Tag Archives: economy

Buy or Go Short?

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The question on tariffs today
Is what will the Court, Supreme, say
Will they agree Trump
Has power to pump
Up taxes with no Senate sway?
 
Or otherwise, will the top court
Decide to, Trump’s tariffs, abort?
And if they decide
That Trump is offside
Is it time to buy or go short?

 

As testament to the idea that no matter the shock to a system, if it is a dynamic system, it will manage to adapt to the new reality, today’s existential question is, what happens if the Supreme Court decides that President Trump’s tariffs are unconstitutional?  Let’s forget for a moment, the fact that they have generated approximately $200 billion in government revenue since their imposition and are forecast to generate upwards of $300 billion next year and $2.5 trillion in the next decade, at least according to the Tax Policy Center (see chart below from taxpolicycenter.org).  Obviously, this is a good chunk of change for a government that has been running $2 trillion annual deficits.

Rather, let us consider the features that have accompanied the tariff negotiations, notably the promised inward investment to the United States.  Although there are several figures that have been mooted, with President Trump claiming $10 trillion, it appears that a fair estimate of the number is half that, so $5 trillion, to be invested in the US, notably in manufacturing capabilities, over time.  That, my friends, is a lot of money.

Now, we all remember what happened when Mr Trump announced those tariffs on Liberation Day back in April, but here is a chart of the S&P 500 to remind us of the size of the initial decline in equity markets.

Source: tradingeconomics.com

The decline from the close on April 2nd to the low on April 7th was ~12%, at which point, things were put on hold for 90 days and a series of furious negotiations began.  But we saw similar dramatic moves across all markets.  For instance, 10-year Treasury yields fell 33bps during that time, before rebounding sharply.

Source: tradingeconomics.com

Oil also collapsed on the news, falling from nearly $72/bbl to $56/bbl in that stretch as the announcement shook up virtually all financial markets around the world.

Source: tradingeconomics.com

Perhaps the most surprising outcome was that the dollar actually fell about 3% during that period despite every economist and every textbook explaining that the impact of tariffs on currency markets would be that those countries whose goods were tariffed would see their currencies decline while the one imposing the tariffs would see strength.  (Yet another reason to pay little heed to economists and their theories which sound great but rarely seem to describe reality.)

Source: tradingeconomics.com

I highlight all this movement because the market behavior since then has been nothing but positive.  Equity markets have decided that things are great and rallied dramatically.  Bond markets have absorbed the information and decided it doesn’t matter that much or perhaps priced in the new revenue model as part of finding a new equilibrium around 4%.  Oil markets have other things about which to worry, with the current theme the alleged glut of oil that is around, and the dollar, while it continued to decline a bit further over the ensuing three months, has now seemingly found a bottom, and if anything looks like it is preparing to climb.

But…what if the tariffs must go?  And what if the government must repay those already collected?  If you recall, the narrative about tariffs back in April was that they were the end of the US economy and a disaster.  Obviously, that has not turned out to be the case.  Is the new narrative that the end of tariffs will be a disaster?  That feels like a pretty big reversal of opinion.    

To my thinking, one of the keys to the recent optimism for the US economy, at least for those who are optimistic, is that the inward investment is going to have very positive medium- and long-term impacts on the economy.  They are going to be critical in the reshoring of American manufacturing, whether Japanese investment into US Steel, or Korean investment into shipbuilding or Taiwanese investment into semiconductor manufacturing.  All these things are unalloyed positives for the nation and its future.  But if the tariffs are revoked, will the investments disappear?  That is the $5 trillion question, and one that I believe would be incredibly detrimental to both the nation and its financial markets.  Stocks would fall sharply and so would bonds as growth prospects would shrink and the fiscal imbalance likely grow even further.  The dollar would suffer between the capital outflows, and the fiscal problems and oil would likely fall amid a dramatic reduction in US demand.  Arguably, the only thing that would prosper would be gold, the historic safe haven.  

Which brings the question back to the Supremes (not these Supremes, although the sentiment is right!), will they unleash that chaos?  Or will they find a way to avoid it?  

With so much to consider, let’s do a brief twirl around the world overnight.  Yesterday saw a solid US equity rally across the board which was followed by strength throughout most of Asia (Nikkei +1.3%, Hang Seng +2.1%, CSI 300 +1.4%) with generally lesser gains elsewhere in the region.  Europe, though, is on its back foot with modest declines (UK -0.4%, Germany -0.1%, France -0.4%) after weaker than expected Construction PMI data across the board.  As to US futures, at this hour (7:00) they are very slightly firmer across the board, 0.1% or so.

In the bond market, yesterday saw US yields climb about 6bps after the ADP Employment data was released at a stronger than expected 42K with modest revisions higher to the previous months.  Remember, last month’s revisions lower were for an entire year, not specifically the past two months, so it appears that job growth is still decent, just not quite as strong as last year.  That data helped push yields up around the world, notably with JGB yields higher by 3bps.  But this morning, yields have backed off -3bps in the US and are unchanged across the entire continent and UK.  As to the UK, they left rates on hold at 4.0%, as expected, but the vote was 5 – 4 with 4 votes looking for a cut, so a more dovish signal.

In the commodity markets, oil (+0.8%) is rebounding after a decline yesterday based on a much larger than expected build in EIA inventories while NatGas also climbed on forecasts for colder weather and increased LNG demand in Europe and Asia.  Gold (+0.9%) and silver (+1.4%) continue their rebound from recent lows and seem like they are getting comfortable in their new “homes” of $4000 and $48.00 respectively.

Finally, the dollar is under modest pressure this morning, with the DXY slipping barely below the 100.00 level (currently 99.94) while the euro (+0.25%) and pound (+0.2%) both edge higher.  It appears that the dollar’s recent strength is on hold for today, although my take is it will resume shortly.  While a negative Supreme Court ruling on tariffs is likely to really undercut the greenback, I don’t see anything else in the near term to do the job.

There is no data of note to be released today, but we have an onslaught of Fed speakers, six in total starting at 11:00 this morning.  The Fed funds futures contract is now pricing just a 65% probability of a rate cut next month, as the ADP number encouraged some folks to change their views.  My take is we are going to hear a lot about caution given the absence of data, but I might contend the market is already somewhat cautious, at least the bond market is.

The thing about the tariff issue is it won’t be decided for at least several weeks, if not months, so may hang over the market like the Sword of Damocles.  I have no idea how they will rule, and the commentary from observers of the hearing gave different views based on their political biases, so it is hard to know.  But it is going to matter a lot.  In the meantime, I expect the recent trends to remain in place, so equity strength, little bond movement, little oil movement and dollar strength.

Good luck

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Turned to Sh*t

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While headlines are all ‘bout elections
And some have discussed stock corrections
The dollar keeps climbing
As some think pump priming
By Jay will find no real objections
 
The punditry, though, remains split
One side claims things have turned to sh*t
The other side, though
Is really gung-ho
And weakness they will not admit

 

The Democrats had a good election, sweeping the big three races in NYC, NJ and Virginia and many down ticket ones as well.  One spin is this is all a vote against President Trump but given that those three venues are all heavily Democratic to begin with, that may be an exaggeration.  Of the three, my concern turns to NYC as having lived there prior to Mayor Rudy Giuliani’s cleanup of the city, I can tell you, things were not fantastic.  Mayor-elect Mamdani’s stated plans have failed every time they have been tried around the world and I suspect that will be the situation here as well. Alas, that will not prevent him from trying.  Ironically, regarding high rents, it is possible that the increased outmigration from the city by those in the center and on the right will reduce housing demand and arguably housing costs.  We will all watch as it unfolds.

But will that directly impact markets?  Of that I am far less concerned.  I read that JPMorgan already had more employees in Texas than NY prior to the election and given that the concept of a physical exchange has basically disappeared, trading can relocate quickly.  My take is, this will get the talking heads quite excited for a while but will have a minimal impact on markets.

Which takes us to yesterday’s price action and its drivers.  First off, one might have thought that we experienced another Black Monday based on some of the hysteria in commentaries, but in the end, US equity indices only fell between -0.5% (DJIA) and -2.0% (NASDAQ).  In fact, using the S&P 500, a look at the chart shows that the decline over the past several sessions amounts to just -2.3% there, hardly calamitous!

