Tag Archives: federal-reserve

Commodities Blazing

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According to Jay and the Fed
The ‘conomy’s moving ahead
So, rates are on hold
With rallies in gold
And stocks and the dollar instead
 
But really, the thing that’s amazing
Is nobody cares about phrasing
Or Dot plots or pressers
‘Cause now all the stressors
Are Trump and commodities blazing

Once upon a time, the FOMC meeting was THE story for markets during the week leading up to the meeting and through the Chair’s press conference explaining the many virtues of what they did and why they did it.  Of course, this has not always been the case.  If we head back to the pre-Alan Greenspan days, the FOMC was peopled by 18 anonymous members and the Fed Chair, at that time Paul Volcker, and nobody ever spoke to the press and only grudgingly to Congress, they simply managed the money supply to the best of their ability to achieve their mandates.  The biggest data point of every week was the Thursday afternoon M2 release, and there was an entire subculture of ‘Fed watchers’, similar to ‘Kremlin watchers’ whose job was to read the tea leaves based on market behavior and data in trying to determine how the Fed would behave going forward.

Almost the only time Chairman Volcker spoke in public was at the semiannual Humphrey-Hawkins testimony to Congress, but he basically never answered any questions and clearly didn’t care what either Senators or Congressmen asked.

But then we got the “Maestro”, Alan Greenspan, who after Black Monday in October 1987, created the first Fed put.  At that time, the rest of the FOMC was still largely anonymous, but Greenspan craved the limelight, if only to try to show how much smarter he was than everybody else.  Famously, he explained in Congressional testimony in 1996, “If you understood what I said I must have misspoken.”  Greenspan was more available to the press than Volcker, but the rest of the committee remained in the background.

However, that simply set the table for the ensuing Fed chairs, Bernanke, Yellen and now Powell, all of whom give press conferences and clearly encouraged their minions to get out there and deliver the message.  As so many struggling leaders explain, it’s not the substance, it’s the messaging that’s the problem.  This is what we have all been dealing with since Bernanke sat down in 2006, mandated press conferences and pushed the narrative as a critical part of policy.

Then, along came President Trump’s second term, and times, they are a-changing.  While Trump rails on Powell to cut rates and lambastes him regularly, it turns out, the combination of new fiscal and economic policy is driving monetary policy into the background, at least from the perspective of market participants.  The result is that while FOMC members still get out there and give interviews regularly, they are never newsworthy.  In fact, my suspicion is that the reason Chairman Powell made his little video announcing the Fed received subpoenas was as an effort to get back on the front page, a place he and his committee members have clearly grown to enjoy, and from which they are increasingly absent.

Which brings us to the meeting yesterday where…nothing happened.  Policy rates remain unchanged, as universally expected, two voters wanted 25bp cuts (Miran and Waller), and they admitted that economic activity moved up from “moderate” to “solid”.  In the most stinging rebuke, the market virtually ignored the entire process.  In fact, the discussion about the next Fed chair is ebbing into the background.  My take is this is a better situation for all involved.  I only hope it stays this way.

So, what did happen?  Stocks were flat, bonds were flat, the dollar rebounded a bit, and commodities continue to rocket higher.  Let’s take a turn around markets overnight and start with commodities as that is where all the action is.

Copper (+6.1%) is the overnight star, soaring in Asia to record highs.  As with virtually all commodities right now, blame is laid at the feet of the weakening dollar (it didn’t move overnight) and with uncertainties about President Trump’s next actions and the potential risks attendant to those actions when they occur.  As we have seen with both gold (+1.9%, +27.1% in the past month) and silver (+1.3%, +54.6% in the past month), there is no doubt that fiat currencies are losing their status as a store of value, regardless of the interest rates they pay.  While copper’s movement has not been as extraordinary as that of either gold or silver, the trend, as you can see in the chart below, remains clearly higher.

Source: tradingeconomics.com

The underlying reality for all these metals is that the financialization of economies all around the world has resulted in far more market activity than was necessarily warranted by the physical markets.  And physical markets need ounces and pounds of stuff, which have very long lead times to get out of the ground.  As a trader, I look at these moves in precious metals and am very concerned they are overdone but as somebody with a basic understanding of physics, I see no reason to believe that the demand for these metals is going to slow down anytime soon.  The below chart shows just how extraordinary the silver move has been, and the table below it really tells the tale.

Source: tradingeconomics.com

As to oil (+2.6%), it is heading higher this morning on increasing fears that the President is going to initiate a military action to depose the Ayatollah in Iran.  Concerns are rising about Iran closing the Strait of Hormuz as well as its ability to respond via missile attacks.  Remember, though, a market that moves on a political issue will revert once that issue has either occurred, or clearly won’t occur, so do not mistake this move for the beginning of a new trend.  Consider what happened to oil after Russia invade Ukraine and after they invaded Crimea in 2014.

Source: finance.yahoo.com

Turning to the equity markets, yesterday’s US blahs were followed with a bit more price action in Asia as though Japan (-0.7%) slipped a bit, China (+0.8%), HK (+0.5%), Korea (+1.0%) and Taiwan (-0.8%) all so more significant movement, albeit not offering a larger theme given the relative gains and losses.  Elsewhere in the region, the smaller exchanges showed more red than green.  In Europe, Germany (-1.15%) is the dog, falling on idiosyncratic weakness in SAP and Deutsche Bank following weak earnings and forecasts, but the rest of the space is performing well (UK +0.4%, France +0.65%, Spain +0.4%) as earnings there have been relatively solid.  And, at this hour (7:10), US futures are pointing higher by about 0.25% or so as earnings numbers have been strong so far this week, highlighted by Meta last night.

In the bond market, activity is less frenetic with Treasury yields unchanged this morning, European sovereigns catching a bit of a bid as yields slip -2bps across the board and JGB yields (+2bps) rising after the latest poll showing PM Takaichi increasing her odds of getting an LDP majority in the Diet next week.  Something to watch closely going forward is the shape of the yield curve as there is growing concern that long-end rates may rise regardless of the Fed (yet another sign the Fed is losing its sway).  In fact, I suspect if that is the case, that we will see yet another bout of QE, although they will find an alternate name.

Finally, in the FX markets, despite all the pearl clutching about the end of the dollar, there is no movement of note in any currency today, with the entire screen showing gains or losses of 0.3% or less with one exception, CLP (+0.5%) following the remarkable jump in copper’s price.  The linked article is quite funny as they explain all the negatives of a weak dollar and then also explain that ECB members are concerned about a too strong euro.  I am frequently confused by whether a strong currency is good or bad for a nation, but I guess it depends on the narrative you are trying to push.

