Tag Archives: investing

Inciting

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It’s true that I may seem passe
But when I heard words people say
I truly expected
The words I detected
To mean what they did yesterday

So, words like cease-fire depict
A time when two sides don’t inflict
The other with fighting
Or, likewise, inciting
An outcome the words contradict

I have always been a plain meaning of the words sort of fellow, using words in their most common form unless there is some extraordinary opportunity for a pun.  And I don’t get many of those.  But these days, government spokespeople sound more like Humpty Dumpty than Walter Cronkite, that’s for sure.

“When I use a word,’ Humpty Dumpty said in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.’
’The question is,’ said Alice, ‘whether you can make words mean so many different things.’
’The question is,’ said Humpty Dumpty, ‘which is to be master — that’s all.”

Lewis Carroll, Through the Looking Glass

Frankly, Humpty Dumpty had nothing on either the Iranians or the US in this regard.  After all, ostensibly there is a cease-fire underway, and yet two days in a row we have had Iran attack ships in the Strait of Hormuz and the US respond.  I’m sorry, that doesn’t sound much like a cease-fire to me, but then, I’m just a poet.

While Tuesday’s activities had virtually no impact on the oil markets, with crude slipping further, and equities continuing their ride higher, last night, there was a modest bounce although so far, WTI is still trading around $90/bbl, hardly a signal that the end is nigh.  But net, risk aversion is more evident this morning.  I guess one day’s worth of skirmishes were believed to be limited, but now, two days in a row, people have concerns.

And that’s where things stand this morning, uncertainty over whether the cease-fire is going to remain in place and uncertainty as to whether talks are going to continue.  My take is that, like every conflict, whether military or commercial or even governmental, the question is which side is feeling the pain more deeply such that they must alter their strategies.  There was an interesting article in the WSJ describing that exact tradeoff as the blockade is successfully hurting the Iranian economy more than the closure of Hormuz is hurting the US economy.  But given the lack of coherent leadership in Iran, with both IRGC hardliners and elected officials tending to be more pragmatic, it remains unclear who blinks first.

So, let’s see how markets are responding this morning.  Yesterday’s lackluster US equity session, where miniscule gains were seen was followed by a somewhat negative picture in Asia as the second attacks made headlines.  Tokyo (-0.5%) and HK (-1.3%) were under pressure as were Korea (-0.5%), Taiwan (-1.4%) and Australia (-1.4%).  In fact, almost every market in the region was lower except China (+0.1%) which managed a tiny gain.  European bourses are all lower this morning as well, with the UK (-0.8%) leading the way down while Spain (-0.4%), France (-0.3%) and Germany (-0.2%) slip less dramatically.  The little data we saw showed weak Spanish Retail Sales and negative Eurozone Confidence indicators (Consumer (gray bars) -19, Industrial (blue bars) -8).

Source: tradingeconomics.com

But let’s face it, looking at this chart, things have been pretty dire in Europe for a while now.  One wonders how long they can continue their current path of energy insanity and over regulation, although the current crop of leaders is clearly committed!  As to US futures, at this hour (6:30) they, too, are pointing lower led by the NASDAQ (-0.8%) with the other indices just barely down in the session.

In the bond market, the fears of runaway inflation and yields from earlier this month have clearly abated and the 10-year is back around 4.50%.  I am sure Secretary Bessent would like to see it somewhat lower, but this is hardly an apocalyptic level.  One of the things that appears to be underlying the recent rise in yields has been foreign central bank sales since the beginning of the war.  Not surprisingly, as the dollar rallied on its haven status, as well as the need for dollars to pay higher prices for oil, nations around the world needed to dip into their reserves to support their own currencies (recall, we have seen intervention from Japan, India and Indonesia for certain) and they sell Treasuries as part of that process.  Bloomberg had a nice explanation this morning.  But that takes me back to the idea that US yields are not running away, and if the Iran conflict ends soon, we will see yields head lower again.  As to today’s price action, most markets have seen yields edge higher by 1bp or 2bps, not really demonstrating much.

In the commodity space, oil (+2.5%) has rebounded from the lows yesterday, but as you can see in the chart below, remains right in the middle of its wartime trading range.

Source: tradingeconomics.com

However, something that hits much closer to home, I would suggest, is gasoline, and you can see how that has behaved over the past month.  While it has tracked oil higher today, we have seen a dramatic decline in the price there in the past week as you can see below.  I imagine that will begin to filter through to your local gas station pretty soon.

Source: tradingeconomics.com

Turning to the precious metals, they have been absolute dogs of late with both gold (-1.5%) and silver (-1.5%) finding no traction whatsoever.  One of the theories has been higher yields are weighing on them, and there is certainly truth there, but I must admit, there seems to be a glitch in the long-term story, a story I have long believed, regarding their ultimate value.  Now, remember, markets have a habit of finding the most painful outcome for the most participants, and long gold and silver has been a favorite trade for a while, so perhaps we are simply watching the weakest hands get forced out.  But whatever the case, it is certainly uncomfortable if you are long.

Finally, the dollar is modestly firmer again this morning, but looking at the DXY (+0.2%), it remains well within its trading range of 96.50 – 100.00, this morning trading at 99.38.  It is very difficult to get too excited about very much here as all the major currencies in both the G10 and EMG blocs are trading in lockstep this morning with one exception, BRL (+0.3%) which has managed a modest gain although it is hard to find a direct rationale for that movement.  After all, interest rates haven’t moved enough to change the carry characteristics.  My best bet is that this is simply a reflexive move after several days of weakness.

On the data front, it is a busy morning with Personal Income (exp 0.4%), Personal Spending (0.5%), Q2 GDP (2.0%), PCE (0.5%, 3.8% Y/Y), Core PCE (0.3%, 3.3% Y/Y), Initial Claims (211K), Continuing Claims (1780K) all at 8:30 and then New Home Sales (670K) at 10:00.  We also get the EIA oil inventory data today, with more draws expected.  Adding to that we get NY Fed president Williams speaking this morning.  Yesterday, Governor Cook explained that she was very focused on inflation and thought rate hikes may be needed if things don’t change.  However, that has been the basic understanding since the last FOMC meeting.  I don’t believe they will be hiking rates anytime soon, personally, although cuts are unlikely as well.

And that’s what we have today.  The war and oil remain the key drivers, but there will be keen interest in today’s PCE data to see if there need to be further worries about the Fed moving.  It is difficult to look at the current situation and think the dollar is going to decline soon, and frankly, my take is we are not going to see much movement at all with price consolidation the theme for the next several weeks.

Good luck

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Actively Chided

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Ostensibly, talks are ongoing
However, some fighting is sowing
The seeds of more doubt
That they’ll work it out
Ere Tehran’s surroundings are glowing

But markets have clearly decided
An outcome will soon be provided
Thus, risk is embraced
And stocks, higher, chased
While bond bears are actively chided

I hope everyone had a nice Memorial Day weekend, although until Monday afternoon, I must admit the weather here in NJ was less than we might have hoped.  Of course, a few raindrops are nothing compared to the “defensive” attacks executed by US forces, sinking two Iranian boats while they were trying to lay mines in the Strait.  Apparently, Iran’s response, several volleys of surface-to-air missiles was met with the destruction of those launchers as well.  

There is nothing better, though, than the language Iran uses in situations like this.  According to the WSJ, the head of the national security committee of Iran’s parliament, Ebrahim Azizi, explained that any attacks on the country’s armed forces would be met with “a decisive, crushing and regrettable response.”  It certainly sounds impressive, but it is not clear they can back up those words that effectively.  I guess we shall see.

In the meantime, the other newsworthy item from the weekend was that the Supreme Leader, Mojtaba Hussein, was killed in a military strike and yet talks appear to be continuing.  President Trump explained that the framework for a deal was getting close and that was enough for traders to don their rose-colored glasses as oil gapped lower by more than $5/bbl when futures markets opened Sunday night and despite the recent “defensive” strikes mentioned above, remains far below levels seen last week.

Source: tradingecomomics.com

Not surprisingly, as Monday night trading in Asia gets underway, risk is back on with equities and metals higher, and bond yields lower.  

