of their periodic (actually, the 22nd) “Bond Market Group” meetings in which they discuss with various groups of market participants the situation in the JGB market regarding liquidity and trading capabilities and the general functioning of the market.  The two charts below, taken from the BOJ’s website (H/T Weston Nakamura) demonstrate that there is growing concern in the market as to its ability to continue along its current path.

The concern demonstrated by market participants is a clear signal, at least to me, that we are entering the end game.  For all the angst about the situation in the US, with excessive fiscal expenditures and too much debt, Japan has that on steroids.  And while Japan has the benefit of being a net creditor country, the US has the advantage of having both the strongest military in the world and issuing the world’s reserve currency.  As well, the US neighborhood is far less troublesome than Japan’s in East Asia with two potential protagonists, China and North Korea.  All I’m saying is that after decades of kicking the can down the road, it appears that the road may be ending for Japan and difficult policy decisions regarding spending, deficits and by extension JGB issuance are coming soon.

It’s funny, many economists have, in the past, described the US situation as Japanification, with rising debt and slowing growth.  But perhaps Japanification will really be the road map for how to respond to the first true limits on the issuance of government debt for a major economy.  Last night, JGB yields fell across the board, dragging global yields down with them.  The yen (-0.8%) weakened sharply, reversing its trend of the past two weeks, while the Nikkei (+0.5%) rallied.  Perhaps market participants are feeling comforted by the fact the Japanese government seems finally ready to recognize that things must change.  But this is the beginning of that process, not the end, and there will be many twists and turns along the way.  Stay tuned.

Ok, I really ran on, but I feel it is critical for us all to recognize the debt situation and that there are going to be changes coming.  As to other markets overnight, this is what we’ve seen.  Asia was mixed with gainers (Hong Kong, Australia, Singapore) and laggards (China, Korea, India, Taiwan) but nothing moving more than 0.5% in either direction.  Europe, on the other hand, has been the beneficiary of President Trump delaying the tariffs on the EU until July 9th, with all the major indices higher led by the DAX (+0.8%) which also rallied more than 1% yesterday.  Say what you will about President Trump, he has gotten trade discussions moving FAR faster than ever before in history.  US futures, at this hour (6:15) are also pointing nicely higher, more than 1.3% across the board.

We’ve already discussed bond yields where 10yr Treasury yields have backed off by 5bps this morning although European sovereign yields have not benefitted quite the same way with declines of only 2bps on average.  But the trend in all cases is for lower yields right now.  Hope springs eternal, I guess.

In the commodity space, with the new view on tariffs, risk is abating and gold (-1.5%) is being sold off aggressively.  Not surprisingly, this has taken the whole metals complex with it.  As to oil (+0.1%) it continues to trade in its recent $60 – $65 range and while the trend remains lower, it is a very slow trend.

Source: tradingeconomics.com

Finally, the dollar is perking up this morning, not only against the yen, but across the board.  On the haven front, CHF (-0.6%) is sinking and the commodity currencies (AUD -0.6%, NZD -0.8%, SEK -0.6%) are also under pressure.  But the euro (-0.4%) is lower and taking the CE4 with it.  In fact, every major counterpart currency is lower vs. the dollar this morning.

On the data front, this morning brings Durable Goods (exp -7.8%, -0.1% ex-transport), Case Shiller Home Prices (4.5%), and Consumer Confidence (87.0). We also hear from NY Fed President Williams this evening.  Chairman Powell spoke at the Princeton graduation ceremony but said nothing about policy.  I will review the rest of the week’s data tomorrow.

Bonds are the thing to watch for now, especially if we are going to see more active policy adjustments to address what has long been considered an unsustainable path.  The question is, will there be fiscal adjustments that help?  Or will central banks simply soak up the bonds?  While I hope it is the former, I fear it is the latter.  Be prepared.

Good luck

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Need Some Revising

Posted on by

The punditry fears that the bond
Is starting to move far beyond
A level at which
The US can stitch
Together a plan to respond
 
Meanwhile, though yields broadly are rising
The dollar, it’s somewhat surprising
Continues to sink
Which makes some folks think
Their models now need some revising

 

Perspective is an important thing to maintain when looking at markets as it is far too easy to get wrapped up in the short-term blips within a trend and accord them more importance than they’re due.  It is with that in mind that I offer the below chart of the 10-year US Treasury yield for the past 40 years.

