Tag Archives: investing

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

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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.
 
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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Fervent Dreams

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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 C2 if you are there.  I would love to meet and speak.
 
Said Governor Waller, inflation
Is falling and so there’s temptation
To cut really fast
And if our forecast
Is right, there will be celebration
 
The problem is, if we are wrong
And price rises we do prolong
We’ll get all the blame
At which point we’ll frame
Our mandate as “jobs must be strong”
 
Meanwhile, in China it seems
That President Xi’s fervent dreams
Of finding more growth
Is stuck cause he’s loath
To listen to Pan Gongsheng’s schemes

 

First, a mea culpa, as while banks and the bond market were closed yesterday, the equity market was open, and the rally continued.  Although, that doesn’t really change anything I wrote yesterday.  But the stories that got the press yesterday were about Fed Governor Chris Waller and his speech.  Waller is considered one of the key FOMC members as his policy research has been consistent and more accurate than most others, as well as because he doesn’t appear to be nearly as partisan as some other governors.

At any rate, he eloquently made the case that the Fed was going to continue to cut rates, albeit perhaps more slowly than previously expected, because even though economic activity remains strong and inflation is above our goals, we remain confident that we are still going to achieve our targets.  In fact, I think his words are worth reading directly [emphasis added]:

“Whatever happens in the near term, my baseline still calls for reducing the policy rate gradually over the next year. The median rate for FOMC participants at the end of 2025 is 3.4 percent, so most of my colleagues likewise expect to reduce policy over the next year. There is less certainty about the final destination…While much attention is given to the size of cuts over the next meeting or two, I think the larger message of the SEP is that there is a considerable extent of policy restrictiveness to remove, and if the economy continues in its current sweet spot, this will happen gradually.”

On to the next story, China and the still-to-come stimulus package.  According to Bloomberg, there is a new plan to allow local governments to swap up to CNY 6 trillion (~$840B) of their outstanding “hidden” debt, which is in the name of special funding vehicles, to straight local government debt, which should carry lower interest rates.  The problem is that both the size of this program and its ultimate effect are seen as insufficient to address the issues.  Certainly, reducing interest payments will help a bit, but the debt problem, along with the property problems, are so much larger than this, at least 10X the proposed CNY 6 trillion, that this will barely make a dent. 

Ultimately, the only solution that seems viable is that the central government borrows more money (its current outstanding debt is at just 25% of GDP) and funds new projects, gives it out to citizens in a helicopter money drop, or something other than investing in more production for exports.  This seemed to be where PBOC Governor Pan Gongsheng was headed several weeks ago.  Alas, President Xi has spent a decade stripping power away from the private sector and amassing his own.  I find it highly unlikely he will willingly cede any of that power simply to help his citizens.  Recent analyst updates for Chinese GDP growth in 2024 have fallen back below his 5.0% target, and I imagine they are correct.

Which brings us to this morning, where the biggest market mover is oil (-5.1%) which is falling on a combination of several things.  First, news that President Biden has convinced Israeli PM Netanyahu to not strike Iran’s oil fields, thus removing a key supply issue and war premium.  Next, the fact that China’s stimulus efforts are so weak implies lower demand from the world’s largest oil importer, and finally, OPEC just cut its forecast for oil demand for 2024 and 2025 although they have not reduced their supply estimates.  The upshot is that oil has given back all its gains of the past month and is presently back at its longer-term technical support level of $70/bbl.  Where it goes from here is anybody’s guess, but absent a resurgence of the Middle East war premium, I suspect it has further to decline.

As to the metals complex, gold (+0.2%) continues to ignore all the signs that it should be falling and is holding within 1% of its recent all-time high prints amid stories that global central banks continue to acquire the barbarous relic.  However, both silver and copper are feeling some stress amid the weaker Chinese growth story.  

