Tag Archives: economy

Need Some Revising

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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

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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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Has Bug Met Windshield?

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So, once again, we were misled
By all those who told us, with dread,
The ratings reduction
Would cause much destruction
With both stocks and bonds, money, dead
 
Instead, what we saw yesterday
Was traders jumped into the fray
Despite all the gloom
It seems there’s still room
Where bullish investors hold sway

 

I know it is hard to believe, but it seems that all the angst that was fomented over the weekend following Moody’s ratings downgrade of US Treasury debt was for naught.  In fact, the decline in both stocks and bonds didn’t even last one session, let alone weeks or months as both markets closed the session essentially unchanged on the day, recouping the early losses seen.  A quick look at the chart below shows the price action in S&P 500 futures from the time of the announcement through yesterday’s close and then this morning.  It seems the market is concerned about things other than the US credit rating.

Source: tradingeconomics.com

In fact, I am willing to say that we are unlikely to hear anything more about the downgrade until such time that equity prices fall on some other catalyst, and the punditry will add in the ratings story to help bolster whatever claim they are making at that time.  Please remember, as well, that I am quite concerned that equity valuations remain rich and that a decline is quite possible, if not likely.  It’s just that the ratings downgrade story is not going to be the driver of that move.

In Japan, it seems
No one’s buying JGBs
Has bug met windshield?

Last night, Japan auctioned 20-year JGBs with the yield coming at 2.52%, the highest since these bonds were first issued back in 1999.  As well, yields in 30-year and 40-year JGBs also soared, rising 12bps in each case to the highest yield in more than 25 years as per the below chart of the 30-year bond.

While the selloff in JGBs has been accelerating, real yields there are still negative with CPI running at 3.6%.  This presents quite a conundrum for Japanese investors as despite the negative real yield, the ability to borrow cheaply (remember short term rates in Japan are 0.50%) and invest in long-dated bonds and earn 3.0% is quite tempting.  250 basis points of carry with no currency risk is now going to compete with 450 basis points of carry (US 30-year yields of ~5.0% – 0.50% funding costs in Japan) with FX risk.

What makes this especially tricky for Japanese investors is that the dollar’s future path, which had been clearly higher for longer, appears to have adjusted.  It seems evident the Trump administration is keen to see the dollar decline, or perhaps more accurately, see other currencies appreciate, especially if those nations run significant trade surpluses with the US.  Japan certainly fits that bill.  And the thing about currency risk is that FX can move swiftly enough to wipe out any carry benefits before institutional investors can even organize meetings to determine if they want to change their strategy.

One of the things that we have heard regularly for the past several years (decades?) is that the US fiscal situation has put the nation in a precarious position, relying on investment by foreigners to fund the massive budget deficits that the government has been running.  The problem with these warnings is they have been ongoing for so long, nobody really pays them any attention.  It is not to say the theory is incorrect, just that there have been other things that have offset that factor and attracted capital to the US anyway.  It is also not apparent that Moody’s ratings cut has changed that dynamic.

But, if at the margin, Japanese investors start to focus more on the JGB market to reduce currency risk, rather than on the highest yield available in major nations, that would likely have a negative impact on the Treasury market.  That is, of course, a big IF and there is no evidence yet that is the situation.  It is something, though, we must watch closely.  

Remember, too, global debt/GDP is more than 300% across all types of debt, public and private.  That tells me it will never be repaid, only rolled over.  The question is at what point will investors decide that holding debt is too great a risk at current yields?  While I assure you governments around the world will work hard to prevent that outcome, including changing regulations to force purchases, it is not clear how much higher that ratio can go without more seriously negative consequences.  We will need to watch this closely.

With that in mind, let’s turn to markets and see how things have behaved in the wake of the reversal in US markets yesterday.  Asian equities were mixed with Japan essentially unchanged, China (+0.5%) and Hong Kong (+1.5%) showing the best performance in the region while India (-1.0%) was the laggard.  Otherwise, there were both gainers and losers of limited note.  In Europe, though, equity markets are rallying across the board led by Spain’s IBEX (+1.6%) despite another infrastructure disaster where half the nation lost telecoms for several hours as Telefonica (Spain’s major telecom company) messed up a systems upgrade.  The rest of the continent has seen shares rise on the order of 0.4% to 0.5% as ECB comments seem to be encouraging the idea of another rate cut coming soon and European Current Account data showed a greater surplus than expected.  US futures, though, are ever so slightly lower at this hour (7:15), down about -0.1% across the board.