Source: tradingeconomics.com

I continue to read about the K-shaped economy with the massive split between the top 10% of income/wealth representing 87% of spending and enjoying life while the bottom 90% struggle immensely.  This has been made possible by the ongoing support of financial assets by the Fed (and other central banks) which has accrued to asset holders, i.e. the top 10%.  In fact, this is a far more likely rationale for Zoran Mamdani’s victory yesterday, he has promised to help those who are struggling by freezing rents, offering free stuff and taking over the grocery stores to remove the profit motive and lower prices.  And when it comes to elections, the bottom 90% have a lot more votes!

Here is as good an explanation of the forces driving this narrative as any:

While equity and asset prices continue to climb, the working class is finding life increasingly difficult as job opportunities seem to be shrinking.  This latter issue seems only to be exacerbated by the growth in AI spending and the announcements by numerous companies that they will be reducing staffing because of the efficiencies created by AI in their operations.

Arguably, the reason we have seen such a large dichotomy between analyst views is that some are focused on data that represents the bottom leg of the ‘K’ and see a recession around the corner, if not already upon us.  Meanwhile, others see the arm of the ‘K’ and see good times ahead.  Certainly, if we look at the broad-based GDP readings, at least based on the Atlanta Fed’s GDPNow forecast, Q3 was remarkably strong at real GDP growth of 4.0% annualized (see below chart).  Calling for a recession with that as backdrop is a very difficult case to make, in my view, but that won’t stop some analysts from trying.

Net, while nobody likes to see their portfolios’ value shrink, the declines so far have been very modest.  It is entirely reasonable to expect a correction of 10% – 15%, especially if we look at the chart at the top showing a 36% rally with limited drawdowns over the past 6 months.  It feels too early to panic.

And with that in mind, let’s see how markets behaved overnight.  Asian markets followed US ones lower with Tokyo (-2.5%) leading the way, although that was well off the early session lows which touched -4.0%.  Korea (-2.9%) and Taiwan (-1.4%) both suffered as well although the rest of the region was far less impacted.  Both China and HK were little changed and other gains and losses were on the order of +/-0.5% or less.  European bourses are all in the red as well this morning, although the one thing of which we can be sure is it is not related to the tech selloff given Europe has no tech industry of which to speak.  But Spain (-0.9%) and Germany (-0.75%) are both down despite reasonable Services PMI data from both nations and better than expected German Factory Orders (+1.1%).  UK equities are unchanged, and the rest of the continent is somewhere between unchanged and Spain.  Negative sentiment has clearly carried over, but there have been no strong reasons to sell aggressively.

In the bond market, Zzzzzz is today’s message.  Every major government bond is within 1bp of yesterday’s close, and yesterday’s price action was only worth 1bp to 2bps.  In fact, as you can see from the chart below, since the FOMC and Powell’s hawkish press conference, nothing has changed.  This is true from Fed funds futures as well, with a 71% probability still price for a December cut.

Source: tradingeconomics.com

In the commodity space, oil (-0.3%) seems to be lower every morning when I write, but continues to trade in a narrow range around $60/bbl.  Perhaps the most interesting thing I read this morning was Javier Blas’ op-ed in Bloombergregarding the rationale for a US-led regime change in Venezuela given it is the nation with the largest known oil reserves.  If you are President Trump and seeking to get oil prices lower, that could be a very effective source of the stuff.  As to the metals markets, yesterday saw a sharp decline in precious metals and this morning they are rebounding with both gold and silver higher by 0.9%.  Copper (+0.25%), too is rising a bit, although remains well off the highs seen when gold peaked.

Finally, the dollar continues to impress.  While this morning it is little changed against most of its counterparts, it is, apparently, consolidating its recent gains.  The DXY remains above 100.00, which many have seen as a key resistance level.  The pound (+0.2%) while bouncing slightly this morning is hovering just above 1.30, a level last seen on Liberation Day, and certainly appears to be working its way lower from its summer peak.  If I consider the fiscal problems and the energy policy in the UK, it is very difficult to expect a significant amount of demand for the pound.

Source: tradingeconomics.com

Elsewhere, ZAR (+0.4%) is responding to the rise in gold prices and otherwise, +/-0.2% is today’s trading story.  Over time, given the promised investments into the US based on trade deals that have been signed, I expect there will be consistent demand for the greenback.  And as I wrote yesterday, the idea of a two-currency world in the future cannot be dismissed.

We do have data today with ADP Employment (exp 25K), ISM Services (50.8) and then the EIA oil inventory data where limited net change is expected although the API data yesterday showed a large build of 6.5mm barrels.  Remarkably, there are no scheduled Fed speakers, but that story remains caution but a tendency toward cutting.

For all the election hype, I don’t perceive that things have changed very much at all.  Perhaps the Supreme Court hearings on the legality of President Trump’s tariffs are the real story today, but regardless of the hearings, no verdict will be rendered for many weeks.  Which leaves us with a world in which tech is still dominant in equity markets and the US is still dominant in tech.  With the perception of the Fed being somewhat more hawkish, I don’t see a good reason to sell dollars.

Good luck

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Filled With Chagrin

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The vibe in the market is fear
As equities get a Bronx cheer
Commodities, too
Most traders eschew
The dollar, though’s, getting in gear
 
So, what has the catalyst been
To drive such a change in the spin
No story stands out
But there is no doubt
Investors are filled with chagrin

 

Ladies and gentlemen, boys and girls, this morning things just feel bad.  As I peruse the headlines around the major publications, there is no obvious story that is driving today’s weakness in risk assets, but there is no mistaking the vibe.  Certainly, there are several issues outstanding that might be seen as a negative, but none of them are new.  

  • The government has been shut down for 35 days as of today, and it doesn’t sound like the Senate Democrats are ready to vote to reopen it.  Granted, the problems of the shutdown increase with time, but there has been no apparent change in tone for at least the past two weeks, so why is today the day when things look bad?
  • The war in Ukraine continues apace with no obvious timeline to ending, but this has been ongoing for nearly 4 years, so what is it about today that may have changed?
  • Concerns over fraud have increased after the recent bankruptcy filings by First Brands and Tricolor, as well as accusations by banks of other situations, but again, no new story broke overnight.
  • Perhaps it is the fact that today is Election Day in the US, and there is concern that Zoran Mamdani, a self-described Democratic Socialist, could become the next mayor of NYC, which given it is still home to so many financial markets, has those market participants unnerved.

Some days, it’s just not clear why markets move in the direction they do, and there can be far less dramatic drivers.  For instance, we have seen a major rally in equity markets, and risk assets in general, over the past 5 years, with an acceleration over the past 6 months and they are simply taking a breather.  Whatever the driver, the movement is clear.

Source: tradingeconomics.com

So, given the absence of obvious drivers to discuss, let’s simply recap the damage. After yesterday’s mixed session in the US, Asia was under significant pressure led by Tokyo (-1.75%) with HK (-0.8%) and China (-0.75%) slipping as well.  But Australia (-0.9%) fell after the RBA left rates on hold, as expected, although Governor Bullock sounded a touch more hawkish than expected, and the rest of the region saw almost universal weakness with Korea (-2.4%) the worst of the bunch, but declines everywhere (India, Taiwan, Indonesia, Singapore, Thailand) except New Zealand, which managed a small gain, to reach yet another record high, on solid earnings numbers from key companies.

Meanwhile, European bourses are all sharply lower as well (DAX -1.3%, CAC -1.2%, IBEX -1.1%) as the overall market vibe weighs on these markets, all of which recently traded at new all-time highs.  Ironically, the UK (-0.6%) is about the best performer despite a speech from Chancellor of the Exchequer, Rachel Reeves, which explained…well, it is not clear what it explained.  The UK has major budget problems and has discussed raising taxes, but given growth is lagging, there is a lot of pushback, even within the Starmer government, on that subject.  As with virtually every G10 economy, the government is spending far more than they take in and they don’t know how to address the deficit.  Unfortunately for the UK, the pound is not the global reserve currency and so they are subject to market discipline, unlike the US…so far.  But, in this space, US futures are all lower this morning, down -1.0% or so as I type at 7:10am.

Now, your first thought might be that bonds have rallied nicely on all this risk aversion, but while they have, indeed, moved higher (yields lower) I don’t know that nicely would describe the movement.  Rather, barely is a better description as 10-year yields are lower by -2bps in the Treasury market and between -1bp and -2bps in all European sovereign markets.  In fact, despite the weakness in Japanese stocks overnight, JGB yields are unchanged.  The message is, bonds are not that appealing, even if stocks aren’t either.

