Tag Archives: #Fed

Printing Up Gobs

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The balance sheet, so said Chair Jay
Is really the very best way
For policy ease
And so, if you please,
QT is soon going away
 
Rate cuts are now back on the table
As we work quite hard to enable
Those folks lacking jobs
By printing up gobs
Of cash, just as fast as we’re able

 

Chairman Powell spoke yesterday morning in Philadelphia at the NABE meeting and the TL; DR is that QT, the process of shrinking the Fed’s balance sheet, is coming to an end.  Below is a chart showing the Fed’s balance sheet assets over the past 20+ years.  I have highlighted the first foray into QE, during the financial crisis, and you can see how that balance sheet has grown and evolved since then.

And the below chart is one I created from FRED data showing the Fed’s balance sheet as a percentage of the nation’s GDP.

Pretty similar looking, right?  The history shows that the GFC qualitatively changed the way the Fed managed monetary policy, and by extension their efforts at managing the economy.  As is frequently the case, QE was envisioned as an emergency policy to address the unfolding financial crisis in 2008, but as Milton Friedman warned us in 1984, “Nothing is so permanent as a temporary government program.”  QE is now one of the key tools in the Fed’s toolkit as they try to achieve their mandates.

There has been a great deal of discussion regarding the issue of the size of the Fed’s balance sheet, paying interest on reserves, something that started back in 2008 as well, and what the proper role for the Fed should be.  But I assure you, this is not the venue to determine those answers. 

However, of more importance than the speech, per se, was that during the Q&A that followed, Mr Powell explained that the Fed was soon reaching the point where they were going to end QT, and that they were going to seek to change the tenor of the balance sheet to own more short-term assets, T-bills, than the current allocation of holding more long-term assets including T-bonds and MBS.  And this was what the market wanted to hear.  While both the NASDAQ and S&P 500 both closed slightly lower on the day, as you can see from the chart below, the response to Powell’s speech was immediate and impressive.

Source: tradingeconomics.com

Too, other markets also responded to the news in a similar manner, with gold, as per the below chart accelerating its move higher.

Source: tradingeconomics.com

While the dollar, as per the DXY, responded in an equally forceful manner, falling sharply at the same time.

Source: tradingeconomics.com

Summing up, Chairman Powell basically just told us that inflation was no longer a fight they were willing to have and support of the economy and employment is Job #1.  Of course, this may not work out that well for long-term bond yields, which when if inflation rises are likely to rise as well, I think Powell knows that he will be gone by the time that becomes a problem, so maybe doesn’t care as much.

But here’s something to consider; there has been a great deal of talk about the animus between the Fed and the Treasury, or perhaps between Powell and Trump, but Treasury Secretary Bessent has already made clear they will be issuing more T-bills and less T-bonds going forward, which is a perfect fit for the Fed’s proposition to hold more T-bills and less T-bonds going forward.  This is not a coincidence.

Now, while that was the subject that got most tongues wagging in the market, the other story of note was the ongoing trade spat between the US and China.  It is hard to keep up with all the changes although it appears that soy oil imports from China are now on the menu of items to be tariffed, and the WSJ this morning explained that China is going to try to pressure President Trump by doing things to undermine the stock market as they see that as a vulnerability.  Funnily enough, I think Trump cares less about the stock market this time around than last time, as he is far more focused on issues like reindustrialization and jobs here and elevating labor relative to capital, which by its very nature implies stock market underperformance.

But that’s where things stand now. So, let’s take a turn around markets overnight.  Despite a mixed picture in the US, Asian equity markets had a fine time with Tokyo (+1.8%), China (+1.5%) and HK (+1.8%) all rallying sharply on the prospect of further Fed ease.  Regarding trade, given the meeting between Presidents Trump and Xi is still on the schedule, I think that many are watching the public back and forth and assuming it is posturing.  As well, Chinese inflation data was released showing deflation accelerating, -0.3% Y/Y, and that led to thoughts of further Chinese stimulus to support the economy there.  Of course, their stimulus so far has been underwhelming, at best.  Elsewhere in the region, green was also the theme with Korea (+2.7%), India (+0.7%), Taiwan (+1.8%) and Australia (+1.0%) all having strong sessions.  One other thing about India is the central bank there intervened aggressively in the FX market with the rupee (+0.9%) retracing to its strongest level in a month as the RBI starts to get more concerned over the inflationary impacts of a constantly weakening currency.

In Europe, the CAC (+2.4%) is leading the way higher after LVMH reported better than expected earnings (Isn’t it funny that the US market is dependent on NVDA while the French market is dependent on LVMH?  Talk about differences in the economy!), and while that has given a positive flavor to other markets, they have not seen the same type of movement with the DAX (+0.1%) and IBEX (+0.7%) holding up well while the FTSE 100 (-0.6%) continues to suffer from UK policies.  As to US futures, at this hour (7:40) they are all firmer by 0.5% to 0.9%.

In the bond market, yields continue to edge lower with Treasuries (-2bps) actually lagging the European sovereign market where yields have declined between -3bps and -4bps across the board.  In fact, UK gilts (-5bps) are doing best as investors are growing more comfortable with the idea the BOE is going to cut rates again after some dovish comments from Governor Bailey yesterday.

In the commodity space, oil (+0.2%) is consolidating after it fell again yesterday and is now lower by nearly -6% in the past week.  However, the story continues to be metals with gold (+1.3%), silver (+2.8%), copper (+0.5%) and platinum (+1.7%) all seeing continued demand as the theme of owning stuff that hurts if you drop it on your foot remains a driving force in the markets.  And as long as central banks are hinting that they are going to debase fiat currencies further, this trend will continue.

Finally, the dollar, as discussed above, is softer, down about -0.25% vs. most of its G10 counterparts this morning although NOK (+0.8%) is the leader in what appears to be some profit taking after an exaggerated decline on the back of oil’s decline.  In the EMG bloc, we have already discussed INR, and after that, quite frankly, it has not been all that impressive with the dollar broadly slipping about -0.2% against virtually the rest of the bloc.

On the data front, we see Empire State Manufacturing (exp -1.0) and get the Fed’s Beige Book at 2:00 this afternoon.  Four more Fed speakers are on the docket, with two, Miran and Waller, certainly on board for rate cuts, with the other two, Schmid and Bostic, likely to have a more moderated view.  Earlier this morning Eurozone IP (-1.2%) showed that Europe is hardly moving along that well.  Meanwhile, despite the excitement about Powell’s comments, the Fed funds futures market is essentially unchanged at 98% for an October cut and 95% for another in December.  I understand why the dollar slipped yesterday, but until those numbers start to move more aggressively, I suspect the dollar’s decline will be muted.

One other thing, rumor is that the BLS will be reporting the CPI data a week from Friday at 8:30am as they need it to calculate the COLA for Social Security for 2026.  If that is hot, and I understand that expectations are for 0.35% M/M, Chairman Powell and his crew may find they have a really tough choice to make the following week.

Good luck

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Many Ructions

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Just two days before Halloween
When Jay and his minions convene
With great joie de vivre
Investors believe
A quarter-point cut will be seen
 
But what if the model that Jay
Consults might have led him astray
Then Fed fund reductions
May cause many ructions
In markets, and too, the beltway

 

I have often discussed the fact that the models the Fed uses no longer seem to work very effectively as evidenced by the tardiness of their reaction function and the results that occur after the fact.  Consider, the Fed was uniformly convinced that inflation was transitory in 2021 and 2022, right up until it hit 7% when it finally dawned on them that it wasn’t.  I would argue that part of the problem is they continue to utilize a Keynesian framework, which has not proven to be very effective for monetary policy (although it’s great for politicians as a fiscal policy excuse to spend more money.)

But I am just a poet and my voice is not so loud in financial markets.  However, John Mauldin is someone with much greater reach and his letter this week highlighted that exact issue. (For those of you who are not familiar with John, his weekly letter, “Thoughts from the Frontline” is usually an excellent read and completely free, you should sign up.)  At any rate, he reprinted a chart originally in the WSJ that I think does an excellent job of demonstrating the flaws in models developed pre-Covid.

