Tag Archives: #higherdollar

Misguided

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On Friday, the news was a sign
Of imminent US decline
The Fed was a hawk
And all of the talk
Was Trump’s actions wiped off the shine
 
But yesterday, markets decided
That Friday’s response was misguided
They’ve come to believe
A Fed funds reprieve
By Powell will soon be provided

 

As I have frequently written in the past, markets are perverse.  The narrative Friday was about the dire straits in which the US found itself with the employment situation collapsing and the recession that has been forecast for the past three years finally upon us.  Part of this story was because of the Fed’s seeming intransigence regarding interest rates as made clear by Chairman Powell’s relatively hawkish comments at the FOMC press conference last week.

But that story is sooo twenty-four hours ago. In the new world, the huge bond market rally that was seen on Friday, and equally importantly, the changing pricing of Fed funds rate cuts has the new narrative as, the Fed is going to cut so buy stonks!  Confirmation of this new narrative was provided by SF Fed President Mary Daly who remarked yesterday evening, “time is nearing for rate cuts, may need more than two.”  All I can say is wow!  

The below chart shows the daily moves, in basis points, of the 2-year Treasury note which is seen as the market’s best indicator or predictor of future Fed funds rates.  On Friday, the yield fell nearly 25bps, essentially pricing in one additional rate cut coming, and as we saw with the Fed funds futures market, that pricing is now anticipating three cuts this year.  Ms Daly merely reconfirmed that news.

Source: https://x.com/_investinq/status/1951356470877925408?s=46

Perhaps it is fair to ask why Daly has taken so long to come around to this view.  After all, she is a known dove and has been for her entire time at the Fed.  As I have asked before, why haven’t the other known doves, like Governors Cook and Jefferson, been out there talking about rate cuts?  For anyone who wants to continue to believe that the Fed is apolitical, nonpartisan or above politics, this is exhibit A as to why it is not.  In fact, if you look, only one Board member was considered a hawk in this analysis by In Touch Markets, and she just resigned.  The other hawks are all regional Fed presidents.  Perhaps this is why they were so slow to raise rates when inflation was roaring in 2022 and why they were so anxious to cut rates in 2024 on virtually no news other than the upcoming election. 

To be clear, until Friday’s NFP data, it was difficult to make the case, in my mind, for a cut because I continue to see inflationary pressures beyond any tariff impacts.  But if the labor market is weaker than had been assumed, that will certainly open the door to more cuts.  Of course, the conundrum is, if the economy is so weak that the Fed needs to cut, why are stocks rallying?  Arguably, a weak economy would foretell weaker earnings growth, a direct negative to equity valuations.  But that appears to be old-fashioned thinking.  I guess I am just an old-fashioned guy.

Ok, let’s turn to the overnight activity.  Starting with bonds, since the big move Friday, Treasury yields have been little changed, climbing 2bps overnight to 4.21%, but still hovering near the bottom of their recent trading range with only the Liberation Day announcement panic showing yields below the current level.  This is a great boon for the Treasury as auctions of 3-, 10-, and 30-year Treasuries are due this week starting with the 3-year today.

Source: tradingeconomics.com

European sovereign yields have also edged higher by 1bp across the board after PMI data was released this morning, pretty much exactly at expected levels.  The outlier last night was JGB yields which slipped -4bps and continue to slide away from designs of a BOJ rate hike.

In the equity markets, yesterday’s US rally was followed almost universally in Asia (Japan +0.65%, China +0.8%, Hong Kong +0.7%, Australia +1.2%) with only India (-0.3%) lagging there.  As to Europe, it too is having a good day with the DAX (+0.8%) leading the way although strength almost everywhere as the PMI data was good enough to keep spirits higher.

In the commodity markets, oil (-1.1%) is slipping for a fourth consecutive day, but is still right in the middle of its $60 – $70 trading range.  There remain so many potential geopolitical issues with saber rattling between the US and Russia and President Trump’s threatened excess tariffs on nations who buy Russian oil that it remains difficult to discern supply/demand characteristics.  Certainly, if the US is heading into a recession, that is likely to dampen demand for a while, but that remains unclear at this time.  As to the metals, gold (-0.65%) is giving back some of its post NFP gains but if I look at the chart below, all it shows is a relatively narrow trading range with no impetus in either direction.  

Source: tradingeconomics.com

The rest of the metals complex is being dragged lower by gold this morning, but not excessively so.

Finally, the dollar is a touch stronger today, despite the rate cut talk, as the euro (-0.4%) and yen (-0.55%) lead the G10 currencies down.  While I understand the rationale for the dollar to soften in the short- and medium-term vs its counterparts, it is very difficult for me to look at the political and economic situations elsewhere in the world and think I’d rather be investing there.  Europe is a mess as is Japan.  And don’t get me started on the emerging market bloc.  So, remember, while day-to-day movements can be all over the map and are impacted by things like data releases or announcements, structural strength or weakness remains largely in place, and the US situation appears stronger than most others for now.   Touching briefly on EMG currencies, the dollar is firmer vs. virtually all of them, mostly on the order of 0.4% or so.

On the data front, today brings the Trade Balance (exp -$61.4B) and then ISM Services (51.5) at 10:00.  We don’t get the first post-FOMC speech until tomorrow by Governor Cook, so it will be interesting to see if there are more doves who are willing to show their colors.  But in the end, as demonstrated by the quick reversal of the narrative from Friday to Monday, there remains an underlying bid to risk assets and we will need to see substantial economic weakness to remove that bid, even temporarily.

Good luck

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Qualm(s)

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As all of us wait for the Fed
And try to absorb what’s been said
Investors are calm
Though pundits have qualm(s)
Their warnings of problems are dead
 
While no move is likely today
So many continue to pray say
A rate cut is coming
To keep markets humming
So, shorts best get out of the way

 

Markets have been in wait and see mode, at least equity markets have, for the past week as investors, traders and algorithms seek something new to discuss.  In fact, a look at the chart below shows that the S&P 500 has moved the grand total of 9 points over the past week!

Source: finance.yahoo.com

Yes, there have been some earnings announcements, with a couple of key ones this afternoon (MSFT and META), but there continues to be an increasing focus on the FOMC which will announce their policy decision (no change) this afternoon.  The focus is really on what Chair Powell will hint at in the ensuing press conference.  At this point, I would say it is baked in the cake that two governors, Waller and Bowman, are going to dissent seeking a 25bp rate cut.

