Tag Archives: #inflation

Simply No Need

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Said Powell, there’s simply no need
To hike rates, we all have agreed
But likewise, no case
To cut, lest we face
An outcome where, jobs, we impede

Said Trump ‘bout the Strait of Hormuz
Be careful and do not confuse
Our aims in this war
As more than before
Which has been, Iran, to defuse

Just like every other day, this morning shows we really have no idea what to believe regarding the war anymore.  The headline in the WSJ is that President Trump may consider the job finished even if the Strait of Hormuz remains closed.  That has certainly gotten the Europeans up in arms as they are the ones relying on its reopening to source much of their oil and LNG.  But consider it from the US perspective, where we source only about 2.5% of our oil related products from nations on the wrong side of the Strait, which means virtually none of our overall import roster (source Grok). 

Now, the one thing I will say about President Trump is that strategic ambiguity is one of his strengths, as he continues to make so many seemingly contradictory statements, nobody knows what he is working to achieve.  Based on the framework that Secretary Rubio laid out again yesterday:

  1. Destruction of Iran’s Navy
  2. Destruction of Iran’s Air Force
  3. Severe diminishment of their missile launching capability
  4. Destruction of their armaments factories

It is not hard to believe the US and Israel are close to their goals.  However, none of this discusses Iran’s nuclear weapons program, which has clearly been a goal, nor the 440Kg of 60% enriched U308 that they retain.  

Again, I wouldn’t dare claim to have any idea when this will end, but the political calculus indicates it is unlikely to go on for very much longer.  However, it is not just the political calculus that implies that, but also market pricing of certain things.  For instance, one of the things that initially surprised me was that Brent crude (+0.6% today) did not initially rise more rapidly than WTI (+2.0% today).  After all, zero WTI transits the Strait and it is not a pricing benchmark for anything that happens over there, while Brent is the basis for all Middle Eastern oil.  As the Strait of Hormuz has been effectively closed since March 4th, a look at the below chart shows that Brent did not separate itself from WTI until 2 weeks later.  But last night, that spread collapsed back to its current $3/bbl, similar to the levels that preceded the onset of the war.

Source: tradingeconomics.com

One interpretation of that price action is that there is a growing belief that the Strait will reopen for transit soon.  Of course, it could simply be that neither Brent nor WTI are representative of the oil grades that are impacted, and thus the large premium no longer makes sense, but given the totality of the news, I’m inclined to lean toward the former idea.  Of course, both benchmarks are currently solidly above $100/bbl so still causing great pain.

However, on this topic, as most of us live and think in a nominal world, we consider $100/bbl as extremely expensive.  But if we take a moment to consider the real (inflation adjusted) price of oil, we can see in the chart below that energy remains pretty cheap, and well below levels seen ahead of the GFC or even in the wake of the Russian invasion of Ukraine.

Source: data FRED, calculations and chart, @fx_poet

My point is that over time, energy has become less of a cost in the economy, and even with the current situation, my take is the US, and frankly global, economy is quite resilient and will get through this.  I’m not suggesting there won’t be some pain, just that this is not going to lead to economic Armageddon.

The other interesting story from yesterday came from Chairman Powell, who in a speech at Harvard explained there was a great deal of uncertainty currently, while admitting that the tariffs were likely a one-off modest inflation pressure.  He indicated rate cuts were likely over, although hikes were possible, and then the man who printed $5 trillion to pay for every one of President Biden’s Covid and ESG bills, explained that debt is growing too fast and could be a problem going forward.   And you wonder why there are those who are skeptical of his concerns over politicization of the Fed.

Ok, let’s turn to markets.  Yesterday’s morning positivity faded all day and both the NASDAQ and S&P 500 closed lower on the session.  That mostly followed in Asia with Tokyo (-1.6%), China (-0.9%), Korea (-4.3%) and Taiwan (-2.5%) all under real pressure, although HK (+0.2%) and Australia (+0.25%) managed some gains.  Other regional exchanges were mixed as investors around the world are trying to figure out the next steps.  At this hour (7:00), US futures are pointing solidly higher, +0.8% or so.  Turnaround Tuesday?  Certainly, that is the case in Europe where despite widely expected higher Flash inflation data for March, green is today’s color with gains ranging from 0.2% (CAC) to 0.5% (FTSE 100) with others somewhere in between.

Bond investors have seemingly turned their views from inflation concerns to growth concerns, at least based on the fact that yields around the world are lower this morning than yesterday.  In fact, since Friday morning, 10-year Treasury yields have fallen -14bps, including -2bps this morning.  in Europe, yields did slide somewhat yesterday, about half that in the US, and this morning they are little changed throughout the continent.  But we did see JGB yields slip -2bps overnight as well.

On the growth side, the Atlanta Fed’s GDPNow is running at 2.0% for Q1, well below its first readings from before the Iran activity, although still in decent shape.  The next update comes tomorrow, so will be interesting to see.  And, of course, the payroll report on Friday will be critical for that reading.  It is, though, still well above the Blue Chip Consensus readings.

We’ve discussed oil, but a quick peek at precious metals shows they are regaining their luster, with gold (+0.8%) and silver (+3.6%) both nicely higher this morning.  As this price action continues, with the current price more than 10% above the spike low from March 23rd, I believe whatever was driving things during the first part of the war, may now have passed.

Finally, the dollar is little changed this morning, but sitting on its recent highs with the DXY at 100.53 as I type.  Here’s the thing about the current level.  As you can see from the long-term chart below, while during the first 4 months of 2025, the dollar did decline sharply, about 10%, the longer history shows that the current level has acted as support for a very long time.  As well, if you take the really long view, we are within spitting distance of the DXY’s average since the 1970’s.

Source: tradingeconomics.com

All I’m saying is the dollar is neither strong nor weak right now, it just is.  It is, though, worth looking at the yen (0.0%) which pushed back to just below 160 during yesterday’s session and got more jawboning from Mimura-san, the Vice Finance Minister for International Affairs (aka Mr Yen) who explained they are ready to take “decisive action” against speculative moves.  But otherwise, this morning’s session is unremarkable with only KRW (-0.6%) continuing to suffer from the energy issues there.

On the data front, we get Case Shiller Home Prices (exp +1.3%) and then Chicago PMI (55.0) and perhaps most importantly, the JOLTs Job Openings (6.92M) report at 10:00.  There are two more Fed speakers, Goolsbee and Barr, but with Powell just having confirmed no moves are coming soon, what can they possibly add to the story?

The war and its headlines remain the key drivers and I don’t see anything changing that dynamic for now.  I wonder if markets are prepared for an announcement that it is ending and Iran has come to terms.  I’m not suggesting that is the likely outcome, just that it would be the biggest surprise, I believe.  In the meantime, there are precious few reasons to sell the dollar outright, that’s for sure.

Good luck

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The Beating War Drum

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Each day it gets tougher and tougher
To figure out things that can buffer
Portfolios from
The beating war drum
And so, we are all set to suffer

Remember, too, I’m just a poet
And I do my best not to show it
But my Spidey sense
Says come some days hence
The end will be nigh and we’ll know it

Basically, as Herbert Stein explained back in 1986, “If it can’t go on forever, it will stop.”  The pressures on the global economy are increasing dramatically as not only markets in oil and natural gas, but also fertilizer and helium (critical for semiconductor manufacturing) markets are being significantly impacted.  And frankly, the world as we know it now cannot exist without a healthy supply, and supply chain, in all those things.  It is this pressure, which is building up on both sides of this war, that will ultimately push both sides to some resolution.  Iran cannot live without the oil and its revenues, but it can certainly destroy a lot of other nations in its death throes.  That is not the outcome we want to see.

And frankly, it appears to me that markets are pricing an off-ramp, because otherwise, I would expect the inelasticity of demand for oil would have driven oil prices much higher than we have seen.  But, while that may be the medium term (next several weeks) view, on a day-to-day basis, one never knows what’s going to happen.  Yesterday, there was a sense that things were going to deescalate.  But overnight, that sentiment changed and now risk is under pressure as oil heads higher once again.

