Tag Archives: #inflation

Designed to Ease Nerves

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The IEA, last night, proposed
That since, Hormuz Strait, has been closed
Strategic reserves
Designed to ease nerves
Ought be released and not opposed

But so far, it’s not been approved
Despite the fact it is behooved
So, oil is higher
As every supplier
Embraces their, margins, improved

It is somewhat ironic that the biggest story of the evening, the IEA’s recommendation that nations around the world release between 300 million and 400 million barrels of strategic petroleum reserves has not helped mitigate the rise in oil prices.  After falling sharply yesterday, this morning, WTI (+4.5%) is rebounding sharply again.  A look at the chart below reminds me of silver from late January, and certainly, as the following chart demonstrates, daily volatility in that market has made a significant step higher from its pre runup levels.

Source: tradingeconomics.com

One need only look at the size of the daily candles to understand that movement each day has increased substantially since then.

Source: tradingeconomics.com

Of course, the countervailing news that is driving oil higher is that Iran has begun to mine the Strait of Hormuz, which will make resuming transit more difficult when hostilities cease.  In fact, that appears to be the newest front in the war, with the US attacking the small boats Iran is using to try to lay mines.  It seems this is similar to the drug boat attacks the US carried out in the Caribbean late last year prior to the exfiltration of Venezuelan President Maduro.

Again, the interesting thing to me about Iran’s actions is that by closing the Strait, they cut off 90% of their own revenue, and as they are actively fighting a war, that seems a major hindrance.  After all, Iran is nowhere near self-sufficient in anything a nation needs to continue its existence.

But the fog of war is just that, a situation that prevents clear understanding of all that is ongoing in the area.  As we sit, fortunately, thousands of miles away from the action, and everything we read is spun by whoever is writing it, it remains extremely difficult to get a good understanding of the situation in Iran, either tactically or strategically.  All we have is the market price action as an indicator.  

But before we look at markets, it is worth mentioning that CPI is released this morning with the following expectations: Headline (0.3% M/M, 2.4% Y/Y) and Core (0.2% M/M, 2.5% Y/Y).  The problem with this data is twofold.  First, it continues to be polluted by the impact of the government shutdown last autumn, but more importantly, it is for February, and the Iranian action has been entirely in March, so there will be no impact from the dramatic rise in oil prices in the data.  Ultimately, in this case, the data is almost certainly going to be ignored by the Fed, to the extent they even look at CPI rather than PCE.  Of course, the PCE data will have the same problems.

So, let’s turn to markets now.  Yesterday’s nondescript price action in the US was followed by a more positive tone in Asia, arguably on the IEA news.  While there were some laggards (India -1.7%, Indonesia -0.7%, HK -0.25%), the bulk of the region did just fine with Tokyo (+1.4%) and China (+0.6%) both nicely in positive territory, although that was nothing compared to Taiwan (+4.1%).  Otherwise, the rest of the region was positive somewhere between +0.5% and 1.0%.  Europe, however, is having a less positive morning with most major bourses lower on the day (Germany -0.7%, France -0.3%, UK -0.6%, Italy -0.3%) with only Spain (+0.3%) managing a gain in the session.  Energy continues to be the biggest concern here although as I type at 7:25 this morning, we are getting the first word of SPR releases from several nations including Germany and Japan.  Perhaps there won’t be a coordinated release after all.  Meanwhile, US futures at this hour are basically unchanged.

In the bond market, yields rose yesterday afternoon in the US and have edged another 1bp higher this morning while European sovereign yields all catch up to yesterday’s US move with gains of between 5bps and 8bps on the continent.  It is important to remember that there is a strong correlation between oil prices and 10-year yields, as would be expected based on the direct connection between oil prices and inflation.  The chart below shows the past week’s movement in the two markets.  The long-term correlation averages +0.61% with a range of +0.5% to +0.7% according to Grok.

Source: tradingeconomics.com

Again, referring back to today’s CPI, we can expect that CPI next month is going to be higher than this month, even if the war ends today.

In the metals markets, weakness is the order of the day although gold (-0.1%) is just barely so.  However, those metals with industrial uses are faring worse this morning led by platinum (-2.4%) but both silver (-1.75%) and copper (-1.7%) are under pressure.  A potential explanation here is that continued high oil prices will weaken economic activity and therefore demand for these metals.  The counter argument is that war is inflationary at all times, and metals tend to do well in those periods.

Finally, the dollar is slightly firmer across the board, but movement has been de minimis overall.  The noteworthy exception is AUD (+0.6%) which has been rallying recently on concerns (hopes?) that the RBA is getting set to raise rates at their meeting on Monday (Sunday night here).  In fact, the Aussie has traded to its highest level in almost four years, although I have a hard time understanding the attraction given the softened state of economic activity there (recent GDP reading of 0.8% Y/Y) and an energy policy only the Europeans could love as they continue to prohibit nuclear power and shut down coal despite having abundant resources in both.  But, in the FX world, relative interest rates mean a lot, and the perception of a hawkish central bank is apparently enough to overcome bad fiscal and energy policy.

And that’s really all for today.  We do see the EIA oil inventory data, with a small net draw expected and Fed Governor Bowman speaks, although it is at the ABA’s Summit on Regulation, so there will likely be no monetary policy discussion as this is the quiet period.

Where do we go from here?  Your guess is as good as mine.  We are already seeing oil prices slip a bit with the announcement of the SPR releases, although they remain higher on the day.  The war continues to drive all the narratives so if you are trading, keep abreast of that news.  If you are not trading, though, avoid it at all costs, it will make for much happier days!

Good luck

Adf

A Bad Dream

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While yesterday’s moves were extreme
It seems like t’was all a bad dream
This morning there’s calm
And nary a qualm
Though things may not be what they seem

For now, oil’s price has retreated
And stocks, a round trip, have completed
As Trump has implied
Though not verified
Iran soon will have been defeated

One must be impressed with the price action yesterday, if nothing else.  It is a very rare occasion when the price of anything in a public market behaves like we saw oil behave yesterday.  From Friday’s closing price in the futures market of $90.71/bbl, we saw a $28.70 (31.6%) rally and a subsequent $34.35 (37.9%) decline in the first 24 hours of trading.

Source: tradingeconomics.com

With oil back to Friday morning’s, still elevated, prices, it’s almost as if nothing happened yesterday.  The two stories that appear to have driven the remarkable reversal early Monday morning were first, the discussion about the G7 potentially coordinating a release of strategic reserves, with that meeting slated for this morning.  The other catalyst apparently was a comment from President Trump that, having made significant progress on their objectives, the war could be over “very soon”.  Obviously, that would be a great outcome for all involved, although it remains to be seen if that will be the case.  

The upshot is that while oil saw the most dramatic price movement across markets, prices everywhere synchronized such that those that had declined (stocks, bonds and metals) rebounded, while the dollar, which rose, retreated.  And that’s where we are this morning.

As I read across news sources, there remains no agreement on any aspect of the ongoing war with each side of the argument maintaining their views.  There is a contingent that insists Iran is about to start a major retaliatory campaign that will devastate Israel and Gulf neighbors and a side that insists Iran’s military infrastructure has been so compromised they have nothing left but drones to fire.  As I’m not on the ground (thankfully) nor in any situation room on any side, I am completely in the dark like essentially all of us.  In fact, arguably, market price action is one of the best indicators we have, because institutions don’t invest on hope, but on the best information they have.  This tells me that the worst-case scenario has been priced out for now, meaning a prolonged conflict, but frankly, neither I nor anyone else really knows.

So, let us embrace our ignorance on the issue and simply observe market behavior to see what we can glean.  Starting with equity markets, the below chart shows the S&P 500 futures from Sunday night’s opening through this morning.  While the opening is obvious on the left, the huge green bar on the right at 3:15pm is the other major feature.

Source: tradingeconomics.com

The interesting thing to me is that Trump’s comment about the war ending soon were not made until 5:45pm.  This tells me that there was a major buy order that went through the market shortly before the close, a feature that we have seen more frequently of late.  My point is there is still much more to the markets than just the Iran conflict.  In fact, the cynical view is that the algorithms continue to control things completely and that there is a major effort to prevent a significant decline in equity markets overall, at least US equity markets.  That’s a little conspiratorial, but one cannot ignore the evidence.