And as we awaken Tuesday morning, very little new has occurred.  The market continues to believe in the idea that the war is over in all but the details, at least the Iran war.  Ukraine continues, alas.  

On Friday, the latest Fed Chair
A man with a full head of hair
Was sworn to uphold
The idea that gold
To dollars, must never, compare

Before the weekend began, Kevin Warsh was sworn in as the new Fed Chair and the man has a tough job, that is for sure.  As another indication that the Fed is not an apolitical institution (as if any institution based in Washington DC could be apolitical), he hadn’t even gotten the keys to the office before two Fed governors were out opposing his very existence. The WSJ editorial page had a nice summation here which explained that Michael Barr, the erstwhile Vice Chair for Supervision who oversaw the collapse of Silicon Valley Bank (perhaps not the best credentials) was adamant that shrinking the balance sheet would lead to problems, as though he could foresee them!  Then Chris Waller, who was in the hunt for the Chairman’s seat, reversed his recent views on interest rates, explaining hikes were likely in order.  I’m sure there are no sour grapes there!

From this poet’s perspective, the financialization of the economy has been one of the biggest long-term problems we have seen and part and parcel of that financialization has been the Fed bloating expanding its balance sheet from <$1 trillion prior to the GFC to nearly $9 trillion at the height of the Covid madness and still well above $6 trillion today.  It is much harder to financialize things if there is less money around.  I fully support the idea that shrinking the Fed’s balance sheet would be a good thing.  Alas, that will be a tough road to hoe for Mr Warsh.  Good luck to him.

And with that, there are few other stories of note, so let’s look at the market response to the latest peace initiatives.  While we’ve already discussed oil above, gold saw the initial move you would have expected, jumping sharply, but has since given back much of those gains, as per the below chart, and is now about 0.5% higher than Friday’s close.

Source: tradingeconomics.com

Silver has seen similar price action as has copper.  Certainly, if a deal is signed, I believe we can expect oil to head back toward $75 – $80 per barrel and gold and silver to rebound sharply as well.  

The other noteworthy mover was the bond market, which saw yields fall sharply on the news of the deal framework getting close.  You may recall the apocalyptic prognostications just last week when 10-year Treasury yields climbed near 4.70% with many discussions regarding the steepening of the yield curve and the trouble ahead for the economy.  But as I type this morning at 7:00am, the 10-year yield has dipped back below 4.50% in sync with the oil move lower as some of those inflation fears seem to be mitigating.

Source; tradingeconomics.com

Now, as I look across European sovereign markets, they all show modest rises in yields this morning, but that is because yesterday, they fell so sharply.  Net, over the two days, yields are lower across the board.  As an example, the chart below shows both German and Italian 10-year yields and I highlighted Friday’s closing levels.  As you can see, both fell sharply yesterday and bounce a bit this morning but remain much lower.

Source: tradingeconomics.com

Moving on to equity markets, we have observed the same phenomena there, where there was a gap opening higher on Sunday night in futures markets which continued in cash markets while the US markets were closed for Memorial Day.  So, while last night, the Nikkei (-0.25%) slipped, that was after a more than 3% rally on Sunday night/Monday.  Ultimately, given the US holiday and the news cycle over the weekend, we need to look at the movement since Friday to get a sense of things.  So, below is a chart of both the Nikkei and the German DAX showing the rally from Friday’s late trading.  Again, risk is back baby!!

Source: tradingeconomics.com

Finally, the dollar is, well, it is all over the place this morning.  I look at tradingeconomics.com as my source for currency prices as they are all in one place.  One of the weird things this morning is that the EUR (-0.1%), GBP (-0.2%), JPY (-0.15%), CAD (0.0%), CHF (-0.2%) and SEK (-0.2%), the components of the DXY, are all flat to weaker this morning, the DXY itself is also weaker.  I have no explanation for that.  Generally, I would say the dollar is a bit firmer overall this morning with one notable exception, KRW (+0.7%) which saw demand alongside the sharp rally in the KOSPI overnight.  but otherwise, the dollar is modestly higher against most of its counterparts.  Lastly there has been a lot more noise than signal here.

On the data front, the short week does bring some important information.

TodayChicago Fed National Activity-0.3
 Case-Shiller Home Prices1.0%
 Consumer Confidence92.0
ThursdayInitial Claims211K
 Continuing Claims1780K
 Durable Goods3.5%
 -ex Transport0.5%
 Personal Income0.4%
 Personal Spending0.5%
 GDP Q12.0%
 PCE0.5% (3.8% Y/Y)
 Core PCE0.3% (3.3% Y/Y)
 New Home Sales670K
FridayGoods Trade Balance-$87.0B
 Chicago PMI49.7

Source: tradingeconmics.com

Now, with PCE coming, we are going to have to get a new line there as Chairman Warsh likes trimmed-mean PCE, which not surprisingly, has been lower of late, as the key metric for the Fed to follow.  I assume that will become the newest thing to watch.  Of course, it is far too early to have any sense of anything at the Fed now, other than the fact that there will be lots of politicking going on.

So, what have we learned?  Markets are still hopeful that the Iran conflict will end soon with a satisfactory (meaning no SOH problems) conclusion.  In that circumstance, risk will be the ongoing preferred stance, and I expect the dollar will come under pressure in that scenario, at least for a time.

Good luck

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Narrative Doom

Posted on by 
The crude price continues to fall
But one thing that has us in thrall
Is narrative doom
Where pundits all fume
God dammit, we’ll soon hit the wall

But under the headlines we learn
It’s really not quite the concern
The major details
Of SPR sales
Are by next year all will return

Oil puked yesterday, down nearly -6% despite the news that the EIA inventories fell dramatically as well.  The total draw was just under 18 million barrels, which on the surface is a new record draw.  Charts like the below were all over the place as the narrative writers were busy calling for the end of American Exceptionalism er.. the dollar, er.. US energy dominance.

However, I am not convinced that is the case.  The first clue is that oil prices collapsed and if the doom porn was accurate, I don’t believe that would be happening.  Instead, there is a far better explanation which I am lifting in its entirety from my friend JJ who writes market vibes and has been trading oil for as long as I have been trading FX.  If you care about oil markets, you really need to be reading what he says.

The DOE is releasing 172 million barrels of SPR oil with swaps rather than outright sales. Companies borrow SPR crude now and they pay it back plus a premium in more barrels later which based on the curve could be as much as 25% more barrels. This is explicitly designed to grow the reserve by at least 200 million barrels “at no cost to the taxpayer” and it will.

These are not “draws.” They are loans. The swaps are repaid ratably from November 2026 through September 2028. Earlier return structures have lower premiums.

In other words, the administration is taking advantage of the major backwardation in the oil futures curve and selling prompt and buying forward, taking oil instead of cash at a discounted basis.  If we understand this, it helps us understand why there is no panic in the oil markets, at least not in the US WTI market.

And, whether or not the IRGC is negotiating or getting ready to annihilate us all, my sense is this is a much bigger part of the picture than anyone is considering, except actual oil traders.  But it is not nearly as sexy a narrative, especially if you hate President Trump and can try to tar him with yet another problem.

And as we have learned lately, as goes oil, so goes the entire market.  So, it should be no surprise that equities and precious metals rallied as oil fell alongside Treasury yields and the dollar.  Pretty ordinary actually.

For Jay in his last time as Chair
Where soon, Kevin Warsh we’ll compare
The Minutes revealed
That rises in yield
Would soon change to common from rare

“A majority of participants highlighted…that some policy firming would likely become appropriate if inflation were to continue to run persistently above 2%.”  This statement from the FOMC Minutes of the last meeting at the end of April is actually quite galling.  Even though the FOMC has settled on the inflation reading that has historically run lower than all others, Core PCE, a metric, by the way, that doesn’t even try to represent a consumer’s experience, they have singularly failed to achieve their 2.0% target for more than five years running now.  In the chart below from tradingeconomics.com, the leftmost bar is at 2.2% from March 2021, right as the Covid monetary insanity started to accelerate.  This chart should be Jay Powell’s epitaph, a singular failure in the seat.  After all, as awful as I thought Janet Yellen was in the role, her track record was not this bad!