In fact, that weaker Chinese growth story hit equities there hard with the CSI 300 (-2.7%) and Hang Seng (-3.7%) both falling sharply on the disappointing fiscal plans.  However, the rest of Asia took their cues from the US rally, and we saw strength virtually across the board.  Interestingly, Taiwan’s TAIEX (+1.4%) completely ignored the China story, perhaps an indication its economy is not nearly so tightly linked as in the past.  In Europe, the picture is mixed with the DAX (+0.3%) rallying on a slightly better than expected German ZEW Economic Sentiment Index (13.1, up from 3.6), while Spain’s IBEX (+0.3%) rallied on better than expected inflation data.  However, weakness is evident in France (CAC -0.8%) on weakness in the luxury goods sector (the largest part of the index) suffering from weaker Chinese demand.  US futures are essentially unchanged at this hour (7:15) as we await Retail Sales later this week.

In the bond market, yields have fallen across the board (Treasuries -3bps, Bunds -4bps, OATs -5bps) as lower oil prices and concerns over slowing growth have investors thinking inflation will continue its downward trend.  Well, at least some investors.  One of the more interesting recent market conditions is the performance of inflation swaps, which have seen implicit inflation expectations rise more than 50bps in the past five weeks as per the chart below from @parrmenidies from X (fka Twitter).

This likely explains the sharp yield rally since the Fed cut rates, but does not bode well for future inflation declining.

Finally, the dollar is little changed net this morning.  Not surprisingly, given the ongoing disappointment of China’s stimulus ,CNY (-0.5%) is amongst the worst performers of the session.  But we have seen weakness in ZAR (-0.3%), CLP (-0.4%) and KRW (-0.4%) to show that EMG currencies are under pressure.  As to the G10, movement has been much smaller with JPY (+0.3%) the biggest mover overall and one of the few gainers.

On the data front, Empire State Manufacturing (exp 2.3) is the only number coming out and we hear from three more Fed speakers (Daly, Kugler and Bostic).  That cleanest shirt analogy remains the most apt these days with the US spending its way to better short-term results and adding long-term problems.  But the market is happy for now.  With that in mind, I don’t see a reason for the dollar to suffer much in the near term.

Good luck

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Inflation’s Not Dead

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It turns out inflation’s not dead
Despite what we’ve heard from the Fed
Will Jay now admit
His forecasts are sh*t
Or are there more rate cuts ahead?
 
To listen to some of his friends
They’re still focused on the big trends
Which they claim are lower
Though falling much slower
If viewed through the right type of lens

 

I guess if you squint just the right way, the trend in inflation remains lower.  I only guess that because that’s what we heard from three Fed speakers yesterday, Williams, Goolsbee and Barkin, but to my non-PhD trained eye, it doesn’t really look that way.  Borrowing the chart from my friend @inflation_guy, Mike Ashton, below are the monthly readings for the past twelve months for Core CPI.

As I said, and as he mentioned in his CPI report yesterday, it is much easier to believe that the outliers are May through July than the rest of the series.  But remember, I am not a trained PhD economist, so it is entirely possible that I simply don’t understand the situation.

At any rate, both the core and headline numbers printed higher than forecast which saw bonds sell off and the dollar rally while stocks edged lower.  Arguably, the big surprise was that commodity prices raced ahead with oil (+3.0% yesterday) and gold (+0.75% yesterday) both showing strength.  It seems that both of these markets, though, benefitted from rumors that Israel is getting set to finally retaliate against Iran for the missile bombardment last week, and fears of a significant disruption in oil markets, as well as a general rise in the level of uncertainty, has been sufficient to squeeze out a bunch of recent short positions.

In China, investors are waiting
For details on how stimulating
The plans Xi’s unveiled
Will truly be scaled
And if they’ll be growth generating

The other topic du jour is China, where tomorrow, FinMin Lan Fo’an is due to announce the details of the fiscal stimulus that was sketched out right before the Golden Week holiday, and which has been a key driver in the extraordinary rise in Chinese equities since then.  Alas, last night, as traders and investors prepared for these announcements, selling was the order of the day and the CSI 300 (-2.8%) fell sharply amid profit taking.  I find it telling that they are waiting to make these announcements while markets are not open, a sign, to me at least, that they are likely to be underwhelming.  Current expectations are for CNY 2 trillion (~$283 billion) of fiscal stimulus, which while a large number, is not that much relative to the size of the Chinese economy, currently measured at about $17 trillion.  And unless they address the elephant in the room, the decimated housing market, it seems unlikely to have a major positive impact over the long term. 

