Tag Archives: #gold

Their Own Ego Trip

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The talk of the town is the “Pause”
Which led to much market applause
Though naysayers still
Say Trump’s actions will
Result in bad outcomes…because


But yesterday saw markets rip
And all those who did buy the dip
Are feeling quite smart
When viewing the chart
Of prices, their own ego trip

 

See if you can guess when President Trump posted that there would be a 90-day pause on tariffs for everyone but China.

Source: tradingeconomics.com

By now, you are almost certainly aware that equity markets in the US rebounded massively in the US, with one of the biggest gains on record as the S&P 500 rose 9.5% and the NASDAQ 12.2%.  Of course, that merely retraced the bulk of the losses seen since the beginning of the month.  In fact, the S&P 500 is still lower by about 200 points since then.  Regardless, moods are much brighter today than they were yesterday at this hour.  And those equity gains are global.

I’ve seen several interpretations of the sequence of events and like virtually everything these days, it appears to have a partisan bias to people’s views.  There are those who claim President Trump could not stand the pressure of a declining stock market and “blinked” in the game of chicken he was playing.  There are also those who claim this was part of the strategy all along, essentially moving the Overton Window substantially in his preferred direction and now he is ready to reap the benefits of this move.  

Arguably, there is evidence for both sides of this argument and I suggest we will never really know. Remember, Trump is quite comfortable making outlandish pronouncements as he level sets for a negotiation.  But he is also quite the realist and while I do not believe he was concerned with his personal or family fortune, recognized that the speed of the pain inflicted could be damaging overall.  In the end, it is not clear the rationale matters, the action stands on its own merits.  

But remember this, equity valuations were very high before the decline last week, and were still quite high, although obviously less so, after the decline.  The rebound put them back in very high territory, especially with equity analysts revising profit forecasts lower on the back of the still 10% tariffs being imposed.  A truism is that the biggest rallies in the stock market occur during bear markets.  Keep that in mind as you assess risk going forward.

But let us turn our attention to a player who is not getting much attention these days, the Fed.  Many questioned the Fed’s rate cuts back in Q4 and attributed the moves to a partisan effort to help VP Harris get elected.  Certainly, there is no love lost between Chairman Powell and President Trump.  Of late, though, the commentary has focused on patience regarding any further policy ease as the impacts of Trump’s tariff policies are unknown at this stage.  Yet, it is not hard to read these comments and get a sense that the Fed is going to work at cross purposes to Mr Trump.  

For instance, yesterday, Minneapolis Fed President Neel Kashkari released an essay with the following comments, “Given the paramount importance of keeping long-run inflation expectations anchored and thelikely boost to near-term inflation from tariffs, the bar for cutting rates even in the face of a weakening economyand potentially increased unemployment is higher.  The hurdle to change the federal funds rate one way or theother has increased due to tariffs.”  While the words here don’t appear partisan per se, Mr Kashkari is one of the most dovish FOMC members and dismissed inflation concerns regularly for a long time.  This sudden change is interesting, at the least.  

At any rate, the market, which had been pricing a 50% probability of a rate cut next month just a few days ago and a total of at least 4 cuts this year, is back down to a <20% probability of a cut in May and about 3 cuts this year.  Truly the pause that refreshes.

So, let’s look at how other markets responded to the pause.  Markets everywhere, including China, rallied last night and this morning, with Tokyo (+9.1%) and Taiwan (+9.2%) leading the way in Asia although gains were universal.  Hong Kong (+2.1%) and China (+1.3%) were the laggards with gains between 2.5% and 5.0% the norm.  In Europe, too, equities are flying this morning as the threat of much higher tariffs is removed, at least temporarily, with the UK (+4.6%) the laggard and gains between 5.0% and 6.5% the story there.  Alas, futures this morning, at 7:00am, are pointing lower by -2.0% or so.  Is that profit taking or a harbinger of the day to come?

In the bond market, which has expressly been Trump and Bessent’s main concern, yields are a bit lower this morning, -3bps in 10-year Treasuries.  But the story in Europe is confusing to me, or perhaps not.  German bunds (+6bps) have seen the largest rise while UK Gilts (-10bps) have seen a sharp decline.  Too, Italy (-4bps and Greece (-2bps) have seen yields decline.  Could this be an illustration that bunds are a better safe haven than Treasuries? And now that haven status seems less important today, they are being sold off?  JGB yields (+9bps) are also rising, perhaps on the same notion.  The corroborating evidence is that nobody thinks Gilts are a good investment, so with risk back on, they are in demand given their highest yield in the G10.

In the commodity markets, oil rebounded sharply alongside equities yesterday although it has slipped 2.4% this morning.  I have altered the Y-axis on the chart below to percentages to give an idea of the magnitude of these moves in the past days, especially relative to the past 6 months.  Despite being the most liquid commodity market around (both figuratively and literally), it is far less liquid than bonds or FX or even stocks, so as commodities are wont to do, sometimes the moves are breathtaking.

Source: tradingeconomics.com

As to the metals markets, gold (+1.0%) continues its march higher, recovering more than 5% from the lows Tuesday morning.  I maintain that much of that selling was margin based, with positions liquidated to cover margin calls in other markets.  Now that the panic has passed, demand is likely increased given the new uncertainties.  However, both silver (-0.5%) and copper (-1.3%), which rallied sharply yesterday, have slipped back a bit.  These are different stories.

Finally, the dollar is lower this morning, having yo-yoed like every other market on the tariff news.  CHF (+1.9%) and JPY (+1.4%) are the big gainers in the G10 although the euro (+1.2%) is having a day as well.  However, there are currencies with less pizzazz this morning, notably ZAR (-0.9%), KRW (-0.6%) and MXN (-0.5%), as it remains difficult to know how to proceed going forward.  JPMorgan has a global volatility index which is a useful barometer of how things are going.  As you can see below, it is not surprising that volatility in this space has also risen sharply.

Once again, I return to the idea that President Trump is the avatar of volatility, and you must always remember that volatility can happen in both directions.  While financial assets tend to collapse (yesterday being the exception) when things get out of hand, commodities go the other way as supply interruptions are the big risk. Writ large, volatility simply means a lot of movement.

We finally get some meaningful data this morning with headline CPI (exp 0.1%, 2.6% Y/Y) and Core (0.3%, 3.0% Y/Y) along with the weekly Claims data (Initial 223K, Continuing 1880K).  Given all the focus on the tariffs, though, it is not clear to me what this data will imply on a forward-looking basis.  As we have seen with the Fed getting sidelined by Mr Trump, his tariff policies have also served to overshadow economic data, at least for now.  There are a couple of more Fed speakers and a 30-year bond auction as well.  Interestingly, I expect that auction may be the most important outcome of the day.  Will there be real demand or are investors shying away?

I expect that over the next few months, tariffs will be discussed on a nation-by-nation basis as new deals are struck.  But that will impede any medium-term views on the economy as until we have a much better sense of the end results, it will be difficult to assess things.  The upshot is, we may be entering a period where we chop up and down, but don’t go anywhere until the global trade situation is clearer.  Volatility with no direction is great for traders, less so for investors.  Headline bingo is still the game we are playing.

