Tag Archives: finance

Europe Has Folded

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Last week Japan finally agreed
To tariffs as they did concede
Now Europe has folded
Their cards as Trump molded
A deal despite pundits’ long screed
 
So, now this week there’s lots of news
That ought to give markets more cues
Four central banks speak
And late in the week
Inflation and jobs we’ll peruse

 

All the talk this morning revolves around the announcement yesterday of a US-EU trade deal where the basics are a 15% tariff on all EU exports to the US and an EU promise to buy US energy and defense products totaling some $550 billion.  Many have said that the agreement means nothing because for it to become law, it requires both the European parliament and each nation to vote to agree on the deal.  As well, we are hearing from various nations how it is a terrible deal (French farmers are furious, German pharmaceutical manufacturers are furious and unions all over the continent are unhappy) and certain politicians (notably Marine Le Pen) are also extremely unhappy.  

It is far too early to understand if the deal will be implemented in full, but the precedent has been set that European exports to the US are going to be subject to higher tariffs than any time since prior to WWI and that is true whether the deal is ratified or not.  As analyst/trader Andreas Steno Larsen explained well this morning, “The EU vs. US trade deal highlights that the EU primarily exports ‘nice-to-have’ products rather than essential ‘need-to-have’ ones.  And if you think about it, arguably the best-known EU companies are luxury goods makers, whether in fashion or autos.  So, while there are women who swear they ‘need’ that Birkin bag, the reality is far different.  

Expect to hear a lot more about this deal going forward, but the market response has been quite positive with European equity markets (IBEX +1.0%, FTSE MIB +0.9%, CAC +0.6%, DAX +0.4%) all higher along with US futures (+0.3%).  Interestingly, Asian markets were mixed overnight as Japanese (-1.1%) and Indian (-0.7%) equities suffered, perhaps on the idea that their deals were no longer that special.  China (+0.2%) and Hong Kong (+0.7%), though, did well amid news that another meeting was scheduled between the US and China, this time in Stockholm, to continue the trade dialog.

Away from the trade discussion, market focus this week is going to be on a significant amount of news and data to be released as follows:

TuesdayTrade Balance-$98.4B
 Case Shiller Home Prices3.0%
 JOLTS Job Openings7.55M
 Consumer Confidence95.8
WednesdayADP Employment78K
 Q2 GDP2.4%
 Treasury QRA 
 BOC Interest Rate Decision2.75% (unchanged)
 FOMC Interest Rate Decision4.50% (unchanged)
 Brazil Interest Rate Decision15.0% (unchanged)
ThursdayBOJ Interest Rate Decision0.50% (unchanged)
 Initial Claims224K
 Continuing Claims19660K
 Personal Income0.2%
 Personal Spending0.4%
 PCE0.3% (2.5% Y/Y)
 Core PCE0.3% (2.7% Y/Y)
 Chicago PMI42.0
FridayNonfarm Payrolls102K
 Private Payrolls86K
 Manufacturing Payrolls0K
 Unemployment Rate4.2%
 Average Hourly Earnings0.3% (3.6% Y/Y)
 Average Weekly Hours34.2
 Participation Rate62.3%
 ISM Manufacturing49.6
 ISM Prices Paid66.5
 Michigan Sentiment61.8

Source: tradingeconomics.com

In addition to all of this, there are Eurozone GDP and inflation data, Japanese inflation data and PMI data from all around the world.  Happily, there is virtually no central bank speaking beyond the post meeting press conferences as I presume all of them will be seeking an escape.

There is far too much data to discuss in any depth this morning, but my take is that President Trump has managed to move the Overton Window significantly over the course of his first 6 months in office.  If you recall, it was on “Liberation Day” back in April, when he announced his reciprocal tariffs on the rest of the world, that the global economic community had a collective meltdown and proclaimed the end of the economy as we know it.  Equity markets around the world plummeted and the future seemed bleak, at least according to every economist and pundit who could get their views heard.  Now, here we are a bit more than three months later and tariffs of 15% on the entire EU as well as Japan, 10% on the UK and higher on other nations is seen as a solid outcome, sidestepping the worst cases promulgated, and the world is moving on.

It appears, at least for the moment, that Mr Trump understood that most nations need to export to the US more than the US needs to export to them. I would contend that is why these deals, which in many eyes seem unfavorable to the US counterparts, are being agreed.  It is far too early to ascertain if things will work out as Trump expects, as the naysayers expect or somewhere in between (or entirely different) but thus far, you have to admit that the president has largely gotten his way.

So, as we open the week, we have already seen equity markets are generally in a positive mood.  Bond markets are also behaving well, with Treasury yields edging higher by 1bp, still glued to that 4.40% level, while European sovereign yields have mostly slipped -2bps or so on the session.  And last night, JGB yields fell -4bps.  It appears that bond investors are not as concerned about the trade deals as some would have you believe.

In fact, the market with the biggest reaction overnight has been FX, where the dollar is showing strength against virtually all its counterparts in both G10 and EMG spaces.  EUR (-0.8%) is the G10 laggard, although CHF (-0.8%) is right there with the single currency as clearly, Switzerland will be impacted by the EU tariff deal.  But AUD (-0.6%), JPY (-0.5%) and SEK (-0.65%) are all under pressure as well as the DXY (+0.6%) continues its bounce.

Source: tradingeconomics.com

I continue to read about all the reasons why the dollar is losing its luster in the global community, because of tariffs, because of the Treasury’s actions freezing Russian assets after the invasion of Ukraine, because China and the BRICS are seeking other payment means to eliminate the dollar from their economies, because American exceptionalism is dead, and yet, while I am no market technician, I cannot help but look at the chart of the DXY above and see a broken downward trendline, indicating a move higher, and a bottoming in the moving average, also indicating further potential gains.  I am confident that if the FOMC cuts rates (which full disclosure I don’t believe makes sense given the current amount of available liquidity and global equity market performance) that the dollar will decline further.  But all those traders who are short dollars (and it is a very crowded position) are paying away between 25bps (long GBP) and 450bps (long CHF) on an annual basis so need to see the dollar’s previous downtrend resume pretty quickly. (see current overnight rates across major economies below from tradingeconomics.com)

The market is pricing just a 2% probability of a rate cut on Wednesday, and about 60% of a September cut. Unless this week’s data screams recession, I am having a hard time seeing the case for the dollar to fall much further, at least in the short and medium term.  And this includes the fact that it is pretty clear President Trump would like to see a lower dollar to help US export competitiveness.

Finally, a look at commodities shows that while oil (+1.3%) is having a solid session, it remains in the middle of its trading range for the past several weeks.  Meanwhile, metals prices (Au -0.1%, Ag -0.2%, Cu -0.4%) are feeling a little strain from the dollar’s strength but generally holding up well overall.  Too, while there has historically been a strong negative correlation between the dollar and metals, given the large short dollar positions that are outstanding, it would not be hard to see both cohorts rally in sync for a while going forward.

And that’s really all for today.  The data doesn’t really start until tomorrow, and as its summer, trading desks are already lightly staffed.  Look for a quiet session today and the potential for choppiness this week if the data is away from expectations.

Good luck

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Filled With Gilding

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There once was a banker named Jay
Who yesterday, tried to allay
Fears that his building
Was too filled with gilding
But Trump seemed to have final say
 
The fact that this story’s what leads
The news, when one looks through the feeds
Is proof that there’s nought
Of note to be bought
Or sold, as price action recedes

 

According to Merriam-Webster, this is the definition of the word frequently bandied about these days, and rightly so.  