Ironically, if markets are looking for a catalyst from this FOMC meeting, I believe they are looking in the wrong place.  Chairman Powell will do everything he can to not answer any question about anything whatsoever, whether on the likely trajectory of future policy decisions or whether he will resign or be fired.  And so, we will need to look elsewhere for market moving catalysts.

Of course, there is always the White House, which has proven to be a rich source of uncertainty, and then there is the data onslaught starting today through Friday, which if it comes in differently than forecast, will have the opportunity to move markets.  Regarding the former, I will not even attempt to guess what the next story will be.  However, the latter is a potentially rich vein to be mined for insight.

To set the table, a look at yesterday’s outcomes is worthwhile.  The Goods Trade Balance fell to -$86B, substantially less than forecast, on the back of a significant decline in consumer goods imports.  While the data still shows a deficit, I imagine Mr Trump is pleased with the direction.  Certainly, compared to the trend prior to his election (as well as the front-running of tariffs early this year) it seems a modest improvement, or at least a reduction. (see chart below)

Source: tradingeconomics.com

Otherwise, Home Prices rose less than forecast and continue to slow their pace of increase and job openings were withing spitting distance of forecast at 7.44M, although somewhat lower than last month.  Finally, Consumer Confidence continues to rebound.  While equity markets were nonplussed, with US markets slipping a bit on the day, Treasury bonds rallied nicely with 10-year yields sliding -8bps on the day.  The bulk of that rally was based on a very positive 7-year auction, with the bid-to-cover ratio rising to 2.79, and dealers only getting 4% of the issue, the lowest level recorded since 2004.  In other words, investors took in virtually the entire $44 billion.  This morning, we will also learn about Treasury’s planned quarterly issuance, although estimates are there will be no increase in long-term bonds, with T-bills continuing to be the main financing vehicle for now.

Too, this morning we will get the ADP Employment report (exp 75K) and the first look at Q2 GDP (2.4% after -0.5% in Q1).  While all of that could have an impact, my sense is that tomorrow’s PCE data and Friday’s NFP will be of much more import.  A final though this morning is that the BOC is going to complete their policy meeting, but no change is expected there.

If we consider this information, absent a new surprise from the White House on your bingo card, it seems to me Friday is the most likely timing for any substantive movement in equities or bonds.  And with that in mind, let’s look at how other markets have been responding to things.

Yesterday’s modest declines in the US were followed by a mixed picture in Asia with both Japan and China little changed on the day although Hong Kong (-1.4%) was under pressure as the US-China trade talks stumbled for now.  But much of the rest of the region had a solid session with Australia (+0.6%) rallying after better-than-expected inflation data encouraged traders to price in a rate cut by the RBA at their next meeting.  But there were gains in Korea, India and Taiwan as well with only Indonesia really lagging.  In Europe, it is a mixed session with the CAC (+0.45%) leading the way higher while both the IBEX (-0.2%) and FTSE 100 (-0.3%) are lagging as Eurozone data was mixed with inflation edging higher in Spain although Eurozone GDP came in a tick better than forecast.  However, the big discussion there continues to revolve around the details of the trade deal.  As to US futures, they are a touch higher at this hour (7:40), about 0.25%.

In the bond market, after yesterday’s rally, US yields are unchanged on the day, trading at the low end of their recent range, while European sovereign yields are all lower by -2bps (Gilts are -5bps) as the US move came later in the day and Europe didn’t really participate yesterday.  Overnight, JGB yields slipped -1bp, but Australian govies fell -7bs as thoughts of rate cuts danced in traders’ heads.

In the commodity markets, oil (-0.65%) is giving back some of its gains that were catalyzed by President Trump’s threats to Russia if they don’t sit down in the next 10 days, rather than the original 50-day window.  As to metals markets, gold is unchanged this morning, still trading in the middle of its range, although we have seen some weakness in both silver (-0.9%) and copper (-0.8%) but it seems more in line with ordinary trading than with any new news.

Finally, the dollar is continuing its rebound as the euro (-0.2%) retreats further from its recent highs and is now lower by more than -2% in the past week.  In fact, the DXY has traded back above 99.0 for the first time since early June as the bottoming formation that I have highlighted over the past several days continues to prove prescient.  In fact, some might say the dollar is starting to accelerate higher!  Once again, I would highlight that the descriptions of the dollar’s demise were greatly exaggerated.

Source: tradingeconomics.com

And that’s pretty much all there is to discuss.  We are firmly in the middle of the summer doldrums where market activity remains subdued at best.  Given the prominence of algorithms in trading most markets, it will require something new and unexpected to get things going.  Of course, perhaps this evening’s earnings data will start some movement, but I’m still focused on Friday.

Good luck

Adf

A Scold

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The market’s convinced that Chair Jay
Is going far out of his way
To keep rates on hold
‘Cause Trump’s been a scold
And strength’s what Jay wants to portray
 
But ask yourself why should rates fall?
With stocks at new highs, after all
And crypto’s exploded
Which clearly eroded
The storied liquidity fall

 

Yesterday’s market activity was benign with modest market movements in both equity and bond markets although the dollar did rally sharply, on the back of the EU trade deal.  Of course, economic theory predicts just that, when tariffs on a nation (or bloc of nations) are raised, that currency will decline in value to offset the tariffs.  Recall, this was the expectation in the beginning of 2025 when President Trump was just coming into office and calling himself ‘Tariff Man’ as he explained he would be imposing tariffs on virtually all US trading partners.  However, back then, the theory didn’t work out very well and the dollar declined throughout the first six months of the year as can be seen below.

Source: tradingeconomics.com

In fact, analysts quickly moved on and were virtually gleeful that the dollar’s decline of roughly 13% was the largest decline during the first six months of the year since the 1980’s.  Personally, I’m not sure why classifying the decline in terms of the time of year is relevant, but that was a key talking point in the narrative that described the end of American exceptionalism.  Other parts of that narrative were the end of the dollar as the global reserve currency (gold was going to take over) and the onset of other currencies as payment rails for trade.  

None of that ever made sense nor do current proclamations that the euro’s status has changed in any significant way.  There are still very significant long euro positions outstanding as the dollar decline theory has many adherents, but being long euros, aside from being expensive, just got a bit uglier after yesterday’s and this morning’s declines totaling about -1.5%.  