In the bond market, in the 10-year space, yields are within 1bp of yesterday’s closing for Treasuries (+1bp), European sovereigns (-1bp) and JGBs (+1bp).  It seems that despite all the talk of the end of times, investors haven’t given up yet, at least not in the 10yr space.  However, the evidence is growing that fixed income investors are growing leery of tenors longer than that.

In the commodity markets, oil (-0.6%) is slightly softer but remains well within its recent trading range amid the slightest of downtrends.  In truth, I find this chart to be an excellent description of my feelings of this market, a really slow decline over time.

Source: tradingeconomics.com

As to the metals markets, gold (+0.6%) is continuing its rebound from the worst levels seen last Thursday and is currently more than $100/oz higher than those recent lows.  This has helped silver (+0.5%) as well although copper (-0.5%) is not playing along today.

Finally, the dollar, remarkably, did not collapse in the wake of the Moody’s downgrade.  In fact, similar to the price action in both stocks and bonds yesterday, the dollar retraced much of its early losses.  This morning, it remains on the soft side, but movement is much less pronounced across both the G10 and EMG blocs.  However, the worst performer today is AUD (-0.7%) which some may attribute to the fact that the RBA cut their base rate by 25bps last night (although that was widely expected).  But I would point to the law that was recently enacted by the Albanese government in Australia to begin taxing UNREALIZED capital gains.  This idea has been floated by other governments but never actually enacted.  I fear that the consequences for Australia will be dire as it becomes clear the policy is extraordinarily destructive.  Capital will flee and that bodes ill for the currency.  If they truly follow through with this, be very careful.

There is no data today, but we hear from six different Fed speakers as they are all participating in an Atlanta Fed symposium.  However, I do not expect anything other than patience is the watchword as they observe the Trump administration policies unfold.

In the end, the predicted doom did not come to pass.  However, for my money, I would pay closest attention to Australia.  I fear the negative consequences of this policy will be extreme.

Good luck

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Set Cash On Fire

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On Friday, the Moody’s brain trust
At last said it’s time to adjust
America’s debt
As we start to fret
That it’s too large and might combust
 
So, Treasury yields are now higher
As pundits explain things are dire
But elsewhere, as well
Seems bonds are a sell
As governments set cash on fire

 

Arguably, the biggest story of the weekend happened late Friday evening as Moody’s became the third, and final, ratings agency to downgrade US government debt to Aa1 from Aaa.  S&P did the deed back in 2011 and Fitch in 2023.  The weekend was filled with analyses of the two prior incidents and how markets responded to both of those while trying to analogize those moves to today.  In a nutshell, the first move in both 2011 and 2023 was for stocks to fall and bonds to rally with the dollar falling. However, in both of those instances, those initial moves reversed over the course of the ensuing months such that within a year, markets had pretty much reversed those moves, and in some cases significantly outperformed, the situation prior to the downgrade.  

Looking at Moody’s press release, they were careful to blame this on successive US administrations, so not putting the entire blame on President Trump, but in the end, it is hard to ignore that the nation’s fiscal statistics regarding debt/GDP and debt coverage are substantially worse than that of other nations that maintain a Aaa rating.  As well, their underlying assumption is that there will be no changes in the current trajectory of deficits and so no reason to believe things can change.

The most popular weekend game was to try to estimate how things would play out this time although given the starting conditions are so different in the economy, I would contend past performance is no guarantee of future outcomes.  In this poet’s eyes, it is not clear to me that it will have a long-term material impact on any market.  We have already been hearing a great deal about how Treasuries are no longer the safe haven they were in the past.  I guarantee you that institutions looking for a haven were not relying solely on Moody’s Aaa rating for comfort.  In addition, given a key demand for Treasuries is as collateral in the financial markets, and the Aa1 rating is just as effective as a Aaa rating from a regulatory risk perspective, I see no changes coming

As to equities, I see no substantive impact on the horizon.  The equity market remains over richly valued and if it were to decline, I don’t think fingers could point to this action.  Finally, the dollar has been declining since the beginning of the year and remains in a downtrend.  Using the DXY as our proxy, if the dollar falls further, should we really be surprised?

source tradingeconomics.com

To summarize, expect lots more hyperbole on the subject, especially as many analysts and pundits will try to paint this as a failure of the Trump administration.  And while bond yields may rise further, as they are this morning, given the fact that yields are rising everywhere around the world, despite no other nations being downgraded, this is clearly not the only driver.