Market activity is just not very interesting.  While there is a new battle brewing on the Thai-Cambodian border, it is unlikely to have much impact on the rest of the world, and the Russia-Ukraine war continues apace, with very little new news.  Congress is in recess, sort of, which means new legislation is not imminent.  And while the Fed meets next week, just like the ECB and the BOE and the BOJ, no policy changes are imminent.  Doldrums indeed.

Which is why the story about President Trump visiting the construction site at the Marriner Eccles Building, the home of the Federal Reserve, has received so much press.  And frankly, a quick look at this clip is so descriptive of the current relationship between Trump and Powell it is remarkable.

But frankly, I just don’t see much else to discuss this morning.  equity markets in the US have generally been creeping higher, the DJIA excepted, the dollar is doing a slow-motion bounce and bond yields trade within a 5bps range.  Yesterday’s jobs data was solid, with both types of claims slipping, while the Flash PMIs showed net strength, although it was entirely Services driven.  And it’s Friday, so I won’t take up too much time.

Here’s the overnight review.  Asian markets followed the Dow, not the S&P or NASDAQ with Tokyo (-0.9%), Hong Kong (-1.1%) and China (-0.5%) all under pressure.  In Japan, there are starting to be more questions asked about whether PM Ishiba can hold on, and if he cannot (my guess is he will go) there is no obvious successor as no party there has any substantial strength.  Remember, the populist Sanseito party is a new phenomenon there and really is screwing up their electoral math.  As to the rest of the region, only Korea and New Zealand managed any gains, and they were di minimis.  Red was the color of the session.

Not surprisingly, that is the story in Europe as well, with most bourses lower on the day (DAX -0.6%, FTSE 100 -0.3%, IBEX -0.5%) although the CAC is essentially unchanged despite LVMH earnings being a little soft.  German Ifo data was slightly better than June, but lower than expected and UK Retail Sales were modestly weaker than forecast on every measure.  Again, it is hard to get excited here.  As to US futures, they are pointing higher by 0.2% at this hour (7:00).

In the bond market, Treasury yields have bounced 2bps from yesterday but are still right around 4.40% while European sovereign yields are higher by 3bps across the board.  Apparently, there is residual concern over European spending plans and absent a trade agreement with the US, investors there are not sure what to do.

In the commodity markets, oil (+0.4%) is bouncing for a second day, but remains within that recent trading range where we have seen choppy trading but no direction.  The gap lower earlier in the week was filled, but it is hard to get excited here about a new trend either.

Source: tradingeconmics.com

Meanwhile, metals markets remain under pressure as we head into the end of the month.  They have had a solid rally this month and it looks to me like some profit taking, but this morning gold (-0.7%), silver (-0.8%) and copper (-0.7%) are all under pressure.

Perhaps one of the reasons that the metals are soft is the dollar is stronger today.  I know we continue to hear about the death of the dollar, but as Mark Twain remarked, “the report of [its] death was an exaggeration.” Instead, what we see this morning is a pattern in the DXY that could easily be mistaken for described as a bottoming and we are simply waiting for confirmation.

Source: tradingeconomics.com

Looking at individual currencies, the dollar is firmer against every G10 currency with the euro (-0.25%) and pound (-0.4%) indicative of the magnitude of movement.  In the EMG bloc, KRW (-0.6%) and ZAR (-0.7%) are the worst performers, with the latter clearly following precious metals lower while the former is feeling a little heat from the fact that Japan struck a trade deal while South Korea has not yet done so.   Otherwise, things are just not that interesting here either.

On the data front, this morning brings Durable Goods (exp -10.8%, 0.1% ex Transports) which tells me that a lot of Boeing deliveries were made last month when Durables rose 16.4%.  But otherwise, nothing and no Fed speakers.  As I said before, it is a summer Friday, and I suspect that most trading desks will be skeleton staffed by 3:00pm if not earlier.

Good luck and good weekend

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All Its Sophists

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The art of the deal
Tokyo and Washington
Birds of a feather

 

Seemingly, the biggest news story of the evening was the trade agreement between the US and Japan, where reciprocal tariffs have been set at 15%, including on Japanese autos, and Japan has pledged to invest $550 billion in the US, which I assume is from private corporations although that was not specified.  However, they did explain that one of the investments would be Alaskan North Slope natural gas liquification, a project that has been on the boards for more than 20 years.  Thus far, this seems like a big win and major milestone in President Trump’s trade strategy as it also opened Japanese markets to American products, including rice which had been a key sticking point.

The market response was as might be expected with the Nikkei (+3.5%) rallying sharply and taking virtually every regional Asian market higher for the ride as the conclusion of a deal in the preferred timeline was seen as a precursor to others falling in line.  It is quite interesting that this happened so shortly after PM Ishiba’s election disaster on Sunday, but perhaps that was his motivation.  He needed a big win and conceding on some points to get a deal was much preferred to holding out and getting nothing.  However, JGB markets saw things differently as a very weak 40-year JGB auction (lowest bid-to-cover ratio of 2.127 since 2011) led to long-dated yields rising between 8bps and 10bps last night, with the 10-year yield trading back to the highs seen in late March.

Source: tradingeconomics.com

While the stock market was giddy, apparently the only discussion in the bond market was whether Ishiba-san would be forced to resign, leaving Japan with a leadership vacuum.  Meanwhile, the yen (+0.3%) did very little overnight although it has been creeping higher since the election results.  My sense is Japanese investors are cautiously heading home, but I would not look for a major move lower in USDJPY, rather the current gradual pace makes sense.

A juxtaposition exists
Twixt Europe with all its sophists
And stolid Japan
Who finished their plan
On trade despite recent vote twists

As trade continues to be the topic du jour, it is no surprise that the chatter out of European capitals is that they will fight to get the best trade deal possible.  (I cannot help but laugh at Friedrich Merz saying, if they [the US] want war, we will give them a war).  However, it is also no surprise that markets have looked at the Japanese deal and increased the pressure on EU negotiators to achieve a solution by the end of the month.  First off, every European official wants to go on holiday in August, so they will want to have completed things.  But secondly, equity investors have taken the fact that deals with major counterparties can be accomplished as a sign that the EU is next.  And if they do not agree terms, it will be a double whammy of political and financial problems as you can be certain that the equity gains we are seeing today and have been steady so far this year (see below), will likely reverse on a failure to agree.

                                                                                     Today        1 Week        1 Month          YTD

Source: tradingeconomics.com

But, away from the trade story, and various political stories in the US that are unlikely to have any immediate impact on markets, that’s kind of all there is to discuss.  The Fed meets next week and there is no expectation of a rate move.  The ECB meets tomorrow and there is no expectation of a rate move.  Important data is scarce on the ground and the focus on crypto and meme stocks continues.  In fact, this is likely the best descriptor of a market that has abundant liquidity and shoots down the case for cutting rates at all.  In the meantime, let’s look at how other markets behaved overnight.

You will not be surprised that US equity futures are all pointing higher this morning, and we have already discussed the rest of the equity markets around the globe.  In the bond markets, after declining yesterday, yields have stabilized this morning (Treasuries +1bp, Bunds +1bp, OATs +1bp) although UK Gilt yields (+5bps) have underperformed as there continue to be concerns over the fiscal picture in the UK as well as questions about PM Starmer’s ability to stay in his seat.  In fact, UK 10-year yields are the highest in the developed world right now, and while they have been knocking back and forth for a few months, show no sign of falling regardless of the BOE’s future actions.