At any rate, after positive closes in the US yesterday on the order of +1.0%, we saw gains across the board in both Asia (Japan +2.9%, HK +2.2%, China +1.3%, Korea +5.4%, Taiwan +2.1%,  India +0.8%, Australia +1.1%) as only New Zealand lagged, essentially unchanged on the day, amid concerns of rising inflation and a tighter RBNZ going forward.  Europe, too, is enjoying the session with strong gains across the board reversing yesterday’s declines as Spain (+2.9%) leads the way, but there is strength everywhere (Germany +2.4%, France +1.9%, UK +1.6%).  At this hour (7:10), US futures are also pointing higher, but just by 0.2% or so across the board.

Bonds also reversed yesterday, albeit not quite as dramatically.  So, in a picture remarkably similar to both oil and stocks, the yield on the 10-year gapped higher Sunday night and fell sharply enough to close lower yesterday as per the below chart.

Source: tradingeconomics.com 

Much of that retracement came after Europe closed, though, and so while this morning, 10-year Treasury yields have edged back up by 2bps, European sovereign yields are lower across the board with Italian BTPs (-6bps) leading the continent although UK Gilts (-7bps) have rallied further.  Other nations have seen a mix between -4bps and -5bps although Germany (unchanged) seems to be suffering on a relative basis after its Trade Surplus grew to €21.2B on the back of a substantial decline in imports.  Throughout all this, JGB yields (-1bp) have been the least impacted and show no signs of running away at this point despite much doomsaying for the nation.

Metals markets have reversed their decline from yesterday and are higher across the board (Au +0.9%, Ag +1.6%, Cu +1.0%, Pt +1.9%).  This is all part of the same story with price action virtually identical, although again, not quite as dramatic, as that of oil.

Finally, the dollar, which had significant support yesterday is giving back some of those gains as well.  But let’s face it, if we take a look at the dollar over the past year vs. the euro, it has largely traded withing a 1.1500 / 1.1900 range and doesn’t appear to be making a break in either direction.  

Source: tradingeconomics.com

The very messy chart below shows four key EMG currencies to demonstrate that there is no trend there either.  While CNY and MXN have both strengthened during the year, INR and KRW have both fallen.  All I’m saying is that the idea that the dollar is either collapsing or exploding higher is simply not true.  Different currencies have different drivers, and while sometimes there is a key dollar issue that impacts virtually everything, many times, you need to watch the currency in question.

Source: tradingeconomics.com

Turning to the data, this morning we just saw NFIB Business Optimism print a bit soft at 98.8, exp 99.7, and we are awaiting Existing Home Sales (exp 3.89M).  Tomorrow’s CPI will garner more attention, I think.  Too, the Fed is in their quiet period as they meet next Wednesday, so even though they have been drowned out by events lately, the FOMC meeting will still get a lot of attention.

But that is where we stand.  As has been the case since President Trump’s election, White House bingo remains the biggest risk to markets since one never knows what may come out.  The backdrop of the war continues to be front of mind for all market participants, so new stories will have market impacts.  With that in mind, short term forecasts are even more of a waste of time than they usually are.  The questions I am pondering are about the long-term implications when the military activity ends.  Certainly, any result where Iran gives up its terrorist interests would not only be welcome on the global stage but would open the door for much more oil flow around the world and lower prices across the board.  Of course, a more entrenched Iranian regime would likely see even stricter sanctions there with the need for other sources to help satisfy global demand.  I guess we shall see.

Good luck

Adf

Sometime Soon Become Miffed

Posted on by 
At this point, I think we’d agree
It’s oil that seems to be key
As it keeps on rising
It’s not that surprising
That markets elsewhere lack much glee

So, how might the narrative shift?
One way is a noteworthy rift
Twixt Trump and our friends
Who seek different ends
And might, sometime soon, become miffed

The war continues to be the only story that matters to markets right now, although this morning we will be seeing the payroll report.  And no matter the information we receive from ordinary news sources, all of which have their own biases, the one thing that rings true is market prices.  People can say whatever they like, but when it comes to money, the truth will out.

With that in mind, a look at the oil market this morning is not very optimistic as the black, sticky stuff is sharply higher once again, up by 5.25% as I type at 6:45.  I have highlighted this week that thus far, the rise had not been excessive, but as we look at the chart this morning, that claim may no longer be correct.  While we remain far below the levels seen shortly after Russia invaded Ukraine in 2022, the price has risen 25% this week.

Source: tradingeconomics.com

As others have highlighted, while the price of crude gets all the market press, for the man on the street, it is really the price of gasoline that matters, and that has risen some 17% this week.  Arguably, markets are beginning to price the idea that this war will continue longer than initial thoughts, and that the key chokepoint, the Strait of Hormuz, will remain closed for longer than initially expected.  I have seen several models that indicate the impact on measured inflation if gasoline continues to rise in price, which indicate that we should expect CPI to be jumping in the next few months.  The upshot there is that do not be surprised if inflation is suddenly running above the Fed funds rate by the summer, a forecast that I don’t believe was on any bingo card at the beginning of the year.

Remember, though, the narrative prior to the onset of this military action that there was an oil glut.  Remember, too, there is a significant amount of oil in storage around the world, and as I continue to say, the Western Hemisphere is pumping as fast as they can.  (As an aside, I saw this morning that the US is going to restart diplomatic relations with Venezuela, an indication that things there are working far better than the critics implied.)  Clearly, fear is rampant in the oil markets right now, but that is subject to change in a heartbeat.

In the meantime, let’s see how markets have responded to the latest rise in oil prices.  Stocks cannot make up their mind, it seems, as the below chart of the S&P 500 shows the price action over the past week, since this started.

Source: tradingeconomics.com

I am hard pressed to discern a trend here, with the movement more akin to a sine wave than anything else.  Interestingly, yesterday’s weakness in the US was followed by a mix of strength and weakness in Asia with Tokyo (+0.6%), China (+0.3%) and HK (+1.7%) all gaining although there were declines in India (-1.4%), Australia (-1.0%) and Indonesia (-1.6%).  Not surprisingly, each nation in Asia is impacted by the war differently, although higher oil prices would seem to me to be quite a negative for the big 3 markets given how reliant each one is on imported oil, and how much of it transits the Strait of Hormuz.

As to Europe, this morning is all red, with losses between -0.1% (UK) and -0.5% (Spain) and everywhere in between.  I read a charming article in Bloomberg about how recent unseasonably mild and sunny weather in Germany has resulted in solar power generating more than 40GW of electricity for the 5th consecutive day this week, helping to keep prices in check despite the rise in energy prices elsewhere.  I hope, for the Germans’ sake, the weather stays more like Phoenix than Frankfurt going forward.  But reality is going to be a problem for them going forward, and high energy prices not only hurt consumers, but they are destroying what’s left of Europe’s industry.  As to US futures, at this hour (7:15) they are lower by -0.6% across the board.

Bonds continue to shun their safe haven role in this conflict with yields continuing to climb.  Treasuries are higher by a further 3bps this morning and approaching the 4.20% level that had been the top of the trading range.  European sovereign yields are all higher by between 3bps and 6bps as inflation concerns percolate amid higher energy prices.  Alas for Europe, this morning they released Eurozone GDP growth for Q4 at a softer than expected 1.2%.  I expect we will begin to hear more about stagflation there if the war continues.

In the metals markets, both gold (+0.1%) and silver (+0.1%) are marginally higher this morning although both suffered yesterday.  My friend JJ who writes the Market Vibes Substack made a very prescient statement last evening, “However, when the shit is hitting the fan, you don’t want safe assets, you want safe prices.”  Thus far, gold has not proven to have safe prices, as evidenced by the daily chop you see below, but my belief remains that it will continue to maintain its value over time, especially in a situation like this.

