Tag Archives: #gold

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

Adf

No Reprieve

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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

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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

Adf

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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Naught But Dismay

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Ishiba’s fallen
Who’ll grab the poisoned chalice
For the next go round?

 

Well, it was inevitable after the LDP lost the Upper House election a few weeks ago, but now it is official, Japanese PM Shigeru Ishiba has resigned effective today and will only stay on until a new LDP leader is chosen.  You must admit, for a politician he was exceptionally ineffective.  He managed to lead the LDP to two major election losses in the span of 10 months, quite impressive if you think about it.  However, now that he has agreed a trade deal with the US, where ostensibly US tariffs on Japanese autos will be reduced from 25% to 15%, he felt he had done enough damage and is getting out of the way.  Frankly, I wouldn’t want to be the next man up here as the situation there remains fraught given still high inflation and a central bank that is so far behind the curve, it makes the Fed seem like it is Nostradamus!

The intricacies of Japanese politics are outside the bounds of this note, but the initial market response is a weaker yen (-0.7% as of 7:30pm Sunday night) and 1% gain in the Nikkei.  JGB yields have barely moved at all as it seems Japanese investors are not yet abandoning ship in hopes of a stronger PM.  However, my take is they have further to climb going forward as the BOJ’s ongoing unwillingness to tackle inflation will undermine their value.  Japan has a world of hurt and lacking an effective government is not going to help them address their problems.  It is hard to like Japanese assets or the yen in my view, at least until something or someone demonstrates competence in government.

The jobs report basically sucked
As companies smoothly conduct
More layoffs each week
While they try to tweak
Their staffing ere management’s f*cked

By now, I’m sure you’re all aware that the payroll report was pretty weak across the board.  NFP rose only 22K, well below expectations and although there was a marginal increase in last month’s results, just 6K, the overall picture was not bright.  The Unemployment Rate ticked up 0.1%, as expected with the labor force growing >400K, but only 288K of them getting jobs.  However, layoffs are down, and the real positive is that government jobs continue to fall, having declined 56K in the past three months with private hiring making up the slack.  In fact, if you look at the past three months, private job creation has been 144K or 48K/month.  That is the best news of the entire process.  Eliminating government employees will eventually result in lower government expenditures and let’s face it, if the government employees who leave become baristas at Starbucks, they are likely adding more value to the economy than their government roles!  The chart below from Wolfstreet.com does a great job of highlighting private sector jobs growth, which is slowing but still positive.  Maybe it is not yet the end of the world.

As to my efforts to prognosticate on the market behavior based on a range of outcomes, I mostly got the direction right, although some of the movement was a bit more aggressive than I anticipated.  The one place I missed was equities, which started higher, but ultimately fell on the day.  Nostradamus I’m not.

The last thing to mention today
Is France, where a vote’s underway
When finally completed
And Bayrou’s unseated
Macron will have naught but dismay

The last key story to discuss is the vote today in France’s parliament where another snap election has been called by a minority government (see Japan for previous results) and in all likelihood will result in the government falling.  The problem here, as it is pretty much everywhere in the Western world is that the government’s budget deficit is exploding higher and legislators cannot agree to cut spending.  The result is rising bond yields (see below chart as I discussed this last week here), and growing concern as to how things will ultimately play out.  The prognosis is not positive.  

Source: tradingeconomics.com

While the US is in a similar situation, we have substantially more tools available and more runway given our status as the global hegemon and owning the global reserve currency.  But France, and the UK or Japan for that matter, have no such backstop and investors are growing leery of the increasing risk of a more substantial meltdown.  Apparently, the results of this vote ought to be known by 3:00pm Eastern time this afternoon.

The question is, if/when he loses, what happens next?  The choice is President Macron appoints a different PM to head another minority government, which will almost certainly be unable to achieve anything else, or there is another parliamentary election, which at least could result in a majority government with the ability to enact whatever fiscal policies they believe.  Remember, France is the second largest economy in the Eurozone, so if it remains under pressure, it is difficult to make the case that the euro will rally very much, especially given Germany’s many issues.