In the commodity space, oil (-0.7%) has been slipping back to the bottom of its post 12-day war range amid lackluster overall activity.  Just as there didn’t seem to be an obvious driver when oil rallied to $68/bbl, too there is no clear driver of the recent decline.  I continue to believe this is market internals rather than macro fundamentals.  In the metals markets, after a major rally yesterday across the board, gold (-0.25%) is consolidating but silver (+0.1%) is pushing within spitting distance of a major milestone, $40/oz, while copper (+1.2%) sees the benefits of the trade deal and is rallying nicely.

Finally, the dollar is mixed this morning.  While the yen is firming and the effects of the trade deal seem to be helping Aussie (+0.6) and Kiwi (+0.75%), the euro and pound are both little changed.  in fact, the rest of the G10 is +/- 0.1% on the day, so nothing at all happening.  In the EMG bloc, KRW (+0.3%) is the biggest mover with every other currency across regions +/- 0.15% or less and showing no signs of a trend right now.  Broadly, the dollar appears to be in a downtrend, but short dollars is one of the most crowded trades in the hedge fund and CTA communities, and that gets expensive given US funding costs are higher than pretty much everybody else’s right now.  Depending on how you draw your trend line (and I am no market technician), it appears that the dollar broke above that line and is now getting set to retest it.  I would not be surprised to see a more substantial bounce on the next move.

Source: tradingeconomics.com

And that is really all there is today.  This morning’s data consists of Existing Home Sales (exp 4.01M) and EIA oil inventories with a small draw expected.  The Fed is in their quiet period so no speakers which means that all eyes will, once again, turn toward the White House to see who has the right squares on their bingo card.

Good luck

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Not Crashing

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The data was pretty darn good
And so, it must be understood
The world is not crashing
Though some things are flashing
Red signs, where recession’s a ‘could’

 

A review of yesterday’s economic data shows that Retail Sales were stronger than expected on every metric and subcomponent, Import Prices rose a scant 0.1%, the Philly Fed Index was much stronger than expected and Jobless Claims fell on both an Initial and Continuing basis.  In truth, it was a sweep of positive economic news.  As such, we cannot be surprised that equity markets responded positively, as did the dollar, while bonds held their ground, given the lack of inflationary signals.  But if we look at the movements in markets, they remain very modest overall.  Sure, the S&P 500 made a new high, by 2 points, but if you look at the chart below, since July 3rd, the rally has been 26 points, or 0.4%.  This is hardly the stuff of excitement.

Source: tradingecononmics.com

Of course, this did not stop the pundits who are calling for recession to highlight any negative subtext, nor did it prevent Fed Governor Waller from claiming that a rate cut in July was appropriate because the labor market is on the edge.  But the naysayers find themselves with diminishing attention these days as market price action has been quite positive.  In fact, most markets have shown similar behavior.  Whether gold or oil or other equity indices or bonds, we have been in a narrow range for a while now and it is not clear what it will take to break us out.  But here’s one thought…

On Sunday, Japan
Will vote for their Upper House
Is there change afoot?

While market insiders will discuss today’s options’ expirations as the key driver of things in the short-term, I think we need turn our eyes Eastward to Japan’s Upper House elections this Sunday.  PM Ishiba’s LDP-Komeito coalition is already in a minority status in the more powerful Lower House, a key reason why so little has been accomplished there.  But at least he had a majority in the Upper House to rubber stamp anything that was enacted.  However, signs are pointing to the LDP losing their majority in the Upper House which could well lead to Ishiba getting forced out.

Now, why does this matter to the rest of us?  There is a case to be made that flows in the JGB market are an important driver of global bond flows, including Treasuries.  For instance, Japan is the second largest net creditor nation with about $3.73 trillion invested abroad (according to Grok), much of which is Japanese insurance companies searching for higher yields than have been available there for the past decades. You may remember back in May, when there was a spike in long-dated JGB yields as all maturities from 20 years on out reached new historic highs (see below chart), well above 3.0%. 

Source: tradingeconomics.com’

Now, consider if you were a Japanese life insurer looking to match your assets to your liabilities.  Historically, buying Treasury bonds, with their much higher yield, was the place to be, especially over the past several years when the yen weakened, adding to your JPY gains.  However, that is still a risky trade, and hedging the FX risk is expensive given the yield differential between the US and Japan.  (Hedgers need to sell USD forward and the FX points reduce the effective exchange rate and by extension the benefits of the higher bond yields.)

But now, for the first time ever, JGB yields are above 3.0%, and that can be earned by a Japanese life insurer with zero FX risk, a very attractive proposition.  In fact, Bloomberg has an article this morning discussing just such a situation with one of the larger insurers, Fukoku Life.

Circling back to the election, it appears that the key issues are the rising cost of living and what the government is going to do about it.  Apparently, there are two approaches; the LDP is talking about giving out cash bribes grants of ¥20,000 to individuals while the opposition is talking about reducing consumption taxes on necessities like food.  However, in either case, the reality is that fiscal policy would loosen further with the MOF needing to issue yet more JGBs to make up for either the increased outlays or reduced income.  Add to that the uncertainty over future Japanese policy if the LDP loses its majority, and the pressure from the US regarding tariff negotiations and suddenly, it makes a lot more sense that the knock-on effects of this election can be substantial, at least with respect to the global bond markets and the USDJPY exchange rate.  (It must be said that Japanese inflation data last night actually fell to 3.3%, but that was due entirely to declining oil prices as fresh food prices, the big issue there, continue to rise.)

An election outcome that weakens PM Ishiba, potentially leading to a fall of his government and new elections in the Lower House, would be a distinct negative for the yen, and likely for the JGB market.  The impact would be felt in global bond markets as yields in the back end would almost certainly rise everywhere around the world.  This is not to imply that yields would rise by 100bps or more, but rather that the current trend of rising long-dated yields would continue for the foreseeable future.  And that will make things tough on every government.

Ok, sorry, I went on a bit long there.  A quick turn through markets shows that other than Japan (-0.2%) Asian equity indices were mostly nicely in the green following the US lead with the biggest winners Australia (+1.4%), Hong Kong (+1.3%) and Taiwan (+1.2%).  Meanwhile, in Europe this morning, while green is the color, the movement has been miniscule, averaging about 0.1% gains.  And US futures are also modestly higher at this hour (7:00) about 0.15% across the board.

In the bond market, Treasury yields have edged lower by -2bps but European sovereign yields are all higher by 2bps across the board.  The talk in Europe is over concerns regarding the conclusion of a trade deal with the US, where concerns are growing nothing will be achieved by the end of the month.

In the commodity markets, oil (+1.3%) is continuing its rebound, perhaps on the beginnings of a belief that the economy is not going to crater in the US.  Certainly, yesterday’s data was positive.  As to the metals markets, they are in fine fettle this morning with both gold (+0.4%) and silver (+0.4%) trading back to the middle of their trading ranges and copper (+1.3%) pushing back toward its recent all-time highs.

Finally, the dollar is under pressure this morning, sliding against the euro (+0.25%), pound (+0.2%) and AUD (+0.4%).  But the real movement has been in the commodity space where NOK (+0.8%) and ZAR (+0.7%) are both having solid days.  There continues to be a great deal of discussion regarding President Trump’s desire to fire Chairman Powell with a multitude of articles describing how that would be the end of the world as we know it because the Fed cherishes their “independence”.  Let’s not have that discussion.

On the data front, this morning brings Housing Starts (exp 1.3M) and Building Permits (1.39M) and then Michigan Sentiment (61.5) at 10:00.  There are no Fed speakers on the slate for today although Governor Kugler, not surprisingly, explained that waiting was the right call for the Fed when she spoke yesterday.  

