Tag Archives: investing

Lest ‘Flation Has Spice

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The market absorbed CPI
And equities started to fly
Though Core prices rose
T’was Headline, I s’pose
Encouraged investors to buy
 
As well, Fed funds futures now price
The Fed will cut rates this year thrice
The upshot’s the buck
Is down on its luck
Beware though, lest ‘flation has spice

 

Core prices rose a bit more than forecast in yesterday’s CPI report although the headline numbers were a touch softer.  The problem for the Fed, if they are truly concerned about the rate of inflation, is that the strength of the numbers came from core services less shelter, so-called Supercore, a number unimpeded by tariffs, and one that has begun to rise again.  As The Inflation Guy™ makes clear in his analysis yesterday, it is very difficult to look at the data and determine that 2% inflation is coming anytime soon.  I know the market is now virtually certain the Fed is going to cut in September, but despite President Trump’s constant hectoring, I must admit the case for doing so seems unpersuasive to me.

Here are the latest aggregated probabilities from the CME and before you say anything, I recognize the third cut is priced in January, but you need to allow me a little poetic license!

However, since I am just a poet and neither institutions nor algorithms listen to my views, the reality on the ground was that the lower headline CPI number appeared to be the driver yesterday and into today with equities around the world rallying in anticipation of Fed cuts.  As well, the dollar is under more severe pressure this morning on the same basis.  However, it remains difficult for me to look at the situation in nations around the world and conclude that the US economy is going to underperform in any meaningful way over time.  

So, to the extent that a currency’s relative value is based on long-term economic fundamentals, it is difficult to accept that the dollar’s relative fiat value will decline substantially, and permanently, over time.  I use the euro as a proxy for the dollar, which is far better than the DXY in my opinion as the Dollar Index is a geometric average of 6 currencies (EUR, JPY, GBP, CAD, SEK and CHF) with the euro representing 57.6% of the basket.  And I assure you that in the FX markets, nobody pays any attention to the DXY.  Either the euro or the yen is seen as the proxy for the “dollar” and its relative value.  At any rate, if we look at a long-term chart of the euro below, we see that the twenty-year average is above the current value which pundits want to explain as a weak dollar.  Too, understand that back in 1999, when the euro made its debut, it started trading at about 1.17 or so, remarkably right where it is now!

Source: finance.yahoo.com

My point is that the dollar remains the anchor of the global financial system, and given the current trends regarding both economic activity and the likely ensuing central bank policies, as well as the ongoing performance of US assets on a financial basis, while short-term negativity on the dollar can be fine, I would be wary of expecting it to lose its overall place in the world.

Speaking of short-term views, especially regarding central bank activities, it appears clear that the market is adjusting the dollar’s value on this new idea of the Fed cutting more aggressively.  If that is, in fact, what occurs, I accept the dollar can decline relative to other currencies, but I really would be concerned about its value relative to things like commodities.  And that has been my view all along, if the Fed does cut rates, gold is going to be the big beneficiary.

Ok, let’s review how markets have absorbed the US data, as well as other data, overnight.  Yesterday’s record high closings on US exchanges were followed by strength in Tokyo (+1.3%), Hong Kong (+2.6%), China (+0.8%) despite the weakest domestic lending numbers in the history of the series back to 2005.  In fact, other than Australia (-0.6%) every market in Asia rallied.  The Australian story was driven by bank valuations which some feel are getting extreme despite the RBA promising further rate cuts, or perhaps because of that and the pressure it will put on their margins.  Europe, too, is rocking this morning with gains across the board led by Spain (+1.1%) although both Germany (+0.9%) and France (+0.6%) are doing fine.  And yes, US futures are still rising from their highs with gains on the order of 0.3% at this hour (7:45).

In the bond market, Treasury yields have slipped -3bps this morning, with investors and traders fully buying into the lower rate idea.  European sovereigns are also rallying with yields declining between -4bps and -5bps at this hour.  JGBs are the exception with yields there edging higher by 2bps, though sitting right at their recent “home” of 1.50%.  as you can see from the chart below, 1.50% appears to be the market’s true comfort level.

Source: tradingeconomics.com

In the commodity space, oil (-0.6%) continues to slide as hopes for an end to the Russia-Ukraine war rise ahead of the big Trump-Putin meeting on Friday in Alaska.  Nothing has changed my view that the trend here remains lower for the time being as there is plenty of supply to support any increased demand.

Source: tradingeconomics.com

Metals, meanwhile, are all firmer this morning with copper (+2.6%) leading the way although both gold (+0.4%) and silver (+1.7%) are responding to the dollar’s decline on the day.

Speaking of the dollar more broadly, its decline is pretty consistent today, sliding between -0.2% and -0.4% vs. almost all its counterparts, both G10 and EMG.  This is clearly a session where the dollar is the driver, not any particular story elsewhere.

On the data front, there is no primary data coming out although we will see the weekly EIA oil inventory numbers later this morning with analysts looking for a modest drawdown.  We hear from three Fed speakers, Bostic, Goolsbee and Barkin, with the latter explaining yesterday that basically, he has no idea what is going on and no strong views about cutting or leaving rates on hold.  If you ever wanted to read some weasel words from someone who has an important role and doesn’t know what to do, the following quote is perfect: “We may well see pressure on inflation, and we may also see pressure on unemployment, but the balance between the two is still unclear.  As the visibility continues to improve, we are well positioned to adjust our policy stance as needed.”  

And that’s all there is today.  The dollar has few friends this morning and I see no reason for any to materialize today.  But longer term, I do not believe a dollar weakening trend can last.

Good luck

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Widely Decried

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While tariffs are widely decried
By analysts, they are worldwide
But Trump’s latest scheme
To some, seems extreme
As license fees are codified
 
So, tech names, who’ve, taxes, deflected
Are now likely to be subjected
To payment of fees
To sell overseas
And revenues will be collected

 

One thing you can never say about President Trump is that he lacks innovative ideas.  Consider one of the biggest complaints over the past decades regarding US corporations; the fact that the tech companies (and drug companies) have been so effective at avoiding paying taxes based on the way they have gamed utilized the tax code and international treaties.  And this was not a partisan complaint as both sides of the aisle were constantly frustrated by large companies’ ability to not pay their “fair share” as it is often described.

It appears that President Trump has come up with a solution for this, charging a licensing fee for companies to sell overseas.  The big news over the weekend was that Nvidia and AMD are both going to pay a licensing fee of 15% of REVENUE on sales of chips to China.  In the case of Nvidia, that is anticipated to be some $2.5 billion with somewhat smaller numbers for AMD.  This is an excellent description of the process by @Kobeissiletter on X. 

I have often expressed the view that corporate taxation, if we are going to have it, ought not be on profits but on revenue.  Corporations are expert at reducing taxable income, maintaining a staff of lawyers and accountants to do just that.  But gaming top line revenues is much harder.  This gambit by President Trump is moving things in that direction.  And remarkably, given these license fees are for exports, it ought to be outside the consumer price chain in the US completely.

There is an article in the WSJ this morning titled, “The US Marches Toward State Capitalism With American Characteristics,” which outlines, and mildly complains, about the changes in the way the US government is dealing with the private sector under President Trump.  It discusses the purchase of 15% of MP Materials, the only US based miner/processor of rare earth minerals, and it discusses these license fees all under the guise of implying this is a bad direction.  And I completely understand that idea as governments tend to be terrible stewards of capital.  However, 25 years of Chinese unfettered access to Western markets while they have skirted the rules codified by the WTO have resulted in some significant national security challenges that can no longer be ignored.  Full marks to President Trump for creative methods to address these challenges, despite the wailing and teeth gnashing of economists.