That said, Chinese stocks have become one of the hottest themes in the market with many analysts claiming they are vastly undervalued relative to US stocks.  However, I saw a telling chart this morning on X, showing that flows into Chinese stocks from outside the nation, the so-called northbound flows from Hong Kong, especially when compared to flows from the mainland to Hong Kong, have been awful, despite this recent rally.  As with many things regarding the Chinese economy and markets, the headlines can be deceiving at times in an effort to make things look better than they are.

While we did see the renminbi rally sharply after those initial stimulus announcements, it has since retraced most of those gains.  I cannot look at the situation there without seeing an economy that has serious structural imbalances and a terrible demographic future.  Meanwhile, the biggest problem is that President Xi has spent the past decade consolidating his power and eliminating much of the individual vibrancy that had helped the nation grow so rapidly.  Ultimately, I see CNY slowly depreciating as it remains the only relief valve the Chinese have on an international basis.

With that in mind, let’s take a look at how markets responded to the US CPI data and what other things may be having impacts.  Ultimately, US equity markets regained the bulk of their early losses yesterday to close marginally lower.  We’ve already mentioned China’s equity woes and Hong Kong was closed last night for a holiday.  Tokyo (+0.6%) managed a small gain, tracking the weakness in the yen (-0.25%) while the bulk of the region drifted modestly lower.  It seems many traders are awaiting this Chinese news to see how it will impact the rest of Asia.  As to European bourses, the movement here has also been di minimus with the FTSE 100 (-0.2%) the biggest mover after its data releases showing that GDP continues to trudge along slowly, growing only 1.0% Y/Y.  Continental exchanges are +/- 0.1% from yesterday, so no real movement there.  US futures, too, are essentially unchanged at this hour (7:00).

In the bond market, yields continue to edge higher with Treasuries gaining 3bps and European sovereigns all looking at gains of between 3bps and 5bps.  An interesting interest rate phenomenon that has not gotten much press is that the fact that at the end of September, the General Collateral Repo rate surged through the upper bound of the Fed funds rate, a condition that describes a potential dearth of liquidity in the markets.  

Source: zerohedge.com

The implication is that QT may well be ending soon in order for the Fed to be certain that there are sufficient bank reserves available for banks to meet their regulatory targets and not starve the economy of capital.  It has always been unclear how the Fed can start cutting rates while continuing to shrink the balance sheet as that was simultaneously tightening and easing policy, but it appears that we are much closer to universal policy ease, something else that will weigh on the dollar and support commodity prices over time.

Speaking of commodities, after yesterday’s rally, this morning, the metals complex is continuing modestly higher (Au +0.3%, cu +0.4%) but oil (-0.8%) is backing off a bit.  So much of the oil trade appears linked to the Middle East it is very difficult to discern the underlying supply/demand dynamics right now.

Finally, the dollar, after several days of strength, is consolidating and is little changed to slightly higher.  The DXY is trading right at 103 and the euro is hovering just above 1.09 with USDJPY at 149.00.  Several weeks ago, these numbers would have seemed ridiculous given the then current view of the Fed aggressively cutting rates.  But now, all that bearishness is fading, and it is true vs. almost every currency, G10 or EMG this morning.

On the data front, PPI leads the way this morning although given we already got the CPI data, it will have virtually no impact I would expect.  Estimates are for headline (0.1% M/M, 1.6% Y/Y) and core (0.2% M/M, 2.7% Y/Y).  As well, we get Michigan Sentiment (70.8) at 10:00 and we will hear from several more Fed speakers, including Governor Bowman, the dissenter at the FOMC meeting who looks quite prescient now.  One thing to note is yesterday’s Initial Claims data was much higher than expected at 258K, but that was attributed to the effects of Hurricane Helene, and now that Hurricane Milton has hit, I expect that those claims numbers will be a mess for a few more weeks before all the impact has passed through.

While Fedspeak remains far more dovish than the data, my take is if the data continues to show economic strength, especially if the next NFP release, which is just before the FOMC meeting, is strong again, the Fed will be hard pressed to cut even 25bps then.  For now, good economic news should support the dollar and weigh on bonds.

