Tag Archives: #higherdollar

Death For the Trend

Posted on by 
The five-year sale went terrib-ly
So, doomsters are all filled with glee
There was a long tail
Though not quite a fail
They claim, now, the future they see

In fact, they claim, this is the end
That bonds will have nary a friend
And stocks will get smoked
As strong growth evoked
The specter of death for the trend

Well, everybody who has been crowing about the end of the US bond market is feeling their oats today, that’s for sure after yesterday’s terrible 5-year Treasury auction that wound up with a 3.1 basis point tail, extremely long for such a short duration instrument.  (The tail is the difference between the actual outcome and the when-issued trading that takes place in the market prior to the auction.  A long tail implies that demand was weaker than expected.)  The upshot is that Treasuries sold off hard, with yields climbing upwards of 15bps in the 2-year and 11bps in the 10-year as you can see in the below chart.

Source: tradingeconomics.com

The starting point was the release of the much better than expected Flash PMI data where both Manufacturing and Services beat handily with 58.0 handles, but the price pressures indicated got the inflation story back as the key narrative.  The yield peak came at 1:00 when the auction results were announced although they slipped a few bps before the close.  And this morning, the 10-year yield is another 3bps higher along with European sovereign yields where we see France (+5bps) having the worst day but the rest of the continent, and the UK all showing yields climb 2bp to 3bps.  Neither was Japan immune to this price action with 10yr JGBs jumping 9bps overnight.  

It’s funny, for a very long time, the idea that good news was bad would have been ridiculous as a concept.  Strong growth would indicate increased profit opportunities and higher equity values.  But it started with Greenspan, when he first cut rates to, and left them at, 1.0%, for far too long and equity markets decided they liked low interest rates more than company fundamentals.  The GFC and ZIRP increased the intensity of that reaction function, and we are still feeling that pain as higher rates, especially caused by strong economic growth, are now seen as a negative for stocks.  The world is upside down.  It is, however, the world in which we live.

On top of the markets’ hard beating
Both Xi and Trump soon will be meeting
The talks are on trade
While AI is weighed
It’s doubtful, though, deals are completing

In China the ‘conomy’s split
Twixt exports of plenty of sh*t
And people at home
Who live in the gloam
And can’t change their lives e’en one bit

While here in the US the sitch
Is talk of the poor and the rich
Election day’s nearing
And though some are cheering
For Trump it could be a real bitch

While the bond market has taken up most of the space of the financial market analysis, the meeting between Presidents Trump and Xi is clearly of great importance.  Both nations have significant issues they are trying to address although in many ways they are mirror images of each other.  On a macroeconomic scale, given the Chinese mercantilist model and the excess investment into productive capacity there, they build an enormous amount of stuff for export and starve the local economy of consumption.  The result is extremely low inflation, if not deflation, while indicators like Retail Sales turn negative.  Recall, consumption represents just over 50% of the Chinese economy compared to about 70% in the US.

For instance, the below chart shows a comparison between US (gray bars) and Chinese (blue bars) retail sales over the past 3 years.  you can see just how soft Chinese activity has been domestically compared to the US.

Source: tradingeconomics.com

I have long maintained that the biggest weakness China has is that they rely on the US as the buyer of last resort and President Trump (and lately followed by many other nations) has been pushing back by imposing tariffs on much of what China sells, thus reducing those sales.  If China lacks export growth, given the domestic weakness, that becomes a huge problem for Xi.

Meanwhile, the US spends far too much, at least the government does, and while there has been a dramatic increase in investment into the US, that has brought along significant demand for credit, hence higher yields, and demand for things that are scarce, like electricity, where power increases cannot keep up with industrial demand.  The upshot here is that inflationary pressures are rising even without the impact of the large rise in oil prices since March and the Iran war began.  

Of course, Xi’s greatest advantage is he doesn’t have to face the electorate, as there is none over there, while in six weeks, Election Day may prove monumental to President Trump’s plans.  We need to watch more than markets right now as both the wars in Ukraine and Iran along with the politics are going to have major impacts for a while longer, I believe.

Turning to markets beyond the bonds, yesterday saw weakness in the US, although not quite as bad as might have been feared with losses of about -1.0%.  To keep that in perspective, even with this morning’s pre-market futures lower by -0.5%, the S&P 500 is less than 2% from its all-time high set last month as you can see in the chart below.  It’s not Armageddon quite yet!

Source: tradingeconomics.com

But the follow on in Asia was filled with red numbers as although the Nikkei (+0.8%) managed a gain, virtually every other index in the time zone fell including: China (-1.7%), HK (-0.3%), India (-1.7%), Australia (-0.7%) and all of the smaller exchanges as well.  South Korea was on holiday, so no trading there.  Meanwhile, in Europe, the picture is not so dour, although most markets there slid yesterday as well.  This morning, the DAX (-0.5%) and CAC (-0.4%) are the laggards while the other major markets are flat to slightly higher, 0.1%.  And as mentioned above, US futures are under pressure again this morning.

In the commodity markets, oil (+1.0%) is continuing its rebound off the lows from earlier this week as President Trump’s threats of annihilation of Iran has some on edge, although I have read that talks continue to find a way to end the conflict.  But precious metals have no friends right now (gold -0.6%, silver -1.25%) as between higher yields and a rising dollar, fear over debasement has given way to greed for the last basis point of yield.  Copper (+0.4%) though is starting to trade on its own terms as the strength in the US economy continues to underpin demand for the red metal.  In fact, to highlight that economic strength, a look at the Atlanta Fed’s GDPNow estimate for Q3 shows that the data supports a positive view.  It currently sits at 5.1%, far above analyst estimates as per the below chart.

Finally, turning to the dollar, as I mentioned earlier this week, a move to the top of the trading range was quite possible and we are on the way to getting there as you can see in the below chart.  The peak is 101.80, so still 0.5% away from where we are, but the recent trend is strong.

Source: tradingeconomics.com

This strength is broad based and entirely on the back of the US rate structure and growth story as markets price in a greater likelihood of a rate hike next month, now 70%, and an additional hike next year as you can see in the below cmegroup.com table.

While the movement today has been pretty uniform across both G10 and EMG currencies, we do need to start to watch USDJPY again as it is heading back to the 160 level.  Now, if the dollar is strong against all currencies, there is far less reason for intervention in the yen, but that doesn’t mean it won’t happen.

On the data front, this morning brings the weekly Initial (exp 201K) and Continuing (1750K) Claims data as well as New Home Sales (620K).  Yesterday’s data also included oil inventories, which remain more than adequate.  Something else to remember is that the SPR releases were all executed via swaps, so starting November 1, the SPR is going to get refilled over the ensuing several years and my guess is we will not hear a word about that in the future.  The diesel export ban is a terrible idea, and hopefully cooler heads will prevail.  Diesel prices are high because Ukraine continues to destroy Russian refining capacity, not because the US exports the excess over what we use.

It’s an odd thing this morning.  I have seen many stories about the imminent collapse of the stock market now that bonds are under pressure and maybe that is exactly what will happen.  But I am not getting the same level of fear from the current situation so while a correction is completely viable, I think we need a much bigger disruption to force a major downturn in risk assets.

Good luck

Adf

No Red Line

Posted on by 
Said Trump at the UN, ‘I’m great
And all of you should really fete
The things I have done
So, we’re number one
And you all are now second rate’

Meanwhile, it’s the market for crude
That shows if we’re OK or screwed
Right now, things seem fine
But there’s no red line
Here’s hoping that peace is pursued

I was reading a new novel, prepublication, and I realized what it is I like about poetry so much, especially something like a limerick or haiku.  It is the economy of words used to tell a story.  Each of those forms of poetry have strict syllabic counts, so if an author is to get his point across, he often must work hard to fit the ideas into the correct syllable count as well as rhyme and meter.  Of course, the greater irony is I recognize that in the rest of my morning discussion, I talk too much and often add too much flourish, but that is the way I write.  Sorry.