But other than that story, as well as the ongoing back and forth regarding potential peace talks in the Russia-Ukraine war, not all that much has happened overnight.  For a change, markets are behaving like it is the summer doldrums, so perhaps we should be thankful for the respite.  As such, let’s take a look at how things have done and what we can anticipate this week with CPI and Retail Sales set to be released.

Friday’s US equity rally combined with the news that Nvidia and AMD will be able to export some chips to China saw modest gains there (+0.4%) and in Hong Kong (+0.2%) even though another major property company in China, China South City Holdings Ltd., is being forced into liquidation.  The property situation in China will continue to weigh on the economy there and given property investment was long seen as most Chinese families’ retirement nest egg, will undermine consumption for years.  Elsewhere in the region, there were more gainers (India, Indonesia, Malaysia, Australia, New Zealand, Taiwan) than laggards (Thailand, Philippines) with Japan closed for Mountain Day, a relatively new holiday, and other markets little changed.  

In Europe, though, screens are modestly red with losses on the order of -0.35% across the CAC, DAX and IBEX amid general uncertainties regarding the future economic direction and a lack of earnings positives.  At this hour (7:00), US futures are slightly higher, by 0.2%.

In the bond market, after last week’s auctions have been absorbed, Treasury yields have edged lower this morning, down -2bps, despite Fed funds futures’ probability of that September rate cut slipping to 88% from Friday’s 93%.  In fact, Fed Governor Bowman reiterated over the weekend that she would be voting for a cut at each of the three meetings left this year.  European sovereigns though are little changed, with some having seen yields edge higher by 1bp, as this appears to be a truly lackluster summer day.

Commodities are the only market that is seeing any movement of note, and it is not oil (+0.2%) which has been trading either side of unchanged since last night.  Rather, gold (-1.2%) is suffering this morning as you can see on the chart below as the promise of a potential peace in Ukraine seems to be removing some need for its haven status.  Of course, the thing to really note about the gold market is just how choppy trading has been as conflicting narratives continue to impinge on price movement.

Source: tradingeconomics.com

This decline has pulled down both silver (-1.4%) and copper (-0.95%) with all this happening despite virtually no movement in the FX markets.

Turning to the dollar, one is hard pressed to find any substantial movement in either G10 or EMG currencies. The true outlier this morning is NOK (+0.4%) but otherwise, +/- 0.1% or less is the best description of the price action.  This is what a summer market really looks like!

On the data front, we do get some important information as follows:

TuesdayRBA Rate Decision3.60% (current 3.85%)
 CPI0.2% (2.8% Y/Y)
 Ex food & energy0.3% (3.0% Y/Y)
 Monthly Budget Statement-$140B
ThursdayPPI0.2% (2.5% Y/Y)
 Ex food & energy0.2% (2.9% Y/Y)
 Initial Claims226K
 Continuing Claims1960K
FridayRetail Sales0.5%
 Ex Autos0.3%
 IP0.0%
 Capacity Utilization77.6%
 Michigan Sentiment62.0

Source: tradingeconomics.com

With all the hoopla about the firing of Ms McEnterfar at BLS, you can be sure that there will be lots of discussion on the CPI data regardless of the outcome.  However, as the Inflation Guy pointed out last week, imputing the bottom 30% of items in the basket, which represent something on the order of 2.5% of the total price impact, is likely to have no impact whatsoever.  We also hear from a bunch of Fed speakers, four to be exact, although Richmond Fed President Barkin will regale us twice.  Now that there are more calls for a September cut, it will be interesting to see who remains patient and who is ready to move.

And that’s all there is today.  It is hard to get excited about too much movement given the lack of obvious catalysts.  Of course, one never knows what will emanate from the White House but look for a quiet one, I think.

Good luck

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You Need to Squint

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While data continues to print
It doesn’t give much of a hint
To where things are going
Unless you’re all-knowing
And even then, you need to squint
 
The reason for this situation
Is passive flows constant inflation
No matter the news
Or anyone’s views
The target funds need their proration

 

The hardest thing about macroeconomic analysis is trying to discern whether it has any impact on market movement.  For the bulk of my career, my observation was that while there were always periods when flows dominated fundamentals, they were short-lived periods and eventually those fundamentals returned to dominance in price action.  This was true in equity markets, where earnings were the long-term driver, outlasting short-term bouts or particular manias and this was true in FX markets, where economic performance and the ensuing interest rate differentials were the key long-term driver of exchange rates.  Bond markets were virtually always a reflection of inflation expectations, at least government bond markets and commodities were simple products of supply and demand of the physical stuff.

Alas, since the GFC, and more importantly, the global central bank response to the GFC, flooding financial markets with massive amounts of liquidity, G10 economies have become increasingly finanicialized to the point where the underlying fundamentals have less and less impact and funds flows are the driving force.  The below chart I have created from FRED data shows the ratio of M2 relative to GDP.  For decades, this ratio hovered between 53% and 60%, chopping back and forth with the ebbs and flows of the economy during recessions and expansions.  But the GFC changed things dramatically and then the pandemic and its ensuing response put financialization on steroids.

By 2011, this ratio hit 60% for the first time since 1965, and it has never looked back.  The result is that there is ever more money sloshing around the economy looking for a home with the best return.  This is part and parcel as to why we have seen both massive asset price inflation as well as consumer price inflation, too much money chasing too few goods.  And this is the underlying facet in why funds flows, whether between asset classes or between nations, are the new driving force of market price action.  Michael Green (@profplum99 on X) has done the most, and most impressive, work on the rise of passive investing, which is a direct consequence of this financialization.  The upshot is, as long as money comes into the system (your semi-monthly 401K flows are the largest) they continue to buy stocks regardless of anything fundamental.  And as almost all of it is capitalization weighted, they buy the Mag7 and maybe some other bits and bobs.  It doesn’t matter about fundamentals; it only matters how much they have to buy.

So, with that caveat as to why fundamental macro analysis has been doing so poorly lately, a look at the data tells us…nothing really.  As I wrote yesterday, the two main blocs of the economy, goods production and services production, are out of sync, with marginal strength in services outweighing marginal weakness in goods production and resulting in slow growth.  Whether you look at the employment situation, the ISM data or the inflation data, none of it points in a consistent and strong direction.

For instance, yesterday’s productivity and Labor cost data were better than expected, far better than last quarter’s and pointing to an improved growth outcome.  However, if we look at the past five years of this data, we can see that labor costs have grown dramatically faster than productivity as per the below chart (ULC in grey, Productivity in blue).

Source: tradingeconomics.com

Looking at this, it is no surprise that price inflation has risen so much, given labor’s impact on prices.  But, again, this is merely another impact of the massive flow of money into the economy over the past 15 years. 

Virtually every piece of data we get has been significantly impacted by this financialization which is one reason that previous econometric models, built prior to the GFC, no longer offer effective analysis.  The system is very different.  I continue to believe that over time, fundamentals will reassert themselves, but that belief structure is under increased pressure.  Perhaps YOLO and BTFD are the future, at least until our AI overlords come into their own and enslave the human population.