Good luck and good weekend

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New Calculation

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The markets in China retraced
One-fifth of their rally post-haste
Not everyone’s sure
The promise du jour
Is where traders’ trust can be placed
 
In Europe, attention’s now turned
To lesson’s the ECB’s learned
Their new calculation
Shows Europe’s inflation
No longer has members concerned

 

Let’s take a trip down memory lane.  Perhaps you can remember the time when the Chinese economy seemed to be faltering, and the Chinese stock markets were massively underperforming their peers.  That combination of events was enough to get President Xi to change his tune regarding stimulus and over the course of several days, first the PBOC and then the government announced a series of measures to support both the economy and the stock market specifically.  In fact, way back on September 24th I described the measures taken in this post.  Yep, that was two whole weeks ago!  The initial response was a rip-roaring rally in Chinese equity markets (~34%), and substantial strength in the renminbi.  Analysts couldn’t sing Xi’s praises loudly enough as they were certain that the government there was finally doing what was necessary to address the myriad issues within the Chinese economy.

But a funny thing happened on the way to this new nirvana, investors realized that all the hype was just that and the announced measures, while likely to help at the margins, were not going to change the big picture.  Ultimately, China remains in a difficult situation as its entire economic model of mercantilistic practices is running into populist uprisings everywhere else in the world.  And since domestic Chinese demand remains lackluster given the estimated $10 trillion that has evaporated in the local property markets, people at home are never going to be able to be a sufficiently large market for all the stuff that China makes.  

As this realization sets in, there is no better picture of this change of heart than the chart below showing the recent performance of the CSI 300.

Source: tradingeconomics.com

Last night’s 7% decline, which followed a similar one in Hong Kong the night before, has certainly stifled some of the ebullience that existed two weeks ago.  Now, the market has still gained a very healthy 25% from its lows last month, certainly nothing to sneeze at, but are the prospects really that great going forward?  Only time will tell, but I am not confident absent another significant bout of fiscal stimulus, something on the order of a helicopter money drop.  And that doesn’t seem like Xi’s cup of tea.

Turning to Europe, the economy there remains in the doldrums with some nations far worse off than others. Germany remains Europe’s basket case, as evidenced by this morning’s Trade Balance release there.  While the balance grew to €22.5B, that was because imports fell a larger than expected -3.4%, a signal that domestic activity is still lagging.  With the ECB set to meet next week, the market is currently pricing a 90% probability of a 25bp rate cut with talk of another cut coming at the following meeting as well.

You may remember that Madame Lagarde was insistent that there was no guaranty that the ECB would be cutting rates at every meeting once they started, rather that they would be data dependent.  But with the combination of slowing economic activity, especially in Germany, and the ensuing political angst it has created amongst the governments throughout Europe, it seems that many more ECB members have seen the inflation light and have declared a much higher degree of confidence that it will be at, or even below, their 2% target soon enough.  And maybe it will be.  However, similar to the Fed’s prognosticatory record, the ECB has a horrific track record of anticipating future economic variables.  A key problem for Europe is the suicidal energy policies they continue to promulgate.  Granted, some nations are figuring out that wind and solar are not the answer, but Germany is not one of them, at least not yet.  And as long as these policies remain in place and electricity prices continue to rise (they are already the highest in the world) then inflation pressures are going to continue.

Bringing this conversation around to more than macroeconomic questions, the market impact of recent data is becoming clearer.  While the US economy continues to show resilience, as evidenced by that blowout NFP report last Friday, and Europe continues to falter, the previous assumptions on rate movements with the Fed being the most aggressive rate cutter around are changing.  The result is the euro, which has slipped more than 2% in the past two weeks, is likely to continue to fall further, putting upward pressure on Eurozone inflation and putting the ECB in a bind.

Ok, those seem to be the drivers in markets today as we all look forward to tomorrow’s US CPI report.  A tour of the rest of the overnight session shows that Japan (+0.9%) continues to rebound from its worst levels a month ago as worries of aggressive monetary policy tightening continue to abate.  The latest view is the BOJ won’t move until January at the earliest.  The rest of Asia was mixed with the biggest gainer being New Zealand (+1.7%) which responded to the RBNZ cutting rates by 50bps, as expected, but explaining that further cuts were in line as they expected inflation to head below the middle of their 1% – 3% target range.  In Europe, the picture is mixed with more gainers than laggards but no movement of more than 0.3%, a signal that not much is happening.  US futures are similarly little changed at this hour (7:45) this morning.

