Tag Archives: investing

Erring

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Excitement does not quite portray
The thirst for risk shown yesterday
Though media cried
Investors took pride
In Trump, sure that he’ll save the day
 
So, next Chairman Jay and the Fed
Will try to explain that instead
Of further rate paring
They might soon be erring
On side that Fed rate cuts are dead

 

Wow!  That is pretty much all one can say about yesterday’s equity market response to the confirmation that Donald Trump will be the next president of the United States.  The DJIA rose 3.6%, far outpacing both the S&P 500 (+2.5%) and the NASDAQ (+3.0%) but even that paled in comparison to the Russell 2000 small-cap index which jumped nearly 6% on the day!  Investors are all-in on the idea that Trump will seek to bring home as much manufacturing and economic activity as possible via tariff policies and small caps and old-line companies are the ones likely to benefit.

But boy, bonds had a tough day with yields across the curve rising between 10bps (2yr) and 20bps (30yr) with the 10yr gaining 15bps on the day.  It is all part of the same mindset, higher economic activity and no slowdown in spending leading to rising inflation and, correspondingly, rising yields.

The other area that really suffered were the metals markets, with gold (-3.3% or $90/oz), silver (-4.7%) and copper (-5.0%) all getting hammered.  The best explanation for the gold price’s decline I have heard is the idea that with Trump coming into office, the prospects for a nuclear war have greatly diminished.  Certainly, based on the fact that there were no new wars during his last term and one of his promises is to end the Russia/Ukraine war on the first day, perhaps that is correct.  As well, consider that the dollar exploded higher, something which had lately been a benefit for metals, but historically has been a negative, and at least we can make some sense of things here.

So, where do we go from here?  That, of course, is the $64 billion question.  Reactions around the world are still coming in and I would characterize them as a mix of stoicism and fear.  Perhaps a good place to start is Germany where the governing coalition just collapsed as Chancellor Sholz fired the FinMin who was the head of the FDP, one of his coalition’s groups.  Their problem is that the German economic model is crumbling, and the population is unhappy with the current situation.  The former can be demonstrated by today’s data showing the Trade Surplus fell more than expected while IP fell back into negative territory again, an all-too-common occurrence over the past three years as can be seen below, and hardly the best way to improve the productivity of your economy.

Source: tradingeconomics.com

Meanwhile, politically, the country is seeing a widening of views across the spectrum with the combination of the anti-immigration parties, AfD on the right and BSW on the left, garnering support of about 25% of the population and preventing any meaningful coalitions from being formed.  

If Germany continues to lag economically, it will negatively impact the whole of the Eurozone.  The divergence between the US economy, which has all the hallmarks of faster growth ahead, especially under a new administration, and the European economy, which continues to struggle under a suicidal energy policy that undermines any chance of industrial resurgence, and therefore a significant rebound in economic activity could not be greater.  While much ink has been spilled regarding the prospects that the dollar is going to collapse because of the debt situation and the BRICS are going to create something to replace it, the reality is the euro is in far more dire straits.  The ECB is going to be much more aggressive cutting rates than the Fed and the market is starting to price that in.  The below chart from Bloomberg this morning does an excellent job showing the change in market pricing over the past month.  

I find it hard to see how the euro can benefit in this environment regardless of the dollar’s performance against other currencies given the more limited economic prospects on the continent.  They are dealing with an existential crisis because of Russia’s more aggressive stance since the invasion of Ukraine combined with an undermining of their economic model which was based on exporting high value items to China and the rest of the world.  The problem with the latter is China has become a huge competitor and a shrinking market for their wares, and they have limited other markets.  If Trump holds to his word and imposes 20% tariffs on European imports to the US, the euro is likely to fall even further.

That is just a microcosm of one area and its response to the US election, but one that may well be a harbinger for many others.  The US stance in the world is changing and other nations are not really prepared.  Expect more financial market volatility, in both directions, as these changes become more evident and play out over time.

Ok, let’s see how other markets behaved with confirmation of the Trump victory.  In Asia, the Nikkei (-0.25%) slid but other indices rallied indicating a mixed picture.  Meanwhile Chinese shares rallied sharply (CSI 300 +3.0%, Hang Seng +2.0%) as expectations grow that the Standing Committee will expand the stimulus measures in the wake of the election.  Remember, the Chinese had delayed this annual meeting by a week to capture the results of the US election and now traders are betting on a bigger response.  As well, the Chinese Trade Surplus expanded far more than forecast, to its third highest monthly reading of all time at $95.3B.  As to the rest of the region, the picture was very mixed with some gainers (Singapore +1.9%, Taiwan +0.8%) helped by the China story and some laggards (India-1.0%, Philippines -2.1%) with the latter suffering from a much weaker than expected GDP report.

In Europe, interestingly, most markets are performing well this morning led by the DAX (+1.3%) although the rest of the continent’s bourses are only higher by around 0.5% or so.  The laggard here is the FTSE 100 which is unchanged on the day in the wake of the BOE’s widely expected 25bp rate cut.  Although, there were apparently some looking for a 50bp cut as stocks fell a bit in the wake of the news and the pound jumped 0.3%, a clear sign of a minor surprise.

Speaking of currencies, the dollar which has had quite a run in the past two sessions is backing off overall this morning although remains well above the pre-election levels.  In the G10, NOK (+1.3%) is the leader as the Norgesbank left rates on hold and indicated that was likely their stance going forward, while AUD (+1.0%) seems to be benefitting from both the rebound in metals prices and the potential Chinese stimulus.  Otherwise, currencies have rallied between 0.3% and 0.5% in this bloc.  In the EMG space, ZAR (+1.4%) is the biggest gainer, also on the precious metals rebound, while MXN (+1.2%) is next, although that is simply a continuation of the retracement from the post-election decline.  Bigger picture, I think the dollar remains well bid, but not today.

In the bond market, Treasury yields are unchanged this morning, consolidating their gains from the past week and waiting for the Fed this afternoon.  However, European sovereign yields have all rallied substantially, between 6bps and 9bps, which looks, for all intents and purposes, like the continent’s catch-up trade to yesterday’s US movement.  Nothing has changed the view that Treasury yields lead bond market moves in the G10.

Finally, in the commodity space, oil (-1.0%) is a bit lower this morning although yesterday it recouped most of its early losses and closed lower only minimally.  Yesterday also saw a surprising inventory build in the US which would be expected to weigh on prices.  In the metals markets, after a virtual collapse yesterday, this morning is seeing stabilization in precious metals and a sharp rebound in copper (+2.3%) as hopes for that Chinese stimulus spread to this market as well.

In addition to the FOMC meeting this afternoon, we see regular Thursday morning data of Initial (exp 221K) and Continuing (1880K) Claims as well as Nonfarm Productivity (2.3%) and Unit Labor Costs (1.0%).  However, despite all the recent activity, and the fact that a 25bp cut is a virtual certainty, Chairman Powell’s press conference will still have the trading community riveted to see how he describes any potential future paths in the wake of the election results.  Given the recent data and the estimate prospects of a Trump administration’s efforts to goose growth further, it is hard to see how the Fed can really discuss cutting rates much further.  In fact, I will go out on a limb and say I expect forecasts of the neutral rate are going to consistently climb higher and reach 4% before the end of 2025.  And that means, as is evident by both the economy and the stock market, the Fed has not tightened financial conditions very much at all.

Good luck

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Half-Crazed

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The rest of the world is amazed
And frankly, I think, somewhat dazed
The vote in the States
Deteriorates
Each cycle, as folks turn half-crazed
 
But still, everyone cannot wait
To find out if we will be great (again)
Or if we will turn
The page and thus spurn
The chance to encourage debate

 

By now, I imagine most of you have figured out my preference for the election outcome and whatever your view, I sincerely hope you don’t hold it against me.  However, if that is the case, so be it.  In the meantime, whatever happened in markets yesterday and overnight just doesn’t matter at all as the opportunity for a major revision of perceptions is so large as to make any price information completely useless, at least in the US markets.