On the data front, weekly Initial (exp 205K) and Continuing (1860K) Claims come at 8:30 as does the Trade Balance (-$40.5B).  We also see final Nonfarm Productivity (4.9%) and Unit Labor Costs (-1.9%) which if those numbers are met indicate quite positive economic activity.  Then, at 10:00 we see Factory Orders from November (1.6%), but that is such old data I don’t think it matters.

Remember, it is Trump’s world (and Bessent) and we’re just living in it.  The White House is the source of all the news so let’s all be happy that the Fed is fading into the background.  With that in mind, based on President Trump’s goals, a weaker dollar is clearly his desire, at least in the short run, although I continue to see scope for longer term strength.

Good luck

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Under Damocles’ Sword

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It turns out the market ignored
Chair Powell, though many abhorred
The idea the Fed
May soon need to shred
Its views under Damocles’ Sword
 
So, stocks rose and set more new highs
And bonds ignored all the shrill cries
But metals retained
The heights that they gained
How long ere the bears euthanize?


 
Yesterday, of course, the big news was the Powell video describing the subpoenas that he and the Fed received on Friday.  This continues to be seen as an attack on the Fed’s “independence” and the talking heads remain aghast.  I couldn’t help but chuckle at 12 current central bankers from around the world putting out a statement that this was a terrible precedent.  Consider that most people have no idea who any of the signees are, so they hold no reverence for their views, and the people who do know them, are already in the camp.  Of course, I cannot help but remember the statement by 51 former FBI/CIA security apparatus people explaining that Hunter Biden’s laptop had all the earmarks of Russian disinformation.  My point is this type of response is not necessarily the unvarnished truth.  I wasn’t at the Senate committee meeting and do not recall what he said, if I ever heard it, so am in no position to judge what went on.  I guess, that’s what a grand jury is all about, to determine if there are sufficient grounds to go forward with a charge.  Again, this is a Washington DC grand jury, who will be biased against anything President Trump’s administration is doing.  I put it at 50/50 that any charges are even brought.
 
Meanwhile, despite all the angst, equity markets rebounded all day to close higher, bond markets absorbed a 10-year auction with little concern and yields were within 1bp of the morning levels while the dollar, which had initially fallen about -0.4% to -0.5% on the news, clawed back a part of that loss, and is slightly firmer this morning.  The only real outlier here were the precious metals markets where both gold and silver had monster days trading to new highs.  Such was yesterday.
 
Takaichi-san
Like a hungry boa, wants
To tighten her grip

First, my error in yesterday’s note regarding the Japanese stock market on Monday, which was actually closed for Coming of Age Day, but overnight did jump 3.1% on the news that PM Takaichi, she of the 70+% approval rating, is going to call for snap elections to try to consolidate her power more effectively in the Lower House of the Diet.  While the announcement has not officially been made, it has been widely reported that on January 23rd, she will dissolve parliament and seek an election on either February 8th or 15th.

The market response here was quite clear.  Aside from the jump in equity prices based on more government support for her fiscal spending, the yen (-0.5%) fell to its lowest point in more than a year and now, trading near 159, is seen as entering the ‘intervention range’.  A look at the chart below shows that in July of last year, the last time the yen weakened to this level, we did see the BOJ enter the market and it was quite effective in the short run.  If I recall correctly, there was a great deal of discussion then about the end of the carry trade.  Of course, that didn’t happen, and even though the BOJ has increased rates to 0.75% in the interim, I assure you, the carry trade is still out there in very large size.

Source: tradingeconomics.com

I expect that this evening we will hear more from the FinMin and her deputies regarding concerns over ‘one-sided’ moves and the need for the yen to represent fundamentals, but I sincerely doubt that there will be any activity before 160 trades, and maybe even 165.

Perhaps of greater concern for Takaichi-san is that JGB yields rose sharply on the news with the 10yr (+7bps) rising to a new high for this move, while the super long 40-year traded to 3.80%, higher by 9bps and a new all-time high for the bond.  Japan has serious financing issues and has had them for quite some time.  However, two decades of ZIRP and NIRP hid the problems as financing costs were virtually nil.  As a net creditor nation, they also have inherent strengths with respect to international finance, although it remains to be seen if the population there will accept the idea that their savings need to be used to pay down government debt.

As we have seen across many markets, the old rules and relationships don’t seem to apply these days.  The fact that Japanese yields are climbing far more quickly than US yields, with the spread narrowing dramatically, in the past would have seen a much stronger yen.  As well, rising yields tend to undermine equity markets, and yet, they sit at record highs.  This is not the world in which many of us grew up.

Ok, as we await this morning’s CPI data, let’s see how other markets behaved overnight.  While yesterday’s US gains were modest across the board, they were gains after a terrible start.  Meanwhile, in addition to Tokyo’s rally, we saw HK (+0.9%), Korea (+1.5%), Taiwan (+0.5%) and Australia (+0.6%) all rally although both China (-0.6%) and India (-0.3%) lagged.  It appears the latter two suffered from some profit-taking (although Indian shares have not really performed that well) while the gainers all benefitted from the US rally and ongoing excitement over tech shares.  In Europe, though, every major market is softer this morning although only Paris (-0.6%) is showing any substance in the decline. Elsewhere, declines of -0.1% to -0.3% are the order of the day, hardly groundbreaking, and given most of these markets have had a good run, it seems there has been some profit-taking ahead of this morning’s CPI data.  As to US futures, at this hour (7:00) they are basically unchanged.

In the bond market, this morning yields are edging higher everywhere with Treasury yields (+2bps) now touching the top of its forever range at 4.20%.  European sovereign yields are uniformly higher by 2bps as well although there has been no data of note nor commentary to really offer a rationale.  Of course, 2bps is hardly earth shattering.  

In the commodity markets, while precious metals (Au -0.2%, Ag +0.75%, Pt -1.1%, Cu +0.5%) have been the headline story, the oil market has taken a back seat.  Quickly, on the metals side, it seems that the supply scarcity remains the main driver overall, and the fact that there is limited new exploration, let alone new mines coming online, ongoing, my take is these have further to climb.  

But oil is quite interesting.  You all know my view that the trend remains lower, but today, it is bucking that trend with WTI (+1.9%) up nicely and back above $60/bbl for the first time since mid-November.  A look at the chart below shows that using my, quite imperfect, crayon if I ignore the massive Operation Midnight Hammer spike, even after a few solid up days, oil remains well within its down trend.  I am no technician, so others will draw lines as they see fit, but I am looking at longer term views, not day-to-day or intraday.  