It is quite apparent how this particular model, which appears to use the type of inputs that most econometric models utilize, had done a pretty good job, even throughout the GFC, of anticipating changes in consumer sentiment right up until Covid.  However, it is also clear that since then, it has a terrible track record.  

And this is the problem.  I would wager that every one of the models built by the hundreds of PhD’s at the Fed has a similar problem, things that used to drive economic decision making no longer do.  I guess when people get used to the government supporting them completely, many are willing to sit back and do nothing.  And when that support stops, it appears that people aren’t very happy about that situation.  Go figure!

The bigger picture here is that I believe it is time for the Fed to question its own modeling prowess.  Consider the situation that with interest rates at their current levels of 4% +/- a bit depending on the tenor, many people, especially retirees, were quite content to clip coupons and were spending those funds supporting the economy.  At the same time, interest expense for small companies never really fell that far, so current rates are not deathly. 

But you know who benefits from low interest rates?  The government and large corporations who have access to capital markets and pay the lowest rates.  And even there, companies like Apple, Google and Microsoft have so much cash on hand that they are net earning interest with higher rates.

All this begs the question, what is the purpose of the Fed cutting rates?  A key risk is that inflation will return with a vengeance.  It has been 55 months since core PCE was at or below the Fed’s target level of 2.0% as you can see in the below chart, and I feel confident in saying that when the data is released this Friday, it will not be changing that trend.

Source: tradingeconomics.com

So, savers will suffer as their income will be reduced, the risk of rising inflation will increase as easier monetary policy typically precedes that type of movement, and long-term yields, which have rebounded recently, run the risk of starting higher again.  Remember what happened last year when the Fed cut, 10-year Treasury yields rose 100bps. (see chart below)

Source: tradingeconomics.com

It is far too early to claim the outcome will be the same this time, but it is a real risk.  After all, bond yields have a strong relationship with inflation, running at a long-term correlation of 0.36 and as can be seen in the chart below I prepared from FRED data.

Concluding, the current batch of economic models utilized by analysts and the Fed appear to have limited ability to describe the economy, whether it is because of the asynchronous nature of the current state of the world, or because the unprecedented government responses around the world to the Covid pandemic have changed the way everything works.  The market is pricing a 93% probability of another rate cut in October, and it appears Chairman Powell believes that to be the case.  But is it the right move at this time?  I feel like that is not the question being asked, but it needs to be by people more powerful than this poet.

Ok, I’ll step down from my soapbox to survey the market activity overnight.  Friday’s US closes at yet more all-time highs were followed by a more mixed session in Asia.  While Japanese investors got the joke, with the Nikkei rising 1.0%, Hong Kong (-0.8%) and India (-0.6%) were both under pressure with the former suffering from a strengthening currency and concern about a major typhoon about to hit the island nation, while India is suffering from the backlash of the Trump policy change on H1-b visas, now charging $100,000 for them.  It turns out Indian firms were the largest user of those visas and there is concern over a serious economic impact there.  Otherwise, the region saw a mixture of green (China, Taiwan, Australia, Malaysia) and red (New Zealand, Indonesia, Singapore, Thailand).

European bourses, though, are having a tougher time this morning with the continental exchanges all under pressure (DAX -0.7%, CAC -0.3%, IBEX -1.0%, FTSE MIB -1.0%) as concerns rise over the Flash PMI data to be released tomorrow and the idea it may show a much weaker economy than previously considered.  As well, USD futures are softer at this hour (6:40), with all three major indices showing declines on the order of -0.25%.  However, we must keep in mind that the trend in equity markets has been strongly higher so a modest pullback would not be a surprise and perhaps should be welcomed.

In the bond market, yields having moved higher on Friday, are quite stable this morning with Treasury yields unchanged and most of Europe seeing a -1bp decline.  The only outlier here is Japan, where JGB yields topped 1.65%, a new high for the move and the highest level since 2008 as per the below chart from marketwatch.com.  Ueda-san has to start getting worried soon, I think.

In the commodity space, oil (-0.7%) is continuing its recent decline but remains within the trading range and doesn’t appear to have much impetus in the short term in either direction.  However, I continue to look for an eventual decline here.  As to gold (+1.15%) and silver (+1.6%), nothing is going to stop this train.  Well, certainly there is no indication that policy changes are coming anywhere in the world that would force investors to rethink the idea of continuous depreciation of fiat currencies, and let’s face it, that’s all this represents.  I continue to see analysts raise their target price for the barbarous relic and I agree there is plenty of room to run as interest has been modest, at best, by Western investors.

Finally, the dollar is a touch softer this morning with both the euro (+0.25%) and pound (+0.25%) leading the way in the G10, although the yen is basically unchanged.  There was an interesting story in Bloombergdiscussing how volatility in the FX markets has been declining rapidly with many attributing this to the rise of algorithmic trading.  As well, all over X this morning are stories about how the dollar’s decline this year (about -14% vs. the euro) is unprecedented.  It’s not at all which is one of the reasons you need be careful about what people put up there.  It seems that some analysts are putting undue emphasis on the starting point being January 1st, rather than when the market tops.  But saying the dollar is declining in an unprecedented manner is absurd and picayune.  Meanwhile, EMG currencies are all over the place with gainers (KRW +0.4%, ZAR +0.4%) and laggards (MXN -0.5%, INR -0.25%) and everything in between.  

On the data front, PCE is Friday’s offering, but before then there is some stuff and more interestingly, there is lots of Fed speak.

TodayChicago Fed National Activity-0.17
TuesdayFlash Manufacturing PMI52.0
 Flash Services PMI53.9
WednesdayNew Home Sales650K
ThursdayDurable Goods-0.5%
 -ex transport-0.2%
 GDP (Q2)3.3%
 Initial Claims235K
 Continuing Claims1930K
 Existing Home Sales3.96M
FridayPCE0.3% (2.7% Y/Y)
 Core PCE0.2% (2.9% Y/Y)
 Personal Income0.3%
 Personal Spending0.5%
 Michigan Sentiment55.4

Source: tradingeconomics.com

On top of the data, we hear from…wait for it…ten different Fed speakers, including Chair Powell tomorrow, across 16 different events.  I expected to hear from a lot as there is clearly no real consensus at this point in time there.

People love to hate the dollar, and if the Fed is going to ease more aggressively, I understand that, but longer term, I think the story is different.  Just be careful.

Good luck

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A Centruy Hence

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A century hence
The BOJ’s equities
May well have been sold
 
But policy rates
Were left unchanged yet again
What of inflation?

 

Finishing up our week filled with central bank meetings, the BOJ left rates untouched last night, as universally expected, and really didn’t indicate when they might consider the next rate hike.  Ueda-san has the same problem as Powell-san in that inflation continues to run hotter than target while the economy appears to be struggling along.  In addition, the political situation in Tokyo is quite uncertain as PM Ishiba has stepped down and a new LDP leadership election is set to be held on October 4th with the two leading candidates espousing somewhat different views of the future.  If I were Ueda, I wouldn’t do anything about rates either.  Interestingly, there were two dissents on the BOJ board with both calling for another rate hike.

But there was a policy change, albeit one that does not feel like it is going to have a significant impact for quite some time.  The BOJ has decided to start to sell its equity and ETF holdings, which currently total about ¥37.2 trillion, at the annual rate of…¥330 billion.  At this pace, it will take almost 113 years for the BOJ to unwind the “temporarily” purchased equities acquired during the GFC to support the market.  While the Nikkei initially fell about 2% after the announcement, it rebounded over the rest of the session to close lower by a mere -0.6%.  However, in a strong advertisement for the concept of buy and hold, a look at the below chart shows when they started buying and how well the BOJ has done.