Anyway, getting on to the stories of the day, arguably, President Trump’s speech at the UN was the most noteworthy thing, although it didn’t really move markets.  Once again, he offered a choice, negotiate an end to the Iran conflict or obliterate them.  In the end, I suspect it will come down to negotiations, but I won’t rule out a step up in destruction there.  Oil markets, though, are clearly not fretting about that this morning as WTI (-0.7%) continues its recent decline.  Of course, the problem is the price of products, specifically diesel, which is getting all the press as it hits record highs despite the decline in crude prices.  Apparently, Ukraine’s attacks on Russia’s refineries are being felt most acutely in diesel.  The below chart shows how crude (blue line) has been separating from products over the past week, especially.

Source: tradingeconomics.com

But in truth, away from that story, and the recent backdrop of the hysteria about AI’s ability to kill us all, there is not much happening.  Equity markets were mixed yesterday, bond markets barely moved and the dollar continues to edge higher.  Discussion about the Fed and what they are going to do at the next several meetings is back page news with the probability of a move at the October meeting right at 50/50 so not driving the discussion at all.  There is an increasing focus on the midterm elections, but they are still about 6 weeks away, so not quite imminent.  Even X is relatively quiet these days with a distinct lack of anxiety about any specific thing.

So, until there is more excitement somewhere, I’ll just recap markets.  After yesterday’s mixed US session, mixed also describes Asia well.  Japan was closed again last night, third night running as they had to fit in Old Age Day alongside Autumnal Equinox Day, but while China (-0.6%) and HK (-1.0%) both slipped, Korea (+0.9%) and India (+0.5%) rallied along with Taiwan (+0.75%) and Indonesia (+1.6%).  It seems yesterday’s strong US tech performance carried over into Korea and Taiwan and Indonesia responded to the central bank leaving rates on hold in a bit of a surprise.  The narrative regarding HK/China is anxiousness ahead of tomorrow’s Trump-Xi meeting for whatever that is worth, which in my opinion is not much, as sometimes markets just go lower.

Turning to Europe, equity markets there are under modest pressure (Germany -0.5%, Spain -0.3%, France -0.2%) despite what I would have called better than expected Flash PMI data released this morning.  Or perhaps that is the driver as there might be a growing concern the ECB will feel the need to hike further.  That was the view of Joachim Nagel from the Bundesbank, as he indicated the ECB may need to move to “mild restrictive territory” from the current neutral stance.  However, the probability of a rate hike at the next meeting is also 50/50 there.  As to US futures, at this hour (7:10) they are basically unchanged.

In the bond market, it appears the entire market is following Japan’s lead and doing absolutely nothing with yields within 1bp of yesterday’s levels in Treasuries and across all of Europe.  Nothing to see here.

Metals markets appear to be responding to the dollar’s ongoing strength, which I will discuss momentarily.  But this morning gold (-1.1%), silver (-2.7%) and copper (-0.3%) are all under pressure, although the copper shortage story seems to still have some legs.

Finally, you can’t keep a good dollar down.  I have been using the DXY as proxy and as you can see from the below chart, for the past two weeks this has basically been a one way trade, with the greenback rising more than 2%.

Source: tradingeconomics.com

The narrative appears to be that the market is pricing in more FOMC tightening than ECB tightening, although in the short-term, both are priced at a coin toss to hike next month.  The thing that still confuses me is the discrepancy between the futures market, where traders are pricing three more hikes by next June as per the below table from cmegroup.com

And the Fed’s dot plot, which, as you can see below, prices in one more hike and then a steady decline thereafter.

One of these two is wrong, but as of now, we have no way of knowing which one.  I will say this, the longer that there is pressure on the products markets, the more likely we see persistent inflationary pressures as diesel costs do feed into virtually everything.  If that is the future, then I lean toward the CME.  Perhaps, despite President Trump’s well known desire for lower interest rates (he is a real estate guy after all, and they always think rates should be lower), the fact that the US economy continues to show resilience and strength may well lead to tighter policy.  Certainly, that is the Keynesian view.

But back to the FX markets where the dollar is firmer across the board, and this morning by some pretty substantial amounts.  In the G10, AUD (-0.7%) and NZD (-0.65%) are the laggards but the pound (-0.5%) and euro (-0.4%) are also under pressure.  In the EMG bloc, KRW (-0.8%), MXN (-0.9%) and PLN (-0.9%) show just how widespread dollar strength is today.   Is this the beginning of a serious move higher in the dollar?  While you can never rule anything out, I suspect that is not the case.  But can we get back to the top of the DXY range we saw during the summer, so another 1.5%?  Sure, easy peasy and nothing fundamental has to change for that to happen.

On the data front, Flash PMI’s are on the calendar (exp Mfg 53.6, Services 56.0) as well as the EIA Oil inventories where a small draw is expected.  South Africa’s SARB is expected to raise its base rate to 7.25% this morning and we hear from Fed Governor Barr later this morning as well.  It is interesting to me that despite the talk about Fed funds, I rarely hear or see much about what Fed speakers have to say.  Perhaps the narratives are already written and if they don’t match up, they are ignored!

I still wouldn’t bet against the dollar here.

Good luck

Adf

Doom Was Misspent

Posted on by 
The 10-year yield hit Five Percent
And somehow, despite this event
The nation’s still here
And growth’s still in gear
Perhaps all that doom was misspent

It’s not to say things are all great
And many, til Wednesday will wait
To see if the Fed
And chief talking head, 
Chair Warsh, will then bless a new rate

I’m going to let pictures do much of the talking to start this morning as we are seeing significant moves across the board in various classes.  To start with government bonds, here is this morning’s view from a Bloomberg screenshot.

As you can see, yields have jumped with most nations seeing them climb around 5bps or more.  (Canada, Brazil and Mexico are not yet open, hence the lack of movement). Prior to touching, and now breaking the 5.0% level, the punditry had spilled a great deal of ink regarding how devastating this was going to be for both risk assets and for the US economy.  On the first count, if we look at equity markets around the world this morning, they were correct, selling is the name of the game as you can see in the below screenshot from tradingeconomics.com

There are not many happy equity investors this morning, although energy shares are holding their own better than most other things.  (Again, Canada and Mexico are closed.)  But as to the second point, it remains to be seen how devastating 5.0% yields on the 10-year Treasury are going to be.  And of course, we still have the FOMC meeting starting today with the policy announcement and press conference coming out tomorrow afternoon. 

But here’s the thing to remember about the equity markets, even the NASDAQ, which has had the most discussion as the tech sector has been rerating lower, is only lower by 6.3% from its all-time high seen in early June.  While nobody ever likes to see their portfolios decline in value, prices remain dramatically higher over the past several years and all three major indices are still higher by 10% or more so far in 2026.  It is hard to call the below chart of the NASDAQ bearish!

Source: tradingeconomics.com

Which, I guess, takes us to the Fed and the ongoing discussion about what they will do.  Depending on where you look, the probability priced into markets for the Fed to hike rates tomorrow is 92% (CME futures) or 100% (rateprobability.com).  Looking at the latter’s most recent chart of the six major G10 central banks, market expectations are for interest rates to rise over the next year by at least 100bps across the board.  (Australia just hiked rates last week so that was their first 25bps).

Now, I often make the case that market pricing ought to be the key feature to watch when considering a situation, but I have to admit, when it comes to the Fed funds rate, there is a bit more to the story, namely the politics involved.  

Let me start by repeating my view that I believe a rate hike would be a mistake.  While headline inflation is running above target, it remains largely an energy story, and we all understand that is outside the Fed’s control.  But if you dig deeper into the inflation statistics, things are not great, but not calamitous either.  It is ironic, if Congress were truly worried about inflation, they would cut spending to balance the budget at which point I am highly confident inflation would no longer be a concern.  Martin Armstrong (@StrongEconomics) made an excellent point this morning on X worth repeating here relative to the FOMC meeting.

