Tag Archives: federal-reserve

Is Past Prologue?

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The Japanese tale
Now sees brighter times ahead
Yen buyers rejoice

 

While its movement has been somewhat choppy, for the past month, the yen has been the best performing currency in the G10, gaining more than 3.0% during that time.  This strength seems to have been built on several different themes including a more hawkish BOJ, better growth prospects based on PMI data, rising wages, and some underlying risk aversion.  A quick look at the chart shows that the trend is clearly lower and there have been far more down days for the dollar than up days during this period.

Source: tradingeconomics.com 

Of course, as I regularly remind myself, and you my good readers, perspective is an important thing to keep in mind, especially when making statements about longer term prospects of a currency.  When looking at USDJPY over a longer term, say the past 5 years where long-term trends have been entrenched based on broad macroeconomic issues as well as the day-to-day vagaries of trading, the picture looks quite different.  In fact, as you can see from the below chart, the past month’s movement barely registers.

Source: tradingeconomics.com

My point is that we must be careful regarding the relative importance of information and news and keep in mind that short-term movements may very well be just that, short-term, rather than major changes in long-term trends.  The latter require very significant macro changes regarding interest rate policy and economic activity, at least when it comes to currencies, not simply a single central bank policy move.

So, the question at hand is, are we at the beginning of a major set of policy shifts that will change the long-term trajectory of the yen?  Or is the yen’s recent strength merely normal noise?

While almost everybody has their own opinion on how the Fed is going to proceed going forward, I think it is instructive to look at the Fed funds futures market and the pricing for future rate activity.  For instance, a look at the current market, especially when compared where these probabilities were one month ago tells us that expectations for Fed rate cuts have diminished pretty substantially, arguably implying that there is more reason to hold dollars.

Source: CME.org

You can see in the lower right-hand corner of the chart that the probability of a rate cut has fallen from nearly 44% to just 16.5% over the past month.  However, during that same period, the BOJ has not only raised interest rates by 25bps, but they have made clear that further rate hikes are coming based on wage settlements and sticky inflationary readings.  One potential way to incorporate this relative movement is to look at the change in forecast interest rates, which in the US have risen by ~7bps (27% *25bps) while Japanese interest rates have risen by 25bps with expectations for another 25bps coming soon.  That is a powerful incentive to be long yen or at least less short yen, than previous positioning.  And we have seen that play out as the yen has strengthened as per the above.

The real question is, can we expect this to continue?  Or have we seen the bulk of the movement?   Here, much will depend on the future of the Fed’s actions as the market is seeing a bifurcation between those who believe rates are destined to fall further once inflation starts to ease again, vs. those, like this poet, who believe that inflation is showing no signs of easing, and therefore the Fed will be hard-pressed to justify further rate cuts.  While I am not the last word on the BOJ, from every source I see, expecting their base rate to be raised above 1.00% anytime in the next several years is aggressive.  Just look at the below chart showing the history of the BOJ base rate.  The last time the rate was above 0.50%, its current level, was September 1995.  That is not to say they cannot raise it, just that as you can see, several times in the intervening years they tried to do so and were forced to reverse course as the economy fell back into the doldrums with inflation quickly falling as well.  

Source: tradingeconomics.com

Is past prologue?  Personally, my take is above 1.0% is highly unlikely any time in the next several years.  Meanwhile, if inflation remains the problem it is in the US, Fed cuts will be much harder to justify.  This is not to say that the yen cannot strengthen somewhat further, but I am not of the opinion we have had a sea change in the long-term trend.

Ok, after spending way too much time on the yen, given that there hasn’t even been any tariff discussion on Japanese products, let’s look elsewhere to see how things moved overnight.

Yesterday saw further relief by equity investors that tariffs are a key Trump negotiating tactic rather than an effort to raise revenue and US markets all gained, especially the NASDAQ.  However, the movement in Asia was more muted with the Nikkei (+0.1%) barely higher while both Hong Kong (-0.9%) and China (-0.6%) fell amid the Chinese tariffs remaining in place.  As to the regional markets, there were some notably gainers (Korea and Taiwan), but away from those two a more mixed picture with less absolute movement was the order of the day.  In Europe, Spain’s IBEX (+1.0%) is the standout performer after the PMI data showed only a modest slowing, and a much better result than the rest of the continent.  Perhaps this explains why the rest of the continent is +/- 0.2% on the session.  As to US futures, they are lower at this hour (7:30) on the back of weaker earnings data from Google after the close last night.

In the bond market, yields have fallen across the board (except in Japan where JGB yields made a run at 1.30%) with Treasury yields lower by 4bps this morning and 12bps from the highs seen yesterday morning.  European sovereign yields are all lower as well, between -4bps and -7bps, as the weaker PMI data has traders convinced that the ECB is going to respond to weakening growth rather than sticky inflation and are now pricing in 100bps of cuts this year with the first 25bps coming tomorrow.

In the commodity space, gold (+1.0%) is the god of commodities right now, rallying more than $100/oz over the past five sessions.  There continue to be questions as to whether this is a major short squeeze as COMEX contracts come up for delivery, but it is not hard to write a narrative that there is increased uncertainty in the world and gold is still seen as the ultimate safe haven.  This gold rally continues to pull other metals higher (Ag +0.8%, Cu +0.2%) although I have to believe this is going to come to a halt soon.  Meanwhile, energy prices have fallen again (oil -1.0%, NatGas -1.5%) as fears over supply issues have dissipated completely.

Finally, the dollar is under pressure overall, certainly one of the reasons the yen (+1.0%) has performed so well overnight, but elsewhere in the G10, we are seeing the euro, pound and Aussie all gain 0.4% or so.  In the EMG bloc, CLP (+1.0%) is gaining on that renewed copper strength while ZAR (+0.5%) is shaking off the Trump threats regarding recent legislative changes and benefitting from gold’s massive rally.  The one outlier is MXN (-0.4%) which seems to be caught between the benefits of stronger silver prices (Mexico is a major exporter of silver) and weaker oil prices.

On the data front today, we start with ADP Employment (exp 150K) then the Trade Balance (-$96.6B) and get ISM Services (54.3) at 10:00.  We also see the EIA oil inventory data with a modest build anticipated across all products.  Four more Fed speakers are on the docket but as we continue to hear from more and more of the FOMC, the word of the moment is caution, as in, the Fed needs to move with caution regarding any further rate cuts.

I don’t blame the Fed for being cautious as President Trump has the ability to completely change perspectives with a single announcement.  While yesterday was focused on Gaza, not really a financial market concern, who knows what today will bring?  It is for this reason that I repeatedly remind one and all, hedging is the best way to moderate changes in cash flows and earnings, and consistent programs, regardless of the situation on a particular day, are very valuable.

Good luck

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Stardom is Fleeting

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Remarkably few people care
That Jay and the Fed will soon share
Their latest impressions
On growth and recessions
An outcome, of late, that’s quite rare
 
Does this mean that ere the next meeting
There will be an increase in bleating
By every Fed speaker
Each one a fame seeker
As they realize stardom is fleeting?

 

I wonder how the atmosphere in the meeting room at the Marriner Eccles building has changed today vs. what it has been for the past decade at least.  Usually, the FOMC meets, and financial markets are riveted by the potential and then everything comes to a virtual standstill as traders and investors await the wisdom of the Fed Chair to help determine where markets are likely to go.  I am reminded of the crop report scene in Trading Places, where the entire pit stops to watch the news and then springs back into action. 

One of the consequences of this evolution is that every member of the FOMC feels it is their duty to reiterate their views as frequently as possible, whether they are changing or not, because they are trying to increase their profile to ensure a lucrative future gig want to make sure that the American people understand just how much the Fed is doing to help them and the nation.  This is why for the first four weeks after a Fed meeting, virtually every day we have at least one if not two or three FOMC members repeating themselves ad nauseum.

But suddenly, they have real competition for airtime.  President Trump, no shrinking violet he, is incredibly adept at forcing all the world’s attention on himself, to the exclusion of formerly important voices like Alberto Musalem or Lisa Cook.  Now, the fact that you can probably not remember who those two people are is exactly my point.  FOMC members speak constantly, but it is the office, not the voice, to which people are listening.  And right now, fewer and fewer people are listening to the Fed because President Trump is commanding all the attention.  In fact, to the extent the Fed is discussed, it is generally in relation to how they are going to respond to Trump’s next moves.