Source: tradingeconomics.com

My take is that the Venezuela story has evolved into increased production from there will take quite a long time, so ought not pressure prices lower.  Rather, I would lean toward the ongoing uprising in Iran as the proximate cause for today’s recent gains.  After all, if the regime falls, and the Mullahs exit for Moscow, it is unclear who will fill the power vacuum and what will come next.  As such, it is easy to anticipate a reduction in Iranian supply, which is currently about 3.2mm to 3.5mm barrels/day (according to Grok), and if that goes missing, or even is cut in half, would have a significant short-term impact on the price.  

Regarding this situation, obviously I have no special insight.  However, the most interesting thing I read, and why I believe this will indeed be the end of the theocracy, is that the protestors have burned down 350 mosques, a direct attack on the belief system of the Ayatollah.  This appears quite widespread, and it would not surprise me if the regime falls before the end of the month.  Good luck to the people of Iran.

Finally, the dollar is little changed this morning other than against the yen.  For the dollar bearish crowd, which is quite large as doom porn about the end of the dollar’s hegemony remains quite popular, yesterday’s decline was tiny.  In fact, if we use the DXY as our proxy, it is higher by 0.1% this morning and trading just below 99.00 as I type.  Once again, if we look at the chart below, it has been 9 months since the DXY has traded outside the 97/100 range in any substantive manner and we are basically right in the middle.  Nobody really cares right now.

Source: tradingeconomics.com

Turning to the data this morning, CPI (Exp 0.3%, 2.7% Y/Y) for both headline and core leads the list.  This is December data, so as up to date as we will get.  We also see stale New Home Sales data, but it is hard to get excited about that.  The NFIB Small Business Optimism Index already printed right at expectations of 99.5.

It’s funny, despite all the discussion of the Fed regarding the Powell subpoena, Fed speakers don’t seem to be getting much traction.  Yesterday, three speakers indicated that rates seemed to be in a good place, and, not surprisingly, all defended Chairman Powell.  My view at the beginning of the year was that the Fed was going to become less important to the market dialog and in truth, that remains my view.  Rate cut probabilities have fallen to 5% for this month with the next cut priced for June.  Obviously, that is a long time from now and much can happen, but if the data showing GDP is accurate, it seems hard to understand why there would be a cut at all.  Too, remember one of the key theses behind dollar weakness was Fed dovishness.  If the Fed is not so dovish, tell me again why the dollar should decline.

It’s a crazy world in which we live.  Hedgers, stay hedged.  The rest of you, play it close to the vest.

Good luck

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The Temperature’s Rising

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This morning the temperature’s rising
With Trump and his allies devising
An alternate way
For him to axe Jay
But this move is quite polarizing
 
The market response has been clear
It’s given the move a Bronx Cheer
Both stocks and the dollar
Are feeling a choler
But gold, everybody holds dear

 

The financial world is aghast this morning as last night, Chairman Powell revealed that the Fed has been served with grand jury subpoenas threatening criminal indictment regarding Chairman Powell’s testimony to the Senate Banking Committee last June.  The issue at hand is ostensibly the ongoing renovations at the Marriner Eccles Building, including their cost, and how that differs from Chairman Powell’s testimony.

Chairman Powell offered a video response last night explaining he will not be cowed into cutting rates because the President wants lower rates, but will continue their work of setting policy based on their assessments of the economy.  One cannot be surprised that this has raised an entirely new round of screaming about President Trump’s tactics, although what I did see this morning was that Florida House Representative Anna Paulina Luna took credit for referring the case to the DOJ.

While I have strong opinions on Chairman Powell’s effectiveness, or lack thereof, this is certainly a new level of pressure.  In fact, if you listen to the video above (it’s just 2 minutes) Powell explicitly claims that this is entirely about the Fed not cutting rates further.  But I am not going to discuss the legality, or tactics here, our focus is on the market’s response.

Starting with the dollar in the FX markets, it has fallen almost universally, and while it hasn’t collapsed, we are looking at a 0.3% to 0.5% decline pretty much everywhere.  Using the euro (+0.4%) as our proxy, you can see from the chart below that in the context of the past year’s price activity, this move is indistinguishable from any other move.

Source: tradingeconomics.com

This is not to imply that the Administration’s actions are insignificant, just that despite the rending of garments by the punditry, the market hasn’t determined it matters that much, at least not yet.  I have maintained my view that the dollar remains the best of a bad bunch of fiat currencies given the prospects for US economic activity compared to the rest of the world.  However, it is quite possible that foreign investors will view this action as far too detrimental to the structure of US financial markets and seek to exit, thus driving the dollar much lower.  I did not have this on my bingo card at the beginning of the year, so my views of dollar strength are somewhat tempered at this point.  It will certainly be interesting to see as we go forward.

One other thing to note is that CPI is released this week (exp 2.7% for both headline and core) and Truflation came out last week at 1.8%.  Now, I don’t put great stock in Truflation but there are many who do.  For that contingent, I assume they are aligned with President Trump in his views that Fed funds are too high.  After all, with Fed funds at 3.75%, that is nearly 200bps above the Truflation number.  I have always understood the “appropriate” relation to be closer to 75bps to 100bps above inflation, which if you believe Truflation, means you are looking for cuts.  (PS, this is not my personal view, I am simply highlighting part of the market thought process.)

At any rate, the dollar is under pressure this morning but remains well within its recent trading range.  Turning to commodities, though, that is where the real price action is, with precious metals exploding higher on this news.  We are looking at record highs for gold (+1.6%), silver (+4.6%) with platinum (+3.2%) also much richer, although not back to all-time highs.  If we look at a chart of both gold and silver below, we can see the parabolic nature of silver’s recent move, a situation which should make everyone uncomfortable as parabolic moves frequently signal the end of the line. 

Source: tradingeconomics.com

But perhaps what makes this more interesting is that there is a substantial amount of supply in both gold and silver due to enter the market as the BCOM index rebalancing began last Friday and continues through Thursday.  Given the dramatic rallies in both metals last year, there is a significant amount to be sold by those funds that track the index.  Estimates are for a total of nearly $7 billion of gold and silver to be sold for the rebalancing, and many expected the metals markets to decline under that pressure.  And perhaps they still will, but today’s moves are the clearest signal that there are many investors who are uncomfortable with the Fed situation.

Remarkably, Venezuela and oil markets have basically disappeared from the conversation at this point.  However, this morning WTI (-0.9%) is giving back some of last week’s gains, and remains well within its recent downtrend, but shows no signs of a sharp break in either direction.