It is a Friday in the summer with relatively unimportant data.  Absent another surprise from the White House Bingo card, I expect a quiet session overall as most traders and investors leave the office early for the weekend.  The dollar’s biggest risk is the Fed does cut early, but if the data keeps cooperating, it will be much harder for dollar bears, especially since so many are already short, to sell it aggressively from here.

Good luck and good weekend

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Kvetched

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The story on everyone’s lips
A central bank apocalypse
If Trump fires Powell
The markets will howl
With yields rising numerous bips
 
However, said Trump, it’s farfetched
Despite plans that he’d clearly sketched
Thus, markets reversed
While bears, losses, nursed
And “right-thinking” people all kvetched

 

If you had Trump fires Powell on your White House Bingo card, congrats, it looked like a winner.  That was the story all morning yesterday, overshadowing PPI data that was quite benign, printing at 0.0% M/M for both headline and core, as the punditry postulated the problems with Trump doing that.  At this point, we are all familiar with the fact that the Fed Chair can only be fired for “cause” although exactly what “cause” represents is unclear.  Too, we know that in Trump’s efforts to reduce the size of the government, the Supreme Court gave him authority to remove the heads of many departments but explicitly carved out the Fed from that process.

In the end, though, despite rampant rumors that he had composed a letter for just such an occasion, at a press conference with Bahraini Crown Prince, Salman bin Hamad Al Khalifa, he said it was “highly unlikely” he was going to fire Powell, although he once again castigated him for not cutting rates. Most markets, after getting all excited about the prospects of this action, reverted to the previous solemnitude of doing nothing over the summer.  The below chart of the S&P 500 was replicated in virtually every market.

Source: finance.yahoo.com

It is also no surprise that the Fed Whisperer was out in the WSJ this morning defending his bread-and-butter relationship, but my take is this is just a feint on the president’s part to move the discussion away from issues he doesn’t like.  Given that Supreme Court protection and given that the Supreme Court has been very good for Mr Trump, I’m pretty confident that Powell will serve out his full term as Chair and be replaced next year.  I would, however, look for a candidate to be announced at the earliest possible time.

While that was the story that sucked up all the oxygen yesterday, life still goes on and this morning, arguably the biggest news is that UK Unemployment rose to 4.7% with earnings slipping and the Claimant count rising.  The punditry continues to harp on how the US is set to go into stagflation because of Trump’s tariffs which are driving inflation higher while weakening the economy (despite all evidence to the contrary) while ignoring the UK which saw inflation rise faster than expected yesterday, to 3.6% while Unemployment is rising.  That feels a lot closer to the stagflation story than in the US, and as we heard from BOE Governor Bailey yesterday, it’s all Trump’s fault because of the tariffs.  Talk about deflection.  However, a little sympathy for the Guv is in order as he really doesn’t know what to do.  After today’s data, there is more discussion of another rate cut by the BOE when they next meet on August 7th.  Certainly, the pound (-0.1%) is behaving as though a rate cut is coming as evidenced by the chart below.

Source: tradingeconomics.com

However, remember that the UK government of PM Starmer has proven its incompetence on virtually every issue it has addressed, both domestically and on an international basis, so the pound’s decline could well be a general exit from the UK by investors.  Speaking of currencies, the dollar is having quite a positive day across the board.  Aussie (-0.9%) is the laggard across both G10 and EMG blocs as its employment situation report showed a much weaker economy than expected, although the yen (-0.4%) is starting to feel real pressure as the Upper House Election approaches.  In fact, there is growing talk that USDJPY above 150 is likely if the PM Ishiba’s LDP loses their majority in the Upper House, or even if it wins given the amount of increased deficit spending they are promising.  Does anyone remember all the talk of the end of the yen carry trade and how the yen was going to rise dramatically?  There’s a theme that did not age well.  As to the rest of the currency market, the dollar is rising vs. everybody with a rough average gain of ~ 0.4%.  The dollar is not dead yet.

Heading back to equities, despite all the angst about Powell yesterday, US indices all managed a gain on the day.  In Asia, most markets performed well with Japan (+0.6%) and China (+0.7%) indicative of the movement.  Australia (+0.9%) responded to its jobs data with growing expectations of an RBA rate cut and there were many more regional exchange gainers than losers overnight.  In Europe, green is also today’s theme, with both the CAC (+0.9%) and DAX (+0.8%) having very nice sessions and most of the rest of the continent climbing around 0.5%.  The only data of note was the final CPI reading for the Eurozone, which was right on the button at 2.3% core.  However, at this hour (7:00) US futures are essentially unchanged.

Bonds were actually the biggest concern yesterday on the Powell news with a huge divergence between the 2-year and 30-year as the rumors flew, although most was forgiven after Mr Trump said he would not be firing Powell.  The Chart below shows that divergence and the retracement although 2-year notes did remain lower for the session.

Source: tradingeconomics.com

But that was yesterday.  This morning, 10-year Treasury yields have edged higher by 1bp, and European sovereigns have largely followed suit.  In Asia, though, it is noteworthy that Australian government bonds saw yields decline -5bps after the data, and JGB yields slid -2bps as election promises seem to imply more QE, not less.

Lastly, commodity prices also got the whipsaw treatment on the Powell story, but this morning, with the dollar showing strength across the board, we see metals prices slipping (Au -0.6
%, Ag -0.25%, Cu -0.15%) although oil (+0.5%) is finding a bottom it seems as per the below chart from tradingeconomics.com.

On the data front, in addition to the weekly Initial (exp 235K) and Continuing (1970K) Claims data, we also get Retail Sales (0.1%, 0.3% ex autos) and Philly Fed (-1.0).  We hear from one Fed speaker, Governor Kugler, but if anything, after yesterday’s Powell drama, I expect everybody we hear from to rally round the Chair, so there will be no talk of rate cuts.  Aside from yesterday’s PPI data, the Fed’s Beige Book indicated modest economic growth, again, not a reason to cut interest rates.

Let me leave you with a thought experiment though.  Last night, the Senate passed the first (of many we hope) rescission bill to actually reduce spending.  Tariff income has grown as evidenced by last month’s budget surplus.  What if Trump and his team are correct, and through reduced regulations as well as tariff and increased inward investment, the private economy grows more strongly and the budget deficit declines far more than current estimates, perhaps achieving Secretary Bessent’s goal of 2%?  Will yields rise or fall?  Will the dollar rise or fall?  Will equities rise or fall?  On the White House Bingo card, I would suggest very few believe in this outcome and are not managing their portfolios to address this.  But I would also suggest it is a non-zero probability, although not my base case.  Just remember, stranger things have happened.

Good luck

Adf

A Wing and a Prayer

Posted on by

The CPI data was hot
Or cool, all depending on what
It is that you buy
Though pundits will try
To tell you that Trump’s a tosspot
 
But stock markets don’t really care
Though bond markets are quite aware
Inflation’s not dead
Which means that the Fed
Relies on a wing and a prayer

 

These were the headlines yesterday in the wake of the CPI report:

WSJ – Inflation Picks Up to 2.7% as Tariffs Start to Seep Into Prices

NY Times – U.S. Inflation Accelerated in June as Trump’s Tariffs Pushed Up Prices

Washington Post – Inflation picked up in June as tariffs began to lift prices across the economy

And here are a couple from this morning:

WSJ – Trump Effect Starts to Show Up in Economy

Bloomberg – US Trade Wars Will Hit Households Worldwide, BOE’s Bailey Warns

As I forecast yesterday, the higher inflation would be blamed on President Trump’s actions regardless of the outcome.  In fairness, that was not a hard prediction to make given the current state of the mainstream media and their general views of the president.  But is that an accurate representation?  As always, on matters of CPI I turn to @inflation_guy, Mike Ashton, to get his take, which has generally been the least hysterical and most cogent of analysts around.  Here is his summary of yesterday’s CPI data.  