Turning to commodities, oil (-1.4%) is having a hard time this morning alongside the equity markets, with virtually all energy prices lower across the board.  Given there has been no announcement of a major energy breakthrough, this has the feel of growing concern over economic activity going forward.  With that in mind, though, WTI is still trading right around $60/bbl, which seems to be its “home” lately.

In the metals markets, gold (-0.15%) continues to trade around the $4000/oz level, which seems to be its new “home” as traders await the next catalyst in this space.  Silver (-0.3%) is similarly fixated on its level of $48/oz and seems likely to follow gold’s lead going forward.  However, copper (-2.3%) seems like it is more in sync with oil lately, as the two are both so intimately linked with economic activity and changes thereto.  It’s funny, despite the risk asset weakness, I have not seen anything new on a pending recession in the US, nor globally, although there continues to be a steady stream of analysts who have been explaining we are already in one.

Finally, the dollar is today’s winner, rising against every one of its counterparts except the yen (+.45%) which responded to a second round of verbal intervention from FinMin Katayama, who once again drew from the MOF seven-step playbook with a half-step overnight: “I’m seeing one-sided and rapid moves in the currency market. There’s no change in our stance of assessing developments with a high sense of urgency.”  

But away from the yen, it is merely a question of which currency looks worst.  The pound (-0.65%) has traded down to levels not seen since Liberation Day, as it appears the FX market did not take Chancellor Reeves’ comments that well.

Source: tradingeconomics.com

For those who view the DXY as the key indicator, it has traded above 100 for the first time since August, and I know many technicians are looking for a breakout here.  The fact remains that the Fed’s recent seeming mildly hawkish turn is out of sync with most of the rest of the world and will support the dollar for now.  Of course, the futures market is still pricing a 72% probability of a rate cut in December, so traders are taking the ‘hawkish’ comments by Chair Powell at the press conference last week with a grain or two of salt.  In fact, one of the things weighing on the pound is the idea that the BOE may cut this week despite still high inflation.

But wherever you look in this space, the dollar is sharply higher.  ZAR (-1.0%), NOK (-0.9%), MXN (-0.85%) and SEK (-0.9%) lead the way, but declines of -0.5% are rampant across all three regional blocs.  Today is a straight up dollar story.

And that’s all we have today.  Yesterday’s ISM data was a touch weaker than forecast, and last month, slipping to 48.7 with Prices Paid (58.0) slipping as well.  Weirdly, the S&P PMI was a better than expected 52.5, rising from last month and beating expectations.  It seems a mixed message.  Yesterday’s Fed speakers didn’t tell us anything new, with Governor Cook explaining that December is a “live” meeting.  I’m not sure what that means.  Is the implication they may not cut there?  That would not go down well in either markets or the White House.

Given how far equity prices have come in the past 6 months, it would not be a surprise to see a more substantial pullback.  In fact, it would be healthy for the market to remove some of the excesses that abound.  The fraud stories are concerning as they tend to flourish at the end of bull markets, and while they are not yet flourishing, they are starting to become more common.  In the end, while I expect the Fed will cut in December, and then again in January, I don’t see a reason for the dollar to decline sharply.

Good luck

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Woes and Scraps

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The PMI data is in
And so far, it’s not really been
A sign of great strength
When viewed from arm’s length
No matter the punditry’s spin
 
That said, we are not near collapse
Despite many trade woes and scraps
And stocks keep on rising
So, t’will be surprising
For all when we see downside gaps

 

It was a quieter weekend than we have seen recently in the global arena with no new wars, no mega protests and no progress made on any of the major issues outstanding around the world.  Thus, the US government remains shut down, the war in Ukraine remains apace and the AI buzz continues to suck up most of the oxygen when discussing markets.

With this as background, arguably the most interesting market related news has been the manufacturing PMI data released last night and this morning.  starting in Asia, the story was some weakness as Chinese, Korean and Australian data all fell compared to last month, although India and Indonesia continued along well.  Meanwhile, in Europe, the data improved compared to last month, but the problem is it remains at or below 50 virtually across the board, so hardly indicative of strong economic activity.

                                                                                                      Current         Previous               Forecast

Source: tradingeconomics.com

I don’t know about you, but when I look at the releases this morning, I don’t see a European revival quite yet, not even if I squint.

I guess the other thing that has tongues wagging is Election Day tomorrow with three races garnering the focus, gubernatorial contests in New Jersey and Virginia and the mayoral race in New York City.  The first two are often described as harbingers of a president’s first year in office and I think this time will be no different.  But will they impact market behavior?  This I doubt.

So, let’s get right into markets this morning.  Friday’s further new record highs in the US were followed by strength through much of Asia (Tokyo was closed for Culture Day) with China (+0.3%), HK (+1.0%), Korea (+2.8%) and Taiwan (+0.4%) leading the way with only the Philippines (-1.7%) bucking the regional trend as earnings growth in the country continues to disappoint relative to its peers around the region.  Europe, too, has seen broad based gains with the DAX (+1.2%) leading the way higher and gains in the IBEX (+0.45%) and CAC (+0.3%) as well.  I guess the PMI data was sufficient to excite folks and despite Europe’s status as a global afterthought, at least in terms of geopolitical issues, their equity markets have been rising alongside the rest of the world’s all year.  And you needn’t worry, US futures are all higher at this hour (6:50), with the NASDAQ (+0.7%) leading the way.

Perhaps more interesting than equities though is the fact that government bond markets are doing so little.  Treasury yields jumped ~10bps in the wake of the FOMC meeting and, more accurately, Chairman Powell’s ostensible hawkishness.  However, as you can see in the below tradingeconomics.com chart, since then, nothing has happened. 

Recall, the probability of a December rate cut by the FOMC also fell from virtual certainty to 69% now.  In fact, if you think about it, that 30% probability decline translates into about 7.5bps, approximately the same amount as 10-year yield’s rose.  It appears that the market is consistent in its pricing at this point, and when (if?) data starts coming back into the picture, we will see both these interest rates rise and fall in sync.  As to European sovereigns, they continue to track the movement in the US and this morning, this morning, the entire bloc has seen yields edge higher by 1bp, exactly like the US.

Commodities remain the most interesting place, although the dollar is starting to perk up a bit.  Oil (-0.3%) slipped overnight after OPEC+ indicated they were increasing production by another 137K bbl/day, although there would be no more increases for at least three months given the seasonality of reduced oil demand at this point on the calendar.  Something I have not touched on lately is NatGas, which traded through $4.00/MMBtu late last Thursday, and is now up to $4.25.  in fact, in the past month it has risen nearly 27%, which given it is massively underpriced compared to oil (on a per unit of energy basis) should not be that surprising.  Nonetheless, sharp movements are always noteworthy, and this is no different.

Source: tradingeconomics.com

Certainly, part of this is the fact that winter is coming and seasonal demand is rising in the US. 

Combine that with the European needs for LNG, of which the US is the largest provider, and you have the makings of a rally.  (I wonder though, did the fact that Bill Gates changed his tune on global warming no longer being an existential threat signal it is now OK to burn more fossil fuels?)

Turning to the metals markets, the ongoing fight between the gold bugs and the powers that be continues as early in the overnight session, gold was lower by nearly -1% but as I type, just past 7:00am, it is slightly higher (+0.1%) compared to Friday’s closing levels.  Silver (+0.1%) has seen similar price action although copper (-0.5%) appears more focused on the economic story than the inflation story.  

Which takes us to the dollar and its continued rally. Using the DXY (+0.1%) as our proxy, it is higher again this morning and pushing back to the psychological 100.00 level.  Now, I have made the case several times that the dollar has done essentially nothing for the past six months, and the chart below, I believe, bears that out.  We have basically traded between 96.5 and 100 since May.

Source: tradingeconomics.com

You will also recall that there is a narrative around about the end of the dollar’s hegemony and how nations around the world are trying to exit the USD financial system that has been in place since Bretton Woods, or at least since the fiat currency world took off when President Nixon closed the gold window.  And there is no doubt that China is seeking to become the global hegemon and thus wants a renminbi-based system to use to their advantage.  However, let’s run a little thought experiment. 

The Trump administration has embraced the cryptocurrency space, and especially the use of stablecoins.  Legislation has been passed (GENIUS Act) to help clarify the legal framework and the SEC has been solicitous in its willingness to ensure that these creations are not securities, thus placing them outside the SEC’s oversight.  When looking at the world of stablecoins, their current total value is approximately $311 billion (according to Grok) of which only ~$1.2 billion are non-USD.  