Remember, a key portion of the short dollar thesis is that the Fed is going to cut rates more than other central banks going forward.  And now that the FOMC’s meeting is starting this morning, let’s discuss that idea.  We all know that President Trump has been a vocal advocate for significant rate cuts immediately.  However, let’s look at some evidence.  On the one hand, equity markets are at historic highs in terms of prices as well as readings like the Buffett ratio (market cap/GDP) and P/E and P/S ratios as well.  Crypto currencies, arguably the most speculative of assets, have been flying, especially things like meme coins, which are literally a play on the greater fool paying someone more than they paid for a token with no intrinsic value whatsoever.  Credit spreads, especially for weak credits, are pushing historic lows as per the below chart.  All these things point to not merely ample liquidity and policy being appropriate, but excess liquidity and policy being easy.  

And yet the other side of that coin is a look at 2-year Treasury yields, which have a long history of accurately forecasting future Fed Funds levels.  Right now, as you can see in the below chart, they are trading at a 50 basis point discount to Fed Funds, an indication that the market is quite convinced the Fed is going to cut rates.  Ironically, I believe that Chairman Powell, a PE guy by background, is a strong believer in lower interest rates and I’m sure all his colleagues from his time at Carlyle Group are also pressing for lower interest rates, but he doesn’t want to seem cowed by Trump.

The market is pricing just a 3% probability of a cut tomorrow, but a 65% probability of a cut in September and then another cut in December.  It strikes me that we will need to see a major reversal in the economic situation in the US, with Unemployment rising and growth rapidly declining in order to bring about a situation where there is a real case to be made for a cut.  But we also know that politics plays an enormous role in this story, and while expectations are that we are going to see two dissents at tomorrow’s meeting, that will not change the outcome of no movement.

Adding this all up I conclude that the weak dollar thesis is largely predicated on the idea that the Fed is going to ease monetary policy going forward, catching down to what most other central banks have already done.  And I agree, if the Fed does cut rates, the dollar will fall.  But every day I watch market behavior and continue to see economic data that appears to be holding up pretty well despite a great deal of angst from the analyst community, and I find it harder and harder to come up with a reason to cut rates.  

Consider the story about the new effort by the Trump administration to remove 100,000 regulations by July 4th2026.  Estimates of the value that will unlock are upwards of $1.5 trillion and that assumes no policy changes.  That’s more than 5% of GDP.  I cannot help but believe that President Trump is going to be successful in completely changing the way the US economy works by changing the way (i.e. reducing) the government’s intrusions in the economy.  And if that is successful, it is not clear why interest rates need to decline.  Remember, too, there is an enormous amount of data compressed into this week, so by Friday afternoon, we will have much more information.

Ok, a quick turn round markets shows that after a mixed session in the US yesterday, Japan (-0.8%) slipped on concerns over the nature of the trade deal, while China (+0.4%) edged higher as trade talks continue in Stockholm between the US and China.  Elsewhere in the region both Korea and India rose a bit, spurred by hopes for trade deals there, and the rest of the area was mixed with no large movement.  In Europe, green is today’s color as investors have taken the avoidance of a trade war as a positive and added the euro’s weakness as a positive as well, helping European exporters.  So, gains are strong (DAX 1.3%, CAC 1.4%, FTSE 100 0.7%) and things are generally bright despite grumbling by some nations that the trade deal is going to hurt them.  And at this hour (7:30), US futures are higher by 0.3% or so.

In the bond market, yields are edging lower this morning (Treasuries -2bps, Gilts -1bp, Bunds unchanged) as investors remain either comfortable with the current situation or uncertain what to do to change things at current yields.  I vote for uncertainty.

In the commodity markets, neither oil nor metals markets are moving much at all this morning with daily fluctuations less than 0.2% in all of them.  This has all the feel of a consolidation ahead of tomorrow’s Fed and the rest of the week’s data including GDP, PCE and NFP.

Finally, the dollar is firmer again today vs. almost all its counterparts with gains on the order of 0.2% to 0.3% in most G10 and EMG currencies.  However, two CE4 currencies (PLN -0.6% and HUF -0.9%) are under pressure with the former complaining that the trade deal will cost them > €2 billion, while the latter is suffering from poor economic data heading into an election where President Orban is on shakier ground that normal.  But net, expect to hear about some more dollar strength in the wake of higher tariffs.

On the data front this morning, we see the Goods Trade Balance (exp -$98.4B), Case Shiller Home Prices (3.0%), JOLTS Job Openings (7.55M) and Consumer Confidence (95.8).  With so much focus on trade lately, I suspect that number could matter, but really the JOLTS number will be of more interest, especially for the bond market, as any weakness in the labor market will encourage the lower rates story.

And that’s really all for today.  Until we hear from Powell, it is hard to make a dollar call in the short-term, and the medium term is dependent on the Fed’s actions.

Good luck

Adf

Kvetched

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

 

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

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

Source: finance.yahoo.com

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

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

Source: tradingeconomics.com

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

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

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

Source: tradingeconomics.com

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

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

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

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

Good luck

Adf

Recession Repression

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

 

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

Source: tradingeconomics.com

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

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

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

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

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

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

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

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

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

Source: tradingeconomics.com

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

Good luck

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Savants Disagree

Posted on by

The Senate completed their vote
And so, BBB, though there’s bloat
Will soon become law
As Dems say pshaw
While lacking a doctrine, keynote
 
So, eyes now turn to NFP
The key for the FOMC
The JOLTs showed that gobs
Of ‘vailable jobs
Exist, though savants disagree

 

Market activity continues to demonstrate lower volumes and despite several competing political narratives, price action remains muted overall.  The biggest news of late is the Senate passed their version of President Trump’s BBB last night and now it goes to committee for reconciliation before getting to the president for signing.  Of course, given the mainstream media’s complete antagonism toward the president, the headlines this morning refer to the problems the Republicans will have agreeing terms between the two houses, and I’m sure it will be difficult.  However, based on everything that President Trump has done to date, I expect it will get completed.  While perhaps not by Friday, probably by next week.

This matters to markets because it will help set the tone for government spending and the potential companies that will benefit, as well as those that will be negatively impacted, based on the change in focus from that of the Biden administration.  

