Squealed Like Stuck Pigs

Posted on April 4, 2025 by fxpoet

What many just don’t comprehend
Is tariffs are not near the end
Of policy changes
As Trump rearranges
The world into foe and to friend

And while Wall Street squealed like stuck pigs
Trump’s boosters just don’t give two figs
They’re willing to try
The Trump calculi
If they see it hurts the bigwigs

I’m old enough to remember when Nonfarm Payrolls were the most important thing to market participants regardless of the asset class. Ahh, those were the days. It is remarkable that across major business headlines, I haven’t seen anything discussing the release for later this morning. Don’t misunderstand me, I’m not upset about that fact, I think there has been far too much focus on that data point for far too long, but I am surprised. This may be the best indicator that we are in a new regime for finance and economics. It appears that most of the things the analyst community used to consider important are now merely afterthoughts.

I thought the WSJ had the most consequential article in this morning’s ‘paper’ asking, who is going to buy the $400 billion of stuff that China makes that will no longer be price competitive in the US? They weren’t mentioned explicitly, but I imagine that Temu and Shein are both going to find their business models significantly impaired. But will other “free trading’ nations allow all that stuff across their borders tariff free? The Chinese mercantilist model was built with the idea that if they could produce stuff more cheaply than other nations, whether through subsidy or efficiency, other nations would welcome that stuff. It remains to be seen how well that model holds up given the changes wrought by President Trump.

On a different note, I have read many comparisons of yesterday’s market declines to the March 2020 Covid panic, but my take is it is far more akin to the September 2008 Lehman Brothers collapse, at least from the tone of the market. Covid was an exogenous event while Lehman and the tariffs were home-made. The issue with the GFC and the current time was/is that they are systemic alterations which means that things will be different going forward in finance and economics. Covid clearly changed our lives based on the government response, but it didn’t change the way markets behaved.

At this point, there is no indication that President Trump is going to change his tune, and why would he? Again, amongst the key financial market goals he and Secretary Bessent have touted were a reduction in 10-year yields, lower by 75bps since inauguration, (✔️), a reduction in the price of oil, lower by $14/bbl or 18%, (✔️) and a lower dollar relative to other currencies lower by 6.5%,(✔️). Ask yourself, do you really think they are unhappy with the current situation?

I have no idea how things will play out from here, and in reality, neither does anybody else. Reliance on models that were built with past assumptions does not inspire confidence. As well, we have barely seen the response to these tariffs, although just moments ago China indicated they would be imposing 34% tariffs on all US goods entering their country. But anybody who believes they know the end game is delusional. This is the beginning of the change, and there will be much more to come across many different aspects of the economy and markets as the year progresses. Interesting times indeed.

With that in mind, let’s see how day two of the new world order is playing out (and to think, there were all those conspiracy theories about a new world order before, but this was not what they had in mind.) Green is a hard color to find on screens again today as after yesterday’s rout in US markets, the follow-through in Asia was almost complete. Indonesia (+0.6%) managed a gain somehow, but every other major market declined, some quite substantially. Singapore (-3.0%), Thailand (-3.6%) and Tokyo (-3.1%) were the biggest losers, but shares everywhere fell with most declining more than -1.0% on the session. Interestingly, European shares are having a much worse session today than yesterday with Italy’s FTSE MIB (-7.1%) leading the way although Spain’s IBEX (-5.5%), the DAX (-4.5%), CAC (-3.8%) and FTSE 100 (-3.5%) are not exactly loving life today either. As to US futures, they are pointing much lower again today, -3.0% or so for all the major indices.

Bonds, however, are in great demand with yields virtually collapsing as investors seek anyplace that is not equities to find shelter from this storm. Treasury yields have fallen a further 15bps this morning and you can see in the chart below, just how large this decline has been. In fact, yields have almost retraced to the level just before the Fed started cutting rates last September!

Source: tradingeconomics.com

But bonds everywhere in the world are in demand with yields on European sovereigns lower by between -7bps (Italy and Greece) and -15bps (Germany) as credit quality has also entered the picture there. Finally, JGB yields have also tumbled, down -18bps overnight, as Japanese investors flee global markets and bring their money home.

Arguably, though, the biggest move has been in oil (-6.9%) which is now down to levels not seen since it was rebounding from Covid inspired lows back in 2022.

Source: tradingeconomics.com

I would contend this is almost entirely a recession fear, lack of forward demand story, although I believe OPEC+ is still planning on reducing its production cuts as the year progresses. I imagine the latter is subject to change based on the economic outcomes. In the metals markets, gold (+0.15%) after a sell-off yesterday, is consolidating for now. Given the amount of leverage that abounds and given that when margin calls come, folks sell what they can, not what they want to, I suspect much of gold’s selling yesterday was forced rather than based on fear. Rather, I suspect gold will outperform as it maintains its ultimate haven status. The same, though, is not true for other metals with silver (-1.5%) and copper (-4.2%) both sharply lower this morning. Certainly, in copper’s case, given the increased recession fears, it can be no surprise that its price is declining.

Finally, turning to the dollar, after a sharp decline yesterday, largely across the board, this morning the picture is a bit more mixed with a rebound against some currencies (AUD -3.0%, NZD -2.5%, SEK -1.7%, NOK (-2.1% although also inspired by oil’s precipitous decline.). However, both the yen (+1.0%) and Swiss franc (+1.25%) are continuing to display their haven attributes, while the euro (-0.1%) seems caught in the middle. In the EMG bloc, though, the dollar is quite solid this morning with MXN (-1.9%), ZAR (-1.7%) and CLP (-1.0%) all falling. Of note, CNY (0.0%) has barely moved throughout the entire process.

As I mentioned above, today we do see the NFP report, although my take is a strong report will be ignored as old regime, while a weak report will be ‘proof positive’ a recession is near. Here are the expectations as of this morning:

Nonfarm Payrolls	135K
Private Payrolls	127K
Manufacturing Payrolls	4K
Unemployment Rate	4.1%
Average Hourly Earnings	0.3% (3.9% Y/Y)
Average Weekly Hours	34.2
Participation Rate	62.4%

Source: tradingeconomics.com

Will the data really matter? I don’t think so, at least not to policy makers as they realize (I hope) the world today is different than when this data was collected. At this point, the market is now pricing in a full 75bps of rate cuts by year end from the Fed with a ~30% probability of a cut early next month. But Powell and company don’t have any idea how this will play out either. I fear that we are in a market situation where volatility is the dominant theme, in both directions. Remember, Donald Trump is best thought of as the avatar of volatility. He has earned that nickname. This is why I harp on maintaining hedges, the world is a tricky place.

Good luck and good weekend

Adf

Stress and Dismay

Posted on April 1, 2025 by fxpoet

The only discussion today
Is how badly tariffs will weigh
On stocks and on growth
As certainly both
Will feel some more stress and dismay

But hopefully, once they’re in force
It will change the pundits’ discourse
‘Cause I’m sick and tired
That it’s now required
We all, tariffs, hate or endorse

A funny thing happened on the way to the market collapsing yesterday, especially given the early morning portents, and that is the market didn’t collapse at all. Equities opened lower and rallied all day with the Dow even having a quite respectable 1% gain when all was said and done. I think the lesson that needs to be taken from this is markets have a tendency to get ahead of the news and reversals are pretty frequent. In fact, this is a perfect example of ordinary market behavior, a sharp move in one direction is suddenly reversed for no obvious reason. Certainly, there was nothing said or done yesterday that seemed a specific catalyst for a short-term rebound. That, my friends, is simply how markets work.

However, for now, with tomorrow being President Trump’s “liberation day” when tariffs will be announced, they remain the major story across both financial markets and political narratives. As I sit here in the cheap seats, observing the back and forth, what has become abundantly clear is that the politicization of economic actions is the true reality. Yesterday I highlighted the difference between Democrat and Republican views on future inflation. Reading through the commentary on X, as well as stories in Bloomberg and the WSJ, I think this is the same situation, with Democrats certain tariffs will be the downfall of the economy and lead to rampant inflation, while Republicans believe they will help the nation recapture lost manufacturing capacity. Personally, I’m just looking forward to moving on to a different story as we have been discussing tariffs for more than two months straight and it is tiresome.