In essence, the higher Y/Y readings are partially due to base effects (the number twelve months ago that is leaving the calculation was very low so even a moderate number will result in a higher print) and partially due to ongoing price changes in the economy.  Goods prices did rise, but services prices were not as affected.  Notably lodging away from home (i.e. hotels) saw prices fall -2.5% on the month, likely perhaps a result of less illegal immigrants being housed in cities around the country.  In the end, as Mike explains, median inflation has been running at ~3.5% annually for the past several years and shows no signs of declining much further.  I fear, that is the new normal for inflation going forward.

(This is a good time to mention that one way to maintain the purchasing power of your money is to own USDi, the only inflation-linked stable coin around which accretes the rise in CPI to its price on an ongoing basis.  Below is a chart showing how this has performed (and by extension what has happened to inflation) since the coin was initiated on March 1st of this year.  (And yes, we know exactly where the price will be going forward through the rest of the summer based on the mechanics of the way CPI is reported.)

But the US is not the only place where inflation is starting higher.  Exhibit A here is the UK, which reported its CPI figures this morning where they rose to 3.6% headline and 3.7% core.  Now, looking at the chart of CPI in the UK, it is abundantly clear that prices have been consistently rising for the past twelve months, at least.  Interestingly, while the Starmer government has demonstrated remarkable incompetence across many factors, they have not been imposing tariffs on all their trade partners and yet inflation is still rising.  Perhaps tariffs are not necessarily the inflation driver that the punditry is keen to describe.  But a look at the last five years of core inflation in the UK shows pretty clearly that price rises, while having slowed from their fastest levels in the wake of the pandemic, have bottomed and appear to be accelerating again.  (Arguably, that is why BOE Governor Bailey was explaining Trump was to blame for his failures.)

Source: tradingeconomics.com

In the end, though, the market adjusted to the inflation data yesterday and overnight things have been far more muted.  This is true, even in the UK, where gilt yields have edged up only 2bps and the pound (+0.1%) is barely higher after having fallen more than 2% since the beginning of July.  In fact, my take is that markets are just not that interested in very much these days as evidenced by the much-reduced volumes that we see across all markets.

So, with that in mind, let’s see how things behaved overnight.  Starting with the bond market, treasury yields have slipped -1bp this morning, but that is after having gained 6bps yesterday after the data.  As well, Fed funds futures are now pricing less than a 3% probability of a rate cut at the end of this month with far less discussion about the Waller and Bowman comments regarding those cuts.  Meanwhile, in Europe, away from the UK, yields have also slipped -1bp across the board, although yields there did rise about 3bps after the US CPI report.  Remember, all these bond markets are tightly linked.  As to Asia, JGB yields edged higher by 1bp overnight.

In the equity markets, yesterday’s broad down session in the US (Nvidia rose on China sales news which propped up the NASDAQ) was followed by modest weakness throughout most of Asia (China -0.3%, HK -0.3%, Korea -0.9%, Australia -0.8%) although Japan was essentially unchanged.  European shares, though, are mostly a touch firmer led by the IBEX (+0.5%) although the DAX (+0.3%) and FTSE 100 (+0.2%) are also in the green despite there being no obvious catalysts here.  US futures are essentially unchanged at this hour (7:10).

In the commodity space, oil (-0.9%) has been dragging lower over the past several sessions and is now down -3.5% in the past week.  This is a reversal of the recent price action and accords far better with the fundamentals of supply coming on from OPEC with the still strong belief that economic activity is set to slow given the Trumpian tariff impact around the world.  Metals markets continue to range trade as well, with gold (+0.3%) higher this morning, although it gave back yesterday morning’s gains and based on the way it has been trading, seems likely to do that again today.  In fact, the entire metals complex has been showing similar behavior, gains overnight that retrace in the US.

Finally, the dollar is little changed this morning although it has been trending ever so slightly higher over the past several weeks.  I haven’t discussed yen in a while, but all thoughts of the end of the carry trade have been banished as the yen has declined by more than 3% since the beginning of the month and is now back to levels last seen in April.  On the day, as I look across the screen, NOK (-0.5%) is the largest mover in either G10 or EMG space, arguably responding to the fact that oil has been sliding over the past week.  But here, as in the other markets, there is no excitement.

On the data front, this morning brings PPI (exp 0.2%,2.5% headline, 0.2%, 2.7% core) as well as IP (0.1%), Capacity Utilization (77.4%) and then the Fed’s Beige Book this afternoon.  We also hear from three more Fed speakers today although yesterday’s group gave no indication that a move was in the offing.  Instead, the only speaker with a differing opinion than the group, Waller, talked about stablecoins, not monetary policy.

I sincerely doubt that anything of note will happen today from either the data or market internals as pretty much the only thing that moves markets these days are White House announcements.  And I have no idea if any of those are coming.  Look for another quiet session overall.

Good luck

Adf

Misconstrue

Posted on by

Ahead of today’s CPI
The markets continue to fly
Though prices keep rising
The pace is surprising-
Ly slower than pundits decry
 
Perhaps now it’s time to review
How old models all misconstrue
The world of today
As their results stray
From outcomes we’re all living through

 

Let’s start with this morning’s CPI data where expectations are for M/M rises of 0.3% for both headline and core readings which translate to 2.7% and 3.0% for the annual numbers.  In both cases, that would be the highest reading since February and will put a crimp in the inflation slowing trend as both the 3-month and 6-month trend data will stop declining.  I assure you that the immediate culprit will be defined as the tariffs, although it is probably still too early to make an accurate reading on that.  Nonetheless, you can be sure that, especially if the bond market sells off, the cacophony will be extreme as to President Trump’s policies are destroying the nation.

Personally, I would disagree with that take.  In fact, something I theorized last week was that a likely impact of the tariffs was that corporate margins would be hit, not necessarily that prices would rise.  Apparently, somebody much smarter than me agrees with that view, a well-respected analyst, @super_macro on X, who made that point this morning.  But all we can do is wait and see the data and response.

Yesterday, as well, I touched on how bond yields around the world were rising which remarkably seems to be a theme in the mainstream media this morning.  I wonder if they’re secretly reading fxpoetry?

Ok, but let’s move on.  I have consistently expressed my view that the current macroeconomic models in use, which are almost entirely Keynesian based, are simply no longer relevant to the world as it currently exists.  I made the point about economic statecraft, as defined by Michael Every (@TheMichaelEvery), the Rabobank analyst who has been far more accurate in his forecasts of likely political outcomes.  Well, in the financial space, another Michael, Green (@profplum99), is also ahead of the pack in my view.  He was on a podcastlast week that is well worth the hour (40 minutes if you listen at 1.5X speed).  

The essence of his work is that the rise in passive investing has had major consequences for equity markets, and by extension other financial markets.  When John Bogle founded Vanguard with the goal of popularizing passive index investing, it represented a tiny fraction of the market and so, its low fees made it an excellent source of capturing market beta unobtrusively.  However, in the ensuing 50 years, and especially in the last 20 when 401K plans were flipped from opt-in to opt-out by government regulation, things have changed dramatically.

This is the most recent chart I can find showing how passive investments (e.g., index funds and target date funds) have grown dramatically in size relative to the overall market (notice the inflection in 2006 when the opt-in regs changed).  In fact, they currently represent about 50% of equity market assets.