Source: finance.yahoo.com

There is no indication that the BOJ has unrealized losses on their balance sheet like the Fed does!

What of USDJPY you might ask?  And the answer is, nothing.  It is essentially unchanged on the day and in truth, as you can see from the chart below, it has done very little for the past 5+ months, trading at the exact same level as prior to the Liberation Day tariff announcements.  While there was an initial decline in the dollar then, that was a universal against all currencies, but we are back to where we were.

Source: tradingeconomics.com

Consider, too, that over the course of the past year, the Fed has cut Fed funds by 125bps while the BOJ has raised their base rate by 60bps, and yet spot USDJPY is effectively unchanged.  Perhaps, short-term interest rate differentials aren’t always the driver of the FX market after all. 

In fact, there is a case to be made that the driver in USDJPY is the capital flowing out of Japan by fixed income investors as they seek a less chaotic situation than they have at home.  This could well be the reason for the ongoing rise in long-dated JGB yields to record after record, while Treasury yields seem to have found a top.  Recall, in the latest 10-year auction, dealers took down only 4% of the auction with foreign interest rising to 71%.  While there has been much discussion amongst the punditry of how nobody wants to buy Treasuries and they are no longer the haven asset of old, the nobody of whom they speak are foreign central banks.  But foreign private investors seem pretty happy to scoop them up and are doing so at a remarkable pace.  I think there are a few more years left before the dollar disappears.

Ok, let’s tour the markets here as we reach the end of the week.  Record highs across the board in the US yesterday as investors apparently decided that the Fed was just like Goldilocks, not too hawkish and not too dovish.  And the hits keep on coming this morning as futures are all higher by about 0.25% at this hour (7:15).  As to Asia, we discussed Japan already, and both China and HK were unchanged.  But elsewhere in the region, the euphoria was not apparent as Korea, India, Taiwan, Singapore and Thailand all fell by at least -0.3% or more while Australia, New Zealand and Indonesia were the only gainers, also at the margin on the order of 0.3% or so.

Europe this morning is also mixed with the DAX (-0.2%) lagging after weaker than expected PPI data indicated that economic activity is slowing more rapidly than anticipated, while both the CAC (+0.2%) and IBEX (+0.4%) are edging higher absent any new data.  There was a comment by an ECB member, Centeno from Portugal, that the ECB needs to be wary of “too low” inflation, a particularly tone-deaf comment after the past several years!  But I guess that is the first hint that the ECB is ready to cut again.

In the bond market, Treasury yields have been bouncing since the FOMC meeting and are now higher by 13bps since immediately after the FOMC statement.  Again, my view is this is a case of selling the news after the market was pricing in the rate cut ahead of the meeting.  I would argue that no matter how you draw the trend line of the decline in yields over the past several months, we are nowhere near testing it.

Source: tradingeconomics.com

And in what cannot be a surprise, European sovereign yields are all rising alongside Treasuries, with today’s bump up of another 1bp to 2bps adding onto yesterday’s 5bp to 7bp raise across the board.  As well, we cannot ignore JGBs which have jumped 4bps after the BOJ meeting last night.  I guess Japanese investors didn’t get any warm and fuzzy feelings about how Ueda-san is going to fight inflation.

Turning to commodities, oil (-0.4%) remains firmly within its recent range, ignoring Russai/Ukraine news as well as inventory data and economic statistics.  I don’t know what it will take to change this equation, but it certainly seems like we will be in this range for a while yet.  Peace in Ukraine maybe does it, or a major escalation there.  Otherwise, I am open to suggestions.  Gold (+0.2%) continues to be accumulated by central banks around the world as well as retail investors in Asia, although Western investors appear oblivious despite its remarkable run.  Silver (+0.7%) too is rallying and has been outperforming gold of late.  Perhaps of more interest is that the precious metals are doing so well despite the dollar’s rebound in the FX markets.

Speaking of which, this morning the dollar is firmer by 0.25% to 0.4% vs most of its G10 counterparts although some of the Emerging Market currencies are holding up better.  So, the euro (-0.25%), pound (-0.5%), AUD (-0.25%), CHF (-0.35%) and SEK (-0.6%) are defining the G10 with only the yen (0.0%) bucking the trend.  As to the EMG currencies, HUF (-0.65%), KRW (-0.6%) and PLN (-0.3%) are the laggards with the rest showing far less movement.  However, while short dollar positions are rife, there is not much joy there lately.  I grant that the trend in the dollar is lower, and we did see a new low for the move print in the immediate aftermath of the FOMC meeting, but it appears that people have not yet abandoned the greenback entirely.  Perhaps the lure of more new record highs in the stock market is enough to get foreigners to reconsider their “end of American exceptionalism” idea.

There is no data today nor are any Fed speakers on the calendar.  Perhaps the most notable data we have seen is UK Public Sector Net Borrowing, which fell to -£17.96B, a massive jump from last month and much worse than expected.  As you can see from the chart below, while there is much angst over US budget deficits, at least the US has the reserve currency on which to stand.  The UK has nothing, and the fiscal situation there is becoming more dire each day.  Yet another reason that the Starmer government can fall sooner rather than later.

Source: tradingeconomics.com

It is hard to look at that chart and think, damn, I want to buy the pound!  

For all the hate it gets, the dollar is still the cleanest dirty shirt in the laundry, and while it may trade somewhat lower in the near term, it will find its legs and rebound.

Good luck and good weekend

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More Insane

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Though debt round the world keeps on growing
The equity run isn’t slowing
But what’s more insane
Is yields slowly wane
Despite signs inflation ain’t slowing
 
The French are the latest to hear
Their credit’s somewhat less sincere
But CBs this week
Seem likely to tweak
Rates lower, and markets will cheer

 

Something is rotten in the state of financial markets, or at least that is the conclusion this poet has drawn (and please do not think I am trying to compare myself to Shakespeare).  No matter what my personal view of the economy may be, I cannot help but look at the recent performance of the equity market and the bond market and be extremely confused.  The chart below shows the past year’s price action in the S&P 500 (blue line) and US 10-year yields (green line). 

Source: tradingeconomics.com

Since early June, the two price series, which have historically had a pretty decent correlation, have gone in completely opposite directions.  Equity markets continue to trade to new highs on a regular basis as earnings multiples continue their expansion.  Typically, multiples only expand when growth expectations are rising, and the economy is in an uptrend.  Ergo, if multiples are high and rising, it seems equity investors believe that is the case.  I understand that view as there are strong indications the administration is going to continue to ‘run the economy hot’ meaning do all it can to increase economic activity and allow inflation to rise as well, counting on the fast growth to offset the pain.

However, 10-year Treasury yields have been sliding steadily for the past three months despite the equity market belief in running it hot.  Bond yields have historically been far more sensitive to inflationary pressures and the fact that yields have been declining, down >40bps since early June, would lead to a very different conclusion about the economy, that it is going to see much slower growth and by consequence, reduced inflationary pressures.

I have discussed the asynchronous economy in the past and I believe this is more proof of that thesis.  The equity markets are still being largely driven by the AI/Tech sector and while that is a huge portion of the equity market, its size within the overall economy is pretty small.  Given the capital weightings of both the S&P 500 and NASDAQ, strength in that sector has clearly been sufficient to drive stock indices higher.  However, much of the rest of the economy is not seeing the same benefits, and in fact, there is a portion suffering as AI takes over roles that had been filled by people thus increasing unemployment.  That segment of the economy is much larger, and it seems there is a growing probability that a recession may be coming there.  

Or not, if the administration is able to run it hot.  Ultimately, the thing the makes the least sense to me is that there is no indication that inflation is slowing anywhere back toward the Fed’s alleged 2% target.  Rather CPI looks far more likely to coalesce around the 3.5%-4.0% level which means that PCE, even on a core basis, is going to be hanging around 3.0%.  If the Fed is getting set to cut rates, and by all indication they are going to cut at least 25bps on Wednesday, I think it is clear that 3.0% is the new 2.0%.

