Tag Archives: #gold

Rare Earths No More

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Said Xi, we’ll sell rare earths no more
Said Trump, well that means we’re at war
The stock market puked
As traders got spooked
And Trump imposed tariffs galore
 
The question is just why would Xi
Get feisty when things seemed to be
Improved for both sides
With fewer divides
Did Mideast peace kill his esprit?

 

Let’s talk about markets for a moment.  Sometimes they go down and go down fast when you’re not expecting it.  That is their very nature, so it is important to understand that Friday’s price action, while dramatic relative to what we have seen over the past 6 months, is not that uncommon at all over time.  It appears the proximate cause of the market decline was the word from China that they would stop selling and exporting rare earth minerals. 

It can be no surprise that President Trump immediately responded by threatening an additional 100% tariffs on all Chinese exports and new controls on software, all to be implemented on November 1st.  There is a lot of tit-for-tat in the dueling messages from China and the Trump administration and it is hard to tell what is real and what isn’t.  However, equity markets clearly weren’t prepared for a break in the previous expectations that the US and China were closing in on a more lasting trade stance.

But weekends are a long time for markets as so much can happen while they are closed.  This weekend was a perfect example.  After the carnage on Friday, we cannot be that surprised that both sides of this new tiff modified their responses.

First we saw this on Truth Social:

Then China backed off clarified that what they are really doing is require licensing for all rare earth minerals and products that contain them in exports.  China claims that applications that meet regulations will be approved although the regulations have not yet been defined. Ostensibly this is for national security reasons, and it is unclear exactly who will receive licenses, but this is clearly not the same as ending exports.  

And just like that, many of the fears that were fomented on Friday have been alleviated as evidenced by this morning’s equity market moves in the futures markets.

Source: tradingeconomics.com

But why did Xi make this move in the first place?  I have no idea, nor does anyone but Xi, although here are two completely different thought processes, one very conspiratorial and one rooted in the broader escalation of geopolitical affairs.

As to the first, (Beware, you will need your tinfoil hat here!) consider if the Israel-Gaza peace settlement, (with the hostages returned as of the time I am writing this morning at 5:30) does not serve China’s interest.  First, the one Middle East nation that will be on the outside is their ally, Iran.  Second, the ongoing problems there were always a distraction for the US, something that clearly suits Xi and China.  After all, if the US is focused there, they will have more difficulty paying attention to things Xi cares about like Taiwan and the South China Sea.  If the peace in Israel-Gaza holds, and the Abraham Accords extend to the bulk of the rest of the region, Xi loses a major distraction that cost him virtually nothing.  Plus, this opens the door for tightening sanctions on Iran even further, which could negatively impact China’s oil flows.  

The second is much more esoteric and I read about it this weekend from Dr Pippa Malmgren, someone who has a deep insight into global politics from her time as a presidential advisor as well as from her father, Harold Malmgren, who advised four presidents.  In her most recent Substack post she explained the importance of Helium-3 (3He), a rare isotope of helium that has major energy and military implications and where the largest deposit of the stuff known to man is on the moon.  Her claim is this is the foundation of the recent acceleration in the space race between the US and China and without rare earth minerals, the US ability to achieve its goals and obtain this element would be greatly hampered opening the door for China to get ahead.

Are either of these correct?  It is not clear, but I would contend each contains some logic.  In the end, though, as evidenced by the quick retreat on both sides, I suspect that the trade situation between the US and China will move forward in a positive manner, although there could well be a few more hiccups along the way.  And those hiccups could easily see equity markets decline such that there is a real correction of 15% to 20%.  Just not today.

So, what is happening today?  Let’s look.  First, I would be remiss if I didn’t highlight the following Bloomberg headline: ‘Buy the Dip’ Call Grows Louder as China Selloff Seen Contained, as it perfectly encapsulates the ongoing mindset in equity markets.  At least in US equities.  Asia had a much rougher session despite the backtracking with HK (-1.5%) and China (-0.5%) under pressure and weakness virtually universal in the time zone (Korea -0.7%, India -0.2%, Taiwan -1.4%, Australia -0.8%). Tokyo was closed.  It appears there are either still concerns over the trade situation, or perhaps the fact that globally, markets have had long rallies has led to some profit taking amid rising uncertainties.  

European bourses, though are all in the green, with the continent seeing gains of 0.5% or so across the board although the UK is lagging with a miniscule 0.05% gain at this hour (6:30).  As to US futures, as seen above, gains range from 1.0% (DJIA) to 2.0% (NASDAQ).

Meanwhile, bond yields also saw a dramatic move on Friday, tumbling -8bps and back to their lowest level seen in a month as per the below chart from tradingeconomics.com

This morning, those yields are unchanged.  European sovereign yields, which followed Treasury yields lower on Friday are also little changed at this hour, down another -1bp as concerns begin to arise that economic growth is going to be impaired by the escalation in trade tension between the US and China.  

I would argue that commodities are the one area where the back and forth is raising the most concern.  At least that is true in metals markets, with gold, which rallied 1% Friday amid the equity carnage, higher by another 1.6% this morning, to more new highs and we are seeing silver (+1.6%), copper (+4.2%) and Platinum (+3.6%) all in sync.  To me, this is the clearest indicator that there is an underlying fear pervading markets.  Oil (+1.8%) has rebounded from Friday’s rout as the easing of trade tensions appears to have calmed the market somewhat, although WTI remains just below $60/bbl at this point.  

Finally, the dollar is firmer again this morning as, although it softened slightly Friday, it has since regained most of those losses and is back on its recent uptrend as you can see below.

Source: tradingeconomics.com

While Tokyo was closed overnight, we did see further JPY weakness as the yen retraced most of its Friday gains like the rest of the market.  The biggest G10 mover was CHF (-0.9%) followed by AUD (-0.7%) and JPY (-0.7%) with other currencies less impacted and NOK (+0.2%) benefitting from the oil rally.  However, the EMG bloc has seen a much wider dispersion with MXN (+0.5%), ZAR (+1.1%) and CLP (+0.8%) all rallying sharply on the metals rally while PLN (-0.5%) and CZK (-0.4%) lag as they follow the euro lower.

And that’s enough for today.  With the government still on hiatus, no official statistics will be released although we do get a little bit of stuff as follows:

TuesdayNFIB Small Business Index100.5
WednesdayEmpire State Manufacturing-1.8
 Fed’s Beige Book 
ThursdayPhilly Fed Manufacturing9.1

Source: tradingeconomics.com

But, with the lack of data, it appears Chairman Powell has instructed his minions to flood the airwaves with a virtual cacophony of speeches this week, I count 18 on the calendar including the big man himself on Tuesday afternoon.  It seems difficult to believe that their opinions on the economy will have changed very much given the lack of new data.  The market is still pricing a 98% chance of a cut at the end of this month and another 91% chance of a cut in December.  With the increased trade tension, there is much more discussion regarding a slower economic course ahead, which would play into further rate cuts.  However, while that would clearly help precious metals as it ends any ideas of an inflation fight, it is not clear it will weaken the dollar very much as everybody else will almost certainly follow along.

Good luck

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The Chaos Extant

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Though yesterday equities fell
The trend that most pundits foretell
Is higher and higher
As AI’s on fire
And it would be crazy to sell
 
And, too, precious metals keep soaring
A sign of investors abhorring
The chaos extant
Which serves as a taunt
To those who prefer markets boring

 

My friend JJ (Alyosha at Market Vibes on Substack) made a very interesting point about recent markets, which I have felt, but not effectively articulated until he pointed it out; the correlation of pretty much all markets is approaching one, but they are rallying.  Historically, every market has its own drivers and tends to trade somewhat independently of other markets, at least across asset classes.  While it is certainly common to see equity indices rise and fall together, we have all become used to bond markets moving in the opposite direction while commodity and FX markets tend to follow completely different drummers.  After all, while there are certainly big unifying themes, each of these markets, and the components that make them up, all have idiosyncratic drivers of price.