Of course, now that Mr Warsh is due to be sworn in tomorrow, you can be certain that the punditry will lay the entirety of blame on the fact that inflation is running hot on him directly because, well, President Trump appointed him and they generally hate President Trump.  Of course, I would contend this was not really a newsworthy release as we all already knew that the FOMC had turned more hawkish, and we have seen Fed funds futures begin to price in the probability of a rate hike by the end of the year.  

In the end, though, the oil price remains the key driver of all market activity for the foreseeable future.  So, let’s see how the rest of the markets behaved after yesterday’s sharp decline and given that the black, sticky stuff is sliding a little further this morning, currently down -0.75% at 6:00am.  Remember, too, that Monday afternoon, WTI was more than $10/bbl higher than it is right now.

Source: tradingeconomics.com

Finishing the commodity space, the metals, which all rallied yesterday, have slipped a bit despite oil’s slide this morning with gold (-0.3%), silver (-1.0%) and copper (-1.0%) all under modest pressure.  I must admit that the price action in both gold and silver is starting to make me question the long-term case, let alone the short-term case, to hold them.  Copper, however, seems like it will be in such demand as the electrification of everything increases, that any price declines should be snapped up.

In the equity markets, as mentioned above, yesterday saw gains in the US which were then followed up by what seemed to be a strong earnings report from Nvidia, although I read that there were those who were disappointed they didn’t guide things even higher.  The follow through in Asia was mixed with Tokyo (+3.1%), Taiwan (+3.4%) and Korea (+8.4%) following the tech lead from the US.  Interestingly, both China (-1.4%) and HK (-1.0%) did not follow along, but sold off, ostensibly on profit taking after their recent rallies.  The other big laggard in this time zone was Indonesia (-3.5%) which reacted negatively to government export restrictions on key commodities like palm oil and metals as still-high oil prices take their toll on the economy.

As to Europe this morning, there is not much of which to speak with the major indices all +/- 0.2% or less after Flash PMI data showed weakening activity, notably in Services, although the market is still pricing two rate hikes this year by the ECB.  US futures at this hour (6:35) are pointing slightly lower, with the NASDAQ (-0.6%) leading the way.

In the bond market, Treasury yields have backed up 3bps this morning after tumbling -8bps yesterday.  Right now, they sit right at 4.60%.  As it happens, yields fell everywhere yesterday alongside oil’s price decline, so it is no surprise that modest gains are the order of the day with German bunds (+1bp) outperforming the rest of the continent where yields are higher by 3bps to 4bps across the board.

Finally, the dollar, which had been very quiet all evening, virtually unchanged when I sat down at my desk a 90 minutes ago, is starting to rally a bit here, which explains all the movements.  Apparently, there was just an announcement by Iran regarding uranium, which not surprisingly, has changed the tone of the market.

This explains the dollar’s sudden revival, higher by 0.25% across the board, oil’s sudden rebound, it is now higher by 2.5% at 6:45, and the decline in metals prices.  It also neatly matches bond yields higher.  So, if negotiations are struggling, we should expect to see further risk-off behavior.

On the data front, this morning brings Initial (exp 210K) and Continuing (1790K) Claims, Housing Starts (1.41M), Building Permits (1.39M), Philly Fed (+18.0) and then a little later the Flash PMI readings (Mfg 53.8, Services 51.1).  But as we have just seen in the past 45 minutes, everything is still attached to oil, so that is the key to watch.  All the market correlations remain intact for now, and I suspect they will continue to do so until this conflict is well and truly over.  In fact, it is situations like this, where news changes market pricing so dramatically in short order, that demands hedging programs to be maintained for everyone.  Let’s face it, nobody is going to get it right all the time.

Good luck

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To Sink or To Climb

Posted on by 
While talks about peace seem to be
In limbo, from what I can see
The threats from each side
Are not bona fide
But rather, the talks’ apogee

So, markets are biding their time
Not sure if to sink or to climb
Thus, things that have rallied
Have all dilly-dallied
While laggards change their paradigm

The dichotomy between the increased intensity of the recent threats from both the US and IRGC and the lack of market response to those threats is quite interesting.  After President Trump responded to a question thusly, “I hope we don’t have to do the war, but we may have to give them another big hit,” the IRGC responded in kind, “If the aggression against Iran is repeated, the regional war that was promised will this time go beyond the borders of the region, and you will be dealt crushing blows in places you do not expect, and you will fall into the abyss of defeat and destruction.”

Once again, I am neither in the situation room nor in Vahidi’s cave, so can only observe from a distance, however, my take is elevated threats on both sides indicate a play to the home crowd showing how tough both sides are being in the negotiations as those talks find a conclusion.  Now, it is possible that Vahidi is truly apocalyptic and doesn’t care, but again, it is very difficult to believe that someone would strive to reach the pinnacle of power in a nation just to destroy it.  

But it is more than my amateur psychology that leads me to this belief, it is the fact that the oil market continues to behave as though things are going to be corrected fairly soon.  Once again, I understand markets can be wrong and misprice things, but there just does not appear to be an actual dearth of oil around the world right now.  Certainly, there are some places suffering more than others, but it is not universal.  And if I look at the chart of WTI below, $100/bbl keeps coming back as a “home” of sorts and has since the conflict began.  Thus, my view has become that by July 4th, as an appropriate date for President Trump, Hormuz will have reopened and there will be a deal on the nuclear material.  In the meantime, alternative routes for oil delivery out of the gulf are being developed post haste.  None of this has changed my view that oil’s price is driven by politics, not geology.

Source: tradingeconomics.com

Turning to the FX market, I thought I might take a trip down memory lane regarding the dollar.  You may recall at the beginning of 2025 when the dollar slid about 10% and there were breathless takes about the end of the dollar and how this was unprecedented in such a short period of time.  You can see the move as the farther right trend line in the chart below.

Source: tradingeconomics.com

The other trendline is steeper (i.e. the dollar fell more rapidly) and that happened just two years prior.  Now, the beginning of 2025 was right at President Trump’s inauguration and one of the main narratives at the time was that he would like to see the dollar weaken to enhance the competitiveness of US manufacturers, but pundits, to highlight the unusual nature of the move, clung to the idea that it was the sharpest decline in the dollar at the beginning of the year since sometime in the 1980’s.  Of course, we know, the calendar doesn’t really matter to a market that trades 24/5.  But I raise the issue as despite the ongoing narrative about the dollar’s still impending collapse, the below chart of both INR and IDR shows that, in fact, these are currencies that are having significant problems and have been selling off steadily despite explicit actions by both nations’ central banks to stop the slide.

Source: tradingeconomics.com

Last night, Bank Indonesia surprised markets and raised rates by 50bps to 5.25% to help mitigate the rupiah’s decline while the RBI entered the market and directly intervened after the rupee fell (dollar rose) below 97.00, a record low.  Both currencies have fallen by about 10% this year vs. the dollar.  Again, the dollar is not going anywhere.

Ok, let’s tour the other markets.  Looking at the dollar more broadly, it is little changed to modestly softer after a solid rally over the past two days on the back of rising yields.  In the G10, most everything is within +/-0.2% or less, hardly worth mentioning and USDJPY is around 159, not quite in the danger zone.  In the EMG bloc, aside from INR (+0.4%) responding to the intervention, ZAR (+0.6%) is getting a reprieve on softer oil prices and then otherwise, things here have also barely moved.

As per the first chart, oil (-2.1%) is slipping again showing no impending fears of disaster.  This, in turn, has helped the metals markets (Au +0.2%, Ag +2.8%, Cu +0.7%) all of which have been under pressure while both oil and yields rose.  For now, I suspect this relationship will remain intact, but as I continue to look for oil to ultimately slide back more substantially, the metals should rebound at that time.

In the bond market, yields are lower across the board this morning, backing off the highs seen yesterday.  I think the below Bloomberg screenshot tells the story well.

It is key to know that neither Brazilian nor Mexican markets are open as I type at 7:30.

Finally, turning to the equity markets, as it appears most people are holding their breath for this afternoon’s Nvidia earnings report, the current situation shows that Asian markets overnight followed the US markets lower with Tokyo (-1.2%), HK (-0.6%), Korea (-0.9%) and Australia (-1.3%) leading the way although other regional exchanges were also generally lower.  Arguably, the one exception of note was India (+0.2%) which seemed to benefit from the FX intervention.