And that feels like enough for one day.  Let me recap the overnight session but since there is no data of note today and the Fed is in its quiet period, I will list data tomorrow.  While US equity markets sold off a bit at the end of the day, that was not the vibe this morning anywhere else in the world as green is the predominant color on screens.  In Japan, no PM is no problem as the Nikkei (+1.45%) rallied after much stronger than expected GDP data (2.2% in Q2) helped convince investors things would be fine.  Hong Kong (+0.85%) and China (+0.2%) also managed gains as hopes for a Fed rate cut spring eternal.  In fact, the bulk of Asia saw gains on that basis.

Europe, too, has embraced the weaker US payroll data and prospective Fed rate cut to rally this morning, although in fairness, German IP rose 1.4% for its first gain in four months, so that helped the cause.  But even French stocks are higher despite the imminent collapse of the government.  I am beginning to notice a pattern of equity investors embracing the removal of ineffective governments, but perhaps I am looking too hard.  US futures are also modestly higher at this hour (7:15) this morning, rising about 0.25%.

In the bond markets, after Friday’s rally, Treasury yields have edged higher by 1bp while European sovereign yields are largely unchanged, perhaps +/- 1bp on the day.  Surprisingly, even JGB yields have not risen despite the lack of fiscal rectitude there.  It certainly appears that bond investors are ignoring a lot of potential bad news.  Either that or someone is buying a lot of bonds on the sly.

In the commodity markets, oil (+2.0%) after a down day Friday ahead of expectations that OPEC+ would be increasing production again, has rallied back as those increases were less than feared by the market.  But net, oil is just not going anywhere these days, trading between $62/bbl and $66/bbl for the past month.  It feels like we will need a major demand story to change this narrative, either up or down.  As to metals, they continue to rally sharply (Au +0.7%, Ag +0.7%, Cu +0.5%, Pt +1.9%) as no matter the bond markets’ collective ennui over global fiscal profligacy, this segment of the market is paying attention.  If this week’s CPI data is cooler than expected, I suspect that 50bps is going to be the default expectation and metals will climb further.

Finally, the dollar is under modest pressure this morning, with the euro and pound both rising 0.2% although AUD (+0.6%) and NZD (+0.8%) are having far better sessions on the back of commodity price strength.  JPY (-0.3%) has recouped some of its early losses from the overnight session, though my money is still on weakness there.  In the EMG bloc, it is hard to get excited about much with ZAR (+0.25%) appreciating the rally in gold and platinum, but only just, while the rest of the bloc hasn’t even moved that much.  

And that’s really all for today.  The discussion will continue around the Fed and whether 50bps is coming with Thursday’s CPI the last big piece of data that may sway that conversation.  Personally, I am surprised that the government upheavals in Japan and France (with the UK also having major fiscal problems) have not had a bigger impact on markets.  My sense is that there is an opportunity for more fireworks in those places in the near future.  But apparently not today.  As investors whistle past those particular graveyards, I imagine we will see a risk-on session continue with the dollar remaining under modest pressure.

Good luck

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Under Real Threat

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The PCE data was warm
And still well above Powell’s norm
The problem for Jay
Despite what folks say
Is tariffs ain’t causing the storm
 
Instead, service prices keep rising
With wages not yet stabilizing
And so, long-date debt
Is under real threat
As traders, those bonds, are despising

 

Under the rubric, economic synchronization remains MIA, I think it is worth looking at the performance of 30-year bond yields across all major nations as per the below chart.  While the actual rates may be different, the inescapable conclusion is that yields across the board continue to rise to their highest levels in more than five years and the trend remains strongly in that direction.  Regardless of central bank actions, or perhaps more accurately because of their attempts to keep rates low, it is increasingly clear that confidence in government debt, the erstwhile safest assets around, continues to slide.  