At this point, it is impossible to forecast with any certainty how things will evolve, especially with respect to issues like the budget deficit and debt issuance.  While yesterday, Treasury Secretary Bessent did explain that they were going to continue to focus on short-term issuance, if (and it’s a big if) the bill does goose economic activity in the US, it is quite possible that faster GDP growth increases tax collections and reduces net government spending and the deficit.  I would estimate that view is not discounted at all in markets at this time given the constant messaging from media and the punditry that not only are people going to starve to death and lose their medical care because of this bill, but that it is unaffordable and will bankrupt the country.  Something tells me the results will be slow acting, although if the government does continue its deportations and stops subsidizing too-expensive green energy projects, we could see less government spending.  We shall see.

But markets need a focus and tomorrow’s NFP is as good as it gets.  Chairman Powell has been attending the ECB’s summer symposium and, in his speech, yesterday he essentially reiterated his views that the Fed will continue to watch and wait on rates as there is still concern that tariffs may drive inflation higher.  As to jobs, they are watching the situation closely, but thus far, the labor market has held up.  Proof of that idea was evident in yesterday’s JOLTs Job Openings data which showed a surprising jump of more than 300K new job listings available.  I haven’t seen a rationale yet, but perhaps it is related to the self-deportations by illegal immigrants who have left businesses with numerous vacancies.  The weekly claims data, while above its lowest levels lately, continues to run at very modest numbers on a long-term perspective as can be seen in the chart below with data from the Department of Labor.  If the job market holds up, I don’t see the Fed cutting rates despite President Trump’s ire.

Also, at Sintra was BOJ Governor Ueda who explained that Japanese policy rates were substantially lower than neutral and that inflation would likely continue creeping higher over time.  I guess we cannot be surprised that the yen (-0.5%) has slipped in the wake of those comments.  The final noteworthy comments from Sintra were from BOE governor Bailey who explained that despite sticky inflation, more rate cuts were on the way, helping to undermine the pound (-0.4%) this morning.

But there is one final thing to discuss regarding the Sintra meeting, and that is how many central bankers were suddenly concerned that their currencies were getting “too strong”!  We have been hearing about the dollar’s decline in the first half of the year as though it was a signal the US was in permanent decline.  Of course, given the nature of FX trading, a weaker dollar can also be seen as strength in other currencies. (To be clear, all fiat currencies continue to weaken vs. stuff as evidenced by the fact that inflation continues to be positive everywhere in the world, except perhaps Switzerland and China right now.)  However, I could not help but laugh at the ECB comments from several board members, that if the euro were to rise any further it could become a problem for the Eurozone economies.  All their models show that if a major export destination raises tariffs, their own currencies should decline to offset those tariffs.  Alas, once again, their models are not giving them answers that reflect the reality in markets.  And given Europe has built their economies on export reliance, a strong currency is a problem.

We must distinguish between a stronger exchange rate and a strong case to own a currency, especially as a reserve asset, but the two have historically been highly correlated.  As I have repeatedly explained, the dollar’s decline this year is neither anomalous nor particularly large in the broad scheme of things.  As well, it is exactly what the administration is seeking as it helps the competitiveness of US companies on the world stage.  However, my take is that at some point soon, the dollar will find a bottom.  I indicated a move to 90 on the DXY would be possible, and I think that is probably still true, although given the growing net short positions in USD vs. other currencies, the short squeeze will be spectacular when it arrives!

Ok, let’s see if we can get through the overnight activity without falling asleep.  Yesterday’s mixed US session was followed by a mixed session in Asia (Nikkei -0.6%, Hang Seng +0.6%, CSI 300 0.0%) with a mixture of modest gains and losses across the rest of the region, all on low volumes.  In Europe this morning, bourses are firmer led by the CAC (+1.1%) and Spain’s IBEX (+0.75%) as hopes for further rate cuts from the ECB dominate discussions.  As to US futures, they are modestly higher at this hour (7:30), about 0.15%.

In the bond market, after stronger than expected JOLTs data and ISM data, yields are backing up with Treasuries (+4bps) leading the way although both Germany (+5bps) and the UK (+6bps) are seeing selling pressure as well.  However, the rest of European sovereigns have only seen yields edge 1bp higher.  The only noteworthy comments I saw were from the Italian FinMin who explained Italy would be maintaining its fiscal prudence.  Not surprisingly, given Ueda-san’s comments, JGB yields rose 4bps overnight as well.

In the commodity space, oil (+1.25%) continues to drift higher as it tries to fill the gap seen last week.

Source: tradingeconomics.com

Apparently, the fact that supply seems to be rising rapidly has not dissuaded traders from the view that the ‘proper’ price range is $65-$75 rather than my belief of $50-$60.  But right now, they are looking smart.  In the metals markets, we continue to see support as the entire decline in the gold price at the end of June has been recouped and we are modestly higher this morning across all the metals (Au +0.1%, Ag +0.6%, Cu +0.4%, Pt +2.2%) with platinum merely showing its volatility due to lack of liquidity.

Finally, the dollar is firmer this morning against every one of its G10 and major EMG counterparts with the euro and pound (both -0.4% now) setting the tone.  Perhaps the best performer this morning is INR (-0.1%) which seems to be benefitting from the news that a trade deal is almost complete there.  As to trade with the Eurozone, that deal seems a bit further away, although I did see something about a European recognition that US tariffs would be, at a minimum, 10%.  At least for today, I haven’t read anything about the dollar’s ultimate demise!

On the data front, today brings ADP Employment (exp 95K) and then the EIA oil inventory data.  There are no Fed speakers either, so quite frankly, absent something newsworthy from DC, I suspect this will be a quiet session ahead of tomorrow’s NFP.  I guess the dollar is not dead yet.

Good luck

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A Weapon of War

Posted on by

The Hammer’s a weapon of war
Just ask those who fought against Thor
At midnight on Friday
Iran learned the hard way
That Trump wields one too when called for
 
The interesting thing early on
Is this clearly ain’t a black swan
While oil did rise
Which was no surprise
Most risk gave an aggregate yawn

 

Obviously, the big news this weekend was the extraordinary attack and destruction of Iran’s three key nuclear enrichment and engineering sites.  While this poet has opinions, since I am just like the rest of you, limited to the peanut gallery and with no voice in the matter, they are not relevant for this discussion.  However, what is relevant is the early movement in markets once they reopened Sunday night in NY.  While it is no surprise that oil’s price rose as you can see below, the early 2.2% gain is pretty lackluster for the alleged (by some) beginning of WWIII.