Now, if stablecoins represent the payment rails of the future, an idea that is readily believable, and the stablecoin market is virtually entirely USD, with massive first mover advantage, is it not possible that economies around the world are going to find it much easier to dollarize than to maintain their own native currency?  While there are calls for Argentina to dollarize, what would the world look like if the EU fell apart (an entirely possible outcome given the inconsistencies in their current energy and immigration policies and the stress within the bloc) and the euro with it?  Would smaller nations opt for their own currency, or would they see the value of having a dollarized economy given the many efficiencies it would present, especially for their export industries?

While I have no doubt that China will never accept that outcome for themselves, is the future a world where there are two currency blocs, USD and CNY, and everything else simply disappears?  Remember, we are merely spit balling here, but if that is the outcome, demand for dollars will continue to rise, and the value of other currencies will continue to decline until such time as they succumb.

Again, this is a thought experiment, but one that offers intriguing possibilities for the future.  And one where the foreign exchange market may ultimately meet its demise.  After all, if there are only two currencies, that doesn’t make much of a market.

One other thing I must note, in the stablecoin realm, there is a remarkable product, USDi (usdicoin.com), which tracks US CPI exactly, yet can fit within those same payment rails.  If you are looking into this space, USDI is worth a peek.

Ok, back to the markets, looking across the FX space, +/-0.2% is today’s theme virtually across the board, with the more important currencies slipping against the dollar (EUR, GBP, JPY, CHF, CAD) than rising vs the greenback (MXN, CLP, NOK, CZK), although the magnitudes are similar.

With the government still closed, there is no official data, but we do get ISM Manufacturing (exp 49.5) with the Prices Paid subindex (61.7) released at the same time.  There are two Fed speakers today, Daly and Cook, and then 9 more speeches throughout the week.  We also get the ADP Employment data on Wednesday (exp 24K), but I imagine that will get more press after the election results are learned Tuesday evening.

It is hard to get excited about things today, but nothing points to a weaker dollar right now.

Good luck

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A Strong Sense of Urgency

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Katayama said
“A strong sense of urgency”
Informs our views now

 

The wonderful thing about Japanese translations into English is that they can be both consistent and nonsensical at the same time.  The term, “a strong sense of urgency” has been used by virtually every Japanese FinMin for the past 40 years, and probably longer, when they discuss the yen after a sharp move.  But ask yourself, is that how you would express this sentiment?  While I have no doubt that the MOF (and the BOJ) are closely watching the movements in the FX market as the yen continues to weaken, if it was urgent, they would have done something.  And they are not going to do anything, I think, until 160 is seen again.  As it happens, the yen is at its weakest point since mid-February and it is hard to make the case that it is going to reverse course soon.

Source: tradingeconomics.com

But this is the first step in their typical seven step plan before intervention.  And I get it, the combination of Chairman Powell suddenly sounding hawkish on Wednesday afternoon, telling us a December rate cut was not a foregone conclusion and the BOJ continuing to sit on its hands despite inflation running at 2.9%, the 42nd consecutive month (see below) that it has been above their 2.0% target (sound familiar?), indicates that the current policy stances will likely lead to further dollar strength vs. the yen.  

Source: tradingeconomics.com

There is something of an irony in the current situation in Japan.  Recall that for years, the Japanese economy was in a major funk, with deflation the norm, not inflation, as government after government issued massive amounts of debt to try to spend their way to growth.  In fact, Shinzo Abe was elected in 2012, his second stint as PM, based on his three arrows plan to reinflate the economy because things were perceived so poorly.  If you look at the chart below, which takes a longer-term view of Japanese inflation, prior to 2022, the two positive spikes between 1992 and 2022 were the result of a hike in the Japanese VAT (they call it the Goods and Services Tax) which raised prices.  In fact, during that 30-year period, the average annual CPI was 0.25%.  And the Japanese government was desperate to raise that inflation rate.  Of course, we know what HL Mencken warned us; be careful what you wish for, you just may get it…good and hard.  I have a sense the Japanese government understands that warning now.

Data source: worldbank.org

Net, it is hard to make a case that the yen is going to reverse course soon.  For receivables/asset hedgers, keep that in mind.  At least the points are in your favor!

So, now that a trade deal’s agreed
Can China reverse from stall speed?
The data last night
Sure gave Xi a fright
More stimulus is what they need!

The other noteworthy macro story was Chinese PMI data coming in weaker than expected with the Manufacturing number falling to 49.0, vs 49.8 last month, with all the subcategories (foreign sales, new orders, employment and selling prices) contracting as well.  The Chinese mercantilist model continues to struggle amid widespread efforts by most developed nations to prevent the Chinese from dumping goods into their own economies via tariffs and restrictions.  The result is that Chinese companies are fighting on price, hence the deflationary situation there as too many goods are chasing not enough demand (money).  

There have been many stories lately about how the Chinese have the upper hand in their negotiations with the US, and several news outlets had stories this morning about how the US got the worst of the deal just agreed between Trump and Xi.  As well, this poet has not been to China for a very long time, so my observations are from afar.  However, things in China do not appear to be going swimmingly.  While there continues to be talk, and hope, that the government there is going to stimulate domestic consumer spending, that has been the story for the past 3 or 4 years and it has yet to occur in any effective manner.  The structural imbalances in China remain problematic as so many people relied upon their real estate investments as their nest egg and the real estate bubble continues to deflate 3 years after the initial shock.  Chinese debt remains extremely high and is growing, and while they certainly produce a lot of stuff, if other nations are reluctant to buy that stuff, that production is not very efficient for economic growth.

Many analysts continue to describe the US-China situation as China is playing chess while the US is playing checkers, implying the Chinese are thinking years ahead.  If that is so, please explain the one-child policy and the decimation of their demographics.  Just sayin.

Ok, let’s look at markets overnight.  While yesterday’s US markets were blah, at best, strong earnings from Amazon and Apple has futures rocking this morning with NASDAQ higher by 1.3% at this hour (7:40).  Those earnings, plus the euphoria over the Trade deal with the US sent Japanese shares (+2.1%) to another new all-time high which dragged along Korea (+0.5%) and New Zealand (+0.6%) but that was all.  The rest of Asia was under pressure as the weak Chinese PMI data weighed on both HK (-1.4%) and mainland (-1.5%) indices and that bled to virtually every other market. Meanwhile, European bourses are all somewhat lower as well, albeit not dramatically so, as the tech euphoria doesn’t really apply here.  So, declines between -0.1% (Spain) and -0.4% (UK) are the order of the day.

In the bond markets, yields have essentially been unchanged since the FOMC response with treasury yields edging 1bp higher this morning, now at 4.10%, while European sovereign yields are either unchanged or 1bp higher.  The ECB was a nothingburger, as expected, and going forward, all eyes will be on the data to see if any stances need change.

The commodity markets continue to be the place of most excitement with choppiness the rule.  Oil (-0.25%) is a touch softer this morning but continues to hover around the $60/bbl level.  I’m not sure what will get it moving, but right now, neither war nor peace seems to matter.  Regime change in Venezuela maybe?

Source: tradingeconomics.com

In the metals markets, volatility is still the norm with gold (-0.45%) lower this morning after a nice rebound yesterday and currently trading just above $4000/oz.  Silver and copper are unchanged this morning with platinum (-0.9%) following gold.  However, regardless of the recent market chop, the charts for all these metals remain distinctly bullish and the theme of debased fiat currencies is still alive.  Run it hot is still the US playbook, and that is going to support all commodity prices.

Finally, the dollar, after another step higher yesterday, is little changed this morning.  Both the euro and yen are unchanged and the rest of the G10 has slipped by between -0.1% and -0.2%.  In truth, today’s outlier is ZAR (-0.4%).  Now, let’s look at two ZAR charts, the past year and the long term, which tell very different stories.  In fact, it is important to remember that this is often the case, not merely a rand situation.  First, the past year shows the rand with a strengthening trend as per the below from tradingeconomics.com.  That spike was the response to Liberation Day.

But now, let’s look at a longer-term chart of the rand, showing the past 21 years.

Source: finance.yahoo.com

Like most emerging market currencies, the rand has been steadily depreciating vs. the dollar for decades.  It’s not that we haven’t seen a few periods of modest strength, but always remember that in the big picture, most EMG currency’s slide over time.  This is merely one example, and it is a BRICS currency.  The demise of the dollar remains a long way into the future.