But, in an effort to maintain our focus on markets and not politics, to the extent that is possible right now, the Fed still has a role to play in both expectations of how things are going to evolve as well as actual pricing.  A quick summation of where we have been with Powell and friends is that last year, starting in September they cut rates for the first time in nearly two years and have since reduced the Fed funds rate by 100bps.  A key issue here is the fact that the economy is showing no signs of slowing down, unemployment remains modest at best, and inflation has been, at best, bottoming well above their 2.0% target, if not rising again.  Hence, there have been many questions as to why they cut rates at all.

At this point, though, the Fed’s narrative prior to the quiet period, was one of increased caution that further rate cuts may not be necessary, or certainly not imminent, given the ongoing positivity in the economic situation.  As such, there is no expectation for a rate cut today, and according to the Fed funds futures market, only a 30% probability of a March cut, with basically two full cuts priced in for all of 2025.  I would argue that based on the data we have seen, it is not clear why there would be any further cuts, and, in fact, believe that by mid-year, we are likely to start to hear talk of a rate hike before the end of the year.  This will be dependent on the data, but if inflation continues to remain sticky (see chart of Core PCE below), the bar for cuts will move higher still.  Certainly, to my non-PhD trained eye, it doesn’t really look like their key metric is declining anymore.

Source: tradingeconomics.com

Perhaps the most remarkable thing about this Fed meeting is that I have seen virtually nothing regarding expectations of how the statement may change or forecasts may change.  FWIW, which is probably not much, my take is the statement will be virtually identical given no real changes in the data trends, and that Chairman Powell will go out of his way to say absolutely nothing at the presser, especially when asked about President Trump and his policies.  Of course, this will not prevent the cacophony of Fedspeak that will come between now and the next meeting, but there may be fewer folks paying attention.

Ok, let’s turn to markets.  While Monday was a tech stock rout, yesterday was the reverse with the NASDAQ shaking off the DeepSeek fears or actually embracing them based on Jevon’s Paradox (the idea that the more efficient something becomes, the greater the need/desire for it and therefore the increase in its price) leading to the new narrative that Nvidia’s chips will be in more demand.  But regardless, everybody was happier!  Asian markets responded with the Nikkei (+1.0%) regaining some luster on the tech story as well as the weaker JPY, which saw the dollar rally a full yen on the session, although it is little changed overnight.  While not universal, there was a lot more green than red in Asia, although Chinese shares (-0.4%) did not participate.

In Europe, most bourses are showing gains this morning although the CAC (-0.3%) is lagging after luxury goods makers saw weaker growth than expected.  But the DAX (+0.75%) and IBEX (+1.0%) are both stronger as is the FTSE 100 (+0.3%) as Chancellor Reeves continues to try to explain that growth is Labour’s goal despite all their policies that seem to point in the other direction.  As to US futures, at this hour (7:30) they are higher led by the NASDAQ (+0.5%).

In the bond market, the fear from Monday is gone although the bounce in yields was modest yesterday and this morning Treasury yields are unchanged on the session.  I suspect that there is some waiting for the Fed involved here.  European sovereign yields, though, are all a bit lower, down between -2bps and -3bps, as investors anticipate tomorrow’s ECB rate cut and are looking for a dovish message going forward.

In the commodity space, yesterday modest rebound in oil (-0.6%) is being reversed this morning while NatGas (0.0%) is consolidating after a dramatic decline in the past week of more than 20% given the latest weather models are now calling for much warmer temperatures in the northern hemisphere.  In the metals markets, gold (-0.2%) is consolidating yesterday’s gains as is silver (+0.2%) and copper (-0.1%).  For now, these are not all that interesting.

Finally, in the FX markets, the dollar continues to regain momentum higher with the euro (-0.3%) sliding back below 1.04 this morning and the DXY (+0.2%) back above 108.00.  However, looking across both the G10 and EMG blocs, while the dollar’s strength is widespread, it is not dramatic, with AUD (-0.5%) and PLN (-0.5%) the biggest movers of the session.  It should be no surprise that there is confusion here given the uncertainty sown by President Trump and his tariff discussions.

On the data front, the only numbers today, aside from the FOMC meeting and the BOC meeting (expected 25bp cut) is the Goods Trade Balance (exp -$105.4B).  We also get the EIA oil data with inventory builds anticipated.  But really, despite the seeming lack of interest leading up to today’s FOMC meeting, it is the only game in town.  To me, the risk is something more dovish as that part of the narrative seems to be ebbing lately, so will be a real surprise.  If that is the case, then I suspect the dollar will suffer somewhat.

Good luck

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In the “Know”

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According to those in the “know”
It’s certain that tariffs will grow
But now some are saying
The timing is straying
From instant to something more slow

 

In what has been a generally quiet evening in the markets, the story that President-elect Trump is considering imposing all those tariffs on a gradual basis, rather than instantaneously when he is inaugurated, was taken as a bullish sign by investors.  This seems to have been the driving force behind yesterday afternoon’s modest rebound in equity markets as the current market narrative is tariffs = bad, no tariffs = good.  From what I can determine, these are anonymous comments not directly attributed to Trump or his incoming economics team and, in fact, Trump denied that possibility.

But the market impact was real as not only did equity markets rebound a bit, but the dollar, which had soared yesterday, has given back some of those gains and is modestly lower this morning.  If we learned nothing else from President Trump’s first term, it should be clear that there is frequently a great deal of bombast emanating from the White House and responding to each and every comment is a recipe for exhaustion and disaster. While this cannot be ruled out, if one were to ascribe a Trumpian gospel it would be that tariffs are beautiful so slow-rolling them doesn’t really accord with that view.  I guess we will all find out more next week.

Now, turning to data releases
This week its inflation showpieces
Today’s PPI
Is tipped to be high
While Wednesday the core rate increases

Away from that story, though, there has been little else of note overnight.  As such, let’s focus on the PPI data this morning and CPI tomorrow as they ought to help inform our views on the Fed’s actions going forward. Expectations are for headline to rise to 3.4% Y/Y while core jumps to 3.8% Y/Y.  It is difficult to look at a chart of these readings and not conclude that the bottom is in and the trend is higher.

Source: tradingeconomics.com

This is not to say that we are going to see price rises like we did back in 2022 as the waves of Covid spending washed through the economy, but the Fed’s mantra that inflation is going to head back to 2.0% over time is not obvious either.  In fact, if I were a betting man, I would estimate that we are likely to continue to see inflation run between 3.5% and 4.5% for the foreseeable future.  There is just nothing around to prevent that in the short run.  Now, if we do see significant productivity enhancements, those numbers will decline, but my take is the best opportunity for that, more effective and widespread use of AI, is still several years away.

Remember, too, that the government writ large, whether headed by R’s or D’s is all-in on inflation as it is the only opportunity they have to reduce the real value of the outstanding government debt.  Perhaps the Trump administration will take a different tack, but it is not clear they will be able to do so.  The only time inflation is a concern is when it becomes a political liability.  For the two decades leading up to Covid, it was not a daily concern of the population and central banks around the world were terrified of deflation!  In fact, there are so many comments by folks like Yellen, Bernanke and other Fed governors and presidents decrying the fact that their key regret was not getting inflation high enough, it is difficult to count them.  But as evidenced by the chart below of CPI, we no longer live in that world.

Source: tradingeconomics.com

Summing up, the current situation is that inflation has likely bottomed, the government continues to run massive fiscal deficits and given the $36 trillion in debt outstanding, the government needs to reduce the interest rate they pay on their debt.  If pressed, I would expect that we will see synthetic yield curve control (YCC) enabled by regulatory changes requiring banks and insurance companies to own a greater percentage of Treasury notes and bonds in their portfolios to ensure there is sufficient demand for issuance.  That can have the effect of turning long-term real yields negative, exactly the outcome the government wants. Remember, from 1944-1951, the Fed enacted YCC directly and it worked wonders in reducing the debt/GDP ratio.  They know this tool and will not be afraid to use it.

Ok, let’s take a look at what little action there was overnight.  After yesterday’s late rebound resulted in a mixed close with the NASDAQ still lower but the other two indices closing in the green, Asian equity markets also had a mixed picture.  The Nikkei (-1.8%) was the laggard, seemingly following last week’s US market movement after reopening from a holiday weekend.  However, Chinese shares (Hang Seng +1.8%, CSI 300 +2.6%) rallied sharply on the latest news that more Chinese stimulus was coming soon.  This time the Ministry of Commerce claimed they would be looking to boost consumption this year, but neglected to mention how they will do so.  Regardless, investors liked the story and when added to the gradual tariff story, it was all green.