Source: tradingeconomics.com

As to the rest of the markets early price action, it’s largely what you would have expected directionally, although unimpressive overall with equity indices modestly lower, about -0.35%, the dollar modestly higher, about 0.2%, and bonds little changed.  Gold, too, is little changed.  It appears that, at least initially, the market was anticipating something like this as you can see that even after the oil price spike, it didn’t reach the levels seen on Friday.

With two days to think it all through
Most traders appear to eschew
The idea that war
Is what is in store
Instead, buy more stocks is their view

 

So, as we wake up Monday morning, despite all the weekend news and the fear mongering thus far, and even though Israel and Iran continue to trade missile fire, the early consensus is that we have seen the worst already.  Iran’s parliament voted to block the Strait of Hormuz, but they have no power to drive actions, that resides with the Supreme Council and as of yet, they have not acted.  In fact, they are in a tricky position for several reasons.  First, China is their largest oil customer by far and 20% or more of their oil transits the Strait which means China’s deliveries would slow dramatically and China is one of their only supporters.  Second, the US navy has significant assets in the region and appears quite ready for that move, likely being able to reopen the Strait quickly.  And third, if they follow through and their objective fails (remember, their objective in this would be to spike the oil price and hurt Western economies accordingly) then they will prove conclusively that they are irrelevant militarily.  That is likely not what the regime there wants to demonstrate.

But the market is pretty smart about these things as the collective wisdom and thoughts of traders and investors is an excellent proxy for issues of this nature.  Therefore, we cannot be surprised that after that initial spike in oil prices, they have retreated to Friday’s pre-attack levels as investors await more information.

Source: tradingeconomics.com

It is also worthwhile to recognize that speculative trader positions in oil are net long just under 200K contracts, so there is no short-covering spree that is likely to arrive and drive prices higher.

Source: en.macromicro.me

The point is that if oil is basically unconcerned with the potential issues in Iran, then other markets will completely ignore the situation.  And that is pretty much exactly what we are seeing this morning.  In Asia, equity markets were mixed with modest overall movement.  The Nikkei (-0.15%) and Australia (-0.35%) slid while Hong Kong (+0.7%) and China (+0.3%) rallied showing no trends whatsoever.  The rest of the region did have more laggards than gainers, but other than smaller markets like Indonesia and Taiwan, both falling -1.5% or more, movement was muted.  In Europe, modest losses are the thing with the DAX (-0.4%), CAC (-0.4%) and IBEX (-0.2%) slipping a bit while the FTSE 100 is unchanged on the morning, but there is certainly no panic.  As to US futures, while they opened lower last night, as I type at 6:30 this morning, they are back to flat on the session.

In the bond market, yields have basically edged higher by 2bps across the US, Europe and Japan, either demonstrating that government bonds are no longer a safe haven, or that no haven is necessary because fears of escalation are minimal.  Despite all the negative talk about bonds, I would still opt for the latter explanation.

In the commodity markets, we’ve already discussed oil at length.  In the metals markets, gold is essentially unchanged this morning although we are seeing a mild divergence between silver (+0.6%) and copper (-0.7%), implying to me that there is no underlying risk trend here.

Finally, the dollar is the one thing that is flexing its muscles from a risk perspective as it is pretty sharply higher across the board.  In the G10, NZD (-1.4%) is the laggard followed closely by the yen (-1.25%), which given the weekend’s events is pretty surprising to most folks.  Perhaps yen is not as haven-like as previously thought.  But AUD (-1.1%) is sliding and the euro and pound are both lower by -0.5%.  In the EMG bloc, the dollar is firmer everywhere, but the moves, other than KRW (-1.2%) are less than might have been expected.  HUF (-0.9%) is the next worst performer with PLN (-0.75%) and CZK (-0.75%) all showing their high beta to the euro.  In Asia, CNY (-0.15%) remains dull and INR (-0.2%) is also lackluster.  LATAM currencies are showing little movement as well, with MXN (-0.4%) the laggard of the bunch.

Looking at data this week shows the following:

TodayFlash Manufacturing PMI51.0
 Flash Services PMI52.9
 Existing Home Sales3.96M
TuesdayCase Shiller Home Prices4.2%
 Consumer Confidence99.8
WednesdayNew Home Sales700K
ThursdayInitial Claims247K
 Continuing Claims1947K
 Durable Goods7.2%
 -ex Transport0.1%
 Final Q1 GDP-0.2%
 Goods Trade Balance-$92.0B
FridayPersonal Income0.3%
 Personal Spending0.1%
 PCE0.1% (2.3% y/Y)
 Ex Food & Energy0.1% (2.6% Y/Y)
 Michigan Sentiment60.3

Source: tradingeconomics.com

As well as all this, with most folks looking forward to Friday’s PCE data, we hear from Chairman Powell as he testifies to the Senate on Tuesday and the House on Wednesday.  In addition, there are 13 more Fed speeches from 10 different speakers.  Too, Madame Lagarde regales us three different times.  A cynic might think that central bankers are concerned their comments are losing their importance!

One never knows what is truly happening on the ground in Iran as all news organizations and governments are trying to tell their own story.  However, I do not believe that this is going to escalate into a greater problem going forward, but rather that there is every chance that tensions reduce over time.  I do not believe Iran will even attempt to block the Strait of Hormuz and if this is the worst that the Middle East can produce in the way of war, look for oil prices to slide back toward $65-$70.  As to the dollar, it feels a bit overdone here, so a modest retracement seems viable as well.

Good luck

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Much Hotter

Posted on by

Remember when riots were seen
Across every TV’s flat screen?
Well, that’s in the past
As news of a blast
In Tehran, just one thing, can mean
 
The Middle East just got much hotter
And now every armchair war plotter
Will offer their views
Of which side will lose
So, traders, keep watch o’er your blotter

 

Is it a coincidence that Israel’s attack on Iran’s nuclear sites occurred on Friday the 13th, or was it meant as a message that luck, both good and bad, can be manufactured? Whatever the driver, the market reaction has been instantaneous.  Here is a look at the five-minute chart in oil with the black sticky stuff jumping more than 8% on the news.