Turning to the other risk spot, equity markets, while US futures are all lower by -0.5% to -0.6% at this hour (7:10), the Fed news has had a mixed impact elsewhere around the world.  For instance, Japan (+1.6%), HK (+1.4%) and China (+0.65%) all had solid sessions with that being the case throughout the region.  Even India (+0.4%) finally managed to go green last night.  And all of this occurred after the Fed news.  One possible explanation is that foreign investors are running home, hence bidding up local shares.  Of course, it is also possible that they don’t believe there is much there, there, and are simply ignoring the news.

In Europe, the situation is different with weakness the general trend as Spain (-0.4%), France (-0.3%) and Italy (-0.15%) all slipping although Germany (+0.3%) has managed to buck the trend absent any specific macro catalyst.  German defense stocks are modestly higher this morning and perhaps threats by President Trump to aid the fomenting Iranian revolution have investors looking for more gains there.  As I often say, markets can be quite perverse for no apparent reason at all.

Finally, bond markets are not really responding to the news in any substantial manner.  Treasury yields have backed up 3bps this morning, but at 4.19%, remain within that long-term trading range and are not signaling flight.  European sovereigns have seen yields edge lower by -1bp across the board, so while modestly better, hardly the sign of massive buying.  And JGB yields were unchanged overnight.  Bonds remain the least interesting space there is of all the markets.

Which takes us to the data this week.

TuesdayNFIB Small Biz Optimism99.5
 CPI0.3% (2.7% Y/Y)
 -ex food & energy0.3% (2.7% Y/Y)
 New Home Sales710K
WednesdayRetail Sales0.4%
 -ex Autos0.3%
 Existing Home Sales4.2M
 Fed’s Beige Book 
ThursdayInitial Claims219K
 Continuing Claims1918K
 Empire State Mfg1.0
 Philly Fed-2.0
FridayIP0.1%
 Capacity Utilization76.0%

Source: tradingeconomics.com

In addition, we get PPI data on Wednesday, but it is all old data, for October and November and, as such, I don’t think it will matter very much at all.  We also hear from 10 different Fed speakers, some several times, over the course of the week.  It will be very interesting to hear how they address the major news overnight regarding the subpoenas, or if they even touch on them.  I expect there will be oblique references to Fed independence at most.

And remember, none of this even considers the ongoing revolution in Iran, which appears to be gaining strength in its third week.  If the theocracy in Iran falls, that will have a very different impact on oil markets than the Venezuela situation.  First, they are currently producing far more oil.  Second, the removal of sanctions there would seemingly reduce the amount of ultra cheap oil that China can import, adding pressure to the Chinese economy, as well as help pressure oil prices lower in general, which would negatively impact Putin’s war chest.  (If Iranian oil is no longer black market, it raises China’s cost, but lower overall prices will reduce further Russia’s sanctioned sale prices).

As to the dollar on the FX markets, this move certainly gives me pause regarding my bullish view, but there seems to be a long way to go before anything really comes of it.  As well, grand jury testimony is secret, so we won’t know about anything that is said anytime soon.  Ultimately, nothing may come of this, no charges of any sort.  Remember, this is a Washington DC grand jury, and so many there disagree with everything that President Trump does, they may not indict for that reason alone.

I’m not willing to make a sweeping statement at this time, but caution in positioning seems like a sensible view.

Good luck

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All But Assured

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Good luck

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Nothing is Clear

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

 

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

Source: tradingeconomics.com

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

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

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

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

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

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

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

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

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

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

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

Source: tradingeconomics.com

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

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

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

Good luck and good weekend

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A Latent Grim Reaper

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The zeitgeist, of late, has been leaning
Toward welcoming gov intervening
Because costs have soared
So, folks once abhorred
Like Socialists, seem more well-meaning
 
Perhaps, though, the story’s much deeper
And points to a latent grim reaper
Elites on one side
Claim Trump’s only lied
While Populists serve as gatekeeper

 

Quite frankly, I feel like markets have become very secondary to an understanding of what is happening in the economy, and while there is intrigue over who may be the next Fed Chair, and correspondingly, if Mr Powell will resign from the FOMC when his chairmanship is up, I believe that pales in comparison to much larger macroeconomic issues with which we all have to deal on a daily basis.  Once again, my weekend reading has highlighted two key pieces that I believe do an excellent job of explaining much of what is going on, not just in the economy, but in the streets.

Last week, I highlighted Michael Green’s piece regarding a new estimate of what the poverty line looks like, putting paid to the idea that the official government level of $31,500 is appropriate, and that in suburban NJ (Caldwell to be exact) it is more like $140K.  Now, you will not be surprised that his piece garnered a great deal of attention given its premise, but I will not go into that.  However, he did write a follow-up piece which is worth reading and where he discusses the reaction.  In brief, whatever number is correct, it is clear that $31.5K is laughably low.   Ultimately, I believe this work has quantified the concept of the “vibecession” which has been making the rounds for a while.  People are allegedly making a decent living and yet are living paycheck to paycheck because the cost of living (not inflation) has risen so remarkably over time and priced many folks out of previously ordinary levels of attainment.

Which brings me to the second key piece I read this weekend, this from Dr Pippa Malmgren, which does a remarkable job explaining how the nation (and not just in the US, but we are more familiar here) has (d)evolved into two groups; Elites and Populists.  The former are the old guard politicians (both Democrats and Republicans), the global organizations like the World Bank, IMF, UN and WEF, and more perniciously in my mind, the so-called deep state.  The latter are personified by President Trump, but include NYC Mayor-elect Mamdani, AfD in Germany, Marine LePen in France and Victor Orban in Hungary, and their followers, to name a few.

The frightening conclusion Dr Malmgren drew was that there is no ability for a nation to continue to operate successfully if the population is split in this manner, and that eventually, one side is going to wind up victorious.  I would say this is the very definition of the 4th Turning and we are living through it.

So, we must ask, what are the potential ramifications from a financial markets perspective with this backdrop?  I have repeatedly highlighted that the Trump administration is going to “run it hot” going forward, meaning the goal will be to increase nominal GDP fast enough to outweigh the inevitable rise in prices.  The idea is if incomes rise quickly enough, people will be able to tolerate rising prices more easily.  

But the one thing of which I am increasingly confident is that prices and their rate of change are going to rise under this scenario.  As central banks leave policy easy, or ease further in an effort to support their respective economies, that is going to be the outcome.  A look at the chart below from the FRED data base of the St Louis Fed shows there is a very strong relationship between CPI and nominal GDP.  In fact, I ran the numbers and the correlation for the past 75 years has been 0.975!  Prices are going to rise friends, alongside M2.