Here’s the one thing of which I am confident, however, and that is nobody has any idea what the impacts will ultimately be on either markets or the economy. I maintain that pretty much every model that has been in use for the past two decades, all of which were developed based on data during a period of low inflation and declining interest rates as well as significant increases in central bank provided liquidity, no longer work. After all, those underlying conditions no longer exist. Inflation remains much higher than during the pre-pandemic decades;

Source: tradingeconomics.com

Interest rates are much higher;

Source: fred.stlouisfed.org

And central banks have been reducing net liquidity for some time now (think QT).

Source: tradingeconomics.com

So, if all the underlying conditions have changed, it seems unlikely that the models based on those conditions will add much value. After all, nobody really knows how elastic prices are for any given goods directly, nor how willing companies will be to sacrifice margin to maintain sales. As such, forecasting short-term movements is a mugs’ game here. In fact, yesterday’s price action is a perfect example of how things are not necessarily how they appear.

With that in mind, let’s see how yesterday’s risk reversal in US equity markets fed into the rest of the world. Asian equities saw a wide range of price action overnight. While Japan, Hong Kong and China were all tantamount to unchanged, Korea (+1.6%) and Taiwan (+2.8%) saw significant bounces while India (-1.8%) fell after concerns that President Trump’s mooted additional sanctions on any nation that buys Russian oil hit home as India buys, I read, 44% of their oil from Russia. Meanwhile, in Europe, screens are green this morning with gains across the board of between 0.7% and 1.0%. This is despite weaker PMI data, with every nation in Europe reporting a sub 50 manufacturing number. However, inflation fell a tick more than expected with Core falling to 2.4% and headline down to 2.2% and this has encouraged traders to believe that the ECB will be cutting again later this month despite some commentary to the contrary from several ECB members. As to US futures, at this hour (7:15) they are pointing lower by about -0.4% across the board.

In the bond market, 10-year yields continue to slide around the world with Treasuries (-5bps) falling back to their lowest level in a month and prior to that since early December. Too, European sovereigns are seeing yields fall sharply, with declines of between -6bps and -10bps as the combination of slowing inflation and weak PMI data has overwhelmed the previous concerns about German defense spending. In fact, that is a story we have not heard in a while, eh? Last week, that was the end of European bond markets, today it is ancient history!

Turning to commodities, oil (+0.1%) is consolidating after a sharp $2/bbl rise yesterday that was fomented by Trump’s threats to both Russia and Iran (he threatened to bomb them if they didn’t renounce their nuclear ambitions). The thing about oil’s price action is since late 2022, it has remained in a trading range of $65/$80 more or less, so despite the large move yesterday, I would argue no new ground has been covered. Certainly Trump’s efforts to open up more area for drilling is likely to weigh on prices over time, but over what timeframe remains to be seen. As it is a day ending in “y”, gold is higher again, this morning by 0.3%, but there is no indication this trend is running out of steam. The remarkable thing is the steadiness of the move. However, the other two major metals, silver (-0.35%) and copper (-0.3%) have slipped a bit this morning.

Finally, the dollar remains confused. Versus the euro (-0.25%) it is stronger, but versus the CHF (+0.25%) and JPY (+0.5%) it is weaker. Now, you might say that is a sign of a risk-off trade, but equity markets are rallying in Europe along with bonds. So, is this a move to havens or risk? The biggest mover this morning is CLP (-0.9%) but it has been one of the biggest gainers YTD, so with copper soft, this looks a lot like some profit taking. Otherwise, movements of +/- 0.2% are the order of the day.

Here’s a crazy theory, perhaps President Trump is seeking to drive the economy weaker in order to force the Fed to cut rates. After all, that appears to be the Fed’s bias, but recent inflation data has made them uncomfortable to do so. If Trump can drive up Unemployment, maybe it does the trick!

Ok, let’s see the data the rest of the week as yesterday’s Chicago PMI (47.6) while modestly better than expected really didn’t seem to matter that much.

Today	ISM Manufacturing	49.5
	ISM Prices Paid	65.0
	JOLTS Job Openings	7.63M
Wednesday	ADP Employment	105K
	Factory Orders	0.5%
	-ex Transport	0.7%
Thursday	Initial Claims	225K
	Continuing Claims	1860K
	Trade Balance	-$123.0B
	ISM Services	53.0
Friday	Nonfarm Payrolls	128K
	Private Payrolls	110K
	Manufacturing Payrolls	1K
	Unemployment Rate	4.2%
	Average Hourly Earnings	0.3% (3.9% Y/Y)
	Average Weekly Hours	34.2
	Participation Rate	62.4%

Source: tradingeconomics.com

In addition to all this, we hear from six Fed speakers including Chairman Powell Friday morning at 11:30am. For today and tomorrow, tariffs will be the primary story, although it is not clear it is the primary driver. However, once they are announced, I expect we will move onto the next big thing, although I have no idea what that will be. But the one thing on which we can count regarding President Trump is there will be another big thing. Stay hedged is all the advice I can give because uncertainty is extremely high.

Good luck

Adf

Nobody Knows

Posted on March 31, 2025 by fxpoet

The punditry’s now out in force
As they hope, their views, we’ll endorse
When tariffs arrive
On Wednesday they’ll strive
To claim they were right, but of course

The problem is nobody knows
Exactly what Trump will propose
So, models will fail
While Trump haters wail
More chaos is all that he sows

Well, folks, it’s month and quarter end today and many are decrying that President Trump’s policies have derailed the bull market in risk assets. And they are almost certainly correct. Yet, at the same time, there has been a broad recognition across a wide spectrum of analysts and politicians that the situation he inherited was unsustainable. Whether the 7% budget deficits, the $36+ trillion in government debt or the ongoing inflationary pressures, the only people who were happy were those who saw their equity portfolios rise against all odds. (I guess the gold holders have been pretty happy too, in fairness.)

However, the underlying reality of a situation is rarely enough to alter a good story, or a story that somebody wants to tell. For instance, the Michigan Consumer Survey was released on Friday, and it fell more than expected to a reading of 57.0, its lowest reading since July 2022, when inflation was peaking.

Source: tradingeconomics.com

But the story that has been getting all the press is the extraordinary rise in inflation expectations. As you can see below, both 1-year (blue line) and 5-year (grey line) have risen sharply in 2025. Conveniently for the mainstream media this has been blamed on President Trump’s policies given their efforts to discredit everything the president does.

However, the Michigan Survey, while having a long pedigree, isn’t that large a survey. As such, it is possible that non-economic factors may be impacting the results. For instance, when the survey is taken, the respondents’ political leanings are asked as well. Now, take a look at the data when split by political views as per the below. Perhaps, we need to take this survey with a grain or two of salt as it appears the question may be seen as a way to express one’s opinion about the current administration rather than unbiased views of future inflation.

This is especially true when we look at other measures of expected inflation, like the NY Fed’s Consumer inflation survey shown below with the green line compared to that Michigan survey in red.

Source: zerohedge.com

My point is, we need to be careful to notice the non-economic factors that enter into things like expectations surveys. As well, the idea that inflation expectations are a critical driver of future inflation, although a staple of current central bank thinking, does not have much empirical backing. For instance, my friend Mike Ashton, the Inflation Guy™, explained in this article way back in 2015, that inflation expectations do not have much empirical proof of effectively forecasting future inflation. But perhaps, if you don’t believe him, you will consider a scholarly paper by a Fed economist, Jeremy Rudd, written in 2021 that is pretty damning with respect to the idea that the Fed relies on this data as part of their policy toolkit.

