Tag Archives: #inflation

Kurtosis

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Get ready to hear ‘bout kurtosis
An idea what very few knows is
In this case they’ll say
Fat tails did hold sway
Be careful, though, ere there’s psychosis

This definition from slideserve.com is probably the most comprehensible one that I have seen around, so thought it would be useful to understand.  And below, is a chart that shows the shape of distributions of outcomes.  Markets live on the blue line below.

The reason this is important was made evident on Friday given the extraordinary movement seen in markets.  It is important to understand that both commodity and financial markets have always demonstrated leptokurtosis in their behavior.  This means that the tails are fatter than a normal distribution’s tails.  In other words, there are far more large movement events than a normal probability distribution would expect or predict.  So, while I have read that Friday’s decline in gold and silver prices were anywhere between a 5SD and 12SD move (it doesn’t really matter for our purposes, just suffice it to say it was quite large), there is nothing to say it cannot happen again tomorrow.  You will undoubtedly read from some that this movement shouldn’t have occurred during the life of the universe it was so statistically improbable, but that is based on a normal distribution.

Understand, too, that market makers, especially in options markets which rely on the basic math of the normal distribution, are well aware that tails are fat.  It is why volatility curves in all markets have smiles or smirks, as these are an effort to take account of those fat tails.  It turns out the math for fat tail distributions is incredibly complex, so traders are happy with the smile approximations.

Which brings us to the question of what really happened and why did it happen on Friday?  The answer is, nobody really knows.  I have seen several writeups that certainly make sense, and are likely to have been part of the process, but in markets, given the millions of variables that are part of the market process (consider how many individuals trade the stuff in addition to things like economic variables and supply/demand information for commodities), it is difficult to pinpoint an exact catalyst. 

Many are pointing to the naming of Kevin Warsh as Fed Chair, on the surface a more hawkish pick than had been expected earlier in the week, although on Thursday, his Kalshi odds were already above 90%, so would seem to have been priced.

What we do know is that leverage was high and that prices were massively extended on technical indicators.  Parabolic moves tend to crash in the same way they rise.  Certainly, once things got going, margin calls were rampant and there was a great deal of forced selling.  The chart below shows just how extensive the move was, and I highlighted the opening of the NY session.

Source: tradingeconomics.com

The great thing about moves like this are the conspiracy theories that arise as an explanation.  Here’s the thing about conspiracy theories, once there are more than two people involved, it tends towards a leak. 

So, what do we know?  Comex futures prices when Asia opens tonight are going to be a lot lower than when they went home on Friday.  But…Chinese licensing restrictions remain in place; no new silver mines have been discovered let alone gone into production; both individuals and central banks in Asia continue to buy the stuff; and the premium for physical metal in Shanghai remains steep.  The fundamentals have not changed with regard to the metals themselves.

How about the financing questions?  Is Warsh a hawk?  My take is he is going to work hand in glove with Scott Bessent to address the economic issues in the nation.  So, I would look for support (i.e. QE) for issuance, although it is entirely realistic that when (if) Warsh sits down in the chair, there will be fewer Fed fund rate cuts than might have been seen with another choice.  Warsh is going to essentially join the Cabinet, as they work to implement their vision of how to overcome the debt and deficit issues.

Is this, more hawkish view, the rationale behind the moves on Friday?  It probably played a role, but it is difficult to ascribe movement of that nature, especially given its self-generated response to positioning, to a single data point.

One other thing to note was that the dollar, which was set to collapse according to so many, rebounded sharply alongside the precious metals’ declines, albeit not quite as far.

Source: tradingeconomics.com

I never looked at the screens on Friday because I know that when moves like that happen, it’s easy to regret the trades you make.  But the underlying thesis remains unchanged.  I was not counting on the dollar’s decline to drive precious metals’ prices higher, and that relationship has broken down to a large extent anyway.  It is not clear to me that having a perfect understanding of the drivers of Friday’s markets is critical.  If I hearken back to Black Monday in October 1987, when the S&P 500 fell 22%, Ace Greenberg, then chairman at Bear Stearns, said it best when asked about what happened.  His reply was, “Markets move, next question.”

Remember that, markets move.

Good luck

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Leverage Thumbscrews

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The President said that today
He’d let us know who’ll replace Jay
The favorite is Warsh
But that could be harsh
For markets, or so people say
 
But really, this morning, the news
Is silver and gold have the blues
It turns out their prices
Were causing a crisis
For players with leverage thumbscrews

The big news this morning, is that President Trump is ostensibly going to announce former Fed governor Kevin Warsh as his selection for the next Fed Chair.  His history has been as someone who has disagreed with many Fed decisions, and he skews to the hawkish side of the spectrum, which seems odd for Trump who everyone expected would nominate a dove. He is clearly quite capable of doing the job and brings a significant amount of intellectual firepower to the role.  It remains to be seen, if he is nominated, how the confirmation process will proceed, as well as what Jay Powell will do when his Chairmanship is up (his term runs until 2028).

The interesting connection for me is the number of stories that have linked this rumor to major market moves overnight, especially in the precious metals space.  So, let’s jump in and look at a few charts to offer some perspective on things.  

As we all live in the moment, it is often difficult to consider history in its fullness.  Look at the three charts of gold (from tradingecomomics.com) that follow, each over a different timespan, 1week, 1year and 5 years.

1 week:

1 year:

5 years:

What do you notice:  there is no question that gold (-4.7% or $250/oz) has fallen sharply overnight.  that is evident in the first two charts.  However, a look at the first chart shows you that despite a decline of that magnitude, the barbarous relic is still higher THIS WEEK!  While gold has been exploding higher, it only crossed above $5000/oz for the first time on Sunday night in Asian trading.  Now, I expect the bulk of the discussion will center around the 1-year chart which shows the dramatic decline as that is the newsworthy story, the ‘collapse’ in the price.  But if we zoom out further, to the 5-year perspective, which has weekly candles, the last down week was in December.  Market technicians will point to the shape of the most recent weekly candle, which is typically referred to as a hammer candle, and explain it signals a reversal in trend.  And maybe it does.  But the fact is volumes on the way up were much higher than those overnight, which does not portend panic selling.  Trees don’t grow to the sky, and a reversal was always expected.  Here we are.

The price action in silver overnight was almost identical, albeit more violent as has been the case with the rally as well.  Platinum too.  A couple of other things to consider about this:

  • Today is month end, a time when positions are typically adjusted and rebalanced, so given the tremendous rally seen this month in the metals, selling is what rebalances things.
  • China has not changed its policy regarding gold purchases nor its policy on license restrictions for the export of silver, so to the extent that those were driving forces in the rally, they still exist
  • There is no evidence the world is a safer place this morning than it was yesterday morning.  There’s no peace in Ukraine; the Ayatollah has not relinquished power; Cuba and Venezuela remain in the status quo, and Europe continues to try to figure out how to power themselves without relying on the two largest energy exporters in the world, the US and Russia.

It beggar’s belief that this is entirely a reaction to the rumored naming of Kevin Warsh as the next Fed chair.  As I type early this morning, the prices of precious metals are already bouncing nicely off their lows.  I do not know what drove this move specifically, but I do not believe that the big picture story has changed.

This segues nicely into another key narrative this week, the dollar’s massive break lower.  Earlier this week I had written about how the DXY was approaching a double bottom on the charts and many in the market were convinced that if we traded below that level, and more importantly, closed below the level, which was 96.22, that it opened the door for a much more significant leg lower.  I addressed this, pointed out that the dollar was still in the broad middle of its long-term trading range, but acknowledged that a move lower was quite realistic.  Well, as of yet, we have not closed below the key level, and this move is shaping up as a potential bounce back into the range.  As you can see in the chart below, the baseline is still holding on.