What does this mean?  It means that the debasement of fiat currency is going to continue apace and so commodities, notably precious metals, but also base metals and property are going to be recognized as better stores of wealth.  If you wonder why gold (+0.9%) and silver (+2.2%) are continuing to rocket higher, look no further than this.  What about equities?  For now, I expect they will continue to perform well as all that liquidity will be looking for a home although this morning, not so much as US futures are lower by -0.5% across the board.  Bonds?  This is a tougher call, and I suspect that the yield curve will steepen further as central banks press short rates lower, but inflation undermines long duration fixed income assets.  Finally, the dollar remains, in my view, one of the best of the fiat currencies, but like all of them, will continue to degrade vs. gold and hard assets.

Keeping that in mind, there are two other stories of note this morning, only one of which is impacting markets.  The non-impactful one is that apparently President Trump has selected Kevin Hassett, currently the White House Economic Council Director, as the man to succeed Jay Powell in the chair.  He is a long-time political operative with deep ties in Washington and I presume will get through the vetting and be confirmed on a timely basis.  As I wrote above, it is not clear to me the Fed matters as much as other things in the current environment, although we will continue to hear about it.  In this light, the Fed funds futures market is currently pricing an 87.5% probability of a 25bp cut next week and is back to a 58% probability of a total of 100bps of cuts by the end of 2026 as per the below from the CME.

The other story of note, this one definitely impacting markets, is the news that Ueda-san hinted more definitively at a Japanese rate hike later this month, with Japanese swaps market raising the probability of that hike to 80% from about 60% last week.  The knock-on effects were that 10-year JGB yields jumped 7bps, to 1.86%, their highest level since 2008 and as you can see from the chart below, continue to trend strongly higher.  Of course, given that inflation in Japan remains well above target, it is not that surprising that yields are climbing.  

Too, the other outcome here has been the yen (+0.7%) gaining a little ground, as per the below chart from tradingeconomics.com, and perhaps we have seen a short-term low in the currency.  Certainly, the increasing probability of US rate cuts is weighing on the dollar overall, so that is part of the story, but it remains to be seen if there are going to be wholesale changes in investment allocations that would be necessary to completely reverse the yen’s remarkable weakness over the past nearly four years.

The move in JGB yields has been blamed for the rise in yields around the world with Treasury and European Sovereign yields uniformly higher by 3bps this morning while some other regional Asian yields climbed between 4bps and 6bps.  In the end, inflation remains a problem almost everywhere in the world and I think that is what we are witnessing here.

As well, the JGB move was seen as the cause for Japanese equities’ (-1.9%) very weak performance which also dragged down some other regional markets (Taiwan, Australia, Philippines) but was not enough to undermine the rest of the region.  The flip side of that weakness was China (+1.1%) and HK (+0.7%) where it appears that hopes for a Fed rate cut more than offset weaker than forecast PMI data from China.  Another interesting story from the mainland was that the monthly Housing price data that was compiled by two key private companies was squashed by the Chinese government after China Vanke, one of the largest Chinese property companies, explained they would be late on an interest rate payment.  One can only imagine what that data looked like!

Meanwhile, in Europe, red is the color led by Germany’s DAX (-1.5%) although with weakness across the board (CAC -0.8%, IBEX -0.6%, FTSE MIB -0.9%).  Apparently, the story that progress has been made regarding peace talks in Ukraine is not seen as a positive there.  After all, if there is peace, will European governments still be so keen to build out their military, spending billions of euros at local defense and manufacturing firms?  It seems after a very strong close to the month in November, there is a bit of profit taking underway this morning.

In the commodity space, oil (+1.3%) is bouncing back to its trend line after OPEC confirmed it will not be increasing production in Q1 next year at a meeting yesterday.  I would expect that a real peace deal would be negative for this market as some part of that would be the relaxation of sanctions, I would assume.  But maybe I’m wrong there.  However, I continue to believe the trend is modestly lower going forward as there is far more supply available.  As to the other metals, both copper (+0.6%) and platinum (+1.5%) are continuing their runs higher with no end currently in sight.

Finally, the dollar is softer overall this morning, and while the yen (+0.7%) is the leader, the euro (+0.3%), SEK (+0.3%) and CHF (+0.25%) are also nicely up on the day with the rest of the G10 little changed.  The real movement, though, has been in the EMG bloc with CZK (+0.75%), HUF (+0.5%), PLN (+0.5%), and CLP (+0.4%) all benefitting from the Fed rate cut story as well as Chile’s benefits from copper’s rally.  While a cut seems highly likely, I suspect the real dollar story will be about the dot plot and SEP as well as Powell’s presser next week.

I’ve already run too long so will just mention that ISM Manufacturing (exp 48.9) is due this morning and I will review the week’s data expectations tomorrow.  

The world is changing and I expect that we will continue to see volatility across markets as investors come to grips with those changes, whether simple central bank rate decisions or more complex social movements and electoral outcomes that lead to major policy changes.  Be careful out there.

Good luck

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Circumspect

Posted on by

Said Williams, I really don’t think
Inflation will get us to blink
The jobs situation
Has led the narration
That growth has now started to shrink
 
But is that assumption correct?
In truth, it’s quite hard to detect
Atlanta’s Fed states
The ‘conomy’s great
And so, rate cuts are circumspect

 

Friday, John Williams was the latest FOMC member to regale us with his views and left us with the following:

“I view monetary policy as being modestly restrictive, although somewhat less so than before our recent actions. Therefore, I still see room for a further adjustment in the near term to the target range for the federal funds rate to move the stance of policy closer to the range of neutral, thereby maintaining the balance between the achievement of our two goals…

“My assessment is that the downside risks to employment have increased as the labor market has cooled, while the upside risks to inflation have lessened somewhat. Underlying inflation continues to trend downward, absent any evidence of second round effects emanating from tariffs.”

The reason his comments are important is because, not only is he a permanent voting member as NY Fed president, but he is also deemed quite close to Chairman Powell, and the belief is Powell okayed the text, implying Powell is still leaning toward a cut.  The Fed funds futures market certainly thinks so as the probability of a cut jumped from 32% on Thursday to 75% this morning.  In fact, that seemed to be the driver of the rebound in equity markets on Friday as futures market started their all-day rally right as he spoke at 7:30 in the morning.

Source: tradingeconomics.com

As to the Atlanta Fed’s GDPNow forecast, it ticked higher on Friday and is now sitting at 4.2% for Q3, certainly not synchronous with a major employment crisis.

This week, we will start to get much more information from the BLS and BEA although there is still a huge hole in that output, notably CPI, PCE and GDP.  It will likely take several more months before the rhythm of data gets back to the pre-shutdown cadence and more importantly, it offers the same level of completeness that existed back then.  I guess the FOMC will have to earn their keep for a while longer.