In Europe, though, it’s happy days as you can see below from the Bloomberg screenshot.

Only the UK is not keeping pace and that is despite lower-than-expected inflation readings this morning, which I would have thought would be seen as beneficial.  As to US futures, at this hour they are all higher by about 0.4%, I guess in anticipation of those Nvidia earnings.

On the data front, the only thing today is the EIA oil inventory data where another large draw, about 5 million barrels, is expected.  This is, of course, due to the selling of oil from the SPR and the fact that the US is exporting a record 5 million bpd lately elsewhere in the world of refined products.  As well, the FOMC Minutes are released at 2:00 this afternoon, but given that was Powell’s last meeting and Mr Warsh is due to be sworn in on Friday, and the fact that the market is already aware that the discussion was about potential hikes and what to do about rising inflation, I don’t think they will teach us very much.  This morning there are also two more Fed speakers but right now, they are speaking into a void.

My belief continues to be that the conflict will end sooner rather than later, that oil prices will slide accordingly along with Treasury yields and the dollar, while stocks and precious metals will rally.  I haven’t seen anything to change that view as of now, but I keep on looking.

Good luck

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Still on Hold

Posted on by 
Despite faster growth
The yen continues to sink
Are rate hikes anon?

It’s funny, in Japan, there is a great deal of angst amongst government officials that the economic situation is under significant duress, and they appear uncertain how to act.  Now, in fairness, the ongoing Iran conflict is clearly problematic for a country that imports essentially 100% of its oil, and most of it travels through the Strait of Hormuz.  But if we look at the data, Japan is holding up remarkably well.  For instance, below is a chart of annual GDP which was released last night showing 2.1% annualized growth in Q1.

Source: tradingeconomics.com

Granted, this is not a chart of an extraordinary expansion, but it is also, relative to its European counterparts, a chart to be envied.  For instance, the below chart of German GDP growth (and I use the term growth loosely) shows that after the Covid reopening, things have basically gone into stagnation.

Source: tradingeconomics.com

My point is that things in Japan seem to be moving along relatively well, with solid growth, especially when one considers that the population in Japan is shrinking, so given GDP = # people working x output/person, it is hard to grow the economy with a shrinking population.  Meanwhile, inflation in Japan remains sticky, although because of government subsidies to ameliorate the costs of electricity and fuel in the wake of the Iran conflict, it is below the 2% target for now.  However, apparently it remains a concern amongst the population there.

Source: tradingeconomics.com

Which brings me to the true market related question, what of the yen?  You may recall a few weeks ago when the BOJ intervened because the yen had traded through the 160 level vs. the dollar and then there seemed to be a few mini interventions in the days that followed.  Yet this morning, as you can see in the below chart, the yen is once again marching toward 160, although I have not seen any commentary from the BOJ or MOF on the subject.

Source: tradingeconomics.com

Bringing it all together, the question I would ask is, why is the BOJ even concerned about raising rates at their next meeting in a few weeks?  Ueda-san has been around a long time and understands the only way to address persistent currency weakness is via policy changes.  Especially now that markets have begun to price rate hikes as the next move in the US (I personally don’t believe that will be the case but that is a different story), the yen will continue to slide unless the BOJ moves.  Yet, with GDP growing decently, and underlying price pressures extant, a rate hike should be an easy call.  Currently, the probability appears to be about 75% that they will hike in June, but certainty they will hike by July, at least according to rateprobability.com as per the below table.  I’m not sure why it is even a question.

The war in Iran’s still on hold
As prices for crude stay controlled
But dollars are bid
And equities skid
While nobody wants any gold

As to the Iran situation, President Trump announced he was delaying, for two or three days, any renewed military action at the behest of the UAE and Qatar who claim that substantive negotiations are underway.  Once again, I make no claims of knowledge about what is actually happening there, although that admission is one that most of the punditocracy seems unwilling to make.  

But here’s a thought.  If you were Ahmad Vahidi, the ostensible leader of Iran, and you have spent the last 3 months in spider holes, caves and basements, moving every 8-12 hours lest someone leaks your location to the Israelis or Americans, how comfortable are you in your position?  After all, one of the reasons that people aspire to lead nations is for all the trappings that come with the job. Not only do you get a nice place to live, but you command respect from the people, at least a significant portion of them.  Is it impossible to believe that Vahidi is actually looking for a way out as well, perhaps willing to give up his nuclear ambitions for the removal of the price on his head?  I know that does not fit the narrative for many folks, and is pure speculation on my part, but is it really that far-fetched?

Ok, in the meantime, as we await the next news from Iran, let’s look at market activities.  Starting in the bond market, yields continue to climb higher pretty much all around the world as inflation concerns remain high and there is a growing concern that government bond issuance is going to grow even faster going forward as countries everywhere seek to rearm quickly.  So, Treasury yields (+3bps) are pushing back to the levels seen in January 2025, although remain 15bps below those levels as per the below Bloomberg chart.

And as has been the case for quite a while now, Treasury yields are leading the global yield market with European sovereign’s all higher by about 2bps and JGB yields jumping 6bps last night after the GDP data.  Certainly, JGB traders believe the BOJ is going to hike rates.

In the equity markets, though, risk appetite remains remarkably robust through all the complexities of the war and economic data.  Yesterday’s US session, which started off deeply in the red, rallied back so the DJIA actually closed higher while the other two major indices dramatically reduced their losses.  This morning, futures markets are pointing slightly lower with the NASDAQ (-0.8%) the laggard as questions continue to arise about how long AI will drive the thesis there.  As to the rest of the world, Asia was mixed with the Nikkei (-0.4%) slipping, although every other index in Tokyo rose, China (+0.4%), HK (+0.5%) and Australia (+1.2%) all gaining.  Korea (-3.25%) and Taiwan I-1.75%), though, had rough sessions as those two markets have been driven by semiconductor companies just like the NASDAQ.  The only other noteworthy move was in Indonesia (-3.5%) as investors are concerned about the central bank raising rates after their meeting concludes tonight.

Europe is in fine fettle this morning with gains across the board led by the DAX (+1.4%) and followed by the CAC (+0.8%), FTSE 100 (+0.7%) and Spain’s IBEX (+0.4%).  I keep reading that there is optimism that an agreement will be reached as the rationale for these moves, but I guess that is the way things go.  Never forget this perfect illustration of how market information is passed.

Turning to oil markets, this morning has seen that war ending optimism here as well with WTI (-0.4%) and Brent (-0.9%) both slipping a bit.  Interestingly, metals markets are not behaving as they have recently as they, too are lower; gold (-0.65%), silver (-2.1%), copper (-1.1%).  In the end, like every market, movement here is entirely dependent on the Iran situation, at least in the short run.

Finally, the dollar is flexing this morning rising against virtually all its major counterparts.  In the G10, AUD (-0.7%) is the laggard, but the euro (-0.3%) and pound (-0.2%) are both under continued pressure with both trading near recent lows as per the tradingeconomics.com chart below.

The rest of the block has not fallen as much but is uniformly lower.  In the EMG bloc, KRW (-1.3%) suffered after the sharp decline in the equity markets there and ZAR (-0.5%) continues to suffer on the back of weaker gold prices.  The one outlier is BRL (+0.3%) which is benefitting despite a weaker economic outlook after some soft data yesterday continues to encourage the potential for further rate cuts there.

And that’s really it for today.  There is no data today although there are 3 Fed speakers, including Governor Waller who many have come to believe is a critical voice for the FOMC.  Broader movement continues to be all about Iran and how things evolve there.  With renewed military engagement on hold, I suspect that the speculators are going to buy stocks again in hopes of a positive outcome.

Good luck

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Starting To Bite

Posted on by 
The meeting between Trump and Xi
Had little but hyperbole
So, markets now turn
To their key concern
Inflation that’s grown one, two, three

While oil has garnered attention
Tis yields and their latest ascension
That’s starting to bite
And causing a flight
Of buyers, and lots of press mention

And one more thing that you should know
Is China continues to slow
Through all of Xi’s bluster
He simply can’t muster
His people to get-up-and-go

As we begin a new week, a quick review of the last one shows that the much-touted Trump-Xi summit didn’t seem to address any of the current problems, at least as defined by what financial markets deem problems.  These are the lack of transit ability through the Strait of Hormuz, with the resultant limit on oil supplies and the resulting rise in prices and inflation as energy prices feed into the price of everything else.  I guess it was always a great leap to believe that this summit was going to end the war, and depending on which side’s comments you read, China has either agreed, or not, to try to push Iran to reopening the Strait.  Certainly, they would like that to be the case, but thus far, as I type Monday morning, there has been no further movement.  In fact, last night, the President sent this message out.