Here’s the problem, if you read all the headlines about the situation in the Persian Gulf, you are no more well-informed than if you ignore them all.  We continue to be bathed in opinions and propaganda from both sides, and it is certainly not within my ability to determine what is truth, assuming any of it is.  Which takes us back to markets as our best indicator, because as it has been said, opinions are like a$$holes, everybody has one and they all stink.

So, let’s go to the tape.  Yesterday saw a positive outcome, but as you look at the chart of the S&P 500 below, you can count that from the beginning of March, when this all began, there have been 19 trading sessions including today.  Nine of those sessions saw green candles (higher) and 10 saw red candles (lower).  This does not strike me as a market where investors have capitulated in any serious manner.  As I mentioned earlier in the week, despite all the angst, right now the S&P 500 is lower by just 6.5% from its all-time high from late January.  That’s not even a correction by most definitions, let alone a war footing.

Source: tradingeconomics.com

As it happens, today is a down day, with US futures sitting lower by about -0.5% across the board as of 7:00.  And that is consistent with what we observed overnight with both major Asian (Tokyo -0.3%, HK -1.9%, China -1.3%) and minor Asian (Korea -3.2%, Taiwan -0.3%, Indonesia -1.9%, Australia -0.2%) markets all lower in the session.  Clearly, rising oil prices continue to weigh heavily on every nation in Asia as they are the primary recipient of Middle East oil and, as oil prices rise once again, it hurts all those nations.  I assure you that as much as we dislike rising gasoline prices, it is nothing compared to what those nations are feeling.

Europe, too, is lower across the board this morning led by Germany (-1.4%) which is not only suffering from general risk-off sentiment but has the added disincentive of declining consumer confidence as measured by the GfK indicator falling to -28.0, its lowest level in two years.  a quick peak at the chart of this indicator shows that while things have rebounded since the darkest days of the 2022 inflation problems, the downward trend is strengthening again.

Source: tradingeconomics.com

But the rest of European bourses are also under pressure with the UK (-1.1%), France (-0.9%), Spain (-0.9%) and Italy (-1.1%) all falling sharply.

As has been the case on days like this, bond prices are under pressure as well, with yields correspondingly rising.  So, after a 6bps decline in the 10-year Treasury yield yesterday this morning it has backed up by 4bps.  As to European sovereign yields, the picture is quite ugly as you can see in the below Bloomberg screenshot.

‘Nuff said.

Which takes us to the driving force in all markets these days, oil (+2.6%) which is rebounding with WTI back above $90/bbl and Brent above $100/bbl.  The one consistent thing I have seen on X this morning is that the propagandists on both sides seem to be preparing for a final outcome soon.  Whether it is the idea that the US is going to run away with its tail between its legs, or the Iranians are going to collapse, the timeline definitely seems to be shortening.  Hence my view that this will not be ongoing very much longer.

Turning to precious metals, as has been the case for the entire war, with oil rising, both gold (-2.0%) and silver (-4.2%) are under pressure.  I must admit the consistency with which this price action holds; oil up, gold down, is somewhat baffling to me.  My initial thesis was that we were seeing central banks liquidate gold to help pay bills, but why would they only do that on days when oil rose?  Something else is going on here and I have not yet been able to figure it out.  I do not believe that gold, after 5000 years as the safest of moneys, has suddenly lost that mojo.  I also know that the premium for physical metal in Shanghai remains substantial.  With this in mind, it is not hard to conclude that the futures market, where the price action is most visible, has seen a great deal of manipulation by someone trying to keep prices low, although to what end I cannot tell.  We need to watch closely.

Finally, the dollar, as has been its wont, is higher this morning alongside oil, albeit not dramatically so.  There are still numerous analysts who are calling for the dollar to decline sharply going forward, once the war premium is gone, but then they have been expecting that for a year and have not been able to explain its stability since early last year.  

Like the CME’s futures page, the ECB publishes its own market-implied probabilities for the deposit rate there as per the below from ecb-watch.eu

Now, I grant that if I look at the table at the bottom of the screenshot and compare it to the CME futures probabilities below, the market is pricing in more rate hikes in Europe than the US.

But I can never get over the actual interest rate involved as an important part of the interest rate parity decision process and mechanics.  Sure, if the ECB hikes 50bps over the next three months and the Fed only hikes 25bps, that is a marginal advantage to the euro but owning euros after that is still a negative carry trade.  Ultimately, the question is exactly how aggressively will central banks around the world address the initial bout of higher inflation that is coming alongside the higher oil prices.  In truth, I think the US has far more leeway to raise rates as the underlying economy is in far better shape than that of the Eurozone, but as we heard yesterday, Madame Lagarde will not be “paralyzed” by events, i.e. she will hike rates if someone whispers in her ear to do so.  I sincerely hope none of the central banks go down that road.

Elsewhere in the FX world, it is worth noting that USDJPY is pushing back toward the 160 level, although is unchanged this morning.  As to today’s trading, NOK (+0.5%) is the big winner on oil’s strength, with BRL (+0.2%) the only other currency showing strength vs. the greenback.  Otherwise, modest weakness (GBP -0.1%, AUD -0.2%, CNY -0.25, MXN -0.2%, ZAR -0.4%) is the order of the day.

On the data front, yesterday had some surprising outcomes with the Current Account ($-190.7B) falling to its lowest deficit in five years.  meanwhile, oil inventories showed a much large build of crude and even distillates, while only gasoline saw an inventory draw.  Perhaps that helped yesterday’s oil price decline.  This morning, Initial (exp 210K) and Continuing (1850K) Claims are on the docket and that’s really it.  There was an interesting article in the WSJ this morning describing how many cities are actually shrinking because of the change in immigration patterns we have seen since the border was closed.  The importance of this is that old expectations of how much job growth defines economic strength need to adjust to the new population realities and frankly, nobody knows the adjustments yet.  But the old idea that we need to see 200K new jobs each month seems to way overstate how to stabilize the Unemployment Rate.

And that’s really it.  Today is a risk-off session and likely to remain so unless we get a new headline about a potential end to the conflict.  But based on the recent pattern, tomorrow seems just as likely to be a risk-on session, although with the weekend coming, and the propensity for military action to start on the weekend, perhaps not.  As to the dollar, it ain’t dead yet!

Good luck

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Banish Conceit

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The back story of every war
Is nobody knows what’s in store
Especially now
As Trump’s sacred cow
Is changing his message once more

So, yesterday morning, his Tweet
Led many to think a retreat
Was on the horizon
But Trump is surprisin’
With him, one must banish conceit

This morning the story is talks
Twixt both sides are unorthodox
As leaders o’er there
Are fighting since there’s
Nobody in charge, doves nor hawks

Obviously, the Iran situation remains the key driver of all market activity at this point and the stories about negotiations are the lead.  From what I can gather, and there is no definitive source I trust completely, a number of nations including Russia, Egypt, Turkey and Saudi Arabia have been trying to get conversations going.  Of course, the biggest problem is determining who speaks for Iran as the bulk of their previous leadership has been decapitated.  My take is there are different factions, some really hard line apocalyptics who would rather the entire world burn down, especially the US and Israel, than end the hostilities, and there are others who are more pragmatic and want the fighting to end, while perhaps being willing to give up some previous goals, like nuclear weapons ownership.

Everything that I have read about the Iranian leadership structure is that there are many military group leaders who have preset plans if there is no central leadership, and I assume that is why headlines from this morning about ongoing Iranian missile attacks continue.  While I am no military strategist, just a poet, from what I have read, if the USMC does, in fact, take over Kharg Island, it is defensible militarily and would essentially end Iranian funding completely.  Trump’s comments about the US and Iran running the facility together would imply the US can determine how much oil is shipped while Iran earns the proceeds.  In that scenario, it would be possible for the US to starve Iran of the money they need to continue their reign of terror and support for proxy groups.  That could well be a very satisfactory outcome for everybody but the mullahs who continue to seek the destruction of Israel and the US.  It would also reopen the Strait of Hormuz and we would see dramatic reversals in the price of oil and inflation fears.  In fact, I bet rate cuts by central banks would be back on the table immediately!