I have seen numerous studies showing the history of how markets behave in presidential election cycles, but I think it is a fair assessment that the current cycle is unlike any previous cycle that we have seen since, perhaps, just before the Great Depression.  Simply consider the massive amount of information that is available to the average person from numerous sources these days compared to anytime in the past.  As such, I don’t put much faith in any of those studies.

Which takes us to this morning.  Do we truly have any idea what the outcome will be?  I would argue not although we all have our favored outcomes.  And that bias, I believe, is deeply embedded in virtually every analysis.  As such, I will not try to analyze.  Rather, I will observe.

The first observation is that market implied volatility has been rising for the past weeks as the seemingly dramatic differences in policy outcomes depending on the ultimate winner mean market dislocations in either direction are quite possible.  

For example, let’s look at 1-month implied volatility in the major USD currency pairs this year as per the below:

Source: Capital Edge Corner via X

They have been rising steadily since early October as a combination of corporate hedgers trying to protect themselves and hedge funds and traders trying to profit from the dislocation have increased demand steadily.  The one truism here is that upon confirmation of a winner, regardless of the underlying move in the dollar, implied volatility is going to decline.

Much has been made of the ‘Trump trade’ which appears to mean that if Trump wins, the prospects for higher growth and inflation will steepen the yield curve, driving yields higher, while supporting the dollar (much to Trump’s chagrin) as foreign investors flock to US equities.  In fact, the most common explanation for the dollar’s decline over the past several sessions has been that Harris has improved in the polls.  

But it is not just the FX markets where implied volatility is rising, look at the VIX below, which is also showing a steady climb over the past two months.

Source: Fred.gov

That spike in August was the almost forgotten market response to the BOJ tightening policy and the -12% decline in the Nikkei just days after the Fed didn’t cut interest rates as many had hoped.  But if you eliminate that event, the trend higher remains intact.

Finally, the MOVE Index, which is the bond market volatility index shows very similar behavior, a steady climb over the past month especially, but truly trending higher since the summer as seen below:

Source: Yahoo Finance

My point is that given the growing uncertainty across all markets as well as the complete inability to, ex ante, determine who is going to win the election, the signal to noise ratio of price movement right now is approximately 100% noise, at least in financial markets.  Commodity markets have a bit of a life away from the election, so price action there is far more representative of true supply and demand issues.  Arguably, this is merely another consequence of the financialization of most things, the loss of market signals as they have been overwhelmed by the flood of liquidity provided by central banks around the world.

At any rate, until we know who wins, it will be difficult to establish a view of the near-term or long-term future of market activity. So, let’s recap the overnight session as its all we have left.

After yesterday’s equity selloff in the US, most Asian exchanges posted gains led by China (+2.5%) and Hong Kong (+2.1%) which responded to comments from Chinese Premier Li Qiang’s comments that, “The Chinese government has the ability to drive sustained economic improvement.”  And perhaps they do, although there are clearly issues regarding the local entities that are willing to gain at the expense of each other in order to demonstrate their own progress.  But Japanese shares (+1.1%) also rallied along with most of the region, perhaps a direct analogy to the US decline as the ‘Trump trade’ has included weakness in markets likely subject to Trump’s promised tariffs.  Meanwhile, in Europe, bourses have edged slightly higher this morning, between 0.1% and 0.2%, with no new data or news of note.  Interestingly, US futures are starting to trade higher at this hour (6:50), perhaps an indication of market beliefs, although just as likely part of the random walk down Wall Street.

In the bond market, Treasury yields (+3bps) are creeping higher again, also in line with the Trump trade, and that seems to be dragging European sovereign yields along for the ride as all those markets have seen yields climb between 4bps and 5bps.  Again, given the lack of new data, and the history of these yields following Treasuries, I see no other strong explanation. 

In the commodity markets, oil (+0.3%) continues its rebound and has now gained more than 6.5% in the past week.  The combination of OPEC+ delaying their planned production increases and seeming hopes for a pickup in Chinese demand on the back of the coming details of the stimulus package seems to have traders in a better mood these days.  As to the metals markets, they are all firmer this morning with gold (+0.2%) mostly biding its time ahead of the election, but both silver (+0.8%) and copper (+0.9%) starting to accelerate a bit.  Nothing has changed my view that regardless of the election outcome, this space is far more dependent on continued central bank policy easing and there is no indication that is going to end soon.

Finally, the dollar is softer again this morning, but in a more muted fashion than the past several sessions.  Although, with that in mind, we still see the euro and pound both climbing a further 0.25% and AUD (+0.6%) today’s leader after the RBA left rates on hold with a more hawkish statement than anticipated.  But the weakness is widespread with NOK (+0.4%) continuing to benefit from oil’s rise while ZAR (+0.6%) gains on the back of the rise in metals.  Of course, the currency that has seen the most discussion ahead of the election is MXN.  It is basically unchanged this morning, a perfect description of the narrative that the election will be extremely close.  However, a quick look at its price movement over the past week shows that it follows every bump in the polls.

Source: tradingeconomics.com

And that’s really it this morning.  We see the Trade Balance (exp -$84.1B) and ISM Services (53.8) but honestly, nobody is going to respond to that data.  Instead, all eyes will be on the early exit polls and the reporting of how the election is going.  No matter what, it seems hard to believe we will really have an idea before 10:00pm this evening, and then only if it is a blowout in either direction, seemingly a low probability.  So, today is a day to watch and wait if you don’t already have hedges in place because honestly, it’s probably too late to do anything now.

Good luck and go vote

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Fraught

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The job growth that everyone thought
Existed, seems like it was fraught
Meanwhile ISM
Showed further mayhem
As growth slowed while prices were hot
 
The funny thing was the reaction
Where stocks were a source of attraction
But at the same time
Bond buys were a crime
With sellers the ones gaining traction

 

The NFP data was certainly surprising as the headline number fell to its lowest level, 12K, since December 2020 with the worst part, arguably, the fact that government jobs rose 40K, so there were 52K private sector job losses.  That is just not a good look, nor were the revisions to the previous months which saw another 112K jobs reduced from the rolls.  It cannot be surprising that the Fed funds futures market immediately took the probability of a rate cut to 99% this week and raised the December probability to 82%, up more than 10 points in the past week.  After all, Chair Powell basically told us that he has slain inflation, and they are now hyper focused on the employment mandate.  With that in mind, the futures reaction makes perfect sense.

Perhaps even more surprising was the market reaction, or the dichotomy of market reactions, which saw equity markets in the US rally nicely, with gains between 0.4% and 0.8% in the major indices, while Treasury yields spiked 10bps despite the data.  That yield spike helped carry the dollar higher as the greenback rallied smartly against virtually all its counterparts by more than 0.50%, and it undermined commodity prices.  

The most common explanation here, though, had less to do with the NFP data and more to do with the recent polls regarding the US election, where it appeared the former president Trump was gaining an advantage.  Remember, the ‘Trump trade’ is being described as a steeper yield curve with benefits for the dollar and US equities on the back of stronger growth and higher inflation.

There once was a US election
Where both candidates lacked affection
The worry it seems
Is half the world’s dreams
Are likely soon met with dejection
 
Meanwhile for investors worldwide
This week ought to be quite a ride
To all our chagrins
No matter who wins
Look for either outcome denied

However, this morning, the markets have changed their collective mind, with virtually all of Friday’s movement now unwound, at least in the bond and FX markets.  What would have caused such a reversal?  Well, the latest polls show that the race is much tighter than thought on Friday, with VP Harris gaining ground in a number of them, which now has most pundits simply calling for their favored candidate to win, rather than trying to read the polls.  As such, the Trump trade has been partially unwound and my sense is that until there is an outcome, it will be difficult for markets to do more than increase the amplitude of their moves amid less and less actual trading.  At least, that is true in bonds, FX and commodities.  Stocks, as we all know, are legally mandated to rise every day, so are likely to continue to do so. 