In the end, the one truism of which I am highly confident is that pretty much all the models that have been utilized for the past twenty plus years are no longer reflective of the reality on the ground today. Not just for inflation, but for growth and trade and every other aspect. President Trump has not merely upset the applecart; he has broken it into pieces and burned them all to cinders. All the fiscal problems mentioned above are still extant, but President Trump appears set on changing them in the direction desired by almost all mainstream economists. They don’t like his methods, but it’s not clear how changes of this magnitude can be made smoothly. So, perhaps the proper question is just how rough things are going to be. If the overnight session is any indication, they could get pretty rough.

The dominant feature today
Is fear is what’s now holding sway
As markets decline
More pundits consign
The blame on Trumps tariff pathway

Investors have risk indigestion this morning, as their appetite to own equities anywhere in the world has significantly diminished. After a rough week ending session on Friday in the US, equity markets in Asia have almost universally declined led by Tokyo (-4.05%) but with sharp declines seen in Korea (-3.0%), Taiwan (-4.2%), Australia (-1.75%), Malaysia (-1.45%) and Thailand (-1.5%). Chinese (-0.7%) and Hong Kong (-1.3%) shares also fell, although perhaps not quite as far as others. The entire conversation today is about President trump’s promise to impose tariffs around the world on Wednesday, with many analysts trying to estimate what damage will occur despite no clarity on the size and breadth of the tariffs. But investors have decided that havens are a better place to hide for now.

European bourses are also sharply lower, although more in the -1.7% to -2.0% range, with every major index in Germany, France, Spain and Italy down by those amounts. There continues to be a great deal of discussion amongst the European leadership about how they will respond to the mooted tariffs, but of course, like everybody else, they have no idea exactly what they will be. As to US futures, at this hour (6:45) the picture is grim with declines between -0.6% (DJIA) and -1.3% (NASDAQ). Right now, the only people who are happy are those holding puts.

Of course, in this risk-off environment, it should be no surprise that bond yields have slipped a bit as, at the margin, investors are flocking to own Treasuries (-5bps) and European sovereigns (Bunds -3bps, OATs -2bps, Gilts -4bps). Even JGBs (-5bps) saw yields decline last night with any thoughts of the BOJ hiking rates in the near term fading away completely.

On the other hand, commodities are finding a lot more interest this morning with gold (+1.15%) leading the way higher and proving itself to continue to be one of the most consistent safe havens available. Interestingly, oil (+0.5%) is rallying this morning despite a number of Wall Street analysts upping their estimate of the probability of a US recession. However, offsetting the potential future demand weakness is the news that President Trump is “pissed off” at Vladimir Putin for his ongoing aggression in Ukraine and seeming unwillingness to move to a ceasefire. This has raised the specter of further sanctions on Russian oil output, potentially reducing supply. As well, the Trump administration continues to tighten the noose on both Iranian and Venezuelan oil sales, so potentially reducing supply even further. I guess this morning, the supply story is bigger than the demand story.

Finally, as we turn to the currency markets, the dollar is generally firmer this morning, although by widely varying amounts depending on the currency. For instance, in the G10, NOK (-0.75%) is the laggard despite oil’s gains, followed by AUD (-0.6%) and NZD (-0.55%), with all three of these being major commodity producers at a time when commodities are doing well. As to the rest of this bloc, JPY (+0.35%) is off its best levels, but behaving as a haven, and the others are just marginally changed from Friday’s closing levels. In the EMG bloc, ZAR (+0.25%) is the exception this morning, clearly benefitting from gold’s ongoing run to new all-time high prices, but otherwise, most of these currencies are modestly softer (MXN -0.2%, PLN -0.2%, KRW -0.25%).

Speaking of currencies, though, there is an article on this morning’s Bloomberg website that is worth reading, I believe, for everyone involved in the FX market. The gist of the article is something that I have been discussing for the past several years, the fact that market liquidity here, despite the extraordinary volumes that trade on average each day (currently estimated by the BIS at $7.5 trillion across all FX products) is not nearly as deep as might be anticipated.

My observation from my time on bank desks was that while there was a great deal of electronic flow, likely driven by HFT firms seeking to extract the last tenth of a pip out of thousands of transactions, when a real client, generally a corporate, had a need to do something specific to address a business need, and that amounted to more than $100 million equivalent, the liquidity situation was far more suspect.

My personal theory was as follows: bank consolidation reduced the net amount of risk-taking appetite as larger banks did not increase their risk-taking commensurate with the reduction that occurred by small banks being gobbled up. Combining this with the introduction of high-frequency trading firms in the business, who had no underlying client base to whom they owed a price, and therefore, could turn off their machines in a difficult market, further reducing liquidity, led to a situation where liquidity was a mile wide and an inch deep. My point is for all the corporates out there who have significant transactions to execute, you must carefully consider the best way to approach the situation to avoid a potentially significant increase in execution costs.

Turning to the data, before we look at this week, which ends with NFP, a quick word on Friday’s core PCE data, which came in at a hotter than expected 0.4% taking the YY number to 2.8%. The Fed cannot be happy with this outcome as a quick look at the recent readings makes it hard to accept inflation is continuing its decline from the 2022 highs. Rather a look at the below chart, at least to my eye, shows me a stability in Core PCE of somewhere between 2.5% and 3.0%, well above the Fed’s target range, and hardly a cause to cut rates further.

Source: tradingeconomics.com

As this note has already gotten a bit longer than I like, I will list the week’s data tomorrow but note that Chicago PMI (exp 45.4) is the only noteworthy data point to be released today.

Absent a complete reversal of Trump’s tariff plans, I see nothing positive on the horizon for risk assets, and expect that equities will maintain, and probably extend the overnight losses while gold and bonds both rally, at least for now. As to the dollar, my take is it will not benefit universally in this risk-off scenario, although there are currencies that will clearly suffer. Remarkably, despite the performance of Aussie and Kiwi overnight, I do believe the commodity bloc has the best prospects for now.

Good luck

Adf

Tripping Off Tongues

Posted on March 24, 2025 by fxpoet

Recession is tripping off tongues
And pundits ain’t twiddling their thumbs
Political shades
Are driving tirades
And screams at the top of their lungs

But are we that likely to see
A minus in our ‘conomy?
We certainly could
And probably should
But life doesn’t always agree

The major discussion point over the weekend has been recession, and how likely we are to see one in the US in the coming months. Of course, this matters to the punditry not because of any concern over the negative impacts a recession has on the population, but ‘more importantly’ because recessions tend to result in sharp declines in equity values. And let’s face it, do you honestly believe that the editors of the New York Times or the Wall Street Journal are remotely interested in the condition of the majority of the population? Me neither.

However, if they can call out something that they believe can impede President Trump, or detract from his current high ratings, they will play that over and over and over. Funnily enough, when I went to Google Trends, I looked up “recession” over the past 90 days with the result below:

That peak was on March 11 although there was no data of note that day compared to a reading of 9 today. Looking at the news of that day, even CNN had a hard time finding bad news with the four top stories being 1) the Continuing Resolution vote in the House being passed, 2) the Department of Education announcing a 50% RIF, 3) 25% tariffs on steel and aluminum being imposed and 4) Ukraine accepting terms for a 30-day ceasefire. From an economic perspective, the tariffs clearly will have an impact, but it seems a leap that the average American can go from 25% tariffs on imported steel and aluminum to recession in one step. And based on the positive responses that continue to be seen regarding President Trump’s efforts to reduce the size of government, I doubt the DOE cuts were seen as the beginning of the end of the economy.

And yet, recession was the talk of the punditry this weekend. To try to better understand why this is the case, I created the following table of several major economic indicators and their evolution since December, prior to President Trump’s inauguration.