As to Chairman Warsh, I think he still must be frustrated that the discussion revolves around what the FOMC is going to do but I presume he will take the information of higher yields in the back end into account regarding this decision.  Remember, too, it is not just his decision, 7 voters need to vote for a hike, and while we know there are three that believe it is proper, are there four more?  I guess we will find out tomorrow afternoon.

It’s interesting, even though oil and energy prices remain the key driver of market activity, they get remarkably little press compared to the stock and bond markets.  Sure, there are still stories about how the real energy crisis is about to come, and market pricing is certainly indicating more concern now than several months ago, but the price of Nvidia or Meta or the 10-year is the top story these days.  At any rate, oil (+1.25%) is higher this morning but has stalled just above $100/bbl for now.  Interestingly, NatGas (-0.6%) is softer and the same is true across Europe and the UK.  I find that quite interesting, especially in the latter places, as there is no indication that more supply is forthcoming.  And, not surprisingly, gold (-0.4%) and silver (-0.1%) are slightly softer with the ongoing rally in oil prices.

Finally, the dollar, which had a very strong session yesterday, is continuing to rally this morning.  it seems that even though interest rates are rising around the world, those higher rates only help the dollar.  Perhaps this is one reason that despite all the hate the dollar absorbs from a certain part of the financial community, it remains the haven of choice.  Open capital markets are worth an awful lot to international investors, and none are more open than those in the US.

Perhaps this is a good time to discuss China, a land of closed capital markets,  and what is happening there.  Last night they released some of their key economic statistics and, the idea that domestic demand is being supported is a joke.  

Source: tradingeconomics.com

It is very difficult to look at these numbers and think things are going gangbusters there.  For instance, the housing market, which has been a key destination for private savings has been declining for five years and has been negative for more than four.

Source: tradingeconomics.com

But more tellingly to me was the new regulations that were imposed starting today regarding the ability of people in China to simply leave the country on holiday.  The below tweet from journalist Melissa Chen from The Spectator is a telling sign that there is growing stress in that nation.

Again, my point is that as many problems as exist in the US, and we have plenty, it is not as though other nations are killing it.  Rather, they, too, are being killed.  Now, has this impacted the CNY?  Not at all.  It is a completely controlled currency and the PBOC is slowly driving it higher although it remains massively undervalued.  As to the rest of the FX market, the dollar is stronger by somewhere between 0.1% and 0.3% nearly across the board with only KRW (-0.9%) outside that window, but remember, the won has been flying over the past two months, so a little pullback is no surprise.

On the data front, this morning brings Empire State Manufacturing (exp 14.75) and that’s it.  It is also worth mentioning that the German ZEW Sentiment Index was released at a weaker than expected 34.7, just showing that there is a bit of despair all around the world.

I have a feeling today is going to be relatively quiet as all eyes look to the Marriner Eccles Building and Chairman Warsh tomorrow afternoon.

Good luck

Adf

A Bad Taste

Posted on by 
For weeks, things appeared to get better
As yields slipped and helped every debtor
But we’ve seen some changes
With yields breaking ranges
And oil back to the pacesetter

So, stocks are not really embraced
While bonds have left all a bad taste
The dollar’s moved higher
While gold’s back to dire
With analysts worldwide disgraced

Investors are not as happy this morning as they had been for the past several weeks as the situation in Iran and the Middle East appears to be deteriorating again.  The US continues to attack Iranian missile launchers and fortifications on a daily basis while Iran continues to fire missiles at targets throughout the Gulf region.  As well, the Houthis are back at it in the Red Sea restricting oil flows through there as well.  Arguably the chart below of oil (+4.0%) is the most descriptive view of what is driving everything.

Source: tradingeconomics.com

Crude is higher by 29% in the past month and back above $90/bbl.  This makes things tough on everybody but the oil companies.  Does this mean we are running out of oil?  I don’t think that is the case.  Rather, the short-term impediments to shipping it are driving the price.  But the price is rising nonetheless and that is impacting everything else.  If you recall when things kicked off in this war back in March, the oil price was the primary catalyst for movement in every market. As things seemed to settle down and it appeared there was an opportunity for a resolution, focus turned back to things like earnings for equities and interest rate differentials for currencies with oil in the background.  But it appears we are back to, as oil goes, so goes every other market.

For instance, here is a chart of oil and 10-year Treasury yields over the past month.  As you can see, the trajectory, especially over the past several sessions, is quite similar.

Source: tradingeconomics.com

But if we look at 10-year yields across Europe, we can see that they are all climbing in sync as well.

German yields have reached their highest level in 15 years according to Bloomberg.

The entire moderation story is falling apart.  So, now instead of conversations discussing the relative merits of AI and whether it will be a boon for mankind or end it, we are discussing the probability that the world will end soon.  I guess it’s no surprise that risk is under pressure.  Of course, the latter conversation doesn’t seem that coherent to me as if there is concern over the end of the world, I would have thought gold would have a better bid!

At any rate, oil is the main story and the driver of every market.  It underpins the question of whether the ECB will hike rates today (they won’t) or whether the FOMC will do so next week (also, they won’t) but the probabilities for those moves have risen.  It has also detracted from the earnings stories, or perhaps exacerbated the negatives, or perceived negatives.

For instance, Alphabet reported last night and Q2 revenues beat estimates coming in at $119.8 billion.  But all the talk is of free cash flow, which in this Bloomberg chart shows how much they are spending on the AI buildout.

Here’s my question, is it bad that Alphabet is spending its money to improve its future?  If it recognizes the criticality of AI to the future of its own existence, it seems like a reasonable move.  Of course, the naysayers claim that spending all that cash is a waste.  I don’t know the answer, and I suspect nobody does yet, but companies spending their cash flow on improving their business seems to be the whole idea behind having companies in the first place.  

It begs the question, on what did investors base the value of Alphabet before AI?  If it was seen as only a cash cow, it certainly traded at a very high multiple for a boring business.  But today, it will be tarred with the oil brush along with all stocks.

Ok, I have gone far afield here, let’s get back to markets overnight.  Yesterday’s lackluster US session was followed by strength throughout most of Asia.  Tokyo (+0.5%), China (+0.25%), HK (+1.3%) and Korea (+4.4%) all had solid sessions with Korea continuing to define what volatility means in equity markets.  Look at the expansion in the daily ranges in this barchart.com chart of the KOSPI over the past month.  It’s remarkable!

European bourses, though, are having a much rougher go of things this morning as Brent crude approaches $100/bbl.  France (-1.1%), Italy (-1.9%), Spain (-0.6%) and Germany (-0.6%) are under real pressure this morning as earnings numbers there have been lackluster and the broader macro picture deteriorates all the while.  As to US futures, right now (7:40), they are pointing lower led by the NASDAQ (-1.2%) although it has not yet breached that critical support level as per the below chart.

Source: tradingeconomics.com

We’ve already discussed bond markets, with yields higher this morning by between 2bps and 3bps across Treasuries and all European sovereign markets.  Turning to the metals, while we had a couple of days where they rallied alongside oil, this morning they have reversed course with gold (-1.3%), silver (-2.6%) and copper (-0.7%) all under pressure.  It seems the interest rate story is today’s discussion as higher yields are the topic du jour.

Finally, the dollar is stronger across the board this morning, although most of this strength just materialized over the past few hours with the Asia session broadly unchanged.  But no matter how you slice it, the dollar is firmer vs. all its G10 counterparts by about 0.25% and almost all of its EMG counterparts by a similar amount.  The exceptions this morning are BRL (+0.25%) and KRW (+0.3%).  Regarding Brazil, you must remember they are an oil exporter, so benefit from high oil prices and have amongst the highest real interest rates around, so draw capital for that as well in the carry trade.  The real has appreciated about 8.5% during the past year, so this is nothing new.  As to KRW, the government’s efforts at internationalization continue to be paying off and a look at the chart below shows that this trend is quite strong right now.