Again, historically, the only time this changes is when there is a crisis, at which point the correlation between markets tends to one (or minus one) as panic selling of risk assets and buying of perceived havens becomes the ONLY trade of interest.

However, what we have observed over the past several weeks is that virtually all risk assets are rising simultaneously, with equities, gold and bitcoin all on a tear as you can see below.

Source: tradingeconomics.com

In other words, their correlations are approaching one.  The odd thing about this is that equity markets tend to reflect expectations for the future of economic activity along the following line of reasoning; strong economic growth leads to strong earnings leads to higher equity prices.  At least that has been the history.  Meanwhile, gold, and more recently bitcoin, have served as the antithesis of that trade, increasing concern over weaker economic outcomes which results in increased demand for haven assets that can buck that trend.  

Of course, historically there has been another asset class seen as protection, bonds, but those are in a tough spot right now as the ongoing massive increases in issuance by countries all over the world has investors somewhat concerned about their safety.  This has been especially true in Japan, where JGB yields last night traded to their highest level since 2008 at 1.70%.

Source: marketwatch.com

But my observation is that investors elsewhere are uncertain how to proceed as yields, though higher than seen several years ago, are not increasing dramatically despite the narrative of fiat debasement, increased inflation and major fiscal problems building around the world.

Source: tradingeconomics.com

The explanation that makes the most sense to me is the concept that governments around the world are going to ‘run it hot’ as they seek faster economic growth at the expense of all else and will only pay lip service to trying to fight inflation.  The result is fiscal spending will continue to prime the pump, whether on purely domestic issues or things like defense, debt issuance will tend toward shorter dates as there is a much greater appetite for T-bills than bonds given the inflation concerns, and so stock markets will benefit, but perceived inflation hedges like gold and bitcoin, will also benefit.  (At this point, I will insert a plug: If you want to protect against inflation, at least against CPI’s rise, while maintaining liquidity, USDi, the only inflation tracking cryptocurrency is a very good idea for some portion of your portfolio.  Check out http://www.USDicoin.com).

The concern about this entire story is that when things change, and they always do at some point, all these assets that are rising in sync will fall in sync, and remember, falling markets tend to move a lot faster than rising ones.  I’m not saying this is imminent, just that the setup feels concerning, at least to my eyes and my gut.

Meanwhile, let’s look at how markets behaved overnight.  Yesterday saw US equity markets slip a bit, although they closed well off their early morning lows and futures this morning are pointing higher by a small amount, 0.2%.  Asian markets saw Japan (-0.5%) and HK (-0.5%) both slide as well, following the US while China remained closed for the holiday but will reopen this evening.  Elsewhere in the region, for those markets that were open (Australia, India, Taiwan were the majors) modest weakness was also the story.  

Europe, though, is a bit of a conundrum as it is having a very positive session (UK +0.9%, Germany +0.7%, France +0.8%, Spain +0.6%) despite the fact that data there continues to disappoint (German IP -4.3%) which as you can see from the below chart continues a three year run of pretty horrible outcomes.

Source: tradingeconomics.com

As well, France has no government, and the UK government is seeing its support erode dramatically.  But looking at the ECB, there is no expectation priced into the market for further rate cuts, so I am baffled as to why European equity markets are performing well.  

Perhaps it is because the dollar is strengthening, which is the recent trend with the euro slipping another -0.25% overnight and trading back to its lowest level in a month.  Too, the pound (-0.2%), CHF (-0.2%) and JPY (-0.6%) have all suffered pushing the DXY up toward 99.00.  Does a strong dollar help foreign markets?  I always thought the story was it hurt them as funding USD debt became more difficult for foreign companies.  Something doesn’t make sense here.  As to EMG markets, they are also seeing their currencies slip, mostly in a similar fashion to the euro, down about -0.2%, although KRW (-0.6%) is the laggard as they have been unsuccessful in getting any tariff relief from President Trump.

Finally, commodity prices continue their remarkable rally, at least metals prices are on a remarkable rally with gold (+1.3% or $50/oz) and silver (+2.5%, now at $49/oz) driving the bus and taking copper (+0.7%) and platinum (+1.8%) along for the ride.  While gold has rallied more than 53% so far this year, it has not been a US investor focus until recently.  I think it has further to run, a lot further.  As to oil (+1.5%), it continues to bounce from last week’s lows but remains well within its recent trading range.  Ukrainian attacks have been successful in reducing Russian output and OPEC+ only raised production by 137K barrels at their last meeting, less than had been rumored.  However, as I observe this market, it needs a large external catalyst to breech the range in my view, and if war doesn’t do the job, I’m not sure what will.

And that’s really it for the day.  Government data remains on hiatus and even though Fed speakers are polluting the airwaves, nobody is listening.  The government has been shut down for a week, and I think that most people just don’t care.  In fact, if the result was less government expenditure for less government service, I think many would make the tradeoff.  The upshot is, the larger trend of equity and commodity rallies remain in place, and the dollar continues to look a lot better than most other fiat currencies.

Good luck

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Never Sold

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The news of the day is that gold
Is actively bought, never sold
The Four Thousand level
Led some folks to revel
And drew many more to the fold
 
But weirdly, the dollar keeps rising
Which based on the past is surprising
The problems in France
And Sanae’s stance
Have been, for the buck, energizing

 

A month ago, many Wall Street analysts came out with forecasts that gold could trade as high as $4000/oz by mid 2026 as they reluctantly jumped on the bandwagon.  But, by many accounts, although my charts don’t show it, the barbarous relic’s futures contract traded a bit more than 120 lots at $4000.10 last night, nine months earlier than those forecasts.

Source: Bloomberg.com

Right now (6:20), the cash market is trading at $3957 (-0.1%) but there is absolutely no indication that the top is in.  Rather, I have been reading about the new GenZ BOLD investment strategy, which is buying a combination of Bitcoin and gold.  Mohammed El-Arian nicknamed this the debasement trade, which is a fair assessment and a number of banks have been jumping on this theme.

Perhaps more interesting than this story, which after all is simply rehashing the fact that gold is seen as a long-term hedge against inflation, is the fact that the dollar is trading higher alongside gold, which is typically not the case.  In fact, for the bulk of my career, gold was effectively just another currency to trade against the dollar, and when the dollar was weak, foreign currencies and gold would rise and vice versa.  But look at these next two charts from tradingeconomics.com, the first a longer term view of the relationship between gold and DXY and the second a much shorter-term view.

The one-year history:

Compared to the one-month history:

I believe it is fair to say that while there is a clear concern about, and flight from, fiat currencies, hence the strength of precious metals as well as bitcoin, in the fiat universe, the dollar remains the best of a bad lot.  Yesterday I described the problems in France and how the second largest nation in the Eurozone was leaderless while trying to cope with a significant spending problem amid broad-based political turmoil.  We have discussed the problems in Germany in the past, and early this morning, the fruits of their insane energy policies were shown by another decline in Factory Orders, this time -0.8%, far less than the 1.7% gain anticipated by economists.  I don’t know about you, but it is difficult for me to look at the below chart of the last three years of Germany’s Factory Orders and see a positive future.  Twenty-two of the thirty-six months were negative, arguably the driving force behind the fact that Germany’s economy has seen zero growth in that period.