Key indicators	Dec	Jan	Feb
NFP	323	125	151
Unemployment Rate	4.10%	4.00%	4.10%
CPI	2.90%	3.00%	2.80%
Core CPI	3.20%	3.30%	3.10%
PCE	2.60%	2.50%
Core PCE	2.90%	2.60%
IP	1.10%	0.30%	0.70%
Capacity Utilization	77.60%	77.70%	78.10%
ISM Mfg	49.2	50.9	50.3
ISM Services	54	52.8	53.5
Retail Sales	0.70%	-1.20%	0.20%

Source: tradingeconomics.com

Once again, while I am certainly no PhD economist, this table doesn’t strike me as one demonstrating a clear trend in worsening data, certainly not on an across-the-board basis. Rather, while you might say January was soft, the February data has largely rebounded. My point is that despite ABC, NBC, Bloomberg, the BBC and CNN all publishing articles or interviews on the topic this weekend, I’m not yet convinced that is the obvious outcome.

My good friend the Inflation Guy™, Mike Ashton, made an excellent point in a recent podcast of his that is very well worth remembering. The breadth of the US economy is extraordinarily wide and covers areas from manufacturing to agriculture to finance to energy and technology along with the necessary housing markets as well as the entire population consuming both goods and services. Added to the private sector, the government sector is also huge, although President Trump and Elon Musk are trying hard to shrink it. But the point is that it is not merely possible, but likely, that while some areas of the economy may go through weak patches, that doesn’t mean the entire economy is going to sink into the abyss.

If we think back to the last two recessions, the most recent was Covid inspired, which resulted from the government literally shutting down the economy for a period of several months, while giving out money. Net, things weakened, but even then, there were stronger parts and weaker parts. Go back to the GFC and the housing bubble popped and dragged banks along with it. That was the problem because banking weakness inhibits the free flow of money and that will impact everyone.

The question to be asked now, I would suggest is, are we likely to see another catalyst that will have such widespread impacts? Higher tariffs are not going to do the trick. Shrinking government, although I believe it is critical for a better long-term trajectory for the economy, will have a short-term impact, but it is not clear to me that it will negatively impact the economy writ large. Certainly, the Washington DC area, but will it impact the Rocky Mountain area? Or Texas and Florida?

Now, a recession could well be on the way. Running 7% budget deficits was capable of papering over many holes in the economy and pumping lots of liquidity into it as well. If those deficits shrink, meaning spending shrinks, the pace of activity will slow. But negative? It seems a stretch to me, at least based on what we have seen so far. One last thing here, is how might this potential weakening economic growth impact inflation? Now, we all ‘know’ that a recession causes inflation to decline, don’t we? Hmmm. While that makes intuitive sense, and we hear it a lot, perhaps the Inflation Guy™ can help here as well. Back in February he wrote a very good explanation about how that is not really the case at all, at least based on the macroeconomic data. The truth is economic growth and inflation have very little correlation at all.

Of course, perhaps the most critical issue for the punditry is, will a recession drive stock prices lower? Here the news is far less sanguine if you are a shareholder and believe there is going to be a recession. As you can see from the below chart of the S&P 500, pretty much every recession for the last 100 years has resulted in a decline in stock market indices.

Source: macrotrends.net

This is a log chart so some of those dips don’t seem that large, but the average downturn during a recession is about 30%, although that number can vary widely. To sum it up, while the data doesn’t scream recession to me, it cannot be ruled out. As well, both President Trump and Secretary Bessent have indicated that weakness is likely going to be a result of their early actions, although the idea is to pave the way for a more stable economic performance ahead. As I have written repeatedly, volatility is likely the only thing of which we can be certain as all these changes occur. Hedge your exposures!

Ok, let’s look at the overnight activity.

The rumor is Trump may delay
His tariffs as he tries to weigh
How much he should charge
And how much, writ large,
These nations are going to pay

Equity futures in the US are higher this morning as the big story is that President Trump is considering narrowing the scope of nations who will have tariffs imposed on April 2^nd. Apparently, his administration has identified the “dirty fifteen” nations with the largest bilateral imbalances and they will be first addressed. The telling comment in the WSJ article I read was when Trump said, “Once you give exemptions for one company, you have to do that for all. The word flexibility is an important word. Sometimes there’s flexibility, there’ll be flexibility.” To my ear, the final plans are not in place, but my sense is he will impose then remove tariffs, rather than avoid them initially. Interestingly, that story was written last night, yet Asian equity markets were not that ebullient. Japan (-0.2%) saw no benefit although Chinese shares (HK +0.9%, CSI 300 +0.5%) fared better. Things elsewhere in the region were mixed with both gainers (India, Thailand) and laggards (Korea, Taiwan, Indonesia) with many bourses little changed overall.

In Europe, green is the predominant color this morning but movement is modest with Spain’s IBEX (+0.4%) the leader and lesser gains elsewhere. While US futures are all higher by about 1% or more at this hour (6:45) apparently the Europeans aren’t as excited at the tariff delay process.

In the bond market, yields have backed up virtually across the board with Treasuries (+4bps) leading the way higher and most European sovereigns showing yields rising by 1bp or 2bps. It’s interesting, while there has been much discussion regarding German yields having traded substantially higher in the wake of the effective end of the debt brake and anticipation of much further issuance, a look at the chart below tells me that after that gap higher on the news, concerns over German finances have not deteriorated at all. And after all, the difference is about 25bps higher, hardly the end of the world.

Source: tradingeconomics.com

In the commodity markets, oil (+0.7%) is continuing its gradual rebound from the lows seen on, ironically, March 11^th. Arguably, what this tells us is that despite the weekend barrage of recession focused articles, the market doesn’t really see that outcome. In the metals, strength is the word, again, with copper (+1.25%) making new all-time highs on the back of China’s stated goals of growing its strategic stockpile. Not surprisingly, both gold (+0.2%) and silver (+0.6%) are also climbing this morning alongside copper as commodities remain in greater demand than a recession would indicate.

Finally, the dollar is a bit softer despite rising Treasury yields with both the euro (+0.3%) and pound (+0.4%) bouncing after last week’s modest declines. And this is despite lackluster Flash PMI readings this morning out of Europe. The biggest winner is NOK (+0.6%) which given the dollar’s broad weakness and oil’s rebound makes perfect sense. Otherwise, while the dollar’s weakness is broad, it is no deeper than the aforementioned currencies.

Given the length of this note already (my apologies) and the dearth of data to be released, with only the Chicago Fed National Activity Index (exp +0.08), I will cover data tomorrow as we do end the week with GDP and PCE data.

Headline bingo remains the key concern for all market participants, but ultimately, my altered view of a softer dollar and higher commodities remains intact.

Good luck

Adf

No Retreating

Posted on March 20, 2025 by fxpoet

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

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

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

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

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

Source: tradingeconomics.com

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

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

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

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

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

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

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

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

Source: tradingeconomics.com

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

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

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

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

Good luck

Adf

Just a Mistake

Posted on March 19, 2025 by fxpoet

It wasn’t all that long ago
That folks really wanted to know
What Jay and the Fed
Implied was ahead
And if more cuts were apropos

But later today when they break
Their words are unlikely to shake
The narrative theme
That whate’er they deem
Important, is just a mistake

Presidents Trump and Putin spoke at length yesterday, but no solution was achieved so the Ukraine War will continue unabated for now. While talks are better than not, certainly this is a disappointment to some. As well, the astronauts who have been stranded in space for the past 8 months are safely back on earth. I mention these things because they are seemingly far more important than central banks these days, and today, that is all we have to discuss regarding financial markets.

To begin, last night the BOJ left rates on hold as universally anticipated. The initial market response was for the yen to weaken through 150 briefly, but then Ueda-san spoke and discussed the expected wage increases and how the economy was doing fine, and the new market assessment is that the BOJ will hike rates by 25bps in May at their next meeting. The market response was to buy back the yen, at least for a little while, although right now, USDJPY seems to be attracted to the 150 level overall.

Source: tradingeconomics.com

It is worth understanding, though, that the last time short-term interest rates were that high in Japan was back in July 2008. And they have not been above that level since August 1995. The below chart from FRED database speaks volumes about just how low interest rates have been in Japan over time, and as an adjunct, just how long the opportunity for shorting JPY on the carry trade has been around. That dotted line is the Fed funds rate compared to the Japanese overnight rate.