Ok, enough prognostication from someone in the peanut gallery.  Let’s see how markets have responded some 24 hours after Trump’s tweet yesterday morning.  volatility remains the primary feature of every financial market led by oil futures.  As you can see in the chart below of the last week of WTI price action, there has been a nearly $18 trading range, about 20% of movement in that timeline.

Source: tradingeconomics.com

With the black sticky stuff higher by 2.2% this morning, I would argue that there will be no sense of calm in the markets until oil heads back toward its pre-war levels of $60/bbl or so.  If you recall, we discussed the support at $55/bbl in December and questioned what was driving the rise from there.  The daily chart for the past six months below offers a better sense of what I believe the market will find reassuring.  

Source: tradingeconomics.com

One other thing to remember is that the futures market remains in steep backwardation.  A look at the table below shows that prices for future delivery remain upwards of $20/bbl less than prompt prices.  All the evidence indicates that this war will be over soon.

Source: barchart.com

Sticking with commodities, precious metals have found some support with gold (+0.5%) and silver (+1.1%) both hanging on this morning.  

Turning to equity markets, yesterday’s solid rallies in the US, with all three major indices rising more than 1% was followed by broad strength in Asia (Tokyo +1.4%, HK +2.8%, China +1.3%) with more gainers (Korea, India Australia, Indonesia) than laggards (Taiwan, Malaysia, New Zealand) elsewhere in the region.  Two newsworthy items here were that Australia and the EU have signed a free trade agreement reducing tariffs between the two substantially, while RBNZ governor Breman talked about hiking interest rates if inflation picks up because of oil’s rise.  (As an aside, that would be a catastrophic error for the nation if she did it.)

Meanwhile, in Europe, it is a far less exciting session as they were able to respond to the Trump tweet during yesterday’s trading.  So, this morning, the DAX (-0.35%) is the laggard while the rest of the continent is +/-0.2% or less on the day.  This morning’s Flash PMI releases were broadly negative in tone as while Manufacturing readings were a touch better than expected Services in Germany, France, the UK and the EU overall, all showed substantial weakness.  I guess the prospect of another energy crisis in Europe is taking its toll.  As to US futures, at this hour (7:00) they are basically unchanged.

In the bond market, after a reversal yesterday, where Treasury yields slipped nearly -5bps, this morning they have backed up 3bps.  Bond investors remain caught between the idea that inflation is going to be a problem because of higher energy prices and the idea that the economy is going to slip into a recession because of higher energy prices.  Remember, too, there is an underlying dynamic where many analysts believe the US is going to hit a financing wall and yields are going to explode much higher.  But that story has been with us for quite a while, so I don’t put great stock in it for now.  

European sovereign yields also slipped yesterday and this morning they are little changed to slightly higher, with both France and Italy (+2bps) the worst performers and all other continental bonds, along with Gilts, essentially unchanged.  As to JGBs, last night yields slipped -5bps on both the prospects of the war ending and lower oil prices as well as a better-than-expected inflation reading where headline fell to 1.3% and core to 1.6%, down from 2% in January and a tick below expectations.

A funny thing about Japanese inflation is that if I look at a chart over the past 5 years, it is not hard to make the case that the BOJ has things moving in the right direction, and of course a reading of 1.6% is below their target.  In fact, if you look at the chart below comparing Japanese (blue bars) and US (gray space) core inflation, I expect Chairman Powell would give anything to have the Japanese chart!

Source: tradingeconomics.com

Finally, the dollar, while firmer this morning (DXY +0.3%) has traded right back into its long-term trading range of 96/100.  Again, I cannot look at the chart below and conclude that the dollar is going anywhere anytime soon.  If skyrocketing oil prices and a war in Iran cannot get a real breakout, I think we will have to go back to interest rate differentials as the driver!

Source: tradingeconomics.com

As to specific currencies, ZAR (-1.35%) is the day’s laggard as the recent sharp decline in both gold and platinum weigh on the nation’s accounts, as well as their status as a major energy importer.  We’ve also seen weakness in PLN (-0.5%), HUF (-0.6%), INR (-0.5%) and, interestingly, AUD (-0.5%) despite the latter’s deal with the EU.  I think ongoing high energy prices remain the issue here.  For the majors, -0.2% is the order of the day for the euro, pound, yen and Swiss franc.

On the data front, there’s not a ton of data this week.

TodayNonfarm Productivity Q42.0%
 Unit Labor Costs Q43.5%
 Flash Manufacturing PMI51.3
 Flash Services PMI51.5
ThursdayInitial Claims210K
 Continuing Claims1860K
FridayMichigan Sentiment53.8
 Michigan Inflation Expected3.2%

Source: tradingeconomics.com

In addition to the modest data releases, we hear from 5 Fed speakers over 7 venues this week, but it is very hard for me to believe that anything they say will matter while the war hogs the headlines.

Prognostication is silly here as headlines drive everything.  My sense is playing it close to the vest remains the best strategy.  But remember this, despite all the pearl clutching and teeth gnashing, the S&P 500 is just 6% from its high print back in January.  This has not even achieved what is typically considered a correction.  The lesson here is that history shows we can decline much further, but also that there is a lot of resilience in the market right now, hence, close to the vest.

Good luck

Adf

Wound-Licking

Posted on by 
The clock to the deadline is ticking
And right now, most traders are kicking
All risk to the curb
But they won’t disturb
The hodlers who spend time wound-licking

The market focus right now is on the deadline that President Trump has imposed for Iran to reopen the Strait of Hormuz, which is at 7:45pm EDT this evening.  I have read several takes on the likely impact of a destruction of Iran’s power grid, all explaining the consequences would be calamitous for the nation and its people.  Within a week or two, the humanitarian crisis would be unprecedented.  And that is only on the Iranian side.  Almost certainly the Iranians would retaliate and seek to destroy as much Gulf and Israeli infrastructure as possible to inflict the same pain there.  Ultimately, I cannot believe anybody really wants to see this happen.  Alas, it is out of all of our hands.

We remain extremely fortunate that we live thousands of miles from the action and although there will be economic consequences, those are easier to adapt to then the destruction of your home and nation.  Beyond that, I have nothing to offer regarding the situation there and since I discussed the end of last week in my note last evening, let’s see how things are going this morning (spoiler alert, it ain’t pretty!)

As has been the case for the past several weeks, screens everywhere are red this morning and it is easier to show a screenshot than list them all here.

Source: tradingeconomics.com

This picture was taken of futures markets at 6:55 this morning but you can see that Asian markets and European markets are all meaningfully lower.  As has been the case since the beginning of the conflict, the rise in oil prices and its knock-on effects have been the driver.  It appears that there are two broad groups of investors right now, the leveraged ones who are being forced out of positions rapidly as every decline brings further margin calls, and the cash investors who are trying to stick it out, at least in the areas they feel will rebound.  But the pain is real, at least on a mark-to-market basis, if one is marking to market every day.

History has shown that declines of this nature tend to offer tremendous buying opportunities for those who have the means to do so.  Consider the chart below showing the S&P 500 from the year 2000 on.  

Source: finance.yahoo.com

It is easy to see the sharp decline from the GFC, as well as the Covid dip and then 2022, which was a particularly difficult year for both stocks and bonds.  But the direction of travel remains up and to the right and this dip will almost certainly be followed by significant gains going forward.  Of course, the timing of those gains remains uncertain, but absent a complete collapse of the economy, this seems the most likely outcome.  That doesn’t, however, mean it will be a painless trip.

Turning to bonds, yields everywhere are higher as inflation fears remain the feature topic throughout the world.  Here, too, a Bloomberg screenshot does all the work for me.  

However, I think it is worth stepping back and looking at how bonds have behaved over the past five years.  the chart below shows the percentage change in 10-year bond yields in the US and Japan since early 2021.  While I am using Treasuries, despite the rise in yields everywhere in Europe, the charts there would be similar.