Source: tradingeconomics.com

Meanwhile, the yen continues to weaken, pushing toward 151 now and quite frankly, showing limited reason to rebound anytime soon.  Takaichi-san appears to be on board with the “run it hot” thesis, looking for both monetary and fiscal stimulus to help Japan grow itself out of its problems.  The JGB market has sussed out there will be plenty more unfunded spending coming down the pike if she has her way as evidenced by the ongoing rise in the long end of the curve there.  While the 30-year bond did touch slight new highs yesterday, the 40-year is still a few basis points below its worst level (highest yield) seen back in mid-May as you can see in the chart below.  Regardless, the chart of JGB yields looks decidedly like the chart of gold!

Source: tradingeconomics.com

In a nutshell, there is no indication the fiscal/financial problems around the world have been addressed in any meaningful manner and the upshot is that more and more investors are seeking safety in assets that are not the responsibility of governments, but either private companies or have inherent intrinsic value.  This is the story we are going to see play out for a while yet in my view.

Ok, so, let’s look at how markets overall behaved in the overnight session.  China remains on holiday, but it will be interesting to see how things open there on Thursday morning local time.  Japan, was unchanged overnight, holding onto its extraordinary post-election gains.  As to the other bourses there, holidays abound with both Hong Kong and Korea closed last night and the rest of the region net doing very little.  Clearly the holiday spirit has infected all of Asia!  In Europe, though, we are seeing very modest gains across the board despite the weak German data.  The DAX (+0.2%) has managed a gain and we are seeing slightly better performance in France (+0.4%) and Spain (+0.4%) with the UK (+0.1%) lagging slightly.  On the one hand, these are pretty benign moves so probably don’t mean much, but it is surprising there are rallies here given the ongoing lousy data coming from Europe.  As to US futures, at this hour (7:20), they are all pointing higher by just 0.1%.

In the bond market, yields are continuing to edge higher with Treasuries (+2bps) leading the way and European sovereigns following along with yield there higher by between 2bps and 3bps.  There continues to be a disconnect between what appear to be government policies of “run it hot” and bond investors, at least at the 10-year maturity.  Either that or there is some surreptitious yield curve control ongoing to prevent some potentially really bad optics.

In the commodity markets, oil (+0.1%) is still firmly ensconced in its recent range with no signs of a breakout.  I read a remarkably interesting article from Doomberg (if you do not already get this, it is incredibly worthwhile) this morning describing the methods that the Mexican drug cartels have been heavily involved in the oil business in Mexico, siphoning billions of dollars from Pemex and funding themselves, and more importantly, how the US was now addressing this situation.  This is all of a piece with the administration’s view that the Americas are its key allies and its playground, and it will not tolerate the lawlessness that has heretofore been rampant.  It also implies that if successful, much more oil will be coming to market from Mexico, and you know what that means for prices.  As to the metals markets, they are taking a breather this morning with gold (-0.1%) and sliver (-0.3%) consolidating after yesterday’s rally.  We discussed gold above, but silver is about $1.50 from the big round number of $50/oz, something that I am confident will trade sooner rather than later.

Finally, the dollar is rallying again with the euro (-0.5%) and pound (-0.6%) both under pressure and dragging the rest of the G10 with them.  If the DXY is your favorite proxy, as you can see from the chart below, this is the 4th time since the failed breakout in late July that the index is testing 98.50 from below.  It seems there is some underlying demand, and I would not be surprised to see another test of 100 in the coming days.

Source: tradingeconomics.com

It should be no surprise that the CE4 currencies are all under pressure this morning and we have also seen weakness in MXN (-0.3%) and ZAR (-0.3%) although given the holidays in Asia, it is hard to make a claim there other than that INR (-0.1%) continues to steadily weaken and make new historic lows on a regular basis.

With the government shutdown continuing, there is still no official data although there is a story that President Trump is willing to have more talks with the Democrats.  We shall see.  I think the biggest problem for the Democrats in this situation is that according to many polls, nobody really cares about the shutdown, with only 6% registering any concern.  It is a Washington problem, not a national problem.  Of course, FOMC members will continue to speak regardless of the shutdown and today we hear from four more.  Interestingly, nothing any of them said yesterday was worthy of a headline in either the WSJ or Bloomberg which tells me that there is nothing coming from the Fed that matters.

Running it hot means that we will continue to see asset prices rise, bond prices suffer, and the dollar likely maintain its current level if not rally a bit.  We need a policy change somewhere to change that, and I don’t see any nation willing to make the changes necessary.  I have no idea how long this can continue, but as Keynes said, markets can remain irrational longer than you can remain solvent.  Be careful betting against this.

Good luck

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The Winds of Change

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Takaichi-san
Her pronouns so very clear
Brings the winds of change

 

Japan has a new Prime Minister, Sanae Takaichi, the first woman to hold the position.  She was deemed by most of the press as the most right-wing of the candidates, which fits with a growing worldwide narrative regarding nationalism, antagonism toward immigration and concerns over China and its plans in the region.  However, in the waning days of the campaign, she moderated a number of her stances as she does not have a majority in either house of the Diet, and will need to persuade other, less rigid members to vote with her in order to pass legislation.

However, the initial market response has been remarkable.  The Nikkei opened in Tokyo +5.5% and held most of those gains, closing higher by 4.75%.  USDJPY gapped 1.3% on the Tokyo opening and is currently higher by 2.0% and back above 150.  Perhaps the most interesting thing is that despite dollar strength, the precious metals have roared higher with both gold and silver gaining 1.4% as gold touches yet another new all-time high and silver pushes ever closer to $50/oz. Meanwhile, JGB yields are little changed as I imagine it will take a few days, at least, for investors to get a better sense of just how effective she will be at governing in a minority role.

Below is the chart for USDJPY, demonstrating just how big the gap was.  This appears to be another chink in the ‘end of the dollar’s dominance’ armor.  Just sayin’!

Source: tradingeconomics.com

In Europe, the powers that be
Have found citizens disagree
With most of their actions
Thus, building up factions
That want nothing but to be free
 
The most recent story is France
Where Macron’s PM blew his chance
He’s now stepped aside
But Macron’s denied
He’ll willingly exit the dance

However, the dollar’s gains today are not merely against the yen, but also, we have seen the euro (-0.7%) slide sharply with the proximate cause here being the sudden resignation of French PM LeCornu.  And the reason it seems like it was only yesterday that France got a new PM after a no-confidence vote in September, is because it basically was only yesterday.  PM LeCornu lasted just one month in the role as President Macron didn’t want to change the cabinet there, thus making LeCornu’s job impossible.  While the next presidential election is not scheduled until April 2027, and Macron is grasping to his role as tightly as possible, it appears, at least from the cheap seats over here in the US, that the vote will happen far sooner than that.  He appears to have lost whatever credibility he had when first elected, and France has now had 4 PM’s in the past twelve months, hardly the sign of a stable and successful presidency.

Like the bulk of the current European leadership, Macron has decided that nearly half the country should not have their voices heard by banning Madame LePen’s RN from government.  And while President Biden was never successful imprisoning President Trump, in France, they managed to convict LePen on some charge and ban her from running.  But that has not dissuaded her followers one iota.  We see the same behavior in Germany with AfD, and the Merz government’s attempts to ban them as a party, and similar behavior throughout Europe as the unelected Brussels contingent in the European Commission struggles to do all they can to retain power.

In fact, if you look at the most recent polls I can find for France, from Politico, you can see that RN, LePen’s party, is leading the polls while ENS, Macron’s centrist party has just 15% support.  The far left NFP is in second place and the center-right LRLC is at 12%.  It is difficult for me to believe that Macron can hold on until 2027, at least 18 months away, and if he does, what type of damage will he do to France?