In the meantime, let’s look at what happened overnight.  Yesterday’s mixed, and relatively dull, US session was followed by a mixed session in Asia with Tokyo (+1.85%) soaring on news that there were going to be adjustments, in Japan’s favor as well as rebates, to the tariff schedule.  However, both the Hang Seng (-0.9%) and CSI 300 (-0.3%) saw no such love from either the Trump administration or investors.  As to the rest of the region, red (Korea, Australia, India, Thailand, Singapore) was more common than green (Malaysia).  Apparently, tariff adjustments are not universal.  In Europe, both Spain (+0.8%) and Italy (+0.8%) are having solid sessions but they are alone in that with the other major bourses (DAX 0.0%, FTSE 100 0.0%, CAC +0.2%) not taking part in the fun.  US futures, at this hour (7:30) are higher by about 0.4%.

Bond markets, meanwhile, are sleeping through the final day of the week, with Treasury yields unchanged on the day and European sovereign yields having edged higher by just 1bp across the board.  It seems, nobody cares right now.  After all, it is August and most of Europe is on vacation anyway.

Commodity markets are showing oil (+0.6%) bouncing off its recent lows, but this seems more about trading activity than fundamental changes.  Perhaps there will be a Russia-Ukraine peace, but it is certainly not clear.  Trump’s tariffs on India for continuing to buy Russian oil are also having an impact, but as I showed yesterday, I believe the trend remains modestly lower.  Gold (-0.3%) is currently lower but has been extremely choppy as you can see from the 5-minute chart below

Source: tradingeconomics.com

This is a market where supply and demand dynamics have been impacted by both tariffs and the interplay between financialized markets (i.e. paper gold or futures) and the actual metal.  There are many theories as to different players trying to manipulate the price either higher (the Trump administration in order to revalue Ft Knox holdings) or lower (the ‘cabal’ of banks that have ostensibly been preventing the price from rising according to the gold bug conspiracy theorists).  Recently, there has apparently been less central bank demand, but that can return at any time based on political decisions.  I continue to believe that it is an important part of any portfolio, but it should be tucked away and forgotten in that vein.  As to the other metals, they are little changed this morning.

Finally, the dollar is stronger this morning, as the euro (-0.3%) and yen (-0.65%) are both under pressure and leading the way.  In fact, virtually every G10 currency is weaker (CAD is unchanged) and yet the DXY seems to be weaker as well. Something is amiss there.  Meanwhile, EMG currencies are mostly down on the session with KRW (-0.5%) the laggard, but weakness in INR (-0.2%), PLN (-0.25%) and CZK (-0.25%). 

On the data front, there is none today.  Yesterday, Atlanta Fed president Bostic explained his view that only one rate cut was likely this year, which is not what we have been hearing from other FOMC members.  Obviously, there is still uncertainty at the Fed, but they also have more than a month to decide.  Today, we hear from KC Fed president Alberto Musalem, one of the more hawkish members, so it will be interesting to see if he has changed his tune.

I would contend that confusion is the driving force in markets because data markers are not pointing in one direction nor are Fed speakers.  But it is a Friday in August so I suspect it will be a quieter day as traders look to escape to the beach for the weekend.  This morning’s trends, a higher dollar and higher stock prices, seem likely to prevail for the day.

Good luck and good weekend

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A Bevy of Doves

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The Fed has a bevy of doves
Whose world view was given some shoves
When Trump was elected
As they were subjected
To boxing, though without the gloves
 
But suddenly, they’ve found their voice
And rate cuts are now a real choice
So, bad news is good
And traders all should
Buy stocks every day and rejoice

 

Apparently, the signal has been given from on high at the Marriner Eccles building that discussing rate cuts is permitted.  Patience is no longer the virtue it was just last week.  In the past two days, three different FOMC members, Daly, Cook and Goolsbee, have returned to form and are quite open to cutting rates sooner after the recent employment data.  I would contend that rate cuts are their natural stance, but they were discouraged from expressing that view because it would put them in sync with the president, something that they very clearly have worked to avoid.  Regardless of the history, the Fed funds futures market is now pricing in a 93.2% probability of a cut next month as you can see below.  Perhaps more interesting is the fact this probability has risen from 37.7% in just the past week.  My how quickly things can change.

Source: cmegroup.com

I’m sure you recall that one of the key reasons Chairman Powell and his acolytes described the need to remain patient was the potential impact of tariffs on inflation.  This was even though the universal view was tariffs, a new tax, would be a one-off price increase, so would have no long-term impact, and that higher interest rates would do nothing to fight this particular cause of inflation, just like the price of food doesn’t respond to interest rates.  However, I want to highlight a piece from the WSJ this morning that asks a very good question, why wasn’t Powell concerned about all the tax increases from the previous administration, or for that matter, the tax increase that would have occurred had the BBB not been enacted.  Again, all the discussion that the Fed is apolitical is simply not true and never has been.

Moving on, I wanted to follow up on yesterday’s discussion as I, along with many market observers, have been trying to come to grips with the inconsistency in the data.  Some is strong, other parts are weak, and it is difficult to arrive at a broad conclusion.  My good friend, the Inflation_Guy™ put out a podcast the other day and made an excellent point, historically, there was a synchronicity between activity in the goods sector and the services sector, so when things in either sector started to decline (or rise) it took the other sector along with it.  But that is not currently the case.  

Instead, what we have seen is asynchronous behavior with the correlation between prices in the two sectors essentially independent of each other over the past five years, rather than tracking each other as they had done for the previous 30 years.  Extending the price action to overall activity, which seems a reasonable concept as prices follow the activity, depending on the data you observe, you may see strength or weakness, rather than everything heading in the same direction.  However, it is worthwhile to remember that systems in nature eventually do synchronize (see this fantastic clip) and so eventually, I suspect that both sectors will do so and a full blown recession (or expansion) will materialize.  Just not this week!

Which takes us to markets and how they have been responding to all the tariff news.  I think you can make one of the following two arguments regarding equity investors; either they have absorbed the tariff information and ensuing changes in trade behavior and have decided that earnings will continue to grow apace, or, they have no idea that there is a cliff ahead and like the lemmings they are, they are rushing toward the abyss.  Perhaps it is simply that President Trump has discussed tariffs so much that they have become the norm in any analysis thought process, and so modest adjustments don’t matter.  But whatever the reason, we continue to see strength pretty much across the board here.

The rally in the US yesterday was followed by strength across almost all of Asia with gains in Tokyo (+0.7%) and Hong Kong (+0.7%) as well as Korea, India and almost all regional bourses.  China, however, was unchanged on the session after their trade balance rose a less than expected $98.2B, as imports rose more than expected.  However, as this X post makes clear, it should be no surprise given the renminbi’s real exchange rate continues to fall, hence their exports remain quite competitive, tariffs or not.  As to Europe, strength is the word here as well (DAX +1.5%, CAC +1.2%, IBEX +0.5%) although the FTSE 100 (-0.5%) is lagging ahead of this morning’s expected BOE rate cut.  And don’t worry, US futures are higher across the board as well.

In the bond market, yields have been edging higher with Treasury yields up 2bps after yesterday’s 10-year auction was not as well received as had been hoped, but then, yields were 25 basis points lower than just a week ago, so demand was a little bit tepid.  European sovereign yields are also edging higher, mostly higher by 1bp and we saw the same thing overnight in JGBs, a 2bp rise.

In the commodity markets, oil (+0.6%) has found a short-term bottom, but is just below $65/bbl, which seems like a trading pivot of late as can be seen by the chart below from tradingeconomics.com.  As my personal bias is that the price is likely to decline going forward, the 6-month trend line heading down does appeal to me, but for now, choppy is the future.