And now, despite the fact that the Fed meets on Thursday, with a rate cut all but assured and ostensibly a great deal of interest in Chairman Powell’s press conference, all eyes are on the election.  Remember, too, not only is that the case in the US, but also around the world.  Whether friend or foe of the US, pretty much all 195 nations on the planet are invested in the outcome.

With that in mind, and since this poet has no deep insight into the outcome, let me simply recount the overnight market activity with the understanding that many trends have the opportunity to reverse depending on the results.

Starting with equity markets, Japanese shares (-2.6%) fell sharply as a combination of both their domestic political struggles (remember their government situation is unclear after the recent snap election) and the significant rebound in the yen (+0.9%) weighed on equities there.  India (-1.2%) also struggled but elsewhere in the time zone, stocks rallied nicely led by China (+1.4%) and Korea (+1.8%) as visions of that Chinese fiscal bazooka continue to dance in investors dreams.  Interestingly, the WSJ had an article this morning downplaying the idea, which based on their history makes a great deal of sense to me.  Turning to Europe, most markets there are firmer, albeit only modestly so, with gains from the CAC and IBEX (+0.3% each) outpacing the DAX (0.0%).  Finishing off, US futures are basically unchanged at this hour (7:00).

In the bond markets, while the Treasury move Friday did help drag European yields somewhat higher, it was nothing like seen in the US and this morning, those yields are essentially unchanged, +/- 1bp in most cases.  The only data of note was the final PMI data which confirmed the flash data from last week.  As to JGB yields, they have been stuck in the mud for a while now, still hanging below the 1.0% level with no designs of a large move.

Oil prices (+3.1%) are rebounding nicely on news that OPEC+ has delayed their previous plans to start increasing production as of December this year.  Concerns about oversupply in the global market plus the return of Libyan production and record high US production have convinced them they better leave things as they are.  Metals markets are a bit firmer this morning with gold (+0.2%) actually somewhat disappointing given the magnitude of the dollar’s decline, while both silver (+1.25%) and copper (+1.1%) show nice gains.

Finally, the dollar is under severe pressure across the board.  The biggest gainers are MXN (+1.2%), NOK (+1.2%) and PLN (+1.1%) although most gains are on the order of 0.7% or more.  Certainly, the oil story is helping NOK, and given the concerns that traders have about prospective tariff increases on Mexico if Trump wins, the idea that the race is closer than previously thought has supported the peso.  As to the zloty, it seems that their PMI data, printing at 49.2, a fourth consecutive rise) has traders looking for a more hawkish central bank on the back of stronger economic activity.

On the data front, aside from the election and the Fed, there is other information, although it is not clear that anyone will notice.

TodayFactory Orders-0.4%
TuesdayTrade Balance-$84.1B
 ISM Services53.8
ThursdayBOE Rate Decision4.75% (current 5.00%)
 Initial Claims223K
 Continuing Claims1865K
 Nonfarm Productivity2.5%
 Unit Labor Costs1.1%
 FOMC Rate Decision4.75% (current 5.0%)
FridayMichigan Sentiment71.0

Source: tradingeconomics.com

Of course, the election will dominate everything, and it certainly appears that there will be legal challenges from the losing side regardless of the outcome.  My expectation is that markets will remain jumpy with outsized moves on low volumes until there is more clarity.  It is not often that an FOMC meeting is seen as an afterthought, but much to Chairman Powell’s delight, I sense that is going to be the case this week.  

I have already voted early and I encourage each of you to vote as the more voices heard, the better the case the winner will have at achieving a mandate.  And the reality is, we need a president with a mandate if we are going to see broad-based positive changes in the nation going forward.

Good luck

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Another Mistake

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Said Janet, we need to watch out
‘Cause bank fraud is starting to sprout
So maybe I’ll make
Another mistake
And drive banking stocks to a rout

 

“I absolutely agree with the premise — which is that fraud is becoming a huge problem.”  These sage wordsfrom our esteemed Treasury Secretary have made headlines and also raised some alarms.  After all, was not Madam Yellen in charge of bank regulation not that long ago?  Did she not receive millions of dollars in speaking fees from those same banks before being named Treasury Secretary?  It is difficult to listen to the recent change in tone without considering the fact that she is concerned if the election results in a Trump victory, her time at Treasury may come under deeper scrutiny so she is starting to spill a few beans to show she was on the ball.

But arguably, the biggest issue is not that fraud is rampant in banking, with action around government checks being the most fertile area, the biggest issue remains the nonstop borrowing that continues as the US government debt continues to grow aggressively each day.  There have been several recent commentaries by some very smart guys, Luke Gromen and Bob Elliott,  regarding the coincidence of rising interest rates in the US and almost every other G10 economy despite significant differences regarding the economic situation and borrowing patterns.  One conclusion is that owning government debt from any western government, at least debt with any significant duration, is losing its luster quickly.  This is a valid explanation of why yields continue to rise despite the Fed’s, and other central banks’, recent rate cuts.  

Of course, there is another popular explanation about the recent rise in yields; the prospects of a Trump victory and corresponding sweep in the House and Senate is seen as growing substantially.  The thesis is that if that is the outcome, the budget deficit will grow even larger as the tax cuts due to expire next year will very likely be rolled over, and there is no indication there will be a reduction in spending (the Republicans merely have different spending priorities).  Hence, deficits will continue to grow, Treasury debt will continue to increase, and yields will increase as well.  At least, that’s the thesis.

One thing which is undoubtedly true is that if there is an increase in volatility in government bond markets, the dollar is going to be one of the beneficiaries.  Keep that in mind going forward.

Though views about Europe were dire
Today, GDP printed higher
While Italy sank
They’ve Germans to thank
For being the major highflier

The other story of note this morning is the Eurozone GDP report alongside GDP readings from several key nations.  At the Eurozone level, GDP surprised everyone with a 0.4% Q/Q print and a 0.9% Y/Y print, higher than the 0.2%/0.8% expectations.  Now, in the big scheme of things, those numbers are not that great, but better than expected is certainly worth something.  Germany was the key driver as they avoided a technical recession by growing 0.2% in Q3.  What is little noted is that Q2’s data was revised lower from -0.1% to -0.3%, so it is fair to say that things have not been great there.  In fact, below is a chart of the past 5 years’ worth of quarterly results in Germany and you can see that the concept of a growth impulse there, at least since the beginning of 2022, has largely been absent.

Source: tradingeconomics.com

Another telling sign that the headline may not be a true reflection of the situation on the ground there is that the Eurozone also released a series of sentiment indicators, almost all of which were weaker than expected, notably Economic Sentiment (95.6 vs. 96.3 last month and expected) and Industrial Sentiment (-13.0 vs. -11.0 last month and -10.5 expected).  Apparently, the growth was the product of greater than expected government spending, not really the best way to grow your economy.  However, the market did respond by pushing the euro (+0.15%) a bit higher although the recent downtrend remains in place as evidenced by the below chart.  It remains difficult to get too excited about the single currency given the growing divergence in views on the Fed and ECB, with the former being questioned about its policy easing while the latter is being called on to do more.

Source: tradingeconomics.com

And that was really the macro news for the evening so let’s see how markets overall behaved.  Yesterday’s mixed US session was followed by similar price action in Asia with the Nikkei (+1.0%) continuing its recent rally as the market gets comfortable with PM Ishiba putting together a minority government while Chinese shares (CSI 300 -0.9%, Hang Seng -1.55%) suffered as hopes for the ‘bazooka’ stimulus faded, at least temporarily.  As to the rest of the region, almost all the stock markets declined on the evening.  That negative price action is evident in Europe as well this morning with every major market in the red (CAC -1.4%, DAX -0.8%, IBEX -0.6%) as the better than expected GDP figures don’t seem to have been that enticing for investors.  In the UK, too, stocks are softer (FTSE 100 -0.3%), although there has been no data released.  The big story there today is the budget release upcoming with most pundits looking for a lot of smoke and mirrors and no progress on spending stability.  Meanwhile, US futures are a bit firmer this morning after solid earnings from Google after the close yesterday.