In fact, one could make the case that bond yields are rising around the world because, like the US, nations all over are talking about adding fiscal stimulus to their policy mix.  After all, have we not been assured that Europe is going to borrow €1 trillion or more to rearm themselves?  That is not coming out of tax revenue, that is a pure addition to the debt load.  As well, is not a key part of the ‘US will suffer more than China in the tariff wars’ story based on the idea that China will stimulate the domestic economy and increase consumption (more on that below)?  That, too, will be increased borrowing.  I might go so far as to say that the increased borrowing globally to increase fiscal stimulus will lead to higher nominal GDP growth everywhere along with higher inflation.  I guess we will all learn how things play out together. 

Ok, so now that we have a sense of THE big story, let’s see how markets behaved elsewhere.  I thought that today, particularly, it would be useful to see how bond markets around the world have behaved in the wake of the Moody’s news.  Below is a screenshot from Bloomberg this morning.  note that every major market that is open has seen bonds sell off and I’m pretty confident that Canada’s at the very least, will do so when they wake up.  Ironically, the European commission came out this morning and reduced their forecasts for GDP growth and inflation this year and next and still European sovereign yields are higher.  I have a feeling that this news is not as impactful as some would have you believe.

Turning to equity markets, Friday’s US rally is ancient history given the change in the narrative.  And as you can see below from the tradingeconomics.com page, every major market is softer this morning (those are US futures) with only Russia’s MOEX rising, hardly a major market.  Again, it appears the fallout from the ratings cut is either far more widespread, or not a part of the picture at all.  It seems you could make the case that if European growth is going to underperform previous expectations, equity markets there should underperform as well.  The other two green arrows are Canada and Mexico, neither of which is open as of 6:30 this morning.

Commodity markets are the ones that make the most sense this morning as oil (-1.3%) is under pressure, arguably on a weaker demand picture after softer Chinese data was released overnight.  While the timing of the impacts of the trade war is unsettled, there is certainly no evidence that China is aggressively stimulating its economy.  This was very clear from the decline in Retail Sales, Fixed Asset Investment and IP, although the latter at least beat expectations.  But the idea that China is changing the nature of their economy to a more consumption focused one is not yet evident.  Meanwhile, metals markets are all firmer this morning with gold (+1.2%) leading the way, arguably as a response to the ratings downgrade.  This has dragged both silver (+0.9%) and copper (+1.0%) along for the ride.  It is not hard to imagine that sovereign investors see the merit in owning storable commodities like metals in lieu of Treasuries, at least at the margin.  But also, given the dollar’s weakness, a rally in metals is not surprise.

Speaking of the dollar’s weakness, that is the strong theme of the day along with higher yields across the board.  Right now, the euro (+1.0%) and SEK (+1.0%) are leading the way higher although the pound (+0.9%) is also doing well.  Perhaps this has to do with the trade agreement signed between the UK and EU reversing some of the Brexit outcomes at least regarding food and fishing, although not regarding regulations or immigration.  JPY (+0.6%) is also rallying as is KRW (+0.75%) and THB (+0.9%) as there is a continuing narrative that stronger Asian currencies will be part of the trade negotiations.  Finally, Eastern European currencies are having a good day (RON +2.3%, HUF +1.8%, CZK +1.2%, PLN +1.0%) after the Romanians finally elected a president that was approved by the EU.  Yes, they had to nullify the first election and then ban that candidate from running again, but this is how democracy works!

On the data front, there is very little hard data to be released this week, although it appears every member of the FOMC will be on the tape ahead of the Memorial Day weekend.  Perhaps they are starting to feel ignored and want to get their message out more aggressively.

TodayLeading Indicators-0.9%
ThursdayInitial Claims230K
 Continuing Claims1890K
 Flash Manufacturing PMI50.5
 Flash Services PMI51.5
 Existing Home Sales4.1M
FridayNew Home Sales690K

Source: tradingeconomics.com

Actually, as I count, there are three members, Barr, Bowman and Waller who will not be speaking this week, although Chairman Powell doesn’t speak until next Sunday afternoon.  In the end, the narrative is going to focus on the ratings cut for a little while, at least for as long as equity markets are under pressure along with the dollar.  However, when that turns, and I am sure it will, there will be a search for the next big thing.  I have not forgotten about the potential large-scale changes I discussed on Friday, and I am still trying to work potential scenarios out there, but for now, that is not the markets’ focus.  Certainly, for now, I see no reason for the dollar to gain much strength.