Arguably, this is a direct response to the fact that despite their vaunted independence, central banks around the world have very clearly abandoned their inflation targets and are now doing all they can to support their respective economies with relatively easy money.  Friday’s PCE data is merely the latest in a long line of data points showing that although most of these banks are allegedly targeting 2.0% Y/Y inflation, the outcomes have been higher than target, yet excuses to cut rates are rife.  If you are wondering why gold continues to rally, look no further than this.

Source: tradingeconomics.com

In fact, this morning’s Eurozone CPI reading of 2.1%, 2.3% core, is merely another chink in the armor as it was a tick higher than expected.  One of the problems, I believe, is that there remains a very strong belief that the key driver of inflation is economic growth, not money supply growth, despite all evidence to the contrary.  But it is a Keynesian fundamental belief, and every central bank around the world is convinced that slowing economic activity will result in declining inflation rates.  Alas, as long as central banks continue to support their domestic government bond markets, inflation will remain.  

This is where the synchronicity, or lack thereof, of the economy is having its biggest impact.  The fact that certain parts of the economy, notably AI investment, continues to run at record pace and continues to support excess demand for certain things offsets weakness in other parts of the economy, for instance, commercial property, which is looking at a significant deterioration in its finances.  A look (see chart below) at Commercial Mortgage-Backed Securities (CMBS) for office buildings shows that the delinquency rate has reached an all-time high, higher even than the GFC, as the changes in the US working population and the increase in work-from-home have devastated the value of many office buildings.

Perhaps more interesting is the fact that multifamily CMBS (financing for apartment buildings) is also suffering despite a housing shortage and rising rents.  While delinquency rates have not reached GFC levels, as you can see, they are rising rapidly as well.

So, which is it?  Are yields rising because growth is driving inflation higher (the Keynesian view of the world)?  How does that accord with rising delinquencies if growth is the driver?  In the end, there is no single, simple answer to explain the dynamics of an extraordinarily complex system like the economy.  I do not envy policymakers’ current situation as there are no correct answers, merely tradeoffs (just like all economics).  But it is increasingly clear that investors are losing their interest in holding onto government debt as they seemingly lose faith in governments’ ability to manage their respective finances.  Which brings us to one more chart, the barbarous relic (which for those of you who don’t know, was Keynes’ term of derision for gold).  I thought it might be instructive to see how gold and 30-year Treasury yields seem to have the same trajectory as the shiny metal regains its all-time highs this morning.

Source: tradingeconomics.com

With that cheery thought after a beautiful Labor Day weekend, let’s see how markets are behaving now that September is upon us.  Friday’s selloff in the US (a disappointing way to end the month) was followed by a mixed session in Asia with the Nikkei (+0.3%) managing to rally although China (-0.75%) and Hong Kong (-0.5%) followed the US lower despite a slightly better than expected RatingDog (formerly Caixin) PMI of 50.5 released Sunday night.  Elsewhere in the region, Korea (+0.95%) was the big winner with modest losses almost everywhere else in the region.  As to Europe, the DAX (-1.25%) is the worst performer, although Spain’s IBEX (-0.95%) is giving it a run for its money as the higher Eurozone inflation squashed hopes that the ECB may cut rates again soon.  Interestingly, French shares are unchanged this morning, significantly outperforming the rest of the continent despite continued concerns over the status of the French government which seems likely to collapse next week after the confidence vote on Monday.  Perhaps the idea that the government will not be able to do anything is seen as a benefit!  As to US futures, negative is the vibe this morning, with all the major indices pointing lower by at least -0.6%.