Source: tradingeconomics.com

Too, gold jumped (+1.2%) as did the dollar (EUR -0.4%, AUD -1.0%) although both JPY (+0.3%) and CHF (+0.4%) showed their haven characteristics.  Treasury bonds rallied with yields slipping an additional -3bps in the evening session on top of the -5bp decline during the day, and stock futures are under pressure around the world (S&P500 -1.6%, Nikkei -1.5%, DAX -1.5%).  This was the early price action.

Those were last night’s initial moves and thus far, things have moderated a bit.  For instance, oil has fallen back about 1%, though remains higher by 7.3% and that big gap down on the charts from April has been filled.  

Source: tradingeconomics.com

Of course, there is now a new gap below the markets to fill, but that is a story for another day.  Equity markets are also finding their footing, bouncing off their lows as the 20-day moving average has held and dip buyers see this as an opportunity.  However, the dollar is little changed from its initial moves as is gold, and overall, not surprisingly, risk-off defines the overnight session and likely will be today’s focus.

Now, there is nothing funny about this situation with more death and destruction occurring and likely in our immediate future.  However, I could not help but chuckle at the Russian statement that Israel’s actions were “unprovoked” and “a violation of UN principles and international law.”  Of course, I guess President Putin would know all about unprovoked attacks and violating UN principles and international law given his ongoing efforts in Ukraine.

Ok, I am not a war plotter, nor a war monger, so let’s see how this and any other things are developing in the markets.  While the war discussion will dominate the headlines, there are other things ongoing that are worth considering.  For instance, though the dollar is performing as its historical safe haven this morning, SocGen analysts highlighted a very interesting relationship that has developed in the dollar with respect to inflation surprises over the past four months.  As you can see in the chart below, it appears that as we have seen a series of lower-than-expected inflation readings, the dollar has fallen in step.  Now, correlation is not causality but one could make the case that reduced inflation will lead to a more aggressive easing policy by the Fed and that could be the mechanism by which this relationship operates.

Along the same lines, there have been more stories regarding the softening in the US labor market and at what point the Fed is going to need to focus on that, rather than inflation, as they consider their policy objectives.  As well, the large contingent of analysts who expect the US to enter a recession soon have pointed to the labor market and the fact that much of the underlying data appears to show a less robust situation than the headlines have thus far revealed.  

I have two anecdotes to recount here, neither of which indicates the labor market is softening.  First, the local pizza parlor is at wits’ end trying to hire people to work there, a common high school summer or after school job but there are no takers.  Second, my daughter works for a TMT consulting firm in HR, and they are seeking to hire several new analysts and junior consultants, jobs that pay six figures out of college, and they, too, are having difficulty filling the roles.

I know that anecdata is not definitive, but two very disparate service industries are facing the same issue, and it is not a question as to whether to reduce headcount.  Consider the idea that the recent declines in inflation readings are a short-term outcome and that underlying inflation remains in the 3.5%-4.0% range.  Given median CPI is still running at 3.5%, that is entirely feasible.  If, as we go forward, we start to see high side surprises in inflation, and this relationship has meaning, that could well imply we are looking at a short-term dip in the dollar and that as the year progresses, this will reverse.  My take is that the Fed will only consider cutting rates, at least as long as Powell is Chair, if inflation remains quiescent and unemployment starts to rise.  But if inflation rebounds, I believe they will be reluctant to go there.

Now, as the morning progresses, the dollar is picking up steam with the euro (-0.8%), pound (-.6%) and JPY (-0.6%) all falling, even the havens yen and CHF (-0.5%).  In fact, looking across the board, every major currency is weaker vs. the dollar at this point in the morning (7:15).  As the US has awakened, it seems that the haven status of the dollar is reasserting itself.

Perhaps more surprisingly, Treasury yields have turned around and are now higher by 2bps, which has dragged all European sovereigns along for the ride.  In fact, the weakest nations (Italy +4bps, Spain +5bps) are faring even worse, as is the UK (Gilts +5bps).  Apparently, the recent ideas of the BOE getting more aggressive in its rate cutting is no longer the idea du jour.

In the equity markets, red remains the only color on the screen with Asian markets (Nikkei -0.9%, Hang Seng -0.6%, CSI 300 -0.7%) all rebounding from their early worst levels, but slipping on the day, nonetheless.  I guess there are dip buyers in every market 😃.  In Europe, continental bourses are all sharply lower (DAX -1.4%, CAC -1.1%, IBEX -1.6%) although the FTSE 100 (-0.4%) is holding up better.  As to US futures, they have rebounded slightly from their earliest lows and are now down about -1.0% at 7:20.  Wouldn’t it be something if they closed the day higher?  I don’t think we can rule that out!

Finally, commodities continue to show oil much higher, no retracement there, and gold also holding its gains although copper (-2.5%) is under pressure.  This is a bit odd to me as I would have thought war would bring more copper demand to a market that is physically undersupplied, but then the LME price of copper and the COMEX price of copper seem unrelated to the industrial flows of late.  At this time, everyone is waiting for the Iranian response, although apparently, the first response, a wave of drone attacks on Israel, was completely thwarted.  Not only did Israel destroy some key nuclear sites, but they were able to eliminate almost the entire leadership of the Iranian army and special forces, so any response is likely to take a little time to be created. No oil facilities were targeted, although the Strait of Hormuz is a key chokepoint in the oil market and Iran is likely able to disrupt the flow of tankers through there for now.  What we know is that everyone who was short oil as a trade has likely been stopped out.  It will likely take a little time before new shorts come back to play, so I expect a few days of prices at these levels.  However, the longer-term trend remains lower, so absent a destruction of oil producing fields, I expect that prices will retreat ahead.

On the data front, this morning brings only Michigan Consumer Sentiment (exp 53.5) and with it the inflation expectations piece, although that has been shown to be a political statement, not an economic one.  I cannot shake the feeling that by the time we head to the weekend, equities will have recovered their early losses, and the dollar will cede some of its gains.