In the bond market, Treasury yields have edged higher by 1bp and continue to trade above 4.00%, a level that had been seen as critical when the market moved below that point.  Given the overall lack of activity today, it should be no surprise that European sovereigns are also within 1bp of yesterday’s closing levels while JGB yields, following suit, rose a single basis point overnight.  It feels like the market is awaiting the CPI data tomorrow to make its next moves.

Oil prices were clobbered yesterday, falling nearly 6% at one point on the session before a modest late bounce.  This morning, they are slipping another -0.5% as market participants seem tired of waiting for a Middle East conflagration and instead have focused on the fact that more supply is coming on the market amidst softening demand.  Libya is back to full output of 1.2mm bpd and OPEC is still planning to increase production while China and Europe show softer growth.  That China story continues to undermine copper (-1.6%) although the precious metals, after downdrafts yesterday, are little changed this morning.

Finally, the dollar continues to find support on the strength of reduced Fed rate cut expectations alongside growing expectations for cuts elsewhere.  NZD (-1.0%) is today’s laggard though the rest of the G10 are all showing declines.  In the EMG bloc, the dollar is also higher universally, but the moves here are more modest.  In fact, away from NZD, the next largest declines have been seen in NOK (-0.6%) and SEK (-0.5%), but LATAM, APAC and EEMEA are all softer as well.

On the data front, this morning brings EIA oil inventories, with a net draw expected and then at 2:00 we see the FOMC Minutes from the last meeting.  But those are stale given the payroll report.  Instead, we hear from seven more Fed speakers today which will set the tone.  Yesterday’s speakers seemed to have been on the same page as Monday’s, with caution the watchword but rate cuts described as necessary despite the payroll report.  Whatever there mental model is, it is clearly pointing to rate cuts are necessary.

It feels like today is going to be quiet as markets await tomorrow’s CPI data.  The dollar seems likely to retain its bid, though, as the US is still the ‘cleanest shirt in the dirty laundry’ and global investors seem determined to own assets here.

Good luck

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Condemned to Damnation

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The Chinese returned from vacation
But hopes for more subsidization
Were rapidly dashed
With early gains trashed
And Hong Kong condemned to damnation
 
Meanwhile, what we heard from the Fed
Was further rate cuts are ahead
They all still believe
That they will achieve
Their goal and inflation is dead

 

Talk about buzzkill.  The Chinese Golden Week holiday is over and all the hopes that the National Development and Reform Commission Briefing would highlight new stimulus as well as further details of the programs announced prior to the holiday week were dashed.  Instead, this group simply confirmed that they were going to implement the previously announced plans and insisted that it would be enough to get the economy back to its target growth rate of 5.0%.  You may recall that the government had promised funds to support the stock market and some efforts to support the housing market, but there was little in the way of direct support for consumers.  While the initial market response to the stimulus measures was quite positive, there is a rapidly growing concern that those measures will now fall short.  In the end, much of the joy attached to the stimulus story has evaporated.  

The market response was telling as while onshore stocks rallied (CSI 300 +5.9%) they closed far below their early session highs and the Hang Seng (-9.4%) in Hong Kong, which had been open all during the Golden Week holiday and rallied steadily through that time, retraced sharply, giving back all those gains and then some (see below). 

Source: Bloomberg.com

In the end, it is difficult to look at the Chinese story and feel confident that the currently announced stimulus packages are going to be sufficient to make a major dent in the problems there.  It appears that the limits of a command economy may have been reached, a situation that will not benefit anyone.

Turning to the first batch of Fed speakers, yesterday we heard from Governor Adriana Kugler, St Louis Fed president Alberto Musalem and Chicago Fed president Austan Goolsbee.  While Mr Goolsbee explained, “I am not seeing signs of resurgent inflation,” it does not appear he is really looking.  As to Ms Kugler, she “strongly supported” the 50bp cut and when asked about the strong NFP report explained that looking through the data, “several metrics point toward labor-market cooling”, despite the strong report.  Finally, Mr Musalem, although he supported the 50bp cut, remarked, “Given where the economy is today, I view the costs of easing too much too soon as greater than the costs of easing too little too late.”