Good luck and good weekend

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Fast or Slow Death?

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As markets all take a deep breath
Concerns are that, just like Macbeth
The President will
The ‘conomy kill
The question is, fast or slow death?

 

Personally, I am hopeful that we can stop discussing tariffs after today.  It’s not that they will decrease in importance, but they will no longer be the primary topic.  Instead, they will be a secondary explanation for anything that anybody decides is wrong with the economy, or the country or the world.  Recession? Tariffs are the cause.  Inflation? Tariffs are the cause.  War? Tariffs are the cause.  Duke loses in the semis?  Tariffs are the cause.  

FWIW, which is probably not that much, my view is the market has absorbed this conversation and the correction we have seen over the past weeks in the equity market is the result of growing expectations of much slower growth or a recession.  Arguably, the biggest concern should be that US equity markets continue to trade at historically rich valuations and any negative catalyst can serve to both depress future expectations and compress multiples, and that’s how you get large equity market declines.

The thing about the tariff story is that while later today we will all find out the details, the actual impacts will take months, at least, to be determined.  For instance, the story that Israel has just decided to drop all tariffs on US made products, thus avoiding them on Israeli products is something I suspect we may see more frequently than now assumed.  Perhaps there would be no greater irony for all the naysayers than if this ‘end of free trade’ moment actually inspired a significant reduction in tariffs around the world as nations seek to retain access to the US.  I’m not saying this will be the case, but given the US is the consumer of last resort, running a nearly $1 trillion trade deficit, pretty much every other nation relies on the US as a market for some portion of their production.

Along these lines, I must ask, why is it that other nations, who apply tariffs and other non-tariff barriers like quotas or regulatory restrictions, to US products do so if tariffs are such a great evil?  Apparently when the French, for example, seek to protect their industries and farmers, it is healthy for the economy, but when the US does, it is world-ending.  Just sayin’

So, is the dip now to be bought?
Or are things still overly fraught?
The overnight session
Did naught for that question
As no one knows what Trump has wrought

Since there are literally no other stories to discuss regarding finance and markets right now, let’s turn to the overnight and see how markets are behaving in the runup to the Liberation Day announcement.  Yesterday’s mixed, but mildly positive, session in the US led to a mixed session in Asia with no real trend.  Even within a nation (Nikkei +0.3%, TOPIX -0.4%) there was no clarity.  Chinese shares were basically flat, Korea and Singapore fell while India and Malaysia rallied.  No movements approached even 1.0% so it is probably fair to say we didn’t learn anything.  However, European bourses are under pressure across the board this morning led by the DAX (-1.3%) and FTSE 100 (-0.9%).  Clearly, there is significant concern that the US tariffs, which are set to come into force immediately upon their announcement, will have a significant negative impact on European companies.  Certainly, German auto makers, who rely greatly on the US market, are likely to be negatively impacted, but as I said, it remains to be seen what actually occurs.  I guess considering that European shares have been performing well of late, with gains on the order of 10% or more YTD, some investors have decided to take their money and run.  

source: tradingeconomics.com

Meanwhile, US futures are pointing lower at this hour (7:10) down about -0.5% across the board.

In the bond market, while there is a lot of huffing and puffing that tariffs will be inflationary, yields are sliding this morning with Treasury yields (-2bps) declining to their lowest levels since last October, and a similar amount to most European sovereigns.  I suppose bond investors are more concerned over the mooted recession than the inflationary impact of tariffs.  Too, JGB yields slid -3bps, back to their lowest level in a month as questions remain about the BOJ’s future path as well as Japanese growth prospects in the new trade regime.

Turning to commodities, oil (-0.35%) has slipped a bit further but remains well up on the week as a story regarding the US moving more military assets toward the Middle East from Asia makes the rounds.  We cannot forget that President Trump has already initiated secondary sanctions on Venezuelan crude, and threatened to do so on Russian crude if Putin doesn’t agree to the ceasefire.  Meanwhile, Iran is always in Trump’s crosshairs while they remain a perceived threat to go nuclear.  As to the metals markets, gold (+0.1%) continues to edge higher with any pullbacks both short term and modest.  One look at the chart below shows how many more green days there have been than red ones over the past 6 months.  I see nothing to stop this trend.  As to the other metals, they are higher this morning and continue to trade well overall.  I believe the case can be made that going forward, commodity markets, and the shares of companies in the space, are set for some real outperformance in the new world order.

Source: tradingeconomics.com

Finally, the dollar is mixed as well, with some widely disparate movements seen.  For instance, NZD (+0.9%) is having a good day, perhaps because direct trade with the US is di minimus, or perhaps because it has been weakening so much for the past 6 months, down nearly 10% even after today’s rally, over that period, that it is a simple bounce.  At the same time, ZAR (-1.0%) is sliding despite the ongoing gold rally, although there are growing concerns over the outcome of the budget there and how it will be funded and impact the economy.  But in truth, as I look across the board, there are probably more currency gainers than losers this morning, which ironically is exactly the opposite of the forecast impact of tariffs by the US.  Just remember, as Yogi Berra allegedly explained, “in theory, there is no difference between theory and practice, in practice there is.” Detailed market outcomes based on economic theories rarely hold up.

On the data front, this morning brings ADP Employment (exp 105K) and Factory Orders (0.5%, 0.7% ex-Transport) as well as the EIA oil inventories.  Yesterday afternoon’s API inventories showed a large build, but expectations are for draws today.  We also hear from Adriana Kugler, Fed governor, but ironically, all the Fed talk is now about tariffs and not about monetary policy.

Today is a crapshoot, with no way to even guess how things will evolve.  Also, beware the initial reaction as it may not represent a new view, but rather the unwinding of current positions.  Until further notice, though, I still think the dollar has a slow decline in its future.

Good luck

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Aren’t Just Rumors

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Give plaudits to President Xi
Who’s trying to show it is he
That’s offering deals
To help grease the wheels
Of trade, which he claims will be free
 
The problem is Chinese consumers
Have not been in very good humors
And history shows
The Chinese impose
Restrictions that are aren’t just rumors

 

Market activity can well be described as lackluster, with equity indices generally slipping lower while bond markets wobble and the dollar retraces some of its recent losses.  In fact, the only markets really showing a trend right now are gold (+0.4%), silver (-0.1%) and copper (-0.2%), all of which have rallied sharply over the past month and year.  Obviously, the major discussion point is President Trump’s tariff policy and how that will impact economies around the world.  Recent focus has been on how other nations will respond with a variety of poses taken by different leaders, from conciliatory to combative.

So, it is with great interest that we see another impact of the Trump administration, the sight of China’s communist party leader, Xi Jinping, trying to convince foreign company CEO’s that investing in China is a good deal.  A lead article in Bloomberg this morning describes a large gathering in China where President Xi hosted CEO’s of numerous companies from around the world in an effort to portray China’s policies as investment friendly.

This makes sense given the trend in foreign direct investment toward China over the past years.  As can be seen in the chart below from the Bloomberg article, it has not been a pretty sight.  And remember, this all occurred before President Trump was elected.  Clearly, there were concerns prior to Mr Trump escalating the trade conflicts with the US.  