Meanwhile, metals markets are in fine fettle this morning (Au +0.4%, Ag +1.4%, Cu +0.15%) as the dollar’s recent weakness seems to be having the expected effect on this segment of the market.

Speaking of the dollar, as more tariffs get agreed, I am confused by its weakness since I was assured that the response to higher US tariffs would be a stronger dollar.  But arguably, the fact that the Fed is suddenly appearing much more dovish is the driver right now, and while the euro is little changed this morning, we are seeing the pound (+0.4%), Aussie (+0.3%) and Kiwi (+0.4%) all move up, although the rest of the G10 space is higher by scant basis points.  In the EMG bloc, movement, while mostly higher in these currencies, is also measured in mere basis points, with INR (+0.25%) the largest mover by far.  Arguably, it is fair to say the dollar is little changed.

On the data front, the BOE did cut rates 25bps as expected, although the vote was 5/4, a bit more hawkish than forecast which is arguably why the pound is holding up so well.  US data brings Initial (exp 221K) and Continuing (1950K) Claims as well as Nonfarm Productivity (2.0%) and Unit Labor Costs (1.5%).  This is a much better mix of this data than what we saw in Q1 with productivity falling -1.5% while ULC rose 6.6%.  That was a stagflationary outcome.  In addition, we hear from two more Fed speakers, Bostic and Musalem, as the Fed gets back in gear this week.  It will be interesting to see if they are more dovish as neither would be considered a dove ex ante.

Apparently, we are back on board the bad news is good for stocks train, and it is hard to fight absent a collapse in earnings or some other catalyst.  As such, with visions of Fed cuts dancing in traders’ heads, I suspect the dollar will remain under pressure for a while.

Good luck

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Misguided

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On Friday, the news was a sign
Of imminent US decline
The Fed was a hawk
And all of the talk
Was Trump’s actions wiped off the shine
 
But yesterday, markets decided
That Friday’s response was misguided
They’ve come to believe
A Fed funds reprieve
By Powell will soon be provided

 

As I have frequently written in the past, markets are perverse.  The narrative Friday was about the dire straits in which the US found itself with the employment situation collapsing and the recession that has been forecast for the past three years finally upon us.  Part of this story was because of the Fed’s seeming intransigence regarding interest rates as made clear by Chairman Powell’s relatively hawkish comments at the FOMC press conference last week.

But that story is sooo twenty-four hours ago. In the new world, the huge bond market rally that was seen on Friday, and equally importantly, the changing pricing of Fed funds rate cuts has the new narrative as, the Fed is going to cut so buy stonks!  Confirmation of this new narrative was provided by SF Fed President Mary Daly who remarked yesterday evening, “time is nearing for rate cuts, may need more than two.”  All I can say is wow!  

The below chart shows the daily moves, in basis points, of the 2-year Treasury note which is seen as the market’s best indicator or predictor of future Fed funds rates.  On Friday, the yield fell nearly 25bps, essentially pricing in one additional rate cut coming, and as we saw with the Fed funds futures market, that pricing is now anticipating three cuts this year.  Ms Daly merely reconfirmed that news.

Source: https://x.com/_investinq/status/1951356470877925408?s=46

Perhaps it is fair to ask why Daly has taken so long to come around to this view.  After all, she is a known dove and has been for her entire time at the Fed.  As I have asked before, why haven’t the other known doves, like Governors Cook and Jefferson, been out there talking about rate cuts?  For anyone who wants to continue to believe that the Fed is apolitical, nonpartisan or above politics, this is exhibit A as to why it is not.  In fact, if you look, only one Board member was considered a hawk in this analysis by In Touch Markets, and she just resigned.  The other hawks are all regional Fed presidents.  Perhaps this is why they were so slow to raise rates when inflation was roaring in 2022 and why they were so anxious to cut rates in 2024 on virtually no news other than the upcoming election. 

To be clear, until Friday’s NFP data, it was difficult to make the case, in my mind, for a cut because I continue to see inflationary pressures beyond any tariff impacts.  But if the labor market is weaker than had been assumed, that will certainly open the door to more cuts.  Of course, the conundrum is, if the economy is so weak that the Fed needs to cut, why are stocks rallying?  Arguably, a weak economy would foretell weaker earnings growth, a direct negative to equity valuations.  But that appears to be old-fashioned thinking.  I guess I am just an old-fashioned guy.

Ok, let’s turn to the overnight activity.  Starting with bonds, since the big move Friday, Treasury yields have been little changed, climbing 2bps overnight to 4.21%, but still hovering near the bottom of their recent trading range with only the Liberation Day announcement panic showing yields below the current level.  This is a great boon for the Treasury as auctions of 3-, 10-, and 30-year Treasuries are due this week starting with the 3-year today.

Source: tradingeconomics.com

European sovereign yields have also edged higher by 1bp across the board after PMI data was released this morning, pretty much exactly at expected levels.  The outlier last night was JGB yields which slipped -4bps and continue to slide away from designs of a BOJ rate hike.

In the equity markets, yesterday’s US rally was followed almost universally in Asia (Japan +0.65%, China +0.8%, Hong Kong +0.7%, Australia +1.2%) with only India (-0.3%) lagging there.  As to Europe, it too is having a good day with the DAX (+0.8%) leading the way although strength almost everywhere as the PMI data was good enough to keep spirits higher.

In the commodity markets, oil (-1.1%) is slipping for a fourth consecutive day, but is still right in the middle of its $60 – $70 trading range.  There remain so many potential geopolitical issues with saber rattling between the US and Russia and President Trump’s threatened excess tariffs on nations who buy Russian oil that it remains difficult to discern supply/demand characteristics.  Certainly, if the US is heading into a recession, that is likely to dampen demand for a while, but that remains unclear at this time.  As to the metals, gold (-0.65%) is giving back some of its post NFP gains but if I look at the chart below, all it shows is a relatively narrow trading range with no impetus in either direction.  

Source: tradingeconomics.com

The rest of the metals complex is being dragged lower by gold this morning, but not excessively so.

Finally, the dollar is a touch stronger today, despite the rate cut talk, as the euro (-0.4%) and yen (-0.55%) lead the G10 currencies down.  While I understand the rationale for the dollar to soften in the short- and medium-term vs its counterparts, it is very difficult for me to look at the political and economic situations elsewhere in the world and think I’d rather be investing there.  Europe is a mess as is Japan.  And don’t get me started on the emerging market bloc.  So, remember, while day-to-day movements can be all over the map and are impacted by things like data releases or announcements, structural strength or weakness remains largely in place, and the US situation appears stronger than most others for now.   Touching briefly on EMG currencies, the dollar is firmer vs. virtually all of them, mostly on the order of 0.4% or so.

On the data front, today brings the Trade Balance (exp -$61.4B) and then ISM Services (51.5) at 10:00.  We don’t get the first post-FOMC speech until tomorrow by Governor Cook, so it will be interesting to see if there are more doves who are willing to show their colors.  But in the end, as demonstrated by the quick reversal of the narrative from Friday to Monday, there remains an underlying bid to risk assets and we will need to see substantial economic weakness to remove that bid, even temporarily.

Good luck

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Typically Dumb

Posted on by

On Friday, the market was sure
The end was nigh, and we’d be poor
The dollar was sold
And stocks mem’ry-holed
While bonds sashayed like haute couture
 
But somehow, the end did not come
As markets around the world hum
Perhaps we should learn
That markets do churn
And pundits are typically dumb

 

I admit to being confused this morning as by Friday evening, the entire narrative was that the recession was here, equity markets had peaked, and the dollar was set to collapse.  All the negative outcomes that have been prognosticated by doom pornsters were arriving and Friday was merely the first step.