Source: tradingeconomics.com

My point is that while there is great angst daily regarding each basis point of movement in yields, US yields have been pretty stable for a long time.  Of course, we all know the story of JGB yields, which had been stable at extremely low levels for a decade, and have now moved much higher.  The thing is JGB yields moved much higher long before the Iran events, so while at the margin, that is having an impact, there was a strong trend already.

Once again, I believe perspective on markets is important as unless you are a professional trader, the day-to-day can drive you crazy and there is little you can do to change it.  Long-term investors need to understand that reality.

Turning to commodities, I have to wait as things have changed dramatically based on the following post by President Trump.

You will not be surprised that the worst-case declines in both stocks and bonds have reversed as per the below screen shot taken at 7:34

Source: tradingeconomics.com

And bonds from Bloomberg:

Back to commodities, below is oil’s response to the Truth Social post, falling sharply from relatively unchanged prior to the comments.

Source: tradingeconomics.com

And while gold is still lower on the day, you can see how much it, too, has adjusted based on the post.

Source: tradingeconomics.com

You won’t be surprised that the dollar, which had been much stronger earlier this morning has reversed course and is slightly lower now.

It is extremely difficult to keep up sometimes and I apologize for the numerous charts, but they truly are worth thousands of words in this situation.

I would talk about data, but I cannot believe that will really matter right now.  The growing consensus was that central banks around the world were preparing to tighten policy as oil driven inflation was going to need to be addressed, even if history showed this to be a categorical error.   And the first inkling from the Fed funds futures markets is that the probability of a rate hike is being reduced somewhat compared to the end of last week.

Frankly, nobody knows how things are going to evolve from here.  Many will say that Trump TACO’d but it is not hard to believe that whatever Iranian leadership remains has looked around and decided they couldn’t take it anymore either.  

As I have maintained for a while, play it close to the vest for now, but I expect that there are many value opportunities around, just in tiny bites.

Said Trump, we have had some good talks
And so, we will set back the clocks
On when we attack
Iran’s power stack
As doves take the lead, not the hawks.

Good luck
Adf

The Abyss

Posted on by 
This month has seen traders dismiss
The idea that risk led to bliss
Stocks worldwide have fallen
And those who were all in
With leverage now face the abyss

But it’s not just war in Iran
That’s scrambled most everyone’s plan
The data, as well
Are heading to hell
With no central banking wise man

As I didn’t write on Friday, and it seems some things happened while I was away, I thought I might offer my views of where things stand as we enter the new week.

🤯🤯 😱😱 🤮🤮

I think that sums it up nicely.

Recapping the end of last week quickly, all the central banks left policy on hold, as was expected with all showing a more hawkish lean given the dramatic rise in energy prices, so far, and fears that food will follow shortly.  The BOE was the most obvious as rather than a 5/4 vote with 4 votes for a cut, it was 9/0 for no movement.  Adding the Thursday decisions to the previous ones from the week, and looking at the Fed funds futures market, the two tables below from cmegroup.com show the change over the past month from modest expectations of a cut at the next meeting to modest expectations of a hike, first:

Then, if we look at the aggregated probabilities, you can see that the market has priced out any cuts for 2026 at this stage, with nothing, really, until the end of 2027.

Now, here’s the thing about this pricing.  It is a current estimation based on the Fed funds futures curve and certainly is subject to massive change going forward.  However, other markets that rely on interest rate cues see this and respond accordingly.

For instance, the 2-yr Treasury note (gray line) also has seen a major yield rally as you can see in the chart below and now sits above Fed funds effective (blue line) for the first time since late 2022 when the Fed finally caught up in its race against the raging inflation of the time.

Source: tradingeconomics.com

So, inflation is once again a major worry of the markets, and investors have come to believe that central banks are not going to be coming to the rescue for their risk assets as their hands will be tied by higher energy prices driving headline inflation higher.  Of course, we all know that central banks raising rates will not adjust short term price inelasticity for energy products, although it could well cause a deep recession which would likely have an inflation impact.  But my take is, that is not their goal either.

And that is why everyone is so unsettled.  The idea that the central banks are going to come to the rescue of risk assets has been killed and now the pricing of those assets needs to rely on their own fundamentals, a much tougher task historically.  

This is especially so given the data from Thursday showed PPI much hotter than expected, which adds to the narrative that the Fed, and other central banks, are on hold, at best, if not getting itchy to hike rates.

With this in mind, we cannot be surprised that equity markets suffered greatly on Friday, as did bond markets and precious metals.  However, I believe the drivers of equities are different than those of the traditional havens of bonds and gold.  In the case of equities, high valuations, which have existed for a long time, and significant leverage, with margin debt at record highs, although as you can see from the chart below, I created from FINRA data, it turned down ever so slightly in February have started to take their toll.

And in fact, that toll on margin debt is being played out in both bonds and gold as both are clearly feeling the effects of massive deleveraging as hedge funds and CTAs all scramble to make their margin calls.  In this case, they sell what they can that is liquid, not what they want to sell, so bonds and gold fit the bill.  My take is if the war continues very much longer, we will see the margin selling diminish and soon, both gold and bonds are going to seem like pretty good places to hide.  (Now, if you want to keep up with inflation, USDi, the fully-backed inflation tracking crypto currency available at www.usdicoin.com) is going to do so far better than short-term interest rates which are almost certainly going to lag inflation for a while going forward!  Ask me about this and I am happy to discuss.)

And that’s all I have this evening.  There is a great deal of back and forth with threats from both sides in the war, and whether or not the Iranian electricity infrastructure is hit, or if their nuclear power plant at Bushwehr is hit and if so, how they retaliate remains unknown and fodder for the narrative writers.  I have no opinion other than I hope none of that happens.

In the meantime, risk reduction is likely to continue as equities suffer while the dollar maintains its value and oil is the real risk, as any indication that the military action is ending is likely to see a major downdraft there.  Unless you are a professional trader, with real capital behind you and a great market and news feed, this is not a time to play in my view. However, if I look at things and where they currently sit as Sunday night opens, gold seems to be too cheap.  For millennia it has served as the last recourse of safety, and I do not believe this war will be any different than any of the countless wars in the past.  This doesn’t mean it cannot go lower, just that it probably is approaching a place of ‘value’ especially as you can be sure that at some point later this year, every central bank will be printing as fast as they can if economies start to stutter.  One poet’s thought.

Let’s see what happens overnight and I will be back again tomorrow.

Good luck

Adf

Dire Straits

Posted on by 
Said Jay, I will not be ignored
And so, I ain’t leaving the board
When my time as Chair
Is up, and I swear
I will see the president gored

So first off, we ain’t cutting rates
‘Cause here in the United States
Inflation’s a worry
And I’m in no hurry
To help Trump escape dire straits

I guess we cannot be surprised that Chairman Powell was combative during his press conference yesterday after the Fed left rates on hold, as expected.  There was only one dissent this month, Governor Miran, still looking to cut rates.  However, while standing pat given the high level of uncertainty that exists from the war situation makes sense, compare the dot plot from this meeting to the December meeting below it.  The dispersion of views on the committee has really tightened up a lot.  While the median for 2026 continues to point to one cut, it appears that the Fed now believes we are near r*, although they didn’t say that exactly.

March 2026 dot plot

December 2025 dot plot

The other noteworthy comment from the Chair was when he explained he had “no intention of leaving” the Fed until the Justice Department investigation is completed.  And, if Kevin Warsh is not confirmed by the Senate by the end of Powell’s term as Chair on May 15th, he will remain as Chairman pro tempore, the same situation as his previous nomination when the Senate delayed his confirmation.  

The market response to both the combative tone and the hawkish rhetoric overall was a further 1% decline in the S&P 500 from an already weak place as per the below chart where I highlighted the time of the Statement release.  You can see how things behaved thereafter.

Source: tradingeconomics.com

But that wasn’t all that happened yesterday, PPI came out MUCH hotter than forecast with headline at 0.7% (3.4% Y/Y) and core at 0.5% (3.9% Y/Y) as inflation concerns rose to the fore.  If you look at the PPI chart below showing both headline (blue bars) and core (gray bars), it is very difficult to discern a pattern of declining producer prices.