European bourses are also in fine fettle this morning with gains across the board (CAC +1.2%, DAX +0.8%, IBEX +0.6%) and even the FTSE 100 (+0.1%) has managed to rally a bit.  This price movement, and that of the rest of Asia where gains were seen, seems all to be a piece with the slower tariff story discussed above.  As to US futures markets, at this hour (6:40), they are pointing modestly higher, 0.45%.

In the bond market, the only place where yields have moved significantly today is in Japan, where JGB yields have jumped 5bps and are now at their highest point since February 2011.  This followed comments from Deputy Governor Himino that the board was likely to debate a rate hike at their meeting next week and market pricing has a 60% probability priced in for the move.  There is much talk of wage increases in Japan, and Himino-san also raised questions about what the Trump administration will do and how it will impact yields.  Interestingly, despite the more hawkish rhetoric, the yen (-0.25%) actually declined today, not necessarily what you would expect.  As to the rest of the bond market, everything is within 1bp of Monday’s closing levels.

In the commodity markets, oil (-0.3%), which has been rocking lately on the increased Russia sanctions, is consolidating this morning although remains higher by nearly 6% this week and 12% in the past month. (As an aside, I don’t understand the Biden theory that sanctions driving up prices is going to be a detriment to Putin as he will make up for the loss of volume with higher prices, but then, I’m not a politician.). Meanwhile, NatGas (-3.2%) has backed off its recent highs as storage concerns ebb, although the ongoing cold weather appears to have the opportunity to push prices higher again.  As well, the latest dunkelflaute throughout Europe is driving demand for LNG.  In the metals markets, yesterday’s declines have been arrested, and we are basically unchanged this morning.

Finally, the dollar is mixed this morning, edging higher against some G10 counterparts (GBP -0.3%, JPY -0.4%) but sliding against others (NZD +0.6%).  Versus the EMG bloc, again the picture is mixed today with gainers (ZAR +0.4%, KRW +0.3%) and laggards (CZK -0.2%) although overall, I would argue the dollar is a touch softer on the back of the gradual tariff story.

On the data front, this morning’s PPI data (exp 0.3% M/M, 3.4% Y/Y) headline and (0.3% M/M, 3.8% Y/Y) core is the extent of what is to come.  Interestingly, the NFIB Index jumped to 105.1, the highest print since October 2018, as small businesses are clearly excited about the prospects of a Trump administration and the promised regulatory cuts.

Right now, both the dollar and Treasury yields are pushing to levels that have caused market problems in the past.  If these trends continue, be prepared for some more significant price action.  That could manifest as a sharp decline in equity markets, or some surprising Fed activity as they try to address any potential market structural problems that may arise.  But there is nothing due to stop the trends right now.

Good luck

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A Future Quite Noeth

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All eyes will be on NFP
As pundits are hoping to see
A modest result
That can catapult
The market to its apogee
 
If strong, the concern is that growth
Will strengthen and Jay will be loath
To cut rates once more
Which bulls will deplore
Implying a future quite noeth
 
If weak, then the problem for stocks
Is earnings will suffer a pox
So even if rates
Are cut in the States
The NASDAQ may still hit the rocks

 

It’s payroll day and especially after yesterday’s day of respect for the late President Carter closed equity markets in the US, investors are anxious to get back to business.  Here are the latest consensus estimates for the key figures to be released

Nonfarm Payrolls160K
Private Payrolls135K
Manufacturing Payrolls5K
Unemployment Rate4.2%
Average Hourly Earnings0.3% (4.0% Y/Y)
Average Weekly Hours34.3
Participation Rate62.8%
Michigan Sentiment73.8

Source: tradingeconomics.com

As well, there will be annual revisions to the household report today, which is the portion of the process that calculates the Unemployment Rate.  Next month we will see the annual revisions to the NFP, where estimates are already circulating that the number of jobs created in 2024 will be revised down by more than 1 million, nearly one-half of the claimed number (~2.2 million) created.

But ultimately, the reason this data point gets so much press is that it is half of the Fed’s mandate and so is closely watched by the FOMC as they consider any policy stance.  Yesterday, St Louis Fed president Musalem became the seventh or eighth Fed speaker since the last meeting to explain that more caution was warranted as the Fed tries to reduce what they still believe is a modest tightening bias.  “… [rate reductions] have to be gradual – and more gradual than I thought in September,” according to Musalem.  So, caution remains the watchword for every member of the FOMC and accordingly, the market is pricing just a 5% probability of a rate cut later this month.

The thing that has really changed over the past several months is the market’s reaction function to the data.  Part of this is based on the fact that it appears the Fed’s reaction function has changed a bit, and part of this is because the economic situation remains so confusing.

Regarding the Fed, given the fact that the data since they started cutting rates in September has been quite robust and given the fact they no longer have a political/partisan motive to cut rates, it strikes me it will be far harder for Powell and friends to justify further rate cuts from here.  After all, if GDP is growing at 3.0% and inflation is running at 3.3%, absent all other information, that data would truthfully argue for rate hikes.  However, there remains a large camp of analysts that continue to expect a significant slowdown in economic activity, with a number of well-respected voices claiming that we are already in a recession and have been in one since sometime in 2024.  

My view is that this confusion remains best explained by the concept of the K-shaped recovery where a smaller portion of the population, notably those with assets and investments in the markets, have been huge beneficiaries of Fed policies as they not only have seen their portfolios climb in value, but their cash is earning a nice return.  Meanwhile, a much larger percentage of the population, although a group that receives far less press from the financial reporters, continues to struggle given still rising prices and less overall opportunity for advancement.  This is the genesis of the labor strife we have seen, but there are many who remain left behind.  The problem for the Fed is they don’t really see this second cohort as their constituents, at least based on their policy actions.

As to today’s release, if we look at the recent Initial Claims data, it is consistent with a stronger number rather than a weaker one.  However, from a market perspective, I believe that a strong NFP number, something like 200K, will see a risk sell-off as the market continues to remove pricing for any rate cuts in 2025.  This will hurt stocks and likely bonds, although it will help the dollar and, surprisingly, commodities, as the market is likely to see increased demand forthcoming.

Elsewhere, aside from the wildfires in LA, which are a terrible tragedy, the other story in markets today revolves around the ongoing, slow motion disintegration of any remaining credibility in the UK government and its ability to address the many problems there.  Gilt yields continue to rise sharply, although I continue to hear many rationales as to why this is NOT like the October 2022 Gilt crisis.  Alas, while certainly the speed of this decline in Gilts is not quite as dramatic as we saw back then, the duration of the problem is far greater, and we have moved further now than then.  As you can see from the below chart, Gilt yields have risen 110bps since the middle of September, outpacing even Treasury yields and 10yr Gilts now yield 15bps more than Treasuries.  

Source: tradingeconomics.com

In fact, UK 10-year yields are the highest in the G10, although in fairness, they are not yet approaching levels like Mexico (10.6%), Brazil (14.75%) or Turkey (26.4%).  Perhaps Chancellor Reeves has those targets in mind.

OK, let’s see how markets behaved in the lead-up to the data this morning.  There was no joy in Mudville Asia last night as the Nikkei (-1.05%) slid amid new stories that the odds of a BOJ rate hike in two weeks are rising, while Chinese shares (Hang Seng -0.9%, CSI 300 -1.2%) were also under pressure amid news that the PBOC would stop buying bonds (ending QE) and additionally might be selling some to reduce liquidity in Hong Kong as they attempt to slow the decline of the renminbi.  The rest of the region was similarly under pressure across the board. 

In Europe, the picture is more nuanced with the DAX (+0.4%) and CAC +0.3%) showing some modest gains after slightly better than expected French IP data.  However, the FTSE 100 (-0.4%) and other continental bourses (IBEX -0.9%) are not quite as positive, with the FTSE clearly feeling pressure from the overall negative sentiment on the UK, while mixed data elsewhere is undermining any investor sentiment.  US futures at this hour (7:15) are pointing lower by about -0.25% across the board.  Fears of a strong number?