And yet, here we are this morning, and not only did the sun rise in the East again, but equity markets throughout Asia also saw far more winners (China +0.4%, Hong Kong +0.9%, Korea +0.9%, India +0.5%, Singapore +1.0%, Thailand +1.25%, Philippines +0.7%) than laggards (Taiwan -0.2%, Malaysia -0.4%, Indonesia -1.0%, New Zealand -0.35%).  As to Europe, it is universally green (DAX +1.25%, CAC +0.8%, IBEX +1.4%, FTSE 100 +0.3%) and US futures, at this hour (6:35) are higher by 0.7% or so.  

Meanwhile, the dollar is higher against the euro (-0.15%), yen (-0.2%) and Swiss franc (-0.5%), although we have seen modest gains in some G10 currencies (GBP +0.15%, AUD +0.15%).  And if we look across the EMG bloc, while KRW (+0.4%) has rallied along with CNY (+0.2%), those are the outliers with the rest of the space softer by about -0.2% or so.  In other words, there has not yet been a wholesale rejection of the dollar on global foreign exchanges.

As to bond yields, after Friday’s dramatic decline, falling 15bps in the hour after the NFP report, they have largely stagnated, rising 1bp this morning.  European sovereign yields have slipped about 3bps on average as they continue the Friday move having closed before all the fun was finished.  In fact, while I have chosen the EURUSD exchange rate as a graph to depict the movement, basically every chart looks the same as this with a dislocation at the 8:30 mark on Friday and then a new range quickly established.

Source: tradingeconomics.com

I highlight this because so frequently, the narrative gets ahead of itself, and Friday was one of those days.  Yes, as I explained last night, the NFP data was weak, albeit still positive regardless of the fireworks surrounding the firing of the BLS Commissioner.  And remember, the idea that President Trump fired McEntarfar because the data displeased him does not mean she was not incompetent.  Certainly, nothing in her career demonstrates keen economic insights.  But that is still the talking point du jour.

However, that is a tired story at this point.  In fact, arguably, the reason it is getting so much press is that there is precious little else new to discuss amid the summer doldrums.  After all, the Russia Ukraine war continues apace with no end in sight, although it seems the rhetoric has increased with ex-president Medvedev seeming to threaten nuclear war and the US moving attack submarines closer to Russia.  

Texas Democratic state legislators have fled the state to avoid a special session where redistricting is due to be completed, so that has a lot of headlines, but seems likely to end like the last time this occurred, with the redistricting being completed, and Fed Governor Adriana Kugler stepped down a few months earlier than her term ends which opens another seat on the Fed for Mr Trump to fill.  

Of these stories, while our antenna should be raised given the Russia nuclear war scenario, it still seems a very low probability event, while Texas may matter in the midterm elections if they successfully redistrict as it is supposed to ensure another 5 Republican seats in the House.  But a new Fed governor, perhaps a precursor to the next Chair will have tongues wagging in the market until the seat is filled, and then until Powell is gone.

So, take your pick as to what is important.  Personally, I think the actual payroll data is the most important issue as we continue to see significant gyrations within the numbers.  Less government hiring (I read that 154,000 federal employees took the buyout) is an unalloyed good for the nation.  After all, if nothing else, given the average federal government employee salary is $106,382 (according to Grok) then that is about $16.4 billion less expenditure by the Federal government.  Every little bit helps.  In fact, all the data we have seen of late shows that the private sector continues to grow while the public sector is shrinking.  Over time, that is undoubtedly a better situation for the US and will reflect in the value of US assets.

But that’s really all there is to discuss, so let’s look at the data upcoming this week:

TodayFactory Orders-4.9%
 -ex Transport0.1%
TuesdayTrade Balance-$61.6B
 ISM Services51.5
ThursdayBOE Rate Decision4.00% (-0.25%)
 Initial Claims220K
 Continuing Claims1947K
 Nonfarm Productivity1.9%
 Unit Labor Costs1.6%
 Mexican Rate Decision7.75% (-0.25%)

Source: tradingeconomics.com

In other words, while we will hear from two more central banks as they cut rates (compared to a Fed that remains on hold, for now) it is hard to get that negative on the dollar.  Fed funds futures are pricing an 87% chance of a rate cut in September and now a 56% chance of three cuts this year, one at each meeting left, so that will weigh on the buck a bit, but if the US is cutting because recession is arriving, the economic situation elsewhere will be more dire.  After all, the US remains the consumer of last resort, and if the US pulls back, everyone else will feel it.

The big picture remains that the broader dollar trend is lower, but it is starting to make a case that trend is ending.  The data this week is largely second tier, and we need to wait until next week for CPI.  I have a feeling we will see very little net movement until then.

Good luck

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Stroke of a Pen

Posted on by

While NFP’s top of the list
For traders this morning, the gist
Of recent releases
Show more price increases
A trend that cannot be dismissed
 
As well, Tariff Man, once again
Imposed more by stroke of a pen
While stocks are declining
The dollar’s inclining
To rise vs. the euro and yen

 

Let’s get the upcoming data out of the way first as the Employment report is due to be released at 8:30. Current median expectations are as follows:

Nonfarm Payrolls110K
Private Payrolls100K
Manufacturing Payrolls-3K
Unemployment Rate4.2%
Average Hourly Earnings0.3% (3.8% Y/Y)
Average Weekly Hours34.2
Participation Rate62.3%
ISM Manufacturing49.5
ISM Prices Paid70.0
Michigan Sentiment62.0

Source: tradingeconomics.com

This report is obviously of great importance as the Fed continues to rely on a solid labor market as its key justification for not cutting rates.  At least that’s its public stance.  Recall, too, that last month’s result of 147K was significantly higher than forecast and really backed them up.  In fact, I would contend that one of the reasons that Chairman Powell was willing to sound mildly hawkish on Wednesday is because of the labor market’s ongoing performance.  

It is interesting to juxtapose this strength with the increasing number of stories about how the increase in investment and usage of AI, especially at tech firms, is driving a significant amount of personnel reductions.  And yet, the broad data continue to point to a solid labor economy.

However, I think it is worth taking a closer look at recent inflation focused data as that, too, is going to be a key driving force in the central bank debate worldwide.  Yesterday’s PCE data was largely as expected but resulted in a faster pace of inflation on both the headline and core bases.  If we consider the trend over the past three years, as per the Core PCE chart below, it appears that the nadir was reached back in June of last year, and while not every print has been higher, I will contend the trend is starting to point upwards.

Source: tradingeconomics.com

Meanwhile, if we turn our attention to European inflation data, while this morning’s Eurozone flash print was unchanged from last month, it was higher than expected.  We saw the same trend in individual Eurozone nations yesterday with Germany, Italy and France all showing the recent disinflationary trend stopping, at least for the past month.  With these recent releases, the analyst community is of the mind that the ECB is likely to hold rates steady again in September, extending the pause on their previous rate cutting cycle.  The strong belief is that US tariffs are going to dampen economic activity and, with that, inflation pressures.

As to the US, with President Trump having announced another wave of tariffs yesterday, as the 90-day window closed, once again the analyst community is calling for inflation to rise here.  Ironically, these analysts may be correct that US inflation is going to be slowly heading higher, but whether that is due to tariffs, or perhaps the fact that more than ample liquidity remains in the economy and services prices continue to rise has yet to be determined.