Source: tradingeconomics.com

In fact, it is hard to look at this data and reconcile it with the Fed’s SEP forecasts describing the view that inflation, even their measure of core PCE, is going to smoothly return to their 2% target over any particular timeline.  

One last event of note was the Iranian response to an attack on its main Natural Gas field, South Pars, where they inflicted serious damage to the Ras Laffan LNG facility in Qatar, which happens to be the largest in the world and is on the wrong side of the Strait of Hormuz to boot.  The result has been a significant rise in the price of European (and UK) natural gas, with both soaring more than 20% this morning while, Brent crude has jumped 7.2% as opposed to WTI’s unchanged status today.  This has taken European NatGas to ~$22.MMBtu compared with the US price of $3.15.  Ask yourself how long Europe can afford to pay 7x US prices for NatGas and maintain any competitive ability to manufacture anything.  (As an aside, this remains a key reason that I see long-term prospects for the euro so dimly.)  But if we look at the longer-term chart of European NatGas, despite the dramatic increase since the Iran conflict began, it is nothing compared to what we saw in the wake of Russia’s invasion of Ukraine.

Source: tradingeconomics.com

Summarizing yesterday’s session in one word, I would say, Aaaaaaggggghhhhhh!

I assume I have depressed you enough with yesterday’s activities, but I will run through market responses overnight.  You won’t be surprised to learn they have not been positive.

In fact, I guess I will start with bonds this morning, which I didn’t discuss above, but not surprisingly given the high PPI readings and the sharp rise in oil and gas prices, have suffered a lot.  Yesterday, Treasury yields reversed their early declines and closed higher on the day by 6bps.  They have edged up another 1bp this morning and are back above that 4.20% range I have focused on.  Meanwhile, European sovereign markets were all closed when the FOMC meeting concluded, which added to the pressure on bond yields which started with the US PPI data.  Net, yesterday, German bunds rose 4bps and this morning they are higher by a further 3bps.  But as you can see from the below Bloomberg screenshot, they are the champs in Europe today.

JGB yields also rose sharply, up 6bps and we saw similar rises throughout Asian bonds.  Right now, it is very clear that inflation is a bondholder’s concern, not recession.

As to equity markets, you will not be surprised to know that every market in Asia declined, most by more than -1.0% with the Nikkei (-3.4%) the worst performer followed closely by India’s Sensex (-3.1%), but there was no place to hide in Asia.  In Europe, the damage is equally broad, although there is one outlier, Norway (+0.5%) which is obviously benefitting from the sharp rise in oil prices.  But otherwise, -1.5% to -2.5% is today’s story across the board there.  Interestingly, at this hour (6:45) US futures are little changed to slightly lower, just -0.1%.  Perhaps this is a sign that all is not lost.  Or maybe the algorithms just haven’t started their day yet.  One noteworthy decline is South African shares (-4.0%) which is suffering from gold getting sold off yet again yesterday and today.

Since we already touched on energy, a quick trip through metals markets sees a major rout ongoing with gold (-2.75%) and silver (-5.2%) both suffering greatly, as is copper (-2.5%) and platinum (-6.1%).  I continue to believe that gold is being liquidated to pay for other losses as the primary attraction of the barbarous relic remains.  One thesis is that Middle Eastern central banks are liquidating their holdings as, given the dramatic decline in their oil revenues, they need money for continuing operations, and arguably, that’s what the gold is for.  Essentially, gold is the rainy-day fund.  As to the other three metals, those hint more at slowing economic activity rather than forced liquidation.  After all, there was a lot of euphoria on the way up, so if the narrative is changing, as that dissipates, so will demand.

Finally, the dollar has given back a small portion of yesterday’s solid gains but remains at the top of its 96.00 / 100.00 trading range as defined by the DXY and shown in the chart below.

Source: tradingeconomics.com

Again, considering energy policies and availability around the world, the US, which is the largest energy producer in the world and a net exporter of energy products, seems better positioned than any of its competitors to weather the current economic gyrations.  However, if we look across specific currency pairs this morning, we see relative strength elsewhere on the order of 0.2% to 0.3%.  Frankly, it is a bit surprising to see ZAR (+0.4%) rally given what is happening in both gold and the South African equity market, but stepping back slightly, given the rand’s weakness since the end of January, I guess we cannot be that surprised that there is consolidation.  Certainly, there is nothing about the chart for the last month that indicates the rand is about to reverse course and strengthen dramatically.

Source: tradingeconomics.com

The big picture here remains, in my view, that the US has more pluses than minuses vs almost all its counterparts.

On the data front, I didn’t even mention last night’s BOJ meeting, where they left policy on hold, as it didn’t seem to have a major impact.  Perhaps, Ueda’s mildly hawkish comments have helped the yen a bit this morning.  As well, the Swedish Riksbank left policy on hold and in a short while we expect both the BOE and ECB to leave policy rates on hold.  The one which might move is the UK, where last time they voted 7/2 to leave policy unchanged but analysts think 4 members could vote for a cut.  However, my sense is that cutting rates at this time, before there is evidence that the economy is truly suffering from the war, would be a surprise.  Otherwise, we get the weekly Initial (exp 215K) and Continuing (1850K) Claims as well as the Philly Fed (10.0) and then at 10:00 we see New Home Sales (720K).  One other thing to note is that yesterday’s EIA data showed a substantial build in crude inventories, but a large draw in gasoline and distillates.  It is this activity that helps explain the rise in crack spreads, and why the refiners should be having a very good quarter.

And that’s it for today.  Quite frankly, that’s enough for me.  As it happens, there will be no poetry tomorrow, so I will get to recap today and tomorrow on Monday and see what has changed in the Persian Gulf as well as any other new news.

Good luck and good weekend

Adf

All Will Reject

Posted on by 
Down Under the latest decision
To raise rates was made midst division
Inflation there’s rising
So, it’s not surprising
The two sides have had a collision

But elsewhere this week I’d expect
That central banks all will reject
A hike in their rate
As long as the Strait
Stays closed, though inflation’s unchecked

For a while now, I have been making the case that central bank activities, at least in the West, had a diminishing impact on market behavior, and that was before the war in Iran began.  My thesis had been based on the idea that fiscal policies had become so overwhelming that market participants realized that the odd 25 basis point rate move was not going to move the needle, at least not on a short-term horizon.  

Then, of course, at the beginning of the month, the Iran conflict began which garnered all the market’s attention, rightfully so.  But here we are, 17 days into the conflict and suddenly, investors seem far less concerned with the situation.  Naturally, the halting of ~20% of daily oil flows through the Strait remains a critical issue, but arguably, until something there changes, the market seems to have absorbed that in its price.  Consider the following screen shot of equity markets from 6:30 this morning.  it is very difficult to look at this and conclude there is any sense of panic.

Source: tradingeconomics.com

Sure, equity markets have slipped over the past month, but the magnitude of that decline has been pretty modest considering oil prices have jumped 50% during that period.   The lesson I take from this is that speculative positioning has been substantially reduced because, frankly, we have not seen nearly as much fear response as I would have anticipated heading into this situation.  If we look at the CNN Fear & Greed Index below, sure it says we are in extreme fear (below 25 on the chart), although this is nowhere near the lows seen during the past year as per the below chart from cnn.com

But if you go to the link above, it shows a series of charts covering different facets of the stock market, and frankly, none of them demonstrate to me that fear is that rampant, despite their labels.  After all, most of the charts show the current readings right in the middle of the range over the past year.

Which takes us back to, what is driving markets these days?  Two and a half weeks into the war, I presume that margin calls have been settled and those positions adjusted or reduced accordingly.  After all, margin clerks demand settlement immediately, not in two weeks’ time, so they are done.  Economic data has been underwhelming, although we are beginning to see the first inklings of war-related weakness with yesterday’s Empire State Manufacturing disappointment (-0.2 vs 7.1 last month and 3.2 expected), but even more so with this morning’s German and European ZEW Economic Sentiment Indices.

                                                                                                                Actual           Previous          Forecast

Source: tradingeconomics.com

This is the first March data we are seeing, and I suspect all of it is going to be lousy.  But again, that is already priced in, I believe, hence the relative lack of movement.