But Williams triggered a solid risk-on session with equities rallying and Treasury yields slipping, while the dollar held tight.  However, I want to touch on one more thing before looking at markets, where the overnight session was rather bland, and that is in reference to a Substack article by Michael Green I read over the weekend that offered a more quantitative approach toward understanding why despite what appears to be solid economic activity, so many people are so unhappy, unhappy enough to believe Socialism is a better choice for the nation going forward. 

The essence of the article, which is very well worth reading as he does all the math to prove his points, is that the delineation of poverty in the US (and I suspect in many Western nations) is laughably low.  For instance, the current poverty line is $31,200, which we all know is far below livable, while the current family median wage in the US is ~$80,000.  Seemingly, most folks should have no problems.  But Green does the calculations to show that if a family of 4 earns less than ~$140,000, they are going to struggle, even if they live in a lower cost area, not NYC where you probably need $350,000 to live.  Between health care, childcare, housing and food, etc., less than that $140k means you are not only living paycheck to paycheck but falling behind as well.

Read the article, linked above, and afterward, you can get a better appreciation for how Zohran Mamdani was elected Mayor of New York City, promising all sorts of free stuff, even though he has approximately zero chance of delivering any of it.

At any rate, that is background for the week ahead.  In Asia, Japan was closed for Workers Day, but Takaichi-san continues to make news regarding her hawkish stance on China.  Meanwhile, bourses in the region had a mixes session with some nice gainers (HK +2.0%, Australia +1.3%, Indonesia +1.85%) although the bulk of the rest of the region saw relatively little overall movement, +/-0.2% or so.  I guess they didn’t understand the benefits of the Fed potentially cutting rates. 🙃

Meanwhile, in Europe, things are far less interesting with a mix of gainers (Spain +0.5%, Germany +0.3%) and laggards (France -0.3%, Italy -1.1%) and the only notable news released being the German Ifo Expectations which slipped although remain solidly within its recent range.  Turning to US futures, at this hour (7:00), they are pointing higher by 0.5%.

In the bond market, Treasury yields continue to slide, down -2bps this morning and now back at 4.05%.  Clearly, the change in sentiment regarding the Fed rate cuts is dragging this yield lower for now.  In Europe, sovereign yields are little changed, overall, with some showing a -1bp decline and others completely lifeless.  Of course, JGB yields are unchanged given the Tokyo holiday.

In the commodity space, oil (-0.25%) continues to drift lower and the trend remains very much in that direction as can be seen in the chart below.  There was a very interesting article by Doomberg on Substack this week, reviewing their call that the idea of peak cheap oil is a myth, and there is a virtually unlimited supply of hydrocarbons available with only the politics preventing more production. (For instance, consider the UK essentially shutting down their North Sea oil production despite being in the midst of a self-inflicted energy crisis with the highest electricity prices in the world.  That’s not geology, that’s politics.)  But geology shows there is plenty to go around and growing supply will continue to pressure prices lower.

Source: tradingeconomics.com

Meanwhile, the metals markets are fairly quiet this morning with gold (+0.25%) and silver (+0.1%) showing far less movement than we have seen of late.  The one thing to note is that while both these metals are well off their highs from last month, they both seem to have found a comfortable resting place for now, and nothing about the global macroeconomic situation leads me to believe that the direction is lower from here.

Finally, the dollar is a touch softer this morning with the euro (+0.25%) the largest gainer in the G10 although JPY (-0.3%) remains under pressure overall.  However, in the EMG bloc, INR (+0.5%) and the CE3 (HUF +0.4%, CZK +0.4%. PLN +0.5%) are all firmer with many other currencies in this bloc creeping higher by 0.2% or so.  Interestingly, the DXY has barely slipped and remains above 100 for now.

This week, we are going to see a lot of the delayed September data come out, so like the NFP report from last week, which was old news, the question is, will we learn anything?  But here is a listing to keep in mind:

TuesdaySep Retail Sales0.4%
 -ex autos0.4%
 Sep PPI0.3% (2.7% Y/Y)
 -ex food & energy0.3% (2.7% Y/Y)
 Case Shiller Home Prices1.4%
 Consumer Confidence93.5
WednesdaySep Durable Goods0.2%
 -ex Transport0.2%
 Initial Claims227K
 Chicago PMI43.8
 Fed’s Beige Book 

Source: tradingeconomics.com

Obviously, Thursday is the Thanksgiving holiday and Friday there is nothing slated to be released.  Housing Data, Personal Income and Spending and PCE data are all still up in the air as to when, and what exactly, will be released.  The good news is it appears the entire FOMC is taking the week off as no Fed speakers are currently on the calendar.

If I recap what we know, the market remains beholden to the idea that the economy needs a Fed rate cut and was encouraged by Williams’ comments Friday.  However, questions about AI accounting methods are being raised and there is a growing split between those looking for an equity correction and those who think the near-future is going to be all roses.  From this poet’s perspective, nothing has changed my view that the Fed wants to cut rates, they just need cover to do so, and some softer data will give that cover.  But I also look around the world and find almost every other nation is in a worse situation than the US from a macroeconomic perspective, and it is that issue that informs my view that the dollar remains the best of a bad lot.  So, while fiat currencies will remain under pressure vs. commodities, I’d rather hold dollars than yen, euros, pesos or pretty much anything else.

Good luck

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Basically Fictive

Posted on by

For Fedniks it must be addictive
To say rates are “somewhat restrictive”
It seems like a show
As how can they know
Since R-star is basically fictive
 
Investors, though, lap up this stuff
In fact, they just can’t get enough
Of comments that hint
There is a blueprint
For policy, though that’s a bluff

 

Yesterday, both Richmond Fed president Barkin and Governor Jefferson explained that current Fed policy is “somewhat restrictive”.  This takes to seven the number of FOMC members who have used this phrase with Powell, Kugler, Hammack, Schmid and Collins all having used it before, as did Jefferson two weeks ago.  And they are all referring to the concept of R-star, the mythical rate at which policy is neither restrictive nor accommodative.  In fact, R-star has become the Fed’s north star, with the key difference being, we can actually see the north star while R-star, even they will admit, is unobservable.  Of course, that hasn’t stopped them from basing policy decisions on the variable.

I highlight this because the tone of virtually every one of these speeches has been one of caution, with the implication being they are very close to their nirvana so the last steps will be small.  However, we cannot forget that though the last steps may be small, there is still confidence amongst the entire body that the direction of travel is toward lower rates. certainly, as you can see from the aggregated meeting probabilities from the Fed funds futures market below, there is zero expectation that rates will rise anytime during the next two years and a decent chance of another 100bps of cuts over that time.