Source: finance.yahoo.com

Lately, much has been made of the fact that 10-year yields have risen all the way back to where they were on…January 1st of this year.  But the long history of the bond market is that yields at 4.5% or so, which is their current level, is the norm, not the exception.  As you can see, in fact they were far higher for a long time.  Now, I grant that the amount of debt outstanding is an important piece of the puzzle when analyzing the risk in bonds, and the current situation is significant.  After all, even Moody’s finally figured out that the US’s debt metrics were lousy.  And under no circumstances am I suggesting that the fiscal situation in the US is optimal. 

But I also know that, as I wrote yesterday, the Fed is not going to allow the bond market to collapse no matter their view of President Trump.  Neither is the US going to default on its debt (beyond the slow pain of higher inflation) during any of our lifetimes.  I continue to read that the just-passed ‘Big, Beautiful Bill’ is going to result in deficits of 7% or more for the next decade, at least according to the CBO.  Alas, predicting the future is hard, and no one knows that better than the CBO.  Their track record is less than stellar on both sides of the equation, revenues and expenditures.  This is not to blame them, I’m sure they are doing their best, it is just an impossible task to create an accurate forecast of something with so many moving parts that additionally relies on human responses.

My point is that one needs to look at these forecasts with at least a few grains of salt.  While the current narrative is convinced that deficits are going to blow out and the nation’s finances are going to fall over the edge of the abyss, while the trend is in the wrong direction, my take is the end is a long way off.  In fact, the most likely outcome will be debt monetization around the world, as every government has borrowed more than they are capable of repaying without monetizing the debt.  The real question we need to answer is which nations will be able to do the best job of managing the situation on a relative basis.  And that, my friends, despite everything you read and hear about, is still likely to be the US.  This is not to say that US assets will not fall out of favor for a while relative to their recent behaviors, just that in the long run, no other nation has the resources and capabilities to thrive regardless of the future state of the world.

I guess the one caveat here would be that the entire global framework changes as the fourth turning evolves and old institutions die while new ones are formed.  So, the end of the IMF and World Bank, the end of SDR’s and even organizations like the UN cannot be ruled out.  And I have no idea what will replace them.  Regional accords may become the norm, CBDC’s may become the new money, and AI may run large swaths of both governments and the economy.  But in the end, at least nominally, government debt will be repaid in every G10 nation, of that I am confident.

One of the reasons I have waxed philosophical again is that market activity, despite all the chattering of the punditry, remains pretty dull.  For instance, in the bond market, despite all the talk, Treasury yields, after slipping a few bps yesterday, are unchanged today.  The same is true across Europe, with no sovereign bond having seen yields move by more than 1 basis point in either direction.  JGB’s overnight, despite CPI coming in a tick hotter than forecast, saw yields slip -4bps, following the US market from yesterday.  If the end is nigh, the bond market doesn’t see it yet.

In equities, yesterday’s lackluster session in the US was followed by a lackluster session in Asia (Nikkei +0.5%, CSI 300 -0.8%, Hang Seng +0.25%) with no overall direction and this morning in Europe, the movement has been even less interesting (CAC -0.5%, DAX +0.2%, FTSE 100 0.0%). Too, US futures are little changed at this hour (7:00).

In the commodity markets, gold (+0.9%) continues to chop around within a range that it entered back in early April.

Source: tradingeconomics.com

To me, this is the perfect encapsulation of all markets, hovering near recent highs, but unable to find a catalyst to either reject those highs, or leave them behind in a new paradigm.  You won’t be surprised that other metals are also a touch higher this morning (Ag +0.2%, Cu +0.7%), nor that oil (+0.3%) is also edging higher.  It strikes me that today’s commodity profile may be attributed to the dollar’s weakness.

So lastly, turning to the dollar, it is softer against virtually all its major counterparts this morning, with the euro (+0.6%) and pound (+0.6%) both having a good day.  In fact, the pound has touched 1.35 for the first time in three years.  But the dollar’s softness is widespread in both blocks; G10 (AUD +0.85%, NZD +1.0%, SEK +1.0%. NOK +1.0%, JPY +0.5% and even CAD +0.35%), and EMG (ZAR +0.7%, PLN +0.6%, KRW +1.0%, SGD +0.5% and CNY +0.35%).  The fact that SGD moved 0.5% is remarkable given its inherently low volatility.  But I assure you, Secretary Bessent is not upset with this outcome.