I find it somewhat ironic, though, that Xi is trying to promote Chinese policy as an island of stability in the world.  Consider how he has capriciously destroyed the private education market, or even the tech market until reversing course after the DeepSeek announcement, all while the housing market continues to implode.  Given the rest of the world has lost patience with China’s mercantilist policies and the flood of cheap goods they produce with government support, I am at a loss to understand the appeal of investing in China.  Using it as an export base is a nonstarter, and history has shown that nearly every foreign company that looked at China’s population as a great untapped market for their products has been hugely disappointed.  The exceptions are the luxury goods makers, where the global brand and cachet were too strong for domestic competitors to overcome.  But that is a small segment of the market.  

Instead, the usual outcome is forced technology transfer which results in a state-supported competitor for their products around the rest of the world.  I am confident there will be companies that choose to invest, if for no other reason than to curry favor with Xi and open the doors to further potential sales, but the trend of late is not promising.  Ultimately, property laws and their enforcement are the keystone for inward investment into any nation and China has no history of treating foreign companies fairly, or domestic ones for that matter.

But really, the flow of direct market news and economic data has been secondary with far more political news leading conversations.  The impact of tariffs on economic activity and inflation, as well as on market performance remains unclear with arguments being made on both sides as to potential benefits or detriments.  FWIW, which is probably not much, my take is the impacts will be very unevenly spread, and how that impacts broad based numbers is unknowable at this time.  I fear we will all need to be reactive for now, although for those with outstanding exposures, there is no better argument for maintaining robust hedge ratios given the overall uncertainty.

Ok, let’s take a look at the overnight action in markets.  After yesterday’s US declines, we saw much of Asia follow suit with Tokyo (-1.8%) particularly hard hit as PM Ishiba thought that he was making headway with President Trump but found out that Japanese auto manufacturers were going to be subject to those tariffs as well.  Adding to the pressure were the “Minutes” from the last BOJ meeting which implied further rate hikes are on the horizon. Both Hong Kong (-0.65%) and China (-0.45%) also slipped and, in fact, almost every major market in Asia (Korea, India, Taiwan, Malaysia, Singapore and Thailand) also fell, some quite sharply.  Apparently, Xi’s efforts at creating that stability haven’t yet been successful.  

In Europe, red is also the dominant color with most continental bourses lower by around -0.6%, also on the tariff story.  The one exception here is the UK, which released a passel of data showing growth was modestly firmer than expected at 1.5% led by Retail Sales growing 1.0%, rather than declining by -0.3% as expected.  As to US futures, at this hour (7:15) they are pointing slightly lower, about -0.2%.

In the bond market, yields are backing off around the world with Treasuries (-3bps) lagging European price action where sovereigns have seen yields decline between -4bps and -6bps.  Even JGB yields have slipped -4bps.  In Europe, inflation data from France and Spain came in softer than expected which has encouraged the move there, and we even heard arch ECB hawk, Robert Holzmann, explain that funding defense spending via bond purchases (i.e. QE) was viable.

In the commodity markets, oil (-0.2%) which rallied yesterday to touch the elusive $70/bbl level is slipping back a bit, but the trend remains clearly higher as per the below.

Source: tradingeconomics.com

Finally, in the currency markets, the dollar is firmer once again with modest rallies vs. the euro (-0.3%) and pound (-0.2%) as well as strength against the Scandies (SEK -0.6%, NOK -0.3%).  However, the picture in the EMG bloc is more mixed with ZAR (+0.35%) showing strength alongside gold’s rally, and INR (+0.2%) bucking the trend after having agreed to reduce tariffs on US products.  Throughout the rest of the bloc, there has been generally little change.

Turning to the data this morning, there is plenty that will be keenly watched.  Personal Income (exp 0.4%), Personal Spending (0.5%) and the PCE data (headline 0.3%, 2.5% Y/Y and core 0.3%, 2.7% Y/Y) all get released at 8:30.  Then at 10:00 we see Michigan Sentiment (57.9) and you can be sure people will be talking about the Inflation Expectations piece (1yr 4.9%, 5yr 3.9%), especially if it syncs with their narrative.  There are two more Fed speakers, Governor Barr and Atlanta Fed president Bostic, but nothing any Fed speaker has uttered has mattered at all, maybe since Trump was inaugurated.

My read on overall sentiment is that investors are wary of the future, but not yet ready to abandon the stocks only go up narrative.  Regarding the dollar, the recent trend remains modestly lower, as per the below, but it is hard to get excited about large moves, at least for today.  Again, Trump clearly wants it lower and seems likely to get his way, at least to some extent.  The one thing I truly do like is commodities, which I believe will remain well bid overall.

Source: tradingeconomics.com

Good luck and good weekend

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The Fools

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In April, it starts with the Fools
But two days thereafter the rules
For importing cars
To where Stars and Bars
Fly will change with tariffs as tools
 
For Europe, the pain will be keen
At least that’s what most have foreseen
And poor crypto bros
Will find their Lambos
May soon cost a price quite obscene

 

While the political set continues to harp on the “Signal” story, markets really don’t care about political infighting between the parties.  Rather, their focus is keenly attuned to President Trump’s confirmation that starting on April 3rd, there will be a 25% tariff imposed on all imported autos from everywhere in the world.  This is particularly difficult for European auto manufacturers as they produce a far smaller proportion (VW 21%, BMW 36%, Mercedes 41%) of their vehicles in the US than do the Japanese (Honda 73%, Toyota 50%, Nissan 52%), although the Koreans will be impacted as well (Hyundai/Kia 33%).  Ironically, according to Grok, where I got all this information, GM only produces about 54% of their vehicles sold in the US, in the US, with the rest coming from Canada and Mexico.  As an aside, Tesla produces all their vehicles in the US.

Particularly hard hit are the specialty manufacturers like Porsche, Ferrari and Lamborghini, which produce none of their vehicles in the US.  Of course, given the price points of these vehicles, my sense is it may not really hurt their sales as if you are spending $250k on a car, you can likely afford to spend $312.5k as well.  In fact, in a funny way, these tariffs may enhance the Veblen effect where people will brag about paying the higher price as it puts it out of reach of more people.

Nonetheless, the action merely confirms that President Trump is very serious with respect to changing the world’s trading model.  I saw something interesting this morning in that Paul Krugman, who made his name, and won his Nobel Prize, based on work regarding international trade and was the prototypical free trader, has adjusted his views after recognizing that nations need to maintain some manufacturing capabilities for security reasons.  I assure you, if Krugman, who has been a vocal liberal critic of every Republican idea for the past twenty years, agrees with this policy, it will be very difficult for anyone to reject it.

In a perfect world (globo economicus?) free trade accrues benefits to all.  But we don’t live in that world and national priorities often supersede these issues.  The pandemic highlighted the weaknesses that the US had developed in its ability to manufacture key items necessary for its continued economic and defense survival. And remember this, for the world at large, their idea of free trade is they should be able to sell whatever they grow/manufacture into the US with no barriers, but US manufacturers need to be subject to barriers in order to protect other nations’ favored industries and companies.  That world is now history with new rules being written every day and most of them by Donald Trump.