At this point, I think it might be useful to break out an updated version of a chart that has made the rounds before showing price changes since 2000 broken down by categories.  Virtually every sector that has seen significant price rises is on the service side of the ledger while most goods saw either deflation or very modest (~1% per annum) inflation.

Housing, which is both a good and a service, and textbooks, which are directly linked to tuition, are the two outliers.  Now, many will complain that something like New Cars having risen only 24.7% since 2000 is crazy given their much higher sticker prices, and that is clearly hedonic adjustments doing its job.  But if you consider the key expenses in your life, housing, food and health care are generally top of the requirements.  It is abundantly clear from this chart that the American angst on prices is well founded.  With that in mind, tariffs are exclusively imposed on goods, not services, so given services represent 77.6% of the US economy as of 2022 (as per Grok), the inflationary impact of tariffs seems like it might not be quite as high as the hysteria indicates.

(This is a perfect time to remind you of a great way to manage your inflation risk if you participate in the cryptocurrency markets by buying USDi, the only fully backed inflation tracking coin available.  Learn more at www.usdi.com.  It is essentially inflation-linked cash.)

Coming back around to the market, I think it is a good time to review one of the other major narrative themes, that the dollar is collapsing as foreigners flee because of the massive debt load, and that the dollar will soon lose its reserve status.  You know I have dismissed this idea from the beginning as nothing more than doom porn and an effort by some analysts to get clicks.  

There is no doubt that there had been a downtrend in the dollar for the first six months of 2025, and as has been written repeatedly, the decline was the largest during the first half of the year since the 1980’s.  As well, my concern over the dollar has been based on the idea that the Fed would indeed be cutting rates despite no need to do so, and that would undermine its yield advantage.  But a funny thing happened on the way to the death of the dollar, it stopped falling.  While I have been using the DXY chart as my proxy, pretty much every chart looks the same as per the below of both the euro and yen, where the nadir was at the beginning of July and the dollar has risen vs. both somewhere between 3% and 5%.

Source: tradingeconomics.com

In fact, as I look down my board, the dollar has risen against every major currency over the past month, with even tightly controlled CNY declining -0.8%, and the yen falling furthest, down nearly -5.0%.  Combine this with the news that Treasury auctions have been well attended with significant foreign interest, and it is hard to conclude the end is nigh for the US economy.

Ok, a really quick turn to markets here as this has gone on longer than I expected.  Equities are red everywhere this morning after yesterday’s US declines.  Japan (-0.7%), China (-0.5%) after weak PMI data, Hong Kong (-1.1%) and Australia (-0.9%) set the tone for Asia.  In Europe, it is even worse with the CAC (-2.2%) and DAX (-1.9%) both under more pressure as a combination of increased worries over trade (although given they ostensibly have a deal, I’m not sure what the issue is) and companies there reporting weaker than forecast results have been the problem.  US futures at this hour (7:30) are all pointing lower by about -0.85%.

Despite the fear in stocks, bonds are not seen as the answer this morning with Treasury yields edging higher by 1bp and European sovereign yields all higher by between 3bps and 5bps.  I guess the inflation reading has a few traders nervous.  Interestingly, if you look at the ECB’s own website showing rate change probabilities, there is a 14% probability of a rate HIKE priced in for the September meeting!  JGB yields have also edged higher by 1bp as the BOJ, in their policy briefing yesterday, raised their inflation forecasts for 2026, ostensibly as a precursor to the next rate hike there.  I’ll believe it when I see it!

As to commodities, oil (-1.1%) after touching $70/bbl yesterday has rejected the level.  While secondary sanctions on Russian oil exports continue to be discussed, they have not yet been implemented.  I continue to believe the price ought to be lower, but clearly there is a risk premium for now.  In the metals markets, gold (+0.4%) continues to find support despite weakness in other markets (Ag -0.6%, Cu -0.9%) as its millennia-long status as the only true safe haven is reasserting itself.  After all, Bitcoin (-0.6%) has not been able to match the relic’s performance of late despite its modern twist.

And that’s really all there is (I guess that’s enough) as we head into the weekend.  The market tone will be set by the NFP data, where my take is a strong report will see the dollar rally, bonds suffer, and stocks suffer as well as hopes for a rate cut fade further.  Conversely, a weak report should see the opposite impacts.

Good luck and good weekend

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Just a Bad Dream

Posted on by

Before yesterday traders whined
‘Bout how much that vol had declined
But President Trump
Caused copper to dump
And still, Chairman Powell, maligned
 
So, chaos is now the new theme
Though most hope it’s just a bad dream
And ere the week ends
Based on recent trends
We could see, results, more extreme

 

It isn’t often that copper is the talk of the town, but this is a new world in which we live, and as I’ve repeatedly explained, all that we think we knew about the way things work, or have worked in the past, is generically wrong.  It is with this in mind that I lead with a chart of the copper price, which after having rallied dramatically back in April, after Liberation Day, and again in July, both times on the back of tariff announcements, collapsed yesterday when President Trump altered the conversation by explaining that tariffs on copper would not be on the raw metal itself, but rather on refined products instead.  As you can see from the chart, this resulted in a massive decline, nearly 23% in the past twenty-four hours. 

Source: WSJ.com

Essentially, the US price, as traded on the COMEX, returned to be in line with the ROW price, as traded on the LME.  That doesn’t make the move any less dramatic, but the question of how long those price differentials could be maintained was always an open one.  At any rate, that was the biggest mover of the day yesterday and naturally, it had knock-on effects elsewhere with the entire metals complex falling sharply (Au -1.85%, Ag -3.0%, Pt -9.7%) as well as some currencies that are linked to those metals like CLP (-1.5%) and ZAR (-1.4%).  Remember how much complaining there was because market activity had slowed so much?  I bet most folks are looking wistfully at that pace this morning!

Turning to the other key focus of yesterday, the FOMC meeting, the FOMC statement was exactly as expected, with continued focus on “solid” labor market conditions and moderate economic activity acting as the rationale to leave rates on hold.  As widely expected, both Governors Bowman and Waller dissented, each calling for a 25 basis point cut.  The two schools of thought continue to be 1) headline data releases have been masking underlying economic weakness (declining home sales, declining air travel and restaurant activity); and 2) while those issues may be real at the margin, the fact that financial markets continue to rise, with significant speculative activity in things like meme coins and cryptocurrency in general, as well as Private Credit, indicate there is ample liquidity in the market and no reason to adjust policy.

This poet, while not a PhD economist (thankfully!), comes down on the side of number 2 above.  There has been talk by numerous, quite smart analysts, about the underlying weakness in the economy and how the data would be demonstrating it very soon.  Whether it is the makeup of the employment situation, the housing market showing a huge imbalance of homes for sale vs. buyers (at least at current prices) or the added uncertainty of tariffs and how they will impact the economy, this story has been ongoing for more than three years without any proof.  In fact, yesterday’s GDP reading for Q2 was a much higher than expected 3.0%, once again undermining the thesis that the economy is already in a recession.  If so, it is the fastest economic growth ever seen in a recession.

In fact, I do not understand the rationale for so many that a rate cut is necessary.  I realize the market continues to price a 60% probability of a cut in September and about 35bps of cuts by year end, but it makes no sense to me.  In fact, the market is pricing for 110 basis points of cuts through 2026.  Now, either market participants are anticipating a significant slowdown in inflation, which given all the tariff talk seems unlikely, or they see that recession on the horizon.  At this point, I have come to believe it is nothing more than wishful thinking because there is such a strong belief that Fed funds rate cuts lead to higher equity prices, and after all, isn’t that the goal?