Along the central bank thesis, Bank Indonesia, too, met last night and left policy on hold with their policy rate at 5.75%. Governor Warjiyo explained that he felt falling inflation and improving growth would help prevent rupiah weakness despite the fact that the currency has been the worst performing Asian currency this year and is trading at historic lows.

But on to the FOMC meeting which will conclude at 2:00 this afternoon with the policy statement (no change expected although some tweaking of the verbiage is likely) and the release of the latest dot plot. You have probably forgotten that at the December meeting, the FOMC reduced the median expectation of rate cuts for 2025 from 4 prior to the election to just 2. In the interim we have seen Fed funds futures trade to where barely one rate cut was priced in, although we are now back to three cuts, seemingly on the idea that tariffs will cause significant economic weakness, and the Fed will need to respond. At least that’s what the punditry maintains.

Here is the last dot plot for information purposes and it will be interesting to see just how much things have changed. will longer run rates continue to move higher? Will 2 rate cuts still be the median outcome for 2025? All this we get to learn at 2:00.

Source: federalreserve.gov

But arguably, of far more import will be Chairman Powell’s press conference beginning at 2:30. Prior to the Fed’s quiet period, the broad assessment was that patience in future rate moves was appropriate and they were happy with the current situation. However, I am confident there will be numerous questions regarding the potential impact of tariffs on monetary policy responses, as well as other things like DOGE and an audit of the Fed. Will any of it matter? Maybe at the margin, but for most markets, I suspect that fiscal issues will remain dominant. The one exception is the FX market, where unalloyed hawkishness could change views on the dollar’s recent weakness (although it is firmer this morning) while a dovish tone will almost certainly undermine the greenback. So, with no other data of note to be released beforehand, it is clearly the day’s major event.

Ahead of that event, let’s see how markets have behaved overnight. Following a weak session in the US, where all three major indices were lower by about -1.0% on average, Asia had a mixed picture. The Nikkei (-0.25%) found no love from Ueda-san and drifted lower. Both Hong Kong (+0.1%) and China (+0.1%) edged higher but continue to doubt the benefits of the mooted Chinese stimulus program while the rest of the region was mixed with some gainers (Indonesia, Korea, India) and some laggards (Taiwan, Australia, Malaysia). In Europe, too, the picture is mixed with the DAX (-0.4%) lagging while the CAC (+0.5%) is gaining. In Germany, the historic breech of the debt brake is not having the positive impact anticipated, or perhaps this is just selling the news. Overall, though, shares in Europe seem to be awaiting the Fed’s actions, or comments, rather than focusing on anything else. As to US futures, at this hour (7:30), they are pointing slightly higher, about 0.25% across the board.

In the bond market, Treasury yields have edged up 1bp this morning but continue to hang around 4.30%. European sovereign debt has seen yields slip -1bp to -2bps, arguably on the Eurozone inflation data released 0.1% lower than forecast at 2.3%. This continues the idea that the ECB will be cutting rates again at their next meeting. As to JGBs, they are unchanged yet again, seemingly affixed at 1.50%.

Commodity prices show oil (-0.2%) continuing yesterday’s decline. From the time I wrote to the end of the session, WTI fell $2/bbl, perhaps on the idea that the Putin/Trump phone call was bringing the war closer to an end. Regardless, if economic activity is slowing, that will lessen demand everywhere, a clear price negative. As to gold (+0.25%) it continues to trade higher undaunted by any news on any front. While silver is little changed this morning, copper (+0.7%) has now crested $5.00/lb and is pushing to the all-time highs seen back in May 2024.

Finally, the dollar is rallying this morning, higher against all its G10 counterparts by between 0.2% and 0.4%. This looks to me like a trading correction, not a new trend. The same price action is true in the EMG bloc with one real outlier, TRY (-4.2%) which actually traded down by as much as -10% earlier in the session (see chart below) on the news that President Erdogan had his key political rival, Istanbul mayor Ekrem Imamoglu, arrested on charges of fraud and terror, while his university diploma was revoked, seemingly in an effort to prevent him from running for president in the future. Thank goodness we never have things like that happen in this country!

Source: tradingeconomics.com

There is no data released today other than EIA oil inventories where a modest net build across products is currently expected. So, until the Fed, I would anticipate very little net movement. After that, it all depends. However, Powell will need to by extremely hawkish to shake any of my view that the dollar is headed lower overall.

Good luck

Adf

Not Fraught

Posted on March 18, 2025 by fxpoet

The Retail Sales data did nought
To clarify anyone’s thought
‘Bout growth or inflation
While anticipation
Of Jay, for a change, is not fraught

Meanwhile, tariffs are, once again
A question of how much, not when
Just two weeks from now
The president’s vow
For more, has disturbed market zen

In a remarkable situation, at least these days, there is precious little new news impacting financial markets. Perhaps that is why equities around the world are rallying, the absence of bad news is seen as good. Here in the States, the biggest story continues to be the controversy over the deportation of several hundred Venezuelan and Salvadorean gang members that some claim ignored a judge’s order. I’m confident this will get top billing for at least another day, but after that, we will move on. However, market related stories are sparser.

For instance, we can look at yesterday’s Retail Sales data, which was not terrible, but not great, as the headline number rose a less than expected 0.2%, but that still translated into 3.1% growth Y/Y. One of the things weighing on the data was the fact that gasoline prices fell, thus despite modest growth in volume, total dollar sales declined. The same was true with autos, where allegedly prices declined though volumes remained solid. (Remember, Retail Sales measures the dollar value of sales, not the quantity of items sold.). At any rate, investors absorbed the data and decided that the recent market declines, to the extent they are a reflection of concerns over rapidly slowing economic activity, were overdone. The result, happily, is that equities rallied most of the day yesterday and that has followed through around the world overnight.

Alas, the other string of stories in headlines today is the Trump administration’s efforts to determine exactly how they want to implement the promised reciprocal tariffs which are due to be put in place on April 2. It seems the fact the US trades with over 180 nations, each with their own tariff schedules, makes the details of the proposal difficult to shape and implement. However, my take is, absent some major shifts by other nations, these tariffs will be imposed.

Ultimately, given the US is the ‘buyer of last resort’ for pretty much every other nation on earth with regards to any of their exports, I expect that there will be a number of nations that choose to adjust their own schedules rather than have diminished access to the US market. But ex ante, there is no way to determine which nations will blink.

As a testament to just how much things have changed in the market, and just as importantly, the market narrative, the fact that three major central banks are meeting this week with the potential to adjust policy, is basically a footnote. The FOMC starts their meeting today and tomorrow afternoon they will announce rates are unchanged. Some attention will be paid to the dot plot, to try to see if the recent discussions of patience translate into higher long-term rate expectations, but quite frankly, it is not clear to me that Chairman Powell can say anything that is going to move markets absent a surprise rate adjustment. The Fed funds futures market continues to price in basically one rate cut each quarter for the rest of the year at this point.

But before that, this evening the BOJ will announce their latest policy updates and, not surprisingly, there is no anticipation of a move there either. While there has been much discussion in Japan of how companies will be, on average, increasing pay by 5.46% this year, that has not resulted in any expectations for the BOJ to adjust policy in response. And in fairness to Ueda-san and his crew, the fact that the yen (-0.3% today) has been relatively stable of late, having rebounded from its dramatic lows last summer and held a good portion of those gains, concerns over a much weaker yen have diminished.

Source: tradingeconomics.com

Looking at the chart above, while I am no market technician, there seem to be several overhead resistance levels starting with that recent trend line. The absence of concern over a declining yen (rising dollar) will leave the BOJ on hold for a while I think.

And let us not forget Thursday morning, where the BOE will convene, also with no policy changes expected. While GDP remains desultory there, printing at 1.0% Y/Y last week for Q4, inflation refuses to fall to their 2% target and so Governor Bailey is caught between that proverbial rock and hard place. In such a scenario, no action is the most likely outcome.