In the bond market, based on my commentary above, you won’t be surprised that Treasury yields are higher by 6bps this morning and European sovereign yields are all higher by between 4bps and 6bps.  The big story here is that French yields are rising to Italian levels as the former’s finances are crumbling while Italy has stabilized things for the time being.  Of course, all this pales compared to UK yields (+4bps) where 30-year yields have climbed to their highest level since 1998 and the 10-year yields are now nearly 200 basis points higher than during the ‘Liz Truss’ moment of 2022 as per the below.  It is not clear to me if the UK or France will collapse first, but I suspect that both may be begging at the IMF soon!

Source: tradingeconomics.com

Oil prices (+1.8%) continue to rise as Russia and Ukraine intensify their fighting with Ukraine attacking Russian refining capacity, apparently shutting down up to 17% of their output.  However, while we have seen oil rebound over the past several weeks, the longer-term trend remains lower.

Source: tradingeconomics.com

As to metals, this morning gold (+0.2%) continues to set new highs while silver (-0.4%) is backing off of its recent multi-year highs, although remains well above $40/oz.  Precious metals are in demand and likely to stay that way for a long time to come in my view.

Finally, the dollar is much firmer this morning with the pound (-1.25%) the laggard across both G10 and EMG currencies as investors flee from the ongoing policy insanity there (between the zeal with which they are trying to reduce CO2 and the crackdown on free speech, it seems the government is trying to alienate the entire native population.). But the euro (-0.7%), Aussie (-0.7%), yen (-1.0%) and SEK (-0.75%) are all under pressure in the G10 bloc.  The UK is merely the worst of the lot.  As to the EMG bloc, MXN (-0.7%), ZAR (-0.7%) and PLN (-0.9%) are also sharply lower although Asian currencies (KRW -0.2%, INR -0.2%, CNY -0.15%) are faring a bit better overall.

On the data front this week, we have a bunch culminating in payrolls on Friday.

TodayISM Manufacturing49.0
 ISM Prices Paid 65.3
WednesdayJOLTS Job Openings7.4M
 Factory Orders-1.4%
 Fed’s Beige Book 
ThursdayInitial Claims230K
 Continuing Claims1960K
 Trade Balance-$75.3B
 Nonfarm Productivity2.7%
 Unit Labor Costs1.2%
 ISM Services51.0
FridayNonfarm Payrolls75K
 Private Payrolls75K
 Manufacturing Payrolls-5K
 Unemployment Rate4.3%
 Average Hourly Earnings0.3% (3.7% Y/Y)
 Average Weekly Hours34.3
 Participation Rate62.1%

Source: tradingeconomics.com

In addition, we hear from four Fed speakers with NY Fed president Williams likely the most impactful.  The current probability for a Fed funds cut according to CME futures is 92%.  A weak print on Friday will juice that and get people talking about 50bps to start.  A strong number will stop that talk in its tracks.  But until then, it is difficult to look at the messes everywhere else in the world and feel like you would rather own other currencies than the dollar (maybe the CHF).

Good luck

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AI is Grokking

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The ‘conomy grew a bit faster
Than ‘spected by every forecaster
Consumers are rocking
While AI is Grokking
Though prices could be a disaster
 
The question this data incites
Is why cut rates from current heights?
With stocks on a tear
And ‘flation still there
The risk is the long bond ignites

 

Yesterday’s GDP data indicated that both consumer spending and AI investment were larger than expected with the result being GDP activity increased more than economists had forecast.  Most would consider this good news, and the equity markets clearly saw the benefits as they continue their slow march higher.  Surprisingly, despite the positive economic data, the Fed funds futures market did not reduce the probability of a rate cut next month.  Arguably that was because Governor Waller, one of the two who voted for a cut in July, spoke yesterday and reiterated his views that a cut was appropriate to prevent a worse outcome in the employment situation.  Frighteningly, he said, “I am back on Team Transitory.”  I fear that the transitory phenomenon is going to be the reduction in inflation we have experienced over the past two years, not the initial peak seen in 2022. (As an aside, if inflation is your concern, USDi is one way to maintain the purchasing power of your funds as it mechanically tracks CPI, rising in step with the index.)