Chairman Powell, despite all the pressure he receives from the White House, has not budged.  In this instance, I believe he is correct.  After all, if the data suddenly implodes, the Fed can cut far more substantially and do so on an intermeeting basis if necessary.  Remember, ahead of the election, he cut rates 50bps for no discernible reason based on the data.  Unemployment had risen from 3.9% to 4.2% over the prior three months and that was enough to scare him (although there was clearly a political motive as well).  If the Unemployment Rate rises to 4.5% on September 5th, they could cut that day if they thought things were really unraveling.  If the Fed is truly data dependent, then the data does not yet point to a major economic problem.  And the one thing we know about the Trump administration’s policies is they are going to try to run the economy as hot as possible.  That does not speak to lower interest rates.

Ok, let’s look at how markets around the world absorbed these changes, and how they are preparing for today’s PCE and tomorrow’s NFP data.  Despite all the noise, the DJIA was the worst performer yesterday, sliding just -0.4%, while the NASDAQ actually rallied at the margin, +0.15%.  And this morning, futures are pointing much higher (NASDAQ +1.4%, SPU +1.1%) as both Meta and Microsoft beat estimates handily.

Overnight, while Japanese shares (+1.0%) rallied nicely, China (-1.8%) and Hong Kong (-1.6%) significantly underperformed as weaker than expected PMI data put a damper on the idea that stimulus was going to solve Chinese problems.  A greater surprise is that Korea (-0.3%) didn’t perform better given the announcement that they had agreed a trade deal with the US with 15% baseline tariffs, although that may have been announced after the markets there closed.  But the rest of Asia had a rough session with most key regional exchanges (Singapore, Philippines, Indonesia, Malaysia) all declining about -1.0% with only Taiwan (+0.35%) on the other side of the ledger.  However, if we continue to see strength in the US tech sector, and trade deals keep getting inked, I suspect these markets will be able to rebound.

In Europe, the picture is also mixed, with the CAC and DAX essentially unchanged after in-line inflation readings, while Spain’s IBEX (+0.5%) reacted positively to Current Account data while the FTSE 100 (+0.5%) rallied on strong earnings data from Rolls Royce and Shell Oil.

Perhaps the most interesting aspect of yesterday was how the bond market sat out the chaos.  Treasury yields edged higher by 2bps yesterday and this morning they have fallen back by -1bp.  European sovereign yields this morning are essentially unchanged, although a few nations have seen yields slip -1bp.  In many ways, I feel that this is confirmation that despite a lot of noise, not much has really changed.

Oil (-0.5%), is giving back some of yesterday’s $2.00/bbl surge which was based on more sanctions talk from President Trump on Russia and reviving the discussion on 100% secondary sanctions on nations that import oil from Russia.  While EIA data showed a major inventory build, the talk was more than enough to spook traders.

Finally, currency markets, which have seen dollar strength for the past several sessions, are relatively calm this morning, at least in the G10, where the DXY is unchanged, although at its highest level since just before Memorial Day.  In that bloc, JPY (-0.5%) is the laggard after the BOJ left policy on hold, as expected, and while the yen has not been the market’s focus lately, it is back to 150.00 this morning for the first time since March.

Source: tradingeconomics.com

Remember all the talk about the end of the carry trade and how the yen was going to explode higher?  Me neither!  As to the EMG bloc, other than the aforementioned metals focused currencies, there has not been much movement in this space either.  However, overall, while the longer-term trend has clearly been lower, this bounce looks more and more like it is gaining strength.  The DXY is a solid 2% through the trendline and a move to 102 seems well within reason in the near term.

Source: tradingeconomics.com

On the data front, this morning brings Initial (exp 224K) and Continuing (1960K) Claims, Personal Income (0.2%) and Spending (0.4%) and PCE (0.3%, 2.5% Y/Y headline, 0.3%, 2.7% Y/Y Core) all at 8:30.  Then at 9:45 we see Chicago PMI (42.0).  There are no Fed speakers and assuming today’s data is in line, I expect that all eyes will turn to earnings from Apple and Amazon after the close and then NFP tomorrow.  So, despite yesterday’s volatility, I see a respite for the day.

Good luck

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Qualm(s)

Posted on by

As all of us wait for the Fed
And try to absorb what’s been said
Investors are calm
Though pundits have qualm(s)
Their warnings of problems are dead
 
While no move is likely today
So many continue to pray say
A rate cut is coming
To keep markets humming
So, shorts best get out of the way

 

Markets have been in wait and see mode, at least equity markets have, for the past week as investors, traders and algorithms seek something new to discuss.  In fact, a look at the chart below shows that the S&P 500 has moved the grand total of 9 points over the past week!

Source: finance.yahoo.com

Yes, there have been some earnings announcements, with a couple of key ones this afternoon (MSFT and META), but there continues to be an increasing focus on the FOMC which will announce their policy decision (no change) this afternoon.  The focus is really on what Chair Powell will hint at in the ensuing press conference.  At this point, I would say it is baked in the cake that two governors, Waller and Bowman, are going to dissent seeking a 25bp rate cut.

Ironically, if markets are looking for a catalyst from this FOMC meeting, I believe they are looking in the wrong place.  Chairman Powell will do everything he can to not answer any question about anything whatsoever, whether on the likely trajectory of future policy decisions or whether he will resign or be fired.  And so, we will need to look elsewhere for market moving catalysts.

Of course, there is always the White House, which has proven to be a rich source of uncertainty, and then there is the data onslaught starting today through Friday, which if it comes in differently than forecast, will have the opportunity to move markets.  Regarding the former, I will not even attempt to guess what the next story will be.  However, the latter is a potentially rich vein to be mined for insight.

To set the table, a look at yesterday’s outcomes is worthwhile.  The Goods Trade Balance fell to -$86B, substantially less than forecast, on the back of a significant decline in consumer goods imports.  While the data still shows a deficit, I imagine Mr Trump is pleased with the direction.  Certainly, compared to the trend prior to his election (as well as the front-running of tariffs early this year) it seems a modest improvement, or at least a reduction. (see chart below)

Source: tradingeconomics.com

Otherwise, Home Prices rose less than forecast and continue to slow their pace of increase and job openings were withing spitting distance of forecast at 7.44M, although somewhat lower than last month.  Finally, Consumer Confidence continues to rebound.  While equity markets were nonplussed, with US markets slipping a bit on the day, Treasury bonds rallied nicely with 10-year yields sliding -8bps on the day.  The bulk of that rally was based on a very positive 7-year auction, with the bid-to-cover ratio rising to 2.79, and dealers only getting 4% of the issue, the lowest level recorded since 2004.  In other words, investors took in virtually the entire $44 billion.  This morning, we will also learn about Treasury’s planned quarterly issuance, although estimates are there will be no increase in long-term bonds, with T-bills continuing to be the main financing vehicle for now.

Too, this morning we will get the ADP Employment report (exp 75K) and the first look at Q2 GDP (2.4% after -0.5% in Q1).  While all of that could have an impact, my sense is that tomorrow’s PCE data and Friday’s NFP will be of much more import.  A final though this morning is that the BOC is going to complete their policy meeting, but no change is expected there.

If we consider this information, absent a new surprise from the White House on your bingo card, it seems to me Friday is the most likely timing for any substantive movement in equities or bonds.  And with that in mind, let’s look at how other markets have been responding to things.