The only data this morning is New Home Sales (exp 692K) and we hear from yet another Fed speaker this afternoon, Governor Cook.  Chairman Powell will be speaking on Sunday afternoon, so that may set things up for next week, although with the holiday weekend, whatever he says is likely to be diluted by the time US markets get back to their desks on Tuesday.

In the end, the message is the end is not nigh, markets are adjusting to the changing realities of trade and fiscal policies, and monetary policies remain on a steady state.  The ECB is going to cut again, as will the BOE.  The BOJ is likely to hike again, and the Fed is going to sit on its hands for as long as possible.  The futures market is still pricing in two rate cuts this year, but I still don’t see that happening.  In fact, if the tax bill is enacted, I suspect that it will have a significantly positive impact on the economy, as well as on expectations for the economy, and interest rates are unlikely to fall much at all.  As well, absent a concerted international effort to weaken the dollar (those pesky Mar-a-Lago accords again), while the short-term direction of the dollar is lower, I’m not sure how long that will continue.  

Good luck and have a great holiday weekend

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A True F’ing Cluster

Posted on by

Seems everyone just wants to sell
Their equities and bonds as well
But what will they do
With funds they accrue
If everything’s all gone to hell?
 
I guess it’s why gold still has luster
And Bitcoin’s become a blockbuster
The future’s unclear
And there’s growing fear
That this is a true f’ing cluster

 

It is difficult to highlight any particular driver of any market movement this morning.  I imagine yesterday’s US equity selloff left a sour taste in the mouths of investors around the world which may help explain why virtually every equity market in Asia (Nikkei -0.85%, Hang Seng -1.2%, Korea -1.2%, India -0.8%) was lower last night or is so (CAC -1.0%, DAX -0.9%, IBEX -0.9%, FTSE 100 -0.65%) this morning.  But bonds are hardly the destination of those funds with yields essentially unchanged this morning after yesterday’s bond sell-off (yield rally).  In fact, in Japan, the long end of the curve, 30-year and 40-year, yields have each traded to new record highs.

Source: tradingeconomics.com

So, if investors are selling stocks and not buying bonds, exactly what are they doing with the funds?  Gold, (-0.5%) which has had a nice run in the past week, is lower this morning, so it doesn’t appear money is heading there.  Too, platinum (-0.3%) is softer this morning after a massive rally this week.  Oil (-1.6%) is lower, NatGas (-1.1%) is lower, and in truth, it is difficult to find anything doing well.  Except perhaps Bitcoin (+1.0%), which has rallied nearly 7% this week and more than 18% in the past month and is trading at new all-time highs.

Source: tradingeconomics.com

It appears that we have reached a point where the market narrative on virtually every asset class (crypto excepted) is that the future is bleak.  There is a bull market in the number of analysts forecasting stagflation because of the US tariff policy and a nascent bull market in the number of analysts calling for much higher US (and by extension other national) yields given the fiscal follies that continue to be evidenced every day.  As much press as the US gets for its massive, peacetime fiscal deficit, in a quieter voice, the IMF just warned France that its fiscal deficits were unsustainable as they, too, are above 7% of GDP.

Our concern should be that central bankers around the world are all going to respond in unison and that response is going to be debt monetization.  Inflation targets are fine as far as they go, but they are not the raison d’etre of central banks.  On a deeper level, central banks, whether independent or not, exist to assure that their respective governments can continue to borrow and fund their expenditures.  Absent a massive fiscal tightening wave around the world, something that seems highly unlikely in our lifetimes, central banks will always be the lender of last resort to their governments.

Now, we already know that fiscal tightening can be accomplished as President Javier Milei in Argentina has accomplished an extraordinary feat down there.  My concern is that it took decades of irresponsible fiscal policy and an almost complete absence of available financing to get the people to vote for change.  Folks, no matter your views about how bad things are in the US or Europe or Japan, we are not even close to the situation there.  So, we know what the future roadmap looks like, Argentina has paved the way, but we are just getting started, I fear.  And in the US, given the advantage of having the global reserve currency, we are much further from a denouement than other Western nations.  

In sum, if you want to know why gold and bitcoin are doing well, I believe they are pointing to the inevitable outcome of global debt monetization, or perhaps debt jubilees.  Owning assets that are a liability of a government that can change the rules if they so desire is not a safe place to be, especially in a fourth turning.  I think this is the message we need to start to understand.  This is not to say things are going to fall apart tomorrow, just that I believe this is the direction of travel.