Good luck and good weekend

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No Retreating

Posted on by

The virtue of patience remains
The key to our policy gains
Though tariffs and trade
May one day, soon, fade
It’s still ‘nuff to scramble our brains

 

In a bit of a surprise, Chairman Powell resurrected the term ‘transitory’ in his press conference yesterday with respect to the potential impact on prices from President Trump’s tariff policies.  He explained, “We now have inflation coming in from an exogenous source, but the underlying inflationary picture before that was basically 2½% inflation, 2% growth and 4% unemployment.”  In addition, he said, “It’s still the truth if there’s an inflationary impulse that’s going to go away on its own, it’s not the right policy to tighten policy because by the time you have your effect, you’re in effect, by design, you are lowering economic activity and employment.”  It is this mindset that returned ‘transitory’ to the discussion.  Now, while mainstream economics would agree to that characterization, with the idea being it is a one-off price rise, not the beginning of a trend, given the Fed’s history of using the word to describe the impact of monetary and fiscal policies in the wake of the pandemic, it caught most observers off guard.

But in the end, the Fed’s only policy change was a reduction in the pace of runoff of Treasuries from the Balance Sheet on a temporary basis.  Previously, they had been allowing $25B per month to run off without being replaced and starting April 1, that will be reduced to $5B per month.  The runoff of Mortgage-backed assets will continue as before.  This has been a widely discussed idea as the Fed approaches their target of “ample” reserves on the balance sheet, an amount they still characterize as “abundant”.

As to changes in the dot plot and SEP forecasts, they were, at the margin, modest, with the median dot plot ‘forecast’ continuing to call for 2 rate cuts this year.  Fed fund futures are now pricing in 65bps of cuts, so marginally tighter than the 75bps seen last week.  The SEP also showed slightly different forecasts for growth, inflation and unemployment, but just a tick or two different, hardly enough about which to get excited.  

Certainly, Mr Powell said nothing to upset equity markets as the response was a continuation of the modest rally that began in the morning.  As well, bond yields slid almost 9bps from their level just before the Statement was released.  Net, I expect the only people who are unhappy with the Fed’s performance are the hundreds of millions of Americans who have seen the inflation rate remain above the 2.0% target for the past 48 months (see chart below), but then Powell doesn’t really respond to them directly, now does he?

Source: tradingeconomics.com

Oh yeah, President Trump also published a little note on Truth Social that Powell should cut rates, but I don’t think that had any impact at all.  For now, Trump’s attention is elsewhere, and if 10-year yields continue to slide, I suspect he will be fine, certainly Secretary Bessent will be.

In Europe, the leaders are meeting
Again, as they keep on repeating
They need to spend more
To maintain the war
In Ukraine, ‘cause there’s no retreating

Back in the real world, the diverging points of view between President Trump, and his attempts to end the Ukraine War, and the EU, which seems hell-bent on continuing it ad infinitum were highlighted again today as yet another summit meeting is being held in Brussels to discuss the process and progress on rearming the continent as well as how they envision the future of Ukraine.  This matters to markets as the continuous calls for more fiscal military spending is going to be a driver of equity prices in Europe, and given it is going to be funded by issuing more debt, on both a national and supranational basis, yields are likely to rise as well over time.  

There has been much talk lately of the end of US exceptionalism, and certainly there has been a shift of investment into European shares, especially defense firms, and out of US tech shares.  This has helped support the single currency, which while it has slipped the past two days, remains higher by 4.5% since the beginning of the month.  Ex ante, there is no way to know how this situation will evolve, but if history is a guide at all, the US continues to hold all the defense cards in the deck, and so even with European protests, I suspect the war will come to an end.

But here’s a thought, perhaps even if the war ends, the pre-war energy flows may not resume.  This would not be because Europe doesn’t want cheap Russian gas, but perhaps because Russia doesn’t want to sell it to those who will use it to build armaments that can be used against Russia.  The world has moved to a different place both politically and economically, than where it was pre-Covid.  My sense is many old models may no longer work as proxies for reality, which takes me back to my favorite theme, the one thing on which we can count is more volatility!

Ok, let’s take a turn through markets overnight.  After the US rally, Asia was far more mixed with the Nikkei (-0.25%) slipping a bit and both China (-0.9%) and Hong Kong (-2.2%) falling more substantially on fears that US tariffs could slow growth there more than previously feared.  But elsewhere in the region there were far more gains (Korea, Australia, India, Taiwan) than losses (Malaysia, Thailand). 

Europe, though, is having a tougher session with losses across the board.  The continent is particularly hard hit (Germany -1.7%, France -1.2%, Spain -1.2%) although the UK (-0.3%) is holding up better after decent employment data was released.  We did see the Swiss National Bank cut its base rate by 25bps, as expected, while Sweden’s Riksbank left rates on hold, also as expected.  In fairness, European stocks have had quite a good run, so a pullback should not be a surprise, but it is disappointing, nonetheless.  As to US futures, at this hour (7:10), they are pointing lower by -0.5% or so.

In the bond market, Treasury yields are lower by a further -4bps this morning and down to 4.20%, still well within the recent trading range (see chart below).  As to European sovereigns, they too are lower by between -3bps and -5bps, as despite concerns over potential new issuance, fear seems to be today’s theme.  Oh yeah, JGB yields are still pegged at 1.50%.

Source: tradingeconomics.com

In the commodity bloc, oil is little changed this morning, and net, on the week little changed as well.  It is difficult to see short-term drivers although I continue to believe we will see it drift lower over time as supply continues apace while demand, especially in a slowing growth scenario, is likely to ebb.  Gold (-0.6%) is having its worst day in more than a week, but the trend remains strongly higher.  Arguably a bit of profit taking is visible today.  This is dragging silver (-1.8%) along for the ride although copper (+0.1%) is sitting this move out.

Finally, the dollar is firmer again this morning, higher by 0.5% according to the DXY, with the biggest currency laggards the AUD (-1.1%), SEK (-0.8%) and ZAR (-0.75%).  But the dollar’s strength is universal this morning.  One possibility is that traders have decided Powell is not going to cut rates, hence more pressure on US equities, and more support for the dollar.  I don’t agree with that thesis, as I believe Powell really wants to cut rates, but for now, the other argument has the votes.

On the data front, we get the weekly Initial (exp 224K) and Continuing (1890K) Claims as well as the Philly Fed (8.5) all at 8:30.  Then at 10:00 we see Existing Home Sales (3.95M) and Leading Indicators (-0.2%).  Also, at 8:00 we will get the BOE rate decision, with no change expected.  However, as I have been explaining, central bank stories are just not that important, I believe.  Investors in the UK are far more worried about the Starmer fiscal disaster than the BOE.