And here’s the problem with that. When inflation is low, 2% or less, equities have historically been negatively correlated with bond prices, so if stocks fell, bonds rallied and the 60:40 portfolio had an internal hedge.  But when inflation is higher, and it doesn’t need to be 10%, 4% is enough to change the relationship, equity prices and bond prices tend to move in sync.  This means, if stock prices fall because of a recession, so do bond prices with yields rising.  In that situation, the 60:40 portfolio suffers greatly.  Just think back to 2022 when both equities and bonds fell -30% or so.  Where was inflation?  Right, we were in the throes of the Fed’s last mistake regarding the word transitory.  The below chart is the best I could find to show how things behaved in the 60’s and 70’s with inflation running hot and then how things changed after Mr Volcker began to squash inflation.

Original source: Isabelnet.com

And what of the dollar you may ask?  Well, theoretically, rising inflation should undermine the currency, but rising rates, when central banks fight inflation, should help support it.  However, this time, with rising inflation and the Fed set to cut, it seems the dollar may have some trouble, although as other central banks follow suit, and they will, the dollar will find support.

Ok, let’s see how things behaved overnight.  While Friday’s US session was mixed with only the NASDAQ managing to gain, there was more green in Asia and Europe.  The Japanese celebrated Respect for the Aged Day, so markets there were closed.  However, both HK (+0.2%) and China (+0.25%) managed modest gains despite (because of?) weaker than expected Chinese economic data.  Every aspect of the data, IP, Retail Sales, Investment and Unemployment, printed worse than forecasts and has now encouraged investors to look for further Chinese government stimulus to support the economy.  That theory helped Korea, Malaysia and Indonesia, all showing solid gains, but did nothing for the rest of the region, perhaps most surprisingly Taiwan.

In Europe, Fitch cut France’s credit rating to A+ from AA- based on fiscal deficits and political turmoil (aka no government), yet equity investors saw that as a buy signal with the CAC (+1.15%) leading European shares higher.  The DAX (+0.4%) and IBEX (+0.6%) are also doing well although the FTSE 100 (0.0%) is just treading water.  There has been no data of note, so it appears investors there are anticipating good things from the US where futures are higher by 0.2% at this hour (7:30).

Bond yields in the US are unchanged this morning, but European sovereign yields have slipped -2bps across the board, despite France’s downgrade.  I am really at a loss these days to understand the mind of bond investors.  I guess there is a growing belief that central bank rate cuts are going to help!

In the commodity sector, oil (+0.4%) has edged higher this morning but remains firmly in the middle of its 3-month trading range and is showing no desire to move in either direction.  Metals markets, meanwhile, are basically unchanged this morning, simply sitting at their recent highs with the latest contest on Wall Street being who can forecast the highest price for gold in 2026.  Goldman just explained that $5000/oz is reasonable if just 1% of risk assets move into the relic.

As to the dollar, while it did little most of the evening, as NY is walking in, it is slipping a bit, with the euro (+0.25%) and pound (+0.5%) leading the way higher in the G10, and truthfully across the board as the largest EMG moves are KRW (+0.4%) and HUF (+0.4%) while the rest have moved on the order of 0.1% to 0.2%.  There has been growing chatter that China is now going to allow the renminbi to start to strengthen more steadily (in fairness, it has been strengthening modestly since the beginning of 2025, up about 3% since then), and that this is part of the trade negotiations ongoing with the US currently taking place in Madrid.  But remember, while CNY has been creeping higher this year, a quick look at the chart below shows it has fallen substantially since 2022, having declined more than 17% between 2022 and the beginning of this year.

Source: tradingeconomics.com

On the data front, in addition to the FOMC, there are several other central bank meetings and some important data as follows:

TodayEmpire State Manufacturing5.0
TuesdayRetail Sales0.3%
 -ex autos0.4%
 Control Group0.4%
 IP-0.1%
 Capacity Utilization77.4%
WednesdayIndonesia Rate Decision5.0% (Unchanged)
 Housing Starts1.37M
 Building Permits1.37M
 Bank of Canada Rate Decision2.5% (-0.25%)
 FOMC Decision4.25% (-0.25%)
 Brazil Rate Decision15.0% (unchanged)
ThursdayBOE Rate Decision4.0% (unchanged)
 Initial Claims240K
 Continuing Claims1950K
 Philly Fed2.3
 South Africa Rate Decision7.0% (unchanged)
 Leading Indicators-0.1%
 BOJ Rate Decision0.5% (unchanged)

Source: tradingeconomics.com

So, while Retail Sales may give us some more color on the strength of the economy, it is really a week filled with central bank policy decisions and the ensuing discussions they have to spin things as they desire.  I imagine we will be getting an article from Nickileaks this afternoon or tomorrow to get Powell’s message out, but it remains to be seen if we are watching bond traders buy the rumor and they are set to sell bonds on the news, especially if the Fed goes 50bps, something that remains a real possibility in my mind, though the futures market is pricing just a 4% chance of that as of this morning.

A 50bp cut will undermine the dollar in the short run and may put pressure on the BOE to cut more rather than hold.  Until then, though, I suspect there will be little net movement in either direction.

Good luck

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Is That the Fear?

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Regarding the payroll report
The fear is jobs coming up short
But is that the fear?
Or will traders cheer
As 50bps they will exhort
 
With clarity at the Fed lacking
Because of Ms Cook’s recent sacking
And markets at highs
It seems to be wise
To hedge some exposure you’re tracking

 

Another month, another payroll day.  It certainly seems that the market has not lost any of its appetite for this particular data point, although one must be impressed with the ongoing rally to continuous record highs in share prices.  So, as we get started, let’s look at what expectations are for this morning’s numbers:

Nonfarm Payrolls75K
Private Payrolls75K
Manufacturing Payrolls-5K
Unemployment Rate4.3%
Average Hourly Earnings0.3% (3.7% Y/Y)
Average Weekly Hours34.3
Participation Rate62.1%

Source: tradingeconomics.com

Yesterday’s ADP Employment number was a bit softer than forecast at 54K with a very slight revision higher to the previous month’s reading.  And of course, poor Ms McEntarfer was fired last month after the massive downward revisions to the previous data so as much scrutiny as this number ordinarily receives, it feels like even that has been turned up to 11 this month.  If we look at the Initial Claims data for a signal, (or the 4-week average which removes situations where individual states are late to report) it is hard to get excited about a major problem in the labor market as per the below chart from tradingeconomics.com.

It has pretty much flatlined since the end of the Covid aberration.  Even more impressively, the number is low by much longer-term historical standards when the absolute population was smaller, yet Claims data were typically somewhat higher.  (I capped the Covid situation so you could get a flavor for the rest of the series).  It is hard to look at the last 58 years and describe Initial Claims as pointing to a problem.  While I didn’t shade the chart, you can see the recessions in 1970, 1973, 1980, 1982, 1990, 2001, 2008-9 as the periods when Claims peaked.  Again, it is difficult to look at this data and conclude a recession is around the corner, at least the traditional definition of one.

Source: FRED database

Of course, there is a very different vibe these days regarding employment as evidenced by the discussions you see on LinkedIn or even the stories in the WSJ regarding the unwillingness of people to leave a job as they fear finding a new one.

All this is just my way of saying that the asynchronous nature of the economy means we really don’t know what to expect.  But we can anticipate market reactions depending on the outcome.  FWIW, and remember, I am just a poet:

NFPBondsFed funds futuresStocksDollarGold
>75K4.30%20bps-1%0.50%-1%
35K – 75K4.15%25bps0%0%0%
0K – 35K4.10%35bps1%-0.5%0.20%
<0K3.95%50bps-1%-1.50%1.50%

So, there you have it, one man’s guesses as to how the markets will respond depending on the data.  In essence, it seems to me that the market has been anticipating enough support to cut rates to protect the economy without assuming the economy is going to crash.  That’s why a negative number will be such a problem because that will force a reevaluation of the economic situation and stocks cannot abide a repricing of that risk given the rich valuations. It will demonstrate that the Fed is behind the curve, at least in traders’ minds, and the result will not be pretty.  We shall see.