Good luck

Adf

Much More Desirous

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The world that we knew ere the virus
Was different, and much more desirous
‘Cause we got to ease
Whenever we’d please
And ‘flation was rare as papyrus

 

A few disparate thoughts this morning as there doesn’t seem to be a real theme in markets.  

Starting with Chairman Powell’s comments yesterday regarding the Fed’s policy framework and how they were reviewing the current framework established in 2020, to see if it was still appropriate.  It was during that policy discussion that the Fed came up with the idea of average inflation targeting, rather than maintaining a stable rate.  However, Chairman Powell was candid yesterday when he explained, “The idea of an intentional, moderate overshoot proved irrelevant to our policy discussions and has remained so through today.”  Ya think?

Of course, being the consummate central banker, he made sure to explain that their future failures would not be their fault.  As explained in the WSJ by the Fed whisperer himself, Nick Timiraos, Powell explained that higher real interest rates might “reflect the possibility that inflation could be more volatile going forward than in the intercrisis period of the 2010s. We may be entering a period of more frequent, and potentially more persistent, supply shocks—a difficult challenge for the economy and for central banks.” 

However, unlike the pre-Trump era, it’s not clear the market paid much attention to Mr Powell.  Going forward, I do expect the Fed to have more market sway again, but it may be a little while before that is the case.  But I think it is worthwhile for us to understand how they are thinking.

While pundits expressed they were certain
The US is who would be hurtin’
From tariffs and Trump
It turns out the slump
Is elsewhere, as he’d been assertin’

One of the themes following President Trump’s “Liberation Day” tariff announcements amongst much of the punditry was that the US was shooting itself in the foot and the US economy would be the loser in the end.  My thesis had been that the US, as the consumer of last resort, was far more important to other nations’ economic growth than vice versa.  Now, we know that the first look at Q1 GDP in the US was a negative number, but we also know that was entirely the result of the uptick in imports that came ahead of the tariffs.  Meanwhile, private economic activity in the US grew and government activity shrank, both distinct economic positives.

Well, it turns out that the rest of the world is finding that when the US market is not as welcoming of their exports as previously seen, those economies find themselves under pressure.  Yesterday we saw weaker Eurozone GDP and last night Japanese GDP declined much more than expected, -0.2% in Q1 leading to a -0.7% Y/Y result.  The change in trade relations and weaker exports were the driver.  Now, this is just one quarter, and not necessarily a trend, especially if trade negotiations conclude on a timely basis.  But Japanese inflation remains sticky on the high side while growth is ebbing.  The BOJ is unlikely to change policy anytime soon as they, like most central banks, try to figure out the underlying trends. 

My take is this is going to be the scenario through the summer, and likely into the early autumn as trade deals get concluded but their impacts will take time to feel.  I suspect that central banks will be reluctant to be too aggressive in either direction given the propensity of President Trump to upset the applecart of policy decisions.  Ultimately, I see this as the backdrop that will result in more market volatility in both directions in response to the currently unknown policy announcements that are sure to come.  If you are a hedger, maintain those hedge ratios, even if they are a little pricey, the alternative could be far worse.  If you are a speculator, keep your positions smaller than you might think.  Wrong is only a Trump tweet away.

And finally, let’s talk of peace
Which most folks would like to increase
Could we really see
A Trump policy
That gets global fighting to cease?

I’m going to don my tinfoil hat for a paragraph or two here, but I think we must consider the possibilities that Mr Trump has far larger plans for a geopolitical realignment than most are aware.  I discussed the remarkable Iranian proposal to re-enter the brotherhood of nations yesterday.  The recent history of war shows that it is a) hugely profitable for a select number of companies and b) generally inflationary.  Mr Trump’s overtures throughout the Middle East this week, as he seems to be cementing relationships with the leadership there could well have a motive beyond lower oil prices.  I read a remarkable piece from Dr Pippa Malmgrenyesterday that pulled together many threads as to potential motivations for Trump’s activities and they were framed as the enemy is not necessarily Russia or China or Iran, but rather the deep-state in the US (I told you it was tinfoil hat territory).  There is a group in government who profits immensely from the ongoing war footing and who are not interested in seeing peace break out all over.  