Source: tradingeconomics.com

Now, the dollar is stronger across the board this morning (EUR -0.2%, GBP -0.2%, JPY -0.5%, CHF -0.4%, ZAR -1.1%, CLP -0.6%) although these declines are abating in a similar fashion to the precious metals price action this morning.   Here, too, portfolio rebalancing would indicate that traders would be buying dollars given its decline this month.  Has anything really changed in the FX markets overnight?  All the recent policy decisions were exactly as expected.  Data overnight showed that European GDP continues to muddle along at just 1.3%, hardly a rationale to invest aggressively on the continent.  Is this dollar rebound just a response to the Warsh story and his presumed hawkishness?  Or is it the normal ebb and flow of markets.  I am not yet willing to concede the dollar is breaking lower, I need more proof for that, but I certainly cannot rule out that outcome, regardless of who the new Fed chair is.  

How about other markets?  Equities in the US yesterday were hampered by Microsoft’s earnings release Wednesday, with its decline dragging down the NASDAQ, although the DJIA managed to recoup all its early losses and finish in the green (barely).  But Asian bourses had a more difficult time.  While Japan (-0.1%) was little changed, both China (-1.0%) and HK (-2.1%) fell sharply, and I don’t believe those markets were responding to the Warsh rumor.  It appears that HK, especially, was the victim of month end profit taking and rebalancing as it has had quite a good run this month.  The other key laggard in the region was Taiwan (-1.45%) while the rest of the markets in the time zone were +/-0.5% or so, or less.  

European shares, though, are all firmer this morning led by Spain (+1.6%) after GDP data there was a tick better than expected at 2.6%.  But gains are universal (DAX +0.85%, CAC +0.7%, FTSE 100 +0.4%) as earnings results were enough to offset the generally lackluster data.  Perhaps the idea of another ECB rate cut is entering the collective consciousness, although according to the ECB’s own forecast tool, there is a 10% probability of a 25bp rate HIKE.  I’ll believe that when I see it.  As to US futures, they are softer this morning as I type (7:10), with declines on the order of -0.3% across the board, which is also a rebound from levels earlier this morning.

Bonds:  nobody seems to care.  Yields have edged higher by 1bp virtually across the board this morning and still remain within the recent trading ranges.  It is quite interesting how little financial markets are focusing on this key source of information.  

And before I leave, oil (-0.5%) has backed off its recent top, although remains higher by 6.5% this week as concerns over a possible US action in Iran continue to haunt traders.

On the data front, this morning brings PPI (exp 0.2%, 2.7% Y/Y) for headline and (0.2%, 2.9% Y/Y) for core as well as Chicago PMI (44.0).  Too, we get the first Fed speaker, Governor Bowman, but the only Fed news that is going to matter today is the mooted announcement about the next Chair.

What have we learned this week?  Volatility is alive and well in the commodity space, and, although not quite to the same extent, in the equity space.  Bonds are boring and the dollar continues to refuse to stick to the narrative that its days in the sun are over.  Regarding the dollar, remember that despite all the talk of the dollar’s collapse, the only thing we have heard from ECB members is that if the euro rises too much (i.e. the dollar falls sharply) that is a problem and they will need to respond.  It’s been an eventful month in the markets.  I suspect that this may be a map for at least the first half of the year.

Good luck and good weekend

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Commodities Blazing

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According to Jay and the Fed
The ‘conomy’s moving ahead
So, rates are on hold
With rallies in gold
And stocks and the dollar instead
 
But really, the thing that’s amazing
Is nobody cares about phrasing
Or Dot plots or pressers
‘Cause now all the stressors
Are Trump and commodities blazing

Once upon a time, the FOMC meeting was THE story for markets during the week leading up to the meeting and through the Chair’s press conference explaining the many virtues of what they did and why they did it.  Of course, this has not always been the case.  If we head back to the pre-Alan Greenspan days, the FOMC was peopled by 18 anonymous members and the Fed Chair, at that time Paul Volcker, and nobody ever spoke to the press and only grudgingly to Congress, they simply managed the money supply to the best of their ability to achieve their mandates.  The biggest data point of every week was the Thursday afternoon M2 release, and there was an entire subculture of ‘Fed watchers’, similar to ‘Kremlin watchers’ whose job was to read the tea leaves based on market behavior and data in trying to determine how the Fed would behave going forward.

Almost the only time Chairman Volcker spoke in public was at the semiannual Humphrey-Hawkins testimony to Congress, but he basically never answered any questions and clearly didn’t care what either Senators or Congressmen asked.

But then we got the “Maestro”, Alan Greenspan, who after Black Monday in October 1987, created the first Fed put.  At that time, the rest of the FOMC was still largely anonymous, but Greenspan craved the limelight, if only to try to show how much smarter he was than everybody else.  Famously, he explained in Congressional testimony in 1996, “If you understood what I said I must have misspoken.”  Greenspan was more available to the press than Volcker, but the rest of the committee remained in the background.

However, that simply set the table for the ensuing Fed chairs, Bernanke, Yellen and now Powell, all of whom give press conferences and clearly encouraged their minions to get out there and deliver the message.  As so many struggling leaders explain, it’s not the substance, it’s the messaging that’s the problem.  This is what we have all been dealing with since Bernanke sat down in 2006, mandated press conferences and pushed the narrative as a critical part of policy.

Then, along came President Trump’s second term, and times, they are a-changing.  While Trump rails on Powell to cut rates and lambastes him regularly, it turns out, the combination of new fiscal and economic policy is driving monetary policy into the background, at least from the perspective of market participants.  The result is that while FOMC members still get out there and give interviews regularly, they are never newsworthy.  In fact, my suspicion is that the reason Chairman Powell made his little video announcing the Fed received subpoenas was as an effort to get back on the front page, a place he and his committee members have clearly grown to enjoy, and from which they are increasingly absent.

Which brings us to the meeting yesterday where…nothing happened.  Policy rates remain unchanged, as universally expected, two voters wanted 25bp cuts (Miran and Waller), and they admitted that economic activity moved up from “moderate” to “solid”.  In the most stinging rebuke, the market virtually ignored the entire process.  In fact, the discussion about the next Fed chair is ebbing into the background.  My take is this is a better situation for all involved.  I only hope it stays this way.

So, what did happen?  Stocks were flat, bonds were flat, the dollar rebounded a bit, and commodities continue to rocket higher.  Let’s take a turn around markets overnight and start with commodities as that is where all the action is.

Copper (+6.1%) is the overnight star, soaring in Asia to record highs.  As with virtually all commodities right now, blame is laid at the feet of the weakening dollar (it didn’t move overnight) and with uncertainties about President Trump’s next actions and the potential risks attendant to those actions when they occur.  As we have seen with both gold (+1.9%, +27.1% in the past month) and silver (+1.3%, +54.6% in the past month), there is no doubt that fiat currencies are losing their status as a store of value, regardless of the interest rates they pay.  While copper’s movement has not been as extraordinary as that of either gold or silver, the trend, as you can see in the chart below, remains clearly higher.

Source: tradingeconomics.com

The underlying reality for all these metals is that the financialization of economies all around the world has resulted in far more market activity than was necessarily warranted by the physical markets.  And physical markets need ounces and pounds of stuff, which have very long lead times to get out of the ground.  As a trader, I look at these moves in precious metals and am very concerned they are overdone but as somebody with a basic understanding of physics, I see no reason to believe that the demand for these metals is going to slow down anytime soon.  The below chart shows just how extraordinary the silver move has been, and the table below it really tells the tale.