In the meantime, after yesterday’s rally in the US, equity markets around the world are all in the green this morning despite some mediocre data from Europe.  But starting with Asia, Japan (+1.0%) had a nice session although China (+2.2%) and Hong Kong (+1.4%) put it to shame.  While Japan benefitted from a reduction to 15% on automobile tariffs vs. Japanese cars, Chinese shares jumped on word from the PBOC that they would inject CNY1 trillion into the system and reduced fears of efforts to hold back the rally.  Elsewhere in the region, other than India, which was unchanged on the day, everything else was nicely higher following the main exchanges’ leads.  As to Europe, while all the bourses are higher, the gains are de minimis, on the order of 0.1% or so, with traders caught between hopes of a US rally and ongoing meh data at home.

In the bond markets, Treasury yields are down to 4.15%, lower by -1bp today, but as you can see from the chart below, down 15bps this week as anticipation of either soft data or 50bps, I’m not sure which, builds.

Source: tradingeconomics.com

In Europe, sovereign yields are all lower by -2bps this morning and we saw the same price behavior overnight in Asia with JGB’s and Australian bond yields slipping as well.  Maybe inflation is dead! (just kidding)

In the commodity markets, oil (-0.7%) continues to slide and has given back all the gains that accrued based on the idea that OPEC+ was going to cut production further.  Gold (+0.1%) continues to find support and drag silver and copper along for the ride as the yellow stuff sits at new historic highs.

Finally, the dollar is softer this morning, down about 0.2% to 0.3% vs. the G10 with similar declines across most of the EMG bloc.  I have a feeling this is the market that is anticipating a weak NFP print and a more aggressive Fed come the meeting in two weeks.  Futures, right now, are pointing to a 99% probability of a 25bp cut and a 55% probability of another cut in October.  Any weak print this morning is going to really show up here, as I explained above.

Source: cmegroup.com

And that’s what we have.  There are no Fed speakers lined up, and after today, the Fed enters its quiet period, so we won’t hear anything until the meeting on the 17th.  NFP will set the tone, so until then, all we can do is wait.

Good luck and good weekend

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The Zeitgeist Could Shatter

Posted on by

While crime throughout DC has dropped
And Trump’s Fed demands haven’t stopped
The story today
That really holds sway
Is whether Nvidia’s topped
 
The war in Ukraine doesn’t matter
Nor does if the yield curve is flatter
‘Cause stonks must go higher
And that does require
Good news, or the zeitgeist could shatter

 

Some mornings things just are not that interesting in markets despite the ongoing events happening around the world.  Arguably, the biggest headlines revolve around the remarkable decline in crime in Washington DC, which while most of the mainstream media decried the President’s actions at first, has grown in popularity, even amongst his foes.  From a market perspective, the number of stories and editorials written about President Trump’s efforts to fire Fed governor Lisa Cook has risen exponentially, with many still trying to explain the Fed will lose its independence if Trump is successful.  (Given they have not been independent since 1987, I would take this with a grain of salt).  The other noteworthy story is that the EU is going to fast-track legislation to remove all tariffs throughout the EU on US industrial good imports, one of the results of the trade negotiations.

But, while those may be of passing interest, the thing in markets that really has tongues wagging is the fact that Nvidia is set to release their Q2 earnings this afternoon after the equity markets in the US close.  I must admit, thinking back to the tech bubble in 2000-01, I do not remember any single company garnering the amount of attention that Nvidia gets these days.  Perhaps Cisco Systems is the closest analogy, but it was nowhere near this level of interest and excitement.  While this is an imperfect analysis, I think it is worth looking at the charts of both Nvidia and Cisco (from finance.yahoo.com) to help you see the magnitude of the rise in each case.  It is certainly not hard to draw the conclusion that Nvidia may be peaking.  After all, if it declines by 75%, it will still have a market cap > $1 trillion!

NVDA

CSCO

I think it is reasonable to ask whether AI is a bubble.  I also think it is reasonable to ask whether the so-called hyperscalers, Meta, Microsoft, Alphabet and Amazon, are spending too much on building out their AI platforms.  This would be the case if the promised revenues never materialize.  Certainly, other than for Nvidia, those revenues are paltry at best so far.  But these are all observations from a poet who doesn’t follow the stock closely and simply cannot avoid some of the story because it is so prevalent everywhere.  FWIW, which is probably not very much, my take is that history has shown that new innovations, e.g. the automobile, electricity, the internet, can have remarkably wide-ranging implications but usually take far longer to achieve those ends than equity investors assume.  In other words, the idea that the megacap companies are overvalued seems pretty compelling.

Enough of my amateur equity analysis, and I’m sorry, but that is all that seems to be of interest today.  So, let’s look at how markets have behaved overnight ahead of the news this afternoon.  After modest afternoon rallies resulted in higher closes in the US yesterday, Japan (+0.3%) followed suit as did Australia (+0.3%), but both China (-1.5%) and Hong Kong (-1.3%) fell sharply, reversing some of their recent gains as Chinese industrial profits fell -1.7%, a worse than expected outcome, and it seemed to have triggered some profit taking.  With that in mind, I have read a number of analysts who have become of the opinion that Chinese equities are setting up for a much larger move higher based on additional stimulus as well as the fact that Chinese interest rates are the lowest in the world right now (ex-Switzerland).  Elsewhere in the region, India (-1.0%) lagged alongside China and most of the others had much less movement in either direction.

In Europe, the picture is mixed with the CAC (+0.4%) the leading gainer which looks very much like a reaction to the past two sessions’ sharp declines.  Spain (-0.4%) is lagging, although there is no particular news, and Germany (-0.15%) is also softer after the GfK Consumer Confidence report was released at a weaker than expected -23.6.  As to US futures, at this hour (7:25) they are ever so slightly higher.

In the bond market, despite all the anxiety over the Fed and Trump’s attempt to remove Governor Cook, 10-year yields are higher by 1bp after falling 3bps yesterday.  European sovereign yields are lower by -1bp across the board and JGB yields are unchanged.  In other words, while the media’s hair is on fire, clearly the market’s is not.

In the commodity space, oil (-0.1%) is little changed this morning, maintaining yesterday’s declines which appear to have been a result of Russia seeking to export more crude after Ukrainian attacks on Russian refineries have slowed output.  Gold (-0.6%) which saw a strong rally yesterday is falling back a bit, but remains in that tight range I showed yesterday, although both silver (-0.9%) and copper (-1.3%) are under more pressure this morning, likely on the back of a stronger dollar.

Speaking of the dollar, it is firmer across the board this morning, rising 0.5% vs. the euro, yen and Aussie, with slightly smaller gains vs. the other G10 currencies.  In emerging markets, ZAR (-0.85%) is the laggard, not surprisingly on the back of weaker precious metals prices, but PLN (-0.75%) is also under pressure on a combination of the weak euro and concerns over the lack of progress in the Russia/Ukraine war.  Even CNY (-0.15%) is weaker despite a renewed belief that China is going to allow the yuan to strengthen as part of any trade deal.

There is no front-line data to be released today, with only EIA oil inventories expecting a modest net draw.  Richmond Fed president Barking speaks at 12:45 but given he just explained his views yesterday, that he didn’t foresee much change in rates at all given the current state of the economy, I cannot imagine he will have changed that view.

And that’s all we have today.  I anticipate a lackluster session in all markets as traders await the Nvidia numbers later.  Of course, President Trump could surprise us all with an announcement on Russia, the Fed, or any of a number of other situations, but those are outside my ability to anticipate.  The market is still pricing an 87% chance of a September cut and an 80% chance of two cuts by December.  If the Fed gets aggressive, for whatever reason, the dollar will suffer.  But that is not yet the case, so range trading seems the best bet.