Source: cmegroup.com

I might contend that is a pretty negative outlook on the US economy by the Fed.  Given the Fed’s models assume that a key to lower inflation is slowing economic growth, the idea that rates are going to fall implies slower growth to help them achieve the inflation portion of their mandate.  But that seems out of step with both the Atlanta Fed’s GDPNow forecast shown below and currently sitting at 4.1% annualized for Q3 and with earnings forecasts in the equity markets.

Asking Grok, the average current earnings growth forecasts for 2026 for the S&P 500 is somewhere in the 13% – 14% range with revenue growth running at ~6.9%, which is typically in line with nominal GDP growth.  (I understand that current forward PE ratios are extremely high at 23x, so be careful that companies hit their targets while their share prices fall anyway.)  But if nominal GDP is going to run at nearly 7%, and let’s assume inflation is at 3.5%, which I think is a reasonable possibility, then the math tells us that GDP is growing at 3.5% on a real basis.  With Fed funds currently at 4.0%, why would they need to decline further?

Looking back at the Fed’s September Summary of Economic Projections, it appears that the Fed sees a very different economy than the markets see.  In fact, you can see that they believe nominal GDP in the long run is going to average <4.0% (sum of longer run GDP and PCE in the table below).  

That is a really big difference, one that is the type that can lead to massive policy errors.  Now, if those 17 people cloistered in the Marriner Eccles building have a better handle on the economy than everybody else, I can understand why they believe rates need to fall further.  But is that the case?  

Here’s something else to ponder, I asked Grok about the relationship between nominal GDP and Fed funds and the below table is what it produced:

It is patently obvious how the Fed has developed its models and because of that, why they have been so wrong.  In fact, look at the SEP above and compare it to the period from 2001 – 2019, they are essentially identical.  But I would argue, and I’m not alone, that the economy from the dot.com crash up to the pandemic is no longer the reality on the ground.  The Fed’s backward-looking models seem set to make yet more errors going forward.

And with those cheery thoughts, let’s look at what happened overnight.  Yesterday’s continuation of the US stock decline seems to be finding a bottom, at least temporarily as Asian markets were mixed (Nikkei -0.3%, Hang Seng -0.4%, CSI 300 +0.4%) with the rest of the region showing a similar mixture of gainers (India, Malaysia, Indonesia, Philippines) and losers (Korea, Taiwan, Australia) as it appears the entire world is awaiting Nvidia’s earnings after the US close today.

Similarly, European bourses are edging higher this morning with the rout seemingly over for now.  This morning Spain (+0.5%) is leading the way higher followed by Germany (+0.3%) with the rest of the markets little changed overall, although leaning higher.  As to US futures, at this hour (7:30) they are pushing higher by about 0.4%.

In the bond market, Treasury yields are unchanged this morning, still sitting right around that 4.10% level while European sovereigns have seen demand with yields slipping -2bps to -3bps across the continent.  The UK is the outlier here, with yields unchanged after releasing inflation data that was bang on expectations, and below last month’s readings, though remains well above their 2.0% target.  I guess if I look at the chart below, I might be able to make the case that core UK CPI is trending lower, but similarly to the Fed, the last time they were at their target was July 2021.

Source: tradingeconomics.com

I would be remiss if I didn’t mention that JGB yields have moved higher by 3bps, pushing their decade long highs further along as concerns grow over the Japanese fiscal situation.

Oil prices (-2.4%) are falling this morning, slipping to the low side of $60/bbl after API inventories showed a surprise build of 4.4 million barrels.  However, I would contend that there is very little new here.  Perhaps the dinner last night where President Trump hosted Saudi Prince MbS has some thinking OPEC will increase production more aggressively going forward.  In the metals markets, they are all shining this morning led by silver (+3.1%) and platinum (+3.0%) with gold (+1.3%) and copper (+1.3%) lagging, although remember the latter two are much larger markets so need more interest to rise as quickly.

Finally, the dollar continues to find support, despite the precious metals gains, and this morning we see the DXY (+0.15%) pushing back toward that psychological 100.00 level.  JPY (-0.5%) has traded through 156 and certainly seems like it wants to push back to its YTYD highs of 158.80.  Interestingly, there was no Japanese commentary of note last night, but I presume if this continues, the MOF will be out warning of potential future action.  Another interesting fact is that while the dollar is firmer against virtually all G10 currencies, the EMG bloc is holding its own this morning led by HUF (+0.6%), PLN (+0.25%) and ZAR (+0.15%) with the rand obviously benefitting from gold’s rally.  The forint has benefitted from the central bank maintaining policy on hold at 6.5%, one of the highest available rates in Europe and that has helped drag the zloty along for the ride.

On the data front, this morning we see the August Trade Balance (exp -$61.0B) and then the EIA oil inventories where a small draw is expected.  We also get the FOMC Minutes at 2:00pm and hear from NY Fed president Williams this afternoon.

I cannot help but look at the difference between the Fed’s very clear view and the markets expectations and feel like the Fed is on the wrong side of the trade.  It is for this reason I fear higher inflation and ultimately, a much lower likelihood of further rate cuts.  If that is the case, the dollar will find even more support.  Interesting times.

Good luck

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We All Will Be Fucted

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The Fed PhD’s have constructed
Their models, from which they’ve deducted
The future will be
Like post-GFC
In which case, we all will be fucted
 
Instead, perhaps what’s really needed
And for which Steve Miran has pleaded
Is changing impressions
In future Fed sessions
Accepting the past has receded

 

While we all know that things change over time, human nature tends to drive most of us, when facing a new situation, to call on our experience and analogize the new situation to what we have experienced in the past.  But sometimes, the differences are so great that there are no viable analogies.  For the past several years I have made the point in this commentary that the Fed’s models are broken.  Consider, as an example, how wrong they were regarding the alleged transitory nature of inflation in 2022 which led to policy adjustments that not only were far too late to address the issue, but in reality, only had a marginal impact anyway.

On a different, and topical subject, consider the issue with tariffs.  Economists explained that the imposition of tariffs would be devastating to the US consumer, raise prices dramatically and strengthen the dollar as FX markets adjusted to reflect the new trade policy.  But none of that happened, at least not yet.  In fact, the dollar continued to fall in the wake of the Liberation Day tariff announcements, while CPI since then has, granted, edged higher, but remains in its recent range for now and well below the 2022 levels (see below chart from tradingeconomics.com).

And a more important question regarding inflation is, have the tariffs been the driver, or has it been other parts of the price index, housing and core services for instance, that have been the key issue, neither of which would be directly impacted by tariffs.