Source: tradingeconomcis.com

Finally, rumors of the dollar’s death continue to be exaggerated.  This morning, it is stronger vs. virtually all its counterparts in both the G10 and EMG blocs, even the traditional havens of CHF (-0.2%) and JPY (-0.3%).  As I have repeatedly written, I don’t believe you can look at the global energy equation without recognizing that the US combination of extraordinary resources and the willingness to exploit them is an unbeatable combination.  After all, despite 25% of global LNG shipping stopped due to the closure of Hormuz, natural gas prices in the US are just over $3.00/MMBtu, certainly above their levels from two years ago, but incredibly cost competitive on a global basis.  Just look at the chart below with European, UK and US gas prices and see how they have behaved.

Source: tradingeconomics.com

Back to the dollar, both the euro (-0.4%) and the pound (-0.3%) have slipped to their lowest levels vs. the dollar since late November 2025.  I believe that is a combination of both fear and the energy situation as it is aggravated by the war.  There are two currencies holding up this morning, NOK (+0.15%) and CAD (+0.15%) with the similarity that both are major oil exporters.  Oil continues to be the story driving everything.  Quite frankly, as long as the war continues, I find it hard to devise a scenario where the dollar declines in any meaningful way.

On the data front, this morning brings the payroll report with the following expectations:

Nonfarm Payrolls59K
Private Payrolls65K
Manufacturing Payrolls3K
Unemployment Rate4.3%
Average Hourly Earnings0.3% (3.7% Y/Y)
Average Weekly Hours34.3
Participation Rate62.5%
Retail Sales-0.3%
-ex Autos0.0%

Source: tradingeconomics.com

Yesterday’s Initial Claims data was in line and the productivity data was better than expected.  Wednesday’s ADP Employment Data was better than expected.  While there continues to be a lot of discussion about the economy setting to crack, at this point the data does not show that to be the case.  Remember, the tax impacts of the OBBB are starting to be felt, and that is a huge stimulus.  Remember, too, last month’s NFP was much stronger than expected.  A strong number will certainly support the dollar, although it will probably support oil prices as if the economy remains strong, it will encourage President Trump that he can continue in Iran for a longer time.

Good luck and good weekend

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A Different Scapegoat

Posted on by 
The war in Iran rages on
But markets are starting to yawn
Initial concern
Led traders to spurn
Risk assets each dusk until dawn

But now, just a few days have passed
And fear mongers all seem downcast
Most stocks have rebounded
And that has confounded
The bears who, gross shorts, had amassed

In fact, today’s story of note
Is China’s decision to float
A lower growth rate
To be their new fate
As Xi seeks a different scapegoat

This morning is the sixth day of the military action in Iran and depending on the source, the US is either kicking ass or setting up for the greatest collapse of all time.  Perhaps the most interesting statistic of this war is the number of casualties reported thus far, which when summed across all the theaters, appears to be somewhere between 1000 and 1200.  It seems to me that given the ferocity of the attacks on both sides, that is a remarkably low number.  I certainly hope it stays low, for everyone’s sake.

In the meantime, market participants have absorbed the ongoing information and much of the initial FUD has been ameliorated.  I only say this because yesterday and overnight, equity markets are almost universally higher, and in some cases, by substantial amounts.  Arguably, this is a bigger disaster for the Iranians than almost anything else.  If financial markets continue to motor along despite the war, it removes a potential pressure point on President Trump to deescalate.  In fact, the only market that is continuing to demonstrate any price concerns is the oil market, where WTI (+2.6%) and Brent (+2.2%) are both back close to the highest levels seen in the first days.

Source: tradingeconomics.com

The Strait of Hormuz continues to be effectively closed, and that remains a problem for both Europe and Asia, especially China.  In fact, this morning I read that China has ceased exporting refined products amid concerns of how long this war will continue.  

Now, permanently higher oil prices would definitely have severe negative consequences for the global economy if that were to be the outcome.  But I don’t see that as the outcome.  Rather, the world is awash in oil as the US and Canada and Venezuela and Brazil and Argentina continue to pump like crazy.  As well, Saudi Arabia has two major pipelines that ship oil to the Red Sea rather than require transit of the Strait, so I am not hugely concerned about a much higher price.  All of the fears of $100/bbl or higher oil in the event of a closure of the Strait of Hormuz have not come to pass, at least not yet, and I see no reason for that to be the case going forward.

But away from oil, things are remarkably ordinary in markets, so much so that the real story of the day, I believe, is that China has targeted GDP growth of ‘just’ 4.5%. – 5.0% for this year.  The WSJ had a very nice graph of the trajectory of Chinese GDP since 1985 showing a 4.5% outcome would be the lowest (excluding Covid) since 1991.

For a good explanation of things regarding the Chinese economy, it is always worthwhile to turn to @michaelxpettis on X and he didn’t disappoint this morning.  In a nutshell, his point is that while the statement claims they will be focusing more on domestic consumption in their effort to rebalance the economy, that has been the stated aim for at least 5 years, and we know that hasn’t happened.  President Xi’s problem is that if that goal were to be achieved, it would result in GDP growth somewhere on the order of 2%, and that is not acceptable.  For my money, nothing has changed there.  Chinese companies will still over produce, prices in China will still be pressured lower and the Chinese trade surplus will remain well in excess of $1 trillion.

And that’s really what we have today.  I am not a war correspondent, so will not be highlighting anything there.  Rather, let’s turn to the markets and see what happened overnight.  under the guise of a picture is worth 1000 words, I give you major equity market performance in the past 24 hours below from Bloomberg.

Of course, this doesn’t consider Korea (+9.6%) which was the biggest winner overnight, and recouped most of the previous day’s losses as per the below.

Source: finance.yahoo.com

But virtually every market in Asia rallied overnight with Taiwan, Indonesia and Thailand all higher by 2% or more.  As to Europe, the euphoria is not as high, but still fear is not evident and at this hour (7:10), US futures are flat to -0.15%, so basically unchanged.

The bond market is having a tougher time around the world with Treasury yields rising yesterday by 4bps and up another 2bps this morning.  European sovereign yields are all higher by between 6bps and 8bps as inflation fears start to get built into investment theses.  Remember, Europe is probably the worst hit regarding the oil/LNG supply disruptions and prices there are likely to climb further than in the US or Western Hemisphere.  Too, JGBs (+4bps) are feeling a little strain, despite (because of?) Ueda-san and his cronies expressing concern over the war’s impact on inflation in Japan and maintaining that a rate hike in April is still a possibility.

Speaking of inflation, the Fed’s Beige Book was released yesterday as well as a NY Fed survey on prices in their region and both pointed to much more underlying inflation than the CPI data currently implies.  Wolf Richter had an excellent write-up here, and the numbers are eye opening.

In the metals markets, gold (+0.6%) really has a remarkable amount of support under all conditions.  Whether I look at a mechanically drawn trend line or the 50-day moving average, the barbarous relic remains in demand and shows no signs of breaking lower.  I continue to believe that the recent volatility and liquidations were the result of leveraged traders in other products needing to sell something to make margin calls, and gold was available for the job.

Source: tradingeconomics.com

As to the other metals, silver (+1.1%) and platinum (+0.9%) are both modestly firmer while copper (-1.3%) is bucking the trend, although I see no good reason for it to decline.  One interesting thing to note is that silver in the COMEX vaults continues to decline which many see as a potential point of supply issues going forward.  Nothing has changed that story.

Finally, the FX markets are once again hewing toward dollars with the DXY (+0.15%) back around 99.00.  The worst performer today is CLP (-1.1%) which is feeling the pressure from copper’s struggles, but ZAR (-0.9%) is also under pressure despite gold’s rebound.  Interestingly, NOK (-0.2%) cannot seem to gain any ground despite oil’s rally, although arguably, the dollar itself has become a major petrocurrency with a positive correlation to oil.  This space is not that interesting right now.