Well, that was darker than I expected when I started writing this morning, but alas, that is where things lead.  The one thing I haven’t discussed is the dollar and FX markets.  But unlike other markets, FX is a truly relative game, where the dollar’s strength (or weakness) is also manifest as another currency’s weakness (or strength).  A broad-based dollar move, may be a harbinger of other market movements being seen as either better or worse than the US in a macro context, but let’s face it, despite all the angst recently of the dollar’s weakness, the euro is higher by just 4.5% in the past year!  Similarly, the pound (+5.5%) has not moved that far although the yen (+8.5%) has shown more life, albeit from a starting point that was at multi decade lows.  The fact that the dollar is modestly higher this morning, on the order of 0.3%ish across most currencies does not really tell us much.

Let’s take a look at the data we’ve seen so far in the session, with today being Flash PMI day.  In Japan, while Manufacturing edged slightly higher to 49.0, it is still sub-50, and the Services number was weaker taking the Composite below 50.0.  In Europe, France was little changed from last month with all three readings below 50, Germany was much softer than last month with all three readings below 49 and the Eurozone softened, as you would expect, with readings around 49.5.  In fact, as we await US data, India is the only economy showing vibrancy with readings above 60!  (I neglected the UK but alas, they are quickly making themselves irrelevant anyway.  But for good order’s sake, they did manage to tick up from last month, although the Composite is still below 50.)

In the US this morning we get the weekly Initial (exp 230K) and Continuing (1890K) Claims data as well as the Chicago Fed National Activity Index (-0.2) at 8:30.  Then the Flash PMI data (Mfg 50.1, Services 50.8) comes at 9:45 and Existing Home Sales (4.1M) at 10:00.  We also hear from NY Fed President Williams, but is he really going to tell us something new?  I don’t think so.

Sorry to have been so bleak this morning, perhaps the weather has contributed to the mood, but it is hard to find financial positives in the short run.  I was truly excited by the concept of the US cutting spending, but I fear that ship has sailed for now.  If DOGE did nothing else, it opened our eyes to the very specific ways in which government money is being spent on things that had no net benefit for the nation, although obviously the recipients were happy.  Perhaps someday these things will be addressed, but if Argentina is any example, it could still take decades.

Good luck

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Struggling…Juggling

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For users of Bloomberg worldwide
This morning, the service has died
So, traders are struggling
As it’s like they’re juggling
With one hand, behind their back, tied

 

While market activity continues, it seems that the single issue receiving the most attention today is that the Bloomberg professional service is not working almost anywhere in the world.  From what I have seen so far, there is no explanation other than technical problems, and on the Bloomberg website that I reference (the professional service is way too expensive for poets) the only mention has been oblique in the news that auctions in the UK and Europe have been extended in time until the service is operational again.  However, on X, the memes are wonderful.  I’m sure they will fix things shortly, and the financial world will go back to worrying about things like interest rates and equity valuations, but right now, this is the story!

JGB markets
Are garnering far more press
Than Ueda wants

 

Yesterday’s story about JGB yields continues to be a key market issue this morning, and likely will be so for some time to come.  Yields there continue to climb and as we all know, the fiscal situation in Japan has been tenuous at best.  The Japanese government debt/GDP ratio is somewhere around 263%.  Consider that when the US has been deemed the height of fiscal irresponsibility with a number half that high.  Granted, Japan is a net creditor nation, which is why they have been able to maintain this situation for so long, but as with every other situation where trends seem to go on forever, at some point they simply stop. 

Sourve: tradingeconomics.com

The thing that seemed to allow Japan to continue for so long was the fact that inflation there had remained quiescent, for decades.  It has been more than twenty years since official Japanese policy was to raise inflation.  Alas, to paraphrase HL Mencken, be careful what you wish for, you just may get it good and hard.  It appears that the good people of Japan are beginning to feel what it is like when a government achieves a policy goal after twenty years.  Notably, the key issue is that inflation, after literally decades of negative or near zero outcomes, has risen back to levels not seen since the early 1990’s, arguably two generations ago.  (The blip in 2014 was the result of the rise in Japan’s GST, their version of VAT, to 10%, which was a one-off impact on prices that dissipated within 12 months.)