Good luck

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Political War

Posted on by

In Washington, Cook feels the heat
As Trump wants a change in her seat
In Paris, the sitch
For Macron’s a bitch
As confidence there’s in retreat
 
These two stories plus so much more
Explain that we’re in, Turning, Four
So, all that we knew
Seems no longer true
Instead, there’s political war

 

The dichotomy between the general lack of price volatility in markets and the increase in political volatility over policy choices and requirements around the world is truly remarkable.  However, just like so much else that many have assumed as a baseline process for so long, this relationship appears to be changing as well.  These changes have historical precedence, as documented by Neil Howe and William Strauss back in 1997 in their seminal book, The Fourth Turning.  

Perhaps this is the best definition of what the Fourth Turning is all about [emphaisis added]:

“In the recurring loop of modern history, a final, perilous era arrives once each lifetime.  It is marked by civic upheaval and national mobilization, both traumatic and transformative.  That era, reshaping the social and political landscape, is unfolding now.”

Now, read that and tell me it is not a perfect description of what we are seeing daily, not just in the US, but around the world.  If you wondered why all the models that had been built about many things, whether financial, economic or governmental are no longer offering accurate forecasts, I would point to this as the underlying premises are going through the throes of change.

For instance, consider President Trump and his relationship with the Fed.  We already know that he and Chairman Powell are at odds and have been so for months over Powell’s reluctance to cut rates.  But his attacks on the Fed are unceasing, and last night he ‘fired’ Governor Lisa Cook for cause.  That cause being the allegations that she committed mortgage fraud, which if true is certainly a concern for a Federal Reserve Board Governor.  But this has never been attempted before so will involve legal wrangling which we will watch over the next many months.

Now, some of you may remember the last time there was a scandal at the FOMC, where two different regional Fed presidents, Dallas’s Robert Kaplan and Boston’s Eric Rosengren, were trading S&P 500 futures in their personal accounts prior to FOMC announcements of which they had inside knowledge.  Both did step down and allegedly the Fed has tightened its controls on that issue as they tried to sweep it under the rug, but let’s face it, Fed members are no angels.

I have no idea how this will play out, although I suspect that Governor Cook will eventually resign as the one thing at which President Trump excels is applying public pressure.  While Powell is an experienced public figure, Ms Cook was a professor at Michigan State, not exactly a spot where you feel the withering heat of a Trumpian attack on a regular basis.  Of course, if she did lie on her mortgage applications, that is a tough look for someone charged with overseeing the financial system.

But that is just the latest issue in the US, at least involving financial markets.  This Fourth Turning is coming alive all around the Western World, perhaps no place more than Paris this morning.  There, PM Bayrou has called for a confidence vote in order to gain the power to pass an austerity budget that cuts €44 billion from spending.  While at this point, it seems long ago, his predecessor PM, Michel Barnier, lasted just 99 days with his minority government and was ousted last December.  While Bayrou has made it for 9 months, it appears his odds of making it for a full year are greatly diminished now as all the opposition parties have promised to vote against him.  Recall, he leads a minority government and if he loses the vote, there will be yet another set of elections in France.

Again, this is emblematic of a Fourth Turning, where systems and institutions that have been operating for decades are suddenly coming apart.  From our perspective, the impact is more direct here with French equity markets (CAC -1.5%) falling sharply (see below) while French government bond yields soar.

Source: tradingeconomics.com

In fact, French 10-year yields now trade above almost all other EU nations including Greece and Spain, although Italian yields are still a touch higher.  Consider that during the European bond crisis of 2011-12, France was considered one of the stronger nations.  Oh, how the mighty have fallen!

Source: tradingeconomics.com

Again, my point is that much of what we thought we understood about how markets behave on both an absolute and relative basis is changing because the institutions underlying the Western economy are undergoing massive changes.  This is not merely a US phenomenon with President Trump, but we are seeing a growing nationalist fervor throughout the West as populations throughout Europe, and even Japan, increasingly reject the culmination of what has been described as the globalist agenda.  As John Steinbeck has been widely quoted, things can change gradually…and then suddenly.

So, let’s look at how other markets behaved overnight following the weakness in US equity markets yesterday.  Asian markets followed suit lower (Tokyo -1.0%, Hong Kong -1.2%, China -0.4%, Korea -1.0%, India -1.0%) with essentially the entire region in the red.  Europe, too, is under pressure this morning and while France leads the way, Germany (-0.4%), Spain (-0.8%) and the UK (-0.6%) are all declining in sync.  However, at this hour (7:10) US futures are essentially unchanged, so perhaps things will stabilize.

Those yields I picture above represent modest declines from yesterday’s levels, although that is only because European yields yesterday mostly climbed between 5bps and 7bps across the board.  As to Treasury yields, they are higher by 2bps this morning, but remain below 4.30%, so are showing no signs of a problem.

In the commodity markets, oil (-1.8%) is giving back all its gains from yesterday and a little bit more, but in the broad scheme of things, continues to trade in its recent range.  The one thing to watch here is Ukraine’s increasing ability to interrupt Russian production and shipment of oil via long-range drone strikes, as if they continue to be successful, it may well start to push prices above their recent cap at $70/bbl.  That is, however, a big if.  It is getting pretty boring describing metals markets as gold (+0.3%) has been trading in an increasingly narrow range as per the below chart.  This has been ongoing since April and feels like it could last another 5 months without a problem.  Silver’s chart is similar, albeit not quite as narrow a range.

Source: tradingeconomics.com

Finally, the dollar is a touch softer this morning, slipping against the euro (+0.3%), pound (+0.2%), and yen (+0.2%) with most of the rest of the G10 having moved less than that.  NOK (-0.3%) is the outlier following oil lower.  In the EMG bloc, +/- 0.3% is the range for the entire bloc today, so it appears that traders like other G10 currencies today for some reason I cannot fathom.

On the data front, we see Durable Goods (exp -4.0%, +0.2% ex Transport) as well as Case Shiller Home Prices (2.1%) and then Consumer Confidence (96.2).  Speaking of Consumer Confidence, in France this morning the latest reading was released at 87.0, three points lower than forecast and clearly trending down.  Perhaps the government’s problems are feeding into the national psyche.

Source: tradingeconomics.com

It is difficult to get excited by markets during the last week of August, and if we add the time of year, when vacations are rife, to the ongoing White House bingo outcomes, the best position seems to be no position at all.  As to the dollar, if the Fed does start to ease policy at this time, with inflation still sticky, I do foresee a decline.  However, it is very difficult to look around the world and think, damn, I want to own THAT currency, whatever currency that might be.  Perhaps the one exception would be the Swiss franc, where they really do work to have sane monetary policies.

Good luck

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Panic They’re Sowing

Posted on by

While eyes and ears focus on Jay
And whatever he has to say
Poor Germany’s shrinking
And it’s wishful thinking
Japan’s kept inflation at bay
 
But fears about Jay have been growing
That rate cuts he will be foregoing
If that is the case
Most traders will race
To sell things while panic they’re sowing

 

Clearly, the big story today is Chairman Powell’s speech with growing expectations that he will sound more hawkish than had previously been anticipated.  Recall, after the much weaker than expected NFP data was released at the beginning of the month, it appeared nearly certain that the Fed was going to cut at the next meeting with talk of 50bps making the rounds.  Now, a few hours before Powell steps to the podium, the futures market is pricing just a 71% probability of that rate cut with a just two cuts priced in for 2025 as per the CME’s own analysis below:

Arguably, this is one reason that equity markets have been having trouble moving higher as the Mag7 drivers of the market are amongst the longest duration assets around, so higher rates really hurt them.  While there has been a rotation into more defensive names, if opinions start to shift regarding the magnificence of AI, or perhaps just how much money they are spending on it and the potential benefits they will receive, things could get ugly.