And so, I turn to the central bank community, with virtually the entire G7 having meetings this week.  While I don’t anticipate any rate movement other than last night’s RBA hike of 25bps, which was priced in before the conflict began, I expect that we are going to need to listen to what they all say as our best indication of current expectations of future behavior, and whether they will react to the oil price rise, or recognize higher rates will not open the Hormuz Strait.  At this point, especially since there has been insufficient inflation data to alter decisions, I expect a lot of talk about carefully monitoring the situation, but no promises to do anything.  And remember, knock-on effects of higher oil prices into other things take time to be felt, so given the completely reactive nature of all central banks, that is not going to be a reason to raise rates.  Ironically, central banks are back in the market discussion despite themselves!

Ok, let’s tour the markets and see how things have behaved overnight.  Yesterday saw a very solid US session, although as in the table above, this morning futures are very modestly lower.  In Asia, Tokyo (-0.1%) slipped a bit after Katayama-san, the FinMin, explained she was watching the yen closely and would consider “bold moves” (a euphemism for intervention) if deemed necessary.  Elsewhere in the region, though, only China (-0.7%) failed to follow the US with Korea (+1.6%), India (+0.75%), Taiwan (+1.5%) and Singapore (+1.2%) representative of the price action.  Other markets had lesser gains, but gains they were.

Meanwhile, European bourses are all in the green as well, albeit not as robustly as Asian exchanges showed.  Spain (+0.8%) is the leader, but 0.5% gains in France and the UK are also extant while Germany (+0.1%) is still trying to shake off that horrible ZEW number.

In the bond market, Treasury yields slipped again yesterday, down -3bps, and this morning, European sovereigns are showing similar activity, with yields sliding between -3bps and -5bps across the entire continent and the UK.  This is certainly odd behavior if the market believes that oil prices are going to remain higher for longer.  If I look at the combination of the early March data weakness and the fact that bond investors are not panicking in any sense, there is no indication that central banks are going to do anything for now, but I suspect that economic weakness will be the issue that arises going forward.  After all, inflation has not seemed to be their driver for a while now.

In the commodity space, yesterday saw oil prices slide about 4%, while this morning they are higher by 3.0%.  but a look at the chart tells me that for now, they have found a new equilibrium just below $100/bbl +/- a bit. 

Source: tradingeconomics.com

It is important to remember that despite the large jump in prices recently, on an inflation adjusted basis, the current level is still only half as high as the 2008 spike to $145/bbl.  In other words, I might contend that it is not the price of oil, so much, right now, but rather its availability that is going to be the key issue going forward.  Naturally, Europe has jumped in to explain that they believe high oil prices help them denounce the US removal of sanctions on Russian oil as they will not countenance such things despite the loss of their key suppliers.  I’m glad I don’t live in Europe.

As to the metals markets, Zzzzzzz is the only way to describe them.  While copper (-1.2%) has slipped, neither gold nor silver has moved overnight, and both remain essentially at their new homes of $5000/oz and $80/oz.

Finally, the dollar is also doing little this morning, essentially unchanged vs. most its major counterparts.  NOK (+0.6%) is enjoying oil’s rally while ZAR (-0.5%) is suffering from the lack of gold movement.  And otherwise, it is hard to get excited about anything with movement +/- 0.2% or less across both G10 and EMG currency blocs.

There is no primary data released this morning in the US.  The FOMC begins its two-day meeting and tomorrow at 2:00 we will learn that policy is unchanged, but all eyes will be on the dot plot and the SEP report to try to better understand the potential future path.  But for today, absent a major change in the Iran situation, I don’t imagine it is going to be very exciting anywhere.

Good luck

Adf

Keep Up the Fighting

Posted on by 
The Strait of Hormuz remains closed
And right now, both sides seem disposed
To keep up the fighting
While pundits keep writing
That Trump will soon find himself hosed

Meanwhile, this week central banks meet
And none are expected to treat
The oil price spike
With any rate hike
Though keep eyes on each balance sheet

Nothing seems to have changed dramatically in Iran with US bombing attacks continuing and Iranian missile and drone attacks continuing.  It remains a daunting challenge to discern reality on the ground there as every news source spins any information to their political viewpoint, and I, for one, have been unable to pull much signal from the noise.  This is truly the fog of war.

With that in mind, it does appear that different markets are taking very different cues from the situation, with some (oil and the dollar) continuing to hew to a strong risk-off viewpoint while others, equities and bonds, remain unconvinced that the world is about to end.

As such, perhaps we should take a few moments to consider the fact that this week, we are going to see interest rate decisions from every major Western central bank in the following order: RBA, BoC, FOMC, ECB, BOE, BOJ, SNB, starting tonight and concluding on Thursday.

Of all these banks, only the RBA is expected to move, raising its base rate by 25bps to 4.10%, although that was baked in prior to the events in Iran beginning.  I would contend this is not a response to the oil price.  In fact, one must assume that central bankers are aware of the history of responses to exogenous price shocks, like an oil spike, and that any attempt to offset the inflationary consequences in the past has led to major economic pain.  It is not hard to understand that a sharp rise in oil prices, and the concurrent rise in gasoline and diesel, acts as a “tax” on the economy which tends to reduce economic activity.  Hiking rates into that scenario would very likely result, and historically has resulted, in a recession in short order.

Remember, the reason central banks, in general, look to core inflation, is because they know they cannot impact the prices of food or energy via interest rate policy.  While the ultimate impact of this oil price spike will only be known many months from now, if the conflict ends in the next several weeks, it is likely that any structural price issues will be avoided.  Of course, we have no idea how long things will last right now, so as investors and hedgers, reduced exposure to financial markets is likely the best advice for almost everyone.

Which means, it’s time to look at the markets and see what they are telling us.  After Friday’s soft close in the US, Asia saw a mix of outcomes.  Tokyo (-0.1%) did little overall, and we saw some weakness in Australia (-0.4%), New Zealand (-0.3%) and the Philippines (-0.9%) with Indonesia (-1.6%) the regional laggard.  However, there were numerous markets who ignored the oil price and rallied including Hong Kong (+1.5%), Korea (+1.1%), India (+1.3%) and Singapore (+0.6%) with mainland China essentially unchanged in the session.  China released a raft of data showing that the economy there continues to have property troubles (House Prices -3.2%), but the rest of things were largely in line with their reduced GDP expectations excepting Unemployment, which rose to 5.3%.  

Europe, too, is seeing a mixed picture this morning with some gainers (Germany, UK) and some laggards (Spain, France, Italy) although none of the movement is very significant, < 0.3% in every case.  US futures at this hour (7:10) are all pointing nicely higher, in fact, by 0.5% to 0.8%.

My point is that despite fears of the death of the equity rally, as I type this morning, the S&P 500 is just 4.5% from its all-time high made at the end of January.  I am no technician, but the chart below shows both the long-term direction and the 52-week moving average, and the current price is well above both of these indicators.  This is not to say the market cannot decline from here, just that the broader trend remains higher.  It does not feel very apocalyptic to me at this point.

Source: tradingeconomics.com

Turning to the bond market, yields are lower across the board this morning with Treasuries (-3bps) backing off the highest levels seen last week, and currently at 4.25%.  While that rate is clearly above the lows, it hardly smacks of panic nor of a bond-buying strike.  Of course, historically, when uncertainty rises, Treasuries have been a primary safe haven, and that has not been the case this time either.  It appears to me that investors are caught between fears of rising inflation and fears of economic contraction so don’t know whether they want to hold their bonds or sell them.  As to European sovereigns, all are in fine fettle this morning with yields slipping between -2bps (Germany) and -6bps (UK).  Again, this does not smack of inflation fears today.

Which takes us to the key driver of almost everything, oil.  Right now, WTI is trading lower by -1.5% and is back below the $100/bbl level.  While, of course, the recent trend is higher, that is entirely on the back of the Iran situation.  If/when that is resolved, I expect the price to retreat sharply right away, although probably not to its prewar levels for another few months.  But if it traded back to $70/bbl, that would remove virtually all the inflation talk and investors would need to look elsewhere for cues.