The point of the story is that whatever you may think of Donald Trump, he has the reins of government and is doing the things he promised on the border and immigration, reducing government and reducing regulations.  In Europe, the entrenched bureaucracy is fighting tooth and nail to prevent that from happening with the result that economic activity is suffering and prospects for future growth are stunted.  And all that was before the US change in trade policy.  With that in mind, absent a massive Fed turnaround to dovishness, which doesn’t seem likely in the near term, the euro has more minuses than pluses I think and should struggle going forward.

Ok, two political stories are the driver today, and neither one has to do with Trump!  Meanwhile, let’s look at how everything else has behaved overnight.  Friday saw a mixed session in the US, and all I read and heard over the weekend was that the denouement was coming, perhaps sooner than we think.  The recurring analogy is Hemingway’s description of going into bankruptcy, gradually, then suddenly, and the punditry is trying to make the case that the ‘suddenly’ part is upon us.  I’m not convinced, and would argue that, at least in the US, things can go on longer than they should.  This is not to say the US doesn’t have serious fiscal issues, just that we have better tools to address them than anyone else.

Elsewhere in Asia, China is still on holiday while HK (-0.7%) could find no joy in the Japanese election.  But Korea (+2.7%), India (+0.7%) and Taiwan (+1.5%) all rallied nicely with only the Philippines (-1.8%) showing contrary price action as investors grew increasingly concerned over a growing corruption scandal with the government there and infrastructure embezzlment allegations.  I didn’t mention above but the rationale behind the Japanese jump is that Takaichi-san is expected to push for significant fiscal expansion on an unfunded basis, great for stocks, not as much for bonds.

In Europe, though, you won’t be surprised that France (-1.6%) is leading the charge lower, although in fairness, the rest of the continent is doing very little with the other major exchanges +/- 0.1% basically.  As to US futures, at this hour (7:15), they are all pointing higher by 0.5% or so.

In the bond market, Treasury yields have moved higher by 4bps this morning, adding to a similar gain on Friday as it appears there are lingering concerns over what happens with the government shutdown.  (Think about it, that issue hasn’t even been a topic of discussion yet this morning!). But remember, the government shutdown does not impact the payment of coupons on Treasury debt, so the issues are very different than the debt ceiling.  As to European sovereigns, not surprisingly, French OATs are the wors performers, with yields jumping 8bps (they have real fiscal problems) but the rest of the continent has tracked Treasury yields and are higher by 3bps to 4bps as well.

I’ve already highlighted precious metals, although copper (-0.7%) is bucking the trend, albeit after having risen more than 10% in the past month.  Oil (+1.4%) is also continuing to bounce off the bottom of the range trade and remains firmly ensconced in the $61.50 to $65.50 range as it has been for the past six months.  In fact, looking at the chart below from Yahoo finance, you can see that except for the twelve-day war between Israel and Iran, nothing has gone on here.  The net price change in the past six months has been just -0.19% as you can see in the upper left corner.  While this will not go on forever, I have no idea what will break this range trade.

Finally, the dollar is stronger across the board with the pound (-0.4%) and SEK (-0.5%) the next worst performers in the G10 while CAD and NOK are both unchanged on the day, reflecting the benefits of stronger oil and commodity prices.  In the EMG bloc, the CE4 are all softer by between -0.6% and -0.9%, tracking the euro, and we have seen APAC currencies slip as well (KRW -0.5%, CNY -0.15%).  MXN (-0.2%) and ZAR (-0.3%) seem to be holding in better than others given their commodity linkages.

And that’s all we have today.  With the shutdown ongoing, there are no government statistics coming but we will hear from 8 different Fed speakers, including Chairman Powell on Thursday morning, over a total of 15 different venues this week.  Again, there is a wide dispersion of views currently on the FOMC, so unless we start to see some coalescing, which given the lack of data seems unlikely in the near term, I don’t think we will learn very much new.  As far as the shutdown is concerned, the next vote is scheduled for today, but thus far, it doesn’t seem the Democratic leadership is willing to change their views.  Funnily, I don’t think the markets really care.

Overall, I see more reasons to like the dollar than not these days, and it will take a major Fed dovish turn to change that view.

Good luck

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Who Will Blink First?

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The question’s now, who will blink first?
With Democrat leaders immersed
In internal strife
Concerned their shelf life
Is short and their party’s been cursed
 
Or will the Republican leaders
Start caring if New York Times readers
Scream loudly enough
The polls will turn rough?
My bet’s on the Dems as conceders

 

So, the government is shut down and yet, the sun continues to rise and set, and life pretty much goes on as before.  Is this, in fact a big deal?  It all depends on your point of view, I suppose.  It is certainly a big deal for those furloughed government employees, especially those whose jobs may disappear in the pending RIF.  But as I have often said, if they leave government and become baristas at Starbucks, they are almost certainly adding more value to the economy.  And consider, whenever you have to interface directly with the federal government (post office, passports, IRS, etc.) has the customer service ever been useful or effective?  Explaining that people will have to wait longer is hardly a compelling argument.  In fact, of all the places where AI is likely to be most useful, repetitive government tasks seems one of the most beneficial potential applications.

Nonetheless, this is the story that is going to lead the headlines for a few more days.  Ultimately, as we have already seen several Democrat senators vote to pass the CR, I expect enough others to do so to reopen the government, if not at the next scheduled vote tomorrow, then at the one following next week.  Ultimately, I believe what we’ve relearned is that most politics is simply performance art.

Too, remember that the decision as to who is considered essential, when the government shuts down, is left up to the president.  So, the Democrats shut down the government and have allowed President Trump to decide what gets done.  Pretty soon, I suspect they will figure out that was a bad idea as we have already seen specific projects in NY (home to both House and Senate minority leaders) get halted with the funds flows stopping as well.

Meanwhile, in the markets, nobody appears to have noticed that the government has shut down.  That is the key conclusion to be drawn from the continuation of the equity market rally where all three major US indices closed at record highs yet again. I am hard pressed to look at the below chart of those indices and glean any concern by markets regarding the government shutting down.  Perhaps, even, they are applauding the idea as it means less spending!

Source: tradingeconomics.com

Arguably, the market’s biggest concern is that government data releases will be missing from the mix, although, that too, might be a blessing.  The person most upset there will be Ken Griffin, as Citadel’s algorithms will not be able to take advantage of the data prints before everyone else!  In fact, I suspect that he is already bending the ears of the Democratic leadership to get things back to normal.

Meanwhile, would it be too much to ask to close the Fed during the shutdown?  Asking for a friend!

Ok, what is happening elsewhere in the world.  Japanese Tankan data the night before last came in a tick weaker than forecast, and than last month, but remains solid overall.  Deputy BOJ Governor Uchida reiterated that if the economy performs as currently expected, the BOJ will continue to remove policy accommodation going forward with expectations for a rate hike at the end of the month priced at a 60% probability.  Interestingly, despite that, the Nikkei (+0.9%) rallied overnight along with the yen (+0.3% overnight, +2.1% in the past week), although the yen move makes more sense.  As to the rest of Asian equity markets, China (+0.5%) and HK (+1.6%) are clearly unperturbed by the US situation as a positive outlook on trade talks with the US are the narrative there heading into their weeklong National holiday.  Elsewhere in the region, every major bourse is higher with some (Korea +2.7%, Singapore +1.7%) substantially so.  The US rally is dragging along the world.

This is true in Europe as well with the DAX (+1.4%) and CAC (+1.3%) leading the way as all major bourses rise alongside the US.  Apparently, increasing global liquidity is good for risk assets.

In the bond market, Treasury yields continue to slide, down another -1bp overnight after slipping -4bps yesterday.  The only data was the ADP Employment Report which showed a decline of -32K jobs compared to expectations of +50K.  It is important to recognize that this report included ADP’s benchmark revisions which, not surprisingly, resulted in fewer jobs create last year just like the QCEW showed with the NFP report two months’ ago.  This data took the probability of a Fed cut at the end of the month up to 99% and pushed the probabilities for cuts next year higher as well.