I have no idea if Mr Trump can be successful in this endeavor, but if he is, the implications for markets will be significant.  Oil prices will be far lower, as will commodity prices generally given the result could easily see more access granted for mining/drilling/growing.  Inflation will remain under control which would reduce interest rates, and by extension remove some pressure from the US budget situation.  As well, reduced defense requirements would also help the budget.  The dollar would maintain its status as the global reserve currency and focus would return to economic growth rather than geopolitical mischief.  And this feels like a pretty good state for equities, at least those that are not defense focused.  Maybe crazy…but maybe not.

Ok, really quick around the world.  In equities, mixed is the best description of the US yesterday and Asia overnight with no real outstanding movers in either direction.  Europe is all green this morning, with gains on the order of 0.6%, but I think that is based on the idea the ECB is going to continue to cut rates going forward given inflation there remains low and growth is declining.  US futures, at this hour (7:15) are pointing slightly higher, 0.25%.

Bond markets rallied yesterday with Treasury yields sliding 10bps and falling another -3bps this morning.  European sovereign yields tracked Treasuries yesterday and are actually leading the way today with yield declines on the order of -4bps to -6bps across the entire continent and the UK.  Even JGB yields fell -2bps overnight.

In the commodity space, oil (+0.25%) bounced from its worst levels of the morning during the session yesterday but has created a new gap above the price to add to the really big gap from the beginning of April.

Source: tradingeconomics.com

My take is the market sees the possibility of lower oil prices going forward as supply is set to increase further.  There has been some discussion about how low oil prices will reduce capex in the space, and that is probably true, but what are oil companies going to do if they don’t drill for oil?  My view is they will still drill.  Meanwhile, gold is under pressure again as fear seems to be abating around the world.  This morning the barbarous relic is lower by -2.0% and that is taking both copper and silver along with similar declines.

Finally, the dollar is a bit softer this morning, with NZD (+0.5%) the biggest mover in either the G10 or EMG blocs.  JPY, EUR, MXN, ZAR are all just basis points different this morning than yesterday with a few gainers and a few laggards but no real trend to note here.  I think it is very clear Mr Trump would like to see the dollar’s value decline in the FX markets for competitiveness reasons, but right now, uncertainty is the driving force.

On the data front, yesterday’s big surprise in PPI (-0.5%) seemed to be the driving force behind the bond market rally.  But there was also a huge surprise in the Philly Fed New Orders sub-index, which jumped 41.7 points, a 4.3SD move and the largest in the history of the series.  Perhaps things aren’t as negative as some would have us believe.  As to this morning, we get Housing Starts (exp 1.37M) and Building Permits (1.45M) at 8:30 followed by Michigan Consumer Sentiment (53.4) at 10:00.  

It is very difficult to determine if the recent equity rally is just a bear market rally, or if things are going to be fine.  Given the still uncertain policy outcomes both domestically and globally, there are still many possible paths forward.  I wonder if gold, which had been a harbinger of concerns about the future is now telling us that the worst has passed.  Certainly, a movement toward peace in the Middle East is going to be a net positive for risk appetite, which when I translate that back to the dollar, implies my view of weakness going forward remains intact.

Good luck and good weekend

Adf

Everyone’s Bitching

Posted on by

With President Trump on the road
The market has heard a boatload
Of ideas and plans
Including Iran’s
Return to a more normal mode
 
There’s talk of a nuclear deal
Audacious, if it’s truly real
Instead of enriching
While everyone’s bitching
A partnership deal they would seal

 

One is never disappointed with the tone of the overnight news when President Trump is traveling.  Between his flair for the dramatic and his desire to conclude deals, it seems like there is always something surprising when we awake each morning.  This morning is no different.  

While the mainstream media has been harping on the audacity of Qatar gifting a “flying palace” to the US for President Trump to use as Boeing’s delivery of the newest Air Force One is something like 10 years behind schedule, Mr Trump has indicated he is quite keen to make a deal with Iran that would bring them back into the fold of good neighbor nations.  Ostensibly, Iran has suggested that they work with the Saudis, Emiratis and the US to enrich uranium together in order to develop nuclear power in the Middle East.  As the Saudis and Emiratis have already expressed interest in building more nuclear power plants, it is not a stretch for them.  But bringing Iran into the fold, so that enrichment activities are done jointly, and therefore can be closely overseen by the US and Saudi Arabia, would be a remarkable outcome.