In the bond market, yields have backed off from their recent highs with Treasuries (-4bps) falling after yesterday’s 4bp decline.  Yesterday’s US data was a bit softer than expected (Goods Trade Deficit fell to -$108.23B, much larger than expected while the JOLTS data (7.44M) fell to its lowest level since January 2021 and indicates a rough balance in the jobs market.  As discussed above, European yields are following Treasuries lower with declines on the order of -3bps across the major economies with only Italy (+1bp) the outlier on higher than expected CPI readings.  Meanwhile, UK Gilts (-10bps) are the real outlier as bond investors seem intrigued over the potential budget.

In the commodity space, oil (+1.3%) is bouncing a bit although remains well below the $70/bbl level.  It appears that the worst is over for now and a choppy market is in our immediate future pending the election outcome.  Consider that if Trump wins, given his ‘drill, baby, drill’ plank in the platform, it is likely that oil will slide on the news while a Harris win is likely to see prices rise on the fear of a fracking ban.  Gold (+0.2%) continues its steady march higher with investors abandoning bonds and looking for a haven, although the other metals (silver -1.1%, copper -0.6%) are suffering this morning on the softer economic data.

Finally, the dollar is under very modest pressure this morning but remains at the high end of its recent trading range.  JPY (+0.25%) has managed a modest rally ahead of tomorrow’s BOJ meeting but we have seen a mixed picture overall with some gainers (AUD, NZD, KRW) and some laggards (SEK, GBP, HUF).  Ahead of the election, I continue to expect choppiness and a lack of direction but once that is complete, as I have said before, market volatility in other markets is likely to lead to a stronger dollar.

On the data front today, we start with ADP Employment (exp 115K) and then see the first look at Q3 GDP (3.0%) along with a key subcomponent of Real Consumer Spending (3.0%).  We also see the Treasury Refunding Announcement, with not nearly as much press given to this as today as we had seen over the past several quarters.  Expectations are running for no large increases although given the budget deficit continues to widen, I’m not sure how that math works.  Lastly, we see oil inventories where a modest build is anticipated.

While the election continues to dominate the discussion, we cannot ignore this data or what is to come tomorrow and Friday, as the Fed will not be ignoring it.  We will need to see a spate of much weaker data to change my long-held view that the dollar has further to climb, so let’s watch and wait.

Good luck

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Full Throat

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The news cycle’s still ‘bout the vote
With Harris and Trump in full throat
‘Bout why each should be
The one filled with glee
When voters, to prez, they promote
 
Meanwhile, out of China we hear
More stimulus is coming near
The rumor is on
That ten trillion yuan
Is how much Xi’ll spend through next year

 

The presidential election continues to be the primary source of news stories and will likely remain that way until a winner is decided.  The vitriol has increased on both sides, and that is unlikely to stop, even after the election as neither side can seem to countenance the other’s views on so many subjects.  

As we watch Treasury yields continue to rise, many are ascribing this move to the recent polls that show former President Trump gaining an advantage.  The thesis seems to be that his proffered plans will increase the budget deficit by more than Harris’s proffered plans, but I find all this a bit premature as budget deficits are created by Congress, not presidents, so the outcome there will have a significant impact on the budget.  With that in mind, though, if we continue to see the yield curve steepen as long-end rates rise, my take is the dollar will continue to perform well.

But the election is still a week away and while there is no new data of note today, we do see important numbers starting tomorrow.  In the meantime, one of the big stories is that the Chinese National People’s Congress is now considering a total stimulus package of CNY 10 Trillion to help support the economy, and that if Trump wins, that number may grow larger under the assumption that he will make things more difficult for the nation.  This report from Reuters indicates that there would be a lot of new debt issuance to help support local governments repay their current borrowings as well as support the property market.  

Now, this is very similar to what was reported last week, although the totals are larger, but there is nothing in the story indicating that President Xi is going to give money to citizens, nor focus on new production.  This all appears to be an attempt to clean up the property market mess (remember, most local government debt problems are a result of the property debacle as well), which while necessary is not sufficient to get China back to its pre-pandemic growth trend.

As it happens, this story did not print until after the Chinese equity markets closed onshore, so the CSI 300’s decline of -1.0% has been reversed in the futures aftermarket.  As well, given that Hong Kong’s market doesn’t close until one hour later, it had the opportunity to rebound before the close and finished higher on the day by 0.5%.  As to the rest of Asia, it mostly followed the US rally from yesterday with the Nikkei (+0.8%) performing well and gains seen across virtually all the other markets there.

Turning to Europe, the only data of note was the German GfK Consumer Confidence index which rose to -18.3.  While this was better than last month and better than expected, a little perspective is in order.  Here is the series over the past ten years.

Source: tradingeconomics.com

While it seems clear that consumers are feeling a bit more confident than they have in the past year, ever since the pandemic, the German consumer has been one unhappy group!  And the other story from Germany this morning helps explain their unhappiness.  VW is set to close at least 3 factories and reduce wages by 10% as they try to compete more effectively with Chinese EV’s.  I can only imagine how confident that will make the people of Germany!

Now, the interesting thing about confidence is that while it offers a view of the overall sentiment in markets, it doesn’t really correlate to any specific market moves.  For instance, the euro (-0.2%) remains rangebound albeit slightly lower this morning, while the DAX (+0.25%) has actually rallied a bit, although that is likely on the basis of the VW news helping to convince the ECB that they need to cut rates further and faster.  In fact, most European bourses are firmer this morning on the lower rate thesis I believe, although Spain’s IBEX (-0.25%) is lagging after some moderately worse earnings news from local companies.

Turning to the commodities sector, it should be no surprise that they are higher across the board as the combination of proposed Chinese stimulus and potential future inflation in the US based on a possible Trump victory (although there is nothing in the Harris policies that seem likely to reduce inflation) means that commodities remain a favored outlet for investors.  After a couple of days of choppiness, we are seeing oil (+1.2%) rise nicely (perhaps the decline was a bit overdone on position adjustments) and the metals complex rise as well (Au +0.3%, Ag +1.3%, Cu +1.1%) as all three will benefit from all the new spending that is likely to occur in the US as well as China.  

One other thing to note, which disappointed the gold bulls, as well as the dollar bears, is that the BRICS meeting in Kazan, Russia resulted in…nothing at all regarding a new currency to ‘challenge’ the dollar.  Toward the bottom of their proclamation, they indicated they would continue to look for ways to work more closely together, but there is nothing concrete on this subject.  As I have been writing for the past several years, and paraphrasing Mark Twain, rumors of the dollar’s demise have been greatly exaggerated.  So, there will be no BRICS currency backed by gold or anything else, no new payment rails and Treasuries are going to remain the haven asset of choice alongside gold.

As to the dollar vs. its other fiat counterparts, it is a bit stronger this morning alongside US yields (Treasuries +3bps) with even the commodity bloc having difficulty gaining ground.  Of note is USDJPY, which is higher by 0.35% and now firmly above 153.00.  Last night, we did hear our first bout of verbal concern from a MOF spokesman explaining they are watching the yen carefully.  I’m sure they are, but I believe they will be very reluctant to enter the market when US yields are rising, and the BOJ is not keeping pace.  In fact, while the November rate cut is baked in at this point, the probability of the Fed cutting in December continues to slowly decrease (now 71%).  If we see a good NFP number Friday, I would look for that to decrease more rapidly and the dollar to see another leg higher.

And that’s all the market stuff today.  On the data front, Case Shiller Home Prices (exp 5.1%) and the JOLTS Job Openings data (7.99M) are the major releases.  As well, the Treasury is auctioning 7-year Notes this morning after a tepid 2-year auction yesterday.  It is very possible investors are starting to get a bit nervous about the US fiscal situation and if that continues, the irony is that higher yields will beget a higher dollar despite the concerns.

It is difficult to get away from the election impact on markets, and it seems that as momentum for Trump builds, the market is going to continue to push yields and stocks higher with the dollar gaining ground alongside gold.  Go figure.