Source: cmegroup.com

Of course, this is the very definition of bad news is good for equities and bonds, as there continues to be a strong expectation that rate cuts are designed to support asset prices rather than address real weakness in the economy.  And in a way, this makes sense.  After all, the Atlanta Fed’s GDPNow forecast for Q3 is currently at 3.8%, hardly the sign of an impending recession.

So, stronger than long-term growth and rate cuts seem an odd policy pairing, but the stock markets love it!

The other markets that love this policy are precious metals which continue to make new highs as well, for gold (+0.5%) these are all-time highs, for silver (+0.3%) they are merely 14-year highs.  But the one thing that is clear (and this is true of platinum and palladium as well) is that investors are starting to look at the current policy mix and grow concerned over the value of fiat currencies.  Oil (-0.7%), though, is currently on a different trajectory, trading right back to the bottom of its months’ long trading range less than a week after touching the top.

Source: tradingeconomics.com

There seems to be a difference of opinion regarding future economic activity between equity and oil markets.  I have read a number of analyses describing peak oil, yet again, although this time they are calling for peak demand, not peak supply.  Given that fossil fuels continue to generate more than 80% of global energy, and that oil also is the base for some 6000 products utilized around the world in everyday applications and the fact that there are some 7 billion people who are energy starved compared to the Western nations, I find the peak demand story to be hard to accept.  But that’s just me and I’m an FX guy, so what do I know?

Speaking of FX, the decline in yields and growing belief in easier US monetary policy has worked its way into the dollar, pushing it a bit lower, about -0.15% based on the DXY.  But looking across both G10 and EMG currencies, the yen’s 0.3% move describes the maximum gain with the rest having either gained less or declined a bit.  Right now, the dollar doesn’t appear to be the focus of the macro world, although that is certainly subject to change at a moment’s notice.

We know there is no government data coming, although apparently, the Treasury is still auctioning T-bills today, that activity will not be delayed!  We also hear from Dallas Fed President Logan, someone who ostensibly has been mooted as a potential next Fed chair.  Again, the one thing we know about the FOMC right now is that there is no consensus opinion on what to do next, at least based on the dispersion of the dot plot from the last meeting.

While the Trump administration may be getting ready to axe a lot of Federal jobs, that will not stop the liquidity impulse.  It’s not that this government is going to spend less, it is just spending money on different priorities.  But running it hot is clearly the MO for now and the foreseeable future.  Ultimately, if the GDPNow forecast is correct, a much weaker dollar seems unlikely regardless of the Fed’s moves.  But that doesn’t mean a dollar rally, rather we could stay near here for a lot longer.

Good luck

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Battlelines

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The battlelines are being drawn
On one side, the dollar is gone
‘Cause debt will explode
And once down that road
They claim folks would rather the yuan
 
But others are making the case
That dollar debt has much more space
To grow and expand
As it can withstand
More stress since it’s used everyplace
 
And finally, one thing left to note
Is Europe appears set to float
A digital euro
That ought to ensure-oh
The market, its price, will demote

 

Friday, I highlighted an idea which I had toyed with, but never explained eloquently, but that was done so by Michael Nicoletos (@mnicoletos on X).  While I offered a link to his work Friday, I know that many never click on links in notes like this, so I am copying his page showing this perspective.  It is clear, clean and asks the proper questions.

The reason I am doing this is because this weekend, I listened to a podcast with another very smart macro guy, Luke Gromen (@lukegromen) who has a very different take on the state of the world.  In short, Luke’s belief is that the US is already past the point of no return and that a potential downward spiral, caused by excessive US debt, is going to kick off soon.  The result is that we will see the dollar decline severely (as described by the DXY), gold, bitcoin, and equities rally, and that Treasury debt, especially long dated debt, will get killed.  In essence, he is explaining the inflation trade, higher US inflation will lead to those outcomes.

Let me start by saying, I agree with Luke on certain things, like the fact that we are likely to see higher inflation going forward as the government is in no mood to cut off the liquidity taps.  If you look at the below chart of M2 from the FRED database of the St Louis Fed, you can see that this measure has set a record high and risen 7.8% since its local nadir on October 30, 2023.

So, in a bit less than 2 years, it has grown about 8% after having shrunk that much in the prior 2 years during the first phases of the Fed’s QT program.  But now, despite the fact the Fed continues to slowly shrink their balance sheet, money supply is growing again, and my take is it will continue to do so for the foreseeable future as the government needs to essentially monetize the debt.  

Back to the argument, I believe that in this scenario of run it hot, gold and equities will do well while bonds will do poorly, but the question of the dollar on the FX markets is very different.  And this is where the Nicoletos’s theory comes into play.  If he is correct, and we adjust our idea about what constitutes excess leverage for the US, then expecting the dollar to fall in the FX markets may not be the best idea.  Rather, the news that the ECB is seeking to institute a digital euro, as per a speech by Madame Lagarde two weeks’ ago, and UK PM Starmer is claiming digital ID is necessary, to be followed by a digital pound, leads me to believe that institutions and individuals may decide they want more control over their own finances, rather than governments who have proven themselves exceptionally incompetent across numerous areas (energy, finance, and defense come to mind).  That implies that the dollar is likely to find a lot more support than those claiming it is set to collapse.

Again, I ask, will developing nations really want to keep their reserves in the CNY, or store their reserves of gold in Shanghai given the long history of capriciousness that the CCP has demonstrated.  People may hate the US; yet more people want to come here than go anyplace else because they have a higher degree of faith that their property will remain their property.  

This is not to say things are great, there are huge problems worldwide, just to say that my medium- and longer-term views are the dollar will be seen as TINA if other nations go down the road they are currently claiming they will follow.

The overnight narrative’s turned
To government shutdown concerns
As Trump and Dems meet
The word on the Street
Is too many bridges are burned

As to this morning’s market activity, the most noteworthy story is the question of whether the Senate will pass a continuing resolution (CR) to keep the government operating past midnight on Tuesday when the current spending authority runs out.  The House of Representatives have passed a ‘clean’ resolution which leaves the spending levels exactly where they are and lasts for 6 weeks allowing Congress time to pass the individual spending bills.  However, in the Senate, they need 60 votes to overcome the filibuster, and the Republicans only have 53 seats.  Minority Leader Schumer has promised to shut down the government unless he gets spending promises in the CR of upwards of $1 trillion over the next 10 years, and that feels unlikely.  Too, the House of Representatives is in recess, so no changes to their bill can be made on a timely basis.

My take is the Senate will cave in, but if not, they will not be able to withstand the pressure for very long as I believe that they will ultimately receive the blame for the outcome.  Turning to the market impact of this story, the most notable move overnight has been in precious metals where Gold (+1.3%), Silver (+1.8%) and platinum (+0.8%) are all continuing their recent runs and all at recent (and for gold all-time) highs.  However, it is difficult for me to understand this as a response to the potential shutdown in isolation.

Perhaps, if we turn to the dollar, which is lower, but only by -0.2% on the DXY, we can have a better understanding as at least it would make some sense that the dollar declines if the government does shut down.  And certainly, a weaker dollar manifests as stronger commodity prices, but the metals moves are so much larger, I have to believe there is another driver there.  Some talk focuses on the fact that Friday’s PCE data was not too hot thus keeping alive the hopes for further Fed rate cuts.  Personally, I lean toward the idea that the combination of concerns over increased military activity and the ensuing inflation are much more likely to be the drivers of precious metals’ rally.