The JCPOA deal signed by President Obama was a nullifying deal, one that was designed to prevent an activity, the enrichment of uranium to the required concentrations sufficient to build a bomb.  But this is an encompassing deal, one that would join erstwhile enemies into a partnership to jointly produce uranium sufficiently enriched for nuclear power, without pushing toward weapons grade material.  Now, this would be a remarkable change in attitude in Tehran as the theocracy there has basically made the end of the US and Israel their motto ever since 1979 and the revolution that brought them to power.  But things are tough in Iran right now and the funny thing about power is that those who hold it are really reluctant to let go.  It would not be unprecedented for a nation’s leadership to reverse course completely in order to maintain their grip, and it is also not hard to believe that a softer tone would be welcome in Iran by the populace.

Regardless, this is a bold and audacious idea, but one that could just work.  Now, we should all care not simply because anything that could lead to less terrorism and destruction is an unalloyed good, but because the impact on the global economy would be significant, namely, the price of oil is likely to decline further.  A deal like this is likely to include the end of restrictions on Iranian oil sales, or at least a dramatic reduction in those restrictions.  While Iran has been producing and selling oil all along this would change the tone of the oil market with another major player now actively looking to expand production and sales.  (After all, the Iranian economy is desperate and the ability to generate more revenue without restrictions would be an extraordinary carrot for the mullahs.)

With this in mind, it should be no surprise that the price of oil (-3.65%) has fallen sharply today, and the real question is just how low it can go.  A look at the chart shows that the trend has been lower for the past year although it seems to have found a temporary bottom just above $56/bbl. 

Source: tradingeconomics.com

I have maintained for the past year and a half that the ‘peak cheap oil’ thesis has been faulty and that there is plenty of the stuff around with political, not geological restrictions the driving force toward higher prices.  This is Exhibit A on the political restriction case.  President Trump is quite keen to see oil prices lower as it suits both the inflation story in the US as well as offers a significant advantage to US manufacturing facilities with access to cheap energy.  I would guess this was not on anyone’s bingo card before today but must now be taken seriously as a potential outcome.  While I’m not an oil trader, I suspect we will test, and break, through those lows just above $56 in the coming weeks and find a new home closer to $50/bbl.

This is such an extraordinary story, I could not ignore it.  But as an aside, President Trump also mentioned that India has allegedly offered to cut their tariff rates on US goods to 0.0%!  I don’t know if that would be reciprocal, and that has not yet been verified by India, but again, it demonstrates that many of the things we believed to be true regarding international relations are not carved in stone.

Ok, let’s look at how markets are absorbing these latest surprises.  Yesterday’s price action could best be described as dull, with US equity markets doing little all day, although the NASDAQ managed to edge higher into the close.  In Asia overnight, the major markets (Japan -0.9%, China -0.9% and Hong Kong -0.8%) all came under pressure although there doesn’t appear to have been a particular story.  There were no new trade related comments, so I sense that the recent uptick just saw some profit-taking.  Elsewhere in Asia, the biggest winner was India (+1.5%) and then it was a mixed bag.  In Europe, equity markets have done very little overall after Eurozone data showed GDP activity was more disappointing than first reported with Q1’s second estimate down to 0.3%.  As to US futures, at this hour (7:10), they are pointing lower by about -0.4% or so across the board.

In the bond market, Treasury yields, which have been climbing relentlessly all month as per the below chart, have backed off -2bps this morning, but 10-year yields are still above 4.50%, a level Mr Bessent is clearly unhappy with.  But today’s price action has also seen European sovereign yields slide a similar amount, with the softer Eurozone growth one of the reasons here as well.

Source: tradingeconomics.com

Turning to the metals markets, the shine is off gold (-0.2%) which has fallen more than 4% in the past week, although remains well above $3100/oz.  It seems that much of the fear that drove the price higher is being removed from the markets by the constant updates of trade and peace deals that we hear regularly.  It remains to be seen if this lasts, and how the Fed will ultimately behave, but for now, fear is fading.

Finally, the dollar is a touch softer overall, but not universally so.  In the G10, the euro (+0.2%) and pound (+0.2%) are both edging higher with UK data looking a tad better compared to that modest weakness in Eurozone data.  But the yen (+0.6%) and CHF (+0.5%) are both nicely higher as there continues to be a strong belief that President Trump is seeking the dollar to decline in value.  In the EMG bloc KRW (+0.7%) and ZAR (+0.8%) are the leaders with most of the rest of the bloc making very modest gains on the order of 0.2% or less.  It appears that the dollar has decoupled from the US rate picture for the time being.  I wonder if it is presaging lower US rates, or if this relationship is going to change for a longer time going forward.  We will need to watch this closely.