On the data front, I neglected to mention ADP Employment yesterday, which wound up at a better-than-expected 63K.  Too, oil inventories in the US rose again last week.  This morning, Initial (exp 215K) and Continuing (1850K) Claims are due as well as Nonfarm Productivity for Q4 (1.9%) and Unit Labor Costs (2.0%).  But does the data really matter right now?  Perhaps tomorrow’s NFP will have impact, but with the war and higher oil prices, it is very difficult for me to see a scenario where the Fed will impose itself here, not where the market will care that much, at least not the stock market. Bonds would react I suppose.  But it ain’t gonna happen, so don’t worry about it.

Absent a change in the war’s current trajectory, I think investors are going to focus on trying to estimate how long oil prices will remain elevated as that is really the big question for most markets.  I can only hope it doesn’t take that much longer for a conclusion.

Good luck

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To Excess

Posted on by

The State of the Union Address
Was, as is Trump’s wont, to excess
He touted his claims
And handed out blames
While focusing on his success
 
The market responded, it seems
Like Trump answered all of its dreams
Stocks round the world rose
Which shows, I suppose
The world does approve of his schemes

As I look at my screen this morning, literally every major equity market is higher, as per the below screenshot, as are US futures.

Source: tradingeconomics.com

In fact, if you ignore Russia, which hasn’t really been relevant since the Ukraine invasion-imposed sanctions, every market is higher over the last year, and US markets are the true laggards as seen by their monthly performance.  But you cannot look at this picture and determine that anything President Trump said last night was negative for the global economy.  I guess it’s full speed ahead now.

In true Trumpian fashion, the president remains incredibly optimistic about the future for the US and the Western world and perhaps that is what is reflected here this morning.  However, there were precious few new initiatives announced so it is unclear to me that this is going to be a topic of discussion in the financial markets going forward, although you can be sure that the political narrative is going to be very active.

So, let’s move on to things that matter for markets.

Is she hawk or dove?
Takaichi hates China,
Not easy money

As you can see in the above table, Japan’s Nikkei 225 rose sharply, nearly 4%, but that had nothing to do with the SOTU.  Rather, her administration named two new BOJ governors (it was simply time to rotate some) and both were seen as quite dovish.  In fact, one, Toichiro Asada, is known for his belief in the benefits of MMT (you remember the magical money tree idea that governments that print their own currency don’t need to worry about overborrowing).  The upshot is that while Japanese stocks raced to yet more new highs, as per the below chart, JGB yields reversed their recent declines and rose (10yr +5bps, 30yr +10bps) and the yen (-0.6%) continued its recent slide, although remains well above (dollar below) the 160.00 level, which many see as the BOJ’s line in the sand regarding intervention.

Source: tradingeconomics.com

But other than this story, it is much harder to find things that have been market drivers.  To my eye, we continue to see market participants laying back in most places as they are still recuperating from the raucous first six weeks of the year.

So, let’s go to the tape.  We’ve already seen the equity performance around the world, with the narratives forming that the US tariff situation is now a reduced stress on global trade as they have been reduced to 10% globally.  As well, there have been an increasing number of rebuttals to the AI piece I mentioned on Monday, with this one, I think, the most succinct takedown of the idea that AI is going to eat the world and drive us into a recession with no jobs left for people.  As such, Monday’s narrative of all stocks being worthless has changed.  Elsewhere, the tariff story and tech rally have been the key discussion points across markets.

In the bond market, yields are a touch higher with Treasuries (+2bps) edging up on what seems like ordinary trading.  The short-term trend here is lower yields, as per the chart below, but we know that nothing moves in a straight line.

Source: tradingeconomics.com

As to European sovereign yields, they, too, are mostly a few ticks higher this morning although, this also appears to be simple trading activity rather than a new narrative.  It is interesting that there are more stories today about ECB President Lagarde stepping down early, which is diametrically opposed to what she said when asked the question recently.  As I said before, I think she steps down and is going to run for President of France.

The commodity markets continue to be the place with the most price action and this morning is a continuation of that recent trend.  Gold (+0.9%), silver (+3.7%) and platinum (+5.5%) are all continuing their rebound from the extreme declines seen back on January 29th.

Source: tradingeconomics.com

I do not have any inside track as to the driver of those moves, but I continue to read and hear about significant intervention designed to burst those bubbles (and they were clearly bubbles) and allow key institutions to cover short positions at better prices.  The problem with these stories is that we have heard for years about the manipulation of the prices of both gold and silver by large banks, and the purveyors of those stories have neither great reputations nor track records, so it is always a tough sell in my mind.  There is no question that when markets go parabolic, as the precious metals did through January, the reversals have always been dramatic.  However, I cannot speculate on the driver as often times, there doesn’t need to be one.  This cartoon from Kaltoons demonstrates it perfectly.

Turning to oil (+0.8%), Iran remains a key narrative and continues to support the front month pricing.  However, it appears that several futures spreads are falling sharply, indicating a potential glut in physical supplies has developed, at least for now.  As I look at the front contracts in the futures curve, we are still in backwardation, which implies a shortage, although I suppose that is the Iran effect.  

Source: barchart.com

I understand the short-term concerns here regarding potential military escalation there, but nothing has changed my view that the long-term energy situation is one of abundance and maintaining much higher oil prices will be very difficult for the long-term.  After all, look at Venezuela, which has already increased production back above 1mm barrels per day with contracts being signed for more activity.  Too, Argentina’s Vaca Muerta shale production is at new record levels, also ~1 mmm bpd and we continue to see growth offshore Brazil and Guyana.  Longer term, there is plenty around, I think.

Finally, the dollar is mixed this morning as the yen’s weakness is being offset by modest strength in the euro (+0.1%) and pound (+0.2%).  However, the big movers today are KRW (+0.9%) which has benefitted from inward equity flows and hopes for tariff relief, as well as ZAR (+0.5%) on the back of the precious metals rally and CLP (+0.4%) on copper’s strength.  Remember, the US is not overly concerned about USD weakness in the FX markets as it suits the administration’s goals of reducing the trade deficit and encouraging onshoring of production.  But even with that, looking at the DXY, it is just below 98.00 and remains right in the middle of its trading range for the past 9 months.

Source: tradingeconomics.com

There is no major data out this morning with only the EIA oil inventories where a very modest build is anticipated.  

Big picture, I don’t think anything has changed.  Fiat currencies continue to lose value relative to ‘stuff’.  Equity markets continue to benefit from the global ‘run it hot’ policy and there is no clarity regarding the outbreak of a war in Iran.  With this in mind, it is hard to see a large move in the dollar in the near future.

Good luck

Adf

A Future, Dystopic

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On Monday, an analyst wrote
His thoughts how AI might promote
A future, dystopic
Though somewhat myopic
And offering no antidote
 
Although prior views had explained
That once AI’s suitably trained
Most labor would suffer
And lacking a buffer
Folks’ politics would be quite strained

This is the research report that got tongues wagging on Wall Street yesterday and the fear it allegedly engendered was impressive.  In essence, it said that by 2028, AI would replace vast swaths of the labor force, notably white-collar workers, and that it would lead to a massive recession, and more importantly to the Street, a significant decline in stock prices.  The back and forth on X was amusing all day as there were those who hyperventilated over the coming tragedy, and those who fought back.

It is important to understand this was not a prediction, per se, but one of the scenarios they came up with, although clearly the most dramatic one.  It certainly gained a lot of clicks and notoriety, and let’s face it, isn’t that the idea these days?

Given that the tariff story has now become too complex for anyone to truly understand, and while we all await the denouement in Iran, this appeared to be the best thing to occupy time amongst the trading community.  Personally, I spent the entire morning shoveling snow, but then, I’m no longer a trader.

The upshot is that the major indices all fell more than 1% while gold and silver rallied and bond yields fell.  Fear was palpable.  But will it last?

Last month’s yen rate checks
Came not from Ueda-san
But Bessent, himself

The other story of note was almost an aside, although it helps outline recent movement in USDJPY.  We all remember last month when the yen rallied very sharply during a Friday session in NY as word got out the Fed was “checking rates”.  As a reminder, this is when the Fed calls out to bank FX desks and asks for prices, although doesn’t actually deal.  However, the signal is strong as all the banks recognize the opportunity for intervention, and the news quickly spreads through the market with the effect you can see in the chart below.  During the next three sessions, the yen rallied 4.5%.