In the bond market, Treasury yields continue to climb, as they are holding onto yesterday’s rise of 5bps and this morning we are seeing European sovereign yields all creep higher by 1bp to 2bps.  JGB yields also rose 2bps overnight as part of that BOJ rate hike story.  In fact, the only market that didn’t see yields rise is China, where they remain within 2bps of their recent all-time lows

In the commodity markets, oil (+3.2%) is skyrocketing as continued cold weather increases heating demand while the reduction in inventories in Cushing, Oklahoma (the main point for NYMEX contract settlements) has raised concern over available supply of crude.  Meanwhile, metals prices continue to climb steadily with gold (+0.3%) continuing its run alongside silver (+0.8%) and copper (+0.45%).  The demand for “stuff” remains strong as nations around the world slowly lose confidence in government bonds as an effective store of value.

Finally, the dollar is, net, little changed this morning with some gains and some losses although few large moves.  On the dollar’s plus side we see KRW (-0.5%), ZAR (-0.55%) and BRL (-0.35%) while the yen and renminbi have both seen modest gains (+0.1%) on the back of the liquidity reduction stories in both nations.  However, we must keep in mind the dollar, as measured by the DXY, remains above 109 and continues to strongly trend higher.  My take is the highs seen in autumn 2022 are the next target, so look for the euro to sink below parity and the pound well below 1.20, probably 1.15, before too long.

There are no Fed speakers on the schedule today, although I imagine we will hear from somebody after the data since they cannot seem to shut up.  However, after today, they head into their quiet period ahead of the next FOMC meeting, so until then we will need to rely on Nick Timiraos from the WSJ to understand what Powell is thinking.

While nothing is that clear, and we could easily see a weak NFP report, my take is we are far more likely to see a strong one with stocks and bonds selling off and the dollar rising further.

Good luck and good weekend

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The Twists of the Coming Year

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(With apologies to Henry Wadsworth Longfellow)

Listen my children and you shall hear
Of the twists and turns to come this year
Let’s look through to Christmas time, Ought Twenty-Five
At which point, I trust, we’re all still alive
To learn what’s robust, and what is austere
 
To start out this tale, the ‘conomy’s first
Will Trump bring us growth or disaster?
The former, my friends, percent three at worst
Though inflation will start rising faster
In fact, by year end, alas you will find
That prices have risen, instead of declined
Perhaps four percent, or just less
For Powell, t’will be quite a mess
At least, as of now, that’s my very best guess
 
With this for context, let’s turn now to rates
A subject, on which, we’ve many debates
The Chairman wants to keep cutting
But that window appears to be shutting
As he’s hemmed in by those dual mandates
In fact, ere this year comes to a close
As neither growth nor inflation slows
The Fed will turn tail and be forced to raise
Fed funds, a result that’s sure to amaze
 
Through summer, before those hikes arrive
Prices for bonds will keep falling
Investors will start caterwauling
As yields climb to levels not lately seen
Think 10-year’s a half-point o’er five
And 30’s at six percent, stalling
With calls that Chair Jay intervene
 
Come solstice, yields will have reached their peak
Then Powell and friends will respond
At which point you’ll want to buy the bond
As we are overwhelmed by Fedspeak
Inflation will once again be Job One
And Powell, this mandate, will not shun
So, Fed funds will start to be raised
And Powell, by hawks, will be praised
But President Trump will be miffed
And his response will be sure and swift
With Tweets, many see as half-crazed
 
As rates and yields rise, what, now, of stocks?
How will they fare in this brave new world?
Seems likely sectors will be swirled
Industrials healthy, tech with a pox
Thus, indices, pressure will feel
As FOMOers soon start to squeal
This is one move they’ll want to miss out
Although I don’t foresee a great rout
Investors will then face a true paradox
Do rates matter more or growth, for stocks?
And will foreigners all lose their zeal?
Come year end, the Dow is likely to drift
Toward 40K in a modest downshift
Though Tech is another story
With the Q’s at four hunge, pretty gory.
 
Attention, now must, to Europe we turn
A region, which lately’s been a concern
Governments falling and growth, oh so weak
This is a place investors will spurn
As profits, returns and value they seek
The ECB mandate, inflation alone
Will suffer as weaker growth they bemoan
Thus Madame Lagarde, much further will cut
Which leads to a case, quite open and shut
As interest rates slide, back to, Percent, One
The euro, itself will, too, come undone
‘ Neath Parity when, December, we look
The euro will trade, as it’s been forsook
And don’t be surprised if Sterling, as well
Falls down to One-Ten, by hook or by crook
As Starmer and Labor face a death knell
 
In China, though Xi is certain to try
His best to attain real 5% growth
When push comes to shove hist’ry shows he’s been loath
To help demand rather than add to supply
And adding to troubles, a falling birthrate
Is just one more thing that will, Xi, frustrate
As such, come December, a Yuan below Eight
Is likely with further rate cuts coming nigh
 
Japan is our next discussion to nourish
Ishiba is anxious for growth there to flourish
As such, raising rates is highly unlikely
His bet will be paychecks are greater than ‘flation
If not, he will be condemned to damnation
And soon lose his job, on that we agree
 
The upshot for FX seems clear
The yen will struggle to find support
And so, come the end of the year
We’ll see levels not seen in decades
One Seventy’s likely where it trades
As yen’s weakness, Ueda can’t thwart
 
Let us turn now to EMG
Whose moneys all tumbled throughout Twenty-Four
When looking ahead I foresee
Troubles ahead, though perhaps not as bad
As last year’s distress, though still quite sad
Ten percent falls or more, you’d agree
Are signals investors, these moneys, deplore
 
Let us start south of the border
Where last year, pesos fell 20%
For Ms. Scheinbaum t’will be a tall order
To soothe Donald Trump and maintain her smile
When fighting inflation all the while
As Banxico, last year’s hikes do augment
This won’t be enough to arrest its fall
Though it won’t fall to Covid lows
Next winter we’ll all be in thrall
When Twenty-Three on your screen shows
 
And finally, Brazil, the land of the Samba
Is likely to see its currency bomb-a
Inflation has bottomed, and is rising
While Lula has nought enterprising
The central bank, rates, will certainly raise
But t’wont be enough, the real to praise
Come Christmas, the real, to Seven will jump
Though that is no way to make friends with Trump
 
These forecasts rely on the Fed
Adjusting their story as prices won’t sink
But if Powell cuts, we must rethink
‘Cause things will be very different ahead
The dollar will suffer, commodities soar
Investors, T-bonds, will say issue no more
While stocks will rise sharply, say Dow 50K
But truly, that strikes me as widely astray
In sum, please remember that I’m just one man
And though I attempt to weave a strong thread
Oft times things don’t go according to plan
Dear readers, I hope, that I’ve not misled
 
For all of you who have stuck with me through the gyrations past, and perhaps will do so for the gyrations future, thank you for giving me your time and consideration.
I truly appreciate your thoughts and feedback on each and every note.
Have a very happy and prosperous 2025
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To Further Debase

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Said Jay, “The economy’s strong”
But rate cuts before weren’t wrong
We’re in a good place
To further debase
Your dollars and will before long
As we slow the pace
Of policy ease all year long

 

Chairman Powell regaled the market for the last time before the Fed’s quiet period begins tomorrow evening and here are the three comments that seem to explain his current views. 

  • “We wanted to send a strong signal that we were going to support the labor market if it continued to weaken.”
  • “The economy is strong, and it’s stronger than we thought it was going to be in September.”
  • “The good news is that we can afford to be a little more cautious as we try to find a rate-setting that neither spurs nor slows growth.”

My read is he was trying to make an excuse for the 50bp cut that started the process in September as there is still no justification for that move.  However, he essentially reiterated his last remarks of the Fed not being in a hurry to cut rates further.  As it happens, SF Fed president Mary Daly also explained, “We do not need to be urgent. There’s no sense of urgency, but we do need to continue to carefully calibrate our policy and make sure it’s in line with the economy we have today the one we expect to have going forward.” 

Now, a funny thing happened to me yesterday as I read those comments, and my expectation was that the Fed funds futures market might reduce the probability of a December rate cut.  After all, we just heard from the Chairman that things are good and they can be cautious about further cuts, while another member expressly said there was no urgency to cut.  But in fact, the 74% probability this morning is unchanged from yesterday’s level and the punditry remains very convinced that they are going to cut next week despite their caution.  It seems that my understanding of caution and Powell’s are somewhat different.  However, his understanding is the one that matters, so it appears absent a major upside surprise in both NFP tomorrow and CPI next week, a cut is coming on the 18th.