Good luck

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This is the Vibe

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In DC, the IMF tribe
Is meeting, and this is the vibe
Leave China alone
While they all bemoan
Das Trump to whom, problems, ascribe
 
Meanwhile in Beijing, Xi’s delayed
His policies as he’s afraid
If Trump wins the vote
More tariffs, he’ll float
Reducing Xi’s winnings in trade

 

With the US election fast approaching, it appears that virtually every aspect of life now hinges on the outcome.  This is even true in ostensibly neutral NGOs like the IMF.  As an example, the title of this Bloomberg article, Trump 2.0 Haunts World Economy Chiefs Gathering in Washington Before Vote is enough to make you question the neutrality of both Bloomberg and the ongoing activity at the IMF.  Briefly, in this article, the authors quote several meeting participants explaining that a Trump victory could disrupt the current global “stability” in trade.  (I’m not sure why they think the current situation is stable given the ongoing increases in tariffs already being implemented by the Eurozone as well as the US vs. Chinese manufactured goods, but they all are certain it will be a problem only if Trump is elected.)

In fact, earlier this week, the IMF explicitly said that a Trump victory would be negative for the global economy and that his policies would be worse for the US as well when compared to Harris’s policies.  My first thought is, how do they know Harris’s policies as she hasn’t been able to articulate any, but second, the idea that a supranational organization would express its electoral preferences leading up to a major national vote is remarkable.  Clearly the concept of neutrality no longer exists.

At any rate, as I explained yesterday, the US election remains THE topic on both investors’ and traders’ minds.  As well, it is THE topic on every other government’s mind around the world.  As such, arguably until the vote is complete and a victor declared, I suspect that all markets will see plenty of volatility with each change in the polls but limited additional secular movement.

One of the ongoing activities that passes for analysis these days is the forecasting of future bond yields or equity returns based on the winner.  This is generally explained as this market will rise if one wins and fall if the other does, or vice versa.  My take is this is simply another way for analysts to proffer their political views under the guise of economic analysis and as such, while I get a chuckle from these earnest descriptions of the future, I certainly don’t see them as rigorous analysis.  

But really, this week, that is all that is happening.  Next week, we do see a lot of data, including the NFP report as well as PCE readings and the BOJ’s interest rate decision, so perhaps there will be more market focused discussion.  But right now, virtually everything you read revolves around the election and the possible results.

So, with that in mind, let’s take a look at what happened overnight.  Yesterday’s mixed US session, with the DJIA slipping while the other major indices rallied a bit, led to a mixed picture in Asia as well.  Japanese shares (-0.6%) suffered a bit as Japan, too, is heading toward a general election and questions about whether new PM Ishiba will be able to win a majority in the Diet are very real this time.  Apparently, even in a homogenous society like Japan, there are questions about the ruling party and how much it is focused on helping the population.  As to the rest of Asia, both China (+0.7%) and Hong Kong (+0.5%) managed modest gains, but there are still many questions as to exactly how much stimulus China is going to inject into the economy there.  In fact, you can see the market asking those questions by the chart below, where the spike was the initial euphoria that something was going to be done, and the retracement is the realization that it was hope and not policy that drove things.

Source: tradingeconomics.com

The numbers show that after a >30% rally in a few sessions, investors have unwound about one-third of the climb as they await the outcome of the National People’s Congress meeting to see if a new fiscal package will be approved.  (Cagily, they have set the dates for the meeting to be November 4-8 to make sure that they can encompass the outcome of the US election in their decisions.  The rest of Asia saw a mix of gainers (Taiwan, Philippines, Australia) and laggards (India, Singapore, Malaysia) with other markets barely moving.

Meanwhile, in Europe, this morning is a down day, although the losses are quite modest (CAC -0.3%, IBEX -0.4%, FTSE 100 -0.2%) as traders head into the weekend with limited confidence on how things will play out going forward.  As to the US, at this hour (7:30), futures are pointing slightly higher, 0.2% or so.

In the bond market, Treasury yields (-2bps) have backed off their highs from earlier in the week but remain far above the levels seen prior to the Fed’s rate cut in September.  A view growing in popularity is that the 10yr yield will rise above 5.0% if Trump is elected while it will decline to 3.5% in a Harris victory.  Personally, I cannot see any outcome that doesn’t boost yields as there seems to be scant evidence that either side will slow spending and the Fed has made it clear that higher inflation is ok, at least by their actions, if not yet by their words.  As an aside, I couldn’t help but notice comments from Secretary Yellen explaining that the budget deficit was getting out of hand and “something” needed to be done about it, as though she had no part in the situation!  Meanwhile, European sovereign yields are mostly edging higher this morning, but only by 1bp or 2bps, as they continue to hold onto the gains that came alongside the Treasury market.  In the end, Treasury yields remain the key global driver.

In the commodity markets, oil (+0.7%) is bouncing slightly this morning after yesteray’s decline.  The talk in the market is that the Saudis are considering opening a price war to regain market share after they have withheld so much production.  That would certainly be a different tack than their recent activities and I imagine that President Putin would not be pleased, but that is one rumor.  As to the metals markets, they are under pressure this morning with all the major metals somewhat softer (Au -0.2%, Ag -0.9%, Cu -0.2%) as we continue to see profit taking in the space after a very large run higher over the course of the entire year.

Finally, the dollar is little changed overall this morning with no G10 currency having moved even 0.2% since the close yesterday although we have seen a couple of EMG currencies (KRW -0.7%, ZAR +0.3%) with a little dynamism.  The won fell further after weaker than forecast GDP encouraged traders to look for further rate cuts by the BOK while the rand’s movement appears more trading than fundamentally focused as there was neither data nor commentary to drive things.

On the data front, this morning brings Durable Goods (exp -1.0%, ex Transport -0.1%) and Michigan Sentiment (69.0).  As explained above, the data doesn’t seem to matter right now with all eyes on the election.  There are no Fed speakers scheduled but it is not clear that all their chatter this week had any impact.  The market is still pricing a 25bp cut in November and a 75% probability of another one in December, which is what it has been doing for a while.

It is very difficult to observe recent market activity and come away with a strong directional view.  My take continues to be that the December rate cut will lose its support based on the data and the dollar will appreciate accordingly.  But right now, that is a minority view.

Good luck and good weekend

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Pulling All-Nighters

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As Harris and Trump try persuading
The voters, the markets keep trading
So, narrative writers
Are pulling all-nighters
To pump up the side that is fading
 
The latest attack is on Trump
Who’s blamed for the bond market slump
But what of the Fed
Whose rate cuts have spread
The fear that inflation will jump?

 

It appears we have reached the point in time when macroeconomic data is taking a backseat to the political situation.  Almost every story you can read in any of the mainstream media right now is about how the election is going to affect whatever subject an article is about.  The latest discussion, which I have seen across numerous sources like Bloomberg, the WSJ and Reuters, just to name a few, is that the bond markets recent decline is entirely Trump’s fault.  The logic is that as Trump’s election prospects improve, and those of fellow Republicans in both the House and Senate alongside him, the market is suddenly concerned that the government is going to spend a lot of money and run a large deficit.  You can’t make this up!

The federal government deficit under the current administration is pegged to be just shy of $2 trillion this fiscal year, and you have all heard about the fact that interest payments on the government’s nearly $36 trillion of debt have grown to be more than $1 trillion.  But that is not the driver according to the narrative.  The driver is the idea that the Republicans could sweep and that would mean large deficits because…Trump.

Now, I realize I am only an FX guy (FX poet I guess), but my rudimentary understanding of economics is that when economic activity is strong (like the current data implies) and the central bank then adds more liquidity to the system to goose demand, say by cutting interest rates in the front end of the curve, then demand can outstrip supply and prices will rise.  As such, bond investors, when they see a dovish Fed entering an easing cycle while economic activity continues to move along and the government is already running a large fiscal deficit, are concerned over higher inflation ahead and so demand higher yields to own Treasury securities.  Of course, that view doesn’t necessarily suit the narrative so desperately pushed by the mainstream media that Trump is the root of all evil, but it does seem to make more sense.