So how have markets responded to this tariff confirmation?  Not terribly well.  Yesterday’s US equity selloff was pretty significant led by the NASDAQ’s -2.0% decline.  In Asia, the Nikkei (-0.6%) also sold off as did Korea (-1.4%), Taiwan (-1.4%) and Australia (-0.4%).  On the other hand, both China (+0.3%) and Hong Kong (+0.4%) managed a better session, seemingly as a rebound against declines in the previous session with the only news showing that Chinese industrial profits fell by -0.3% compared to a Y/Y decline of -3.3% in December.  However, a quick look at a chart of this data for the past five years tells me they need to seasonally adjust it in order to get something meaningful, so I don’t think it really impacted markets.

Source: tradingeconomics.com

As to European shares, it should be no surprise that the tariff announcements have negatively impacted shares there with declines of between -0.2% (Spain) and -0.7% (Germany).  US futures though, at this hour (7:00) are little changed on the session.

In the bond market, Treasury yields continue to creep higher, up another 3bps this morning and back to levels last seen a month ago.  This cannot be helping Secretary Bessent’s blood pressure, although he very clearly has a plan in mind.  There is much stagflation discussion in the markets by the punditry as they assume tariffs will slow growth and raise prices and bonds are not the favored investment in that scenario.  Meanwhile, European sovereign yields are all sliding this morning, largely down -2bps, amid growth concerns on the back of the tariff announcements.  The one exception here is UK Gilts (+7bps) as the UK Budget announcement indicated slightly more gilt issuance would be necessary to fund the government’s spending plans.  However, there is a growing concern over the financial management of the Starmer government overall.

In the commodity markets, oil (-0.35%) is slipping from yesterday’s closing levels and continues to flirt with the $70/bbl level but has not been able to breech it since late February.  Apparently, there are questions as to whether the auto tariffs will reduce demand.  Personally, I would think it is the opposite as more older, less fuel efficient cars will remain on the road here.  As to gold (+1.0%) after a several day pause, it appears that it is resuming its very strong trend higher.  You know what we haven’t heard about lately?  Ft Knox auditing.  I wonder if that is getting arranged or is now so old a story nobody cares.  Silver (+1.0%) is along for the ride although copper (-0.4%) is taking a breather after a breathtaking run to new all-time highs this year.  Look at the slope of the copper chart and you can see why it is pausing, at the very least.

Source: tradingeconomics.com’

Finally, the dollar is broadly softer this morning, with the euro, pound and Aussie all gaining on the order of 0.3%.  As well, NOK (+0.3%) is firmer after the Norgesbank surprised some and left rates on hold with a relatively hawkish message about the future.  But there is weakness vs. the greenback around with JPY (-0.3%), MXN (-0.3%) and INR (-0.2%) all leaning the other way.  Another tariff related story is that India is planning to cut its tariffs in half for the US, a very clear victory for President Trump. 

On the data front, this morning brings the weekly Initial (exp 225K) and Continuing (1890K) Claims data as well as the third and final look at Q4 GDP (2.3%).  Part of the GDP data is Real Final Sales (4.2%) which is a key indicator for what happens here given consumption represents ~70% of the economy.  We do hear from Richmond Fed president Barkin this afternoon, but right now, Fed speakers are speaking into the void.

International statecraft continues to be the underlying thesis of global relations and President Trump’s goals of reshoring significant amounts of manufacturing and jobs along with it is still the primary driver.  There has been far less talk of the Mar-a-Lago Accord as that seems to be losing its luster.  If countries adjust their trade policies, Trump will continue in this direction.  While that may include short-term economic weakness and some pain, for both the economy and the stock markets, there is no indication, yet, he is anywhere near blinking.  One thing to keep in mind is that an overvalued stock market can correct by prices falling sharply, but also by prices stagnating for a long time while earnings catch up and multiples compress.  We may very well be looking at the latter scenario, so no large gains nor losses, just choppy markets going forward.  As to the dollar, lower still seems the direction of travel overall from current levels, but probably in a very gradual manner.

Good luck

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Eyes Like a Bat

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The new Mr Yen
Is watching for excess moves
With eyes like a bat

 

While every day of this Trump presidency is filled with remarkable activity at the US government level, financial markets are starting to tune out the noise.  Yes, each pronouncement may well be important to some part of the market structure, but the sheer volume of activity is overwhelming investment views.  The result is that while markets are still trading, there seem to be fewer specific drivers of activity.  Consider the fact that tariffs have been on everyone’s mind since Trump’s inauguration, but nobody, yet, has any idea how they will impact the global macro situation.  Are they inflationary?  Will sellers reduce margins?  Will there be a strong backlash by the US consumer?  None of this is known and so trading the commentary is virtually impossible.

With that in mind, it is worth turning our attention this morning to Japan, where the yen (-0.4%) has been steadily climbing in value, although not this morning, since the beginning of the year as you can see from the chart below.

Source: tradingeconomics.com

Amongst G10 currencies, the yen is the top performer thus far year-to-date, rising about 5%.  Arguably, the key driver here has been the ongoing narrative that the BOJ is going to continue to tighten monetary policy while the Fed, as discussed yesterday, is still assumed to be cutting rates later in the year.  

Let’s consider both sides of that equation.  Starting with the Fed, just yesterday Atlanta Fed president Bostic explained to a housing conference, “we need to stay where we are.  We need to be in a restrictive posture.”  Now, I cannot believe the folks at the conference were thrilled with that message as the housing market has been desperate for lower rates amid slowing sales and building activity.  But back to the FX perspective, what if the Fed is not going to cut this year?  It strikes me that will have an impact on the narrative, and by extension, on market pricing.

Meanwhile, Atsushi Mimura, the vice finance minister for international affairs (a position known colloquially to the market as Mr Yen) explained, when asked about the current market narrative regarding the BOJ’s recent comments and their impact on the yen, said, “there is no gap with my view.  Amid high uncertainty, we have to keep watching the impact of any speculative trading on, not only the exchange market, but also financial markets overall.”  

If I were to try to describe the current market narrative on the yen, it would be that further yen strength is likely based on the assumed future narrowing of interest rate differentials between the US and Japan.  That has been reinforced by Ueda-san’s comments that they expect to continue to ‘normalize’ policy rates, i.e. raise them, if the economy continues to perform well and if inflation remains stably at or above their 2% target.  With that in mind, a look at the below chart of Japanese core inflation shows that it has been above 2.0% since April 2022.  That seems pretty stable to me, but then I am just a poet.

Source: tradingecomnomics.com

Adding it all up, I feel far better about the Japanese continuing to slowly tighten monetary policy as they have a solid macro backdrop with inflation clearly too high and looking like it may be trending a bit higher.  However, the other side of the equation is far more suspect, as while the market is pricing in rate cuts this year, recent Fed commentary continues to maintain that the current level of rates is necessary to wring the last drops of inflation out of the economy.