The French president, M. Macron
May soon find himself overthrown
His PM is out
And there is great doubt
‘Bout any new views he has shown

The other topic of note this morning is the collapse of Monsieur Macron’s minority government in France.  This was the widely expected outcome that markets had priced in, so there has been little in the way of impact there.  However, the bigger picture impact is about the structure of the Eurozone (and EU) and its rules.  After all, if the second largest economy in the group is not merely floundering economically, but essentially leaderless, the concept of a coherent set of plans to oversee the Eurozone seems a bit of a stretch.

Macron’s term is not up until 2027, and he has consistently maintained he will not step down early, but there are increasing calls for him to do just that.  Members of parliament on both the left and right, although not Marine Le Pen, the RN’s leader, have been vocal on the subject and a recent poll by Cluster17 for Le Point magazine showed that 54% of the French public wanted him to step down as well.  Now, you know as well as I that absent a criminal conviction, the odds of an elected official stepping down anywhere in the world approach zero and I expect nothing less from Macron.  At the same time, French law prevents another parliamentary election for 12 months after the last, which means July.  At that time, one will almost certainly be called, and it will be interesting to see how that plays out.  

However, in the meantime, it seems likely that France will be floundering with no ability to address fiscal issues, be they spending or deficit focused.  This cannot be a positive for the single currency, especially if France slips into recession.  Again, despite all the concerns over the dollar and the untenable fiscal deficits, things in Europe appear far worse.  Parity in the euro and below seems a far better bet over the next 6 months than the opposite.  While the euro (+0.2%) has bounced slightly this morning, a look at the chart below indicates, at least to me, that the trend is distinctly lower.

Source: tradingeconomics.com

And with that, let’s look at the overnight session in markets.  Continuing in the FX world, that modest euro gain is descriptive of the market as a whole, with the dollar slightly softer this morning, although few currencies showing any notable strength.  I suspect much of this is based on the idea that the Fed will cut rates soon despite the “strong economy”.  In truth, in the G10, no currency has moved more than 0.2% and even in the EMG space, only ZAR (+0.4%) and HUF (+0.5%) have climbed more.  Those moves, which don’t appear to have any fundamental drivers, seem more likely to be expressions of the fact those markets are more volatile than the G10.

In the equity markets, yesterday’s US rally, to new all-time highs across the board, saw a mixed review in Asia with the Nikkei (+0.3%) edging higher but both Hong Kong (-0.9%) and Shanghai (-0.25%) slipping a bit.  The rest of Asia was also mixed with Korea (-0.9%) still suffering from the bizarre happenings there yesterday but other markets performing well (India +1.0%, Singapore +0.6%).  In Europe, only the UK (-0.1%) is under water this morning although the CAC (+0.2%) is the continental laggard.  Spain’s IBEX (+1.2%) is the leader on the back of stronger IP, and although Eurozone Retail Sales were much weaker than expected, it has not seemed to impact investor views.  As to US futures, they are little changed at this hour (7:30).

In the bond market, Treasury yields have backed up 3bps and I am beginning to sense that there is a negative correlation to the probability of a Fed rate cut and the 10-year yield.  As that probability rises, bonds sell off further, but that is merely an anecdotal observation, I have not done the math.  In Europe, yields are mixed, but within 1bp of yesterday’s closing levels with even French yields slipping 1bp. It will be very interesting to see how the European Commission handles the fact that the French budget deficit is so far above the targeted 3% level and now without a government, there is no way to address the situation.  The original idea when the euro was formed was that governments would be fined if they broke the policy caps on debt and deficits.  Of course, no fine has ever been imposed and I don’t suppose one will be now.  (However, if Marine Le Pen’s RN wins the election next summer, you can be sure they will seek to impose fines on her government!)

Finally, in the commodity markets, it is very quiet this morning.  Oil (+0.3%) is edging higher after a big rise and fall yesterday.  The rise was the result of a steep draw in US inventories, but the decline seemed to be a response to OPEC+ confirming they will be increasing production at some point in 2025.  Meanwhile, metals markets are basically unchanged this morning.

One other thing I have not discussed but is obviously getting a lot of press this morning, is Bitcoin which traded through $100K yesterday after President-elect Trump named Paul Atkins to be his new SEC Chair.  Atkins has a very pro crypto bias, and I expect we will see far more impetus in the crypto space going forward, not just in Bitcoin.

On the data front, yesterday’s ISM data was a bit softer than forecast while the Beige Book explained that economic activity rose slightly in the past month along with employment and prices, but all movements were quite modest.  This morning, we see Initial (exp 215K) and Continuing (1910K) Claims as well as the Trade Balance (-$75.0B) and later we hear from Richmond Fed president Barkin.  

Looking at the overall situation, investors continue to ignore any potential problems and run to risk assets, as evidenced by the rally in Bitcoin and new highs in stock prices.  Unless we see some really surprising data, either crazy strong implying the Fed is going to stop easing, or crazy weak implying we are in a recession, I see no reason for this process to end heading into the new year and President Trump’s inauguration.  Again, in that scenario, I think you have to like the dollar higher.

Good luck

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In a Plight

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The Minutes explained that the Fed
Is confident, looking ahead
They’ve conquered inflation
Although its duration
May last longer than they had said
 
They still think their policy’s tight
And truthfully, they may be right
But if they are not
And ‘flation’s still hot
They might find themselves in a plight

 

Below are a couple of key passages from the FOMC Minutes which show that the Fed continues to put on a game face when it comes to their performance.  Although some participants have begun to hedge their bets, it is clear the majority of the committee remains convinced that despite the broad inaccuracies of their models over the past forty four years, they are still on track to achieve their objectives.  

“Participants anticipated that if the data came in about as expected, with inflation continuing to move down sustainably to 2% and the economy remaining near maximum employment, it would likely be appropriate to move gradually toward a more neutral stance of policy over time.”

“Participants indicated that they remained confident that inflation was moving sustainably toward 2%, although a couple noted the possibility that the process could take longer than previously expected.”  [emphasis added]

And this morning, they will get to see if their confidence has been rewarded with the release of the October PCE data (exp 0.2%, 2.3% Y/Y headline; 0.3%, 2.8% Y/Y core).  One of the tell-tale signs that they are losing confidence is there has been more discussion about the vagaries of where exactly the neutral rate lies as evidenced by the following comment.  

“Many participants observed that uncertainties concerning the level of the neutral rate of interest complicated the assessment of the degree of restrictiveness of monetary policy and, in their view, made it appropriate to reduce policy restraint gradually.”

Once upon a time, the Fed was the undisputed master of markets, and their actions and words were the key drivers of prices across all asset classes.  However, not dissimilar to what we have seen occur regarding other mainstream institutions and their loss in respect, the same is happening at the Marriner Eccles Building I believe.  Chairman Powell, he of transitory inflation fame, is a far cry from the Maestro, Alan Greenspan, let alone Saint Volcker, and my observation is that more and more market participants listen to, but do not heed, the Fed’s words.

My read is the Fed has it in their mind that they need to continue to cut rates because the committee members have not lived through periods when interest rates were at current levels for any extended length of time.  They still fervently believe that their policy is restrictive, despite all the evidence to the contrary (record high stock prices and GDP expanding above potential) and so seem afraid that if they don’t cut rates they will be blamed for a recession.  I would argue the market interpretation of the Minutes was dovish as shown by the Fed funds futures market increasing the probability of a December cut to 66%.  Remember, Monday it was 52%.  My cynical view is the reason Powell wants to cut is his friends in the Private Equity space are suffering and he wants to help, because really, given both the inflation and economic activity data, it does not appear a cut is warranted.

Turning our attention elsewhere, there is a story going round that China is preparing to fire that bazooka this time…for real.  At least that’s what I keep reading on X, and certainly, Chinese equity markets rallied on something (CSI 300 +1.75%, Hang Seng +2.3%), but I cannot find a news story explaining any of it.  Were there comments from Xi or Li Qiang?  If so, I have not seen them.  While Chinese assets have underperformed lately, that seems to have been a response to the Trump announcements of even more tariff-minded economic cabinet members.  And the currency is essentially unchanged this morning, hanging just above that 7.25 level vs. the dollar which has served as a cap for the past decade.  (see below).