I guess we cannot rule out a further escalation of military action in Iran at this point, and I imagine the oil market will not be pleased.

Speaking of China, though, while many want to continue telling the story that they are weathering the Iran conflict with limited impact because they had stockpiled so much stuff ahead of time, below are their latest economic data statistics, a grouping that does not shout, at least to me, of a nation hitting on all cylinders.

Source: tradingecomomics.com

I am confident that we will once again hear about all the stimulus that President Xi will soon add to the Chinese domestic economy as they seek to increase the proportion of domestic activity compared to their export focus.  But I would take the under there.  First, if you thought that politicians in the US didn’t care about their constituents, compared to Xi, they wait on their constituents hand and foot.  But history has shown that China’s model is to support chosen industries, as I showed on Friday, and subsidize them so they can learn to dominate all competitors.  

Arguably, the one time they were willing to subsidize the domestic economy was with the property market, although that simply led to the construction of the so-called “ghost” cities, where people invested in the property bubble, as they had few other outlets to save money, and enormous amounts of resources were consumed to build cities that never had any occupants.  Alas, for all those investors, those cities still don’t have occupants, and with a shrinking population, never will.  The property market has been shrinking in value for 4 years now and shows no signs of slowing as per the below chart of the House Price Index from above.  

Source: tradingeconomics.com

While things are certainly not perfect here, China’s got problems as well, just remember that.

But arguably the real story right now is bond yields as Treasury yields, and those almost everywhere else in the world, continue to rise.  As you can see from the Bloomberg screenshot below, while the overnight movement has not been excessive by any stretch, yields have now risen pretty aggressively over the past month, and year, and are trading at their highest levels since the 2022 inflation peaks.

Now, if we look at the below chart from tradingeconomics.com, it shows 10-year yields over the past 5 years.  You can see that US yields have not yet reached their October 2023 highs (driven then by the combination of strong economic growth and ongoing QT as inflation remained high from its Covid induced rise), but both Germany (green line) and Japan (brown line) are at their highest levels in quite a long time.  We have discussed Japan numerous times over the past months, but not spent much time on Germany.  However, the German story is one of stagflation.  I have shown how poorly German economic output has grown over the past 5 years, as it has essentially stagnated over the entire timeframe.  Now, add the self-inflicted energy policy insanity, that had already severely impacted Germany before the Iran conflict, and then the Iran conflict and $100/bbl oil prices, and the Germans have even more problems.  

Here in the States, the recent inflation data has been consistently higher, and higher than expected and the great white hope of AI-induced deflation seems to always be a little further away than hoped/expected.  It remains difficult for me to see a scenario where prices fall dramatically in the US anytime soon as there is too much economic stimulus to allow for a recession, let alone a depression, which is what I think would be needed to get prices to fall.  In this world, yields will continue to creep higher, at least until such time as Iran is no longer an issue.  One other thing to remember is that there is a massive short position in bond futures, upwards of $1 trillion across all maturities, although that is entirely driven by hedge funds in the basis trade, where they are long cash bonds and short futures as an interest rate hedge.  But that only works as long as the math works (funding costs are less than the carry they earn).  The point is, if short end rates start to rise such that funding is too expensive, we can see a massive unwind of that position, which would mean huge sales of cash bonds, and that will really drive yields higher.  However, if that were to start to play out, even Mr Warsh, he of the shrinking balance sheet idea, will be out there buying bonds to prevent a collapse.

Ok, I’ve gone on too long, so a really quick tour of the markets overnight follows.  Friday’s US equity selloff was followed by weakness across the board in Asia (Japan -1.0%, HK -1.1%, China -0.5%, Taiwan -0.7%, Australia -1.5%) although somehow Korea (+0.3%) managed to hold in there ok.  In Europe, while the UK and Germany are essentially unchanged this morning, both France (-1.0%) and Spain (-0.7%) are under pressure, following the trend.  US futures, at this hour (7:30) are also lower across the board, on the order of -0.6% or so.

Of course, underpinning all of this is oil (+1.2%) which continues to climb slowly higher as fears over an escalation in Iran have removed hope for a resolution.  Oil is higher by nearly 9% in the past week and 22% since this time last month.  In the metals markets, gold and silver, which both fell sharply on Friday into what appears to have been some major option expiration liquidation, are little changed this morning although copper (-0.8%) is still sliding from its highs amid overall market concerns about risk.

Finally, the dollar, which had a very strong week last week, is ever so slightly softer this morning, -0.1% on the DXY although there are two currencies with more substantive moves, NOK (+0.5%) on the back of the oil rally, and COP (+1.1%) which seems odd given copper’s performance today, but remember, copper is still within spitting distance of its all-time highs set last week and higher by 35% in the past year.

On the data front, it is extremely quiet this week with only a handful of meaningful numbers, although all eyes will be on NVDA’s earnings Wednesday after the close.

WednesdayFOMC Minutes 
ThursdayInitial Claims210K
 Continuing Claims1790K
 Housing Starts1.41M
 Building Permits1.40M
 Philly Fed186
 Flash Manufacturing PMI54.0
 Flash Services PMI51.0
FridayMichigan Sentiment48.2
 Leading Indicators-0.3%

Source: tradingeconomics.com

We also get 7 Fed speeches, although only four speakers in total.  And remember, too, next weekend is the holiday weekend, so as summer approaches, trading desks will start to thin out.

My take is all eyes will be on the bond market for now, which will obviously be driven by oil prices, but also by the huge basis trade.  As to the dollar, I see no reason to sell it with any force, that’s for sure.

Good luck

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Prices Ain’t Tame

Posted on by 
The story today is the same
First China, then prices ain’t tame
The meeting twixt Xi
And Trump seemed to be
Successful as both sides will claim

But price data once again soared
Thus, PPI wasn’t ignored
But markets remain
Quite happy to feign
Indifference while traders are bored

China and prices remain the two dominant stories this morning, although despite much angst over yesterday’s MUCH hotter than expected PPI readings (Headline: 1.4% M/M, 6.0% Y/Y; Core 1.0% M/M, 5.2% Y/Y), markets did very little overall.  For instance, Treasury yields edged up 1bp yesterday and this morning have reversed that tiny move.  US equity markets were mixed with the DJIA slipping slightly while the NASDAQ (+1.2%) powered ahead oblivious to any potential negative issues with rising prices.  Oil barely budged, and the same was true with metals and the dollar.  In other words, despite a lot of analyst angst, and there was plenty regarding the data point, investors didn’t seem to care.

Now, while I am personally concerned over the trajectory of prices as I have seen nothing to indicate that governments anywhere are going to reduce their debt-financed spending nor are central banks going to stop supporting that activity, I clearly do not make up the majority view.  With that in mind, I do have a suspicion that something will come along that will shake the investor community’s faith in higher forever equity prices, but I have no idea what it will be.  After all, every other potential catalyst (e.g., oil at $100/bbl, 30-year Treasury yields at 5.00%, two hot wars involving nuclear powers) has been largely ignored.  So, let’s move on to the other story of note, Nixon Trump in China.

It is always interesting to see the framing of a particular story from different news outlets which is obvious based on how they lede a story.  But, trying to get through different versions of the same thing, it is clear that China’s primary concern is Taiwan and that there should be no US interference there.  The US’s primary concern appears to be solving the Iran situation with President Trump looking to President Xi to use his influence to get Iran to see the light.  Both nations agreed Iran should never have a nuke and that the Strait of Hormuz is an international waterway that should not be subject to blockage by one nation.  (China really cares about this because half of their oil also transits the Strait of Malacca, and if the precedent is set in Hormuz that it is not a free waterway, that could easily be extended to Malacca which would be a real problem for Xi.). 