Source: tradingeconomics.com

During my career, I had never heard of this activity driven by anyone other than the BOJ, as they were always the most concerned with the yen’s value.  Certainly, they may have been responding to US pressure, but it was always their call.  Now the news comes out that Treasury Secretary Bessent did this on his own last month, a clear indication that the administration is not happy with an over weak yen.  This sets an interesting precedent regarding who controls any given currency.  Now, I doubt we will see this type of thing frequently, but we need to keep it in the back of our mind.  Meanwhile…

Seems Takaichi
Told Ueda, higher rates
Are not helping her

Last night, in a surprise to many in the market, news of a meeting between PM Takaichi and BOJ Governor Ueda resulted in Takaichi-san imploring Ueda-san to leave rates alone, rather than continue raising them.  Higher rates are not helping her growth agenda, and I imagine her belief set is that if the yen weakens too far, she can always intervene, and now that we know about Bessent’s actions, she can count on the US to help.  But I cannot observe this and think anything other than the market is going to test 160 and do so before long.  One poet’s opinion.

Ok, let’s see how markets traded overnight.  First off, last night was the first that all of Asia was back at work so overall liquidity was improved.  However, the results were mixed with Tokyo (+0.9%) ignoring the AI driven US rout while the Hang Seng (-1.8%) fell right alongside the US.  China (+1.0%) rallied in its first day back but consider that simply offset the decline of their last session and, like most other markets, it remains relatively unchanged over the period.  Meanwhile, the tech sense was strong with Korea (+2.1%) and Taiwan (+2.75%) both up nicely while India (-1.3%) suffered under the AI fear umbrella.  Elsewhere in the region, there was no pattern of note with both gainers and losers.

In Europe, the largest markets (UK, Germany and France) are basically unchanged this morning while both Spain (-0.7%) and Italy (-0.4%) are under some pressure.  There is talk of tariff issues, but I’m not sure why only those two markets are taking the heat.  As to the US, at this hour (7:00), all three major indices are higher by about 0.2%.

In the bond market, after a -4bp decline in Treasury yields yesterday they are unchanged this morning while European sovereigns are seeing yields slip -1bp across the board.  Too, JGB yields (-2bps) have continued their slow descent as it appears investors have acclimatized to the risks of Takaichi-nomics.  I think we will have to see inflation figures there to get a better sense.  Regarding Treasury yields, I’m not sure I can explain why I feel this way, but given how bearish sentiment is for bonds, (leveraged players are short >1 million futures contracts), it feels to me like we could see a short-term continuation of the recent rally with yields heading back to test the 3.8% level at least.  I understand both the fiscal argument and the technical argument (see long-term chart below) but neither rules out a short-term rally to inflict pain.  After all, that is what markets do best!  (full transparency, I bought some June TLT call spreads yesterday, so I am talking my book!)

Source: finance.yahoo.com

In the commodity markets, oil (+0.3%) continues to hold its recent Iran inspired gains as the world awaits the outcome of Friday’s meetings between the US and Iran.  I have no insight as to the potential outcome here other than what I read, but it does seem like there will be some type of military action as I do not see Iran ceding anything.  As to the precious metals, gold (-1.0%) is giving back yesterday’s gains but remains in its recent uptrend after the end-January crash, although it has yet to regain the old highs.  I imagine this will take more time, but it also seems quite likely to happen. This is still a quite bullish chart in my view.

Source: tradingeconomics.com

Interestingly, silver is little changed this morning as there continues to be much talk of delivery questions at the COMEX given the apparent lack of available ounces relative to outstanding contracts.  My take is things will get rolled as they usually do, but if not, beware a major spike higher on Friday!

Finally, the dollar continues to be the least interesting space there is with today’s JPY (-0.8%) move the exception that proves the rule.  Having already touched on that situation, there is literally nothing else to describe in either G10 or EMG currencies as +/-0.15% describes the entire session.

As to data this week, here’s what we have coming:

TodayCase Shiller Home Prices1.4%
 Consumer Confidence87.0
ThursdayInitial Claims216K
 Continuing Claims1872K
FridayPPI0.3% (2.6% Y/Y)
 -ex food & energy0.3% (3.0% Y/Y)
 Chicago PMI52.5

Source: tradingeconomics.com

In addition to this bit, we hear from seven more Fed speakers across nine venues, but I still don’t think anybody cares.  The market has priced out any rate cuts before Powell leaves, although there is still one cut priced for the year, expected in October.  

Frankly, it is not surprising that markets have calmed down so much given how much activity we saw in January.  As I wrote then, markets have a great deal of difficulty maintaining high volatility as traders and investors simply get tired and tune out.  We will need a new catalyst to get things going, either an attack on Iran or some new China news in my view.  Tariffs are no longer interesting, and frankly I think Iran and AI have both lost some pizzazz.  Maybe the UFO releases will get things going again!

Good luck

Adf

Far Too Extreme

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Said Roberts and five more Supremes
Those tariffs, are far too extreme
They don’t pass the test
And so, we request
You find a new revenue scheme
 
Said Trump, while I think you are wrong
Your actions won’t stop me for long
We have many laws
That give me good cause
For tariffs, that help make us strong

For whatever reason, this is what first popped into my head upon hearing the tariff ruling on Friday.  I guess I confused love for law, but whatever.  At any rate, I’m sure you have seen far too much on this subject already so I will be brief.  The Supreme Court ruled against President Trump’s use of the IEEEA law to enable the imposition of tariffs on foreign nations.  They did not discuss what to do about the ~$200 billion that has already been collected under that law.  The companies that sued want the money rebated, but that was not part of the decision, and of course, the logistics of that would be extraordinarily complex.

But in the end, President Trump simply imposed a sweeping 15% tariff across the board under a different law, which to my understanding can remain in place for 150 days.  The equity market shook off the news, rallying across the board on Friday (DJIA +0.5%, S&P 500 +0.7%, NASDAQ +0.9%), so it didn’t seem to be that big a deal.  But then when Asia opened Sunday night, risk was in a much less desired state.  Early returns show equities softer across the board (-0.75% at 10:00pm), the dollar (DXY -0.4%) under pressure and gold (+1.25%) and silver (6.25%) seeing significant haven demand.

One of the things that appeared to be in question was whether countries that had signed trade deals accepting tariffs and promising investments as part of the deal, would renege, but thus far, that has not happened.

My take is the tariff discussion is no longer a concern to investors.  Playing the lead role once again is Iran, as concerns over a potential US military strike rise, with a new actor joining the cast, Mexico, which appears to be suffering significant chaos after the elimination of a cartel leader, “El Mencho” has resulted in fire fights throughout the country there.  Obviously, given the proximity to the US, this has the potential to be quite significant, although since the border with Mexico has been effectively sealed, my take is all the action will stay in country there.

Historically, when there’s a war
The first move is stocks to the floor
But generally speaking
Post first mover freaking
The buyers step up to the fore

So, if tariffs are not going to be the primary topic of discussion, and I sincerely hope that is the case, after we finish congratulating the US men’s ice hockey team for the thrilling Olympic victory this weekend, what’s next on the agenda? Iran.

The US continues to amass forces in the Middle East and from various sources, including MSM and X and Substack, the growing consensus is that some type of military action is going to occur.  The question now seems to be whether it will be an attempt to decapitate the regime, or just to impede its ongoing buildup of armaments, notably ballistic missiles.

Negotiations are set to resume this week in Geneva and given the stakes, especially for the Ayatollah, it remains unclear as to his willingness to cede to American demands of essential disarmament and the end of terrorist support.  For President Trump, the risk is that any military action does not work as quickly and smoothly as either the first attacks on the nuclear sites, or the exfiltration of erstwhile Venezuelan president Maduro.  If there is something quick and relatively clean that achieves a clear objective, I think it can be a huge boon for the President, but if anything drags on, it will have numerous ramifications for both the mid-term election and the markets.  Let’s focus on the latter.

Below is a long-term chart of the S&P 500 which shows both the extraordinary recent performance relative to its previous history, as well as helps highlight some of the downturns seen during that time.  Of course, the noteworthy feature is that the downturns don’t last very long.