On the data front, Chicago PMI (exp 42.3) is the only release, and we hear from three more Fed speakers.  It appears every FOMC member wants to get their view into the press as quickly as possible since there seem to be so many differing views.  In the end, I continue to think the Fed cuts in December, and nothing has changed.  But for now, there is less certainty as this morning, the probability of a cut is down to 66%.  I guess we’ll see.  But regardless, I still like the dollar for now.

Good luck and good weekend

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Far From It

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Ahead of the FOMC
The pundits were sure they would see
A cut come December
As every Fed member
Saw joblessness to some degree
 
But turns out, dissent did abound
And Jay, to the press, did expound
December’s not destined
“Far from it”, when pressed, and
The bond market fell to the ground

 

The Fed cut the 25bps that were priced and they said they would end QT, the balance sheet runoff beginning December 1st.  As well, they indicated that as MBS matured, they would be replaced with T-bills.  So far, all pretty much as expected.  But…the vote was 7-2 for the cut.  One dissent was Stephen Miran, once again looking for 50bps but the real shocker was KC Fed president Jeffrey Schmid, who wanted to stand pat!  During the press conference, Powell explained [emphasis added], “there were strongly different views about how to proceed in December.  A further reduction in the policy rate at the December meeting is not a foregone conclusion.  Far from it!”

The Fed funds futures market jumped on that comment and as of this morning, the December probability fell from 92% to 70% with only a 3/4 probability of another cut after that by April, down from a near certainty by March previously.  

You won’t be surprised by the fact that the bond market sold off hard, with yields rising 10bps on the day, with seven of those coming in the wake of the press conference.  

Source: tradingeconomics.com

Stocks struggled, with the DJIA under modest pressure and the S&P 500 unchanged although the NASDAQ managed to rise yet again to a new high, as NVDA doesn’t pay attention to gravity.

So much has been written about this that I don’t think it is worth going into more detail.  FWIW, my view is the Fed is still going to cut in December, and that will become clearer as the government reopens (which I think happens by the end of the week) and data starts to trickle out again.  The employment situation remains their main focus, and it just doesn’t seem that positive right now.  I suspect next year, when the OBBB policies begin to be implemented and we see the fruits of the dramatic increase in foreign investment in the US, that situation can change, but things feel slow for now.  

In effect, that is why they are going to run the economy as hot as they can to try to prevent any recession and hopefully make it to the point where the government can back off and the private sector picks up the slack.  At least, that’s my read for now.  For the dollar, that means more support.  For stocks, the same.  And the inflation prospects will keep the precious metals supported.  Bonds feel like the worst place to be.

In other central bank news, the Bank of Canada cut 25bps, as expected, and in their commentary explained rates were now “at about the right level” for the economy based on their projections.  The market demonstrated they cared about this story for about 3 hours, as the initial move was modest CAD strength that evaporated as soon as Powell started speaking.

Source: tradingeconomics.com

The BOJ also met last night and left rates on hold, as widely expected, with the same two votes for a rate hike as the last meeting.  During the press conference, Ueda-san explained, “We held today as we want to see more data on domestic wage-setting behaviors, while uncertainty remains high in overseas economies. If we’re convinced, we’ll adjust rates regardless of the political situation.”  The yen (-0.6%) fared somewhat poorly, responding to Ueda-san’s comments regarding the relative lack of strength in the Japanese economy.  Ultimately, as you can see in the below chart, the yen fell to its weakest point since last February, although I suspect if I am correct regarding the Fed continuing its policy ease, that weakness will abate somewhat.

Source: tradingeconomics.com

While Spinal Tap got to eleven
Said Trump, t’was a twelve, not a seven
The deal that he struck
To get things unstuck
With China, it’s manna from heaven

The last big story was the long-awaited meeting between Presidents Trump and Xi last night, where the two sat down and agreed to cool the temperature regarding trade.  Key aspects include the US reducing tariffs on China, especially those regarding fentanyl, as well as rolling back the broad restrictions on Chinese companies, while China will purchase “tremendous amounts” of soybeans and pause their restrictions on the sale of rare earth minerals.  Tiktok came up, and that will be settled and overall, it appears that a great deal of progress was made.  This was confirmed by the Chinese as they announced the same things.
 
Clearly, this is an unalloyed positive for the global economy and while the situation is not back to its pre-Trump days, it offers the hope of some stability for the time being.  But the surprising thing about these announcements was how little they seemed to help financial markets.  For instance, both the Hang Seng (-0.25%) and CSI 300 (-0.8%) slipped during the session, as did India (-0.7%) and Australia (-0.5%) with the rest of the region basically unchanged.  That is a disappointing performance for what appears to be a very positive outcome.  I suppose it could be a ‘sell the news’ response, but in today’s markets, especially with the ongoing influx of central bank liquidity, I would have expected more positivity.
 
Turning to European markets, they are lower across the board led by Spain (-1.1%) and France (-0.6%) as the US-China trade deal had little impact, and investors responded to a plethora of data on GDP and inflation.  The odd thing about this is that the Q/Q GDP data was better than expected across the board (France 0.5%, Netherlands 0.4%, Germany 0.0%, Eurozone 0.2%) which was confirmed by positive confidence data and modest inflation.  While those growth numbers are hardly dramatic, at least they are not recessionary.  You just can’t please some people!  Meanwhile, at this hour (6:30) US futures are little changed to slightly softer.
 
If we turn to the bond markets, yesterday’s dramatic rise in Treasury yields is consolidating with the 10-year slipping -1bp this morning.  In Europe, sovereign yields are higher by 3bps across the board as they catch up to yesterday’s Treasury move.  At this hour, though, bond markets are doing little as investors and traders await Madame Lagarde’s announcements at 9:15 EDT although there is no expectation for any rate move.  In fact, looking at the ECB’s own website, there is currently a 5% probability of a rate hike!  (That ain’t gonna happen, trust me.)
 
In the commodity markets, oil (-0.5%) is softer this morning but is still right around $60/bbl with yesterday’s EIA inventory data showing a larger draw on inventories than expected.  That is what helped yesterday’s modest gains, but those have since been reversed.  In the metals markets, price action remains quite choppy, but this morning sees gold (+1.3%), silver (+1.0%) and platinum (+0.35%) all bouncing although copper (-0.2%) is a touch softer.  Nothing has changed my longer-term views here, but it does appear that there is a lot more choppiness that we will need to work through before the trend reasserts itself.
 
Finally, the dollar, which rose yesterday on the relatively hawkish Fed commentary is mixed this morning as it shows strength vs. the yen (now -0.8%), ZAR (-0.4%), KRW (-0.35%), and INR (-0.4%) with even CNY (-0.2%) following suit, although the rest of the currency universe has moved only +/-0.1% from yesterday’s closes.  Again, my view is the dollar is confined to a range, has been so for many months, and we will need to see some policy changes to break out in either direction.  Right now, those policy changes don’t seem to be imminent.
 
With data still MIA, the only things to which we can look forward are the ECB and the first post-meeting Fed speak with Governor Bowman and Dallas Fed president Logan up today.  I would have thought risk assets would be in greater demand this morning, but that is clearly not the case.  Perhaps, as we approach month-end, we are seeing some window dressing, but despite the ostensible hawkish outcome from yesterday’s FOMC, I don’t think anything has changed with their future path of more rate cuts no matter what.  As equity markets had a broadly positive October, rebalancing flows would indicate sales, but come Monday, I think the rally continues.  As to the dollar, there is still no reason to sell that I can discern.
 
Good luck
Adf
 
 
 

Curses and Squeals

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Though data is scarce on the ground
This week has the chance to astound
Four central banks meet
And when it’s complete
Two cuts and two stays ought abound
 
Meanwhile, Mr Trump’s signing deals
In Asia, an act that reveals
His fervent desire
To drive markets higher
As foes let out curses and squeals

 

Some days, there’s very little to note, with the news cycle a rehash of stories that have been festering for weeks.  This is especially true in the political sphere, but also on the economic front.  As well, given the ongoing government shutdown and the lack of government data being released, a key market focus is missing.  But not today!

News across the tape moments ago is that President Trump has agreed a trade deal with South Korea, although the details of the deal are yet to be revealed.  When it comes to Trump and trade deals, it is always difficult to get through the hype to determine if things will actually improve, but if we use the KRW as a proxy for market sentiment, as you can see in the chart below, the announcement was seen as a benefit to the won.