Source: tradingeconomics.com

As to oil (+2.6%), it is heading higher this morning on increasing fears that the President is going to initiate a military action to depose the Ayatollah in Iran.  Concerns are rising about Iran closing the Strait of Hormuz as well as its ability to respond via missile attacks.  Remember, though, a market that moves on a political issue will revert once that issue has either occurred, or clearly won’t occur, so do not mistake this move for the beginning of a new trend.  Consider what happened to oil after Russia invade Ukraine and after they invaded Crimea in 2014.

Source: finance.yahoo.com

Turning to the equity markets, yesterday’s US blahs were followed with a bit more price action in Asia as though Japan (-0.7%) slipped a bit, China (+0.8%), HK (+0.5%), Korea (+1.0%) and Taiwan (-0.8%) all so more significant movement, albeit not offering a larger theme given the relative gains and losses.  Elsewhere in the region, the smaller exchanges showed more red than green.  In Europe, Germany (-1.15%) is the dog, falling on idiosyncratic weakness in SAP and Deutsche Bank following weak earnings and forecasts, but the rest of the space is performing well (UK +0.4%, France +0.65%, Spain +0.4%) as earnings there have been relatively solid.  And, at this hour (7:10), US futures are pointing higher by about 0.25% or so as earnings numbers have been strong so far this week, highlighted by Meta last night.

In the bond market, activity is less frenetic with Treasury yields unchanged this morning, European sovereigns catching a bit of a bid as yields slip -2bps across the board and JGB yields (+2bps) rising after the latest poll showing PM Takaichi increasing her odds of getting an LDP majority in the Diet next week.  Something to watch closely going forward is the shape of the yield curve as there is growing concern that long-end rates may rise regardless of the Fed (yet another sign the Fed is losing its sway).  In fact, I suspect if that is the case, that we will see yet another bout of QE, although they will find an alternate name.

Finally, in the FX markets, despite all the pearl clutching about the end of the dollar, there is no movement of note in any currency today, with the entire screen showing gains or losses of 0.3% or less with one exception, CLP (+0.5%) following the remarkable jump in copper’s price.  The linked article is quite funny as they explain all the negatives of a weak dollar and then also explain that ECB members are concerned about a too strong euro.  I am frequently confused by whether a strong currency is good or bad for a nation, but I guess it depends on the narrative you are trying to push.

On the data front, weekly Initial (exp 205K) and Continuing (1860K) Claims come at 8:30 as does the Trade Balance (-$40.5B).  We also see final Nonfarm Productivity (4.9%) and Unit Labor Costs (-1.9%) which if those numbers are met indicate quite positive economic activity.  Then, at 10:00 we see Factory Orders from November (1.6%), but that is such old data I don’t think it matters.

Remember, it is Trump’s world (and Bessent) and we’re just living in it.  The White House is the source of all the news so let’s all be happy that the Fed is fading into the background.  With that in mind, based on President Trump’s goals, a weaker dollar is clearly his desire, at least in the short run, although I continue to see scope for longer term strength.

Good luck

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Quite Gory

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While yesterday, there was one story
‘Bout silver and gold and their glory
By end of the session
The dollar’s depression
Was headlining comments quite gory
 
The narrative now speaks of trends
Which lead to a dollar that ends
The problem they’ve got
Is history’s taught
That cycles and dollars are friends

The dollar is clearly under pressure lately as discussed here yesterday morning.  Using the DXY as our proxy, it has traded and closed through the recent double bottom (see chart below), and the doomsayers are licking their chops that their views of the demise of the dollar are finally coming to fruition. 

Source: tradingeconomics.com

And I am not here to say the dollar is about to reverse course higher.  While I remain medium and long-term bullish on the buck, it doesn’t feel like the time to get long.  However, look at the chart below, to get a longer-term perspective on the dollar’s history.  This chart starts back in 1985, which is just before the Plaza Accord where it was agreed the dollar was too strong and central banks around the world intervened and altered policy to change it.  But here we are at 96ish in a market that has spent no little time below 80 with several drops below 75.  My point is, the dollar tends towards long cycles.  It is entirely possible that we peaked in late 2022 for this cycle and are now heading lower from there.  But I remain highly confident that it will reverse course and rebound. Not tomorrow, but this is not the end.  Just remember that when you read the eulogies for the buck.

Source: finance.yahoo.com

One other thing that seems to be getting headlines is that the president was asked his views on the dollar’s recent weakness and was (rightly) nonplussed over the issue as described here.  After all, this is a man who constantly rails against the artificial weakness of the yen and the yuan, and who is seeking to rebalance the trade account.  All that points to a weaker dollar, so it beggar’s belief that this is a surprise to the market.

One last thing while I’m on my high horse.  I couldn’t help but notice this article about Banque de France chief Villeroy explaining that the weakening dollar may impact ECB policy-making with a throwaway line about diminishing confidence in the dollar stemming from the unpredictability of US economic policy.  First off, US policy is very clear, run it hot!  And second, it is remarkable that when the euro was tumbling, we never saw this same introspection about Eurozone/EU economic policy and their self-destructive energy policies.  My point is, nothing we are currently witnessing is new in any way at all, but rather part of the longer-term cycle of FX markets.

OK, how has this dollar move impacted other markets?  Well, yesterday’s US equity session was marked by a rotation back to tech as the NASDAQ (+0.9%) had a fine day while the DJIA (-0.8%) fell hard.  This led to a mixed session in Asia with the Nikkei little changed (although other indices there were under steady pressure), while HK (+2.6%) exploded higher on news that China has licensed its first Nvidia H200 chips to Alibaba and someone threw money at China Vanke, one of the collapsing Chinese real estate firms.  The mainland was modestly higher (+0.25%) but there was strength in Korea (+1.7%), Taiwan (+1.5%) and India (+0.6%).  On the downside, Indonesia (-7.3%) tumbled after MSCI indicated they may downgrade the market there to frontier status due to lack of liquidity.

In Europe, red is today’s color led by Spain (-1.1%) and France (-1.0%) with the latter seeing weakness in luxury stocks while the former appears to be unwinding some of its recent strength with no particular catalyst, merely a negative view overall in Europe.  Germany (-0.2%) and the UK (-0.4%) are also softer without anything specific.  As to US futures, at this hour (6:40) they are pointing higher with NASDAQ (+1.1%) leading the way again.  As an aside, the S&P 500 futures are above 7000 now, and the cash market looks set to break that big round number this morning.

In the bond market, as we await the FOMC policy decision (no change expected) and the subsequent press conference, Treasury yields are unchanged this morning after having edged higher by 2bps yesterday.  European sovereign yields are all basically softer by -2bps, perhaps on the back of the euro’s strength.  After all, Villeroy hinted that if the euro remains strong, they may need to cut rates again.  Interestingly, JGB yields (-5bps) fell after BOJ Minutes from the December meeting (remember, they already met again last week) indicated that some members were concerned over the weaker yen driving inflation higher.  Talk about stale news.  My sense here is this is much more about the election and JGB’s will track Takaichi-san’s support level with lower yields coincident with weakening support, potentially preventing her Liz Truss moment.

In the commodity space, oil (0.0%) is unchanged this morning but has rallied more than 7% in the past month after a solid session yesterday.  Looking at the chart, the trend clearly remains lower, but the short-term reversal is also quite clear.

Source: tradingeconomics.com

The dollar’s recent weakness is supporting all commodities (given they are generally priced in USD, other nations can afford more with the dollar’s slide), but the bigger picture remains that there is an extraordinarily large amount of the stuff around and much of the angst over its recovery is political (look at Europe) rather than geologic.  Nat Gas (-4.5%) is backing off its extended levels as temperatures are forecast to rebound early next week (cannot happen soon enough for me, where’s global warming when you need it?), but the long-term story here remains positive as it continues to be the energy source of choice for timely access with the least environmental impact.