Source: finance.yahoo.com

If we move from right to left on the chart (these are monthly candles), the first spike down is Liberation Day in April 2025, when President Trump first announced his tariff plans.  Obviously, that is long past investors’ concerns now, especially given the events on Friday.  The next major decline took place in February 2022, when Russia invaded Ukraine.  But remember what also happened around that time, the Fed began its aggressive rate hiking when it figured out that inflation may not be transitory after all.  You probably remember that 2022 was one of the worst market performances for both stocks and bonds.  It is a worthwhile question to ask how much of that was the Russia/Ukraine situation and how much was the Fed.  My money is on the Fed.  Moving left, we see the Covid spike lower in Q1 2020 and then a baby dip during the repo shock of late 2018, when the Fed lost control of the Fed funds rate.  After that, we go back to the GFC in 2008-09 and the bursting of the dot com bubble in 2000 – 2003.  Sure, in 2003, the US invaded Iraq, but I don’t think that was the market driver.

My point here is that any impact from military action is likely to be very short-lived in equity markets.  The other market that will certainly be impacted is the oil market.  A look at the long-term story there shows that, here too, there are many things that have a major impact on oil other than war.

Source: finance.yahoo.com

The huge decline on the left was the GFC and ensuing recession.  The drop in 2014 was the realization that shale oil was going to add an enormous amount of supply to the market.  You can see the Covid spike to negative prices and then the run up in prices in the wake of the Russian invasion in 2022, which was relatively short-lived, and we have been declining ever since.

Much of the commentary regarding Iran right now revolves around their ability to close the Strait of Hormuz and how that would cut 20% of the world’s oil supply from reaching the market.  (It would cut almost all of Iran’s oil off from the market as they have virtually no pipeline network).  But even here, the evidence is that a price spike will be relatively short-lived.

I raise these issues because while war is inflationary, that is generally not because of the impact on oil prices, but rather because of the increased government spending that accompanies war (remember LBJ’s guns AND butter policies leading to the inflation of the 1960’s and 70’s.). 

Summing the discussion up, while in the immediacy, there will be market responses to military actions, I do not believe they will have long-term impacts.

Ok, I went on way too long, so let’s do a hyper quick tour of markets this morning and I will leave the weekly data until tomorrow.

Equities – mainland China is still closed, (they open tomorrow) but the rest of Asia mostly ignored the war drums.  HK (+2.5%), Korea (+0.65%), India (+0.6%) and Taiwan (+0.5%) all showed strength although Australia (-0.6%) seems to have suffered on the tariff story.  Tokyo, too, was closed last night.  In Europe, despite slightly better than expected German Ifo data, the DAX (-0.45%) is today’s laggard while the IBEX (+1.0%) and FTSE MIB (+1.0%) both have seen strong support, ignoring any uncertainty regarding the US tariff situation and benefitting from positive earnings results. The UK and France have done little.  As to the US futures market, at this hour (7:15) they have risen from their early evening lows but are still softer by -0.35% across the board.

Bonds – the bond market remains the enigma, in my mind, as it is basically locked in place and has been for months.  Treasury yields (-1bp) have edged lower and European sovereign yields are essentially unchanged, as are JGB yields.  It continues to baffle me that bond markets, which typically sense fear first, do not seem to care about all that is ongoing in the world right now, whether war, government spending, or commodity prices.

Commodities – this morning, oil (0.0%) is ignoring Iran, which is maybe the most surprising thing of all.  Perhaps this is telling us that concerns over a closure of the Strait of Hormuz are overblown, or perhaps if that does happen, we will see a dramatic spike higher.  Again, like the bond market, something feels amiss.  In the metals markets, while both gold (+0.8%) and silver (+2.25%) are higher than Friday’s closing levels, they are well below last night’s opening levels.  I guess fear is abating, at least for now.

FX – As to the dollar, it’s early decline has largely been erased with both the euro and pound unchanged, AUD (-0.4%) sliding and the rest of the G10 under pressure.  In the EMG space, MXN (-0.5%) is feeling a little stress from the increased violence that has begun and there seems to be some sympathy in that move with CLP (-0.3%) and BRL (-0.2%). On the flip side, CZK (+0.5%) is the biggest gainer as the market continues to respond to recent central bank hawkishness.

In the US today we see the Chicago Fed National Activity Index (exp 0.3 in January) and Factory Orders (-0.5% from Dec).  But remember this, as per the below, don’t look for that much activity in NY as this is the picture out my backyard this morning, I’m estimating 10” of snow, so skeleton staffs will be the rule.

Good luck

Adf

Not All in Sync

Posted on by

The story that’s tripping off lips
Is whether the buildup in ships
And aircraft we’ve seen
Is likely to mean
A war with Iran’s in the scripts
 
But markets are not all in sync
As equities clearly don’t think
That war would be trouble
While bond traders’ double
Their bets war will drive stocks to drink

Economic data is clearly not a key driver of market movement these days, arguably because we continue to get mixed outcomes, with some things looking good (Initial Claims, Philly Fed) while others are less positive (Trade Balance, Leading Indicators), although granted, it is not clear to me what the Leading Indicators purpose is anymore.  My point, though, is that we have not seen unambiguous strength or weakness across the data set for several months.  This allows every pundit to frame the economic situation through their own personal lens, whether bullish or bearish.  A perfect example is the dichotomy between the strength of US corporate balance sheets, as per Torsten Slok and seen below, 

and the rise in corporate bankruptcies as per this X post from The Kobeissi Letter (a great follow on X) which shows the following chart.

So, which is it? Are things good or bad?  My understanding is that strong balance sheets and a high number of bankruptcies are not typically correlated, but I could be wrong.  

Given the lack of direction, markets have turned their focus to other things, with most headlines currently garnered by the ongoing buildup of US military power in the Middle East as President Trump tries to pressure Iran into ceding its nuclear and missile programs.  (Of course, the announcement that all information on UAP’s (fka UFO’s) has many excited, and of course, the Epstein files continue to garner attention, as does the SAVE Act, but none of those are even remotely related to financial markets.)

But even here, we are seeing very different responses by the financial markets.  For instance, equity markets continue to perform pretty well, even though Tokyo and Australia sank a bit last night.  Look at the monthly and YTD returns in Europe, Japan and Australia below:

                                           Daily   Weekly   Monthly   YTD

Source: tradingeconomics.com

It strikes me that if war was a major concern, investors wouldn’t be stocking up on risk assets.  Rather, havens would be in more demand, which we are also seeing with gold (+0.4%) and silver (+3.3%) rising overnight as despite extreme volatility in the precious metals space, there is clearly underlying demand for these havens.

Bond yields over the past month have declined, indicating that despite ongoing deficit spending, investors are seeking their perceived safety whether in Treasuries, Bunds or JGBs as per the below chart of all three.

Source: tradingeconomics.com

Finally, the dollar, despite frequent calls for its death, has been edging higher in a classic risk-off response as no matter how much some may hate the dollar philosophically, when bad things happen, its massive legal and liquidity advantages outweigh virtually everything else.  Once again, the DXY has moved back to the middle of its trading range, just below 98.00 this morning, and to my eyes, shows no signs of an imminent collapse.  Rather, if hostilities do break out in Iran, I expect the greenback to rally to at least the top of this trading range at 100, and depending on the situation, it could easily go higher.

Source: tradingeconomics.com

All this is to point out that nobody knows nothing.  Narrative writers continue to try to keep up with the action, and it is increasingly difficult to do so as things change on the ground so rapidly.  Let me be clear when I say I have zero inside information regarding any of this, I am merely an observer.  However, my observations are that there will be some type of military action in Iran as to build up this much fire power in a concentrated area and not use it would be remarkable and I can see no way in which the Ayatollah can accept the terms being offered as it would end his leadership if he does.  I guess we will find out soon enough as President Trump has put a 10-day timeline on things.

Arguably, the only market I didn’t mention here was oil (-0.5%) which is consolidating after a 20% rise in the past two months.  Remember, if military activity is directed at oil production or transport, we could see a sharp spike here and that will not help equities or economic data, although both gold and the dollar are likely to benefit.