Source: tradingeconomics.com

Keep in mind that the consensus view is if Trump imposes tariffs, the renminbi will weaken enough to offset them very quickly.  Arguably, the dollar’s strength since September, when it briefly traded below 7.00, is a response to first, Trump’s improving prospects to win, and then once he won, his cabinet selections.  Will CNY really decline 5% if tariffs are imposed?  That seems an awful lot, but I guess it’s possible.  It strikes me that hedgers should be looking at CNY puts to manage their risk here.

Finally, a look at Europe shows that the dysfunction on the continent seems to be accelerating.  France is the latest target as the current government is hanging on by a thread with growing expectations that Marine Le Pen’s RN party is going to call for a confidence vote and topple it.  As well, there are growing calls for President Macron to resign as he has clearly lost control.  They are currently running a 6% fiscal deficit (just like the US although without the benefit of the world’s reserve currency) and they already have the highest tax burden in Europe.    With Germany sinking further into its own morass (GfK Consumer Confidence fell to -23.3 and continues to show a nation lacking belief in its future.  Just look at the longer-term chart of this indicator below:

Source: tradingeconomics.com

While Covid was obviously a problem, things seemed to be getting back toward normal until Russia’s invasion of Ukraine in early 2022 sent energy prices higher and laid bare the insanity of their Energiewende policy.  As industry flees the country and politics focuses on the immigration issues ignited by Angela Merkel’s open borders policy, people there truly have little hope that things will get better.  

I cannot look at the situation in both Germany and France, with both nations struggling mightily and conclude anything other than the ECB is going to be cutting rates more aggressively going forward.  Combining that with the ongoing belief that Trump’s policies are going to be dollar positive overall, it seems that the euro has much further to decline.  Do not be surprised to see it break parity sometime early in 2025.

Ok, ahead of the Thanksgiving holiday, let’s look at other markets.  In addition to the gains in Chinese shares, Australia (+0.6%) and New Zealand (+0.7%) had a good session with the latter buoyed by the RBNZ cutting rates the expected 50bps.  However, Japan (-0.8%) was under pressure as the yen (+1.1%) rallied strongly on rumors that the BOJ is getting set to hike rates next month, a bit of a change from the previous viewpoint.  In Europe, the CAC (-1.25%) is the laggard as investors are watching French OATs slide in price (rise in yields) relative to their German Bund counterparts and worrying that if the government does fall, there is no way for things to work without the RN involved.  But the DAX (-0.6%) is also softer as is the rest of the continent.  Only the UK (0.0%) is holding up this morning.   meanwhile, at this hour (7:10), US futures are pointing slightly lower, just -0.15% or so.

In the bond market, Treasury yields (-4bps) continue to slide as investors are going all-in on the idea that proposed Treasury Secretary Bessent will be able to solve the intractable problems current Secretary Yellen is leaving him.  This decline is helping European sovereign yields slide as well, as they decline between -1bp and -3bps.  However, a quick look at the chart below shows the above-mentioned Bund-OAT story and how that spread is the widest it has been in many years.

Source: tradingeconomics.com

In the commodity space, oil (+0.2%) is settling in just below $70/bbl as it becomes clear that OPEC+ is not going to be raising production anytime soon.  NatGas (-4.8%) has suffered this morning on warmer weather in Europe, but the situation there remains dicey at best, and I think this has further to run.  In metals markets, gold (+0.8%) is continuing to rebound from Monday’s wipeout, having recouped about half of the move, and we are also seeing strength in silver and copper on the China stimulus story.

Finally, the dollar is under pressure again this morning with the yen and NZD (+1.1%) leading the way although the euro (+0.3%) and pound (+0.3%) are having solid sessions as well.  In the EMG bloc, MXN (-0.3%) continues to be pressured by the tariff talk although much of the rest of the bloc is following the euro’s lead and edging higher.  My sense here is that there are quite a few crosscurrents pushing the dollar around so on any given day, it is hard to tell what will happen.  However, I still am looking for eventual further dollar strength, especially given the Fed seems to be far less likely to cut aggressively.

On the data front, yesterday’s new Home Sales were horrific, falling -17.3% and indicating the housing market is beginning to struggle.  I think that is one of the reasons the rate cut probability rose.  As to the rest of today’s data beyond PCE we see the following: 

Personal Income0.3%
Personal Spending0.3%
Q2 GDP2.8%
Durable Goods0.5%
-ex Transport0.2%
Initial Claims216K
Continuing Claims1910K
Goods Trade Balance-$99.9B
Chicago PMI44.0

Source: tradingeconomics.com

With the holiday, there are no Fed speakers scheduled and Friday, exchanges are only open for a half-day.  There continues to be a very positive vibe overall, with retail investors the most bullish they have ever been according to several banking surveys.  As well, there continues to be a positive vibe from the Trump cabinet picks which has many people expecting great things.  As I said yesterday, I hope they are correct.

My concerns go back to the fact that I just don’t see inflation declining like the Fed projects and that is going to have some negative market impacts along the way.  The one inflation positive is that I see oil prices with the opportunity to fall further, although demand for NatGas should keep that market underpinned.  As to the dollar, I’m still looking for a reason to sell it and none has been presented.

There will be no poetry on Friday so please have a wonderful Thanksgiving holiday and we get to see how things play out come Monday.

Good luck and good weekend

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Not in a Hurry

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Said Jay, we are not in a hurry
To cut, as the future is blurry
As well, since it’s Trump
We don’t want a slump
‘Cause really, his favor, we curry

 

Apparently, the Chairman is reading FX Poetry (🤣) these days as he has come to the same conclusions I have drawn, there is no reason to cut rates anytime soon.  Yesterday, in a moderated discussion in Dallas, the Chairman said, “The economy is not sending any signals that we need to be in a hurry to lower rates. The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully.”  And let’s face it, yesterday’s data simply added to the picture where the employment situation is not in trouble (Initial Claims rose only 217K, less than expected) while inflation signals remain hotter than desired with both core CPI and core PPI looking like they have bottomed as per the chart below.

Source: tradingeconomics.com

One of the things that Fed speakers consistently discuss is whether or not current policy is accommodative or restrictive based on their view of where the neutral rate of interest lies.  The problem, of course, is that neutral rate, also known as R* (R-star) is unknown and unknowable, only able to be determined in hindsight.  But that doesn’t stop them from trying.

At any rate, a consistent theme we have heard recently from Fed speakers is that they believe their policy is restrictive, hence the need to lower interest rates at all.  But there is a case to be made that policy is not restrictive at all right now as evidenced by the fact that the 10-year Treasury rate is actually below the “true” risk free rate.  How is that possible you may ask.

Consider that 30-year mortgage rates are also generally considered risk-free as not only are they collateralized, but they are mostly guaranteed by FNMA, GNMA and FHLMC, quasi government agencies that were shown to have the full faith and credit of the US government behind them when things got tough during the GFC.  Historically, meaning prior to Covid, the spread between 30-year mortgage rates and 10-year Treasuries was about 165bps on average.  However, since February of 2020, that average spread has expanded to 230bps.  (Notice how the green line representing the difference between the two rates is stably higher since Covid in 2020.)

Source: data FRED database, calculations @fx_poet

That difference is important because if you consider the idea that mortgage rates represent a better estimate of the “true” risk-free rate, then Treasury yields are cheap by 65bps relative to where they would otherwise be.  In other words, policy is looser by that amount than the Fed believes.  Why would this be the case?  Well, QE has very obviously distorted the price signals from the bond market.  Now, I grant that the Fed has also distorted the mortgage market (recall, they still own $2.26 trillion of those), but despite the ongoing QT process, they own $4.3 trillion of Treasuries.  And if price signals are distorted, making policy becomes that much tougher for the Fed.  It seems quite possible that through their own actions they have lost sight of reality and therefore, continue to make policy based on inaccurate data.  I would offer that as an explanation as to why the Fed always seems out of touch…because they are looking at the wrong things.

Ok, let’s take a look elsewhere in the non-political world to see what is going on.  Last night, China released their monthly data on Retail Sales (4.8% Y/Y), IP (5.3% Y/Y), Unemployment (5.0%) and Fixed Asset Investment (3.4% Y/Y).  Some parts were good (Unemployment was a tick lower than last month and expected, Retail Sales was a full point higher than expected) and some not so good (IP was 0.3% lower than forecast and Fixed Asset Investment came in 1 tick lower.). As well, the House Price Index there fell -5.9% Y/Y last month, which as you can see in the chart below, is indicative of the fact that the property problems in China are still significant and seemingly getting worse.