Source: tradingeconomics.com

There was an interesting article in Bloomberg this morning explaining how the dollar’s weakness vs. LATAM currencies has begun to bite for local companies but I find it quite interesting when it comes to discussions about the dollar; some find it too strong and are looking for it to tumble while others complain it is too weak!  Seems nobody is ever happy here!

On the data front we see Chicago Fed National Activity (exp 0.14) as well as Initial (212K) and Continuing (1809K) Claims.  Of course, we have the ECB announcement shortly, although no change is expected.  Something getting very little press is the fact that Crude Oil stocks rose in the US last week, but I guess that doesn’t suit the narrative!

This market is entirely focused on oil, and as it moves, so will everything else.  If oil keeps climbing, look for stocks and gold to fall while yields and the dollar rise.  If oil reverses, so with those moves.

Good luck

Adf

40-Year Nadir

Posted on by 
Each day, one more pip
As the yen slides to the next
40-year nadir

The current blame is
The Fed’s recent hawkishness
What if that’s all wrong?

I feel like I must apologize by focusing on the yen again this morning, but quite frankly, there is not that much else to discuss.  And in fairness, it is not as though the yen’s move overnight, edging lower by a further -0.1%, is all that much to write about.  However, the yen has been getting a great deal of press as there is a cadre of analysts who are ‘certain’ that the MOF/BOJ is going to step in and intervene again soon, although I have seen more discussion of how 170 is in the cards as well.

Now, as it is the beginning of the second half of the year, I thought I might look at what I wrote at the beginning of the year regarding the yen to see how it’s going.  And while it is far too early to discern if I was prescient, things are looking pretty good right now.  Below, I have copied my yen discussion from back in January.  You decide if I’m on track.

A turn to the East where the Sun Also Rises
Will teach us that, really, there are no surprises
To date you’ve heard much ‘bout the rise in yen rates
With pundits opining the Carry Trades’ fates
This year, so they say, look for much stronger yen
As local investors buy yen bonds again
Thus, all the hedge funds who’ve been funding their trades
By borrowing yen, and they’ve done so in spades,
Will need to buy back all that Japanese Money
The outcome, for yen shorts, will not be so sunny
But what if this idea of yen heading home
Is wrong?  This implies quite a different syndrome

At this point there’s no sign the government there
Is ready, more spending and debt, to forswear
Instead, what seems likely is more of the same
More government spending in all but its name
So, debt will continue to rise without end
And up to One-Eighty the buck will ascend

So, with that in mind, let’s see what we learned overnight.  First, Japanese Tankan data was released and the economy, or at least the corporate sector, seems in fine fettle.  The below chart of the Large Manufacturer’s Index shows the strongest reading since 2017.

Source: tradingeconomics.com

Clearly, the corporate set is not unhappy with the yen’s movement.  Now, there was yet another Bloomberg articlediscussing comments from the current Mr Yen, Atsushi Mimura, and reflecting on the fact that the MOF is in regular contact with Secretary Bessent and the Treasury department and there is no obvious concern on then US’s part with the current level of the yen.  

However, the consensus view is that the yen’s recent decline has been driven by the change in attitude regarding the FOMC.  The idea is that while the market was anticipating Fed rate cuts back in January, the comments by Chairman Warsh (more of which we will hear later this morning from Sintra, Portugal) have turned things around dramatically and we are now pricing a one-third chance of a hike at the end of July, a certain hike in October and another 40% probability of a second hike in December as per the below CME table.

So, if we take this sentiment shift into account, we can look at the last month of trading in USDJPY, which basically encompasses two weeks before the FOMC meeting and two weeks since.

Source: tradingeconomics.com

And, if you do the math, it seems that the yen weakened 0.72% (from 159.45 => 160.60) in the first two weeks of June and 1.32% (160.60 => 162.72) since the FOMC meeting.  I completely agree that modest change in trajectory is the result of this newfound belief in Fed hawkishness.  Of course, you all know that I don’t believe that is what the Fed is going to do, and in fact, my 180 call at the beginning of the year had nothing to do with the Fed raising rates, it was all about deterioration of Japan’s fiscal account.  However, as we learned this morning from Europe, where inflation fell to 2.8% headline, 2.4% core, both much lower than last month and forecasts (good thing the ECB hiked into the energy price shock, right?) we can look forward to at least a few months of softening inflation in the US as well based simply on the ongoing decline in oil prices (-1.0% this morning) and continuing to trend lower as per the below chart.

Source: tradingeconomics.com

Softer US inflation numbers are going to undermine the call for rate hikes, and I expect to see those hikes priced out of the markets by the end of July.  That alone should help prevent the yen from collapsing in the short-term, although their long-term problems remain extant.

But one thing to keep in mind is that we are coming up to a holiday weekend in the US with market liquidity impaired.  It would not be surprising to see the MOF step in to markets Friday when liquidity is thin and they will get more bang for their buck.  But the yen is a basket case regardless of US rates.  Like I said, short-term, maybe a dip in USDJPY back toward 155 on the back of intervention, but longer-term, unless they change their fiscal policies, lower the yen will go.

Otherwise, there is not much new to discuss.  Equity markets finished the quarter with their best result in forever, with the NASDAQ rising ~30%.  Seems like it will be hard to repeat that again, and this morning, futures are slightly in the red, about -0.3% or so.  As to the rest of the world (do we really care?) last night saw Tokyo (+0.6%) rally along with India (+0.6%) and Taiwan (+1.9%) but the rest of the region slumped led by Korea (-2.0%) which had been the leader, with China (-0.4%) and HK (-0.6%) also falling and the rest of the regional bourses seeing more red than green.  In Europe, there is more negativity than not with only the DAX (+0.2%) edging higher after their PMI release (50.3) was slightly better than expected, although still weak.  However, the rest of Europe is softer this morning (Spain -0.7%, France -0.65%, UK -0.4%) amid unimpressive PMI results.

In the bond market, yesterday saw US yields pop nearly 10bps in what appeared to be a major futures led move.   Certainly, yesterday’s data releases didn’t indicate dramatic strength in the economy, just that things are still fine.  But things being what they are as the Treasury market drives global bond yields, we did see yields climb everywhere yesterday and have followed on in Europe this morning with sovereign yields higher by between 3bps and 5bps across the board.  JGB yields (+3bps) rose overnight as well, although Treasury yields are little changed this morning.  I feel like this move will be reversed by month end, if not sooner.

In the metals markets, oil’s decline has seen support for both gold (+0.4%) and silver (+0.6%) although copper (-1.6%) is struggling this morning.  Nonetheless, I continue to like the long-term outlook for metals.

Finally, the rest of the dollar story is one of strength for the greenback with the euro (-0.25%) slipping back below 1.1400 and every G10 currency under pressure.  Meanwhile, in the EMG bloc, KRW (-0.7%) is today’s dog, as it approaches its GFC levels as the equity market selling weighed on the currency.  Otherwise, broad dollar strength, but nothing dramatic.

On the data front, ISM Manufacturing (exp 54.0) is coming later this morning as are the EIA oil inventory data. And, of course, Mr Warsh’s speech at 9:00am.  It will be quite interesting to hear what he has to say, as I think it will be the most critical thing for the session, and frankly, I have no idea where he may go.

So, as we head into a holiday weekend, less positioning is better, and choppiness is to be expected.

Good luck

Adf

Just Keeping Up

Posted on by 
The yen slid further
Is it accelerating?
Or just keeping up?