At any rate, for the next two weeks at least, and likely four years if Trump wins, I can assure you that every negative day in any financial market will be blamed on Trump and his policies, despite the fact that the Fed seems to be the one with far more direct impact on short-term economic outcomes.  A look at the below chart, showing 10yr Treasury yields and the Fed funds rate cannot help but show that it was the Fed’s rate cut that is coincident with the recent sharp rise in yields, and this took place long before the odds of a Trump victory improved.  Look through the narrative and instead at the data and Fed activities for the most important clues as to what is actually happening.  I would argue that this is a bond market that is concerned about returning inflation as the Fed’s policy prescription no longer matches the reality on the ground.

Source: tradingeconomics.com

One other thing.  If the Fed does continue to cut rates while US economic data continues to demonstrate solid growth, look for commodity prices to continue their ongoing rally, likely equity markets to continue to perform well, but the dollar is more nuanced as rising inflation ought to undermine the greenback, but given we are seeing more aggressive rate cuts elsewhere in the world (Bank of Canada just cut 50bps this week and the ECB and BOE are going to be cutting again next month), it is entirely possible the dollar holds its own despite macroeconomic fundamentals that should point to weakness.

Ok, let’s see what happened overnight.  Yesterday’s US sell-off, the third consecutive day of broad market weakness, seems to have been sufficient to wash out some of the froth in the market as US futures are pointing higher this morning, especially after Tesla’s better than expected earnings report.  But overnight, the trend from yesterday’s US session was intact with most Asian markets under pressure (Hang Seng -1.3%, CSI 300 -1.1%, KOSPI -0.7%) with only Japan (Nikkei +0.1%) bucking the trend.  In Europe, however, this morning’s color is green with all the major bourses showing life (CAC +0.75%, DAX +0.7%, FTSE 100 +0.5%). Now, there was data released in Europe with the Flash PMI readings out this morning.  The funny thing is that they did not paint a great picture, with continued softness almost everywhere.  My take is Europe is going through a ‘bad news is good’ phase where the weak PMI data implies there will be more aggressive rate cuts by the ECB going forward.  Certainly, Eurozone economic activity, led by Germany’s virtual stagnation, is lackluster at best.

In the bond markets, after several sessions of rising yields, Treasuries have seen yields slip back 5bps this morning with similar declines across the board in European sovereign markets.  Part of this is the weak PMI data I believe, but part of it is a simple trading response to a market that is likely somewhat oversold.  After all, for the past month, bonds have been under significant pressure so a bounce can be no surprise.

In the commodity markets, after yesterday’s rout, where there seemed to be a lot of profit taking of the recent rally, this morning the march higher continues.  Oil (+1.0%) is leading the energy complex higher and the entire metals complex (Au +0.5%, Ag +0.7%, Cu +0.5%, Al +0.9%) is back in gear as all the underlying drivers (rising inflation, solid demand, and for gold, ongoing geopolitical concerns) remain in place.

Finally, the dollar is a bit softer this morning, but this too seems like a response to what has been a strong rally.  Once again, using DXY as a proxy (see chart below) for the broad dollar, the rally over the past month has been quite strong, so a day of backing off is to be expected.  As I mentioned above, the future of the dollar is nuanced because while the macro indicators point to potential weakness, if the rest of the world eases monetary policy more aggressively, the dollar will still rally.

Source: tradingeconomics.com

As to today’s movement, currency gains have been between 0.2% and 0.5% with the commodity bloc the biggest beneficiary (ZAR +0.5%, NOK +0.4%, AUD +0.3%) and we have also seen the yen (+0.5%) regain a little of its footing amid declining US yields, although it remains far above the 150 level.  There are those who are looking for another bout of intervention, but I am not in that camp, at least not in the near-term.

On the data front, this morning brings the Chicago Fed National Activity Index (exp 0.2), Initial Claims (242K), Continuing Claims (1880K), Flash PMI (Mfg 47.5, Services 55.0) and New Home Sales (720K).  Yesterday’s Existing Home Sales data was weaker than expected at 3.84M, arguably a testament to the fact that mortgage rates have followed Treasury yields higher and are back above 7.0% again.  On the Fed front, we hear from new Cleveland Fed president Beth Hammack, but it feels like Fed speak is losing some momentum.  Nobody believes that they are going to stop cutting rates, and fewer and fewer analysts think they should continue amid strong growth.  The futures market is now pricing a 95% probability of a November cut but only a 71% probability of a December cut to follow.  I remain in the camp that they pause in December, especially in the event of a Trump victory.

While the dollar is under pressure today, I continue to believe it retains the ‘cleanest shirt in the dirty laundry’ appeal and will ultimately continue to rally.  

Good luck

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Not Persuaded

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In China, Xi’s still not persuaded
The actions he’s taken have aided
The ‘conomy’s course
The outcome, perforce
Is access to money’s upgraded

 

In an otherwise very uninteresting session, the biggest news comes from China where the PBOC cut both the 1yr and 5yr Loan Prime Rates by a more than expected 25bps last night.  While PBOC chief Pan Gongsheng did indicate that more cuts were coming, the speed and size of this move are indicative of the fact that worries are growing about the nation’s ability to achieve their “around 5%” GDP growth target.  At least the people who will be blamed if they don’t achieve it are starting to get worried!

The interesting thing about this move is the singular lack of impact it had on Chinese markets with the CSI 300 rising a scant 0.25% for the session.  Although, perhaps it had more impact than that as the Hang Seng (-1.6%) seemed to express more concern over the need for the move than embrace any potential benefits.

Ultimately, the issue for Xi is that the breakdown of economic activity in China remains unbalanced in a manner that is no longer effective for current global politics.  China’s rapid growth since its accession to the WTO in 2001 has been based on, perhaps, the most remarkable mercantile effort in the world’s history.  But now, that mercantilist model is no longer politically acceptable to their main markets as the rest of the world has seen a significant political shift toward populism.  Populists tend not to be welcoming to foreign made goods (or people for that matter), and so Xi must now recalculate how to continue the growth miracle.

Economists have long explained that China needs to see domestic consumption, currently ~53%, rise closer to Western levels of 65% – 70% in order to stabilize their economy.  However, that has been too tall an order thus far.  It is far easier in a command economy to command businesses to produce certain amounts of stuff, than it is to command the citizens to consume a certain amount of stuff, especially if the citizens remain shell-shocked over the destruction of their personal wealth as a result of the imploding property bubble.  As much as Xi wants to change this equation, it seems clear he doesn’t feel he has the time to wait for the gradual adjustment required, as that might result in much weaker GDP growth.  Given that the most important promise he has made, at least tacitly, to his people is that by taking more power he will increase their prosperity, he cannot afford any indication that is not the path on which they are traveling.

My take is that we are going to continue to see more efforts by the Chinese to prop up the economy, but it remains unclear if the fiscal ‘bazooka’ that many in markets have anticipated will ever be fired.  History has shown the Chinese are much more comfortable with slow and steady progress, rather than massive changes in policy, at least absent an actual revolution!  Ultimately, nothing has changed my view that the ultimate relief valve is for the renminbi to depreciate over time.  Xi is fighting that for geopolitical reasons, not for economic ones, but unless or until the domestic situation there changes, I believe that will be the destiny.

Away from the China story, though, there is precious little else of note ongoing, at least in the financial markets.  As this is not a political discourse, I will not discuss the election until afterwards as only then will we have an idea of what will actually happen fiscally and economically.  Meanwhile, everything else seems status quo.  

So, let’s look at the overnight markets.  Aside from China and Hong Kong, and following Friday’s very modest rally in the US, the rest of Asia had no broad theme attached.  There were gainers (Korea, Australia, New Zealand) and laggards (India, Japan, Singapore) with movements of between 0.5% and 0.75% while the rest of the region saw much lesser activities.  In Europe, the mood is dourer with red the only color on the screen ranging from the UK (-0.2%) to virtually all the large continental bourses (CAC, DAX, IBEX) at -0.8%.  There has been no data of note to drive this decline except perhaps the fact that the dollar continues to rise, a situation typical of a risk-off environment.