The reason this matters is because the term passive is no longer very descriptive of what these funds do.  As Mr Green explains, they work on the following algorithm, if funds flow in, they buy more stocks and if funds flow out they sell them.  Since they are following cap weighted indices, they basically reflect that since funds flow from every 401K into the market throughout every day, they continue to buy the largest stocks (Mag7) out there regardless of any concept of value.  If you think this through, the main factor in the markets is no longer how a company performs, but how many people have jobs where they have some portion of their incomes allocated to 401K plans.  So, as long as people have jobs, and if employment is growing, equity prices have a price-insensitive base of support.  The upshot is equity markets are no longer forward-looking systems, as has been the belief since early financial market theories, but rather they are indicators of the employment situation.  And it is key to remember that the unemployment rate is a lagging macroeconomic indicator

This matters because the Fed, and frankly most major financial institutions and analysts, continue to model the economy with an input from equity markets.  Consider the Index of Leading Economic Indicators, which has the S&P 500 explicitly in the calculation as an example.  Now, if the Fed is looking at models which discount changes in the equity market, clearly a part of their process, it means they are looking in the rear-view mirror.  This is a very cogent explanation as to why the Fed’s models have grown so out of touch with reality, which if you consider how important they are to monetary policy, and by extension the economy as a whole, is quite concerning.  

Concluding, Mr Green has eloquently explained what I have observed over the past months and years, the Fed’s (and most of Wall Street’s) models are simply no longer fit for purpose.  Add to this the concept of fiscal dominance, where government spending overwhelms monetary policy as has been the case for the past several years, and we all can see why the Fed is flying blind.  

With that cheery thought, let’s see how markets are behaving.  Yesterday’s modest US rally was followed by some strength in Asia (Nikkei +0.55%, Hang Seng +1.6%) although mainland shares were unchanged.  Chinese data overnight surprised on the upside regarding GDP, with an annualized outcome of 5.2%, and it saw IP rise 6.8% Y/Y, also better than expected but Retail Sales (4.8%) and Fixed Asset Investment, which is housing driving (2.8%) both disappointed.  The upshot is that domestic demand continues to flag although they have been working hard to export lots of stuff.  The rest of the region saw a very positive day with almost all markets gaining.  In Europe, the picture is more mixed as tariff concerns continue to weigh on nations there with today’s price action a mix of small gains (CAC, DAX) and losses (IBEX, FTSE 100) and nothing more than 0.3%.  US futures, though, are pointing higher at this hour (7:20) by 0.5% or so.

In the bond market, yesterday’s modest rise in yields is seeing a reversal with Treasury yields slipping -1bp, but European sovereigns having a good day with yields down between -5bps and -6bps.  Inflation data from Spain confirmed that the overall inflation situation there is ebbing, and market participants are now pricing one more rate cut by the end of this year which would take the ECB rate down to 1.75%.  As it happens, JGB yields were unchanged overnight, but there is still growing angst over their recent rise.

In the commodity arena, oil (-0.5%) reversed course yesterday and sold off more than $2/bbl as per the below chart.

Source: tradingeconomics.com

This makes more sense to me given the apparent growth in supply, but there seems to be an awful lot of calendar and crack spread activity in the market, most of which I do not understand well enough to describe, but which can impact pricing of the front futures contract.  I would suggest looking on substack at market vibesfor a real education.  I keep trying to learn.  However, from a macro view, I continue to believe that prices have further to decline than rise from current levels.  As to the metals markets, gold (+0.5%) and silver (+0.4%) continue to find consistent support and I see no reason for them to reverse course anytime soon.

Finally, the dollar continues to do very little overall.  For now, the more aggressive downtrend appears to have been halted, as per the chart of the DXY below, but it is hard to get too excited about a significant rebound based on the macro data and interest rate outlook.  The one thing working in the favor of a dollar rebound is the extreme short dollar positions that exist in the hedge fund and CTA communities.

Source: tradingeconomics.com

In addition to the CPI data, we will see the Empire State Manufacturing Index (exp -9.0) and we will hear from four Fed speakers today (Bowman, Barr, Collins and Logan).  Absent a major shock in the CPI data, it strikes me that there is limited reason for any of these speakers to change their personal tune.  So, Bowman is calling for cuts, while the other three have not done so, at least not yet.  In fact, if we start to hear a more dovish take from any of them, that would be news.

And that’s it for this morning.  Market activity is pretty dull overall, and trends remain in place.  Remember, the trend is your friend.

Good luck

Adf

Heartburn

Posted on by

It seems bond investors are learning
That government spending’s concerning
As yields ‘cross the board
Have all really soared
While buyers become more discerning
 
Meanwhile, o’er the weekend we learned
That Tariff Man’s truly returned
More letters were sent
Designed to foment
Responses as well as heartburn

 

As we approach the middle of the summer, two things are becoming increasingly clear; the world today is very different from just a few years ago and it is getting harder and harder to pay for all the things that the world seems to want.  Taking the second point first, market headlines today have pointed to German 30-year yields which have traded to their highest level since October 2023, and appear set to breech that point and move to levels not seen since prior to the Eurozone bond crisis in 2011 (see MarketWatch chart below)

Similarly, we have seen 30-year yields rise in Japan, a story that gained legs back in late May, and yields overnight returned to those all-time highs from then.

Source: tradingeconomics.com

Not surprisingly, given the debt dynamics globally, US 30-year yields are also pushing back to the levels seen back in May, although have not quite reached those lofty levels and as I type this morning, are trading just below the 5.00% level.

Source: tradingeconomics.com

As Austin Powers might say, “What does it all mean, Basil?”  While I’m just a poet, so take it for what it’s worth, it seems pretty clear that the level of government borrowing is pushing the limits of what private sector investors are willing to absorb.  The below chart, created from FRED data tells an interesting tale.  Up through the GFC, government and private sector debt grew pretty much in step with each other, although after Black Monday in October 1987, government debt started to grow a bit more rapidly.  But the GFC completely changed the conversation and government debt took on a life of its own.  Essentially, the GFC took private losses and nationalized them and put them on the government’s balance sheet. (As an aside, this is why there is still so much anger at the fact that nobody was held accountable for that event, with the perpetrators getting larger bonuses after their banks were bailed out.). But in today’s context, the rise in yields is telling us, or me at least, that the market is losing its appetite for more government debt.

While this is the US graph, the situation is similar around the developed world.  This is why we are hearing more about Secretary Bessent’s sudden love of stablecoins as they will be a source of significant demand for Treasury paper that he needs to sell.  But in the end, do not be surprised if we see more than simply QE, whatever they call it, going forward, but outright financial repression and yield curve control.  While the US may be in the vanguard of this situation, the yields in Germany and Japan tell us that the same is happening there as well.  

As to the first point above, back in the day, it seemed that weekends were observed by one and all around the world with policy statements a weekday affair.  But no longer.  Over the weekend, President Trump sent letters to Mexico and the EU that 30% tariffs were on the way if they did not reach an agreement by August 1st.  For 80 years, most of the Western world operated on a genteel basis, with decorum more important than results.  It is not clear to me if this was because negotiations were more effective, or because most leaders didn’t have the stomach for confrontation.  But it is abundantly clear that President Trump is quite willing to be confrontational with other leaders in order to get his way.  The problem for other leaders is they are not used to dealing in this manner and find themselves uncertain as to how to proceed.  Thus far, whether they have been combative or conciliatory, it doesn’t seem to matter.  Remarkably, it is still just 6 months into this presidency, so things are going to continue to change, but the one thing that is unequivocally true is the world is a different place today than ever before.