Source: tradingeconomics.com

In the metals markets, gold (0.0%) is trading just above $5000/oz and silver (-1.6%) just below $80/oz, and neither has responded as would have been expected prior to the Iran conflict.  Recall, both peaked at the end of January, just before the Kevin Warsh as Fed chair announcement, and as you can see below, both have largely gone nowhere, albeit with a lot of daily volatility attached to that lack of movement.

Source: tradingeconomics.com

It makes no sense to me that after a 5000-year history as the ultimate monetary safe haven, gold has suddenly lost its allure in that capacity.  As such, I continue to believe that the lack of follow-through higher during this war is a result of leveraged investors needing to raise cash to cover margin calls and given the gains that were available in their gold positions, and the liquidity in the market, gold was the most convenient way to manage positions.  Remember, leverage has been a key part of the story of recent market moves, with margin debt at all-time highs, > $1.1 trillion, although it represents just 1.9% of outstanding market capitalization, less than the all-time high percentages seen ahead of the financial crisis.

Source: investing.com

Nothing has changed my take on the underlying demand for precious metals at this point.

Finally, the dollar is a bit softer this morning but has retained most of its gains from this move.  However, as a descriptor of today’s lack of fear, the dollar’s pull back is as clear a signal as any.  So, the euro (+0.5%) is rebounding away from the 1.1400 level seen Friday, while the yen (+0.4%) is backing away from the 160 level.    AUD (+1.0%) seems like it is preparing for this evenings’ RBA rate hike, but the dollar is lower across the board after a solid run ever since the Warsh announcement.  Looking at the DXY (-0.35%) below, you can see that today’s move is modest in the scheme of things, and we will need to see a lot more dollar selling before this trend changes.

Source: tradingeconomics.com

EMG currencies are having a very strong day, almost like the war is over.  CZK (+1.8%), HUF (+1.7%), PLN (+1.1%), ZAR (+1.0%), MXN (+0.9%) and KRW (+0.9%) are representative of today’s price action.  I’m wondering if I missed the news that the war ended!

On to the data this week, which in addition to all those central bank meetings includes a large array of generally secondary data, although PPI is part of the mix.

TodayEmpire State Manufacturing3.2
 IP0.1%
 Capacity Utilization76.2%
WednesdayPPI0.3% (2.9% Y/Y)
 -ex Food & Energy0.3% (3.7% Y/Y)
 Factory Orders0.2%
 FOMC Rate DecisionUnchanged
ThursdayInitial Claims215K
 Continuing Claims1855K
 Philly Fed9.0
 New Home Sales720K

Source: tradingeconomics.com

I imagine that folks will look at the PPI data to see if they can glean anything about inflation going forward, but it, too, is a February number, so will not have anything from the war.  It will also be interesting to see what Chairman Powell says in his press conference, but I can’t imagine much new information will flow there either.  After all, with the war, they are kind of stuck for now.

So, it continues to come down to market interpretations of commentary regarding the war.  As I said, this morning, investors don’t seem that worried things will get worse.  The Greed and Fear index is at 22, not great, but we have seen worse just recently.  Again, lighter positions are the way to go in my view.

Good luck

Adf

Not Be Sublime

Posted on by 
Investors are starting to shun
The riskiest things one-by-one
So, stocks feel the pain
And bonds, too, feel strain
The dollar, though’s, on quite a run

It’s nearly two weeks since this started
And so far, no ending’s been charted
The impact o’er time
Will not be sublime
Thus, trading’s not for the faint-hearted

Another day and there is no end in sight for the ongoing military action in Iran.  US strikes continue apace and Iranian retaliation also continues, albeit at a lesser rate it seems.  However, the information from the war zone remains difficult to trust as all of it is spun for various audiences with no sense of objective truth.  As such, it is difficult to have an opinion on how long this will continue.

With that in mind, all we can do is observe market behavior and see what we can glean.  Starting with equity markets around the world, the below screenshot from Bloomberg.com this morning shows that risk is clearly off, although not catastrophically so, at least not yet.

So, weakness in the US yesterday was followed by weakness overnight in the major markets in Asia as well as in other regional markets (Korea -1.7%, India -1.9%, Indonesia -3.1%) with the rest having declined by lesser amounts.  It is important to see that all the Asian markets (and European and US markets) have fallen in the past month, but remain higher, in some cases substantially so, since this time last year.  The point is that this move can still rightly be considered corrective, rather than a dramatic change in opinion.

European bourses are demonstrating similar behavior although US futures at this hour (6:45) are slightly higher, about +0.15% across the board.  Thinking about equity markets overall, one of the main features of the US market was that it maintained a relatively high P/E ratio, no matter whether measured on a forward looking or historical basis.  Thus, a correction in equity prices, even absent the war, would not have been that surprising.  The same could not be said about European or Asian markets, which trade at much lower valuations, but then, in Europe especially, prospects for growth remain hampered by individual national domestic policies along with EU wide policies, notably in the energy sector.    Under the rubric a picture is worth 1000 words, it is not hard to understand why US equity markets dominate global markets.

Source: tradingeconomics.com

Germany has averaged -0.3% GDP growth over the past 3 years, and the EU is just above it at +0.4%.  Meanwhile, this morning’s UK GDP data showed weaker than expected outcomes, with Y/Y of 0.8% after a stagnant January.  Are US markets richly priced?  Sure, but what prospects do you have elsewhere?

Turning to bond markets, the traditional safe haven appeal of bonds, especially Treasuries and Bunds, is MIA.  While this morning, Treasuries (-1bp) and most European sovereigns (-1bp across the board) have seen prices stop declining, the picture over the past two weeks has not been encouraging.  The chart below shows the price action in both Treasuries and Bunds and, as you can see, both have seen yields rise sharply since the beginning of the month/war.  Given the ongoing stress in oil markets, and the implications that has for inflation worldwide going forward, it should not be a surprise that bonds don’t appear to offer their ordinary haven characteristics.

Source: tradingeconomics.com

The big question here, and around the world truthfully, is how will central banks respond to the rise in energy prices and subsequent rise in headline inflation?  If they try to address price pressures by raising rates in this scenario, it will almost certainly lead to recessions everywhere.  But will their models allow them to hold their policies if inflation starts to rise sharply?  It’s funny, I have been remarking how central bank policies have lost their luster recently, having been overwhelmed by fiscal policies, but suddenly, monetary policy is back in the limelight.  We shall see how they perform.

In the commodity markets, WTI (-1.3%) rallied sharply yesterday but is giving back a bit this morning.  The big headline yesterday was that Brent crude closed above $100/bbl for the first time since 2022 in the wake of Russia’s invasion into Ukraine.  Of course, that was more about the big, round number feature, than the percentage rise.  After all, is there really a difference of $98/bbl or $100/bbl in the broad scheme of things?  Oil continues to be THE driving factor in all markets right now and that is not likely to change anytime soon.  As long as the Strait remains closed to traffic, this pressure will continue to build. 

In the metals markets, both gold and silver continue to consolidate around their recent levels ($5100 in gold, $85 in silver) and it appears we are going to need another catalyst of note to get that to change.  I see no change in supply metrics, that’s for sure, but if there is a recession, silver demand may well be reduced given its industrial uses.

Finally, the dollar is king of all it surveys, at least in the FX markets.  The euro is below 1.15 (it seems like only last week that pundits were talking about the consequences of the euro trading above 1.25.  The DXY has broken above 100, although we will need to see an extension of this move to be convinced that it is going to head much higher, and USDJPY is now pushing near 160 again, which brought out comments from Katayma-san, the Japanese FinMin, about closely monitoring the yen’s value.  Of course, given the broad-based rise in the dollar, the current yen weakness cannot be seen as that troubling.

But what is a bit more interesting to me, and more definitive proof that the dollar is not about to collapse, is the coincident moves higher in the dollar vs. a number of other currencies.  Look at the chart below of ZAR (-0.15%), SEK (-0.3%) and MXN (0.0%).  Each demonstrates virtually identical trade patterns, and all of them reached their respective peaks (dollar’s nadir) on January 29th.  You may recall that was the day president Trump named Kevin Warsh as the next Fed Chair, and we saw a major reversal in stocks, gold, silver and other markets.  