In the bond markets, yields are climbing across the board this morning, a very risk-on perspective.  (This is simply more proof that the traditional views of asset performance for big picture risk on or off movements is no longer valid.)  At any rate, Treasury yields have risen 4bps while European sovereign bonds have all seen yields jump between 7bps and 8bps.  It appears that bond investors are growing somewhat concerned that central banks are going to allow inflation to run hotter than targeted over time as they are desperate to prevent any significant economic downturn.  As well, given the Treasury market leads all other bond markets, and US economic data continues to perform, that is a key global yield driver as well.

Arguably, the biggest story in markets continues to be the commodities space, specifically metals markets, as once again, and despite today’s dollar strength, we see gold (+0.5%), silver (+1.0%) and copper (+1.1%) rallying with the barbarous relic making yet another set of new all-time highs while silver has broken above a key technical resistance level at $32.00/oz as seen in the chart below.

Source: tradingeconomics.com

One of the reasons I focus on commodities so much is I believe they are telling an important story about the state of the global economy.  We have seen a decade of underinvestment in the production of stuff, especially metals, but also energy, as this has been sacrificed on the altar of ESG policies.  But the world marches on regardless, and that stuff is necessary to build all the things that people want and are willing to pay for.  As they say, the cure for high prices is high prices, meaning high prices are required to increase supply.  That is what we are witnessing, I believe, the beginning of high enough prices to encourage the investment required to increase the supply of these critical inputs to the economy.  However, given the often decade-long process to get from discovery to production of things like metals, look for these prices to continue to rise as a signal that demand is growing ahead of supply.  

As to oil prices, they too, have found legs this morning with a significant bounce (+2.2%) and back above $70/bbl.  On the energy front, we are also seeing NatGas rally sharply with gains in both the US and Europe of > 2%.

Finally, the dollar, as I mentioned, is stronger this morning with only NOK (+0.1%) outperforming the greenback in the G10 space as the dollar benefits from rising yields and continued strong growth, at least as measured by the major data points.  In the EMG bloc, it is universal with the dollar higher against all comers and the worst performers (KRW -0.75%, HUF -0.7%, MXN -0.3%) in each region continuing their recent trend declines.  Until we see a substantive change in the US economic situation, I see no reason for the dollar to fall very far at all.

On the data front, this week brings a lot more Fedspeak than hard data, but this is what we have.

TodayLeading Indicators-0.3%
WednesdayExisting Home Sales3.9M
ThursdayChicago Fed Nat’l Index0.2
 Initial Claims247K
 Continuing Claims1865K
 Flash PMI Manufacturing47.5
 Flash PMI Services55.0
 New Home Sales720K
FridayDurable Goods-0.9%
 -ex Transport-0.1%
 Michigan Sentiment69.3

 Source: tradingeconomics.com

None of this is all that exciting or likely market moving, but we will be regaled with speeches from seven more FOMC members, both governors and regional presidents.  While ordinarily I feel like these comments have limited impact, my take is the market is starting to adjust its views of future Fed actions.  After all, the rationale to cut rates is hard to understand if the economic data continues to rise alongside inflation.  As of this morning, the market is pricing in a 93% probability of a November cut and a 73% probability of a December one as well.  While I agree November is a necessity for them to save face, I think December is a much longer shot than that based on recent data.

With the last two weeks ahead of the election upon us, things are heating up further and most focus will be there.  Given the secondary nature of this week’s data, my suspicion is that absent a massive surprise, or a really consistent theme amongst the Fed speakers that rates are going to go a lot lower soon, the dollar is going to continue its recent rebound.

Good luck

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Panic Attack

Posted on by

The FX Poet will be in Nashville at the AFP Conference October 21-22, speaking about effective ways to use FX options in a hedging program.  Please come to the presentation on Monday at 1:45 in Grand Ballroom C1 if you are there.  I would love to meet and speak.
 
Said Madame Lagarde, we’re “on track”
To make sure inflation gets back
Below two percent
So, we can prevent
A government panic attack
 
The subsequent news from the East
Is Chinese growth, once more, decreased
Their five-percent goal
Ain’t on cruise control
So, Xi needs more skids to be greased

 

See if you can find the conundrum in the ECB statement issued yesterday after they cut interest rates 25bps, as expected, taking the Deposit Rate down to 3.25%,. [emphasis added]

“The incoming information on inflation shows that the disinflationary process is well on track. The inflation outlook is also affected by recent downside surprises in indicators of economic activity. Meanwhile, financing conditions remain restrictive.

Inflation is expected to rise in the coming months, before declining to target in the course of next year. Domestic inflation remains high, as wages are still rising at an elevated pace. At the same time, labour cost pressures are set to continue easing gradually, with profits partially buffering their impact on inflation.”

While I realize that I am just an FX guy, and that my education at MIT was far more focused on numbers than words, I cannot help but read the highlighted phrases and be confused how the conclusion of high domestic inflation and expectations for it to rise means the disinflationary process is “well on track.”  Of course, it is important to remember that Madame Lagarde is a politician, not an economist nor banker nor any other background familiar with numbers, so perhaps she is the one that doesn’t understand.  Either that or as with every politician she is simply lying.

Regardless, as you can see in the chart below, the market response in the wake of the announcement was to sell the euro as interest rate traders priced in a December rate cut as well.

Source: tradingeconomics.com

The juxtaposition of US and Eurozone data remains the key here and as yesterday’s US numbers showed, the long-awaited recession continues to be postponed.  It becomes ever more difficult to see how the Fed will justify easing policy in any substantive manner if every economic print beats expectations.  (To clarify, Retail Sales printed at 0.4%, 0.5% ex-autos vs. expectations of 0.3% and 0.1% respectively. Philly Fed printed at 10.3 vs. expectations of 3.0 and Initial Claims fell to 241K despite the hurricanes, vs expectations of 260K). 

In the end, all this simply reinforces my view that the euro has further to decline going forward.  I still like the 1.05 – 1.06 level as a target by year end.

Turning to China, last night they had their monthly data dump and the numbers there continue to point to an economy struggling to gain momentum. (The first, black, number is the September data, the second, green or red, number is the August data.)

Source: tradingeconomics.com

Xi’s 5% target, or even if you use their recent “around 5%’ concept, is getting strained.  While Retail Sales there was a positive, the ongoing disintegration of the housing/property market is a major problem.  Now, all this data represents activity before the plethora of stimulus measures that have been announced.  However, recent equity market performance there, if using as an indicator of the belief that the stimulus was going to be effective, had shown a substantial decline from the early sugar highs back in September immediately following the first stimulus announcements.

With that in mind, PBOC Governor Pan Gongsheng strongly hinted that there would be another interest rate cut next week, as the government struggles to not only convince investors that they have things under control, but to also implement the measures already described.  Now, last night, after Pan hinted at the rate cuts, along with other comments regarding the funds allocated to help companies buy back shares, Chinese equity markets rose sharply in the afternoon session, as per the below chart, rising 3.6% on the day.

Source: Bloomberg.com

Once again, I will highlight the irony of the Chinese Communist Party focusing on the epitome of capitalism, the equity market, as a key means of economic improvement and a key signal that they are on the right track.

That was really all the big news since I last wrote.  Let’s look at the overall market activity.  After yesterday’ lackluster US session, Japanese shares (+0.2%) managed to edge a bit higher and Hong Kong (+3.6%) mirrored Chinese mainland shares.  The other beneficiary of the Chinese stimulus discussion was Taiwan (+1.9%) but Australia (-0.9%), Korea (-0.6%) and a host of other regional exchanges did not seem to appreciate the effort.  In Europe, only the UK (-0.3%) is really under any pressure although the gains on the continent are not terribly impressive with the CAC (+0.5%) the leader at this point.  Most other markets there are little changed to slightly higher.  As to US futures, at this hour (7:20), they are higher by about 0.25%.