Net, it appears that recent data upticks have not had any impact on their views that they must cut rates further and are prepared to do so every meeting going forward.  The Fed funds futures market has now priced 25bp rate cuts into both the November and December meetings, although that is reduced significantly from the nearly 100bps that was priced prior to the NFP report.

Away from those stories, though, there was not much other news of note overnight.  Russia/Ukraine has moved to page 32 of the newspapers and is not even discussed anymore.  Israel/Hamas/Hezbollah/Iran has more tongues wagging but at this point, it has become a waiting game for Israel to respond to the missile barrage from Iran last week.  Given we are between Rosh Hashanah and Yom Kippur, it seems unlikely to me that we will see anything prior to the weekend.  China fizzled after vacation.  The US election remains a tight race at this point with no clear outcome.  Hurricane Helene and the aftermath is being superseded by Hurricane Milton, due to hit the Tampa area shortly, but again, the latter two, while horrific tragedies, or potential tragedies, are not really market stories.

So, what’s driving things?  Arguably, interest rate policies and bond markets are having the biggest impact on financial markets right now.  With that in mind, the fact that 10-year Treasury yields are now back above 4.0% for the first time since August seems to be the main event.  Why, you may ask, would bond yields have backed up so far so fast?  Ultimately, it appears that bond investors are losing confidence in the central bank inflation story, the idea that they have it under control.  First off, oil prices, though lower today by -1.9%, have still gained more than 8.3% in the past week with gasoline prices higher by nearly 7% in the same period.  This does not bode well for lower inflation prints going forward.  Second, the combination of the much stronger than expected NFP report and the Fed’s willful ignorance of the implications is also tipping the marginal investor toward seeing more inflation going forward.

Ok, so how have these things impacted markets?  Well, aside from China/HK and following yesterday’s US declines, there were far more laggards (Japan, Singapore, Korea, Australia) than leaders (India) across Asia with Tokyo (-1.0%) the next worst performer.  In Europe, all the screens are red this morning led by the UK (-1.1%) but with losses between -0.2% in Germany after a much better than expected IP reading, to -0.6% in France.  Oftentimes, it seems like Europe is trading on yesterday’s US news, and that is the case today as US futures are pointing higher by about 0.4% at this hour (7:40).

Bond yields, which have been climbing for the past week, are little changed this morning, with neither Treasuries nor European sovereigns showing any movement of note.  However, one need only look at the chart below to see the trend over the past month.

Source: tradingeconomics.com

Aside from the oil retreat mentioned above, which seems to be a response to the absence of that Israeli action so widely expected, copper (-2.6%) is the laggard as disappointment over the Chinese stimulus dud pushed down demand expectations.  Gold (+0.3%) though, remains in demand and is hovering just below its recent all-time highs.

Finally, the dollar is backing off a bit this morning, although as evidenced by the chart below of the DXY, it has been on a bit of a tear for the past week, so consolidation should not be a surprise.

Source: tradingeconomics.com

However, overall, today’s price activity has been relatively muted with all G10 currencies within 0.2% of yesterday’s closing levels and the biggest movers in the EMG bloc (PLN +0.4%, ZAR -0.4%) hardly showing much more motion.  One exception is IDR, where the central bank intervened overnight after six consecutive days of rupiah weakness which saw the currency decline -4.5%.

On the data front this morning, the NFIB Small Business Optimism Index was released at a slightly softer than expected 91.5 although the Uncertainty sub index it a record high of 103 indicating small businesses are in a tough spot.  Otherwise, the only number is the Trade Balance (exp -$70.6B) and then a bunch more Fed speakers, all different ones than yesterday.  We also see the 3-year Note auction, so that may give us some clues as to the demand story for Treasuries ahead of the CPI data on Thursday.

The ongoing conflicting data has many, if not most, investors confused.  I believe that people will be seeking more clarity on Thursday and so until then, absent another geopolitical shock, we are likely to see modest market movements overall.  However, with the Fed hell-bent on cutting, I continue to fear inflation starting to reaccelerate and the dollar starting a more substantive decline.

Good luck

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