All of this is to highlight the fact that the world has changed and that the evidence of the past several years, at least, is that the Fed’s econometric models are no longer fit for purpose.  I raise this issue because a look at so many previous market relationships show that many are breaking down.  We have seen gold rise alongside rising real interest rates and the dollar rise alongside gold, two things that are 180o from previous history.  Too, think back to 2022 when both stocks and bonds fell sharply at the same time, breaking the decades-long history of bonds behaving in a manner to offset declines in equity markets.

Source: tradingeconomics.com

This contemplation was brought on by a tweet which led me to a very interesting article (just a 5 minute read) by DL Jacobs of the Platypus Affiliated Society, regarding Fed Governor Miran and his recognition that the world has changed and that the Fed needs to change too.  Here is the second paragraph, and I think it explains the issue beautifully [emphasis added]:

He [Miran] used the moment to challenge the foundations of United States monetary policy. “I think it’s important to take these models seriously, not literally,” he said. He warned that models do not take into account the scale and speed of policy changes in light of the Trump administration’s re-election. The problem with the Fed isn’t wrong technique or bad data, he suggested, but rather that the very structure of its models is embedded in the economic and political assumptions of a bygone era. The world the forecasts are trying to measure no longer exists.

(At this point, I have to explain that the Platypus Society is a left-wing organization trying to explain why Marxism failed and recreate it, but that doesn’t make this article any less worthwhile.  I believe they see it as a step in the destruction of capitalism, which appears to be their goal.)

To me, this is just another point indicating that we’re not in Kansas anymore.  Policies need to change, and the Trump administration is working hard to do so.  One of the key points Miran makes is that the Fed and Treasury ought to be considered as a single entity, with the idea of Fed independence an anachronism from a bygone age.  The upshot is the Trump administration is going to continue to run things hot, or as macro analyst Lynn Alden has been saying, “Nothing stops this train”.  

This means that the Fed is going to run relatively easy monetary policy while the government, via the Treasury, is going to ensure there is ample liquidity available for everything, real economic activity and market activity.  The downside of these policies, alas, is that the idea inflation is going to decline in any meaningful way is simply wrong. It’s not.  Keep this in mind as we go forward.

As it happens, there was very little news of note overnight, at least market news, so let’s see how things behaved.  Friday’s mixed session in the US was followed by Chinese weakness with HK (-0.7%) and China (-0.7%) both under pressure.  Tokyo (-0.1%) was not nearly as impacted and the regional exchanges were actually broadly higher (Korea, India, Taiwan, Indonesia, Thailand).  The big news in Asia is the increasing verbal jousting by China and Japan at each other after PM Takaichi said, out loud, that if China attacked Taiwan, it would impact Japan.  Given the proximity, that is, of course, true, but apparently it was a taboo item in the diplomatic dance in the past.  I don’t see this having a long-term impact on anything.

In Europe, though, bourses are lower this morning led by Spain (-0.8%) although weakness is widespread (Germany -0.5%, France -0.4%. UK -0.1%).  There has been no data of note to drive this movement and it seems as though we are seeing the beginning of some longer-term profit taking after strong YTD gains by most bourses on the continent.  US futures at this hour (6:45) are pointing a bit higher, 0.43% or so.

In the bond market, Treasury yields have slipped -3bps this morning despite (because of?) the market pricing a December rate cut as a virtual coin toss.  This is a huge change over the past month as can be seen at the bottom of the chart below from cmegroup.com

Recent Fedspeak has highlighted the Fed’s uncertainty, especially absent data, and the belief that waiting is a better choice than acting incorrectly (what if waiting is the incorrect move?).  At any rate, we are going to be inundated with both Fedspeak (14 speeches this week!) as well as the beginnings of the delayed data so there will be lots of headlines.  Right now, I think it is fair to say that nobody is confident in the current direction of travel in the economy.  But perhaps, a more hawkish tone at the front of the curve has investors believing that inflation will, once again, become the Fed’s focus.  Alas, I don’t think so.  Looking elsewhere, European sovereign yields have followed Treasury yields lower, slipping between -2bps and -3bps this morning.  Perhaps more interesting is Japan, where JGB yields (+3bps) have risen to a new 17-year high as a prominent LDP member put forth a massive new spending bill to be passed.

In the commodity space, oil remains pinned to the $60/bbl level with lots of huffing and puffing about Russian sanctions and oil gluts and IEA changes of opinion but in the end, WTI has been either side of $60 for the past month+ and continues to trend slowly lower.  

Source: tradingeconomics.com

Metals remain the most volatile segment of the entire market complex although this morning, movement has not been so dramatic (Au -0.1%, Ag +0.9%, Cu -0.4%, Pt -0.1%).  All the metals remain substantially higher than where they began the year and all have seemingly run into levels at which more consolidation is needed before any further substantial gains can be made.  I don’t think the supply/demand story has changed here, just the price action.

Finally, the dollar is a touch firmer this morning, with the DXY (+0.1%) a good representation of the entire space.  The only two currencies that have moved more than 0.2% today are KRW (-0.9%) which reversed Friday’s price action and is explained as continued capital outflows to the US for investment.  On the flip side, CLP (+1.1%) is benefitting from the first round of Presidential elections in Chile, where the right-wing candidate came out ahead and is expected to consolidate the vote and win an absolute majority in the second round.  Jose Antonio Kast, if he wins, is expected to proffer more market-friendly policies than the current socialist president, Gabriel Boric.  It seems the people in Chile have had enough of socialism for now.  But other than those two currencies, this market remains quiet.

On the data front, there is so much data to be released, but the calendar for much of it has not yet been finalized.  One thing that is finalized is the September employment situation which is due for release Thursday morning at 8:30. This morning we see Empire State Manufacturing (exp 6.0) and Construction Spending (-0.1%) and hopefully, the calendar will fill in as the week passes.

While equity markets remain very near their all-time highs, the Fear and Greed Index is firmly in Fear territory as per the below from cnn.com.

Historically, this has been seen as an inverse indicator for stock markets although it has been down here for more than a month.  Uncertainty breeds fear and the lack of data has many people uncertain about the current state of the US economy since the only information they get is either from the cacophony of social media, the bias of mainstream media or their own two eyes.  But even if you trust your own eyes, they just don’t see that much, likely not enough to come to a broad conclusion. 

FWIW, which is probably not much, my take is things are slower than they have been earlier in the year, but nowhere near recession.  I think it is the correct decision for the Fed to hold next month rather than cut because the drivers of inflation remain extant.  But Jay doesn’t ask me.  Whether Miran is correct in his prescriptions for the economy, I am gratified that he is questioning the underlying structure.  In the meantime, run it hot remains the name of the game and that means any risk-off period is likely to be short.

Good luck

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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
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