Turning to metals, gold (+1.6%) continues to trade to new highs on the ‘all of the above’ thesis (weak dollar, debasement trade, geopolitical risk, central bank buying) and shows no signs of slowing down.  Silver (-0.1%), however, has been so incredibly volatile it is starting to become a concern for all involved.  It is not normal for 10%-12% daily moves in any product, let alone one with so much involvement from both retail and institutional players.

Source: tradingeconomics.com

The silver market has gone into backwardation which means that there is significant demand for the actual metal.  And prices in Shanghai trade at a significant premium to the COMEX.  Shanghai is a delivery market.  We will need to watch deliveries at futures expirations closely going forward.

Finally, the dollar today is bouncing off yesterday’s session lows but remain under pressure overall.  After trading through 1.20 yesterday, the euro (-0.6%) has backed off a bit and we have seen similar moves through much of the rest of the G10 (GBP -0.6%, SEK -0.7%, NOK -0.7%, CHF -0.9%).  The yen (-0.3%) continues to be caught between potential intervention fears and fears of unfunded spending.  In the EMG bloc, we have seen CE4 currencies all suffer on the order of -0.7% or so, although APAC currencies are little changed this morning.  The one currency bucking the trend is CLP (+0.2%) which remains closely connected to copper (+1.0%).

On the data front, yesterday’s Consumer Confidence Index fell sharply, a further indication that there is a split between most of the economic numbers and people’s beliefs.  Today, aside from the Fed, we hear from the BOC (no change expected) and we get EIA oil inventories with a small draw forecast after several weeks of large builds.  Too, later in the day the Banco do Brazil will announce their policy (no change expected).

The thing that makes me happy is the Fed is an afterthought today.  While the cacophony of noise that comes from media is extremely difficult to parse given the biases underlying almost all one reads or hears, to me, the question will be whether people start to believe things are getting better, and that is more political than economic in my view.  In the meantime, the dollar appears to be set for a bit of further weakness, but do not mistake this for the end of the dollar or the dollar’s role in the global economy.

Good luck

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Totally Wrecked

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The chaos is starting to spread
As traders, when they look ahead
Have come to the view
More debt will accrue
And fear that the dollar is dead
 
So, gold and its ilk rise unchecked
While fiat is totally wrecked
Most bonds have a pox
But hope lives for stocks
And crypto? They’re still circumspect

I cannot possibly cover all the things ongoing in the markets right now as it would take a 5000 word note to do so adequately.  As such, I will try to give a high level take in far fewer words.

Headlines – 

  • Minneapolis continues to consume most of the domestic press, but is only tangentially, if at all, related to markets.  Perhaps it questions President Trump’s authority and that is a negative for US assets and the dollar.  
  • Xi Jinping purges his most senior military leader, accused of spying and selling state nuclear secrets to the US. Xi has removed virtually his entire military leadership, probably reducing near term risk of a Taiwan invasion, but ignores economic issues

Currencies – 

  • JPY (+1.2%) remains the top story as speculation remains rife that the BOJ stepped into markets on Friday (I don’t think so) and questions arise as to how soon they will do so. 

Source: tradingeconomics.com

 There is a great deal of talk of joint intervention with the US, but I remain skeptical there.  It is critical to understand exactly what joint intervention is and what it represents.  Joint intervention means that the US Treasury is selling its own dollars alongside those of Japan.  That is very different than the Fed, acting on behalf of the Treasury-MOF-BOJ connection executing sales for the MOF.  The former implies a US effort to change the dollar; the latter is simply assisting an ally in our time zone.  I can only think of two times the US intervened, 1985 and 1998.  In the second chart, I highlighted the shape of the move from 1998, which was obviously far sharper than anything we have seen so far. 

Source: finance.yahoo.com

  • DXY (-0.5%) is falling as well, obviously dragged lower by the dollar’s decline vs. the yen, but the dollar’s weakness is universal today.  As you can see from the chart, the DXY has fallen through the bottom of the trading range at 98.00 and the bears are celebrating the end of the dollar.  But just looking at the chart below, we need to see a more substantial extension, in my view, before concluding the dollar is dead.

Source: tradingeconomics.com

Precious Metals – 

MetalPriceDay%WeeklyMonthlyYTDYoY
Gold5090.47101.85+2.0%8.9%17.6%17.95%85.85%
Silver110.347.38+7.2%16.7%53.15%55.05%266.2%
Copper5.99420.048+0.8%1.6%8.4%5.45%42.2%
Platinum2867.20128.8+4.65%21.75%35.2%39.7%205.3%

Source: tradingeconomics.com

I think this table tells the entire story eloquently.  The combination of supply shortages in trading venues, as well as for industrial users, and fears over the collapse of fiat currencies as every government in the world runs it hot and issues massive amounts of debt, has an increasing number of both individuals and institutions looking for someplace to maintain their purchasing power.  Precious metals earned their name and reputation for this very reason.  If anything, the fear is that the speed of the move has been so extraordinary that it must slow down at some point, but so far, that has not been the case.  As you can see in the chart below, the moves in all three have become parabolic, or certainly in silver and platinum.  Historically, prices like this do not continue in this vein, but that doesn’t mean they cannot continue to rise further for a while yet.

Source: tradingeconomics.com

As to energy, oil (-0.2%) is trading above $60/bbl, but doesn’t show a great deal of interest in breaking in either direction right now.  I imagine a US action in Iran would push prices higher, but do not discount a breakthrough on the Russia/Ukraine war that could have the opposite effect.  However, NatGas (+14.6%) continues to be in massive demand as the 15° temperature outside my window this morning is indicative of what is happening across most of the country.  As well, it seems Germany, which is now hugely reliant on US LNG exports, has run their storage down to a dangerously low 40% or so, far below normal for this time of year.  Until this cold-snap ends, demand will remain exceedingly high.

Stocks – the biggest mover overnight was Tokyo (-1.8%) as the much stronger yen weighed heavily on Japanese exporters like Toyota.  Too, both South Korea (-0.8%) and India (-0.9%) slipped with the former showing concern that there would be intervention in the KRW market and negatively impact Korean exporters while the latter continues to see international capital outflows, with another $3 billion coming out so far this month (which has undermined the INR as well).  But otherwise, not much price action in China, HK or elsewhere in the region.  In Europe, most major bourses are little changed, although there have been modest gains in Spain (+0.5%) and Italy (+0.4%).  The only data of note was German Ifo Business Climate (87.6) which remained unchanged, falling below expectations for a modest gain.   And at this hour (7:45), US futures are virtually unchanged.

Bonds – yields have slipped modestly this morning with Treasuries (-1bps) not really showing signs of serious degradation.  European sovereign yields have fallen further between -3bps (Germany) and -5bps (France) with the latter benefitting from the idea that France would actually pass a budget soon.  JGB yields (-2bps) also slipped as polls show Takaichi-san’s approval ratings are slipping and some are assuming she won’t be able to run it quite as hot if she wins the election in two weeks.

Data this week is dominated by the Fed meeting on Wednesday, although as I have said from the beginning of the year, I think the Fed’s importance has waned relative to the market overall.