Source: tradingeconomics.com

This is hardly definitive, and the nature of a trade deal is that it takes time to be able to determine its benefits for both sides, but for now, it appears markets are giving it the benefit of the doubt.  As well, it continues to be reported that Presidents Trump and Xi will be sitting down tomorrow (tonight actually) and that a trade framework has been agreed by Secretary Bessent and Chinese Vice Commerce Minister Li Chenggang which includes reduced tariffs, fentanyl, soybeans, semiconductors and rare earth minerals as key pieces of the puzzle.  

The ongoing competition between the US and China is not about to end with this deal, but perhaps it will be able to revert to a background issue rather than a headline one, and that is likely a positive for all.  Certainly, equity markets continue to believe that this dialog is a benefit as evidenced by their daily trips to new highs.

Which takes us to the other key discussion point in markets, central banks.  Over the next twenty-seven hours (it is 6:30am as I type) we are going to hear four major central banks explain their latest policy steps starting with the Bank of Canada (expected 25bps cut) at 9:45 this morning, then the FOMC at 2:00 this afternoon with their 25bps cut.  This evening at 11:00, NY time, the BOJ is expected to leave rates on hold, although there are those who believe a 25bps hike is possible, and then tomorrow morning at 9:15 EDT, the ECB will also leave rates on hold.  

While this is certainly a lot of new information, the question is, will it have any market impact?  Given the market pricing of these events, if any of the central banks do something different, you can be sure its markets will respond.  If I had to assess what might be different, both the BOC and FOMC could cut more than 25bps, and the ECB could cut 25bps rather than standing pat.  In all those cases, the currency would likely weaken sharply at first, although if all those things happened, I suppose it would simply create a new equilibrium.  But understand, I don’t think any of that WILL happen.

Regarding the Fed, though, there is another question and that is, what is going to happen to QT and the balance sheet.  Lately, there has been a great deal of discussion regarding how much longer the Fed will allow the balance sheet to shrink.  Last week I discussed the difference between ample and abundant reserves, but in numeric terms, the signals are coming from the SOFR (Secure Overnight Financing Rate) market, the one that replaced LIBOR.  It seems that there is increasing concern over the recent rise in the rate.  This is seen by numerous pundits, as well as by some in the Fed, as a signal that the reserve situation is getting tighter, thus offsetting the Fed’s attempts at ease. 

The below chart from the NY Fed shows the daily wiggles, but also, it is pretty clear that the recent trend has been higher.  You can see the September Fed funds cut in the sharp drop, and the first peak after that was September 30th, the quarter-end when banks typically look to spruce up their balance sheets, so borrow more aggressively.  But since then, this rate has been edging higher, an indication that there may not be sufficient reserves available for the banking system.

This begs the question; will the Fed end QT today?  Or wait until December?  My money is on today as they are growing concerned about the employment situation with the uptick in recent layoff announcements, and the pressure on SOFR is the best indicator they have that things have reached the point where their balance sheet no longer needs to shrink.  One other thing to keep in mind, at some point, it seems likely that the Fed is going to need to find more buyers of Treasuries as the market may develop indigestion given the amount being issued.  That pivot back to QE, whatever it is called, is easier if they are not simultaneously reducing their own balance sheet.

And one final point on the Fed.  Apparently, when they cut today, it will be the twenty-second time the Fed will have cut with stock indices at all-time highs, and of those previous twenty-one, twenty-one times equity markets were higher one year later.  Let’s keep that party rolling!

Ok, let’s look at how things have gone overnight.  Tokyo (+2.2%) was basking in the glow of all the love between President Trump and PM Takaichi, as it, too, traded to new all-time highs.  China (+1.2%) gained on the news of the trade framework, but interestingly, HK (-0.3%) did not follow suit.  And it should be no surprise that Korea (+2.1%) rallied on that trade news with India and Taiwan rising as well.  Australia (-1.0%) though, had a rougher go after a higher than forecast inflation print (3.5%) put paid to the idea that the RBA would be cutting rates again soon.

In Europe, Spain (+0.65%) is rallying on solid GDP data (1.1% Q/Q) although the rest of the continent is doing very little with virtually no change there.  In the UK, the FTSE 100 (+0.6%) is rallying on stronger corporate earnings from miners (metals are higher) and pharma companies.  As to US futures, at this hour (7:30) they are all nicely in the green, about 0.35% or so.

In the bond market, Treasury yields have backed up 2bps, but are still just below the 4.00% level, hardly signaling major concern right now.  European sovereign yields are all essentially unchanged this morning and overnight, only Australia (+5bps) moved after that CPI data Down Under.

Turning to commodities, oil (+0.5%) is bouncing after a couple of weak sessions, but net, we are right back to the $60 level which appears to be a comfortable level for both buyers and sellers.  It is also a high enough price to encourage continued exploration, so my take is we are likely to trade either side of this level for quite a while going forward.  My previous bearish views are being somewhat tempered, although I don’t foresee a major rally of any note.  

Source: tradingeconomics.com

In the metals markets, gold (+1.7%) is bouncing off its recent trading low and currently back above $4000/oz.  A look at the chart for the past month shows just how large the movements have been as the parabolic blow-off to near $4400 was seen through the middle of the month, and after a second try, the rejection was severe.  I don’t believe the long-term story in the precious metals has changed at all, the idea that fiat currencies are going to maintain their current status as reserve assets is going to be more and more difficult to defend with gold the natural replacement.  But in a market with a history of manipulation, don’t be surprised to see many more sharp moves ahead.

Source: tradingeconomics.com

As to the rest of the metals, they are all higher this morning with silver (+2.1%) leading the way and copper (+0.6%) and platinum (+1.6%) following in its wake.

Turning to those fiat currencies, the dollar is broadly firmer this morning, with only AUD (+0.15%) managing any gains against the greenback after that inflation print got traders thinking about higher rates Down Under.  But otherwise, in the G10, the dollar is ascendant.  In the EMG bloc, we already discussed KRW, but ZAR (+0.2%) is also gaining today on the back of the metals bounce.  Elsewhere, though, modest dollar strength is the rule.  What makes this interesting is the dollar is back to rallying alongside precious metals.

Ahead of the Fed, we only see EIA oil inventories with a small draw expected.  In theory, with President Trump in South Korea, one would expect him to be sleeping throughout most of today’s session, but apparently the man rarely sleeps.

The big picture is that run it hot remains the play, and that means equities should benefit, bonds should have a bit more trouble, but the dollar and commodities should do well.  I see no reason for that to change soon.

Good luck

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A Pox

Posted on by

The world is a wonderful place
We know this because of the chase
For more and more risk
Though Washington’s fisc
Continues, more debt, to embrace
 
Investors can’t get enough stocks
And bonds have found buyers in flocks
But havens like gold
Are actively sold
As though they’ve come down with a pox

 

I’m old enough to remember when there was trouble all around the world; war in Ukraine was escalating, anxiety over a more serious fracture in the trade relationship between the US and China was growing, and President Trump was building a ballroom at the White House!  Ok, the last one is hardly a problem.  But just two weeks ago, risk assets were struggling and havens seemed the best place for investors to hide.  But that is sooooo last week.

By now you are all aware that the delayed CPI report on Friday came in on the soft side, thus reinforcing the Fed’s plans to cut rates tomorrow.   While Fed funds futures pricing, as seen below, has not changed very much at all, with virtual certainty of cuts tomorrow and in December, plus two more by the April meeting next year, the punditry is starting to float the idea that even more cuts are coming because of concern over the employment situation and the fact that inflation appears under control.

Source: cmegroup.com

Now, it is a viable question, I believe, to ask if inflation is truly under control, but the problem with this concern is that Chairman Powell told us, back in September, that they are not really focused on that anymore.  The fact that the official payroll data has not been released allows the Fed to avoid specific scrutiny, but literally everything I read tells me that the employment situation is getting worse.  The latest highlight was Amazon’s announcement yesterday that they would be reducing corporate staff by about 14,000 folks in the coming months as, apparently, AI is reducing the need for headcount.

In fact, I would contend the answer to the question; if the economy is doing so well, why does the Fed need to cut rates, is there is a growing concern over the employment situation which has been masked by the lack of data.