There has been a lot of press this morning regarding the yen (-0.25%) which as you can see has weakened a bit, but hardly an extraordinary move.  Thus, the press is all about the level at which it now trades, 162.30ish which is a new high for the move, although it has yet to break above its 1986 levels.  The nature of the articles has been a question as to when the BOJ is going to be back intervening again which then morphs into a discussion as to whether intervention is effective.  (While I don’t know if they will be back in, I imagine that will be the case at some point, we know it is not effective.)  At any rate, I have created the following chart on tradingeconomics.com so that you can (hopefully) see why they have not yet intervened.

One of the key features of the MOF seven step program to intervention is the pace of the yen’s movement.  A rapid decline is far less tolerable than a gradual movement.  As well, there is the question of whether the yen is declining across the board, or it if is declining specifically, or at least more rapidly, vs. the dollar.  It is no surprise to me that the MOF remains on the sidelines as the dollar is rallying everywhere right now, so yen weakness is really more about dollar strength.  If you look at the chart above, I tried to show the slope of the movement in USDJPY vs. DXY back in the beginning of 2024 which was the previous time the yen started to show serious weakness and the BOJ intervened.  To my eye, the slope of the two lines in 2024 are far different than the slope of the current movement.  In fact, the table below shows that the yen’s weakness over the past week and month is hardly an outlier.  In fact, it has basically held up better than its major counterparts.

My point is much is being made about the yen’s breech of the 162 level, but the movement has been quite gradual, hardly the rapid and volatile movement that has driven intervention decisions in the past.  Frankly, there is little reason to believe that with the dollar strong across the board, the BOJ can do anything other than waste money in an intervention effort.

Which begs the question, why is the dollar performing so well?  The pat answer remains that the market is pricing in a suddenly hawkish FOMC with the Fed funds futures market pricing an October rate hike now, with a one-third chance of a second one in December.  See below from the CME.

But I still don’t understand that pricing.  Despite all the ongoing chatter about the imminent shortage of oil/diesel/gasoline/jet fuel that has yet to appear and has now been delayed to H2 of this year, markets continue to price limited further interruption to energy availability.  In addition, one need only look at today’s raft of Eurozone inflation data where France (1.8%), Italy (3.0%) and every German state (between 2.1% and 2.4%) all printed lower than last month, as well as lower than forecast, and recognize that the significant decline in energy prices over the past month is going to push down measured inflation.  Nothing has changed my view that the Fed is on hold for now, and over the next several months the idea of rate cuts will come back into vogue.  At that point, I assume the dollar will give up its recent gains, although I do not foresee a reason for a substantial decline.  After all, investment flows into the US are going to remain robust.

And with that, let’s look at other markets.  As proof positive that nothing is ongoing, oil is unchanged this morning, just above $70/bbl and there has been precious little new news about the situation in the Gulf.  Metals are edging higher (Au +0.4%, Ag +1.3%, Cu +1.3%) but the precious set remain in downtrends although copper is in demand.

You’ve already seen the dollar movement above, at least vs. the bulk of the G10.  But elsewhere, it is not a very interesting picture either.  Perhaps the fact that ZAR (+0.3%) is firmer this morning on the back of both the modest rise in gold and the fact that their fiscal situation looks a bit better (significantly reduced budget deficit in May) is the outlier of note.

Bond markets continue to drift as 10-year Treasury yields slip -1bp and we see similar price action across most of Europe.  The outlier here is Italy (+3bps) which given the better-than-expected inflation data is confusing and I have seen no other cogent explanation.  As well JGB yields (+4bps) overnight reacted to the yen’s weakness as well as to comments by the newest BOJ member, Ayano Sato, who sounded modestly dovish.

Finally, turning to the equity markets, another record setting day in the US was followed by a mixed picture in Asia with both gainers (Tokyo +0.9%, China +1.1%, Korea +1.0%, Taiwan +2.5%) and laggards (HK -0.6%, Australia -0.5%, India -0.3%, Indonesia -3.1%) with the latter a response to a legal verdict of corruption which the market has taken as a major government intrusion into the economy and frightened investors.

Turning to Europe, though, everybody is happy this morning with gains across the board (Germany +1.5%, UK +1.2%, Spain +0.7%, France +0.6%) as those slipping inflation numbers help the overall sentiment.  As to US futures, you will not be surprised that at this hour (7:25) they are marginally higher.  

One must be impressed with the consistency of equity market gains.  It is enough to make you reconsider your prior ideas as to how markets work.  Arguably, the key feature of the recent equity market performance is that earnings data continues to improve.  Now, if you look at the ongoing growth in money supply, both in the US and around the world, it is no surprise that nominal results continue to rise.  It is also not surprising that people are feeling stressed by inflation regardless of the data that is printed as all that money has to find a home somewhere.  And the Cantillon effect tells us that the first folks who get the newly printed money (banks and institutions) are the ones who benefit the most while the rest of us simply watch our cost of living increase.  This is the entire wealth/income inequality story and, arguably, the reason that the idea of socialism is making a comeback.  And socialism does have a perfect record in its economic outcomes; it has failed 100% of the time it has been tried.  But right now, I fear that record is not going to be a problem.  There is much potential trouble ahead.

Today’s data brings Case-Shiller Home Prices (exp 0.9%) as well as Chicago PMI (58.1), JOLTs Job Openings (7.30M) and Consumer Confidence (94.7).  But with Warsh on the tape tomorrow morning and then NFP on Thursday, I don’t see today’s data having much impact.

While the Iran situation is in the background right now, it remains the issue with the biggest potential impact going forward.  A successful conclusion of a deal and resumption of flows of energy through the SOH will put additional downward pressure on energy prices, and by extension general inflation.  In that scenario, central banks will be quick to turn away from rate hikes.  However, if things collapse there, then we will need to be prepared for another major hiccup, that’s for sure.

Good luck

Adf

‘Pocalypse Dreams

Posted on by 
Though many have preached the buck’s dead
The greenback keeps moving ahead
And right now, it seems
Their ‘pocalypse dreams
Are still all confined to their head(s)

But narrative writers ignore
Whatever they said from before
Right now, it’s the buck
That’s causing bad luck
As rate hike bets all start to soar

In a fairly rare set of circumstances, the dollar has drawn the spotlight in markets for the past few sessions.  While it always matters to some extent, it is rarely seen as the cause of many other market movements, just a coincident one.  But right now, I read more about how the strong dollar is driving equity weakness and commodity weakness as more and more bets get placed on the Fed hiking rates aggressively to address inflation by the end of the year.

Using the DXY as proxy, the first chart is the one everybody wants you to focus on, showing the last year and how we have had a clear break above the trading range top of 100.50 and now people are creating targets for just how high it can go.

Source: tradingeconomics.com

And it certainly can go higher, as a quick step back to get some more perspective shows where the dollar has been during the past 5 years. It seems to me I could create a narrative that the dollar has been massively undervalued over the past 18 months, and this move is simply returning it closer to its longer-term fair value.  In fact, just eyeballing, it seems quite reasonable to think the 5yr average of the DXY is somewhere around 103-104 (subsequently confirmed with Grok), still a few percent higher than current levels.  Reversion to the mean anyone?

Source: tradingeconomics.com

All of this, though, begs the question, are rate hikes really on the near-term horizon?  I remain firmly in the camp that is not the case.  Fortunately, someone on my side is super smart, Bob Elliott, former hedge fund manager at Bridgewater.

On the rate hike front, the below CME probability table has barely changed from yesterday as the narrative is strong that rate hikes are coming.  

I cannot really understand why this is suddenly the belief set given the fact that the key driver of recent higher inflation data has been the price of oil, and that price continues to fall, down a further -2.0% this morning.  I understand that gasoline prices have not fallen quite as dramatically, but nothing about the chemistry has changed and I remain highly confident that those prices will be falling as well, catching down to oil.