Weirdly, despite concerns over inflation, bond yields are not responding in the manner one might expect as Treasuries are lower by -3bps and we are seeing similar moves throughout all the European sovereigns this morning.  As well, there was a very interesting article in the WSJ this morning about the fact that credit markets are incredibly strong, meaning the spread between corporate and Treasury yields has shrunk to the lowest levels on record for investment grade, and near that for junk bonds.  

To sum this up, bond markets are completely unconcerned with future inflation while precious metals markets are screaming inflation is coming soon.  Of course, one possible explanation for this seemingly divergent behavior is that the amount of liquidity that continues to be pumped into markets globally by central banks is driving fixed income investors to seek investments within their remits, i.e. bonds, while others are watching and trying to prepare for the inevitable.  In a funny way, the fixed income folks may be doing the right thing because if YCC comes into play, and I am almost certain it will, then yields will be lower still!

As to the rest of markets, equities are all about more liquidity as Friday’s US rally, which is continuing this morning with futures higher by 0.5% at this hour (7:15) demonstrates.  In Asia overnight, Japan (-0.7%) did not follow suit as a BOJ member hinted that a rate hike was coming at the October meeting, and we all know how much equities hate rate hikes.  But China (+1.5%) and HK (+1.9%) both rocked as word of a new government plan to inject CNY 500 billion into local governments to spur investment made the news.  Korea also benefitted from the combination of those things although India was unchanged and Taiwan (-1.7%) seemed to respond to a story that President Xi is seeking to get President Trump to agree that Taiwan is part of China.

As to Europe, the UK (+0.55%) is the leading gainer amid stories about pharma giants there raising prices, while continental markets are +/-0.2%, really not showing much life at all.

Oil (-1.8%) is slipping on news that Kurdish oil in the amount of up to 180K bbl/day is going to start flowing to the market again, adding to supply as OPEC is also talking of increasing production.  There was, however, an interesting article in the WSJ about the fact that Russian production is starting to turn down as 3 years of war and sanctions has reduced their capability of producing absent Western technology.

Finally, the dollar, as mentioned above, is a bit softer this morning with JPY (+0.4%) and NZD (+0.4%) the G10 leaders although the rest of the bloc has seen gains on the order of 0.1% or 0.2% only.  In the EMG bloc, KRW (+0.6%) is top dog with CNY (+0.2%) actually the next best performer.  So, overall, movement here has not been that impressive despite the narrative.

I’ve gone on far too long and as there is no front-line data today, I will post it tomorrow.  Of course, payrolls come Friday and be aware of five Fed speakers today and a total of ten this week.

Good luck

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No Reprieve

Posted on by

The barbarous relic is soaring
As Stephen Miran is imploring
That Fed funds should be
At 2, don’t you see
An idea that Trump is adoring
 
But what else would happen if Steve
Is Fed Chair, when Powell does leave?
At first stocks would rally
Though bonds well could valley
And ‘flation? There’d be no reprieve

 

Arguably, the most interesting news in the past twenty-four hours has been the speech given by the newest FOMC member, Stephen Miran, where he explained his rationale for interest rates going forward.  There is no point going into the details of the argument here, but the upshot is he believes that 2.0% is the proper current setting for Fed funds based on his interpretation of the Taylor Rule.  That number is significantly lower than any other estimate I have seen from other economists, but then, the track record of most economists hasn’t been that stellar either.  Who am I to say he is right or wrong?

Well, actually, I guess that’s what I do, comment from the cheap seats, and FWIW, I suspect that number is far too low.  But forgetting economists’ views, perhaps the best arbiter of those views is the market, and in this case, the gold market.  With that in mind, I offer the following chart from tradingeconomics.com:

Those are weekly bars in the chart which shows us that the price of gold has risen for the past five weeks consecutively, during which time it has gained more than 14% on an already elevated price given the rally that began back in the beginning of 2024. Today’s 1% rise is just another step toward what appears to be much higher levels going forward.  

Why, you may ask, is gold rallying like this?  The thought process, which Miran defined for us all yesterday, is that he is in line to be the next Fed chair when Powell leaves, and so his effort will be to cut rates as quickly as possible to that 2% level.  Of course, the risk is inflation readings will continue to rise while the Fed is cutting.  If that occurs, and I suspect it is quite likely, then fears about a weaker dollar are well founded (that has been my view all along, aggressive rate cuts by the Fed will undermine the dollar in the short-run, longer term is different) and gold and other commodities will benefit greatly.  As to bonds…well here the picture is likely to be pretty ugly, with yields rising.  In fact, I wouldn’t be surprised to see 10-year Treasury yields head back toward 5.0% at which point the Treasury and the Fed, working hand in hand, will cap them via some combination of QE and YCC.

Of course, this is just one hypothesis based on what we know today and won’t happen until Q2 or Q3 next year.  Gold is merely sniffing out the probability of this outcome.  Remember, too, that the Trump administration has been quite unpredictable in its policy moves, and so none of this is a sure thing.

As an aside, given the inherent dovishness of the current make up of Fed governors, it would seem that a Miran chairmanship with a distinctly dovish bent will not have much problem getting the rest of the FOMC to go along, except perhaps for a few regional presidents.  And that doesn’t even assume that Governor Cook is forced out.  After all, she is a raging dove, just a political one that doesn’t want to give President Trump what he wants.

And before I start in on the overnight activity, here is another question I have.  Generally, economists are much more in favor of consumption taxes (that’s why they love a VAT) rather than income taxes and it makes sense, in that consumption taxes offer folks the choice to pay the tax by consuming or not.  If that is the case, why are these same economists’ hair all on fire about the tariffs, which they plainly argue is a consumption tax?  I read that the US is set to generate $400 billion in tariff revenue this year which would seem to go a long way to offsetting no tax on tips and other tax cuts from the OBBB.  I would expect that if starting from scratch, an honest economist, with no political bias (if such a person were to exist) would much rather see lower income tax rates and higher consumption tax rates.  Alas, that feels like a conversation we will never be able to have.

Anyway, on to markets where yesterday saw yet another set of new all-time highs in the US across all the major indices with futures this morning slightly higher yet again.  Japan was closed for Autumnal Equinox Day, while the rest of the region had a mixed performance.  China (-0.1%) and HK (-0.7%) suffered on continuing concerns over the Chinese economy with news that banks which are still dealing with property loan problems are now beginning to see consumer loan defaults as well.  Elsewhere Korea and Taiwan both rallied nicely, following the tech-led US while India suffered a bit on the H1-B visa story with the rupee falling to yet another historic low (dollar high) now pushing 89.00.  There were some other laggards as well (Thailand, Philippines) but most of the rest were modestly higher.  

In Europe, green is the theme with the CAC (+0.7%) leading the way while the DAX (+0.2%) and IBEX (+0.3%) are not as positive.  Ironically, Flash PMI data showed that French activity was lagging the most, with both manufacturing (48.1) and services (48.9) below the 50.0 breakeven level and much worse than expected.  It seems the fiscal issues in France are starting to feed into the private sector.  As to the UK, weaker Flash PMI data there has resulted in no change in the FTSE 100 as it appears caught between inflation worries and growth worries.

In the bond market, Treasury yields which rose 2bps yesterday have slipped by -1bp this morning while continental sovereigns are all essentially unchanged.  The one outlier here is the UK where gilts (-3bps) are rallying on hopes that the PMI data will lead to easier monetary policy.

Elsewhere in the commodity markets, oil (+1.1%) is bouncing from its recent lows but has not made much of a case to breech its recent $61.50/$65.50 trading range as per the below.

Source: tradingeconomics.com

The other precious metals are rocking alongside gold (Ag +0.7%, Pt +2.6%) with silver having outperformed gold since the beginning of the year by nearly 10 percentage points.  Oh, and platinum has risen even more, more than 63% YTD!