But we all know that the economy and the stock market behave very differently at times, and this appears to be one of those times.  Yesterday, yet again, equity markets in the US closed at record highs as earnings releases were strong virtually across the board.  Adding to the impetus was the news that Treasury Secretary Bessent announced a framework for trade between the US and China had been reached with the implication that when Presidents Trump and Xi meet later this week, a deal will be signed.

Putting it all together and we see the concerns that were driving the “need” for owning havens last week have virtually all dissipated.  While the Russia/Ukraine situation remains fraught, I don’t believe that equity markets anywhere in the world have paid attention to that war in the past two years.  Oil markets, sure, but not equity markets.

There is a fly in this ointment, though, and one which only infrequently gets much airtime.  The US is continuing to run substantial fiscal deficits.  Lately, as evidenced by the fact that 10-year yields have slipped back to their lowest level this year, and as you can see below, are clearly trending lower, this doesn’t seem to be an issue.  But ever-increasing federal deficits cannot last forever, and if the Trump plans to boost growth significantly does not work out, there will be a comeuppance.  I have described before my view that the plan is to ‘run it hot’ and nothing we have seen lately has changed that sentiment.  I sure hope it works for all our sakes!

Source: tradingeconomics.com

Ok, let’s see if the euphoria evident in the US markets has made its way around the world.  The answer is, no.  Interestingly, despite a high-profile meeting between President Trump and Japanese PM Takaichi, where Trump was effusive in his support for the new PM and her plans to increase defense spending, Japanese equities were under pressure all evening, slipping -0.6%.  Too, both China (-0.5%) and HK (-0.3%) could find no traction despite the news that a trade deal was imminent.  In fact, the entire region was under pressure with losses in Korea, Taiwan, Australia and virtually every market there.  Was this a sell the news event?  That seems unlikely to me, but maybe.  As to Europe, pretty much every major index is modestly softer this morning, down between -0.1% and -0.2%, so not terrible, but clearly not following the US.  As to US futures, at this hour (7:30), they are little changed to slightly higher.

Global bond markets are quiet this morning, with almost all unchanged or seeing yields slip -1bp.  While US yields have been trending lower, in Europe, I would say things are more that yields have stopped rising and, perhaps, topped, but are not yet really declining in any meaningful fashion yet.  Germany’s bund market, pictured below, exemplifies the recent price action.

Source: tradingeconomics.com

One interesting note is that JGB yields slipped -3bps overnight, despite PM Takaichi reaffirming that the defense budget was going up with no funding mentioned.  Like I said, the world is a better place this morning!

In the commodity markets, gold (-1.5%) continues to get punished as all those who were chasing the haven story have been stopped out.  The price went parabolic two weeks ago, and price action like that cannot hold for any length of time.  This has taken silver (-1.1%) and copper (-0.5%) lower as well, and I suspect that there could well be further to decline.  Oil (-1.1%) meanwhile seems far less concerned about the sanctions on Lukoil and Rosneft this morning.  The conundrum here is if the economy is performing well, that would seem to be a positive demand driver.  I have not seen word of major new oil sources being discovered to increase supply dramatically, but if you think back to last week, the narrative was all about a glut.  I guess we will learn more with inventory data this week.

Finally, the dollar… well nobody really seems to care.  As you can see from the below chart of the DXY, it is approaching six months where the index has traded in a very narrow range, and we are pretty close to the middle.  I don’t know the catalyst that will be needed to change this story, but frankly, I suspect that nobody (other than FX traders) is unhappy with the current situation.

Source: tradingeconomics.com

It’s not that there aren’t currencies that move around on a given day, but there is no broad trend in place here.

On the data front, the key release today is the Case-Shiller Home Price Index (exp 1.9%) and then the Richmond Fed Manufacturing Index (-14) is also due later this morning.  However, all eyes are on tomorrow’s FOMC outcome with the focus likely to be more on QT and its potential ending, than on the rate cuts, which are universally expected.  One other thing, with the government shutdown ongoing, GDP and PCE data, which were originally scheduled for this week, will not be released.

Life is good!  That is the only conclusion I can draw right now based on the ongoing strength in risk assets, at least US risk assets.  Keynes was the one who said, markets can remain irrational longer than you can remain solvent, and I have a feeling that we are approaching some irrationality.  But for now, enjoy the ride and if FX is your arena, I just don’t see a reason for any movement.

Good luck

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What Havoc it Wreaks

Posted on by

Today, for the first time in weeks
Comes news that will thrill data geeks
It’s CPI Day
So, what will it say?
We’ll soon see what havoc it wreaks
 
The forecast is zero point three
Too high, almost all would agree
But Jay and the Fed
When looking ahead
Will cut rates despite what they see

 

Spare a thought for the ‘essential’ BLS employees who were called back to the office during the shutdown so that they could prepare this month’s CPI report.  The importance of this particular report is it helps define the COLA adjustments to Social Security for 2026, so they wanted a real number, not merely the interpolation that would have otherwise been used.  Expectations for the outcome are Headline (0.4% M/M, 3.1% Y/Y) and Core (0.3% M/M, 3.1% Y/Y) with both still well above the Fed’s 2% target.  As an aside, we are also due Michigan Sentiment (55.0), but I suspect that will have far less impact on markets.

If we consider the Fed and its stable prices mandate, one could fairly make the case that they have not done a very good job, on their own terms, when looking at the chart below which shows that the last time Core CPI was at or below their self-defined target of 2.0% was four and one-half years ago in March 2021.  And it’s not happening this month either.

Source: tradingeconomics.com

Now, when we consider the Fed and its toolkit, the primary monetary policy tool it uses is the adjustment of short-term interest rates.  The FOMC meets next Tuesday and Wednesday and will release its latest statement Wednesday afternoon followed by Chairman Powell’s press conference.  A quick look at the Fed funds futures market pricing shows us that despite the Fed’s singular inability to push inflation back toward its own target using its favorite tool, it is going to continue to cut interest rates and by the end of this year, Fed funds seem highly likely to be 50bps lower than their current level.

Source: cmegroup.com

The other tool that the Fed utilizes to address its monetary policy goals is the size of its balance sheet, as ever since the GFC and the first wave of ‘emergency’ QE, buying (policy ease) and selling (policy tightening) bonds has been a key part of their activities.  As you can see from the chart below, despite the 125bps of interest rate cuts since September of 2024 designed to ease policy, they continue to shrink the balance sheet (tighten policy) which may be why they have had net only a modest impact on things in the economy.  Driving with one foot on the gas and one on the brake tends to impede progress.

But now, the word is the Fed will completely stop balance sheet shrinkage by the end of the year, something we are likely to hear next Wednesday, as there has been much discussion amongst the pointy-head set about whether the Fed’s balance sheet now contains merely “ample” reserves rather than the previous description of “abundant” reserves.  And this is where it is important to understand Fedspeak, because on the surface, those two words seem awfully similar.  As I sought an official definition of each, I couldn’t help but notice that they both are synonyms of plentiful.

These are the sorts of things that, I believe, reduces the Fed’s credibility.  They sound far more like Humpty Dumpty (“When I use a word, it means just what I choose it to mean – neither more nor less.”) than like a group that analyses data to help in decision making.  

At any rate, no matter today’s result, it is pretty clear that Fed funds rates are going lower.  The thing is, the market has already priced for that outcome, so we will need to see some significant data surprises, either much weaker or stronger, to change views in interest rate sensitive markets like bonds and FX.

As to the shutdown, there is no indication that it is going to end anytime soon.  The irony is that the continuing resolution passed by the House was due to expire on November 21st.  it strikes me that even if they come back on Monday, they won’t have time to do the things that the CR was supposed to allow.  

Ok, let’s look at what happened overnight.  Yesterday’s rally in the US was followed by strength in Japan (+1.35%) after PM Takaichi indicated that they would spend more money but didn’t need to borrow any more (not sure how that works) while both China (+1.2%) and HK (+0.7%) also rallied on the confirmation that Presidents Trump and Xi will be meeting next week.  Elsewhere, Korea and Thailand had strong sessions while India, Taiwan and Australia all closed in the red.  And red is the color in Europe this morning with the CAC (-0.6%) the main laggard after weaker than forecast PMI data, while the rest of Europe and the UK all suffer very modest losses, around -0.1%.  US futures, though, are higher by 0.35% at this hour (7:20).