Ok, let’s turn to the overnight market activity, which has all investors excited given the fact that markets everywhere are embracing risk today. A solid day in the US was followed by strong gains throughout Asia (Nikkei +1.2%, Hang Seng +2.5%, CSI 300 +0.3%) with the mainland a little disappointing. There has been more discussion recently that despite some splashy headlines about more Chinese stimulus, it is less than meets the eye. That is a view with which I agree. The exception to this rule was Indonesia (-3.9%) which fell after concerns over slowing growth and a widening budget deficit spooked foreign investors. In Europe, things are also bright with all markets firmly higher led by Germany (+1.2%) as continued belief in the end of the debt brake has investors anxious to take advantage of all the government spending set to come. We shall see how that works out, but if the US is the template, it probably has some room to run. However, all these bourses are higher this morning in a general risk-on mood. The crimp in the story is US indices are all slightly softer this morning ahead of Housing data.

In the bond market, yields are climbing with Treasury yields up by 1bp and European sovereign yields all higher by 3bps. Again, this seems to be focused on the mooted extra government spending which is coming down the pike, although yields have backed off the levels seen after the initial announcements as per the below. In fact, I read a forecast this morning about German bund yields rising to 4% by the end of next year after all the borrowing.

Source: tradingeconomics.com

In the commodity bloc, gold (+0.9%) is unstoppable for now, and taking silver (+1.1%) and copper (+0.4%) along for the ride. Whatever else is ongoing, it appears that more and more investors have decided that having some portion of their portfolios in the barbarous relic is the right trade. After all, it is higher by more than 15% just since the beginning of the year and more than 40% over the past twelve months. Oil (+1.1%) is also managing to hold above its recent lows but continues to run into resistance below $70/bbl. The biggest news today is that Saudi Aramco has seen its stock price falling to 5-year lows, down 50% from its highs of 2022 after cutting dividends earlier this month.

Finally, the dollar is little changed at this hour (7:45), rebounding from modest weakness earlier in the session. The euro and pound are unchanged, and the yen remains slightly softer. However, MXN (-0.5%) and KRW (-0.5%) are both feeling the heat of the tariff story. In the opposite camp, CL (+0.6%) continues to benefit from the rally in copper prices. The big picture here remains unchanged, with the dollar likely to remain on its back foot as capital flows toward Europe’s government spending bonanza and away from the US, which appears to be pushing for fiscal tightness.

On the data front, this morning we see Housing Starts (exp 1.38M) and Building Permits (1.45M) at 8:30 then at 9:15 we get IP (0.2%) and Capacity Utilization (77.8%). With the Fed meeting ongoing, the only headlines will come from the White House, and those are virtually random these days. Tight fiscal and loose monetary policy tends to weaken a currency and given that is the best description of the US these days, it remains my default position.

Good luck

Adf

Not Worried

Posted on March 17, 2025 by fxpoet

‘Bout markets, Scott Bessent’s not worried
As favor with specs can’t be curried
Instead, what he seeks
Is policy tweaks
To help growth, though folks want that hurried

Meanwhile, Chairman Jay and his team
Continue their policy theme
Inflation’s still falling
Although they are calling
For patience, as bulls start to scream

“I’ve been in the investment business for 35 years, and I can tell you that corrections are healthy, they are normal,” Bessent said Sunday on NBC’s Meet The Press. “I‘m not worried about the markets. Over the long term, if we put good tax policy in place, deregulation and energy security, the markets will do great.”

The above comments from Treasury Secretary Scott Bessent yesterday morning (quote courtesy of Bloomberg.com) have garnered a remarkable amount of commentary amidst both the political and market punditry. My first comment is I must be much older than Mr Bessent, since I have been in the investment business for 43 years. However, as I have written numerous times over the course of the past years, the market has not cleared for a very long time. Since the 1987 stock market crash, when then Fed Chair Greenspan started pumping liquidity into the financial markets to stabilize things, and realized he could do that to prevent serious downturns, we have seen two significant downdrafts, the tech bubble and the housing market crash, both of which were immediately met with massive liquidity injections, extremely low interest rates and for the latter, the advent of QE.

All of that liquidity has resulted in market excesses across many markets and has been a key driver in the stock market’s exceptional rise since the Covid blip. Adding to that was the massive fiscal spending (remember those 7% budget deficits?) which has helped to insure that not only did markets rise, but so did retail prices.

Now, along comes a Treasury Secretary who hasn’t married himself to higher stock markets on a day-to-day basis and instead is focused on the long-term. What I find most interesting is that the same pundits who are screaming about Bessent and Trump destroying the economy, were all-in on the discussion of how the US debt was going to ultimately cause a collapse. Yet as the administration explicitly tries to address that issue (you may disagree with their methods, but that is their clear goal) suddenly, the fact that stock prices are falling is a tragedy of biblical proportions. Here’s the thing, the worst performer, the NASDAQ, is down about -12% since its peak last month as per the below chart. I might argue that is hardly a collapse. In fact, a healthy correction doesn’t seem to be a bad description.

Source: tradingeconomics.com

There is no doubt that uncertainty about the near-term direction of the economy has grown, and there is no doubt that President Trump’s mercurial tendencies make long-term planning difficult. However, I would contend we are a long way from the apocalypse or even a stockopalypse. But once again, I highlight that volatility remains the key metric for now, and that hedging exposures remains very important.

With that as backdrop, the FOMC meets on Wednesday and while there is no expectation of any rate move, the market continues to price three rate cuts for the rest of the year, pretty much one each quarter. A key unknown is just how hawkish or dovish Fed members currently find themselves given the recent market gyrations. As well, while inflation had seemingly been the primary focus, with all the concern over a significant slowdown in the US economy, there are now many who believe we will see a rising Unemployment Rate despite a lack of evidence from the weekly Claims data. These same pundits are also certain that Trump’s tariff policy will lead to rising inflation, really putting the Fed in a bind with a stagflationary outcome. And maybe that is what will happen.

But I would contend it is far too early to assume that is our future. First off, on the inflationary front, energy prices have fallen, a key inflation component, and as far as the tariffs are concerned, if they reduce demand, that is likely to cap prices. If on the other hand, demand is not reduced, I don’t see slowing growth as the likely outcome.

In the end, if the economy is adjusting from one with far more government spending support, to one with more organic private sector economic activity, the transition may be bumpy, but the outcome will be far stronger. We shall see if that is how things evolve.

In the meantime, let’s look at how the world has responded to the latest stories. Friday’s US equity rebound was welcomed everywhere, although the key narrative remains the end of American exceptionalism, at least as regards equity markets. Friday also saw the exiting German Bundestag agree to eliminate the debt brake for infrastructure and defense, with Chancellor-to-be Merz agreeing to ~~waste~~ spend €100 billion on climate related projects to convince the Green Party, which is out of the new government, to vote in the rule change before the new government is seated. It is not clear to me how spending that money on net-zero ideas will defend Germany, but then I am just a poet, not a German policymaker.

As to Asian markets, other than mainland China (-0.25%) green was the predominant color on screens overnight with Japan (+0.9%), Australia (+0.8%) and Hong Kong (+0.8%) all following the US. One of the remarkable things, though, is that Chinese data overnight showing IP (5.9%), Retail Sales (4.0%) and Fixed Asset Investment (4.1%) was generally solid. Of course, Unemployment (5.4%) rose 2 ticks, an unwelcome outcome, and House prices (-4.8%) continue to decline, albeit at a slowing rate, but neither of those speak to a rebound in the Chinese economy. The end of the Chinese NPC offered more platitudes about supporting the consumer, but it is not clear where the money is coming from. And recall, more than 60% of Chinese household wealth remains tied up in housing investment, which continues to decline in value. The Chinese have a long way to go in my view.