This lack of inflation was deemed the fatal flaw in the Japanese economy, despite the fact that things there seem to work pretty well.  The infrastructure is continuously modernized and works well and while my understanding is that a part of the population was frustrated because their nominal incomes weren’t rising, with inflation averaging 0.0% or less for 20 years, they weren’t falling behind.  However, the broad macroeconomic view from policy analysts around the world was that Japan, a nation with an actual shrinking population, needed to do everything they could to push inflation higher in order to better the lives of its citizens.  Well, they have done so with inflation there now higher than the most recent readings in the US.  I fear that the good people of Japan are going to be asking many more questions about why the government thought this was a good idea as prices continue to rise.  It is already apparent in the approval numbers of the current government with readings on the order of 27%.

So, now we must ask, how will different markets interpret the ongoing rise in inflation.  We are already seeing what is happening in long-dated JGB markets, with the 30yr and 40yr yields rising to record levels, albeit below, and barely at current inflation readings respectively.  But, as I mentioned yesterday, the broader market question will be at what point will Japanese investors, who are one of the key sources of global capital, decide that the yield at home is sufficient to bring assets back from around the world, notably the US.  That level has not yet been reached although I suspect we are beginning to see the first signs of that.  

In the event this occurs, and I believe it will do so, what will be the impact on markets?  The first, and most obvious outcome will be a significant rise in the JPY (+0.6%).  As you can see below, while the yen has strengthened compared to levels seen in mid and late 2024, it remains far weaker than levels seen over the past 30+ years, where the average has been 112.62, more than 20% stronger than the current levels.

As to Treasury markets, Japan remains the largest non-US holder of Treasuries and while I doubt they will sell them aggressively, it would certainly be realistic to see them allow current positions to mature and not buy new ones but rather bring those funds home (stronger yen) while removing a key bid for the market (Kind of like their version of QT!).  Higher US yields are a real possibility here.  As to equities, these will likely be sold, although the Japanese proportion of holdings is not as large relative to others, but with rising yields and a falling dollar, it doesn’t feel like a good environment for equities.

Of course, all of this is dependent on the status quo in US policy remaining like it is today.  If President Trump can get Congress to implement his policies and they are successful at reinvigorating the US domestic economy, two big Ifs, these views will be subject to change.  The key to remember about markets, especially currency markets, is that there are two sides to every story, and expecting a particular outcome because one side of the equation moves may be quite disappointing if the other side moves and was unanticipated.

Ok, I spent far too long there, but not that much else is exciting.  The other story with some press has been driving oil markets higher (WTI +0.85%) with a gap up on news that Israel was considering a strike against Iranian nuclear facilities.  Naturally, this has been denied, and oil’s price has retreated from the early highs seen below.

Source: tradingeconomics.com

Sticking with commodities, gold (+0.5%) continues to rally, perhaps on fears of that Israeli news, or perhaps simply because more and more investors around the world want to own something they can hold onto and has maintained its value for millennia.

In the equity markets, yesterday’s modest US declines were followed by weakness in Japan (-0.6%) but strength in China (+0.5%) and Hong Kong (+0.6%).  As to the rest of the region, there were many more gainers (Korea, India, Taiwan, Australia) than laggards (Malaysia, Thailand) so a net positive tone.  In Europe, though, modest declines are the order of the day with the CAC (-0.5%) the worst performer and the FTSE 100 (-0.1%) the best.  US futures are also pointing lower at this hour (7:50) down on the order of -0.5% across the board.

Treasury yields (+4bps) have moved higher again this morning and have taken the entire government bond complex along with them as all European sovereign yields are higher by between 4bps (Germany, Netherlands) and 6bps (Switzerland, UK).  We have already discussed JGB yields where 10yr yields have moved higher by 2bps.

Finally, the dollar is softer across the board this morning with the DXY (-0.45%) a good proxy of what is happening.  The outliers are KRW (+1.2%) and NOK (+1.1%) with the latter an obvious beneficiary of oil’s rise while the former seems to be climbing in anticipation of something coming out of the G10 FinMin meeting in Canada this week.  Otherwise, that 0.45% move is a good proxy for most things.

On the data front, we have another day sans anything important although EIA oil inventories will be released with a solid draw expected.  Fed speakers were pretty consistent yesterday explaining that patience remains a virtue in a world where they have no idea what is going on.  Fed funds futures markets have pushed the probability of a June cut down to 5% and only 50bps are priced in for all of 2025.  (Personally, I see no reason that a cut is coming.)

The dollar remains on its back foot, and I expect that the combination of pressure from the Trump administration to keep it that way is all that is going to be necessary to see things continue with this trend.  Of course, an Israeli strike on Iran would change things dramatically in terms of risk perception and likely support the dollar, but absent that, right now, lower is still the call.

Good luck

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