Source: tradingeconomics.com

So, I remain confused as to why everybody seems to believe the Fed, which despite a new Chair remains the same institution that observed inflation run higher for years during Covid and calling it transitory, has become the reincarnation of the Bundesbank.  In fact, the only rationale I see is that other than Waller, Warsh and Bowman, who were all appointed by Trump, everybody else in that room has TDS and is terrified that things will work out such that by the time the election rolls around, the economy is ticking over nicely with inflation a historical issue.  And frankly, I think most of them do share that affliction.

But other than Powell, and Cook to some extent, none of them have really felt the force of the critiques that come with upsetting President Trump, and frankly he didn’t care about Cook per se, she was just a convenient target to get ousted so he could put his man in there.  And in fairness, Cook is a massive dove, and should agree with Trump on this policy, but I’m sure she doesn’t because…Trump.  I am confident none of them signed up for being in that spotlight.

Apparently, BOA is calling for 3 rate hikes this year in the final four meetings.  I think that’s nuts, but futures are pricing a 2/3 chance of a hike at the end of July, which I also think is nuts.

The recent hiccup in stocks, and the steadier downturn in commodities has been blamed on dollar strength which is being driven by expectations of rate hikes coming soon.  While I like the dollar in the long-term, that is because I believe investment flows into the US will drive it, not financial arbitrage flows.  As things evolve, I expect the market to understand the Fed will not be hiking rates and narratives will need to find a new bogeyman.

Ok, let’s tour markets quickly.  Yesterday’s equity market selloff in the US, following the tech selloff in Asia closed well off the lows and futures this morning are pointing slightly higher.  Asia was mixed overnight with Korea (+3.3%) rebounding sharply although there was weakness in Japan (-0.9%), Taiwan (-2.25%), Indonesia (-3.6%) and the Philippines (-2.2%).  But on the flip side, China (+0.5%), HK (+0.3%) and India (+1.0%) all followed Korea while other regional exchanges had much more limited movement.  It appears that people are trying to figure out what to do for now.

In Europe, Germany (-1.0%) is the laggard after Germany cancelled its plans for a new warship and Rheinmetall, the company set to win biggest there, got crushed.  But elsewhere +/-0.3% or less is the norm with little new information as traders await the next shoe to drop.

In the bond market, interest is low as 10-year Treasury yields continue to track around the 4.5% level and movement has been 1bp or so lower across all of Europe.  Nothing to see here for now.  Just wait until views start to change on rate hikes though!

Metals markets continue to get hammered with gold (-1.7%), silver (-2.9%) and copper (-1.6%) all still falling as the opening narrative about higher rates and a stronger dollar play out.  The thing is, I think the fundamentals remain positive for metals markets as there continues to be central bank demand for gold as well as industrial interest in silver and copper and long-term shortages of supply.  But right now, none of that matters.

Finally, looking beyond the DXY, it is no surprise the euro (-0.35%) and pound (-0.35%) are lower given the DXY’s continued rise, but the yen (-0.1% and at a new low (dollar high) for the move) continues to slide and there is weakness pretty much across the board in both the G10 and EMG blocs.  KRW (-1.0%) is today’s laggard while INR (+0.2%) is the lone currency holding its own.  This continues to be a dollar focused story so when the rates story changes, so will the dollar.

On the data front, we see New Home Sales (exp 640K) and then EIA Oil inventories with yet another large draw expected.  And that’s it for today.  As long as this rate hike narrative remains primary, look for weaker risk appetite and a strong dollar.  But I think it is a short-term phenomenon.

Good luck

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What’s Next To Be Feared?

Posted on by 
For Holmes, when the dog didn’t bark
He recognized that was the spark
To solving the case
And so, we must brace
For narrative changes quite stark

This morning, no headline appeared
Regarding Iran, which is weird
Have markets moved past
This problem, at last?
And if so, what’s next to be feared?

So, perusing the WSJ on-line this morning, the notable absence was any story on Iran and the current situation regarding the ongoing peace talks.  There was a throwaway article about Trump and what he has said about Iran, but nothing of substance.  Part of me is amazed that this is the case as the conflict would still seem to be the most important issue in the markets given the impact on oil prices and inflation, as well as its general geopolitical impact.  But part of me cannot be surprised at all.  It’s not just traders who have the attention span of a fruit fly, apparently so does the general public.

I made the point several weeks ago that this conflict would fade into history quickly when it was ending based on the fact that the Venezuela incursion, back in January, fell from headlines within about three days.  Given the generic MO for most publications of, if it bleeds, it leads, the fact that bombs are no longer falling, and peace talks are ongoing is no longer that interesting.  Add to that the generic TDS of most of the media, where they loved to play up rising oil prices as a major policy failure for Trump, now that those prices have been falling for the past 11 weeks and have slipped >30% in that period, and quite frankly, have further to fall, most editors have moved on.  If they cannot tar Trump with a policy failure, they would rather not discuss the subject at all.

Source: tradingeconomics.com

So, here we are this morning with the market now turning its focus to an ostensibly hawkish Fed despite the recent analysis by the BLS indicating that more than 60% of the recent uptick in inflation was driven by the rise in energy costs.  So, with energy costs reversing course dramatically, what does that say about their impact on inflation and exactly how hawkish does the Fed need to be in that case.

Right now, equity markets are under some pressure as some of the euphoria associated with the rising tech sector’s stock prices and the ongoing AI mania, is wearing a little thin.  And let’s face it, things certainly seemed a bit bubblicious.  But the combination of ongoing fiscal support from the OBBB and tax cuts and declining energy prices is likely to help support things going forward.  No matter the timeline you observe, we have seen a remarkable rally in tech stocks, as evidenced by the NASDAQ’s chart below.  A correction to the 50-day moving average would hardly be surprising, nor would it be damaging to the overall market structure, I think, although it would almost certainly result in ‘end of days’ headlines!

Source: tradingeconomics.com

So, while futures this morning are lower across the board (NASDAQ -2.9%, SPX -1.4%, DJIA -0.6%) as of 6:40am, and we could easily see some weakness for a few more days/weeks as positions shake out, I am not in the camp of things are about to collapse.

Speaking of equity markets, the overnight session was filled with red ink led by the KOSPI (-10.0%) in South Korea, although there was weakness pretty much everywhere (Nikkei -3.6%, CSI 300 -2.8%, Hang Seng -1.8%) with India and Taiwan also slipping more than -1.0% although Australia, NZ and Singapore had more muted declines.  Tech was clearly under pressure.  Of course, we cannot be surprised that European shares are also lower in a generally weak risk scenario, but given the lack of tech companies headquartered there, the declines have been far less significant (DAX -1.0%, CAC -0.6%, IBEX -0.2%, FTSE 100 -0.2%) although the Netherlands (-1.3%) home to ASML, the only tech name of note on the continent, is underperforming as well.

Meanwhile, the bond market has peeked at the oil market and decided, perhaps inflation is not a chronic condition, or at least not as bad as previously feared.  Yields are lower across the board with Treasuries (-3bps) leading the way while European sovereigns are all lower by between -3bps and -4bps.  Overnight, though, JGB yields could make no headway lower as the yen continues to be under enormous pressure.

Speaking of the yen, it continues to slowly weaken despite prominent statements by Japanese FinMin Katayama about her discussions with Treasury Secretary Bessent and their agreement to have the US coordinate with Japan in the event it is decided something needs to be done in the markets.  But so far, no signs of actual intervention.  A look at the chart below shows a very slow and steady climb in the dollar, and frankly, I do not see what will change this trajectory.

Source: tradingeconomics.com

While interest rates aren’t the only driver, they still have a key impact, and they are the one thing that can be changed quickly.  In fact, the best hope for the yen, in my view, is the fact that at some point soon, the market is going to understand the Fed is not about to raise rates again, and the next move will likely be lower, albeit not until later in the year.  but that change in tone will change a lot of opinions on how the yen should behave, and a move back toward 155 amid modest overall dollar weakness could easily be seen.  But right now, everybody is of the opinion that the FOMC is going to hike this year, and Japan cannot afford to be aggressive in that context, hence the yen’s weakness.