Perhaps the futures market is starting to expect that Governor Lisa Cook’s days are truly numbered with a third instance of potential mortgage fraud surfacing yesterday, a situation that has a bad look for a Fed governor.  If she is forced out soon, that would be yet another Fed governor that President Trump will get to appoint, and the tension in the Marriner Eccles building will certainly grow at that September meeting.  After all, if Trump seats two more governors, and has 4 votes for a rate cut on the board, the question will not be should they cut, but how much they should cut with 50 basis points on the table regardless of the economics.

But all that is still three weeks away and based on the fact that if I look at almost every market, price action has been consolidating for the entire summer, it is hard to get excited in the short-term.  In fact, I think it is worthwhile to look at some charts so you can get a sense of just how little is going on.

All these charts are from tradingeconomics.com and I have drawn in some recent ranges to show that over the past 6 months, only one asset class has shown any trend of note.  See if you can guess which that is.  I’ll start with the EURUSD since, after all, I am an FX guy, but go to bonds, oil, gold and equities.

Since late April, the euro has chopped back and forth despite many stories of the dollar’s incipient demise and the euro’s upcoming rally as investors flock to European equity markets.  Maybe not.

Treasury yields have also been largely range bound, and if anything, look like they are heading lower despite fears being flamed regarding massive amounts of issuance having trouble finding buyers as foreigners pull out of the market.  Maybe not.

Crude has been the choppiest, and of course we did have the bombing of Iran’s nuclear facilities which inspired some fears of the beginning of a new Middle East war.  But Russia keeps pumping, OPEC put 2.2 million barrels per day of production back into the market and it appears, that for now, the market has found a balance.  I still see oil sliding over time, but for now, the range is king.

The barbarous relic has just started to pick up and broke above the $3400 range cap just two days ago but has not yet shown signs of a major breakout.  However, if the Fed cuts, especially if they go 50bps for some reason, I would look for this to change and gold (and all precious metals) to rally sharply as inflation re-enters the conversation.

However, if we look at the US equity market, the picture is very different.  The only other market moving like this is USDTRY as the Turkish Lira steadily depreciates amid massive monetary expansion there with inflation rising sharply.  In fact, this is what many foresee for the dollar going forward, but even if the Fed cuts, it seems a bit of an exaggeration.

At this point I should note that there is one currency that is outperforming the dollar right now, the Chinese renminbi.  It appears that as trade negotiations are ongoing, the Chinese (and the Koreans amongst others) have gotten the message that they need to adjust their currency’s value if an agreement is going to be reached.  

To conclude, ranges remain the situation in most markets other than equities which continue to rally based on hopes and prayers that central bank spigots are never turned off.  With Labor Day on Monday, perhaps we will begin to see more real activity reenter the market as traders and investors come back from summer vacation.  But we will need a real catalyst to break those ranges, whether that is a shocking NFP number, a reescalation of Middle East conflict or something else (China laying siege to Taiwan?).  While I don’t know what that catalyst will be, history tells us something will come along, that’s for sure.

As we look to the NY opening, we do get more important data as follows: Personal Income (exp 0.4%); Personal Spending (0.5%); PCE (0.2%, 2.6% Y/Y); Core PCE (0.3%, 2.9% Y/Y); Goods Trade Balance (-$89.5B); Chicago PMI (46.0); and Michigan Sentiment (58.6).  There are no Fed speakers on the docket, but you can be sure that the Lisa Cook story will remain front and center, especially as I read that the judge initially selected to oversee the case was Ms Cook’s sorority sister, potentially a disqualifying factor that would cause her recusal and a new appointment. In fact, I suspect that story will have more traction than whatever the data says today.

As to the dollar, it is hard to get excited at this point.  If PCE data is softer than forecast, though, I would look for the dollar to sell off and the probability of that Fed funds rate cut to rise from its current 85%.