Then there were trade talks, and discussion of fentanyl precursors and oil and agricultural trade as well as semiconductors, the usual stuff.  FWIW, which may not be much, I see this as the first major step to serious de-escalation between the two nations.  But here’s an interesting tidbit, and a critical piece of the Trump rationale behind tariffs on Chinese manufactured goods.  The below table from Nikkei News shows how much major Chinese companies (all listed on their stock exchanges) are getting in state subsidies.  This is, of course, the very definition of “cheating” on trade.

Ask yourself why profitable public companies that focus on exports would need state support.  This appears to be just another reason that Chinese manufactured goods are relatively cheap compared with elsewhere in the world.

Ok, enough about those stories as traders don’t seem to care about them.  In fact, right now, traders don’t seem to care about much.  But let’s look at the markets this morning.

Since there is not that much ongoing across all markets right now, I’m going to start in the FX world as yesterday saw a noteworthy move in the Brazilian real (-2.4%) as you can see in the chart below.

Source: tradingeconomics.com

While thus far this morning it has rebounded ever so slightly, +0.25%, the story is that Flavio Bolsonaro, former president Jair’s son and a leading candidate in the upcoming presidential election, has been caught up in a local financing scandal which may impact his electoral prospects and leave Lula, and his socialist policies, in charge.  Now, it must be remembered that this is a one-day movement but has done nothing to change the trend, as you can see below.  BRL has gained more than 21% in the past 18 months as real interest rates remain quite high and are drawing in carry traders from around the world.

Source: tradingeconomics.com

But away from that story in Brazil, FX is sound asleep across both G10 and EMG blocs.

Mixed is the only way to describe Asian equity markets last night with Tokyo (-1.0%), China (-1.7%) and Indonesia (-2.0%) all under pressure while Korea (+1.75%), India (+1.1%) and Taiwan (+0.9%) all rallied nicely.  As to the rest of the region, it was +/- a lot less movement.  Data overnight showed Chinese financing shrinking slightly, a surprising outcome, but one in sync with the reality on the ground there that the combination of a still imploding property market and a significant reduction in local government financing on the back of that is weighing on the economy overall.  They claim they will grow GDP at 4.5% to 5.0% this year, and I’m sure they will “meet” that target when the official data is produced, but all is not well there.

European bourses, though, are having a much better day with the DAX (+1.2%) leading the way higher although solid gains in France (+0.6%) and Spain (+0.8%) as well.  Everything I read about this price action this morning points to excitement over AI, but given Europe is virtually absent from the AI universe, I am not sure what they are implying.  It doesn’t seem likely there will be a European AI champion anytime soon, if ever.  But that’s the story I see.  Meanwhile, US futures continue to trade modestly higher at this hour (7:30).

In the bond market, while JGB yields continued higher overnight by 4bps, making yet further 19-year highs, European sovereign bonds have all seen yields slide between -4bp and -5bps this morning, allegedly on optimism that the Trump-Xi meeting will lead to pressure on Iran to reopen the Strait and reduce oil prices.  But that seems misplaced in the short-term in my view.  Nonetheless, that’s the story.

Earlier this week I discussed the political sh*t show in the UK and how PM Starmer appears to be on his last legs.  One of the reasons for this is that his policies have not exactly helped the nation’s economy.  For instance, this morning, preliminary GDP figures were released, and the Y/Y number was a better than expected 1.1%.  Now, the fact that 1.1% annual growth is better than expected is a major part of the problem.  A look at UK GDP growth for the past 5 years gives a sense of why the people there are so unhappy.  Of course, hamstringing yourself with the worst energy policies on the planet are a big part of this outcome, and that defines the Starmer administration.

Source: tradingeconomics.com

Finally, a turn to commodity markets shows…almost no movement.  Both oil (-0.1%) and gold (+0.1%), the leaders in the category, are going nowhere right now.  We have seen other commodities sink a bit (silver -0.8%, copper -0.7%), but given their volatility, those are also limited moves in reality.  When it comes to the oil market, there is an enormous amount of discussion regarding the imminent collapse of the global economy as the shuttering of the Strait is going to lead to a virtual energy apocalypse.  But to my eye (and I am not an oil trader) I cannot help but look at the below chart and see a market that has found a pretty good balance between supply and demand at around $100/bbl.  

Source: tradingeconomics.com

It is also important to remember that the oil market remains in a steep backwardation which tells us that supply issues over time are not a great concern.  In fact, I read this morning that with the overall curve at current levels, some oil drillers are considering expanding operations to take advantage of the higher prices, yet another reason to expect that the fears of $200/bbl oil are massively overblown.  They ain’t coming, I think.

On the data front, this morning brings the weekly Initial (exp 205K) and Continuing (1790K) Claims data as well as Retail Sales (+0.5%, +0.6% ex-autos) and Business Inventories (+0.8%).  We hear from a few more Fed speakers but, again, I don’t think they are of much importance right now.  The market is not pricing in any Fed funds movement for the rest of the year, and then a 25bp hike is the new view after that.  But the one thing we know about Fed funds futures is they are subject to major changes based on policy comments.  I’m sure we are all anxiously awaiting Chair Warsh’s first meeting next month.

And that’s it for today.  Quiet markets and no reason to think that will change right now.  Remember, fiat currencies are still crap, but nothing has changed my view that the dollar is the best of the bunch.

Good luck

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Hot, Hot, Hot

Posted on by 
So, prices were all Hot, Hot, Hot
Resulting from Trump’s Iran shot
But do not forget
The government’s debt
And spending, with what that has wrought

Meanwhile, Trump, to Beijing, has flown
As both sides seek a temperate zone
Where it is agreed
To what both sides need
And neither, the outcome, bemoan

For a change, Iran is not the lead story today in markets.  Instead, there is much angst over yesterday’s CPI reading, which was hotter than forecast, and much pontificating as to what will come from the summit between Presidents Trump and Xi that starts tonight in Beijing.  Let’s take inflation first.

The results showed the month-on-month readings for headline (0.6%) and core (0.4%) which translated into annual readings of 3.8% and 2.8% respectively.  I always turn to The Inflation Guy™, Mike Ashton, when trying to understand CPI readings and have linked here his description of the report and things driving it, which you should all read.  However, I will offer his conclusion here:

“Wrapping this up, the read is actually pretty easy. Inflation is not just in energy, but right now is fairly wide as the diffusion index shows. Some of that is related to energy…the price of diesel fuel affects trucking costs, which affects other goods prices…and some of it is related to the fact that wage growth is no longer slowing. Any way you look at it, as I said the read is pretty easy: the Fed obviously isn’t going to be tightening into an oil shock. But there is nothing here that gives them cover to ease into an oil shock either. Warsh inherits a pickle.”

I know the Fed targets Core PCE, not Core CPI, but I include the below chart of the latter to remind us all of just how far from their target the Fed has been for the past 5+ years.  Powell may have bitched about political pressure, but he received none during the Biden administration and he failed dismally then too.  Just sayin’.

Source: tradingeconomics.com

(One last thing I will note is that USDi, which I mentioned yesterday, will return 10.2% annualized during the month of June, on top of this month’s 12.6% return.  Folks, you really should own some.  You can mint it at www.usdicoin.com ).

We cannot be surprised that yields rose yesterday on the back of the CPI result with the 10-year rising a further 3bps right after the number and 4bps on the day.  This takes us to a 10bp rise in the past three sessions including this morning as per the below.

Source: tradingeconomics.com

It also is the highest yield since last summer and clearly is not moving in the direction the administration would like to see.  The thing is, now that we are several months into the Iran war and oil prices have been elevated since the beginning of March, we are going to see more pass through of price increases due to energy costs, at least until demand starts being destroyed.  That is always the market tension, rising prices force behavioral adjustment unless the central bank accommodates those prices by increasing money supply.  It is, of course, that action which helps drive generalized inflation as opposed to specific price increases.  Mr Warsh, who was confirmed as a Fed governor by the Senate yesterday and faces another vote today to become Fed Chair, although I expect that will be without fireworks either, will have has work cut out for him.