In the bond market, Treasury yields edged higher again overnight, up 1bp while European sovereigns have had a rougher go of things with yields climbing between 3bps and 4bps across the board.  While the French PMI data was weak, Germany and the rest of the continent showed resilience which, while it hasn’t seemed to help equities, has hurt bonds a bit.  Interestingly, despite the Takaichi comments about more spending, JGB yields slipped -1bp.

In the commodity space, oil (+0.7%) continues its rebound from the lows at the beginning of the week as the sanctions against the Russian oil majors clearly have the market nervous.  Of course, despite the sharp rally this week, oil remains in the middle of its trading range, and at about $62/bbl, cannot be considered rich.  Meanwhile, metals markets continue their recent extraordinary volatility, with pretty sharp declines (Au -1.7%, Ag -0.9%, Pt -2.1%) after sharp rallies yesterday.  There seems to be quite the battle ongoing here with positions being flushed out and delivery questions being raised for both futures and ETFs.  Nothing has changed my long-term view that fiat currencies will suffer vs. precious metals, but the trip can be quite volatile in the short run.

Finally, the dollar continues to creep higher vs. its fiat compatriots, with JPY (-.25%) pushing back toward recent lows (dollar highs) after the Takaichi spending plan announcements.  But, again, while the broad trend is clear, the largest movement is in PLN (-0.4%) hardly the sign of a major move.

And that’s all there is today.  We await the data and then go from there.  Even if the numbers are right at expectations, 0.3% annualizes to about 3.6%, far above the Fed’s target and much higher than we had all become accustomed to in the period between the GFC and Covid.  But remember, central bankers, almost to a wo(man) tend toward the dovish side, so I think we all need to be prepared for higher prices and weaker fiat currencies, although still, the dollar feels like the best of a bad lot.

There will be no poetry Monday as I will be heading to the AFP conference in Boston to present about a systematic way to more effectively utilize FX collars as a hedging tool.  But things will resume on Tuesday.

Good luck and good weekend

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Has, Now, the Bell Tolled?

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The pundits are still talking gold
But what is the reason it sold?
Liquidity drying
Means selling, not buying
Of havens. Has, now, the bell tolled?

 

One of the great things about FinX (FKA FinTwit) is that there are still a remarkable number of very smart folks who post things that help us better understand market gyrations.  The recent parabolic rise and this week’s reversal in the price of the barbarous relic seem unrelated to any concept of fundamentals one might have.  After all, perhaps the only fundamental that impacts gold is the rate of inflation, and since we haven’t seen a reading there in a month, it seems unlikely that had anything to do with this price action.  However, there is a far more likely explanation for the move lower, which has been very impressive in any context.  First, look at the chart below from tradingeconomics.com which shows the daily bars for the past 6 months.  The rise since early September has been nothing short of remarkable.

This begs two questions; first, why did it rise so far so fast, and second, what the heck happened on Friday to turn it around so dramatically?

The first question has several pieces to its answer including ongoing concerns over fiat currencies in general (the debasement trade that became popular), increased central bank buying and a recent change in financial advisors’ collective thought process about the merits of holding gold in an investment portfolio.  In fact, I think it was Bank of America (but I could be wrong) that recently suggested that the 60:40 portfolio should really be 60:20:20 with the final 20% being gold!  Given the human condition of jumping on bandwagons, it is no surprise that this type of ‘analysis’ has become more popular lately.  Whatever the driver, or combination of drivers, the price action was remarkable and clearly overdone.  After all, compare the current price, even after the recent sharp decline, to the 50-day moving average (the blue line on the chart) as an indicator of the extreme aspect of the price action.

But let’s focus on the last few days and the sharp reversal, which takes me back to X.  There is an account there (@_The_Prophet_) who put out an excellent step by step rationale of what led up to yesterday’s dramatic decline and why it is important.  I cannot recommend it highly enough as a short read.

In sum, his point is, and I fully subscribe to this idea, that when things get tough, investors/traders/speculators sell what they can sell, not what they want to sell.  If liquidity is drying up for the funding of speculative assets that are highly leveraged, then when margin and collateral calls come, and they always do, those owners sell whatever they have that they can liquidate.  In this case, given the massive run up in the price of gold, there was a significant amount of value to be drawn down and utilized to satisfy those margin calls.  

History has shown this to be the case time and again.  I would point to the Long-Term Capital Management fiasco back in 1998 where the Nobel Prize winning fund managers quickly found out that liquidity was much more important than ideas and they were forced to sell out their Treasury holdings rather than their leveraged positions because the former had prices and the latter didn’t.  This ultimately led to the liquidation of their fund along with some $5 billion in capital.

There has been much discussion as to the nature of the recent rise in asset prices with many pundits calling it the everything bubble.  Bubbles are created when central banks pump significant liquidity into the system and this is no different.  We know the Fed has allegedly (look at the graph of M2 below to see how much they have been increasing money supply during their tightening) been trying to reduce its balance sheet (i.e. liquidity) but this could well be a sign that phase is over.  Typically, the next step is QE in some form, so beware.  And when that comes, you can be sure that gold will rally sharply once again!

Of course, while the gold move has been the most spectacular, we have seen a lot more market volatility in the past several sessions, so let’s look at how things behaved overnight.  Yesterday’s mixed US session was followed by more laggards than leaders in Asia with Japan essentially unchanged, while HK (-0.9%) and China (-0.3%) both slid a bit.  Recent comments by President Trump that he may not sit down with President Xi next week have investors and traders there nervous.  Elsewhere, Korea (+1.5%) and Thailand (+1.1%) had solid sessions while the rest of the region (Indonesia -1.0%, Malaysia -0.9%, Australia -0.7%) all lagged.

In Europe, the UK (+0.9%) is benefitting this morning from softer than expected inflation readings (3.8% vs 4.0% expected) which has tongues wagging that the BOE will now be cutting rates.  The market priced probability has risen to 60% for a cut this year, up from 40% yesterday, before this morning’s data release.  However, on the continent, only Spain (+0.6%) is showing any life on local earnings performance while the rest of the markets are all lower by varying degrees between -0.1% and -0.5%.  As to US futures, at this hour (7:20) they are unchanged.

Bond markets continue to see yields slide lower with Treasuries (-1bp) now nicely below 4.00% and trading at their lowest level in more than a year (see below)

Source: tradingeconomics.com

European sovereign yields have seen similar movement, edging lower by -1bp except for UK gilts, which have fallen -10bps this morning after that inflation report.  Perhaps more interesting is the fact that despite Takaichi-san becoming PM, with her platform of increased fiscal spending, JGB yields are 2bps lower this morning.

Turning to the rest of the commodity space, oil (+2.1%) is rising on the news that the US has started to refill the SPR.  While the initial bid is only for 1 million barrels, this is seen as the beginning of the process with the administration taking advantage of the recent low prices.  Arguably, given they want to see more drilling as well, it is very possible that $55/bbl is as low as they really want it to go.  As to the metals beyond gold (-2.4% this morning), silver (-1.6%) is still getting dragged along but copper (+0.6%) and platinum (+0.9%) seem to be consolidating after sharp declines in both.  My sense is gold remains the liquidity asset of choice given its far larger market value.  (One other thing to note is that there was much discussion how gold has replaced Treasuries as the most widely held central bank reserve asset.  That was entirely a valuation story, not a purchase story.  In other words, the dramatic rise in the price of gold increased the value of its holdings relative to other assets on central bank balance sheets.)  

Finally, the dollar is doing just fine.  It continues within its recent trading range and basically hasn’t gone anywhere in the past six months.  In fact, of you look at the DXY chart below from Yahoo Finance, it is arguably in the upper quintiles of its long-term price action.  It is very difficult for me to listen to all the reasons that the dollar is going to be replaced by some other reserve currency and take it very seriously.

As to specific currency moves today, the pound (-0.3%) is slipping on the increased belief in a rate cut coming soon and ZAR (-0.5%) is suffering on the ongoing gold price decline but away from those two, +/-0.1% is the story of the day.

EIA Crude Oil inventories are the only data of the day with a modest build expected.  Yesterday, Governor Waller discussed payment systems and cryptocurrencies never straying into monetary policy so we will need to wait for CPI on Friday, the FOMC next Wednesday and whenever the government reopens, which I sense is coming sooner rather than later as the Democrats have been completely unsuccessful in making the case this is President Trump’s fault.  

It appears the cracks in the leverage that has accompanied the recent rally in asset prices are beginning to appear.  If things get worse, and they probably will, look for the Fed to respond and haven assets to be in demand.  Amongst those will be the dollar.

Good luck

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