There is a caveat to this, though, and that is the gathering concern that the US economy is getting set to fall off a cliff.  While that may be a bit hyperbolic, I do continue to read pundits who are making the case that the data is starting to slip and if the Fed is not going to be cutting rates, things could get worse.  In fairness to that viewpoint, the Citi Surprise Index is pointing lower and has been declining since the beginning of December, meaning that the data releases in the US have underperformed expectations for the past two months. (see below)

Source: cbonds.com

However, a look at the Atlanta Fed’s GDPNow estimate shows that Q1 is still on track for growth of 2.3%, not gangbusters, but still quite solid and a long way from recession.  I think we will need to see substantially weaker data than we have to date to get the Fed to change their wait-and-see mode, and remember, employment is a lagging indicator, so waiting for that to rise will take even longer.  For now, I think marginal further yen strength is the most likely outcome as we will need a big change in the US to alter current Fed policy.

Ok, let’s see how markets have behaved overnight.  Yesterday saw a reversal of recent US equity performance with the DJIA slipping while the NASDAQ rallied, although neither moved that far.  In Asia, the Nikkei (+0.3%) edged higher as did the CSI 300 (+0.2%) although the Hang Seng (-0.3%) gave back a small portion of yesterday’s outsized gains.  The rest of the region, though, was under more significant pressure with Korea, Taiwan, Indonesia and Thailand all seeing their main indices decline by more than -1.0%.  In Europe, red is the most common color on the screen with one exception, the UK (+0.35%) where there is talk of resurrecting free trade talks between the US and UK.  But otherwise, weakness is the theme amid mediocre secondary data and growing concern over US tariffs.  Finally, US futures are nicely higher this morning after Nvidia’s earnings were quite solid.

In the bond market, Treasury yields (+4bps) have backed up off their recent lows but remain in their recent downtrend.  Traders keep trying to ascertain the impacts of Trump’s policies and whether DOGE will be able to find substantial budget cuts or not with opinions on both sides of the debate widely espoused.  European sovereign yields have edged higher this morning, up 2bps pretty much across the board, arguably responding to the growing recognition that Europe will be issuing far more debt going forward to fund their own defensive needs.  And JGB yields (+4bps) rose after the commentary above.

In the commodity markets, oil (+1.1%) is bouncing after a multi-day decline although it remains below that $70/bbl level.  The latest news is that Trump is reversing his stance on Venezuela as the nation refuses to take back its criminal aliens.  Meanwhile, gold (-1.1%) is in the midst of its first serious correction in the past two months, down a bit more than 2% from its recent highs, and trading quite poorly.  There continue to be questions regarding tariffs and whether gold imports will be subject to them, as well as the ongoing arbitrage story between NY and London markets.  However, the underlying driver of the barbarous relic remains a growing concern over increased riskiness in markets and rising inflation amid the ongoing deglobalization we are observing.

Finally, the dollar is modestly firmer overall vs. its G10 counterparts, with the yen decline the biggest in the bloc.  However, we are seeing EMG currency weakness with most of the major currencies in this bloc lower by -0.3% to -0.5% on the session.  In this case, I think the growing understanding that the Fed is not cutting rates soon, as well as concerns over tariff implementation, is going to keep pressure on this entire group of currencies.

On the data front, we see the weekly Initial (exp 221K) and Continuing (1870K) Claims as well as Durable Goods (2.0%, 0.3% ex Transport) and finally the second look at Q4 GDP (2.3%) along with the Real Consumer Spending piece (4.2%).  Four Fed speakers are on the calendar, Barr, Bostic, Hammack and Harker, but again, as we heard from Mr Bostic above, they seem pretty comfortable watching and waiting for now.

While I continue to believe the yen will grind slowly higher, the rest of the currency world seems likely to have a much tougher time unless we see something like a Mar-a Lago Accord designed to weaken the dollar overall.  Absent that, it is hard to see organic weakness of any magnitude, although that doesn’t mean the dollar will rise.  We could simply chop around on headlines until the next important shift in policy is evident.

Good luck

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Is Past Prologue?

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The Japanese tale
Now sees brighter times ahead
Yen buyers rejoice

 

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

Source: tradingeconomics.com 

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

Source: tradingeconomics.com

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

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

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

Source: CME.org

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

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

Source: tradingeconomics.com

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

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

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

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

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

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

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

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

Good luck

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Cha-Ching

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It wasn’t all that long ago
When data would headline the show
As traders would wait
For each release date
And then recount trades blow-by-blow
 
But now there is only one thing
That matters, Trump’s latest cha-ching
He speaks off the cuff
Which makes it quite tough
To plan from Berlin to Beijing

 

As the morning of the third day of President Trump’s second term dawns, it is nigh on impossible to keep up with all the things he is doing and their actual and potential impacts on markets going forward.  Arguably, the main FX market driver continues to be the tariff discussion and the question of if, and when, he may be imposing said tariffs. You will recall that on Monday, the mere absence of his reaffirmation that tariffs were coming resulted in a major dollar decline, which was subsequently reversed when he finally mentioned them in the evening.

Of course, those were aimed at Canada and Mexico with China, significantly, left out of the mix.  Last night he remedied that situation declaring that China and Europe were also in his sights for tariffs, although he mooted a 10% initial level, far below the 60% he discussed during the election campaign.  Once again, I would argue it is not possible at this point to make any serious market prognostications based on the lack of information as to the products to be impacted, the exact timing and what he is seeking in return for a reduction or elimination of those threats. 

At the same time, I find the strait-laced approach that ‘tariffs are bad and a tax on Americans which will lead to inflation’ which continues to be promulgated by orthodox academic economists, typically from a left-leaning lens, to be almost comical at this point.  We all should remember that during his first term, he imposed many tariffs, especially on China, and yet inflation was quiescent, with CPI averaging 1.9% during the entire term.  This is not to say things will be identical in 2024 and beyond, just that in fairness, his record demonstrates that tariffs are not necessarily inflationary.  Below is a chart of the monthly readings showing only 8 of the 48 months he was in office that headline CPI rose more than 0.3%, implying the rest of the time it was at or below that level.  Those were the days.

Source: tradingeconomics.com

Beyond the tariff discussion, the bulk of his time currently seems to be focused on the size of the government workforce, which is certainly due to shrink, and the border and immigration.  What will market impacts of these issues be like?  For the former, I would suggest that less government employees will lead to less government interference in the workplace, and arguably, be beneficial for productivity if nothing else.  As to the latter, it is a much more difficult problem to solve as there will likely be reductions in both labor supply but also demand for services like housing.  It seems quite possible that there will be a reordering of the economy, although it is unclear if that will lead to a net positive or negative from an overall growth perspective, or at least an inflation perspective.  Growth, of course, is the product of the size of the workforce * productivity, so a smaller workforce, if that is the outcome, will weigh on topline GDP, but not necessarily on per capita GDP.  As I mentioned above, there are far more unknowns than knowns at this time, so forecasting the future is a mug’s game.

As we keep in mind that nobody knows anything about the future, let’s take a look at what happened overnight amid all the knee-jerk reactions to the latest Trump comments.