TodayDurable Goods3.7%
 -ex Transport0.3%
TuesdayCase Shiller Home Prices1.2%
 Consumer Confidence90.9
WednesdayFOMC Rate Decision3.75% (unchanged)
ThursdayInitial Claims205K
 Continuing Claims1860K
 Trade Balance-$42.1B
 Nonfarm Productivity4.9%
 Unit Labor Costs-1.9%
 Factory Orders1.7%
 -ex Transport0.3%
FridayDec PPI0.2% (2.8% Y/Y)
 -ex food & energy0.3% (2.9% Y/Y)
 Chicago PMI43.8

Source: tradingeconomics.com

And that’s pretty much what we have right now.  Clearly, the biggest signal comes from the precious metals space and indicates, to me at least, that there is huge concern over the way of the world right now.  I guess this is what the 4thTurning looks like.  As I said, if the Treasury is actually going to intervene of their own accord, working alongside the Japanese, that is a distinct negative for the dollar against all currencies and needs to be carefully assessed.  However, if the Fed sells dollars on the BOJ’s behalf, that is likely to have just a temporary impact on the FX markets.  Keep that in mind as we go forward.

Good luck (we all need that right now!)

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Yen Reprobates

Posted on by

On Friday we questioned what stage
The BOJ reached for to gauge
If yen intervention
Would soon get a mention
And could Katayama assuage
 
The markets, without spending dough
Since Friday, we’re now in the know
That Bessent checked rates
With yen reprobates
Now anxious to deal a deathblow

On Friday, I asked the question whether the movement seen in Tokyo after the BOJ meeting was finished consisted of step six, rate checks, or step seven, intervention.  Of course, my comments preceded the NY session and then in the afternoon, as you can see from the below chart, something much more substantial occurred.

Source: tradingeconomics.com

At this point on Sunday evening, it appears that about 11:00 Friday morning in NY, as Europe was heading home for the weekend, the Fed rang into major dealers around the Street and asked for prices where they could buy yen / sell dollars.  This is the very definition of ‘rate checks’ and the market response was exactly what you would expect.  The sequence of events was almost certainly that the Japanese MOF reached out to the Treasury department who then rang up the Fed and asked them to act. (Remember, currency policy is a Treasury function, not a Fed one). As you can see from the chart above, the initial move when Asia opened was a continuation of the yen’s strength, and in truth dollar weakness against most currencies, but we have already seen the initial bounce (the green bars to the right.)

Here’s the thing about rate checks, and in truth, every monetary policy, the law of diminishing returns is in effect here, so the next time they try it, and I would not be surprised to see something again tonight or tomorrow in NY, it will have a smaller impact.  Now, perhaps they are comfortable at 155 instead of pressing 160 and if USDJPY stabilizes here, things will go on much as before.  But I doubt that without further efforts, including direct intervention, things are going to change.  And even then, as history has shown time and again, intervention’s impact typically wears off after a few months.  The only way to truly change this trajectory is to change policy in Japan, and by all accounts, as the country heads into an election where PM Takichi’s platform is ‘run it hot’ that seems unlikely.  

It may not be a fade today, but at 150 or so, I expect that the risk/reward of selling yen is going to be extremely attractive again.

Have a good evening

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Clearly Explained

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The warmups in Davos for Trump
With Howard and Scott on the stump
Quite clearly explained,
While WEFers complained,
The US was, no more, the chump
 
The globalist world that existed
Is no longer to be assisted
Instead, US goals
Align with Trump’s polls
No matter the words WEF has twisted

 

As we await President Trump’s address in Davos this morning, it is worth recapping the highlights from yesterday’s US speakers, Commerce Secretary Howard Lutnick and Treasury Secretary Scott Bessent.   Starting with Lutnick, he explained the White House view as follows; “The Trump Administration and I are here to make a very clear point—globalization has failed the West and the United States of America. It’s a failed policy… and it has left America behind.”  The video is linked above in his name.  It is hard to misunderstand what he is saying, and that is very clearly US policy.

Turning to Secretary Bessent, he explained that the US has spent $22 trillion more than the rest of NATO since 1980 on defense while Europe and Canada created their welfare states.  “The Europeans have been spending the money on social welfare, on roads, on education, and it’s time for them to pay more, which they’ve agreed to do.”  The video clip is linked to his name in the first stanza.  The below graph is telling:

At the same time, Europe continues to buy Russian oil, funding Russia’s war against Europe.

Needless to say, Europeans were unhappy with the commentary as they appeared to be coming under attack from the US.  The market narrative quickly framed around President Trump going too far and how it was going to destroy the US as nobody will want to invest in the US. That is the explanation for yesterday’s decline in US equities (although they fell around the world), the dollar and Treasury bonds (although bonds, too, fell everywhere, notably in Japan).  

Yesterday I sought to disabuse you of the notion that Europe is going to sell all their Treasuries to hurt the US as the results would likely be either irrelevant or horrific for Europe.  So, the narrative pivoted to Trump is bad and destroying the US.  

And yet, remarkably, the world did not end either yesterday or last night, despite what many have explained is inevitable.  This morning markets are somewhat less catastrophic.  It makes sense that markets are going to remain volatile as the underlying theses for international relations adjust to the new reality of power politics and economic statecraft from the previous “Rules Based Order”.  And at this stage, there is no way to know which outcomes are most likely.  The only thing of which I am confident is that we have not seen the end of this play out.  

I must admit, that while I don’t think President Trump cares much about France and President Macron’s comments seeking more Chinese investment in that nation, I suspect that PM Carney’s efforts to cozy up to President Xi will be less welcome based on the Donroe Doctrine of US dominance in the Western Hemisphere.  But I also believe that the power structure between the US and Canada is such that it will ultimately bend to the US’s will.

So, let’s review market activity overnight as we await President Trump’s comments, which I understand have been delayed until 11:30 EST this morning.  Yesterday’s sharp declines around the world have been followed by less dramatic activity last night and so far today.  In Asia, Tokyo (-0.4%) slipped a bit further, but hardly dramatically, as FinMin Katayama focused on the JGB market in comments made in Davos.  “Since last October, our fiscal policy has consistently been responsible and sustainable, not expansionary, and the numbers clearly demonstrate that.  I’d like everyone in the market to calm down.”  I’m sure she would.  And it worked with JGB yields slipping -8bps and 30yr yields falling -17bps.  Elsewhere in Asia, China was flat, HK (+0.4%) rallied a bit along with Korea (+0.5%) while Taiwan (-1.6%) led the way lower across numerous other regional markets.  

In Europe, red is today’s color led by Germany (-0.7%) and Spain (-0.5%) although France and the UK have both only ceded -0.1% so far during the session.  The discussion here continues to revolve around President Trump, the trade deal, and potential new tariffs on nations that try to prevent the US from its Greenland desires.  As to US futures markets, at this hour (6:45) they are slightly firmer, +0.1%, so not yet, at least, indicating the end of the American investment thesis.

As to the rest of the bond market, away from Japan, yields are basically -1bp lower across Treasuries and European sovereigns as investors await Mr Trump’s comments.  Again, the mooted collapse in the US bond market has yet to appear.  However, there is a popular meme about the Danish pension fund, Akademikerpension, which has announced that it will sell all its US Treasuries by the end of the month, a total of $100 million, due to its perception of increased credit risk.  This has been fodder, though, for those who continue to believe that Europe is going to ditch their Treasuries, and many are calling it a signal.  While certainly a trendy decision, I see it as noise, not signal.

Turning to commodities, one cannot be but impressed with gold’s consistency of late.  It has risen another 2.1% this morning and is now nearing $4900/oz.  I guess $5000/oz is right around the corner.  Looking at the long-term chart below, we have seen a monster rally for the past two years.  