Source: tradingeconomics.com

I don’t think there is anything else to discuss market wise so let’s turn to the data.  This morning brings a bunch of important stuff as follows:

Personal Income0.3%
Personal Spending0.4%
PCE0.3% (2.8% Y/Y)
-ex food & energy0.3% (2.9% Y/Y)
Q4 GDP3.0%
Flash Manufacturing PMI52.6
Flash Services PMI53.0
Michigan Sentiment57.3
New Home Sales730K

Source: tradingecomomics.com

We also hear from two more Fed speakers, but at this point, they are all singing from the same hymnal explaining policy is in a good place and unless there are major changes in the data, there is no reason to change.

Arguably, the PCE data is the key for markets here as if it continues to run hotter than target, hopes for further rate cuts will continue to dissipate.  In fact, the next cut is now priced in for July with a second for October.  

Source: cmegroup.com

Remember, too, at that point it will be Kevin Warsh’s Fed, not Jay Powell’s, and Warsh has a very different idea about the way things need to be done.  Interestingly, as this 4th Turning proceeds and old institutions come under increasing pressure, their efforts to fight back and maintain the status quo is no longer behind the scenes as evidenced by this Bloomberg article this morning.

As I have written before, President Trump is the avatar of the 4th Turning and the institutions that are going to change are desperate to maintain the status quo.  This is, truly, the big fight that will continue through the end of the decade in my view.  Every institution that has been overseeing the global situation, whether politically, financially or militarily, is coming under pressure as income and wealth inequality have driven an ever wider disparity of outcomes.  As much power as the rich have, there are a lot more people who are not rich.  Ask Louis XVI how much being rich helped him.

On a lighter note, I watched the gold medal skating performance of Alysa Liu and it was truly magical.  A much better thought for the weekend!

Good luck and good weekend

Adf

Chock Full of Crises

Posted on by

Their mandate includes stable prices
And that they should use all devices
To work to achieve
That goal lest they leave
A legacy chock full of crises

“Most participants, however, cautioned that progress toward the Committee’s 2 percent objective might be slower and more uneven than generally expected and judged that the risk

of inflation running persistently above the Committee’s objective was meaningful.”

These words [emphasis added] are from the FOMC Minutes released yesterday afternoon.  To set the stage, the Fed left rates on hold then, although there were two votes for another cut.  However, a full reading of the Minutes shows there were those who would have considered a hike as well.   Now, I am just a guy in a room who observes market behavior through the lens of too many years involved on a daily basis, and my resources are virtually nil, especially compared to the Federal Reserve.  I don’t have a PhD in economics (although I believe that is a benefit in this context, if not every context).  However, the bolded part of the comment seems a tad disingenuous to me based on the below chart which shows the history of their inflation metric, Core PCE prices.

Source: tradingeconomics.com

It has been exactly 5 years since their metric was at or below their 2% target by which they defined stable prices.  The idea that they are claiming the risk of inflation running hot was a meaningful risk is perhaps the worst gaslighting comments they have made.  It is very difficult to believe that the Fed, in its current incarnation, is going to ever address the inflation issue appropriately.  Perhaps a Chairman Warsh, if he is successful at reconfiguring their operating procedures will be able to drive positive changes.  I am hopeful but not confident.  The one thing we know is that changing government institutions requires a mammoth effort.  And let’s face it, he will only have two plus years of leeway for sure depending on whoever becomes president in 2028.

I continue to believe that the market is going to increasingly focus only on Warsh’s comments going forward as the direction he has expressed is very different than the current FOMC membership mindset.  We shall see how this all evolves.  In the meantime, I expect that Fed funds are not going anywhere before Warsh is confirmed.  As to bond yields, that is a very different question and will depend on both the macroeconomic outcomes and the risk perception of investors around the world.  For now, that trading range of 4.00%. – 4.20% seems likely to hold absent a major economic data miss in one direction or the other.  But as long as we continue to get mixed data, this market will remain on the backburner.

The fear that is growing each day
Trump’s policy might go astray
Regarding Iran
Although not Japan
Thus, oil’s up, up and away

Texas tea (+1.5%) is following yesterday’s 4.6% rise with another strong session and as you can see in the chart below, is showing a very clear trend higher since December.

Source: tradingeconomics.com

This movement is very clearly a response to the ongoing buildup of US military assets in proximity to Iran, with two aircraft carriers, and somewhere above 200 military aircraft as well as the carrier group tenders with Tomahawk missiles in tow.  While negotiations are ostensibly ongoing, the one thing that seems clear is that absent a complete capitulation by the Iranian government, something big is going to happen here.  Of course, the question is, how much, and for how long, will it impact oil supplies?

Obviously, nobody knows the answer to that question, but the recent history has shown that every time there was an event in the Middle East, whether the 12-day war several months ago, the killing of Suleimani, the attacks on Saudi oil infrastructure, or others, prices retraced pretty quickly as per the below.  

Even the Ukraine invasion in February 2022 saw prices retrace 50% within a few months.  Other issues lasted less time than that.  This recent history implies that fading the rally is the right trade, but boy, that is hard to do.  And of course, in the event that the Iranian government falls, the chaos could result in a significant degradation of Iranian oil production.  Given they pump about 5 mm bpd, ~5% of global supply, that would matter a lot at the margin.  Certainly, the oil glut narrative would disappear in a hurry.  This is a very large risk to both markets and the economy, and one which needs to be hedged, if possible.  This will certainly be the focus of markets for the next few weeks, at least, so be prepared.  Personally, I do own some stuff here, but I like the drillers generally, as they are going to be employed no matter what!

Ok, let’s see what else is happening.  After a solid US session yesterday, Asia saw some major positive price action with Korea (+3.1%) the leader although Tokyo (+1.1%) also had a solid session, as did Taiwan, New Zealand, Singapore and Australia.  The exception to this rule was India (-1.5%) which suffered after a three-day positive run as traders and investors fled worrying about oil, the Fed, and the future of India’s relationship with Russia after the seizure of more ‘dark fleet’ oil tankers trying to avoid sanctions on Russian oil.  Europe, meanwhile, is uniformly lower this morning, with all the major indices slipping -0.8% or so.  The narrative is pointing to the escalation in Iran as the cause du jour.  US futures are also slipping at this hour (7:20), -0.25% or so across the board.

I touched on bonds briefly above, but today’s price action shows yields edging higher by 1bp in Treasury markets and between 1bp and 2bps across European sovereign markets.  There has been no data of note to alter views, and the only ECB news is that Spain has thrown their hat into the ring to have the next ECB president.

In the metals markets, yesterday’s gains are being followed by a mixed picture with gold (+0.2%) and silver (+0.3%) edging higher while copper (-1.6%) and platinum (-1.8%) cede those gains.  However, as I highlighted yesterday, this all still feels like consolidation.  FYI, there is much talk in the markets about silver and how there is not enough physical silver in the COMEX vaults to cover open interest, and how that could result in a major squeeze, but my take is most of it will roll forward as the fundamental supply/demand equation does not appeared to have changed.

Finally, the dollar had a strong session yesterday, rising 0.6% as measured by the DXY, and making gains vs. almost all currencies.  This morning, those trends are continuing with SEK (-0.4%) and GBP (-0.2%) leading the way lower in the G10 space while ZAR (-0.85%), INR (-0.4%) and KRW (-0.4%) are dragging down the EMG bloc.  Again, data has been scarce, so I see this as a more traditional risk-off sentiment than some new macro story.

Data yesterday was generally stronger than forecast, notably IP and Capacity Utilization, which showed solid outcomes that were ascribed to AI infrastructure building as well utilities activity.  It strikes me this is exactly what the Trump administration is trying to achieve with their reshoring goals.  I guess the question is how productive this investment will be and how will it impact inflation readings.  This morning, we see the weekly Initial (exp 225K) and Continuing (1860K) claims, as well as the Trade Balance (-$55.5B), Philly Fed (8.5) and Leading Indicators (0.0%).  The interesting thing about the Leading Indicators number is that a flat result would be the highest in 4 years.  A look at the Conference Board’s chart below shows an interesting thing about this number, and to me, anyway, calls its value into question.  Leading Indicators have been declining for four years while coincident indicators (and economic growth) have been moving along just fine.  I’m trying to figure out what these indicators lead.