On the data front, there is a bunch this morning as well as comments from Chairman Powell at 8:40.  

Initial Claims229K
Continuing Claims1890K
Retail Sales0.0%
-ex autos0.3%
PPI0.2% (2.5% Y/Y)
-ex food & energy0.3% (3.1% Y/Y)
Empire State Manufacturing-10
Philly Fed Manufacturing-11
IP0.2%
Capacity Utilization77.8%

Source: tradingeconomics.com

I don’t see PPI as having much impact, but Retail Sales will get some discussion as will the manufacturing indices as weakness there will help the negative narrative that some are trying to portray.  Net, though, the story seems likely to continue to be the announcements of deals as they come in.  It is not clear to me that they will all be net positives, and I believe that much positivity has already been absorbed so we will need to see data that backs up the narrative and that could take a few quarters.  In the meantime, my lower dollar thesis seems to fit better today.  That’s my story and I’m sticking to it!

Good luck

Adf

As Though It Had Fleas

Posted on by

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

 

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

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

Source: tradingeconomics.com

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

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

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

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

Source: tradingeconomics.com

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

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

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

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

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

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

Source: tradingeconomics.com

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

Good luck

Adf

No Longer Concern

Posted on by

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

 

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

Source: tradingeconomics.com

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

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

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

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

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

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

Source: tradingeconomics.com

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

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

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

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

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

Good luck

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Huge Fluctuations

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There once was a war between nations
That led to some huge fluctuations
In markets worldwide
As pundits all cried
The world’s shaken to its foundations
 
In secret, though, pundits all cheered
‘Cause they all hate Trump, and thus steered
The narrative toward
This Damocles’ sword
That hung o’er the world and was feared
 
But now, twixt the US and China
There is just a bit less angina
Both sides, tariffs, slashed
And quite unabashed
These pundits said things were just fine-a

 

The wonderful thing about controlling the narrative is that it doesn’t matter if you are right or wrong at any particular time, because if you are wrong, you simply change the narrative.  At least that’s my impression looking here from the cheap seats.  At any rate, the news this weekend brought the end to the trade war, or at least a 90-day cease fire, as both the US and China slashed their announced tariffs dramatically, with US tariffs falling to 30% on Chinese goods and Chinese tariffs falling to 10% on US goods.  Between now and August, Treasury Secretary Bessent will be leading trade talks with Chinese Vice Premier He to try to come up with a more permanent solution.

In the interim, it will be interesting to see how the narrative evolves.  Certainly, I got tired of the different articles I saw explaining that there were no ships crossing the Pacific from China to the US and that store shelves would be empty by summer.  I wonder if we will see any of those claims retracted. (I’m not holding my breath).  I also wonder why that is the case simply from a mathematic perspective.  After all, annual US GDP is ~$28 trillion and imports from China in the twelve months from April 2024 through March 2025 were ~$444 billion, according to the FRED database.  So, does that mean that the other $27.56 trillion in economic activity was all services?  A look at the charts below created from FRED data shows that not only has the amount of imports from China not been growing lately, as a percentage of GDP, they have been shrinking.  I am not saying Chinese activity is unimportant to the US, just that the reduction in relative trade has been happening far longer than President Trump has been in office this time.

While certainly, low priced items could become a bit scarcer, it strikes me that there was more than a bit of hyperbole involved in those claims.  Of course, the next question is, will those ships start sailing again?  I guess we shall find out soon enough.

But stepping back a bit, I think it is critical to remember that prior to President Trump’s “Liberation Day” tariff announcements, it’s not as though the world trade system was all peaches and cream.  In fact, this weekend I listened to an excellent Monetarymatters podcast with guest George Magnus discussing the trade situation and why it was untenable in its current form before President Trump tried to change things.  He is far more eloquent and knowledgeable than a mere poet like me, and it is worth listening.  In the end, as others have also said, the status quo was unsustainable as both US government spending needs to be cut and the US reliance on China (or any other nation) for things of national security importance could not continue without grave results for our nation.  

I contend there is no easy way to change a system that has evolved over 80 years with goals changing during that period.  I also contend that the idea that a proverbial scalpel would have been a better method to do things, as it would not have created the market ructions we have all felt for the past few months, would never have worked.  Just like in changing the way the federal government works, the inertia in the trade system is far too great to be adjusted by tweaks here and there.  To make a lasting change, major disruptions are needed and that is what President Trump has been doing, disrupting things majorly.  Whether or not he will ultimately be successful is hard to say, but the odds of a change are greater now than before he started.  And almost everybody agreed that things were unsustainable.