Source: tradingeconomics.com

FWIW, which may not be much, I continue to see this as a commentary on all fiat currencies, not the dollar per se as evidenced by the table I created from data on goldbroker.com.  While you can see that the dollar has definitely underperformed during the past year (which we already knew given the early year 10% decline vs. the euro and pound, over time, it is hard to make the case that other currencies are any better.  In fact, I find it particularly surprising that the rand has performed so poorly given its seeming benefits when gold rallies.  And of course, it is no surprise that the yen which has been having a really tough time, is the worst of the lot.

 Historical Returns of Gold 
Currency1 Month1Year5 Year10 Year
EUR9.54%54.22%164.28%300.85%
JPY10.02%76.45%288.91%481.02%
USD9.62%73.45%154.49%331.44%
GBP9.13%59.31%160.26%357.37%
MXN7.04%47.93%127.14%305.03%
ZAR7.35%53.89%179.88%327.69%

As to the other metals, silver (0.0%) seems to be getting tired after its move and has done little over the past several sessions.  Platinum (+1.0%) seems to still have life as does copper (+0.75%).  Turning to energy markets, oil (+0.3%) is trying to figure out whether the geopolitics is going to blow up or fade away and remains right around $60/bbl.  But given the temperature here in New Jersey is 1° this morning, we cannot be surprised that NatGas (+21.5%) has exploded (no pun intended) higher.

Finally, the dollar is a touch softer this morning, but not very much.  The euro is unchanged, and the pound, after some lousy inflation data, has fallen -0.2%.  But JPY (+0.2%) is offsetting that, arguably responding to FinMin Katayama’s comments, although elsewhere, KRW (+1.1%) rebounded after comments from President Lee Jae Myung sought to sooth investors and explain that the government would continue to work to boost economic growth with new policies.   But once again, my recent favorite chart of the DXY shows that this is not a USD story.

Source: tradingeconomics.com

On the data front, aside from the President’s speech today, nothing but tomorrow brings the real data.

ThursdayQ3 GDP4.3%
 Q3 Price Index3.7%
 Initial Claims212K
 Continuing Claims1880K
 Personal Spending (Nov)0.5%
 Personal Income (Nov)0.4%
 PCE (Nov)0.2% (2.8% Y/Y)
 Core PCE (Nov)0.2% (2.8% Y/Y)
FridayFlash PMI Manufacturing52.1
 Flash PMI Services52.8
 Michigan Sentiment54.0

Source: tradingeconomics.com

Don’t forget that next week the FOMC meets, but on the Fed story, today Governor Cook’s case about dismissal will be heard at the Supreme Court, which is, potentially, a much bigger deal.  If the Fed is not protected from Presidential authority, that will certainly change many views on the future, and likely initially, see the dollar and bond markets decline while stocks rally.  But that decision won’t come for months, and remember, we are still awaiting the tariff decision.

There is much we don’t know and volatility remains the most likely outcome.  Be careful out there.

Good luck

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The Specter

Posted on by

On the horizon
The specter of BOJ
Intervention climbs

 

For those of you who don’t know, the genesis of this note was a daily update during my time covering US corporates for their FX hedging needs.  The poetry was episodic… until it wasn’t.  At any rate, this is the reason I sometimes harp on particular currencies rather than markets more generally.  And right now, while the dollar, writ large, is not that interesting, as I have been explaining for months, the yen (+0.3%) is becoming interesting in its own right as its recent spate of weakness has opened the door to intervention.  Last night, I would say we took a half-step forward on this journey as, while the BOJ did not check rates, FinMin Katayama was more explicit in her discussion about the yen’s weakness, even discussing the fact that the ‘agreement’ that her predecessor made with Treasury Secretary Bessent has no restrictions on intervention if deemed appropriate.

Following are her remarks from last evening, “We can take decisive measures against sudden movements that do not reflect fundamentals. This refers to intervention, and there are no constraints or restrictions on this.  I have repeatedly stated that we will take bold action including all the different measures available.  We shared the view that recent moves have been excessive and do not reflect fundamentals.” Then, she followed that up by referring back to her discussions with Bessent in Washington on Monday. “For many years before I took office, the Treasury secretary has held the personal view that monetary policy has been behind the curve.”

The chart below shows that for now, jawboning is the preferred measure to prevent further yen weakness, but as jawboning is only ever a temporary solution, it seems clear to me that there will be intervention at some point.  In fact, given Monday is a bank holiday in the US, implying less liquidity as banks run skeleton staffs, that may be an ideal time to get the most bang for their buck.

Source: tradingeconomics.com

But remember, even if/when they intervene, the impact will only be temporary.  Perhaps keeping a floor underneath the currency for a month or two.  Ultimately, though, it will follow the fundamentals, and if those are such that the US continues to grow rapidly and receive investment flows, unless the BOJ raises rates dramatically to moderate those flows, the yen will ultimately weaken further.   Now, ask yourself if you think the BOJ can raise rates aggressively given the combination of Japan’s 250% debt/GDP ratio and the fact that Takaichi-san’s policy mix is to borrow more and run things as hot as possible.

Away from the mess in Japan
A story of note is Iran
But tensions have waned
And thus, it’s explained
The oil complex can, down, stand

Looking elsewhere for news of note, there continues to be an enormous amount of energy focused on Minneapolis, which has no market impact.  Remarkably, Venezuela has become an afterthought to the markets as the new narrative is their natural resources are not economically retrievable at current prices.  Iran remains a hot topic in the oil market, but the concerns registered by traders early in the week have ebbed overall, although this morning, Texas tea is higher by 1.5% and back over $60/bbl. 

Looking at other markets, bonds remain somnolent, with yields up 1bp this morning, reversing yesterday’s decline of -1bp but still firmly within the 4.00% – 4.20% range.  European sovereign yields have edged higher by 2bps this morning and overnight JGB yields rose 3bps.  However, it remains difficult to see any significant pattern over the past month as evidenced by the chart below of French and German 10-year yields.  Net movement has been a handful of basis points overall.

Source: tradingeconomics.com

Even the metals markets, which have been THE story for the past months, have calmed down a bit as they consolidate their recent remarkable gains.  This morning, gold (-0.25%), silver (-2.1%), copper (-1.5%) and platinum (-3.2%) are all softer, but all remain higher on the week and over the past month, with silver having gained 37% since this time in December, and sitting above $90/oz.

Equity markets in the US rebounded yesterday, seemingly on some decent earnings data, but overnight, there was little love with Japan (-0.3%), China (-0.4%) and HK (-0.3%) all slipping from recent highs.  Elsewhere in the region, though, there was much more positivity as Korea (+0.9%), India (+0.25%), and Taiwan (+1.9%) all rallied with the latter benefitting from the agreement of a trade deal with the US that cut tariffs on Taiwanese exports in exchange for a $250 billion commitment of investment into the US.

In Europe, France (-0.8%) is the laggard du jour as ongoing budget negotiations in the government are no closer to completion and showing signs of breaking down.  As to the rest of the continent, modest declines are the order of the day while the UK is unchanged.  US futures at this hour (7:40) are pointing higher, however, led by the NASDAQ at +0.7%.

While overall, the dollar remains dull, an underreported story is the CNY (0.0% today) which has been appreciating steadily for the past year and is now at its strongest level since May 2023.  In the beginning of the year my view was if Xi actually got Chinese consumers to raise their spending and back away from the mercantilism that has been the driver of the Chinese economy since the beginning, we would see CNY strength, calling for 6.50 by the end of the year.  Well, a look at the chart below helps keep things in perspective as while CNY has appreciated about 5% in the past year, it remains far below (dollar higher) levels seen post pandemic.  However, I need to see the data indicate Chinese domestic demand is growing before I become a true believer!  Note, too, that the pace of this move is hardly remarkable.