Moving on to the Beijing summit, the key to remember is that summits are where things are signed amid a ceremony, they are not events to negotiate details.  Secretary Bessent has been in Asia all week and he has met with Chinese Premier Le Hifeng, clearly discussing terms of what can be agreed.  One would expect that the focus will be on Iran and having China press Iran to come to an agreement, trade between the nations, especially in AI related technology and rare earth elements, and Taiwan.  I have no way of knowing what will be announced, but I’m confident Mr Trump wouldn’t be going if there wasn’t a deal of some sort already agreed.

So, let’s see how markets have behaved overnight.  Yesterday’s US session, which started out looking pretty awful, moderated throughout the day to wind up with fairly benign outcomes.  Weirdly, this led to some dramatic differences in Asia with some strong gainers (Korea +2.6%, Japan +0.85%, China +1.0%, Singapore +1.2%) and some serious laggards (Indonesia -2.0%, Taiwan -1.25%) with some lesser weakness (Australia, New Zealand, Malaysia and HK).  I might argue that most investors were excited about the potential results of the summit, but if so, perhaps it implies a change in the US position regarding Taiwan, and that could well be a negative there.

In Europe, the picture is also mixed as Germany (+0.7%) is having a solid session on some solid earnings reports from the pharma sector, although France (-0.4%) is under pressure after the Unemployment Rate there jumped to 8.1%, its highest print in five years.

Source: tradingeconomics.com

Otherwise, the rest of Europe is mixed with little of note.  US futures at this hour (7:30) are also mixed with DJIA (-0.25%) lagging but the other two major indices showing gains of 0.25%.

While we discussed Treasuries above, looking elsewhere around the world, yields this morning in Europe are essentially unchanged, having risen on the back of the US CPI report yesterday.  However, overnight, JGBs saw yields rise 4bps on that inflation fear, and they have made yet another new 19-year high as per the below chart (dates are in European terms).

In the commodity markets this morning, oil is essentially unchanged as it is clear nobody knows how things will play out in Iran.  There have been numerous commentators competing to describe just how much oil has been missing from the market and how soon (June? July? September?) the infrastructure will crash and it will be a global depression.  But they keep having to push their timeline further out as the combination of more production outside the gulf plus the ingenuity of getting production there to other markets via trucks and trains, has mitigated the overall price risk.  Again, here in the US, there is no risk of a shortage of any type as we continue to export our net surplus of products.  I have not read about the blockade lately, but I think that speaks to the fact it must be effective because most articles wanted to describe it as a failure and not doing its job.  If Iranian oil is not getting to market, their financial troubles are growing apace which is the key pressure point.

As to the metals markets, given the lack of movement in oil, it should be no surprise that gold (-0.25%) is little changed as well.  However, something is changing here and that is silver (+1.0%) and copper (+2.0%) are both starting to distance themselves from the gold trade as both remain critical inputs into the electrification story.  A quick look at the chart below of the two elements shows how just in the past two days, silver has broken away from gold.

Source: tradingeconomics.com

Finally, the dollar is firmer again today, continuing to ignore the many calls for its demise.  But as we have seen in most other markets today, the magnitude of the movement is unimpressive.  So, DXY (+0.2%) is an excellent proxy for virtually the entire FX market this morning.

On the data front, today brings PPI (exp 0.5% M/M, 4.9% Y/Y) and core (0.3% M/m, 4.3% Y/Y) although with CPI already released, I doubt it will get much interest.  We also get the EIA oil inventory data which is looking for continued draws of roughly 6 million barrels across crude and products.  there are Fed speakers too, but when was the last time anyone listened to anything they had to say with interest?  Exactly.

It is shaping up to be a quiet session (famous last words) and I suspect all the news of note will come from Beijing tonight.

Good luck

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Massive Divides

Posted on by 
On Friday, the Payrolls were strong
So, pessimists mostly were wrong
This week it’s inflation
That might change narration
Of how things are coming along

As well, this week Trump and Xi meet
And pundits, for good takes, compete
One side says Trump’s hand
Is nought but grandstand
The other cites Xi’s self-deceit

And last, but not least, all the talk
Of some kind of deal on the block
Was trashed by both sides
With massive divides
Twixt what each will offer…or walk

Last week ended on a very positive note in markets.  The payroll report, at least to my eyes, was solid with NFP higher than forecast, although Manufacturing payrolls shrank slightly, and overall, things seemed pretty solid.  Certainly, the equity markets were comforted as all three major indices closed higher with new record highs for both the S&P 500 and the NASDAQ.  Oil prices slipped on Friday, along with bond yields and the dollar while gold and silver finished the day higher.  The Iran narrative was that there were proposals going back and forth and folks were generally in a good mood.

Ahhh, the good old days.  While thus far, this morning is no disaster, there has clearly been a change in tone as hopes for a peace deal collapsed after President Trump declared that the Iranian response was “TOTALLY UNACEPTABLE!”  Not surprisingly, the first move in markets was oil (+2.5%) rising along with the dollar (DXY +0.1%) and Treasury yields (+3bps) while stocks (S&P -0.15%, NASDAQ -0.3%) and gold (-1.1%) fell.  This is all of a piece with recent correlations and relationships.

So, what are we to make of the current situation?  On the ground, at least in the US, things have not changed very much.  While energy prices remain higher than before the war, there are no shortages of any type for consumers, although that is not the case in many other nations.  India has gotten a lot of press this morning after PM Modi suggested that more people there work from home and that they stop buying gold as that exacerbates the shrinking FX reserve situation while the rupee continues to slide. 

Now, the thing about the rupee is that it has been sliding for a very long time.  Since 2003, as you can see in the below chart from Yahoo finance, the currency has more than halved in value vs. the dollar.  Perhaps the trajectory has steepened a little lately, but my take is this is more about the big round number of 100 rupee/dollar than the fact that the currency is weakening.

Of course, the issue for them becomes a weakening rupee amid rising commodity prices results in rising inflation, and that never helps an elected government.

I raise the point because it is a lead article in the WSJ and I have seen discussions on Substack blogs as well this morning, so it has a little oomph.  But look at that chart and ask has anything really changed?  The more important fact is that India is merely the avatar of what is happening around the world, especially in developing nations as they try to cope with the current situation.

Which begs the next question, when might this change?  Here the answer is far more difficult.  Clearly, there needs to be a cessation of hostilities in Iran for things to begin to return to normal and while I am encouraged that, at least, the US and Iran are swapping proposals, no matter how far apart the terms, it implies that there is a goal to end the situation.  One other thing that I continue to read is that the world hasn’t really felt the full impact of the war as the buffers of products that flow through Hormuz were significant and haven’t been run down yet, but there are many analysts explaining its just a matter of days/weeks/months before a total collapse occurs.  And maybe they are correct, but so far it has just not been the case.

Which takes us to the key event this week, the Trump-Xi meeting and what may result.  China is one of Iran’s few allies and likely has real pressure points there to help (force?) them to come to the table.  And, of course, there is a great deal of economic and trade stress between the two nations.  However, it is clearly in both nations’ best interest to come to an accord of some nature and de-escalate.  I am far more hopeful of a positive outcome on that front than on Iran, but we shall see.

In the meantime, let’s look at how markets have behaved overnight as we await, prior to the Trump-Xi summit, CPI tomorrow.

In the equity markets, overall, Tokyo was mixed although the Nikkei (-0.5%) finished the day lower.  Other laggards of note were, not surprisingly, India (-1.7%) along with Australia (-0.5%), Indonesia (-0.9%) and Thailand (-0.6%).  However, on the flip side, Korea (+4.3%) continues to be the biggest beneficiary of the semiconductor craze and setting yet another closing record.  As you can see from the chart below from Bloomberg.com, the market is going parabolic right now.  For those who are long, this is great, but history has shown that these moves will revert to the mean over time, and likely pretty quickly when it happens (remember gold and silver in late January?).  Beware here.  Meanwhile China (+1.6%) was amongst the other half of markets there with gains, although no others had substantial movement. 

In Europe, there is broad weakness on the continent, but only France (-1.0%) has shown any movement of note. Otherwise, major bourses here are +/- 0.25% or less.

In the bond markets, yields are higher across the board, with European sovereigns following Treasury yields and all higher by between 2bps and 4bps.  The UK (+6bps) is the outlier here after BOE member, Greene, in an interview explained that all the inflation risks were to the upside in the UK.  Right now, I suspect that is the case around the world.