And that’s really it for today.  We do see oil inventories as well, with a slight build expected and we will hear from Minneapolis Fed president Kashkari, but I cannot remember the last time he said anything interesting.  To me, the concern today, and tomorrow and next week, is that we see an escalation in rhetoric regarding Iran, at the very least, if not an actual military strike.  That feels like it would be bad for stocks, good for bonds, the dollar and gold.  Hopefully I am wrong there.

Good luck

Adf

Hold My Beer

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For months, I was calmly assured
A weak dollar must be endured
The US had peaked
And money had leaked
Elsewhere, so it could be secured
 
But suddenly, it’s not so clear
The end of the dollar is near
Instead, other nations
Have seen expectations
Decline, saying, here, hold my beer

The long holiday weekend is behind us now and with China on holiday all week, it seems there may be fewer interesting stories to consider.  However, one of the things that tickled my fancy is the sudden, recent adjustment in several pundits’ views on the dollar.  

By now you are all aware that I have been more bullish than consensus on the basis of the US economic situation relative to that of Europe and the UK (Japan may have changed their stripes in the wake of Takaichi-san’s recent landslide election, so we will need to revisit that).  After all, the combination of stronger GDP growth, higher interest rates and ostensibly calming inflation in the US relative to Europe and the UK (as well as numerous other nations) seemed to offer better investment opportunities, and therefore more demand for the dollar.  And this was outside the need for dollars simply to service the enormous amount of USD debt outstanding around the world, estimated at between $60 trillion and $80 trillion.

I will use the euro (-0.1%) today, rather than the DXY (+0.35%), as my dollar proxy because there is some deliciously ironic news from Bloomberg on the single currency.  But below, you can see the past year’s trading pattern, where, like the DXY, it has largely been range bound since June.  Sure, we saw a little spike up at the end of January, during the metals/equity market correction, but that story has passed.

Source: tradingeconomics.com

But I couldn’t help but chuckle at the following two headlines on Bloomberg.com this morning, literally right next to each other.

Briefly, the first story describes how the FinMins throughout the Eurozone want to expand the use of the euro globally and are considering offering swap lines to other nations that have difficulty accessing the single currency (although I cannot imagine why they would have such difficulty).  The second story highlights the French explaining that if the first story is true, the euro might gain strength and that would hurt their export industries, something the current government can ill afford right now.  It’s almost as if there is no agreement at all.  

Just remember, Eurozone GDP is growing at ~1.0%, its base rate is 2.0% and inflation is at 2.3%.  In the US, GDP is growing at 3+%, its base rate is 3.75% and inflation was just released at 2.4%.  Add to this the fact that energy costs in Europe, which is a price taker producing less than 15% of its energy needs domestically, are more than 2X higher than in the US, and in some countries, 3X higher, and it becomes increasingly difficult to say, damn, euros are the place to be!

And for the UK, where this morning they reported the highest Unemployment Rate in five years (see chart below) with wages slipping, slowing growth and a worse inflation and energy picture, arguably, things are even worse.

Source: tradingecomomics.com

It continues to be difficult for me to understand the relative merits of owning euros or pounds (-0.5%) in the current macroeconomic environment.  The fact that equity multiples remain lower there than in the US has certainly peaked some investor interest, but prospects just don’t appear that great.

There are certainly emerging markets whose currencies had been extremely weak, and which have significantly higher real interest rates than in the US (Mexico, Brazil, South Africa) where I can see the attraction, although this morning’s South African Unemployment report (31.4%!) might still give one pause as to the prospects.

One other place where the currency has been strengthening is China, where the PBOC has been walking the renminbi higher (dollar lower) for the past year (see below), as President Xi seems to want to show the world the renminbi is a strong and stable currency. 

Source: tradingeconmics.com

And of course, a large part of this particular currency discussion is that the Chinese are ‘dumping’ US assets, notably Treasuries.  Alas, recent data as per the below from two of the best-informed analysts regarding China and its activities shows that the PBOC has basically been offloading Treasuries to State owned Chinese banks and their US assets are, in fact, growing.  The CNY is a completely managed currency and can be set at any level the PBOC chooses.  Exclaiming the dollar is falling against it is not a very good representation.

Ok, I will stop repeating myself regarding my view on the dollar and turn to other markets.  In equities, Asia was very quiet as numerous nations observed the lunar new year so really, all we saw was Japan (-0.4%), India (+0.2%) and Australia (+0.2%), with China, Korea and Taiwan all closed.  I would argue we did not learn very much from the session.  Europe, though, is edging higher this morning with Spain (+0.6%) and the UK (+0.45%) leading the way.  The latter seems to be benefitting from the bad news is good scenario, as the weak employment data has investors looking for a BOE rate cut at the next meeting, while Spain has not seen any economic data to help drive things.  Perhaps, the ZEW data, where both Germany and the Eurozone printed at lower levels than last month and much lower levels than expected, has more belief in an ECB cut coming forward.  Net, however, activity here is muted.  As to US futures, at this hour (7:25), they are softer with the NASDAQ (-0.7%) the laggard by far.

In the bond market, right now, the inflationistas are having a hard time explaining the decline in yields.  Treasury yields (-2bps and back to 4.03%) have been marching lower for the past two weeks as per the below, and we have seen similar price action elsewhere.

Source: tradingeconomics.com

European sovereign yields have also slipped -2bps across the board while UK gilt yields have fallen -4bps.  But the big winner is Japan (-8bps) where investors apparently no longer fear unfunded spending and aggressive fiscal policy by PM Takaichi, as the 5-year auction last night was extremely well received and investors are looking forward to the 20-year auction later this week.

In the commodity bloc, oil (+1.5%) has moved up after Iran closed part of the Strait of Hormuz, restricting traffic there.  This seems odd to me as they desperately need that to remain open to deliver their oil, but perhaps they are trying to show their strength.  A second round of discussions are ongoing between the US and Iran as I type, so we shall see what happens here.  Meanwhile, in the metals markets, with China on holiday, and given they have been the source of the most demand, it cannot be surprising that all are lower this morning (Au -1.0%, Ag -0.75%, Cu -1.3%, Pt -1.7%).  My take is these markets are likely to spend the next several months consolidating before any leg higher (and I believe that is the direction) will be evident.  

Finally, we discussed the dollar above and the only noteworthy move beside the pound is SEK (-0.6%) which appears more to be a function of its higher beta to the rest of Europe than any specific news.

On the data front, this week brings a bunch as follows:

TodayEmpire State Manufacturing6.0
WednesdayHousing Starts1.33M
 Building Permits1.40M
 Durable Goods-2.0%
 -ex Transport0.3%
 IP0.4%
 Capacity Utilization76.5%
 FOMC Minutes 
ThursdayInitial Claims225K
 Continuing Claims1870K
 Trade Balance-$56.0B
 Phiily Fed9.3
FridayQ4 GDP3.0%
 Personal Income0.3%
 Personal Spending0.4%
 PCE0.3% (2.8% Y/Y)
 -ex food & energy0.3% (2.9% Y/Y)
 Flash Mfg PMI52.6
 Flash Service PMI53.0
 Michigan Confidence57.0
 New Home Sales730K

Source: tradingeconomics.com

In addition, we hear from 5 more Fed speakers, but as I have consistently said, I don’t think they matter that much at this point.  Overall, my take is that sector rotation in the equity markets is the key activity there, that bond markets are beginning to get more comfortable with a lower inflation outlook since the recent data has been pointing in that direction, and that the dollar, despite its many detractors, is not dead yet.  We have seen an awful lot of volatility for the past several weeks.  As I have repeatedly reminded you, that cannot continue forever.  While I am sure that we will see more bouts of volatility this year, it does feel like for the next several sessions, things will be pretty quiet.  Let’s be thankful for that.

Good luckA