Source: finance.yahoo.com

And that’s all I got today.  Today’s data brings IP (exp 0.2%) and Capacity Utilization (76.0%) with a few more Fed speakers as well.  Remarkably, despite the Fed trotting out virtually every member this week, nothing of note has been said given the current focus on defending Chairman Powell regarding the renovations at the Eccles Building.  

One other thing I have been wondering, and this has been for a long time, is the meaning of the Capacity Utilization reading.  On its surface, it tells us that only three-quarters of the US currently available manufacturing, mining and drilling capacity is being utilized.  But that seems like a low count based on the economy and the narrative.  I wonder, how much of what is considered available capacity is actually obsolete?  Undoubtedly, as you can see from the chart below from the FRED database, the trend is falling.  

But do companies really build so much capacity they don’t use and it sits idle?  Seems a tough way to make a living in a highly competitive world.  I understand that globalization undermined US manufacturing ever since China entered the WTO in 2001.  And maybe that is all this reflects.  But given the dramatic buildout in AI infrastructure, as well as growth in LNG and power production of late, if nothing else, I have to believe this trend is set to reverse in the near future.  After all, isn’t that Trump’s goal?

Meanwhile, I feel like we are all awaiting the next headline to determine the next move.  The underlying trend in commodities remains in place, and mostly, bonds and the dollar have no reason to go anywhere.

Good luck and good long weekend

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Tired

Posted on by

Though recently there’s been a ton
Of news, which has led to much fun
The markets today
Have little to say
Though recent trends ain’t been undone
 
Sometimes traders simply get tired
And find, in a rut, they’ve been mired
But you needn’t worry
‘Cause soon they will scurry
To come back with ideas inspired

 

As much activity and new news that has been part of the process over the past several weeks, today is one of those days when it appears we may be able to step back and catch our collective breath.  One thing I have observed throughout my career on trading desks is that no matter the underlying news, narrative or data, traders, even algorithms, can only remain in a frenzy for so long.  Consider it has been nearly two weeks of nonstop news since the US exfiltration of former Venezuelan president Maduro, yet some markets have exploded.  Silver is probably the poster child for this price action and as you can see below, since markets reopened after that news, gold’s little brother has risen nearly 25%, including today’s modest -2.3% retracement.

Source: tradingeconomics.com

But all the precious metals, and base metals as well, have had massive runs and the narrative regarding supply constraints and increased strategic purchases by China along with the US labeling many as critical national defense requirements, has been enough to bring retail into the mix.  But a 25% move in less than two weeks is really exhausting for the folks who are in those markets every day.  

At the same time, the amount of energy that has been consumed regarding Greenland, Iran and Minneapolis (which even though it is not a market related issue, is so widespread in its reporting takes up space in one’s brain) seems to have reached a peak yesterday, at least a local maximum.  I don’t, for a minute, believe that these trends have ended.  But a few sessions of modest net movement as positions are adjusted is a normal response to dramatic movement.  We should welcome the rest!

Reading through as much as I could find this morning, there really is no new story on which to hang your hat, so without further ado, I will review overnight market activity and perhaps ponder how things may evolve going forward.

A key sign of the slower activity was yesterday’s US equity markets where modest declines were the order of the day.  That was followed by a mixed session in Asia with some gainers (China +0.2%, Australia +0.5%, Korea +1.6%) and some laggards (Tokyo -0.4%, HK -0.3%, Taiwan -0.4%, India -0.3%).  Other than Korea’s strong session, which was inspired by central bank and government efforts to get investment to come back home to support the won, it appears traders are now biding their time ahead of the next major event.

European bourses are also mixed (Germany -0.1%, France -0.3%, Spain -0.1%, UK +0.4%) with the UK benefitting from a stronger than expected GDP report where growth jumped to 0.3% on the month, well above expectations of a 0.1% increase.  But a look at the chart below indicates one ought not get too excited about the economic growth in the UK with 14 negative months in the past 3 years.

Source: tradingeconomics.com

As to US futures, at this hour (7:10) they are pointing higher, currently almost exactly offsetting yesterday’s declines.

In the bond market…ZZZZZZ is the story of the day week month past four months as evidenced by the chart below.

Source: tradingeconomics.com

There are a number of conflicting narratives here with one story that the economy is going into a tailspin as a look beneath the headline data shows weakness everywhere (housing, employment, manufacturing) and the result is rates will fall along with inflation because of the coming recession.  Another narrative is that the ongoing debt expansion to fund unending budget deficits in the US is going to lead to the collapse of the dollar and much higher long-term rates as investors require far more payment to hold this much riskier than previously assumed asset.

Right now, neither of these seem to be living up to their promises.  Yesterday’s Retail Sales print was much stronger than expected at +0.6%, which hardly portends a recession.  Now, the CPI data has been polluted by the missing October numbers and is biased downward based on the BLS methodology, but you can be confident that it will recoup those losses in a few months’ time.  Meanwhile, there is no indication the Fed is going to do anything in two weeks, and my take is there is significant uncertainty over the future direction of the economy, with both positive and negative pieces.  Until we get indications that growth is either truly cratering along with rises in unemployment, or that things are exploding higher, remaining in the range seems the most likely outcome.  Remember, too, the OBBB is going to goose economic activity right away and running it hot remains the mantra.  

As to European sovereign yields, they have edged higher by 1bp this morning with one outlier, Portugal (+13bps) which seems to be reacting to the prospect of a runoff in the presidential election this Sunday, in the race between a populist outsider and a Socialist party insider, with the populist seen a slight favorite.  As to JGB yields, they have slipped back -2bps as the market becomes accustomed to the idea of the snap election.

In the commodity space, oil (-3.6%) has ceded most of its recent gains after President Trump indicated that there would be no bombing by the US, and the Mullahs ostensibly promised no executions of protestors.  Added to that was a massive build in inventories reported yesterday and supply concerns have abated.  In the metals markets, we are seeing that breather across the board (Au -0.25%, Ag -2.3%, Cu -0.8%, Pt -0.6%) which is very clearly profit taking after we saw record highs in all metals yesterday.  Nothing has changed the fundamentals here, so higher is still the way, IMO, but a few days of chop ought not be surprising.

Finally, the dollar appears to have found a comfortable home at 99.00 in the DXY.  There has been limited movement across the board with even JPY unchanged on the day as traders wait before trying to push the currency lower again.  KRW (-0.3%) is the worst performer today as it has been weakening steadily for a year.  Adding to the discussion above, the Korean government is trying to internationalize the won to some extent in their effort to get Korea taken out of the emerging market bucket for markets.  This relaxing of restrictions has seen capital outflow, but my take is this will be temporary as the country remains in very good fiscal and economic condition and will attract investment in my view.  Otherwise, there is nothing of note.

On the data front today, we get the weekly Initial (exp 215K) and Continuing (1890K) Claims as well as Empire State Manufacturing (1.0) and Philly Fed (-2.0) all at 8:30.  We hear from 3 more Fed speakers and it seems the hymnal now contains a single talking point, Fed independence is crucial and the subpoenas to Powell are lawfare and inappropriate.  Only Steven Miran is not singing that tune, but given he is Trump’s appointee, that is no surprise.

As commodities, and really metals, have driven the entire narrative lately, if they are going to have a quiet day, look for quiet all over.  Longer term, nothing has changed, but nothing goes up in a straight line, and that is what we are witnessing today.

Good luck

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Step Five?

Posted on by

It takes seven steps
Ere intervention arrives
Was last night step five?