There are no Fed speakers on the schedule today, so, I suspect it will be headline bingo.  While the dollar has outperformed for the past two sessions, I continue to believe the trend is lower for the buck and higher for commodities.  Perhaps today is a good day to take advantage of some dollar strength for payables hedgers.

Good luck

Adf

Eclipse

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This morning, the question on lips
Is where did DeepSeek get their chips
As well, there’s concern
That China will learn
Our secrets, and so, us, eclipse

 

Narratives are funny things.  They seemingly evolve from nowhere, with no centralization, but somehow, they quickly become the only thing people discuss.  I’ve always been partial to the below comic as a perfect representation of how narratives evolve for no apparent reason.

Of course, yesterday’s narrative was that the Chinese LLM, DeepSeek, was built by a hedge fund manager with older NVDA chips and for far less money than the other announced models from OpenAI or Google and performed just as well if not better.  While equity traders were not going to wait around to determine if this was true or not, hence the remarkable selling on the open of all things AI, a little time has resulted in some very interesting questions being raised about the veracity of how DeepSeek was built, what type of chips they use and who actually built it.

For instance, a quick look at NVDA’s 10Q shows that, remarkably, Singapore is a major source of revenue, and it has been growing dramatically.

Source: SEC.gov

Now, it is entirely possible that Singapore is a hotbed of AI development, but from what I have read, that is not the case.  In fact, there is basically one lab there that has resources on the order of just $70mm.  But despite that lack of local investment, at least reported local investment, Nvidia shows that chip sales in Singapore nearly quadrupled in the last year.  Far be it from me to suggest that the narrative may change again, but who is buying those chips, more than $17 billion worth?  The idea that they have been trans shipped to China is quite plausible and they may well be what underpins DeepSeek.

Again, I have no first-hand knowledge of the situation but it is not beyond the pale to make the connection that China has been effectively circumventing US export controls through Singapore, have built their own LLM model using the exact same chips as OpenAI and others, but propagated a narrative that they have built something better for much less in order to undermine the US tech sector equity performance and call into question some underlying beliefs in the US market and economy.  Now, maybe this Chinese hedge fund manager did what he said.  But the one thing we know about China is, it is opaque in everything it does, so perhaps we need to take this story and dig deeper.  I am sure others will do so, and more information will be forthcoming, but it highlights that narratives continue to drive markets, but can also, at times, be constructed rather than simply evolve.

The thing is, this is still the only story of note in the market.  Scott Bessent was confirmed as Treasury Secretary yesterday, and indicated he was a fan of gradual tariff increases, perhaps 2.5% per month, rather than large initial tariffs, but that does not seem all that exciting.  And while Trump has not slowed down one iota, his focus has been on things like browbeating California into allowing reconstruction of LA rather than international issues, at least for the past twenty-four hours.  The upshot is that markets, which even yesterday closed far above their worst levels from the opening, are rebounding further today with many of yesterday’s moves reversing, at least to some extent.

Starting in the equity markets, despite the weakness in the tech sector, US market closes were far higher than the opens with the DJIA actually gaining 0.65% on the session.  However, while Japanese shares (-1.4%) definitely felt the pain of the tech sector, the rest of Asia saw some decent performance (Korea +0.85%, India +0.7%, Taiwan +1.0%) although Chinese shares (-0.4%) struggled.  Of course, one reason for that may be that the largest Chinese property company, Vanke, reported humongous losses and both the Chairman and CEO stepped down.

In Europe, though, all is well with every major exchange in the green led by Spain’s IBEX (+1.0%) although gains of 0.5% – 0.7% are the norm.  Now, remember, there is effectively no tech sector in Europe to be negatively impacted by the AI story, and it should be no surprise that these shares have followed the DJIA higher.  And this morning in the US futures market, at this hour (6:50), we are seeing gains on the order of 0.4% across the board.

In the bond market, yesterday’s early rally in prices (decline in yields) backed off as stocks bounced from their lows although Treasury yields still fell 10bps on the day.  This morning, the bounce in yields continues with Treasury yields higher by another 3bps and European sovereign yields rising between 1bp and 2bps on the session.  It will be very interesting to watch the bond market now that Bessent has been confirmed as Treasury Secretary given his goal to extend the maturity of the US debt outstanding.  Arguably, that should push up back-end yields, so we will see how effective he can be in reaching that goal.  

Turning to commodities, yesterday saw a rout there as well with both oil and the metals markets suffering greatly.  However, this morning, like many other markets, things are reversing course.  Oil (+0.75%) has bounced off its lows from yesterday, and despite a pretty rough past two weeks, is still higher than it was at the beginning of the year.  Gold and silver are unchanged from yesterday’s closing levels, and while off their recent highs, remain much higher in the past month.  Copper, too, is bouncing slightly and still much higher this month.  Perhaps yesterday’s price action was a catalyst for lightening up positions rather than changing views.

Finally, the dollar has rebounded vs. the G10 this morning, rising alongside US yields with the euro (-0.7%) and AUD (-0.8%) lagging the field, although dollar gains of 0.5% are the norm across the entire G10 this morning.  In the EMG bloc, the CE4 are all tracking the euro lower, with all down around -0.6% to -0.8%, but yesterday’s biggest laggards, MXN, COP and BRL are little changed this morning, not rebounding, but not falling further.  With the Fed expected to remain on hold while both the BOC tomorrow and ECB on Thursday are set to cut rates, perhaps the FX market is reverting to its more fundamental interest rate drivers than the hysteria of AI models.  If that is the case, then we are likely to turn our attention to Chairman Powell’s press conference as the next critical piece of news.

On the data front this morning, we see Durable Goods (exp 0.8%, 0.4% -ex Transport), Case Shiller Home Prices (+4.3%) and Consumer Confidence (105.6).  Yesterday saw New Home Sales rise more than expected but still resulted in the smallest number of sales for the year since 1995 when the population was far smaller.  

Once again, depending on where you look, you can find data that supports either economic strength or weakness.  It strikes me that today’s data will be of little consequence as traders will be focused on the equity market to see if the rebound has legs, as well as further news regarding DeepSeek.  Tomorrow, however, the Fed will take center stage.

Good luckAdf