One last thing you are sure to hear, especially now that the negotiations have begun is that the only reason is because President Trump “blinked” and couldn’t stand the pain of the market and the slings and arrows of the punditry.  However, it remains very difficult for me to look at the data that has been released of late, with Chinese growth slowing rapidly and Chinese stimulus unable to solve the problem and believe that President Xi hasn’t felt enormous pressure to speed up the economy.  It is clearly in both sides interest to come to a resolution, and that is what we should focus on going forward.

So, how did markets take the news?  Well, it should be no surprise that Chinese (+1.2%) and Hong Kong (+3.0%) shares both rallied sharply given they are the direct beneficiaries of the story.  Taiwan (+1.0%) and Korea (+1.2%) also fared well in the euphoria, but perhaps the biggest news in Asia was the ceasefire between India and Pakistan that was brokered by the US.  That saw Indian shares (+3.8%) and Pakistani shares (+9.0%) both explode higher.  It is certainly better that the explosions are in the relevant stock markets than on the ground!  As to the rest of Asia, markets were generally higher but not nearly as ebullient. Meanwhile, in Europe, screens are green (Germany +0.9%, France +1.35%, UK +0.4%) but the gains pale compared to some of the Asian price action.  US futures, though, are soaring at this hour (6:50) with gains between 2.4% (DJIA) and 4.0% (NASDAQ).

In the bond market, yields are soaring everywhere with Treasuries (+7bps) rising a similar amount to all European sovereigns (Bunds +7bps, OATs +6bps, Gilts +8bps) and JGBs (+8bps).  It appears that with money flowing rapidly back into the equity markets now that the trade war has ended RISK IS ON baby!!!  Either that or the only way to generate this new growth is by spending lots of government money which will require even more issuance.  I’ll take the first for now.

But that risk on trade is clear in commodities with oil (+3.6%) soaring higher to its highest level in three weeks and despite the idea that OPEC+ is going to increase production.  In fact, there are many things ongoing in the oil market that are far too detailed for this commentary, but in a nutshell, from what I understand, OPEC’s changes are simply catching up to the reality of what members have already been pumping and the market is now focusing on the renewed growth enthusiasm with the trade war on hold.  As well, if risk is no longer a concern, you don’t need to hold gold, and the barbarous relic is under huge pressure this morning, tumbling -3.5% and taking silver (-2.1%) with it.  Copper (+0.4%), however, is higher on the growth story.

Finally, the dollar is flying this morning.  on the one hand, given risk is in such demand, that doesn’t make much sense as historically, risk on markets tend to see the dollar weaken.  But my take is that all the stories about the end of American exceptionalism, with respect to US equity markets, got destroyed by the truce in the trade war, and now folks are buying dollars to buy US equities.  So, the euro (-1.4%) is under major pressure along with the pound (-1.1%) and the yen (-2.0%) is in more dire straits, as is CHF (-1.8%).  Other G10 currencies have also fallen, albeit not as far.  In the Emerging markets, only two currencies are rallying this morning, both benefitting from truces; INR (+0.7%) which is obviously benefitting from the military ceasefire and CNY (+0.6%) which is benefitting from the trade ceasefire.  As to the rest of the bloc, all currencies are lower between -0.6% and -1.6%.

On the data front, we see the following this week:

TuesdayCPI0.3% (2.4% Y/Y)
 -ex food & energy0.3% (2.8% Y/Y)
ThursdayInitial Claims230K
 Continuing Claims1890K
 Retail Sales0.0%
 -ex autos0.3%
 PPI0.2% (2.5% Y/Y)
 -ex food & energy0.3% (3.1% Y/Y)
 Empire State Manufacturing-10.0
 Philly Fed Manufacturing-12.5
 IP0.2%
 Capacity Utilization77.9%
FridayHousing Starts1.37M
 Building Permits1.45M
 Michigan Sentiment53.1

Source: tradingeconomics.com

As well as all the data, we hear from six Fed speakers, including Chairman Powell on Thursday morning.  I cannot help but think that things are a bit overdone this morning but perhaps not.  It is certainly positive that the US and China are speaking about trade, but it remains to be seen what can be agreed.  In the end, while this week is starting off well, I suggest not getting too excited yet.  As to the dollar, certainly this is positive news, but I have not changed my view that eventually it will slide.

Good luck

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