Here is a forecast I do not make lightly, Fed funds will finish the year lower than they are now, probably 3.25%-3.50%.  And the current Fed funds futures market has bottomed (rates peaked) as per the CME table below.

As to the rest of the FX world, the dollar reigns supreme this morning as the euro (-0.3%) is below 1.1400 this morning, its weakest in more than a year as the Flash PMI data did it no favors, but the new hawkish Fed, higher US rates strong dollar narrative has been the driver.  We have seen the same type of movement elsewhere, except where the dollar has moved further, with AUD (-0.8%) the worst performer in the G10 although HUF (-1.0%) is actually the biggest laggard.  However, given the overall decline in commodity prices, those currencies that benefit from rising commodities are also under pressure (NOK (-0.7%, ZAR -0.5%, SEK -0.8%, MXN -0.7%) and we already discussed AUD.

Lastly, the metals markets are also under serious pressure with gold (-1.6%), silver (-4.5%) and copper (-3.3%) all tumbling on the same new view of higher rates and a stronger dollar.  The thing about the commodities story is the fundamentals still seem positive to my eyes, and this seems like the last of the fluff getting taken out.

On the data front, Thursday’s PCE data is the big day and here’s what we have overall:

TodayFlash Manufacturing PMI54.8
 Flash Services PMI51.0
WednesdayNew Home Sales640K
ThursdayInitial Claims225K
 Continuing Claims1800K
 Q1 GDP Final1.6%
 Personal Income0.4%
 Personal Spending0.6%
 PCE0.5% (4.0% Y/Y)
 Core PCE0.3% (3.4% Y/Y)
 Durable Goods-4.3%
 -ex Transport0.7%
FridayMichigan Sentiment50.3

Source: tradingeconomics.com

In addition to the data, we start to hear from some of the FOMC members, although I am confident Chairman Warsh won’t be out and about.  Some analysts claim that Warsh’s view of less communication is going to weaken him as others will get to make their point and he won’t be able to counter it.  But I think that Warsh has a plan, and if we continue to see oil prices decline, which seems the likely outcome, then all the inflation fears are going to dissipate and by the time the next meeting rolls around, it will be far harder to make the case that tighter policy is necessary.  Historically, hiking into an energy price shock has been a central banking mistake, and I think Warsh knows this and is keen not to repeat it.

Net, for now, everybody loves the dollar and hates risk on this new hawkish Fed narrative.  But going forward, I like the dollar on the back of a better economy and better investments and expect that the hawkish Fed narrative is going to fade away.  But I’m just an FX poet.

Good luck

Adf

No Plan of Action

Posted on by 
In England and Scotland and Wales
Kier Starmer has gone off the rails
A buffoon-like clown
He’s set to step down
As from the Brits eyes, fall their scales

But will his replacement gain traction
Or will Burnham be a distraction
From solving their woes
As Lord only knows
They’ve many, and no plan of action

It has been an eventful weekend for me so let me start by telling you that Marvel was Best of Breed in back-to-back shows last Thursday.  We are very proud and happy.

Second, Friday was a more difficult day for me as I wound up having emergency surgery, although everything is fine.  But I am still in recovery mode.  Sometimes, aging is harder than other times.

With that in mind, we can talk about the three things that matter, I believe, the change of PM in the UK, the on-again-off-again peace talks in Iran and the fact that the yen is now weaker than the level that got the MOF to intervene back in April.

Starting with the UK, PM Starmer has promised to step down now that his most likely successor, Andy Burnham, the former mayor of Manchester, is in Parliament and will now become PM sometime in the next several months depending on the actual timing of certain technicalities.  He is described as left-wing, even by the press, which tells you that he must be quite far to the left.  But the UK has serious problems with respect to their economy, slowing growth and high inflation, and the social structure due to massive immigration, both legal and illegal.  As well, the report that just dropped about the Pakistani grooming gangs that were systematically raping young English girls is so damning, it is hard to believe, yet it was all covered up.  The government doesn’t have to go to the national polls until 2029, so Burnham will have time to try to implement policies, but the nation has many troubles ahead.

As to UK markets, both the pound and FTSE 100 have been underperformers relative to their peer European counterparts over the past month or so as this process has heated up, but in truth, not by very much.  Much of the pound’s weakness can be attributed to dollar strength (see chart below), where the dollar has broken through key technical resistance in the DXY, while the FTSE is just drifting given the lack of positive news.  Certainly, this story didn’t help either one, as both are unchanged on the day.

Source: tradingeconomics.com

In Switzerland, talks are ongoing
As Trump and the Mullahs try showing
That they are the ones
Who have the most guns
But progress seems like it is growing

It cannot be a great surprise that there is a lot of bluster from both sides of this negotiation between the US and Iran as President Trump tries to end the conflict in Iran.  After all, both sides are famous for their bluster!  And you can read whatever you like from whatever source you want to get your spin, but I’m not smart enough to understand the intricacies of international diplomacy.  However, what I do understand is market price movement, and here we are this morning, with oil prices falling further, down -2.5%, and back to levels last seen in early March, right at the beginning of this conflict.

source tradingeconomics.com

Thus far, every story about tank bottoms being reached and an insufficient amount of oil for the pipeline infrastructure to be effective has proven not to be true.  There is still a large group of analysts who are calling for end of days, but the market signals just don’t agree.  I suspect that the only ones who really want to see oil prices remain high are the oil companies who sell the stuff, but for the rest of the world, lower is clearly better.  Obviously, anything can still happen, but by all appearances, it seems that more and more traffic is flowing through the Strait and we are going to see lower prices going forward.

In the end, from my vantage point thousands of miles away from the action, it appears that Iran was greatly weakened by this conflict on a military basis, but more importantly, every one of its Gulf neighbors realized that they needed alternative routes to get their oil to market, and we are going to see a lot more pipeline infrastructure built to do just that, so as time goes by, this choke point is going to lose its effectiveness.  And that is probably a bigger weakness for Iran, as that was something they held over the world, but now it seems it is not as impressive a strength as it had been made out to be in the past.

It’s no waterfall
But the yen keeps dripping down
Whence the BOJ?

Finally, the yen (-0.3%) is having a tough time right now as it has traded back to its lowest level vs. the dollar since 1986!  That’s right folks, it has been forty years since USDJPY traded above 162.00, and we are pushing that level right now as you can see in the chart below.

The last two times the yen reached these levels, back in April and in July 2024, the BOJ intervened in the markets aggressively.  But so far, crickets.  I think the issue for them is the dollar continues to be quite strong, especially as traders are now pricing in rate hikes by the Fed, and so intervening is going to be a waste of money.  And it’s true, if the dollar is rallying across the board, there is very little Ueda-san can do.  As I have repeatedly said, the only way for the yen to break this slide is for serious fiscal and monetary policy changes, and frankly, that doesn’t look like it is in the cards right now.  While I know there are many who think the dollar is heading to its graveyard, it apparently still has a bit of life left in it.

Which takes us to the overnight activity.  Equity markets have been mixed as all this new information gets digested.  In Asia, Tokyo (+1.6%) and China (+2.4%) both had strong sessions although HK (-0.7%) couldn’t keep up.  Elsewhere in the region, there was slightly more green than red led by Taiwan (+2.75%) while the Philippines (-1.65%) was the biggest laggard.  Uncertainty continues to reign although as the Iran situation slowly resolves, I expect to see things brighten here as Asia was the region hurt most by the entire conflict.

In Europe it is also a mixed picture with the UK (+0.3%) now rallying on the news that Starmer is leaving and Spain (+0.4%) has managed a gain as well while both Germany (-0.3%) and France (-0.7%) are lagging this morning, although there is no news of note in either place.  US futures are basically unchanged at this hour (7:15).