Good luck and have a good holiday weekend

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Widely Decried

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While tariffs are widely decried
By analysts, they are worldwide
But Trump’s latest scheme
To some, seems extreme
As license fees are codified
 
So, tech names, who’ve, taxes, deflected
Are now likely to be subjected
To payment of fees
To sell overseas
And revenues will be collected

 

One thing you can never say about President Trump is that he lacks innovative ideas.  Consider one of the biggest complaints over the past decades regarding US corporations; the fact that the tech companies (and drug companies) have been so effective at avoiding paying taxes based on the way they have gamed utilized the tax code and international treaties.  And this was not a partisan complaint as both sides of the aisle were constantly frustrated by large companies’ ability to not pay their “fair share” as it is often described.

It appears that President Trump has come up with a solution for this, charging a licensing fee for companies to sell overseas.  The big news over the weekend was that Nvidia and AMD are both going to pay a licensing fee of 15% of REVENUE on sales of chips to China.  In the case of Nvidia, that is anticipated to be some $2.5 billion with somewhat smaller numbers for AMD.  This is an excellent description of the process by @Kobeissiletter on X. 

I have often expressed the view that corporate taxation, if we are going to have it, ought not be on profits but on revenue.  Corporations are expert at reducing taxable income, maintaining a staff of lawyers and accountants to do just that.  But gaming top line revenues is much harder.  This gambit by President Trump is moving things in that direction.  And remarkably, given these license fees are for exports, it ought to be outside the consumer price chain in the US completely.

There is an article in the WSJ this morning titled, “The US Marches Toward State Capitalism With American Characteristics,” which outlines, and mildly complains, about the changes in the way the US government is dealing with the private sector under President Trump.  It discusses the purchase of 15% of MP Materials, the only US based miner/processor of rare earth minerals, and it discusses these license fees all under the guise of implying this is a bad direction.  And I completely understand that idea as governments tend to be terrible stewards of capital.  However, 25 years of Chinese unfettered access to Western markets while they have skirted the rules codified by the WTO have resulted in some significant national security challenges that can no longer be ignored.  Full marks to President Trump for creative methods to address these challenges, despite the wailing and teeth gnashing of economists.

But other than that story, as well as the ongoing back and forth regarding potential peace talks in the Russia-Ukraine war, not all that much has happened overnight.  For a change, markets are behaving like it is the summer doldrums, so perhaps we should be thankful for the respite.  As such, let’s take a look at how things have done and what we can anticipate this week with CPI and Retail Sales set to be released.

Friday’s US equity rally combined with the news that Nvidia and AMD will be able to export some chips to China saw modest gains there (+0.4%) and in Hong Kong (+0.2%) even though another major property company in China, China South City Holdings Ltd., is being forced into liquidation.  The property situation in China will continue to weigh on the economy there and given property investment was long seen as most Chinese families’ retirement nest egg, will undermine consumption for years.  Elsewhere in the region, there were more gainers (India, Indonesia, Malaysia, Australia, New Zealand, Taiwan) than laggards (Thailand, Philippines) with Japan closed for Mountain Day, a relatively new holiday, and other markets little changed.  

In Europe, though, screens are modestly red with losses on the order of -0.35% across the CAC, DAX and IBEX amid general uncertainties regarding the future economic direction and a lack of earnings positives.  At this hour (7:00), US futures are slightly higher, by 0.2%.

In the bond market, after last week’s auctions have been absorbed, Treasury yields have edged lower this morning, down -2bps, despite Fed funds futures’ probability of that September rate cut slipping to 88% from Friday’s 93%.  In fact, Fed Governor Bowman reiterated over the weekend that she would be voting for a cut at each of the three meetings left this year.  European sovereigns though are little changed, with some having seen yields edge higher by 1bp, as this appears to be a truly lackluster summer day.