Yesterday saw US equity markets continue in their winning ways seemingly trying to achieve new highs.  In Asia, the follow on was broad with Japan (+1.6%), Korea (+1.2%) and India (+0.75%) all nicely higher although Chinese shares suffered.  This should be no surprise now that Trump has squarely put China on the tariff map again, but there are other things happening here as well.  Perhaps the most confusing is the word that financial workers would be seeing pay cuts of up to 50% as President Xi no longer sees them as critical workers for the nation.  I’m sure this will help rebalance the consumption-production equation…not!  So, it should be no real surprise that both mainland (-0.9%) and Hong Kong (-1.6%) shares were under pressure.

Not so the case in Europe where the DAX (+1.2%) is leading the way higher although gains are universal, after comments from several ECB bankers that rate cuts were coming next week and likely will continue during the year.  While inflation remains the sole ECB mandate, the weak economic situation plus the threat of tariffs certainly has Madame Lagarde under pressure to do something to support the economy there.  Finally, it should be no surprise that US futures are nicely higher this morning with the NASDAQ (+0.9%) leading the way at this hour (7:15).

In the bond market, yields have stabilized after their recent 20bp decline in the past week and have edged higher by 1bp this morning.  The same price action has been seen in Europe where sovereign yields are little changed to higher by 2bps across the continent.  As to JGB yields, they, too, were unchanged on the session despite an increase in chatter that the BOJ is set to hike rates on Friday.

In the commodity space, gold continues to rally and is now within 1% of its all-time highs set back in late October.  This has dragged silver along for the ride, and copper, in truth, although today copper is ceding -0.6%.  however, a look at the price movement over the past month shows all three metals nicely higher (Au +5.3%, Ag +3.7%, Cu +6.2%).  Oil (0.0%) is flat today as it consolidates its recent retracement.  Recall, for the first two weeks of the year, it rallied sharply, up nearly $10/bbl, although it seems that may have been more of a short squeeze than a fundamental shift in thinking.  Since then, it has given back about $4/bbl as market participants try to decide if the theorized Trumpian demand increase will offset the supply increase of drill, baby, drill.

Finally, the dollar is little changed this morning overall.  That said, net over the past week, it has given back about 1.5% although that was from recent highs.  This price movement feels far more like consolidation than a change in view especially given that the tariff story remains front and center.  Now, it is possible that the market pushed the dollar higher ahead of the inauguration on a ‘buy the rumor’ idea and is now selling the news, but it remains difficult to see what has changed in the US economy relative to its counterparts that would encourage a change in rate expectations.  As to today’s movement, there are more gainers than laggards vs. the dollar, but nothing of any real significance.

On the data front, the only US data is the Leading Indicators (exp 0.0%) so traders will continue to look at corporate earnings and listen to the president for the next pronouncement.  I assure you; I have no idea what that will entail.  Once again, I am a strong proponent of being hedged because the one thing we have learned lately is that markets can turn on a dime.

Good luck

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Growth Stank

Posted on by

Three score and a year have now passed
Since flags in the States flew half-mast
In honor of Jack
Who wouldn’t backtrack
On his goal of world peace at last

 

It has been sixty-one years since President John F Kennedy was assassinated in Dallas.  This was one of the most dramatic and impactful events in the history of the US with many still of the belief that it was an inside job.  One needn’t wear a tin-foil hat all the time to recognize that the government has done nothing but grow dramatically since then, with the defense complex the leader of the pack.  Perhaps in his second term, President Trump will release the case files in an effort to shine a light on the underbelly of the government.  This poet has no idea what occurred that day (although I did recently visit the 6th floor museum in Dallas, a quite interesting place) and I would guess that all these years later, there are very few, if any, people who may have been involved that are still alive.  Of course, the risk is that powerful organizations like the CIA and FBI could be forever tarred with this if they were involved, and that would have dramatic implications going forward, hence their desire to maintain secrecy.  I highlight this simply as another potential flashpoint in the upcoming Trump presidency.

The data from Europe revealed
That if there is growth, it’s concealed
The PMI’s sank
And German growth stank
Thus Christine, her razor, will wield

Let us now discuss the Eurozone.  Not only do they have an increasingly hot war on their border and not only are they being inundated by a major blizzard interrupting power and transportation throughout France, Germany and Scandinavia, but their economies appear to be slowing down far more rapidly than previously anticipated.  But that inflation was slowing as quickly!

This morning the Flash PMI data was released for Germany, France and the Eurozone as a whole, as well as the UK.  It did not make for happy reading if you are a politician or policymaker in any of these nations.

IndicatorCurrentPrevious
 Germany 
Manufacturing PMI43.243.0
Services PMI49.451.6
Composite PMI47.348.6
 France 
Manufacturing PMI43.244.5
Services PMI45.749.2
Composite PMI44.848.1
 Eurozone 
Manufacturing PMI45.246.0
Services PMI49.251.6
Composite PMI48.150.0
 UK 
Manufacturing PMI48.649.9
Services PMI50.052.0
Composite PMI49.951.6

Source: tradingeconomics.com

One needn’t look too hard to see that the economic situation in Europe is ebbing toward a recession or at least toward much slower growth (German GDP was also released at a slower than expected 0.1% Q/Q, -0.3% Y/Y).  While the ECB is very aware of this situation, the problem is that like most other central banks, their strong belief that inflation is going to reach their 2.0% goal has not yet been realized let alone shown an ability to stay at that level over time.  However, the ongoing comments from ECB members is that more rate cuts are coming with only the timing and size in question.  There is still a strong belief that interest rates in Europe (and the UK) are well above ‘neutral’.

Of course, it will not surprise you to see the chart of the EURUSD exchange rate given this information as the single currency collapses continues its sharp decline.

Source: tradingeconomics.com

Since the end of September, the single currency has declined ~7.0% in a quite steady fashion.  All the technical levels that had been in play have been broken with the next noteworthy level to consider being parity.  I have been clear for a while that I expected the dollar to continue to perform well and nothing has changed that view.  The combination of an increase in fear amid the escalation of tensions in Ukraine and Russia’s intimation that the US and NATO have entered the war already and the very divergent paths of the US and Eurozone economies can only lead to the conclusion that the euro is going to continue to decline for a while.  And remember, this price action has very little to do with potential Trump tariff or other policies as they remain highly uncertain.  The euro is simply a victim of its own leaders’ ineptitude on both the economic and diplomatic/military fronts.  Any Trump tariffs that are imposed on Europe will simply add to the pain.

Before we head to other asset classes, let’s take a quick look beyond the euro in the FX markets.  It should be no surprise that the dollar is broadly higher, although not universally so.  Versus the rest of the G10, even the yen has not been able to find enough haven demand to hold up as the greenback rallies against them all with the euro (-0.6%) and pound (-0.6%) sharing honors as the laggards.  However, in the EMG bloc, the picture is more mixed with CE4 currencies all sliding but ZAR (+0.4%) rallying amid the ongoing rebound in the price of gold (+1.2%) which is also benefitting from increased fear and risk disposition.  As to Asian currencies, most were somewhat weaker but other than KRW (-0.4%) the moves were unimpressive.