Ok, let’s see how other markets are handling the latest tariff storms.  Equity markets are mostly unhappy with this new process as after Friday’s modest declines in the US, we saw more losers (Japan, India, Taiwan, Australia) than winners (Hong Kong, China, Korea) in Asia.  The salient news there was that the Chinese trade surplus grew to $114.8B, slightly more than expected as exports rose sharply while imports underperformed.  However, Chinese bank and lending data did show an increase in M2 and Loan Growth, so at least they are trying to add some monetary stimulus.  As to Europe, other than the UK (+0.4%) the continent is under pressure with Germany (-1.0%) the laggard of the bunch.  The UK story seems to be a single stock, AstraZeneca, which released strong trial results for a new drug.  But otherwise, the tariff story is weighing on the continent.  US futures are also softer at this hour (7:30), down around -0.3% across the board.

While my bond conversation was on the 30-year space, 10-year yields are only marginally higher, about 1bp, in the US and Europe although JGB yields did jump 6bps ahead of their Upper House elections this week. 

In commodities, oil (+1.2%) continues to find support despite the ongoing theme that the economy is soft and supply is growing significantly with OPEC increasing production and set to return even more to the market by the end of the summer.  As it happens, NatGas (+4.75%) is also higher this morning and continues to find substantial support as on a per BTU basis, it is desperately cheap vs. oil, something like one-seventh the price.  In the metals markets, while gold (+0.4%) continues to see support, the real action is in silver (+1.4%) which has rallied very consistently, gapping higher as you can see in the chart below, and has been the subject of much discussion as to how far it can rise.  Historically, silver lags the timing of gold rallies but far outperforms the gains in percentage terms.

Source: finance.yahoo.com

Finally, the dollar is little changed to a touch stronger this morning as traders cannot decide if tariffs are going to be a problem, or if deals are going to be struck.  However, in the dollar’s favor right now is the fact that most other countries are in a clear easing cycle while the Fed remains firmly on hold.  Fed funds futures are pricing less than a 7% chance of a cut this month and only a 61% chance of a September cut.  If US rates continue to run higher than the rest of the world, and there is limited belief they are going to fall, the dollar will find support.  However, given the pressure that President Trump continues to heap on Chairman Powell (there was a story this weekend that Powell is close to resigning, although my take is that is wishful thinking), it is hard to get excited about the dollar’s prospects.  Remember this, all the economists who tell us that an independent central bank is critical work for central banks.

On the data front, after virtually nothing last week, we do get some important numbers this week.

TuesdayCPI0.3% (2.7% Y/Y)
 -ex food & energy0.3% (3.0% Y/Y)
 Empire State Manufacturing-8.0
WednesdayPPI0.2% (2.5% Y/Y)
 -ex food & energy0.2% (2.7% Y/Y)
 IP0.1%
 Capacity Utilization77.4%
 Fed’s Beige Book 
ThursdayInitial Claims234K
 Continuing Claims1970K
 Retail Sales0.1%
 -ex autos0.3%
FridayHousing Starts1.30M
 Building Permits1.39M
 Michigan Sentiment61.4

Source: tradingeconomics.com

In addition to this, we hear from eight FOMC members, so it will be interesting to see if the erstwhile doves are willing to join Waller and Bowman in their call for a July rate cut.  If we start to see momentum build for a July cut, something which is not currently evident, look for the dollar to suffer substantially.  But absent that, I have a feeling we are going to range trade for the rest of the summer.

Good luck

Adf

Trump’s Latest Ire

Posted on by

The Minutes explained that in June
The Fed felt no need to impugn
Their previous view
Of nothing to do
Though two sang an alternate tune

 

Yesterday’s release of the FOMC Minutes from their June meeting confirmed what we have learned in the interim.  Governors Waller and Bowman have been clear that they see tariffs as a one-off impact on the rate of inflation, and not something on which to base policy.  If you think about it, tariffs are like food and energy, something that cannot be addressed effectively by monetary policy and which the Fed explicitly excludes from their decision-making process.  (For a really good read on the inflationary impact on tariffs, @inflation_guy published this yesterday).  To me, the salient comments from the Minutes are below:

“While a few participants noted that tariffs would lead to a one-time increase in prices and would not affect longer-term inflation expectations, most participants noted the risk that tariffs could have more persistent effects on inflation.”

“Participants agreed that although uncertainty about inflation and the economic outlook had decreased, it remained appropriate to take a careful approach in adjusting monetary policy.” 

In fact, it is not hard to conclude that the Fed’s intransigence on this issue is politically motivated as well since we have already established that the Fed is clearly political (and partisan).  I would estimate part of the reason they do not want to cut rates here is because they don’t want to be seen as caving into President Trump’s demands.  But whatever the reason, even the futures market is reducing the probability of a cut with the July probability having fallen from more than 20% two weeks ago to 6.7% as I type this morning.  We will need to see some seriously weak economic data to get the Fed to move, I believe, although I expect we will see Governors Waller and Bowman dissent at the July 30th meeting.

However, I would contend that the market has already sussed this out and there will be limited impact on any financial markets after the meeting absent a surprise cut.  So, let’s move on.

The target of Trump’s latest ire
Brazil, has now come under fire
The issue’s not trade
Instead, Trump was swayed
By lawfare ‘gainst one he admire(s)

The other news from yesterday (and there has been precious little overnight) was President Trump’s threat of 50% tariffs on all of Brazil’s exports to the US.  Now, the US runs a trade surplus with Brazil of about $10 billion, so clearly trade is not the issue here.  Rather, it seems that Mr Trump is seeking to help is friend, former Brazilian president Joao Bolsonaro, who is also a right-leaning populist and who is on trial for leading an insurrection after he lost the last election.  It is not hard to understand Mr Trump’s concern over the issue given the history in the US and the previous administration’s efforts to imprison Trump himself.  

However, this seems, at least to me, a bit over the top.  Brazil had been slated to get the minimum 10% tariff prior to yesterday’s outburst.  As well, the US is Brazil’s second largest trading partner, so this will have a significant impact on the country if these tariffs are imposed.  As such, it is no surprise that the market responded immediately.  

Source: tradingeconomics.com

As you can see from the chart above, the announcement at 1:30 yesterday afternoon had an immediate impact with the real falling -2.5% with minutes of the news.  Too, the IBOVESPA stock index fell more than -1.3% yesterday with Embraer, the airplane manufacturer down nearly 10%.  Right now, this is a threat, and the immediate Brazilian response was to say they would not be cowed by this action and will continue with their internal legal activities.  There is no way I will opine on how this will end, but if these tariffs are put in place, it will be a distinct negative for Brazil’s economy, and I would expect that the real could quickly head back toward 6.00 from its current levels.

Away from those two stories, though, issues impacting financial markets are sparse.  With that in mind, let’s see how markets behaved overnight.  Yesterday’s US equity rally was followed by a mixed picture in Asia with Japan (-0.4%) slipping a bit but gains in both China (+0.5%) and Hong Kong (+0.6%) after rumors came out that the Chinese government was getting set to add more support to the still-imploding Chinese property market.  Other regional bourses saw some gains (Korea, Taiwan, Australia) and some losses (India, Thailand, Philippines).  At this point, all eyes remain on the tariff story for most of these nations.  Meanwhile, in Europe, the FTSE 100 (+1.1%) is today’s leader on the strength of its mining sector which responded positively to President Trump’s mooted 50% tariffs on copper.  Elsewhere, though, things have been less robust with the CAC (+0.7%) having a nice day, the DAX (+0.2%) edging higher after inflation data was released as expected at 2.0% while the IBEX (-0.6%) is moving in the other direction absent a major catalyst.  However, remember it has been performing well, so this could just be some profit taking.  US futures are essentially unchanged at this hour (7:00).