Quickly, European bourses are all modestly higher this morning, on the order of 0.3% or so, as hope springs eternal that the rearming of Europe will drive profit margins higher. Unfortunately, at this hour (7:15), US futures are pointing lower, about -0.25% across the board, although that is up from earlier session lows.

In the bond market, Treasury yields have slipped -2bps this morning, but are really just trading around in their new trading range of 4.20% to 4.35% as investors try to get a handle on which of the big themes are going to drive markets going forward. European sovereigns are all seeing rallies, with yields slipping -5bps to -6ps which seems out of step with the news about the end of the German debt brake. Perhaps bond investors don’t believe the legislation will pass, or perhaps that they won’t spend the money after all. As to JGB yields, the edged lower by -1bp in the 10yr, although longer dated paper has seen yields rise with 40-year bonds touching 3.0% for the first time in their relatively short history.

In the commodity markets, oil (+1.4%) is continuing to bounce of its lows from last week but remains well below levels seen at the beginning of the month. The US attack on the Houthis is being called the beginning of an escalation in the Middle East by some, and perhaps that has traders concerned. On the flip side, ostensibly, Presidents Trump and Putin are to speak tomorrow in an effort to get peace talks moving along, potentially a bearish oil signal. In the metals markets, gold (+0.6%) remains in great demand having crested the $3000/oz level last week and rising from there. This has helped both silver and copper, with the latter, despite concerns over slowing economic activity, pushing closer to $5.00/lb. There is much talk of shortages in the market driving the price action.

Finally, the dollar is under pressure this morning with every G10 currency firmer led by NZD (+0.6%) and AUD (+0.4%) although gains elsewhere are on the order of +0.25%. This story seems to go hand-in-hand with the German defense spending and the end of US exceptionalism. As to the EMG bloc, most of these currencies are also stronger this morning, but the magnitude of these moves is generally less than the G10 bloc. Recall, Trump wants a lower dollar, and my default is that is where we are headed at this point.

On the data front, we have an action-packed week ahead starting this morning.

Today	Retail Sales	0.6%
	-ex autos	0.4%
	Empire State Manufacturing	-0.75
Tuesday	Housing Starts	1.375M
	Building Permits	1.45M
	IP	0.2%
	Capacity Utilization	77.8%
Wednesday	FOMC Rate Decision	4.50% (unchanged)
Thursday	Initial Claims	224K
	Continuing Claims	1880K
	Philly Fed	12.1
	Existing Home Sales	3.92M
	Leading Indicators	-0.2%

Source: tradingeconomics.com

As we have seen over the past many months, I suspect that this week’s data will be likely to give analysts on both sides of the economy is stronger/weaker argument new fodder. While the Fed won’t be doing anything, and despite their relative decline in importance, I suspect that Chairman Powell’s press conference will still get a lot of attention.

While we don’t know what the future will bring for sure, I remain convinced that the dollar will slide, and commodities will rally. As to stocks and bonds, well your guess is as good as mine.

Good luck

Adf

Starting to Fret

Posted on March 13, 2025 by fxpoet

In DC, they’re starting to fret
That Trump will make good on his threat
If government closes
The risk that it poses
Is markets become quite upset

There is yet another budget showdown in Washington as the Biden administration never passed the bills necessary to fund the government for the rest of this fiscal year ending on September 30^th. The previous continuing resolution (CR) expires at midnight on Saturday and if a new funding law is not enacted, then a government “shutdown” occurs. Now, a government shutdown is not like a company that runs out of money shutting down. Rather roles the President deems essential continue to operate, along with the military, but other roles see the people furloughed until new legislation is passed. Everybody gets paid back wages when things go back to normal.

The situation is that the House of Representatives did pass a CR to fund the government at almost the exact same levels as last year and sent it to the Senate. However, in the Senate, it needs to beat a filibuster, so needs 60 votes to pass and get to President Trump’s desk. However, last night, Senate Minority Leader Shumer declared the Democrats would not support the bill, so would rather have the government shut down. This is a big change from the previous 3 times that there were government shutdowns, because each of those was blamed on Republican intransigence.

In the end, whatever the politics, the market impact has been negative for stocks while bonds held up, even rallied. Of course, previous shutdowns all were amidst very different economic environments as inflation was quiescent and bull markets in both stocks and bonds were extant. As such, arguably, the momentum behind the market was sufficient to offset any concern over the shutdown. But this time markets are already under pressure going into the potential shutdown. I fear that market dislocation, at least in the equity markets, could be far more severe if this one occurs. Something to keep in mind.

The history shows the US
Has long done all things to excess
But now, as they try
With less, to get by
The pundits complain of regress

Reading the WSJ this morning, I couldn’t help but think of the George Costanza opposite day episode of Seinfeld when reading the Heard on the Street column decrying the fact that the Trump administration is seeking to rein in fiscal excess. Of course, this is an issue that has been fodder for the punditry for a long time, how the US was living beyond its means and borrowing too much money. But now, this article is concerned about the opposite. The key concern is that if the US government doesn’t continue to run massive deficits, the economy will slow and corporate profits will fall dramatically, resulting in falling equity prices.

Arguably, this would always be the case if a change of this nature were to be made. And remember, the punditry was all in on making these changes. However, now, they point to Germany and the DAX, which has outperformed US markets over the past several weeks as the model. (chart below from WSJ)

And what is Germany doing so well? Why, they are talking about borrowing an extra €500 billion, eliminating their debt brake that ensures budget deficits remain below 0.35% of GDP, and funding a huge buildup in defense spending. Germany, which has long been seen as the only source of fiscal rectitude is now being lionized for getting rid of that trait. As I said, opposite day!

The lesson, if you haven’t learned it yet, is that the ascendance of Donald Trump to the presidency is going to continuously change many long-held beliefs in governments around the world, as well as in the punditry, who may find that things which seemed great in theory may have consequences previously unconsidered. From a market perspective, this means volatility will continue to be the best estimate for the future.

Ok, let’s turn our attention to markets and see how things performed overnight. After yesterday’s mixed session in the US, where the DJIA could not manage a gain despite cooler than expected CPI readings, overnight saw a mixed picture as well. Japan was either side of unchanged while both Hong Kong (-0.6%) and China (-0.4%) slipped as did most other Asian markets with Malaysia (+1.7%) the true exception. In Europe, though, screens are green as excess government spending is rewarded, although the gains are modest, 0.3% or so.

On the topic of excess spending regarding Germany, I read yesterday that the plan to alter the constitution may have serious problems (meaning that spending may not materialize) because about 50 Bundestag members in the old parliament lost their seats in the election, so it is not clear they will be willing to vote to overturn the constitution during the current lame duck session and allow the debt brake to be set aside for defense purposes. As I said when the story first arose, we are still a long way from Germany paying their own way defensively. US futures, meanwhile, are slightly softer at this hour (7:15).

In the bond market, yesterday saw yields climb a few bps and this morning those trends remain with Treasury yields (+2bps) not climbing as much as European sovereigns (+3bps to 4bps) as there appears to still be a level of confidence that all the extra defense spending will happen. One story that should have Europeans concerned is that the European Commission, in their effort to find funding for their newly found defensive aggressiveness, have spied the €10 trillion in savings that European citizens hold. Frau von der Leyen, the European Commission President was quoted as saying, ”we’ll turn private savings into much needed investment.”

Call me crazy but my economics classes taught me the identity that Savings º Investment, so I am not sure why those savings aren’t already being invested. Perhaps European citizens are not investing where Frau von der Leyen wants and that is the problem. At any rate, I suppose even if Germany fails to overcome its constitutional debt brake, the EU will get there anyway.

In the commodity markets, oil (-0.3%) is edging lower after a nice run for the past several days as it bounced off the bottom of its trading range. Yesterday’s EIA data showed a large draw in gasoline, but I am given to understand that is a seasonal thing (H/T Alyosha). Meanwhile, nothing has dissuaded investors that gold (+0.25%) is a good thing to hold as it rallied further after yesterday’s gains, although both silver (-0.3%) and copper (-0.4%) are a touch softer this morning.