 

The yen continues to be in the crosshairs of traders as further weakness is anticipated based on several things I believe.  First, there had long been an assumption that the Fed was going to cut rates further, especially with President Trump haranguing Chairman Powell constantly on the subject.  In addition to that, there continues to be an underlying thesis amongst many pundits that the US economy is weakening dramatically to drive that rate decision.  Yet recent data belies those facts, notably the Atlanta Fed’s remarkable GDPNow jump, but also relative stability in other data, including employment.  The upshot is the futures market is now pricing a mere 3% probability of a cut at the end of this month and not pricing the next rate cut until June, after Chairman Powell is gone.  One key leg of the yen strength argument is weakened.

Source: cmegroup.com

Second, there continues to be a belief that the BOJ will continue to hike interest rates, and perhaps they will, but it appears that the pace of those hikes will be far slower than previously anticipated.  Currently, the market is pricing just 50bps of hikes for all of 2026.  At the same time, Takaichi-san is set to “run it hot” in Japan just like in the US, pumping up fiscal stimulus and forcing the BOJ to come along for the ride.  The implication here, which is what we are seeing in the markets right now, is that a larger fiscal deficit will lead to strength in equities but a weaker currency.  The second leg of the yen strength argument is failing here as well.

Which brings us to last night’s commentary from Satsuki Katayama, Japan’s FinMin, who explained, [emphasis added] “We won’t rule out any means and will respond appropriately to moves that are excessive, including those that are speculative. We’ve mentioned this to the prime minister today as well.”  The kind of sudden moves we saw on Jan. 9 have nothing to do with fundamentals, and are deeply concerning,” she added. Her message was soon backed up by Atsushi Mimura, the ministry’s top official in charge of the yen, who reiterated that no options were being ruled out.

The bolded words are all part of the Japanese seven-step plan toward intervention.  At this point, I feel like we have reached number five.  The market responded predictably, with the yen strengthening vs. the dollar (and all its counterparts), albeit not all that much.  Last night saw the yen trade at 159.45, its highest since July 2024 (the last time the BOJ intervened), before the comments helped bring it back a bit.

Source: tradingeconomics.com

But one other area which the MOF/BOJ follow closely is not just the USDJPY exchange rate, but also the yen’s rate vs. other major currencies.  If, for instance, the yen is only weakening vs. the dollar, that is one thing.  However, a look at the chart below showing USDJPY, EURJPY and GBPJPY shows us that the yen is weakening against all those currencies pretty much in sync.  In fact, this argues that the yen’s current weakness is a yen specific fundamental, not a speculative move, which should argue against intervention, as that will only be a temporary sop.  However, my take is when we get to 160 or 162, which I believe is coming, we will see the BOJ selling aggressively.

Source: tradingeconomics.com

Ironically, the one currency against which the yen has been weakening steadily that I’m sure delights the BOJ/MOF is the Chinese yuan.  Since Liberation Day in the US, the yen has fallen more than 17% and continues to slide vs. the yuan as it has been doing for the past five years.  It is not hard to believe there are voices in the Japanese government that see that move and recognize how much it helps the Japanese export sector and caution against trying to arrest the yen’s weakness too aggressively.

Source: tradingeconomics.com

I look forward to much more dialog on this subject and expect that soon, we will be hearing about the end of the carry trade, yet again.  To my eyes, until Japanese fundamentals change, or at least appear to be moving in the right direction, the yen will struggle.  So, let me know when the fiscal deficit shrinks, or GDP jumps to 4% or inflation slides back to 1%.  Until then, they yen is damaged goods.

As to the rest of the market, precious metals continue to be the shining stars with the whole sector higher this morning (Au +1.0%, Ag +4.2%, Pt +2.0%) and that move taking copper (+0.4%) along for the ride.  Last night the CME raised its margining requirement and changed its nature by requiring a percentage of the value, rather than a numeric amount per contract.  My friend JJ, who writes the Market Vibes substack wrote a brilliant piece last night explaining how the flows are evolving in the silver market.  To sum it up, at this point, there appears no end in sight for the demand as short positions are covered by new shorts.  Metal for delivery remains scarce and despite the extraordinary shape of the move, it appears to have more steam to drive it forward.  Markets like this are extremely difficult to trade, and history shows that movements in the shape seen below reverse very sharply.  But as Keynes explained 100 years ago, markets can remain wrong longer than you can remain solvent.  I am happy I have been long silver for quite a while but am having a hard time figuring out what to do now!

Source: tradingeconomics.com

Meanwhile, oil (+1.4%) continues to rally on concerns that the Iran situation will lead to one of two outcomes, either a substantial decline in production as the regime collapses, or an effort by the regime to close the Strait of Hormuz which will impede shipping and reduce supply as they try to inflict pain on the US and the rest of the world who are rooting for the uprising.

Heading back to paper markets, yesterday’s weakness in the US was followed by a more mixed picture in Asia with Japan (+1.5%) rallying on continuing hope for more fiscal stimulus.  HK (+0.6%) benefitted from news that China’s trade surplus hit a new record high of $1.2 trillion (remember when they were going to grow domestic demand?) but Chinese shares suffered (-0.4%) after the regulators there raised margin requirements to 100%.  As to the rest of the region, it was far more green than red, although India continues to be a laggard overall.  In Europe, mixed is also the best description with the DAX (-0.35%) lagging while we have seen modest gains in the UK (+0.3%) and France (+0.2%).  Otherwise, it is hard to get excited about activity here today.  There continue to be existential questions about the EU and which nations will enact EU directives given that Poland, Hungary, Italy and the Czech Republic seem to be ignoring the latest issues like the Digital Asset Tax.  As to US futures, at this hour (7:00) they are softer by about -0.25% across the board.

Bond markets (except Japanese ones) remain completely uninteresting.  Treasury yields have slipped -3bps this morning and European sovereign yields are lower by -1bp.  Despite all the sound and fury about specific issues in markets, fixed income investors remain nonplussed by everything for now.  If/when that changes, we will need to watch things carefully.

Finally, aside from the yen (+0.3%) there is little to discuss overall. The DXY is still trading right around 99 and there has been very little movement of note.  Relationships that we would expect (ZAR and Au, NOK and oil) remain intact, but despite the metals dramatic movement, the rand is just gradually appreciating.

On the data front, yesterday’s CPI printed slightly softer than market expectations, but it is hard to get excited that inflation is heading back to target anytime soon.  @inflation_guy, Mike Ashton, had an excellent write-up here explaining what is going on and why much lower inflation is unlikely.  Ultimately, despite a lot of discussion regarding rental rates, those figures are not representative of the rental market as a whole and shelter costs continue to climb.  Absent a serious decline in goods inflation, it will be virtually impossible to get back to 2.0% on any sustainable basis.

As to today, it is a hodge podge of current and old data with Existing Home Sales (exp 4.21M) the only December number.  We see November Retail Sales (0.4%, 0.4% ex-autos) and PPI for both October and November which seem unlikely to impact markets greatly.  We also see EIA oil inventory data where a small draw is expected for crude but a build for gasoline.  Last week saw a massive build in products which likely helped weigh on the price last week.  But this week, things are different.  

We also hear from five more Fed speakers including Steven Miran, who will undoubtedly make his case for aggressive rate cuts again.  Then at 2:00 we get the Fed’s Beige Book.

Drinking from a firehose seems an apt metaphor for market analysts trying to make sense of the current situation.  Stepping back, I have never understood the market pricing for more rate cuts given the economy’s resilience.  The twin stories, in my estimation, are a growing level of fear regarding the debasement of fiat currencies, hence the move in metals, and the fact that the US remains the cleanest dirty shirt in the laundry, hence my preference for the dollar vs. other fiat currencies.  But on any given day, be careful!

Good luck

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