Commodities are the only market that is seeing any movement of note, and it is not oil (+0.2%) which has been trading either side of unchanged since last night.  Rather, gold (-1.2%) is suffering this morning as you can see on the chart below as the promise of a potential peace in Ukraine seems to be removing some need for its haven status.  Of course, the thing to really note about the gold market is just how choppy trading has been as conflicting narratives continue to impinge on price movement.

Source: tradingeconomics.com

This decline has pulled down both silver (-1.4%) and copper (-0.95%) with all this happening despite virtually no movement in the FX markets.

Turning to the dollar, one is hard pressed to find any substantial movement in either G10 or EMG currencies. The true outlier this morning is NOK (+0.4%) but otherwise, +/- 0.1% or less is the best description of the price action.  This is what a summer market really looks like!

On the data front, we do get some important information as follows:

TuesdayRBA Rate Decision3.60% (current 3.85%)
 CPI0.2% (2.8% Y/Y)
 Ex food & energy0.3% (3.0% Y/Y)
 Monthly Budget Statement-$140B
ThursdayPPI0.2% (2.5% Y/Y)
 Ex food & energy0.2% (2.9% Y/Y)
 Initial Claims226K
 Continuing Claims1960K
FridayRetail Sales0.5%
 Ex Autos0.3%
 IP0.0%
 Capacity Utilization77.6%
 Michigan Sentiment62.0

Source: tradingeconomics.com

With all the hoopla about the firing of Ms McEnterfar at BLS, you can be sure that there will be lots of discussion on the CPI data regardless of the outcome.  However, as the Inflation Guy pointed out last week, imputing the bottom 30% of items in the basket, which represent something on the order of 2.5% of the total price impact, is likely to have no impact whatsoever.  We also hear from a bunch of Fed speakers, four to be exact, although Richmond Fed President Barkin will regale us twice.  Now that there are more calls for a September cut, it will be interesting to see who remains patient and who is ready to move.

And that’s all there is today.  It is hard to get excited about too much movement given the lack of obvious catalysts.  Of course, one never knows what will emanate from the White House but look for a quiet one, I think.

Good luck

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Full Schmooze

Posted on by

The temperature’s starting to fall
With Israel and Iran’s brawl
On hold for the moment
Though either could foment
Resumption, and break protocol
 
But that truce combined with the news
That Trump’s team are pushing full schmooze
On trade, has the markets
Increasing their bull bets
While skeptics are singing the blues

 

President Trump is having a pretty remarkable week.  The successful attack and destruction of Iran’s nuclear enrichment facilities combined with the news that the US and China have agreed the details of the trade framework that was outlined in Geneva and followed up in London has market participants feeling a lot better about the world this morning.  Add to that the news that a particularly onerous part of the BBB, Section 899, which was nicknamed the Revenge clause for its tax targeting anybody from nations that imposed excess taxes on US companies internationally, being stripped after negotiations with European leaders, and the fact that NATO has gone all-in on increasing their spending, and Mr Trump must be feeling pretty good this morning.  Certainly, most markets are feeling that, except those that thrive on chaos and fear, like precious metals.

In fact, this morning it seems that the entire discussion is a rehash of what has occurred all week with very little new added to the mix.  Data from the US yesterday was mixed, with Claims a bit softer and Durable Goods quite strong while the third look at Q1 GDP was revised lower on more trade data showing imports were greater than first measured while Consumer Spending and Final Sales were a bit weaker than expected.  Net, there was not enough to push a view of either substantial strength or weakness in the economy, so investors and their algorithms continue to buy shares.

The other story that continues to get airplay is the pressure on Chairman Powell and questions about whether at the July meeting Fed governors are going to vote against the Chairman.  Apparently, it has been 32 years since that has occurred (and you thought they were actual votes!) and the punditry is ascribing the dissent to politics, not economics.  It should, of course, be no surprise that there is a political angle as there is a political angle to every story these days, but the press is particularly keen to point out that the two most vocal Fed governors discussing rate cuts were appointed by Trump.