Source: tradingeconomics.com

However, one thing China is doing is pumping up its exports ahead of the inauguration of Donald Trump as they are clearly very concerned over the widely mooted 60% tariffs to be imposed on Chinese exports to the US.  In October, exports exploded higher by 12.7% and I expect we will see that again in November and December as companies there do all they can to beat the clock.  One thing this will do is help goose GDP data in China so that 5.0% growth target seems much more attainable now.  How things play out going forward remains to be seen, but for now, China is going to push as hard as possible.

Alas for the Chinese, that data and this idea did nothing to help the stock market there where the CSI 300 fell -1.75% last night, the laggard in the Asian time zone.  Given equities are discounting instruments, it appears people are more concerned over the future than the past.  Elsewhere in Asia, markets were generally flat to modestly firmer (Nikkei +0.3%) after (despite?) the US equity declines yesterday.  In Europe this morning, most markets are little changed to slightly softer  although Spain’s IBEX (+0.9%) is bucking the trend with its financial sector performing well, perhaps on the idea that the two big Spanish banks, Santander and BBVA, will benefit from the Fed’s seeming policy shift.  However, US futures are softer at this hour (7:15) lower by between -0.3% and -0.6%.

In the bond market, yields around the world are virtually unchanged this morning with 10yr Treasuries at 4.43% and no movement in either Europe or Japan.  This feels to me like investors are not sure which way to go.  Perhaps more are beginning to understand my type of explanation above regarding where things are now and are unsure how to play the future regarding inflation prospects, especially with potentially large changes coming under a new administration.  My take is yields will continue to drift higher alongside rising inflation, but that is not a universal view at all.

In the commodity space, oil (-0.4%) is a touch softer this morning although the big declines seemed to have stopped for now.  Here, too, uncertainty about how policy will evolve going forward has traders on the sidelines. In the metals markets, yesterday’s lows seem to be holding for now as while gold is unchanged on the session, both silver (+0.85%) and copper (+1.75%) seem to be rebounding.  If yields are going to continue higher, the road for metals is likely to be tough, but ultimately, lack of supply is going to drive this story.

Finally, the dollar is giving back some of its gains from this week in what appears to be a profit taking move.  It can be no surprise this is the case, especially given holding positions over the weekend at the current time remains a fraught exercise.  After all, will there be an escalation in Israel/Lebanon?  Ukraine?  Somewhere else?  And what will Trump announce over the weekend?  There has still been no announcement regarding his Treasury Secretary, and that is obviously crucial.  So, the dollar has given back about 0.3% of this week’s move largely across the board and I wouldn’t give it any more thought than that.

On the data front, this morning brings the Empire State Manufacturing Index (exp -0.7) as well as Retail Sales (0.3%, 0.3% ex autos) at 8:30.  Then, at 9:15 we see IP (-0.3%) and Capacity Utilization (77.2%).  There are no other Fed speakers scheduled today, although after Powell pushed back on further rate cuts yesterday, it will be interesting to hear the next ones and how they describe things.  If today’s data is hot, I would expect the probability of a rate cut in December, which currently sits at 62.4%, to fall below 50%.  As I have maintained, there just doesn’t seem to be much of a case to keep cutting given the economy’s overall strength.

With that in mind and given that growth elsewhere in the world is lagging, I still like the dollar to maintain and gain strength going forward.

Good luck and good weekend

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Right On Humming

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So, CPI didn’t decline
And may not be quite so benign
As Jay and the Fed
Consistently said
When hinting more rate cuts are fine
 
However, that will not deter
Chair Powell, next month, to confer
Another rate cut
Though it is somewhat
Unclear if his colleagues concur

 

Despite the fact the narrative is pushing Unemployment as the primary focus of the FOMC, yesterday’s CPI report, which seemingly refuses to decline to the Fed’s preferred levels, had Fed speakers beginning to hedge their bets regarding just how quickly rates would be coming down from here. [Emphasis added.]

St. Louis Fed President Alberto Musalem explained, “The strength of the economy is likely to provide the space for there to be a gradual easing of policy with little urgency to try and find where the neutral rate may be.”

Dallas Fed President Lorrie Logan commented (using a series of maritime metaphors for some reason) “After a voyage through rough waters, we’re in sight of the shore: the FOMC’s Congressionally mandated goals of maximum employment and stable prices, but we haven’t tied up yet, and risks remain that could push us back out to sea or slam the economy into the dock too hard.”  

Finally, Kansas City Fed President Jeff Schmid told us, “While now is the time to begin dialing back the restrictiveness of monetary policy, it remains to be seen how much further interest rates will decline or where they might eventually settle.”  

If we ignore the oddity of the maritime metaphor, my takeaway is that the Fed is still looking to cut rates further as directed by Chairman Powell, but the speed with which they will act seems to be slowing down.  As I have maintained in the past, given the current data readings, it still doesn’t make that much sense to me that they are cutting rates at all, but arguably, that’s just another reason I am not a member of the FOMC.  Certainly, the market is on board as futures pricing increased the probability of that cut from 62% before the release to 82% this morning.  There is still a long way to go before the next meeting, with another NFP, PCE and CPI report each to be released, as well as updates on GDP and Retail Sales and all the monthly figures, so this story is subject to change.  But for now, a rate cut seems likely.

One other thing, I couldn’t help but notice a headline that may pour a little sand into the gears of the rate cutting apparatus at the Eccles Building.  This is on Bloomberg this morning: Manhattan Apartment Rents Rise to Highest Level Since July.  Again, the desperation to cut rates seems misplaced.

Despite the fact rate cuts are coming
The dollar just keeps right on humming
This morning it’s rising
Which ain’t that surprising
As more depths, the euro is plumbing

Turning our attention to the continent, European GDP figures were released this morning, and they remain disheartening, to say the least.  While the quarterly number rose to 0.4%, as you can see from the chart below, it has been several years since the continent showed any real growth, and that was really just the rebound from the Covid lockdowns.  Prior to Covid, growth was still lackluster.

Source: tradingeconomics.com

While these are the quarterly numbers, when looking at the Y/Y results, real GDP grew less than 1% in Q3 for the past 6 quarters and, in truth, shows little sign of improving.  After all, virtually every nation in the Eurozone is keen to continue their economic suicide via energy policy and regulation.  This thread on X (formerly Twitter)is a worthwhile read to get an understanding of the situation on the continent.  I show it because this morning, the euro has fallen yet further, and is touching the 1.05 level, seemingly on its way to parity and below.  It highlights that since just before the GFC, the Eurozone economy has fallen from virtually the same size as the US economy, to just 60% as large, and explains the key reasons.  Read it and you will be hard-pressed to consider the euro as a safe store of value, at least relative to the dollar.  And remember, the dollar has its own issues, but at least the US economy remains dynamic.

But the dollar is king, again, this morning, rising against virtually all its counterparts on the session.  Versus the G10, the average movement is on the order of 0.3% or so, but it is uniform.  USDJPY is now pushing 156.00, the pound seems headed for 1.2600 and Aussie is below 0.65.  My point is concerns about the dollar and its status in the world seem misplaced in the current environment.  If we look at the EMG bloc, the dollar is stronger nearly across the board as well, with similar gains as the G10.  MXN (-0.5%), ZAR (-0.4%) and CNY (-0.2%) describe the situation which has been a steady climb of the greenback since at least the Fed rate cut, and for many of these currencies, for the past 6 months.  Nothing about President-elect Trump’s expected policies seems likely to change this status for now.

If we look at equity markets, yesterday’s US outcomes were essentially little changed on the day.  However, when Asia opened, with the dollar soaring, we saw a lot more weakness than strength, notably in China with the CSI 300 (-1.7%) and Hang Seng (-2.0%) leading the way lower although the Nikkei (-0.5%) also lagged along with most other Asian markets.  While there were some modest gainers (Australia +0.4%, Singapore +0.5%) red was the predominant color on screens.  In Europe, however, investors are scooping up shares with the DAX (+1.2%) leading the way although all the major bourses are higher on the session.  It seems that there is a growing consensus that the ECB is going to cut 25bps in December and then another 25bps in January, which has some folks excited.  US futures, meanwhile, are slightly firmer at this hour (7:00).