Finally, the dollar is basically unchanged this morning, with marginal movement against most of its counterparties.  There are only two outliers, SEK (+0.5%) which rallied despite (because of?) the Riksbank cutting their base rate by 25bps in a surprise move.  However, the commentary indicated they are done cutting for this cycle, so perhaps that is the support.  On the other side of the coin, INR (-0.5%) has been weakening steadily with the H1-B visa story just the latest chink in the armor there.  PM Modi is walking a very narrow tight rope to appease President Trump while not upsetting Presidents Putin and Xi.  His problem is that he needs both cheap oil and the US market for the economy to continue its growth, and there is a great deal of tension in his access to both simultaneously.  But away from those currencies, +/- 0.1% describes the session.

On the data front, today brings the Flash PMI data (exp 52.0 Manufacturing, 54.0 Services) and the Richmond Fed Manufacturing Index (-5.0).  remember, the Philly Fed Index registered a much higher than expected 23.2 last week, so the manufacturing story is clearly not dead yet.

Arguably, though, of far more importance than those numbers will be Chairman Powell’s speech at 12:35 this afternoon on the Economic Outlook in Providence, RI.  All eyes and ears will be on his current views regarding the employment situation and inflation, especially in light of Miran’s speech yesterday.

While the gold market is implying our future is inflationary and fiat currencies will weaken, the FX market has not yet taken that idea to extremes.  Any dovishness by Powell, which given the lack of data since we heard from him last week would be a surprise, will have an immediate impact.  However, I suspect he will maintain the relatively hawkish tone of the press conference and not impact markets much at all.

Good luck

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Many Ructions

Posted on by

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

 

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

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

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

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

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

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

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

Source: tradingeconomics.com

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

Source: tradingeconomics.com

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

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

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

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

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

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

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

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

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

Source: tradingeconomics.com

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

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

Good luck

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Markets Ain’t Scared

Posted on by

So, NFP data was wrong
Which many have said all along
Perhaps it was proper
For Trump to just drop her
Creating McTarfer’s swan song
 
Remarkably, though, no one cared
And equity markets ain’t scared
While Treasury yields
Edged higher, it feels
That 50bps is now prepared

 

Like a dog with a bone, I cannot give up the NFP story even though the market clearly didn’t care about the adjustment or had fully priced it in before the release.  In fact, it seems investors, or algos at least, welcomed the fact that the number was so large as it seems to make the case for a 50 basis point cut next week that much stronger.  Certainly, Chairman Powell will have difficult saying that starting a cut cycle with 50bps would be inappropriate given his more politically driven efforts a year ago.

But one final word on this subject is worthwhile I believe, and that is; why does the market pay so much attention to this particular data point?  Consider the following:  according to the BLS, current total employment in the US is approximately 159,540,000.  In fact, that number has been above 150 million since January 2019, although Covid managed to impact that for a few months before it was quickly regained.  

Now, NFP has averaged ~125K since they started keeping records in 1939 with a median reading of 160K.  To modernize the data, since 2000 it has averaged ~93K with a median of 154K.  Consider what that means with respect to the total labor force.  Ostensibly, the most important economic data point of each month represents, on average, 0.06% of the working population.  Additionally, that number is subject to massive revisions both on a monthly basis, and then, as we saw yesterday, there is another annual revision.  I don’t know if Ms. McEntarfer was good at her job or not, but it is not unreasonable to consider that the payrolls data, as currently calculated, does not really represent anything other than statistical noise.   I prepared the below chart to help you visualize how close to zero the NFP number is relative to the working population.  Absent the Covid spike, I would argue that the information that this datapoint delivers, especially in the past 25 years, also approaches zero.

Data FRED database, calculations @fx_poet

You may recall the angst with which the firing of Ms McEntarfer was met, and given President Trump’s penchant for overstating certain things, it certainly had a bad look about it.  But the evidence seems to point to the fact that the data is not only suspect, given its revision history, but essentially inconsequential relative to the economy.  The fact that the Fed is making policy decisions based on changes in the economy that represent less than 0.1% of the working population, and half that amount of the general population, may be the much larger scandal here.  

Remember, a 4th Turning is all about tearing down old institutions because they no longer are fit for purpose and building new ones to gain trust.  Perhaps NFP as THE monthly number is an institution whose time has passed, and investors (and the Fed) need to find other data to help them evaluate the current economic situation.  Of course, the algos love a single number to which they can be programmed and respond instantaneously, so if NFP loses its cachet, and algos lose some of their power, it would be better for us all, except maybe Ken Griffin and Larry Fink!

Otherwise, the overnight market offered very little new information.  Chinese inflation data continues to show an economy in deflation with the Y/Y result of -0.4% being worse than expected and the 5th negative outcome in the past seven months.  Looking at the chart below, it is becoming clearer that President Xi, despite flowery words about consumption, has no idea how to stimulate domestic activity other than the mercantilist model to which China subscribes.  Now, they overproduce stuff and since the imposition of higher tariffs by the US on Chinese goods, it seems more of that stuff is hanging around at home and driving prices down.  Alas, it seems not enough Chinese want the things they manufacture, hence steadily declining prices.  While it is a different problem than in the US, it is a problem nonetheless for President Xi.

Source: tradingeconomics.com

And with that, let’s head to the market activity.  Yesterday’s US rally was followed by strength all around the world as it appears everybody is excited about the prospects of the FOMC cutting rates by 50bps next week. While the Fed funds futures market has barely moved, currently pricing just an 8.2% probability of that move, I am hard pressed to conclude that the rest of the economic and earnings data is so good that equities should be rallying for any other reason.

Anyway, Japan (+0.9%), China (+0.2%), HK (+1.0%), Korea (+1.7%), India (+0.4%) and Taiwan (+1.4%) are pretty definitive proof that everybody is all-in on a 50bp cut by the Fed.  In fact, the worst performer in Asia, Thailand (0.0%) was merely flat on the day.  Turning to Europe, here, too, green is today’s color with Spain (+1.3%), France (+0.6%), Germany (+0.2%) and the UK (+0.5%) all rising nicely.  Domestic issues, which abound throughout Europe, are inconsequential this morning.  and don’t worry, US futures are higher by 0.35% this morning as well.

In the bond market, while yields edged up yesterday a few basis points, this morning they are essentially unchanged across the board in the US, Europe and Japan.  Worries about excessive deficits have been set aside.  A major protest in France today is not impacting markets at all.  Word that the BOJ will consider tightening policy (as if!) despite the political uncertainty has had no impact.  Perhaps we have achieved that long sought equilibrium in rates! 🤣

In the commodity space, oil (+1.1%) rallied after the Israeli attempt to eliminate Hamas leadership in Qatar yesterday ruffled many feathers and was seen as a potential escalation in Middle East conflicts.  But, at $63.30/bbl, WTI remains firmly in the middle of its recent trading range as per the below chart.

Source: tradingeconomics.com

But you know what is not in the middle of its trading range, in fact the only thing with a real trend right now?  That’s right, gold.  A quick look at the below chart from tradingeconomics.com helps you understand why so many market pundits, if not investors, are excited about continued gains here.  Calls for $4000/oz and more by early next year are increasing.  As to the other metals, silver and platinum are following gold higher this morning although copper is unchanged.

Finally, the dollar is little changed vs. most major currencies with the euro and pound having moved 0.1% or less than the close and the same with JPY, CAD, CHF and MXN.  In fact, the biggest mover this morning is NOK (+0.5%) which on top of oil’s rally has benefitted from still firm inflation encouraging the idea that the Norges Bank is going to raise rates when they meet next Thursday.  If they hike after the Fed cuts 50bps, the krone will likely see further strength, at least in the short run.