In the bond market, yesterday’s 10-year auction went well with no tail and yields ultimately slipped 6bps during the session.  This morning, that yield has edged back higher by just 1bp.  As to European sovereigns, they are +/- 1bp this morning, showing no direction or new views on anything.  Readings from Europe this morning have confirmed that the rate of inflation is quiet and near the ECB’s target so there is little reason for investors to worry.  As well, the word is that a trade deal between the US and EU is getting close, which will almost certainly be seen as a benefit for markets on the continent.

In the commodity markets, oil (-0.6%) is softer this morning but continues to hug the $68/bbl level despite EIA inventory data showing a net large build of nearly 4 mm barrels.  It appears that there is both ample supply and production and there continues to be concern over slowing economic activity, yet oil is in demand.  As I often say, sometimes markets are simply perverse.  In the metals markets, gold (+0.5%) continues to trade either side of $3350/oz and has done so since mid-April.  I continue to read about central banks buying the relic and replacing US Treasuries with gold in their reserve portfolios, but there is obviously enough supply to prevent further price appreciation for now.  But gold is leading gains across the entire metals complex (although copper is getting a boost from the tariff talk.)

Finally, in the FX markets, there is no direction this morning.  both the euro and pound are slightly softer, but AUD (+0.4%) and NZD (+0.35%) are firmer with the yen and CAD little changed.  ZAR (+0.4%) is also having a good day, arguably on the strength in the precious metals markets but otherwise, it is hard to find anything exciting to note.

Turning to this morning’s data, we get the weekly Initial (exp 235K) and Continuing (1980K) Claims and that’s it.  We do hear from three Fed speakers, Musalem, Daly and Waller, but since we already know Waller’s views, it will be far more interesting to hear the other two.  I do find it interesting that Ms Daly, one of the most dovish FOMC members, is not in the rate cut camp, a situation I attribute entirely to her political views.

And that’s what we’ve got today.  Nothing has changed any trends, and it seems highly unlikely that today’s data will.  However, if we hear dovish signals from both Daly and Musalem, that may indicate a turn at the Fed and perhaps we will see that narrative change.  I am confident the one thing Chairman Powell does not want is to have a 5-4 vote to leave rates unchanged.  I would contend that is the most intriguing thing on the horizon right now.

Good luck

Adf

Recession Repression

Posted on by

Though many conclude that recession
Is coming, this poet’s impression
Cannot overcome
A key rule of thumb
More jobs mean recession repression
 
As well, on the fourth of July
The naysayers all went awry
The BBB’s law
As Trump oversaw
Parades and a massive fly-by

 

I will be brief this morning.  First, Thursday’s NFP report was much stronger than expected, with 147K new jobs and the Unemployment Rate falling to 4.1%.  This is clearly not pointing in a recessionary direction, although as would be expected by all those who have made that call, there was much analysis about the underlying makeup of the jobs report, with more government hires and less private sector ones.  And I agree, I would much rather see private sector hiring, but I don’t recall as much angst in the previous administration when they hired into the government extremely rapidly.  It is difficult for me to look at the below chart of government hiring over the past five years and conclude that this administration is being anywhere nearly as profligate.

Source: tradingeconomics.com

Second, despite all the naysaying by the punditry, President Trump got his Big, Beautiful Bill through Congress and he was able to sign it on his schedule, July 4th.  Whether you love Trump or hate him, you must admit that he is a remarkable political force, greater than any other president I can remember, although Mr Reagan was certainly able to accomplish many things with a very different style.  And perhaps, that is the issue, Trump’s style is unique in our lifetimes as a president, although I understand that throughout our history, there have been some presidents with a similarly brash manner, I guess Andrew Jackson is the best known.  And it is that style, I would say that leads to the Trump Derangement Syndrome, although his attack on the Washington elite is also a key driver there.

Thus far, the articles I have read about the legislation all focus on how many people are going to die because Medicaid is requiring able-bodied adults to work, volunteer or go to school 20 hours/week in order to remain eligible.  It would be helpful if these ‘news’ sources could keep a running tally so we can all see the results.  Given the law simply sets priorities, and not actual appropriations yet, my take is all this death and destruction may take a few months yet to materialize.

But after those two stories, there is a growing focus on the upcoming Tariff deadline this Wednesday, with a mix of views.  There is both a growing concern that the original level of tariffs is going to be put back in place, and that will disrupt global commerce, and there is a story gaining traction that the deadline will be delayed again.  The administration hinted there would be some notable deal signings this week, so we shall see.

As that’s all there is, let’s look at markets overnight.  Thursday’s US rally in the wake of the NFP data is ancient history.  Overnight in Asia, the major markets (Japan -0.6%, Hang Seng -0.1%, CSI 300 -0.4%) were under pressure but the rest of the region was mixed with some gainers (Korea, Indonesia, Singapore) and some laggards (Taiwan, Malaysia, Australia) although none of the movement was very large, 0.5% or less in either direction.  In Europe this morning, the DAX (+0.65%) is far and away the leader after a stronger than expected IP reading of +1.2%.  However, the rest of the continent and the UK are all tantamount to unchanged in the session.  US futures at this hour (7:00) are pointing slightly lower, about -0.025%.

In the bond market, Treasury yields which rallied 5bps on Thursday after the data are higher by one more basis point this morning.  European sovereign yields are all higher this morning as well, between 2bps and 3bps, as concerns over the timing of tariffs has investors cautious.  The rumors are solid progress has been made in these negotiations.

In the commodity space, oil (+0.7%) is higher this morning which is a bit of a surprise given that OPEC+ raised their production quotas by a more than expected 548K barrels/day at their meeting this weekend.  At this point, they are well on their way to eliminating those production cuts completely.  I guess demand must be real despite the recession calls.  Metals markets, though, are all lower this morning (Au -1.0%, Ag -2.0%, Cu -0.6%) as hopes for trade deals has reduced some haven demand.  Of course, copper’s decline doesn’t jibe with oil’s rally on a demand note, but the movements have not been that large, so it is probably just random fluctuations.

Finally, the dollar is stronger this morning, which is also weighing on the metals markets.  ZAR (-1.1%) is the biggest loser overnight although NZD (-0.9%) and AUD (-0.7%) are doing their best to catch up.  But the euro (-0.35%) and pound (-0.3%) are both under pressure as is the yen (-0.7%) and CAD (-0.5%) and MXN (-0.5%). In other words, the dollar’s strength is quite broad-based.  On this note, I couldn’t help but chuckle at this article in Bloomberg, Misfiring Models Leave Wall Street Currency Traders Flying Blind, which describes how all the old models no longer work in the current world.  This is a theme I have harped on for a while, mostly with the Fed, but also with the punditry in general.  The world today is a different place, and I might ascribe the biggest difference to the fact that for 20+ years, inflation had fallen to 2% or lower in most of the western world and markets behaved accordingly.  But now, inflation is higher, and those relationships no longer hold.

On the data front, this may be the least active week I have ever seen.

TuesdayNFIB Small Biz Optimism98.7
 Consumer Credit$10.5B
WednesdayFOMC Minutes 
ThursdayInitial Claims235K
 Continuing Claims1980K

Source: tradingeconomics.com

There are only 3 Fed speakers as well so pretty much, Washington is on vacation this week.  It is very hard to get excited about much right now.  We will all need to see the outcomes of the trade negotiations and which countries will see tariffs applied or not.  I have no forecasts for any of that.  In the meantime, I think the fact that implied volatilities are relatively low across most asset classes offers the opportunity for hedgers to protect themselves at reasonable prices.

Good luck

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