Finally, the dollar is somewhat firmer this morning, albeit not dramatically so. Of course, it has been under significant pressure during the past week+, so this trading response ought be no surprise. SEK (-0.8%) is the laggard in the G10, but you must remember that it has been the leading gainer over the past month. Meanwhile, AUD (-0.5%) and NZD (-0.45%) are also under a bit of pressure this morning, but the rest of this bloc has seen far less movement. In the emerging markets, HUF (-0.6%) is the laggard with the rest of the bloc seeing declines on the order of -0.3% or less. As I said, nothing dramatic here to see.

Yes, yesterday’s CPI data was a bit cooler than anticipated, but as my friend The Inflation Guy™, Mike Ashton, explained here, I wouldn’t get too excited that inflation is collapsing back to the Fed’s 2% target. This morning brings the weekly Initial (exp 225K) and Continuing (1900K) Claims data as well as PPI (headline 0.3%, 3.3% Y/Y; core 0.3%, 3.5% Y/Y). However, given CPI is already out, I don’t think it will have much impact. Rather, as we have observed lately, politics remains the key driver of all market reactions. The unfolding government shutdown in the US and the German debt drama are the two most noteworthy issues right now, but Ukraine and the Middle East are still out there to offer surprises.

Once again, volatility is the only thing about which we can be sure. That said, my confidence is growing that the dollar will decline over time.

Good luck

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Lost In Translation

Posted on March 12, 2025 by fxpoet

The data today on inflation
Will help tweak the latest narration
But arguably
There’s little to see
As CPI’s lost in translation

And too, central bankers have learned
Their comments leave folks unconcerned
Today’s BOC
Where rate cuts will be
The outcome will ne’er be discerned

It is Donald Trump’s world, and we are all just living in it. Virtually everything that happens in any financial market these days is a result of something that President Trump has either said or done. Obviously, tariffs are a major player, but so are the peace talks in Ukraine (good news that Ukraine has agreed a cease fire to get things started) and his domestic initiatives regarding DOGE and the shake up that has come to government from that project. You cannot look at a business journal without reading a story about how corporate America’s CEO’s are very concerned because of all the activity as they are having difficulty planning their strategies.

While this poet endeavors to track the macroeconomic issues and how they impact markets, and one can argue that tariffs are a macro issue, the ongoing back and forth as to which products will get tariffed and when is occurring far more rapidly than is worth reporting on a daily outlook. After all, nobody has any idea what today will bring on that front.

With that in mind, one of the other things I have discussed has been the demotion of central bankers from their previous preeminence in the world of financial markets. Now, every one of them is simply left to respond to whatever President Trump says that day. Consider, the Fed entered their quiet period last Friday and the fact that we have not heard a word from them is entirely inconsequential. The Fed funds futures market is currently pricing just a 3% probability of a rate cut next week and a total of 75bps of cuts by the end of the year, but that has been true for the past several weeks. Despite an increase in the talk of a US recession, the markets are not indicating that is a concern.

Now, that doesn’t mean that other central banks aren’t doing things, but when the BOC cuts rates by 25bps this morning, taking their base rate to 2.75%, 150 basis points below the US, nothing is going to happen in the market. It is already widely assumed. I guess it is possible that Governor Macklem could make some comments of note, but given that Canada remains a bit player on the world stage, does whatever he says really matter? In fact, the only reason people are discussing Canada now is because of President Trump and his trolling former PM Trudeau and calls to make it the 51^st state. Let’s face it, the economy there is ticking along fine for now, although if their exports to the US are impaired by tariffs it will definitely hurt them. Meanwhile, other than a huge housing bubble, nobody really notices them. After all, their economy is roughly $2.3 trillion, smaller than that of Texas.

We have also heard from Madame Lagarde recently as she tries to calm European leaders’ nerves while the ECB tries to manage their policy around US fiscal gyrations. However, the most concerning information from there has been her confirmation that the ECB is pushing forward with their central bank digital currency (CBDC) project, looking to get things started in October of this year. This contrasts with President Trump’s EO that the US will not pursue a CBDC and there is currently legislation in Congress to enshrine that into law. My personal view is a CBDC would be very concerning given its inherent reduction in individual liberties. While the current setup is for the euro to rise relative to the dollar, it is not clear to me that will remain the case in the event the digital euro comes into being. In fact, it would not surprise me if many Europeans decided that holding dollars was a much better idea than holding euros in that environment. But that is a story for the future.

As to today, CPI is set to be released with the following median expectations; headline (0.3%, 2.9% Y/Y) and core (0.3%, 3.2% Y/Y). Both of those annualized numbers are one tick lower than last month’s outcomes, so would help the Fed narrative that inflation is falling back to their target. But again, absent a major discrepancy, something like a 0.1% or 0.5% reading on the core number, I don’t think it will have any market impact across any market. Data is just not that important these days.

Let’s turn to the overnight session to see how things are behaving in the wake of yesterday’s late US equity rebound, where while the indices all finished lower, they were well off the daily lows. In Asia, the picture was very mixed with some major gainers (Korea +1.5%, Indonesia +1.8%, Taiwan +0.9%) and some major laggards (Thailand -2.5%, Malaysia -2.3%, Australia -1.3%, Hong Kong -0.8%) with both Japan and mainland China showing little movement. In Europe, after a down day yesterday, this morning is seeing a solid rebound across most major markets with the DAX (+1.8%) leading the way followed by the CAC (+1.4%) and FTSE 100 (+0.6%). Some solid earnings reports and ongoing ~~hope~~ belief that European defense spending will ramp up seems to be the drivers. As to US futures, at this hour (7:30) they are firmer by 0.8% ish across the board.

In the bond market, after Treasury yields climbed 7bps yesterday, this morning they have edged a further 1bp higher. The big domestic story is the continuing resolution which was just passed by the House and now sits at the Senate. If it is not passed by Friday, the government will shut down, although it is not clear to me how that can be more disruptive than the way things have been operating for the past 6 weeks! Meanwhile, European sovereign yields are also edging higher with German bunds (+4bps) leading the way as the ongoing discussion over breeching the debt brake continues and concerns over massive new issuance remain front and center. Elsewhere in Europe, yields have risen as well, but generally by only 1bp or 2bps. Last night, JGB yields didn’t move at all.

In the commodity bloc, oil (+1.1%) is continuing to bounce along the bottom of its trading range as per the below chart.

Source: tradingeconomics.com

A look at the trend line there shows that, at least based on the past 6 months, there has not been any net movement of note. The question of whether the Ukraine war ends and that allows Russian oil back into the market, out in the open, is also current, with no clear answer in sight. Meanwhile, the metals markets continue to ignore the recession calls with silver (+0.7%) and copper (+2.3%) both strong although gold is unchanged on the day.

Finally, the dollar is bouncing slightly this morning after declining sharply in 5 of the past 7 sessions with the other two basically unchanged. This has all the hallmarks of a trading pause as there is nothing that has altered the idea that President Trump wants the dollar lower, and his policies are going to push it in that direction. The one big outlier this morning is CLP (+0.9%) which is tracking copper’s rally, but otherwise, the yen (-0.6%) is the only mover of note, and that also seems a trading response, certainly not a fundamental change.

And that’s really it. CPI is the only data for the day and there are no Fed speakers. Of course, tape bombs are the new normal and we never have any idea what President Trump or Secretary Bessent may say at any given time. However, with that in mind, the bigger picture remains intact. I remain negative the equity space overall as changes continue, while the dollar is likely to remain under pressure as well. This should help the bond market, and commodities.

Good luck

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fxpoetry

Explaining the rhyme and rhythm of the FX markets each day

Tag Archives: #inflation

Squealed Like Stuck Pigs

Stress and Dismay

Nobody Knows

Tripping Off Tongues

No Retreating

Just a Mistake

Not Fraught

Not Worried

Starting to Fret

Lost In Translation