On the commodity front, oil (-0.6%) is slipping a bit heading into the weekend but it has had an excellent week, rallying more than 4%.  There are many cross tensions in this market as on one side we have fears that the Russia/Ukraine situation will impact supply, or that Iran will react to Israel’s ongoing campaign in Lebanon and do something about the Strait of Hormuz.  These are obviously bullish for crude.  But the flip side is that Trump has made very clear his desire to open up far more land for drilling and is seeking to increase supply substantially, a negative price signal.  

Turning to bond markets, there is demand everywhere as the combination of risk aversion and weaker Eurozone growth have brought the buyers out of the woodwork.  Treasury yields have slipped -4bps and in Europe, the entire continent is seeing yields decline between -7bps and. -8bps.  After the PMI data this morning, the Euribor futures market upped pricing for a December ECB rate cut from a 15% to a 50% probability.  Add to that comments from ECB members Stournaras and Guindos and it seems quite likely that rates in Europe are going to decline.

Finally, equity markets have shown very little consistency.  Yesterday’s strong US rally was followed by strength in Japan (+0.7%) but massive weakness in China (CSI 300 -3.1%, Hang Seng -1.9%) as concerns over those Trump tariffs continue to weigh on investors there.  However, it was only China that suffered as pretty much every other market in the region saw gains, with some (India +2.55, Taiwan +1.6%, New Zealand +2.1%) quite substantial.  European shares, however, are more mixed with most continental bourses showing modest declines although the UK (+0.8%) has managed to buck that trend despite the weak PMI data and weak Retail Sales data as investors seem to be prepping for a BOE rate cut next month.  As to US futures, at this hour (7:30) they are little changed.

Yesterday’s data showed Initial Claims sliding but Continuing Claims rising to their highest level, above 1.9M, in three years.  It appears that while layoffs aren’t increasing, finding a job once you are unemployed is much tougher.  Philly Fed was also softer than forecast and that seemed to help the Fed funds futures market push up the probability of a December cut to 59% this morning, up from 55% yesterday.  This morning, we see the Flash PMI data here (exp Mfg 48.5, Services 55.0) and then Michigan Sentiment (73.7).  There are no Fed speakers on the schedule so I expect that this morning’s trends may run for a little longer, but as it is Friday, I would not be surprised to see a little reversal amid week ending profit taking.  However, the dollar has further to go, mark my words.

Good luck and good weekend

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Nothing But Fearporn

Posted on by

Said Logan, right now things are cool
With loads of reserves in the pool
And if I’m correct
The likely effect
Is rates will remain our key tool
 
As such, talk of balance sheet woes
Is nothing but fearporn, God knows
We’ll let bonds mature
Though we are unsure
Of how many we need dispose

 

“If the economy evolves as I currently expect, a strategy of gradually lowering the policy rate toward a more normal or neutral level can help manage the risks and achieve our goals,” explained Dallas Fed President Lorrie Logan on Monday. “However, any number of shocks could influence what that path to normal will look like, how fast policy should move and where rates should settle.”

In other words, we want to keep up appearances but we have no real idea how things are going to play out and so whatever we think our policies are going to be right now, they are subject to changes at any time.  It shouldn’t be surprising that the Fed doesn’t really know where things are going to go, after all, predicting the future is very hard.  But for some reason, many folks, both market focused and politicians, seem to believe they should be able to forecast well and control the outcomes.

Based on the market reaction to Logan’s comments, market participants, at least, are losing some of that confidence.  Treasury yields jumped 11bps in the 10-year dragging the entire yield curve higher along with all of Europe.  And perhaps more ominously for the Fed’s wish list, mortgage rates also rocketed to their highest level since July.  I might suggest market participants are losing their belief that the Fed is going to continue to cut interest rates as many had believed.  Fed funds futures have reduced their cut probabilities by nearly 10 points compared to yesterday as the latest example of this issue.  

And you know what else continues to benefit as those interest rates refuse to decline?  That’s right, the dollar continues to rally steadily against all comers.  Using the DXY as a proxy, the greenback has rebounded 3% from its levels around the time of the last Fed meeting as per the below chart.  I assure you, if I am correct that the Fed cuts 25bps in November and then doesn’t cut in December, the dollar will be much higher still.  Something to watch for!  

Source: tradingeconomics.com

In fact, there were four Fed speakers yesterday and three of them, including Logan, sounded more cautionary in their view of the future path of rates.  However, uber dove Mary Daly from the SF Fed is still all-in for many more cuts to come.  And this is the current situation at the Fed, I believe.  There are FOMC members who remain in the “we must cut rates at all costs” camp, who despite the evidence of the data they supposedly track remaining stronger than expected want lower rates, and there are those who are willing to reduce the pace of cuts, but still want lower rates.  This tells me that the Fed is going to continue to cut rates regardless, and so the bond market is going to become the arbiter of financial conditions.  Recent bond market movements seem more likely to be a harbinger of the future than an aberration, at least unless/until the economy weakens substantially.  In fact, you can see that the relation between bond yields and the dollar is quite strong now, something I suspect will remain true for a while going forward.

And that was really all that we had as the overnight session brought us virtually nothing new.  So, a quick recap of the overnight shows that after a lackluster session in the US on low volumes, Asia had more laggards than leaders with Tokyo (-1.4%) and Australia (-1.7%) dominating the story although China (CSI 300 +0.6%, Hang Seng +0.1%) managed to buck the trend.  The latter two, though, seemed like reactionary bounces from recent declines.  In Europe, bourses are all red this morning led lower by Spain’s IBEX (-1.1%) but seeing weakness everywhere (CAC -0.7%, FTSE 100 -0.7%, DAX -0.25%).  And, at this hour (7:45), US futures are lower by -0.5% or so.

After yesterday’s dramatic rise in yields in the US, we are seeing a continuation this morning with Treasuries edging higher by 1bp but European sovereigns all higher b between 4bps and 5bps.  That seems to be catching up to the last of the afternoon Treasury move yesterday.  As I mention above, I see the trend for yields in the US to be higher, and that should impact yields everywhere.

In the commodity markets, once again, demand is increasing and we are seeing gains in oil (+1.1%), gold (+0.6% and new all-time highs), silver (+1.7%) and copper (+0.9%).  The financial narrative is turning more and more to inflation concerns and the fact that commodities remain an undervalued and important segment in which to have exposure.  I am personally long throughout this space and believe there is much further to run here.

Finally, after the dollar’s blockbuster day yesterday, it has paused for a rest with the noteworthy gainers today all in the commodity bloc (AUD +0.5%, NZD +0.55%, MXN +0.2%, ZAR +0.2%, NOK +0.4%) with most other currencies actually a bit softer vs. the buck.  Keep an eye on JPY (-0.2%) which is now firmly above the 150 level and is likely to begin to see more discussion about potential intervention soon.

There is no data of note this morning although we do hear from Philly Fed president Harker.  It will be interesting to hear if he is in the dovish or uber dovish camp, as there appear to be no hawks left on the FOMC. 

Until the election in two weeks, I suspect that volumes will remain low but trends will remain intact, so higher yields and a higher dollar seem most likely to be in our future.