I also find it interesting that the Fed whisperer, Nick Timiraos at the WSJ, has been running flack for Chairman Powell in this morning’s article, trying to get people to focus on the Fed’s framework as the basis of today’s speech, rather than policy per se.  Briefly, the current Fed framework, was designed right before COVID when for whatever reason they were concerned that low inflation was a problem, and they created Average Inflation Targeting (AIT) as a way to allow inflation to run above their target of 2.0% for a period if it had been below that level for too long.  We all know how well that worked out and, in fact, we are all still paying for their mistakes every day!  The word is they are going to scrap AIT although it is not clear what they will come up with next.  It is exercises like this that foment the ‘end the Fed’ calls from a growing group of monetarist economists and pundits.

At any rate, comments from other Fed speakers indicate that most are not yet ready to cut rates, so Powell will be able to have a significant impact if he turns more dovish.  But we have to wait a few more hours for that so let’s turn our attention elsewhere.

Germany GDP data (-0.3% Q/Q, +0.2% Y/Y) was a few ticks lower than expected and continues to point to an economy that has no positive momentum at all.  In fact, a look at the quarterly GDP data from Germany paints a pretty awful picture if growing your economy is the goal.

Source: tradingeconomics.com

Clearly, the US tariff changes have been quite negative, but in fairness, Germany’s insane energy policy is likely a much bigger driver of their problems as they have the most expensive power costs in the EU.  It is very difficult to have a manufacturing-based economy if you cannot power it cheaply.  Again, while the euro is more than just Germany, this does not bode well for the single currency.

Turning to Japan, inflation continues to run far above their 2.0% target, printing last night at 3.1% on both the headline and core metrics, which while 2 ticks lower than June’s data, was still a tick higher than expected.  It has now been 40 consecutive months that core CPI in Japan has been above the BOJ’s 2.0% target and Ueda-san continues to twiddle his thumbs regarding raising rates.

Source: tradingeconomics.com

It is very hard to watch this lack of policy response to a clear problem, that from all I read is becoming a much bigger political issue for PM Ishiba, and have confidence that the yen is going to strengthen any time soon.  Back in May, the talk was of the unwinding of the carry trade.  All indications now are that it is being put back on in significant size.  FWIW I think we will see 150.00 before too long, especially if Powell sounds hawkish.

And those are really the stories today ahead of Powell and the NY open.  So, let’s see how things behaved overnight.  After a modest down day in the US yesterday, and despite the poor inflation data, Japan was unchanged overall.  However, China (+2.1%) had a huge up move apparently on the idea that US-China trade tensions are easing and despite continued weak data from the country.  Apparently, there has been a rotation from bonds to stocks by local investors driving the move.  Hong Kong (+0.9%) also had a strong session as did Korea (+1.0%) although India, Taiwan and Australia all struggled with declines between -0.6% and -1.0%.  In Europe, the. screens are green, but it is a pale green with muted gains (DAX +0.1%, CAC +0.25%, IBEX +0.4%) despite the weak German data.  Perhaps the belief is this will encourage the ECB to ease policy further.  Meanwhile, at this hour (7:15) US futures are pointing higher by 0.25% or so.

In the bond market, after climbing a few basis points yesterday, Treasury yields are unchanged, trading at 4.33%, so still range bound.  European sovereign yields are softer by -1bp to -2bps, again likely on the softer German data with hopes for a more aggressive ECB.  JGB yields edged higher by 1bp in the 10-year but the longer end of the curve there has seen yields move to new all-time highs with 30-year yields up to 3.216%. it feels like things are starting to unravel in Japanese bond markets.

Turning to commodities, oil (+0.4%) is creeping higher again this morning but remains in its downtrend and activity is lacking.  Meanwhile, the metals markets (Au -0.35%, Ag -0.5%, Cu -0.3%) are all under pressure from a combination of a strong dollar and a lack of investor interest, at least in the West.

Speaking of the dollar, it rallied yesterday and is largely continuing this morning with one notable exception, KRW (+0.75%) which benefitted from trade data showing exports rose 7.6% in the first 20 days of the month on strong semiconductor sales.  But otherwise, +/-0.3% or less is the story of the day, with most currencies within 0.1% of yesterday’s closing levels.

And that’s really it.  There is no data so we are all awaiting Powell and then anything that may come from the White House regarding trade deals, or peace, I guess.  As the summer comes to a close, unless Powell says rate hikes are coming or promises cuts, I expect that traders will have gone for the weekend by lunch time and it will be a very quiet market.

Good luck and good weekend

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A Thirst for Vengeance

Posted on by

The talk of the town ‘bout the Fed
Was not what the Minutes had said
But rather the look
Into Lisa Cook
And whether the rules she did shred
 
It seems now both parties agree
That lawfare is how things should be
Impeachment was first
But now there’s a thirst
For vengeance ‘gainst your enemy

 

The FOMC Minutes released yesterday were not that informative overall.  After all, the two dissensions by Waller and Bowman have already been dissected for the past 3 weeks and reading through the Minutes, they basically said that most participants had no idea how things would play out.  They couldn’t decide if tariffs would be more inflationary, if the impact would be consistent or a one-off and so doing nothing felt right.  As to the employment situation, there too they had no clarity as to their thoughts, with some positing things could get worse while others thought the employment situation would be fine.  Anyway, with Powell speaking tomorrow, it was all old news.

However, the real Fed news came from the head of the FHFA, Bill Pulte, who revealed that he had forwarded information to the DOJ to investigate potential mortgage fraud by Fed Governor Lisa Cook.  In what has become something of a pattern, Ms Cook appears to have misrepresented the purchase of a secondary home she was planning to rent out as her primary residence in an effort to get a reduced rate on her mortgage.  This is remarkably similar to the case against NY Attorney General Letitia James as well as California Senator Adam Schiff.  While the latter two appear vengeful in that both of those two were instrumental in personal political attacks on President Trump, it is Ms Cook’s situation that may have the bigger impact.  If she is forced to resign, as has already been demanded by President Trump, then that opens another seat on the Fed for Mr Trump to fill.  Based on Trump’s current views, one would anticipate it would turn the Fed that much more dovish if that is the way things evolve.

Sitting here in the bleachers, I have no idea as to the veracity of the claims against any of these three, but it will not be a huge surprise to see charges brought in each case.  It will certainly be a sticky wicket for Chairman Powell if a Fed governor is brought up on charges of mortgage fraud given her role in monetary policy making.  At this stage, my working assumption is we will see all three served and cases brought against them.  If that is the case, we have to assume the Fed is going to become that much more dovish during the rest of the year regardless of the data.

Interestingly, one cannot look at Fed funds futures and conclude this will be the case as the probability of a rate cut next month has actually declined a bit further, now at 79% as per the below chart.  In fact, if you look at the recent history, you can see that just one week ago, that probability was 92% and the week prior to that it was over 100%.

Source: cmegroup.com

There is an irony in the idea that President Trump wants to see the Fed cut rates while describing the economy as doing great.  Arguably, if the economy is doing great with rates where they are, why change them.  The answer, I believe, is the administration’s goal to run the economy as hot as possible with the idea that faster growth in real activity will help overcome the debt problems.  Alas, part of running it hot means that inflation is unlikely to fall much further.  And that, my friends, is the conundrum.  A hot US economy will continue to draw investment and support the dollar’s strength.  While that will help moderate inflation, it will negatively impact manufacturing competitiveness.  And that is the balance that every government wants to control but is impossible to do.  This is the very essence of Triffin’s dilemma.

(PS: if you want to protect against that hotter inflation, a great tool is USDi, the only fully backed, CPI tracking cryptocurrency available.)

Turning from the political, which keeps interfering in the daily financial commentary, to the financial directly, we have continued to see pressure on the semiconductor sector drive US equity markets a bit lower, notably the NASDAQ, which continues to play out elsewhere around the world.  In Asia, the Nikkei (-0.65%) was emblematic of that with the Hang Seng (-0.25%) slipping as well, but in truth, Asia had an overall better performance as Taiwan (+1.4%), Australia (+1.1%) and Korea (+0.4%) all fared well.  I think some of this was a reversal of the previous day’s sharp declines on the semiconductor concerns although Australia was the beneficiary of some solid Flash PMI data.