Source: tradingeconomics.com

My best estimate is that FX markets are pricing in a tighter Fed at this point, which. Based on Fed funds futures, showing just one cut potentially this year in December, makes a lot of sense.  I guess it remains to be seen how other central banks will respond to the ructions in markets caused by the war, but this is the first order consequence.

Source: cmegroup.com

Turning to this morning’s data, we see a bunch as follows: 

Q4 GDP (2nd estimate)1.4%
Personal Income0.5%
Personal Spending0.3%
Durable Goods1.2%
-ex Transport0.5%
PCE0.3% (2.9% Y/Y)
Cpore PCE0.4% (3.1% Y/Y)
JOLTs Job Openings6.7M
Michigan Sentiment55.0

Source: tradingeconomics.com

As with Wednesday’s CPI data, the PCE data does not include the war, so will be dismissed.  My take is the Income and Spending numbers, and the JOLTs number will be the most impactful if they are a long way from estimates.  

And that’s where we stand.  Markets are still unsure of what to believe regarding the war, and when it comes to war, things happen that are unexpected all the time, the so-called unknown unknowns.  In the end, it is hard to bet against the dollar for right now, but that could change in an instant based on the next headline.

Good luck and good weekend

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Rise and Shine

Posted on by 
Though CPI’s print was benign
It’s clear that it didn’t enshrine
The impact of war
That caused crude to soar
Thus, yields round the world rise and shine

But other than yields heading higher
And prospects for peace looking dire
Most markets lack motion
Which leads to the notion
That not very much may transpire

It seems incongruous but despite the war, and a remarkable cacophony from the press, markets are not really doing very much at all.  Certainly, at the margin, there is some movement, and, of course, this does not include oil prices which have been all over the map, but generally, if you look at the charts below, it is hard to get too excited.

Starting with the dollar, as per the DXY, it has traded in a 4% range for basically the past year, touching both top and bottom three times each.  The current rebound looks almost identical to the October rally.  But 4% is just not that much of a move, certainly not one that implies a regime change.  Overnight, the largest move was PLN (-0.4%) with virtually every other counterpart, whether G10 or EMG, +/-0.25% or less.

Source: trading economics.com

Turning to stocks, it is difficult to look at the below chart of the S&P 500 and come away with the conclusion that it is either rallying or declining in any meaningful measure.  For the past 6 months, the range has been about 450 S&P points, which, given the level, works out to less than 7%.  It is no surprise that equity volatility is a bit higher than currency volatility, but this chart does not instill fear of either collapse or breakout to my eyes.

Source: tradingeconomics.com

Yes, this morning there is rising concern and equity markets around the world had a weak session overall, but nothing indicating a collapse.  Consider in Asia we saw the following movement:

  • Tokyo -1.0%
  • Hong Kong -0.7%
  • China -0.4%
  • Korea -0.5%
  • Taiwan -1.6%
  • India -1.0%
  • Australia -1.3%

A weak performance?  Absolutely.  Unprecedented declines?  Not even close.  The same is true in Europe, but even less so, with Spain (-0.7%) the worst offender by far while France (-0.3%), the UK (-0.3%) and Germany (0.0%) all tread water.  Again, where is the fear?  US futures, at this hour (6:50) are lower by just -0.4%, again, soft but not catastrophic.

Turning to bonds, while Treasury yields climbed 7bps yesterday, and have been rising since the beginning of the month, they are just now at the top (and slightly through) the range of the past 6 months.  Now, the recent rise is understandable as we all know that yesterday’s benign CPI reading didn’t include any of the oil price movement since the Iran war began.  My understanding is that the rule of thumb for headline CPI is that every $10/bbl rise translates to 0.2% higher CPI.  So, with this morning’s WTI price at $91.50/bbl, compared with $65/bbl prior to the first attacks, that is about 0.5% higher CPI ceteris paribus.  Now, ceteris is never paribus, so we don’t know how things will actually play out, but it seems a fair bet headline inflation will be higher next month.  (This is the point where I will highlight the best way to take advantage of the rising CPI is through USDi, the fully-backed CPI tracking currency.  We already know that CPI next month is going to be higher because of the catch up from the October government shut down.  Add to that the oil price moves and we are looking at annualized returns in the coin of 4.5+% over the next quarter, well above T-bills!)

Back to the bond market, a look at the chart shows the chopping action described above, just like the dollar’s price action.

Source: tradingeconomics.com

This is the Treasury story.  Elsewhere around the world, things have not been quite as benign.  For instance, German bund yields have, this morning, traded to their highest level since October 2023 as per the below chart, although, in fairness, the rise has been gradual.

Source: tradingeconomics.com

UK gilts, on the other hand, have been somewhat more volatile, although I suspect that has a great deal to do with UK domestic economic policy as the nation continues its effort at suicide by insisting that Net Zero CO2 output is the way of the future, thus crushing economic output while suffering through remarkably higher energy prices, and the corresponding inflation that comes with that.  But even here, while the price action has been choppier, the result so far has been similar, a sharp rise in the post Covid recovery reaching a plateau.  

Source: tradingeconomics.com

The fear here, and across all bond markets, is that the Iran war lasts much longer, that oil prices continue to rise, perhaps back to the post Ukraine invasion levels of $120 or higher, and that inflation reignites.  History has shown that every time oil prices rise swiftly and remain there for any length of time, it leads to a recession or at least coincides with one as per the below chart from the FRED database.

Remember, recessions are called after the fact, so my take is the NBER goes back to include the spike.  But it is not a hopeful chart.

On the subject of oil, this morning it is higher by 4.2% as news that Iran has begun to mine the Strait of Hormuz has the narrative updating to explain that the Strait will be closed for an extended length of time and so some 20% of global oil supplies will be off the market.  Now, this is not strictly true as Iran is still transiting the Strait and sending those cargos to China, and I read that India is trying to negotiate for oil heading there to get through as well.  Nonetheless, there is a significant backup there and production is starting to get shut in, which is never a good sign.  While we remain far below the Sunday night panic peak, there is nothing to say we cannot climb back there if things deteriorate in Iran.

Source: tradingeconomics.com

Which takes us to the metals markets.  After a remarkable run over the past two years, gold (0.0%) appears to be settling into a new trading range, as does silver (+1.75%).  

Source: tradingeconomics.com

The funny thing about this is that gold has historically been seen as an inflation hedge, so with inflation almost guaranteed to be higher for the next several months, at least, one might expect gold to rally more aggressively.  One consideration is that with inflation rising, expectations are for rising interest rates which, correspondingly, are negative for gold, so there is no buying. (H/T Alyosha for that narrative.). But perhaps the explanation is that gold has historically been a hedge for monetary inflation, meaning the printing of more currency.  If inflation is caused by a spike in energy prices, gold typically sits on the sidelines. 

Which takes us to the Fed.  If Powell and friends look at inflation and decide that they need to raise rates to address it, that would be a double negative for gold in my view as not only would interest rates be higher, but it would almost certainly trigger a recession.  Initially, that would not be a gold positive, although their response to the ensuing recession, which would be significant policy ease, would definitely send the barbarous relic soaring again.  

So, that’s how I see things this morning.  some market chop, but nothing really changing.  I suppose that we will need to see a conclusion of some sort in Iran to change opinions because, if things drag on, just like they did in Ukraine, investors forget about it after a while.  For instance, how many of you remember Venezuela, which was just 2 months ago.  Attention spans these days are very short.

On the data front, Initial (exp 215K) and Continuing (1850K) Claims lead this morning alongside the Trade Balance (-$66.6B) and Housing Starts (1.35M) and Building Permits (1.41M).  There is also a 30-year auction today, although nobody has been discussing auctions at all lately.  

You will not be surprised that I am not excited by the current market situation, and in fact, my take is the bigger risk for a large move is a sudden end to the Iran conflict, rather than anything else.  In the meantime, I am hunkering down.

Good luck

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