Good luck

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Not Persuaded

Posted on by

In China, Xi’s still not persuaded
The actions he’s taken have aided
The ‘conomy’s course
The outcome, perforce
Is access to money’s upgraded

 

In an otherwise very uninteresting session, the biggest news comes from China where the PBOC cut both the 1yr and 5yr Loan Prime Rates by a more than expected 25bps last night.  While PBOC chief Pan Gongsheng did indicate that more cuts were coming, the speed and size of this move are indicative of the fact that worries are growing about the nation’s ability to achieve their “around 5%” GDP growth target.  At least the people who will be blamed if they don’t achieve it are starting to get worried!

The interesting thing about this move is the singular lack of impact it had on Chinese markets with the CSI 300 rising a scant 0.25% for the session.  Although, perhaps it had more impact than that as the Hang Seng (-1.6%) seemed to express more concern over the need for the move than embrace any potential benefits.

Ultimately, the issue for Xi is that the breakdown of economic activity in China remains unbalanced in a manner that is no longer effective for current global politics.  China’s rapid growth since its accession to the WTO in 2001 has been based on, perhaps, the most remarkable mercantile effort in the world’s history.  But now, that mercantilist model is no longer politically acceptable to their main markets as the rest of the world has seen a significant political shift toward populism.  Populists tend not to be welcoming to foreign made goods (or people for that matter), and so Xi must now recalculate how to continue the growth miracle.

Economists have long explained that China needs to see domestic consumption, currently ~53%, rise closer to Western levels of 65% – 70% in order to stabilize their economy.  However, that has been too tall an order thus far.  It is far easier in a command economy to command businesses to produce certain amounts of stuff, than it is to command the citizens to consume a certain amount of stuff, especially if the citizens remain shell-shocked over the destruction of their personal wealth as a result of the imploding property bubble.  As much as Xi wants to change this equation, it seems clear he doesn’t feel he has the time to wait for the gradual adjustment required, as that might result in much weaker GDP growth.  Given that the most important promise he has made, at least tacitly, to his people is that by taking more power he will increase their prosperity, he cannot afford any indication that is not the path on which they are traveling.

My take is that we are going to continue to see more efforts by the Chinese to prop up the economy, but it remains unclear if the fiscal ‘bazooka’ that many in markets have anticipated will ever be fired.  History has shown the Chinese are much more comfortable with slow and steady progress, rather than massive changes in policy, at least absent an actual revolution!  Ultimately, nothing has changed my view that the ultimate relief valve is for the renminbi to depreciate over time.  Xi is fighting that for geopolitical reasons, not for economic ones, but unless or until the domestic situation there changes, I believe that will be the destiny.

Away from the China story, though, there is precious little else of note ongoing, at least in the financial markets.  As this is not a political discourse, I will not discuss the election until afterwards as only then will we have an idea of what will actually happen fiscally and economically.  Meanwhile, everything else seems status quo.  

So, let’s look at the overnight markets.  Aside from China and Hong Kong, and following Friday’s very modest rally in the US, the rest of Asia had no broad theme attached.  There were gainers (Korea, Australia, New Zealand) and laggards (India, Japan, Singapore) with movements of between 0.5% and 0.75% while the rest of the region saw much lesser activities.  In Europe, the mood is dourer with red the only color on the screen ranging from the UK (-0.2%) to virtually all the large continental bourses (CAC, DAX, IBEX) at -0.8%.  There has been no data of note to drive this decline except perhaps the fact that the dollar continues to rise, a situation typical of a risk-off environment.

In the bond markets, yields are climbing across the board this morning, a very risk-on perspective.  (This is simply more proof that the traditional views of asset performance for big picture risk on or off movements is no longer valid.)  At any rate, Treasury yields have risen 4bps while European sovereign bonds have all seen yields jump between 7bps and 8bps.  It appears that bond investors are growing somewhat concerned that central banks are going to allow inflation to run hotter than targeted over time as they are desperate to prevent any significant economic downturn.  As well, given the Treasury market leads all other bond markets, and US economic data continues to perform, that is a key global yield driver as well.

Arguably, the biggest story in markets continues to be the commodities space, specifically metals markets, as once again, and despite today’s dollar strength, we see gold (+0.5%), silver (+1.0%) and copper (+1.1%) rallying with the barbarous relic making yet another set of new all-time highs while silver has broken above a key technical resistance level at $32.00/oz as seen in the chart below.

Source: tradingeconomics.com

One of the reasons I focus on commodities so much is I believe they are telling an important story about the state of the global economy.  We have seen a decade of underinvestment in the production of stuff, especially metals, but also energy, as this has been sacrificed on the altar of ESG policies.  But the world marches on regardless, and that stuff is necessary to build all the things that people want and are willing to pay for.  As they say, the cure for high prices is high prices, meaning high prices are required to increase supply.  That is what we are witnessing, I believe, the beginning of high enough prices to encourage the investment required to increase the supply of these critical inputs to the economy.  However, given the often decade-long process to get from discovery to production of things like metals, look for these prices to continue to rise as a signal that demand is growing ahead of supply.  

As to oil prices, they too, have found legs this morning with a significant bounce (+2.2%) and back above $70/bbl.  On the energy front, we are also seeing NatGas rally sharply with gains in both the US and Europe of > 2%.

Finally, the dollar, as I mentioned, is stronger this morning with only NOK (+0.1%) outperforming the greenback in the G10 space as the dollar benefits from rising yields and continued strong growth, at least as measured by the major data points.  In the EMG bloc, it is universal with the dollar higher against all comers and the worst performers (KRW -0.75%, HUF -0.7%, MXN -0.3%) in each region continuing their recent trend declines.  Until we see a substantive change in the US economic situation, I see no reason for the dollar to fall very far at all.

On the data front, this week brings a lot more Fedspeak than hard data, but this is what we have.

TodayLeading Indicators-0.3%
WednesdayExisting Home Sales3.9M
ThursdayChicago Fed Nat’l Index0.2
 Initial Claims247K
 Continuing Claims1865K
 Flash PMI Manufacturing47.5
 Flash PMI Services55.0
 New Home Sales720K
FridayDurable Goods-0.9%
 -ex Transport-0.1%
 Michigan Sentiment69.3

 Source: tradingeconomics.com

None of this is all that exciting or likely market moving, but we will be regaled with speeches from seven more FOMC members, both governors and regional presidents.  While ordinarily I feel like these comments have limited impact, my take is the market is starting to adjust its views of future Fed actions.  After all, the rationale to cut rates is hard to understand if the economic data continues to rise alongside inflation.  As of this morning, the market is pricing in a 93% probability of a November cut and a 73% probability of a December one as well.  While I agree November is a necessity for them to save face, I think December is a much longer shot than that based on recent data.

With the last two weeks ahead of the election upon us, things are heating up further and most focus will be there.  Given the secondary nature of this week’s data, my suspicion is that absent a massive surprise, or a really consistent theme amongst the Fed speakers that rates are going to go a lot lower soon, the dollar is going to continue its recent rebound.

Good luck

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