In the bond market, Treasury yields (+3bps) have edged higher this morning, I guess on this new belief in higher Fed funds, although I would have thought the bond market would appreciate a hawkish Fed fighting inflation.  European sovereign yields, though, are lower across the board down about -2bps everywhere.  Bonds remain less interesting now that they are back in their ranges and not breaking out as so many though was occurring back in May as per the below chart.

Source: tradingeconomics.com

With oil prices lower, it should be no surprise that gold (+1.35%) and silver (+2.4%) are both higher this morning.  Many have made the case that with the dollar strengthening, the precious metals complex will remain under pressure, and it is a valid case, but for some reason, I have a feeling it will not be as dramatic as they believe.

Finally, the dollar is firmer across the board this morning, albeit not by very much.  Wednesday and Thursday of last week were the big moving days in the wake of the FOMC meeting and the new hawkish read.  Since then, not much has happened, just a slow drift higher across the board.  FWIW, I don’t think that Chairman Warsh is going to be that hawkish, but I look forward to the structural changes that he makes.  However, for now, that is the market assessment.

On the data front, there is nothing today and really nothing of import until Thursday so I will go through it tomorrow.

That’s how things are shaping up, with the dollar gaining, oil sliding and stocks uncertain what to do next.  I am a fan of uncertainty as it will reduce systemic risk, and that is something we really need to see.

Good luck

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Still on Hold

Posted on by 
Despite faster growth
The yen continues to sink
Are rate hikes anon?

It’s funny, in Japan, there is a great deal of angst amongst government officials that the economic situation is under significant duress, and they appear uncertain how to act.  Now, in fairness, the ongoing Iran conflict is clearly problematic for a country that imports essentially 100% of its oil, and most of it travels through the Strait of Hormuz.  But if we look at the data, Japan is holding up remarkably well.  For instance, below is a chart of annual GDP which was released last night showing 2.1% annualized growth in Q1.

Source: tradingeconomics.com

Granted, this is not a chart of an extraordinary expansion, but it is also, relative to its European counterparts, a chart to be envied.  For instance, the below chart of German GDP growth (and I use the term growth loosely) shows that after the Covid reopening, things have basically gone into stagnation.

Source: tradingeconomics.com

My point is that things in Japan seem to be moving along relatively well, with solid growth, especially when one considers that the population in Japan is shrinking, so given GDP = # people working x output/person, it is hard to grow the economy with a shrinking population.  Meanwhile, inflation in Japan remains sticky, although because of government subsidies to ameliorate the costs of electricity and fuel in the wake of the Iran conflict, it is below the 2% target for now.  However, apparently it remains a concern amongst the population there.

Source: tradingeconomics.com

Which brings me to the true market related question, what of the yen?  You may recall a few weeks ago when the BOJ intervened because the yen had traded through the 160 level vs. the dollar and then there seemed to be a few mini interventions in the days that followed.  Yet this morning, as you can see in the below chart, the yen is once again marching toward 160, although I have not seen any commentary from the BOJ or MOF on the subject.

Source: tradingeconomics.com

Bringing it all together, the question I would ask is, why is the BOJ even concerned about raising rates at their next meeting in a few weeks?  Ueda-san has been around a long time and understands the only way to address persistent currency weakness is via policy changes.  Especially now that markets have begun to price rate hikes as the next move in the US (I personally don’t believe that will be the case but that is a different story), the yen will continue to slide unless the BOJ moves.  Yet, with GDP growing decently, and underlying price pressures extant, a rate hike should be an easy call.  Currently, the probability appears to be about 75% that they will hike in June, but certainty they will hike by July, at least according to rateprobability.com as per the below table.  I’m not sure why it is even a question.

The war in Iran’s still on hold
As prices for crude stay controlled
But dollars are bid
And equities skid
While nobody wants any gold

As to the Iran situation, President Trump announced he was delaying, for two or three days, any renewed military action at the behest of the UAE and Qatar who claim that substantive negotiations are underway.  Once again, I make no claims of knowledge about what is actually happening there, although that admission is one that most of the punditocracy seems unwilling to make.  

But here’s a thought.  If you were Ahmad Vahidi, the ostensible leader of Iran, and you have spent the last 3 months in spider holes, caves and basements, moving every 8-12 hours lest someone leaks your location to the Israelis or Americans, how comfortable are you in your position?  After all, one of the reasons that people aspire to lead nations is for all the trappings that come with the job. Not only do you get a nice place to live, but you command respect from the people, at least a significant portion of them.  Is it impossible to believe that Vahidi is actually looking for a way out as well, perhaps willing to give up his nuclear ambitions for the removal of the price on his head?  I know that does not fit the narrative for many folks, and is pure speculation on my part, but is it really that far-fetched?

Ok, in the meantime, as we await the next news from Iran, let’s look at market activities.  Starting in the bond market, yields continue to climb higher pretty much all around the world as inflation concerns remain high and there is a growing concern that government bond issuance is going to grow even faster going forward as countries everywhere seek to rearm quickly.  So, Treasury yields (+3bps) are pushing back to the levels seen in January 2025, although remain 15bps below those levels as per the below Bloomberg chart.

And as has been the case for quite a while now, Treasury yields are leading the global yield market with European sovereign’s all higher by about 2bps and JGB yields jumping 6bps last night after the GDP data.  Certainly, JGB traders believe the BOJ is going to hike rates.

In the equity markets, though, risk appetite remains remarkably robust through all the complexities of the war and economic data.  Yesterday’s US session, which started off deeply in the red, rallied back so the DJIA actually closed higher while the other two major indices dramatically reduced their losses.  This morning, futures markets are pointing slightly lower with the NASDAQ (-0.8%) the laggard as questions continue to arise about how long AI will drive the thesis there.  As to the rest of the world, Asia was mixed with the Nikkei (-0.4%) slipping, although every other index in Tokyo rose, China (+0.4%), HK (+0.5%) and Australia (+1.2%) all gaining.  Korea (-3.25%) and Taiwan I-1.75%), though, had rough sessions as those two markets have been driven by semiconductor companies just like the NASDAQ.  The only other noteworthy move was in Indonesia (-3.5%) as investors are concerned about the central bank raising rates after their meeting concludes tonight.

Europe is in fine fettle this morning with gains across the board led by the DAX (+1.4%) and followed by the CAC (+0.8%), FTSE 100 (+0.7%) and Spain’s IBEX (+0.4%).  I keep reading that there is optimism that an agreement will be reached as the rationale for these moves, but I guess that is the way things go.  Never forget this perfect illustration of how market information is passed.

Turning to oil markets, this morning has seen that war ending optimism here as well with WTI (-0.4%) and Brent (-0.9%) both slipping a bit.  Interestingly, metals markets are not behaving as they have recently as they, too are lower; gold (-0.65%), silver (-2.1%), copper (-1.1%).  In the end, like every market, movement here is entirely dependent on the Iran situation, at least in the short run.

Finally, the dollar is flexing this morning rising against virtually all its major counterparts.  In the G10, AUD (-0.7%) is the laggard, but the euro (-0.3%) and pound (-0.2%) are both under continued pressure with both trading near recent lows as per the tradingeconomics.com chart below.

The rest of the block has not fallen as much but is uniformly lower.  In the EMG bloc, KRW (-1.3%) suffered after the sharp decline in the equity markets there and ZAR (-0.5%) continues to suffer on the back of weaker gold prices.  The one outlier is BRL (+0.3%) which is benefitting despite a weaker economic outlook after some soft data yesterday continues to encourage the potential for further rate cuts there.

And that’s really it for today.  There is no data today although there are 3 Fed speakers, including Governor Waller who many have come to believe is a critical voice for the FOMC.  Broader movement continues to be all about Iran and how things evolve there.  With renewed military engagement on hold, I suspect that the speculators are going to buy stocks again in hopes of a positive outcome.

Good luck

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