In the bond market, after yesterday’s much stronger than expected US data, Treasury yields jumped 7bps and this morning have edged higher by another 1bp to get back to 4.10%.  However, on the continent, sovereign yields this morning are lower by between -2bps and -4bps after yesterday’s ECB action and comments.  The one exception here is the UK, where gilt yields are higher by 2bps after UK Retail Sales data printed much stronger than expected at +0.3% in September, vs. -0.3% expected.

In the commodity markets, oil (-0.4%) is modestly lower this morning but really going nowhere for now as evidenced by the chart below.  Once the word had come that Israel was not going to target Iranian oil infrastructure and the price fell, it has basically been flat.

Source: tradingeconomics.com

As to the metals complex, gold (+0.6%) continues its ongoing rally and is at yet another new all-time high, above $2700/oz this morning, as demand continues to be present from all segments.  However, this morning, all the metals are rallying with silver (+1.0%) and copper (+1.5%) showing even better performance.  The combination of continued solid data from the US and hopes for a return to Chinese demand seem to be the drivers.

Finally, the dollar is closing the week on a down note, as traders reduce positions and take profits ahead of the weekend.  During the week, the dollar rose against virtually every one of its main counterparts in both the G10 and EMG blocs.  Again, the big picture here is that for the dollar, good US economic data is going to continue to benefit the greenback, and we will need to see not just one bad number, but a series of them before the dollar truly suffers.

On the data front, we see Housing Starts (exp 1.35M) and Building Permits (1.46M) at 8:30 this morning and then we hear from three more Fed speakers (Bostic, Kashkari and Waller) with Bostic making two appearances.  At this stage, despite the strong data, the Fed funds futures market is pricing in a 92% probability of a 25bp cut next month and then a 75% probability of another one in December.  I know that Powell seems desperate to cut rates, but if the data continues to show strength, the case to do so is going to be much harder to make.  That doesn’t mean he won’t do it, but if he continues down that path, it just means that inflation will return that much sooner.  

Good luck and good weekend and reach out if you are in Nashville at the AFP!

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Nearly Obscene

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The FX Poet will be in Nashville at the AFP Conference October 21-22, speaking about effective ways to use FX options in a hedging program.  Please come to the presentation on Monday at 1:45 in Grand Ballroom C1 if you are there.  I would love to meet and speak.
 
While here in the States we have seen
Inflation that’s nearly obscene
In Europe, inflation
In ‘bout every nation
Has fallen much more than foreseen
 
The narrative there has adjusted
As all of their models seem busted
So, cuts with more speed
We’ll soon see proceed
Though central banks still aren’t trusted

While Fed speakers are trying to claim victory over inflation, whether or not that is reality, the situation in Europe is a bit different.  In fact, headline inflation has fallen quite dramatically virtually across the board as evidenced by the below chart.

Now, a critical piece of this decline is the fact that energy prices have fallen dramatically in the past year with Brent Crude (-16.5%) and TTF NatGas (-18.9%) leading the way lower.  In fact, core inflation data, for the few nations that show it, remains above that 2% target with the UK (Core 3.2% Y/Y) the latest to report this morning.  One other thing to remember is that in the wake of the Covid pandemic, no nation printed and spent nearly as much money as the US on a relative basis, let alone an absolute basis, so there was less fiscal largesse elsewhere.

Yet, the fact remains that headline inflation throughout Europe and the UK has fallen below the 2% targets and so the narrative has now shifted to see more aggressive rate cuts by the central banks everywhere.  This will be part of the discussion tomorrow at the ECB, where most analysts are looking for a 25bp cut although some are calling for 50bps, and the market is pricing more than 40bps at this point.

You know what else is pricing a larger rate cut by the ECB?  The FX market.  Yesterday, the euro fell below the 1.09 level for the first time in more than two months (remember that chart of the double top formation from Monday?) and the single currency has fallen more than 2% in the past month.  Similarly, the pound, after today’s softer than expected CPI readings, has fallen -0.35% this morning, the worst performer in the G10, and is now lower by nearly -1.5% in the past month and looking like it has reversed the uptrend that existed through the summer and early autumn.

Ultimately, my point is that the narrative about rate cuts is shifting to a more accelerated mode in Europe and the UK (where talk of a 50bp cut is making the rounds as well) while here in the States, a 25bp cut is not fully priced in even after yesterdays’ much weaker than expected Empire State Manufacturing Index (-11.9 vs. exp 3.8 and last month’s +11.5).  If you want a reason to explain the dollar’s resilience, you could do worse than the fact that economies elsewhere in the world are lagging the performance here.

Speaking of the Fed, yesterday’s surprise Fedspeak came from Raphael Bostic, Atlanta Fed president, when he explained that he only foresees one more rate cut in 2024.  That is quite a different story than we have been hearing from the rest of the FOMC speakers, who seem completely on board with at least 50bps of cuts and seemingly could be persuaded to head toward 75bps.  There is still much to learn between now and the next FOMC meeting the day after the election here, but despite Bostic’s comments, I believe the minimum we will see before the end of the year will be 50bps.

Ok, that was really all the action overnight.  Yesterday’s disappointing US equity performance, with all three major indices lower by at least -0.75% (I thought that was outlawed 🤣) was followed by similarly weak performance in Asia with the Nikkei (-1.8%) leading the way lower as tech shares underperformed, but further weakness in China (-0.6%) as Godot seems more likely to arrive than the Chinese stimulus.  Throughout the region, only Thailand (+1.2%) managed any gains after the central bank there cut rates 25bps in a surprise move seeking to foster a better growth situation.  In Europe, only the UK (+0.6%) is rallying on the strength of the idea that lower inflation will encourage a 50bp cut from the BOE when they meet the day after the Fed. But otherwise, red is the color of the day in Europe with losses ranging from -0.1% (Spain) to -0.6% (France).  Meanwhile, US futures are a touch firmer at this hour (7:15), by just 0.2%.

In the bond market, yields are lower across the board after that weak Empire State number encouraged the slowing economy narrative and the lower inflation prints in Europe and the UK have weighed on yields there this morning.  So, Treasury yields (-2bps) are lagging most of Europe (Bunds -3bps, OATs -3bps) and UK Gilts (-8bps) are all about the data this morning.  Even JGB yields (-1bp) got into the act.

In the commodity space, oil (-0.5%) is continuing its recent decline, although yesterday it managed to bounce a bit and close above the $70/bbl level where it still sits, barely.  But the metals complex is having another good day with gold (+0.6%) pushing to new all-time highs as western investors are finally following Chinese and Indian investors as well as global central banks.  The lower interest rates certainly help here.  Similarly, we are seeing gains in the other metals (Ag +1.2%, Cu +1.1%) as stories regarding shortages for both metals in the long-term resurface given the lack of new mining activity and increased demand driven by the idea of increased solar and electricity needs respectively.

Finally, the dollar, overall, is little changed, holding onto its recent gains although with a mixed performance this morning.  ZAR (+0.5%) is this morning’s leader on the back of the metals market gains, and we have seen strength in KRW (+0.3%) as well.  However, elsewhere, movement is small and favoring the dollar (HUF -0.2%, CZK -0.2%) and we’ve already discussed the euro and pound.  Interestingly, the THB (+0.45%) rallied after the rate cut on the back of equity inflows.

There is no major data set to be released this morning and no Fed speakers on the current calendar, although as always, I suspect we will still hear from some of them.  Madame Lagarde speaks this afternoon, and given the ECB meeting tomorrow, there will be many interested listeners.

Overall, the themes seem to be that Eurozone inflation is sinking and rate cuts are coming.  That should keep some downward pressure on European currencies vs. the dollar, at least until we see or hear something that describes a more aggressively dovish Fed.  The one truly consistent feature of these markets has been the rally in gold which seems to benefit from fear, inflation and lower rates, all of which appear to be in our future.

Good luck

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