All this is happening against a backdrop of a continued climb in yields around the world.  Yesterday, again, yields rose with 10yr Treasuries trading as high as 4.48%, their highest level since May, and that helped drag most European yields higher as well.  This morning, we are seeing some consolidation with Treasury yields backing off 1bp and European sovereign yields lower by -2bps across the board.  The one place not following is Japan, where JGB yields edged higher by 1bp and now sit at 1.05%.    Consider, though, that despite those rising yields, the yen continues to slide.  In fact, that is the correlation that exists, weaker JPY alongside higher JGB yields as you can see in the below chart.

Source: tradingeconomics.com

While it is open to question which leads and which follows, my money is on Japanese investors searching for higher yields, selling JGB’s and buying dollars to buy Treasuries.

Finally, the commodity space continues to get blitzed, or at least the metals markets continue that way as once again both precious and industrial metals are all lower this morning.  In fact, in the past week, gold (-5.7%), silver (-6.4%) and copper (-9.1%) have all retraced a substantial portion of their YTD gains.  It is unclear to me whether this is a lot of latecomers to the trade getting stopped out or a fundamental change in thinking.  My view is it is the former, as if the Trump administration is able to support growth, I expect that will reveal the potential shortages that exist in the metals space.  Oil (+0.4%) is a different story as it continues to consolidate, but here I think the odds are we see lower prices going forward as more US drilling brings supply onto the market.

On the data front, this morning brings the weekly Initial (exp 223K) and Continuing (1880K) Claims data along with PPI (0.2%, 2.3% Y/Y) and core PPI (0.3%, 3.0% Y/Y).  In addition, the weekly EIA oil data is released with modest inventory builds expected and then we hear from Chair Powell at 3:00pm this afternoon.  Arguably, that is the event of the day as all await to see if the trajectory of rate cuts is going to flatten out or not.

I cannot look at the data and conclude that the Fed will be very aggressive cutting rates going forward.  The futures market is now pricing in about 75bps of cuts, total, by the end of 2025.  That is a 50bp reduction in that view during the past month and one of the reasons the dollar remains strong.  I would not be surprised if there are even fewer cuts.  Right now, everything points to the dollar continuing to outperform virtually every other currency.

Good luck

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Lickspittle

Posted on by

The Fed has a banker named Jay
Who last week was quick to betray
His fervent belief
He can’t come to grief
If Trump wants to force him away
 
This morning his Journal lickspittle
Wrote glowingly ‘bout Jay’s committal
To stand strong and firm
And finish his term
No matter how much he’s belittled

 

First, on this Veteran’s Day holiday, let us all pause a minute and remember those veterans who gave their lives for our nation.

The reverberations of Donald Trump’s re-election last week continue to be felt around the world with comments from virtually every walk of life explaining their joy/distress at the outcome and trying to prognosticate what will play out in the future.  I will tell you that I have no idea how things will evolve, although I am hopeful that his administration will be able to reduce the size of the federal government as that can only be a benefit.

But one of the things that we learn about people during times of change, especially people who believe they are crucially important to the world, is just how much they believe they are crucially important to the world.  Nothing highlights this quite like the lead article in this morning’s WSJ titled, If Trump Tries to Fire Powell, Fed Chair Is Ready for a Legal Fight.  This is not to say that Powell doesn’t have an important role, he certainly does.  But this pre-emption of the entire question is a testimony of just how important he thinks he is.  

My one observation on this is that despite all the discussion that the Fed isn’t political, it is clearly a very political institution.  Nothing highlights that better than this Tweet from Joseph Wang (aka @FedGuy12), a commentator who spent a dozen years at the Fed and understands its inner workings quite well.  Under the rubric that a picture is worth 1000 words, take a look at Federal Reserve political contributions below and then ask yourself if the Fed is not only political, but partisan.  

Source: X @FedGuy12

It is important to recognize this as it also may help explain why the Fed is cutting interest rates despite GDP (currently 2.8%) and Core PCE (currently 2.7%) running far above their long-term expectations and Unemployment (currently 4.1%) running below their long-term expectations as per the below SEP from the September FOMC meeting.  If anything, I might argue they should be raising interest rates!

Source: fedreserve.gov

At any rate, the ramifications of this election outcome are likely to drive the market narrative for a while yet.

But overnight, there just wasn’t that much of interest, at least not that much new.  So, let’s take a look at overnight market activity.  After Friday’s latest record high closes in the US, the picture in Asia was less robust with Japanese equities basically unchanged on the day after Shigeru Ishiba was elected PM to run a minority government, while Hong Kong (-1.5%) and mainland Chinese (+0.7%) shares went in opposite directions.  Chinese financing data was released that was mildly disappointing, but there are several stories about how the government is going to reacquire land that is currently in private hands but not being used and repurpose it for benefit.  The rest of the region had many more laggards than gainers, perhaps on concerns that Trump will be imposing tariffs throughout the region.  As to Europe, despite all the pearl clutching by the leadership there, equity investors are excited with gains seen across the board (DAX +1.3%, CAC +1.2%, FTSE 100 +0.8%).  US futures at this hour (7:30) are continuing their ride higher, up 0.4%.

In the bond market, Treasuries aren’t really trading today with banks closed.  In Europe, sovereign yields have edged down between 1bp and 2bps, perhaps feeling a little of that equity euphoria, as there was precious little in the way of news or commentary to drive things.

In the commodity space, oil (-1.7%) is under further pressure as broadly slower global growth undermines demand while prospects of the Trump administration fostering significant additional drilling opportunities helps build the supply side.  However, NatGas (+7.0%) is soaring this morning as Europe, notably Germany, is suffering from dunkelflaute (maybe the best word I have ever heard) which means ‘a period of low wind and solar power generation because it is cloudy, foggy and still’, and so they need to buy a lot more NatGas to power the economy.  In fact, NatGas is higher by nearly 15% in the past month although remains substantially cheaper in the US than in Europe and Asia.  My take is this discrepancy cannot last forever.  As to the metals markets, they are under pressure again this morning with both precious (Au -0.9%, Ag -0.3%) and industrial (Cu -0.5%, Al-1.4%) feeling the pain.  

A key driver in the metals space is the dollar, which is rallying against all its counterparts this morning quite robustly.  The euro (-0.6%) is back to levels last briefly touched in April, but where it spent more time a year ago, as it seems to be heading to 1.05 and below.  Meanwhile, JPY (-0.8%) is also feeling the heat while NOK (-0.7%) is pressured by both the dollar’s general strength and the oil weakness.  In the EMG bloc, MXN (-1.3%) is having a rough go as the tariff talk heats up, but we have also seen weakness in EEMEA with ZAR (-1.4%), PLN (-1.0%) and HUF (-1.2%) all under pressure this morning.  Not to be outdone, Asian currencies, too, are selling off with CNY (-0.3%) back above 7.20 for the first time since August while THB (-0.9%), MYR (-0.7%) and SGD (-0.6%) demonstrate the breadth of the move.

With the holiday, there is no data to be released today, but this week brings CPI amongst other things.

TuesdayNFIB Small Biz Optimism91.9
WednesdayCPI0.2% (2.6% Y/Y)
 Ex food & energy0.3% (3.3% Y/Y)
ThursdayPPI0.2% (2.3% Y/Y)
 Ex food & energy0.3% (2.9% Y/Y)
 Initial Claims224K
 Continuing Claims1895K
FridayRetail Sales0.3%
 -ex autos0.3%
 Empire State Mfg-1.4
 IP-0.3%
 Capacity Utilization77.2%

Source: tradingeconomics.com

In addition to this data, we hear from 11 different Fed speakers this week, including Chairman Powell again at 3:00pm on Thursday afternoon.  It is difficult to believe that the message from last week is going to change, but you never know.  However, I expect that every one of them is going to be explaining that things are good, but they are cutting rates to ensure things remain that way as they consistently congratulate themselves on having slain inflation.  I hope they are right…I fear they are not.

For now, though, the US economy remains the strongest in the world (7% budget deficits will help prop up growth after all) and capital continues to flow in this direction.  I see no reason for the dollar to fall anytime soon.  Whatever problems lie ahead, I believe they are over the metaphorical horizon and other than a few doomporn purveyors, not in the market’s view.

Good luck

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