In Europe, however, all markets are weaker this morning led by the CAC (-0.6%) and IBEX (-0.6%) with the DAX (-0.3%) and FTSE 100 (-0.3%) not quite as badly off after PMI data there showed things were better than last month, but still not particularly great.  It seems the commentary attached to the numbers indicated serious concerns about future activity.  As to US futures, at this hour (7:15) they are modestly lower across the board, on the order of -0.15%.

In the bond market, zzzzzz’s are the story.  While yields have edged slightly higher this morning (+1bp in Treasuries, +2bps to +3bps in Europe), the trend remains a flat line with none of these markets doing anything other than chopping around.

Source: tradingeconomics.com

The one exception here is Japan, which has seen 10-year yields march consistently higher over the past year with the past 10 sessions showing consistently higher yields.  Perhaps their debt chickens are finally coming home to roost.

Source: tradingeconomics.com

Turning to commodities, oil’s (+0.85%) modest bounce continues but it remains nearer the bottom than the top of its recent trading range.  The EIA data yesterday showed a surprisingly large draw in crude oil as well as gasoline stocks with reduced imports, so this does make sense.  In the metals markets, yesterday’s rally is being reversed this morning with the major markets all lower by about -0.4%.

Finally, the dollar remains quite uninteresting excepting two currencies; NOK (+0.6%) which is clearly benefitting from the recent rebound in oil while JPY (-0.4%) is under further pressure as there appears to be an increase in short JPY carry trades being initiated, especially against the dollar as more traders discount the idea the Fed is even going to cut 25bps next month.  Otherwise, there is nothing noteworthy here this morning.

We finally get data this week as follows: Initial (exp 225K) and Continuing (1960K) Claims, Philly Fed (7.0), Flash PMI (Manufacturing 49.5, Services 54.2) and Existing Home Sales (3.92M).  We also hear from Atlanta Fed president Bostic this morning, but I do believe the market remains almost entirely focused on Powell’s speech tomorrow.  Of course, if the semiconductor space continues to underperform, that would be an entirely different kettle of fish and likely create some serious market adjustments.  

Net, it is difficult for me to remain too bearish the dollar overall, especially if the market starts to price out a rate cut in September.

Good luck

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Lest ‘Flation Has Spice

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The market absorbed CPI
And equities started to fly
Though Core prices rose
T’was Headline, I s’pose
Encouraged investors to buy
 
As well, Fed funds futures now price
The Fed will cut rates this year thrice
The upshot’s the buck
Is down on its luck
Beware though, lest ‘flation has spice

 

Core prices rose a bit more than forecast in yesterday’s CPI report although the headline numbers were a touch softer.  The problem for the Fed, if they are truly concerned about the rate of inflation, is that the strength of the numbers came from core services less shelter, so-called Supercore, a number unimpeded by tariffs, and one that has begun to rise again.  As The Inflation Guy™ makes clear in his analysis yesterday, it is very difficult to look at the data and determine that 2% inflation is coming anytime soon.  I know the market is now virtually certain the Fed is going to cut in September, but despite President Trump’s constant hectoring, I must admit the case for doing so seems unpersuasive to me.

Here are the latest aggregated probabilities from the CME and before you say anything, I recognize the third cut is priced in January, but you need to allow me a little poetic license!

However, since I am just a poet and neither institutions nor algorithms listen to my views, the reality on the ground was that the lower headline CPI number appeared to be the driver yesterday and into today with equities around the world rallying in anticipation of Fed cuts.  As well, the dollar is under more severe pressure this morning on the same basis.  However, it remains difficult for me to look at the situation in nations around the world and conclude that the US economy is going to underperform in any meaningful way over time.  

So, to the extent that a currency’s relative value is based on long-term economic fundamentals, it is difficult to accept that the dollar’s relative fiat value will decline substantially, and permanently, over time.  I use the euro as a proxy for the dollar, which is far better than the DXY in my opinion as the Dollar Index is a geometric average of 6 currencies (EUR, JPY, GBP, CAD, SEK and CHF) with the euro representing 57.6% of the basket.  And I assure you that in the FX markets, nobody pays any attention to the DXY.  Either the euro or the yen is seen as the proxy for the “dollar” and its relative value.  At any rate, if we look at a long-term chart of the euro below, we see that the twenty-year average is above the current value which pundits want to explain as a weak dollar.  Too, understand that back in 1999, when the euro made its debut, it started trading at about 1.17 or so, remarkably right where it is now!

Source: finance.yahoo.com

My point is that the dollar remains the anchor of the global financial system, and given the current trends regarding both economic activity and the likely ensuing central bank policies, as well as the ongoing performance of US assets on a financial basis, while short-term negativity on the dollar can be fine, I would be wary of expecting it to lose its overall place in the world.

Speaking of short-term views, especially regarding central bank activities, it appears clear that the market is adjusting the dollar’s value on this new idea of the Fed cutting more aggressively.  If that is, in fact, what occurs, I accept the dollar can decline relative to other currencies, but I really would be concerned about its value relative to things like commodities.  And that has been my view all along, if the Fed does cut rates, gold is going to be the big beneficiary.

Ok, let’s review how markets have absorbed the US data, as well as other data, overnight.  Yesterday’s record high closings on US exchanges were followed by strength in Tokyo (+1.3%), Hong Kong (+2.6%), China (+0.8%) despite the weakest domestic lending numbers in the history of the series back to 2005.  In fact, other than Australia (-0.6%) every market in Asia rallied.  The Australian story was driven by bank valuations which some feel are getting extreme despite the RBA promising further rate cuts, or perhaps because of that and the pressure it will put on their margins.  Europe, too, is rocking this morning with gains across the board led by Spain (+1.1%) although both Germany (+0.9%) and France (+0.6%) are doing fine.  And yes, US futures are still rising from their highs with gains on the order of 0.3% at this hour (7:45).

In the bond market, Treasury yields have slipped -3bps this morning, with investors and traders fully buying into the lower rate idea.  European sovereigns are also rallying with yields declining between -4bps and -5bps at this hour.  JGBs are the exception with yields there edging higher by 2bps, though sitting right at their recent “home” of 1.50%.  as you can see from the chart below, 1.50% appears to be the market’s true comfort level.

Source: tradingeconomics.com

In the commodity space, oil (-0.6%) continues to slide as hopes for an end to the Russia-Ukraine war rise ahead of the big Trump-Putin meeting on Friday in Alaska.  Nothing has changed my view that the trend here remains lower for the time being as there is plenty of supply to support any increased demand.

Source: tradingeconomics.com

Metals, meanwhile, are all firmer this morning with copper (+2.6%) leading the way although both gold (+0.4%) and silver (+1.7%) are responding to the dollar’s decline on the day.

Speaking of the dollar more broadly, its decline is pretty consistent today, sliding between -0.2% and -0.4% vs. almost all its counterparts, both G10 and EMG.  This is clearly a session where the dollar is the driver, not any particular story elsewhere.

On the data front, there is no primary data coming out although we will see the weekly EIA oil inventory numbers later this morning with analysts looking for a modest drawdown.  We hear from three Fed speakers, Bostic, Goolsbee and Barkin, with the latter explaining yesterday that basically, he has no idea what is going on and no strong views about cutting or leaving rates on hold.  If you ever wanted to read some weasel words from someone who has an important role and doesn’t know what to do, the following quote is perfect: “We may well see pressure on inflation, and we may also see pressure on unemployment, but the balance between the two is still unclear.  As the visibility continues to improve, we are well positioned to adjust our policy stance as needed.”  

And that’s all there is today.  The dollar has few friends this morning and I see no reason for any to materialize today.  But longer term, I do not believe a dollar weakening trend can last.

Good luck

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