However, despite all the talk, the futures market does not appear to have adjusted its opinion all that much as evidenced by the CME chart of probabilities below.  In fact, over the past month, the probability of a cut has declined slightly.  Rather, I would contend that on a slow news Friday, the punditry is looking for a story to get clicks.

The last story of note is about the dollar and its ongoing weakness.  This is an extension of the Fed story as there is alleged concern that if the Fed is perceived to lose some of its independence, that will be a negative for the dollar in its own right, as well as the fact that the loss of independence would be confirmed by a rate cut when one is not necessary (sort of like last autumn prior to the election.  Interestingly, I don’t recall much discussion about the Fed’s loss of independence then.)

But, in fairness, the dollar has continued to decline with the euro trading to its highest level, above 1.17, in nearly four years.  It is hard to look at the story in Europe and think, damn, what a place to invest with high energy costs and massive regulatory impediments, so it is reasonable to accept that what had been a very long dollar position is getting unwound.  But look at the next two charts (source: tradingeconomics.com) of the euro, showing price action for one year and for five years, and more importantly notice the trend lines that the system has drawn.  There is no doubt the dollar is under pressure right now, but I am not in the camp that believes this is the beginning of the end of the dollar’s global status.  Remember, too, that President Trump would like to see the dollar soften to help the export competitiveness of the US, and so I would not expect to hear anything from the Treasury on the matter.

However, while these medium and long-term trends are clear, the overnight session was far less exciting with the largest move in any major currency the ZAR (+0.5%) which is despite the decline in gold and platinum prices.  Otherwise, today’s movement is basically +/- 0.2% across both G10 and EMG currencies.

Speaking of the metals, though, they are taking it on the chin this morning as we approach month end and futures roll action.  Gold (-1.3%), silver (-1.7%), copper (-0.9%) and platinum (-4.4%) are all under pressure, although all remain significantly higher YTD.  However, to the extent that they represent a haven and the fact that havens seem a little less necessary this morning seems to be the narrative driver adding to the month end positioning.  Meanwhile, oil (+0.5%) continues to bounce ever so slowly off the lows seen immediately in the wake of the bombing attacks.

Circling back to equity markets, after a nice day in the US yesterday, with gains across the board approaching 1% and the S&P 500 pushing to within points of a new all-time high, Japan (+1.4%) followed suit as did much of the region (India, Taiwan, New Zealand, Indonesia) but China (-0.6%) and Hong Kong (-0.2%) didn’t play along.  Europe, though, is having a positive session with gains ranging from 0.65% (DAX) to 1.3% (CAC) and everything in between.  It seems that the NATO spending news continues to support European arms manufacturers and the cooling of tensions in the Middle East has lessened energy concerns.  US futures are also bright this morning, up about 0.5% at this hour (7:40).

Finally, bond markets are selling off slightly after a further rally yesterday and yields since the close have risen basically 3bps in both Treasury and European sovereign markets.  There is still no indication that any government is going to stop spending, rather more increases are on the horizon, but there is also no indication that central banks are going to stop supporting this action.  No central bank is going to allow their nation’s bond market to become unglued, regardless of the theories of what they can do and what they control.  Ultimately, they control the entire yield curve.

On the data front, this morning brings Personal Income (exp 0.3%), Personal Spending (0.1%) the PCE data (Core 0.1%, 2.6% Y/Y; Headline 0.1%, 2.3% Y/Y) and at 10:00 Michigan Consumer Sentiment (60.5) and Inflation Expectations (1yr 5.1%, 5yr 4.1%).  There are several more Fed speakers, including Governor Cook, a Biden appointee who is a very clear dove, but has not yet agreed that rate cuts make sense.  It will be interesting to see what she has to say.

It is a summer Friday toward the end of the month.  Unless the data is dramatically different than forecast, I expect that the dollar will continue to slide slowly for now, although I do expect the metals complex to find a bottom and turn.  As to equities, apparently there is no reason not to buy them!

Good luck and good weekend

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