On the data front this morning, PPI (exp 0.3%, 3.3% Y/Y; 0.3%, 3.5% Y/Y core) is the key release and then the EIA oil inventory data is released at 10:30 with a modest draw expected.  As we remain in the quiet period, no Fed speakers are slated, so the algos will have to live with the PPI data or any other stories they can find.

If the inflation data this week stays quiescent, I think 50bps is likely next week as the employment situation, despite my comments above, will still be seen in a negative light and I think Powell will feel forced to move.  Plus, if Stephen Miran is added to the board this week, there will be increased pressure for just such an outcome.  However, while a Fed aggressively cutting rates should be a dollar negative, I feel like that is becoming the default view, so maybe not so much movement from here.  We need another catalyst.

Good luck

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Voters Have Doubt

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In France, Monsiuer Bayrou is out
In Norway, though, Labor held stout
Japan’s been discussed
And Starmer’s soon Trussed
In governments, voters have doubt
 
Investors, though, see all this news
And none of them have changed their views
Just one thing they heed
And that’s market greed
At some point they’ll all sing the blues

 

Here we are on Wednesday and already we have seen two major (Japan and France) and one minor (Nepal) nations make governmental changes.  Actually, they haven’t really changed yet, they just defenestrated the PM and now need to figure out what to do next.  In Japan, it appears there are two key candidates vying to lead a minority LDP government, Sanae Takaichi and Shinjiro Koizumi, although at this point it appears too close to call.  Regardless, it will be rough sledding for whoever wins the seat as the underlying problems that undermined Ishiba-san remain.  

In France, President Macron has, so far, said he will not call for new elections, nor will he resign despite increasing pressure from both the left and the right for both measures.  He will appoint a new PM this week and they will go through this process yet again as the underlying issue, how to rein in spending and reduce the budget deficit, remains with nobody willing to make the hard decisions.  A side note here is that French 10-year OATs now trade at the same level as Italian 10-year BTPs, a catastrophic decline over the past 15 years as per the below chart. 

Recall, during the Eurozone crisis in 2011, Italy was perceived as the second worst situation after Greece in the PIGS, while France was grouped with Germany as hale and hearty.  Oh, how the mighty have fallen.

Nepal is clearly too insignificant from a global macroeconomic perspective to matter, but it strikes me that the fall of the PM there is merely in line with the growing unhappiness of populations around the world with their respective governments.

A friend of mine, Josh Myers, who writes a very thoughtful Substack published last night and it is well worth the read.  He makes the point that the Washington Consensus, which has since the 1980’s, underpinned essentially all G10 activity and focused on privatization of assets, free trade and liberalized financial systems, appears to have come to the end of the road.  I think this is an excellent observation and fits well with my thesis that the consensus views of appropriate policies are falling apart.  Too many people have been left behind as both income and wealth inequality in the G10 is rampant, and those who have fallen behind are now angry enough to make themselves heard.  

This is why we see governments fall.  It is why nationalist parties are gaining strength around the world as they focus on their own citizens rather than a global concept.  And it is why those governments still in power are desperately struggling to prevent their opponents from being able to speak.  This is the genesis of the restrictions on speech that are now rampant in Germany and the UK, two nations whose governments are under extreme pressure because of policy failures, but don’t want to give up the reins of power and are trying to prevent anybody from saying anything bad about them, thus literally jailing those who do!

And yet…investors are sanguine about it all!  At least that seems to be the case on the surface as equity indices around the world continue to trade higher with most major equity markets at or within a few percent of all-time highs.  This seems like misplaced confidence to me as the one thing I consistently read is that markets are performing well in anticipation of the FOMC cutting Fed funds next week, with hopes growing that it will be a 50bp cut.  

But if we look at the Treasury market, which has seen yields slide steadily since the beginning of the year, with 10-year yields now lower by 75bps since President Trump’s inauguration, it is difficult to square that circle.  

Source: tradingeconomics.com

Bond yields typically rise and fall based on two things, expected inflation and expected growth as those two have been conflated in investor (and economist) minds for a while.  The upshot is if yields are declining steadily, as they have been, it implies investors see slowing economic activity which will lead to lower inflation.  Now, if economic activity is set to slow, it strikes me that will not help corporate profitability, and in fact, has the potential to exacerbate the situation by forcing layoffs, reducing economic activity further.  Alas, it is not clear if that will drive inflation lower in any meaningful way.  The point is the bond market and the stock market are looking at the same data and seeing very different future outcomes.

Is there a tiebreaker we can use here?  The FX market might be one place, but the weakness in this idea is that FX rates are relative rates, not descriptive of the global economy.  Sure, historically the dollar has been the ultimate safe haven with funds flowing there when things got rough economically, but its recent weakness does not foretell that particular story.  Which brings us to the only other asset class around, commodities.  And the one thing we have seen lately is commodity prices continuously rising, or at least metals prices doing so, specifically gold.  Several millennia of history showing gold to be the one true store of value is not easily forgotten, and that is why the barbarous relic has rallied 39% so far in 2025.  

A number of analysts have likened the current situation to that of Wile E Coyote and I understand the idea.  It certainly is a potential outcome so beware.

Well, once again I have taken much time so this will be the lightning round.  Starting with bonds, this morning, yields in the US and Europe are higher by 2bps across the board, with one exception, France which has seen yields rise 6bps as discussed above.  JGB yields are unchanged as it appears investors there don’t know what to think yet and are awaiting the new PM decision.

In equities, yesterday’s very modest late rallies in the US were followed by a mixed session in Asia (Japan -0.4%, China -0.7%, HK +1.2%) although there were more winners (Korea, India, Taiwan, Thailand) than laggards (Australia, New Zealand, Indonesia) elsewhere in the region.  In Europe, mixed is also the proper adjective with the CAC (+0.4%) remarkably leading the way higher despite lousy IP data (-1.1%) while Germany (-0.4%) and Spain (-0.4%) both lag.  As to US futures, at this hour (7:20) they are marginally higher, 0.15% or so.

Oil (+0.8%) continues to trade back and forth each day with no direction for now.  I’m sure something will change the situation here, but I have no idea what it will be.  Gold (+0.5%) meanwhile goes from strength to strength and is sitting at yet another new all-time high, above $3600/oz.  While silver and copper are little changed this morning, the one thing that seems clear is there is no shortage of demand for gold.

Finally, the dollar is arguably slightly lower this morning, although mixed may be a better description.  The euro (-0.15%) is lagging but JPY (+0.6%) is the strongest currency across both G10 and EMG blocs.  Otherwise, it is largely +/-0.2% or less as traders ponder the data.

While CPI is released on Thursday, I think this morning’s NFP revision is likely to be the most impactful number we see this week, and truly, ahead of the FOMC next week.

TodayNFP Revision-500K to -950K
WednesdayPPI0.3% (3.3% Y/Y)
 -ex food & energy0.3% (3.5% Y/Y)
ThursdayECB Rate Decision2.0% (unchanged)
 CPI0.3% (2.9% Y/Y)
 -ex food & energy0.3% (3.1% Y/Y)
 Initial Claims235K
 Continuing Claims1950K
FridayMichigan Sentiment58.0

Source: tradingeconomics.com

As I type, the Fed funds futures market is pricing a 12% probability of a 50bp cut next week and an 80% chance of 75bps this year.

Source: cmegroup.com

If the NFP revisions are more than -500K, I suspect that rate cut probabilities will rise sharply with the dollar falling, gold rising, and bond yields heading lower as well.  Equity markets will probably rally initially, although it strikes me that this type of bad news will not help corporate earnings.  So, buckle up for the fun this morning on a release that has historically been ignored but is now clearly center stage.

Good luck

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