In the commodity markets, perhaps the surprising feature today is not that gold is lower amid higher oil prices, but that silver (+0.25%) and copper (+1.4%) are both firmer.  In fact, copper is pushing back to its all-time trading highs set in a spike in late January.  But as you can see from the chart below from tradingeconomics.com, this move is gaining some strength.

Finally, the dollar is a bit stronger this morning, although hardly running away.  Other than the rupee discussed above and KRW (-0.65%) which is odd given the equity performance there, the bulk of the movement has been dollar strength on the order of 0.1% to 0.2% against both G10 and EMG currencies.  The dollar is not driving the market bus right now.  For those who follow the DXY, it is right at 98.00, again in the middle of its year long range.

On the data front, it is inflation week around the world with China reporting last night higher than forecast numbers of 1.2% Y/Y and PPI of 2.8% Y/Y with the latter, as you can see in the chart below, the highest number since July 2022.  Perhaps China’s long deflationary slog is over.

Source: tradingeconomics.com

Here are this week’s offerings:

TodayExisting Home Sales4.05M
TuesdayNFIB Small Biz Optimism96.1
 CPI0.6% (3.7% Y/Y)
 -ex food & energy0.4% (2.7% Y/Y)
WednesdayPPI0.5% (4.9% Y/Y)
 -ex food & energy0.3% (4.3% Y/Y)
ThursdayInitial Claims205K
 Continuing Claims1775K
 Retail Sales0.5%
 -ex autos0.6%
FridayEmpire State Manufacturing7.8
 IP0.3%
 Capacity Utilization75.9%

Source: tradingeconomics.com

As well, we get inflation readings from Germany, India, Brazil, France, Spain and Italy this week.  There are several Fed speakers, five in total, but they just don’t seem to matter that much right now.

And that’s what we have, everybody is waiting on the next Iran conflict news with hope for a resolution seeming to ebb slightly.  Frankly, until there is more clarity there, it is difficult to determine what comes next.

Good luck

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Futures Are Juiced

Posted on by 
At first, it was open then not
As small boats attacked and were shot
But now, all eyes turn
To what we will learn
From Payrolls and if things are hot

While yesterday saw risk reduced
This morning stock futures are juiced
So, as we await
More news from the Strait
We’re hoping Jobs give things a boost

The top story was the minor skirmish in the Strait of Hormuz when three US destroyers transited the Strait and escorted one or two ships trapped in the Persian Gulf out.  Iranian small boats attacked and were sunk, but missiles were fired and it seems they hit a Chinese tanker.  I’m guessing President Xi is none too pleased with that outcome.  In the end though, while oil (-0.2%) traded higher through most of yesterday, as you can see in the chart below, it subsequently faded back from its highest levels of the day and remains well below $100/bbl as I type.

Source: tradingeconomics.com

In the end, the major market themes and correlations continue to play out with oil the primary driver and other markets responding either in sync (the dollar and bond yields) or in opposition (stocks and precious metals).  I imagine we are going to see this continue to play out until such time as an agreement is definitively reached to end all the hostilities there, whether that is by signing an accord or the complete destruction of the IRGC leadership.

Which means, we need to turn elsewhere for our news and happily, we have the payroll report to observe this morning.  Leading into this report, we saw the ADP number on Wednesday print at a better-than-expected 109K, while Initial and Continuing Claims yesterday both printed at lower than forecast numbers, indicating that the labor market is in pretty good shape.  With that in mind, here are this morning’s expectations:

Nonfarm Payrolls62K
Private payrolls75K
Manufacturing Payrolls5K
Unemployment Rate4.3%
Average Hourly Earnings0.3% (3.8% Y/Y)
Average Weekly Hours34.2
Participation Rate61.7%
Michigan Sentiment49.5

Source: tradingeconomics.com

Of course, it is key to remember that revisions to this report have been consistently lower over the past several years as per the below chart.  Of course, headlines are everything in today’s world, and while there are many economists and analysts who try to explain the revisions matter and offer a much dimmer view of the labor market, as we all know, the correction to a misleading story published on page 24 never impacts the narrative.

In fact, based on this, and what is apparently a fatally flawed birth/death model at the BLS, and based on the stronger performance in the ADP data as well as the continued low readings from Initial Claims, I anticipate a better than expected number and would not be surprised to see something on the order of 100K.  There is one other thing worth noting that I believe is a major positive, and that is that government payrolls continue to shrink, something that can only help the overall fiscal position in the US.

We can only hope that the recent trend, as seen below, continues.  As I have written in the past, given the remarkable lack of productivity in the government, if these people become baristas at Starbucks, it would add more to economic prosperity for the nation than their current role.

Source: tradingeconomics.com

And with that as preamble, let’s visit the overnight market results in the wake of the little skirmish and President Trump’s comments that the cease fire was still in effect.

Yesterday’s US weakness has been followed around the world, pretty much, with declines in Asia (Japan -0.2%, HK -0.9%, China -0.6%) and the regional exchanges there as well (India -0.7%, Taiwan -0.8%, Australia -1.5%, Indonesia -2.9%) with only Korea (+0.1%) managing to hold its ground during the session.  There is much discussion regarding the upcoming Summit between Presidents Trump and Xi, and the other stories of note are yet another Chinese plan to support domestic consumption.  (It strikes me that these plans are akin to European sanctions on Russia, full of fanfare and producing zero results).

Speaking of Europe, equity markets are weaker there as well with the DAX (-0.7%) leading the way lower after IP was released at a much worse than expected -0.7% in March along with a smaller than forecast trade surplus.  A quick look at the last 3 years of German IP and you can see that Energiewende, their insane energy policy, is effectively deindustrializing the nation, once the heartbeat of Europe.

Source: tradingeconomics.com

As to the rest of the continent, red is today’s color with France (0.7%), Spain (-0.3%) and the UK (-0.1%) all under water.  However, US futures are higher by about 0.5% across the board ahead of NFP.

In the bond market, Treasury yields (-1bp) are reversing part of yesterday’s climb, but are still higher than yesterday morning.  Most of Europe is little changed although UK gilts (-5bps) have performed best after (despite?) local elections where the ruling Labour Party lost half the seats they were defending with the MAGA-like (MUKGA? MEGA?) Reform Party of Nigel Farage and the Green party the big beneficiaries.  Pressure is increasing on PM Starmer to step aside as his favorability plummets, but like most politicians, he is clinging to power with a death grip.  I’m not really sure I understand the mechanics of why gilts would rally, although perhaps as Reform’s power increases, investors believe there will be more fiscal rectitude.

Precious metals, which rallied yesterday again, are continuing higher this morning (Au +0.8%, Ag +2.8%) with Silver back above $80/oz.  I have not mentioned copper (+1.7%) lately, but it is worth noting that the red metal has been powering higher and is approaching the spike high seen in late January, which is the all-time high in the market there.  While there are clearly market internals regarding positioning that are helping the move here, it does portend a positive outlook for the economy given its importance in virtually all manufacturing these days.

Source: tradingeconomics.com

Finally, the dollar is under pressure again this morning with the DXY (-0.1%) back below 98.00, but just barely.  Again, the collapsing dollar narrative makes no sense to me and if I look at the DXY over the last year, 96.50 – 100.00 does a pretty good job of containing the entire range as per below.  If the dollar gets down to that lower level and breaks it convincingly, we can discuss the merits of a short-term vs. long-term view on the dollar’s future.  

Source: tradingeconomics.com

And it is important to note that the long-term future, at least compared to other fiat currencies, remains positive in my view.  Looking at specific movers, both the euro and pound are higher by 0.35% while the yen (+0.1%) remains caught between its negative fundamentals and fears of another round of BOJ intervention.  NOK (+1.3%) is kind of surprising given the lack of impetus in the oil market, but it is no surprise to see ZAR (+0.6%) and CE4 currencies benefit alongside the euro.  LATAM currencies are also doing well although CLP (0.0%) is somewhat surprising given copper’s strong move higher.

And that’s really it today.  We see payrolls in a bit and that should drive the discussion unless there is some other breakthrough in Iran and the ongoing conflict.

Good luck and good weekend

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