Yesterday’s modest declines in the US were followed by a mixed picture in Asia with both Japan and China little changed on the day although Hong Kong (-1.4%) was under pressure as the US-China trade talks stumbled for now.  But much of the rest of the region had a solid session with Australia (+0.6%) rallying after better-than-expected inflation data encouraged traders to price in a rate cut by the RBA at their next meeting.  But there were gains in Korea, India and Taiwan as well with only Indonesia really lagging.  In Europe, it is a mixed session with the CAC (+0.45%) leading the way higher while both the IBEX (-0.2%) and FTSE 100 (-0.3%) are lagging as Eurozone data was mixed with inflation edging higher in Spain although Eurozone GDP came in a tick better than forecast.  However, the big discussion there continues to revolve around the details of the trade deal.  As to US futures, they are a touch higher at this hour (7:40), about 0.25%.

In the bond market, after yesterday’s rally, US yields are unchanged on the day, trading at the low end of their recent range, while European sovereign yields are all lower by -2bps (Gilts are -5bps) as the US move came later in the day and Europe didn’t really participate yesterday.  Overnight, JGB yields slipped -1bp, but Australian govies fell -7bs as thoughts of rate cuts danced in traders’ heads.

In the commodity markets, oil (-0.65%) is giving back some of its gains that were catalyzed by President Trump’s threats to Russia if they don’t sit down in the next 10 days, rather than the original 50-day window.  As to metals markets, gold is unchanged this morning, still trading in the middle of its range, although we have seen some weakness in both silver (-0.9%) and copper (-0.8%) but it seems more in line with ordinary trading than with any new news.

Finally, the dollar is continuing its rebound as the euro (-0.2%) retreats further from its recent highs and is now lower by more than -2% in the past week.  In fact, the DXY has traded back above 99.0 for the first time since early June as the bottoming formation that I have highlighted over the past several days continues to prove prescient.  In fact, some might say the dollar is starting to accelerate higher!  Once again, I would highlight that the descriptions of the dollar’s demise were greatly exaggerated.

Source: tradingeconomics.com

And that’s pretty much all there is to discuss.  We are firmly in the middle of the summer doldrums where market activity remains subdued at best.  Given the prominence of algorithms in trading most markets, it will require something new and unexpected to get things going.  Of course, perhaps this evening’s earnings data will start some movement, but I’m still focused on Friday.

Good luck

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Not Crashing

Posted on by

The data was pretty darn good
And so, it must be understood
The world is not crashing
Though some things are flashing
Red signs, where recession’s a ‘could’

 

A review of yesterday’s economic data shows that Retail Sales were stronger than expected on every metric and subcomponent, Import Prices rose a scant 0.1%, the Philly Fed Index was much stronger than expected and Jobless Claims fell on both an Initial and Continuing basis.  In truth, it was a sweep of positive economic news.  As such, we cannot be surprised that equity markets responded positively, as did the dollar, while bonds held their ground, given the lack of inflationary signals.  But if we look at the movements in markets, they remain very modest overall.  Sure, the S&P 500 made a new high, by 2 points, but if you look at the chart below, since July 3rd, the rally has been 26 points, or 0.4%.  This is hardly the stuff of excitement.

Source: tradingecononmics.com

Of course, this did not stop the pundits who are calling for recession to highlight any negative subtext, nor did it prevent Fed Governor Waller from claiming that a rate cut in July was appropriate because the labor market is on the edge.  But the naysayers find themselves with diminishing attention these days as market price action has been quite positive.  In fact, most markets have shown similar behavior.  Whether gold or oil or other equity indices or bonds, we have been in a narrow range for a while now and it is not clear what it will take to break us out.  But here’s one thought…

On Sunday, Japan
Will vote for their Upper House
Is there change afoot?

While market insiders will discuss today’s options’ expirations as the key driver of things in the short-term, I think we need turn our eyes Eastward to Japan’s Upper House elections this Sunday.  PM Ishiba’s LDP-Komeito coalition is already in a minority status in the more powerful Lower House, a key reason why so little has been accomplished there.  But at least he had a majority in the Upper House to rubber stamp anything that was enacted.  However, signs are pointing to the LDP losing their majority in the Upper House which could well lead to Ishiba getting forced out.

Now, why does this matter to the rest of us?  There is a case to be made that flows in the JGB market are an important driver of global bond flows, including Treasuries.  For instance, Japan is the second largest net creditor nation with about $3.73 trillion invested abroad (according to Grok), much of which is Japanese insurance companies searching for higher yields than have been available there for the past decades. You may remember back in May, when there was a spike in long-dated JGB yields as all maturities from 20 years on out reached new historic highs (see below chart), well above 3.0%. 

Source: tradingeconomics.com’

Now, consider if you were a Japanese life insurer looking to match your assets to your liabilities.  Historically, buying Treasury bonds, with their much higher yield, was the place to be, especially over the past several years when the yen weakened, adding to your JPY gains.  However, that is still a risky trade, and hedging the FX risk is expensive given the yield differential between the US and Japan.  (Hedgers need to sell USD forward and the FX points reduce the effective exchange rate and by extension the benefits of the higher bond yields.)

But now, for the first time ever, JGB yields are above 3.0%, and that can be earned by a Japanese life insurer with zero FX risk, a very attractive proposition.  In fact, Bloomberg has an article this morning discussing just such a situation with one of the larger insurers, Fukoku Life.

Circling back to the election, it appears that the key issues are the rising cost of living and what the government is going to do about it.  Apparently, there are two approaches; the LDP is talking about giving out cash bribes grants of ¥20,000 to individuals while the opposition is talking about reducing consumption taxes on necessities like food.  However, in either case, the reality is that fiscal policy would loosen further with the MOF needing to issue yet more JGBs to make up for either the increased outlays or reduced income.  Add to that the uncertainty over future Japanese policy if the LDP loses its majority, and the pressure from the US regarding tariff negotiations and suddenly, it makes a lot more sense that the knock-on effects of this election can be substantial, at least with respect to the global bond markets and the USDJPY exchange rate.  (It must be said that Japanese inflation data last night actually fell to 3.3%, but that was due entirely to declining oil prices as fresh food prices, the big issue there, continue to rise.)

An election outcome that weakens PM Ishiba, potentially leading to a fall of his government and new elections in the Lower House, would be a distinct negative for the yen, and likely for the JGB market.  The impact would be felt in global bond markets as yields in the back end would almost certainly rise everywhere around the world.  This is not to imply that yields would rise by 100bps or more, but rather that the current trend of rising long-dated yields would continue for the foreseeable future.  And that will make things tough on every government.

Ok, sorry, I went on a bit long there.  A quick turn through markets shows that other than Japan (-0.2%) Asian equity indices were mostly nicely in the green following the US lead with the biggest winners Australia (+1.4%), Hong Kong (+1.3%) and Taiwan (+1.2%).  Meanwhile, in Europe this morning, while green is the color, the movement has been miniscule, averaging about 0.1% gains.  And US futures are also modestly higher at this hour (7:00) about 0.15% across the board.

In the bond market, Treasury yields have edged lower by -2bps but European sovereign yields are all higher by 2bps across the board.  The talk in Europe is over concerns regarding the conclusion of a trade deal with the US, where concerns are growing nothing will be achieved by the end of the month.

In the commodity markets, oil (+1.3%) is continuing its rebound, perhaps on the beginnings of a belief that the economy is not going to crater in the US.  Certainly, yesterday’s data was positive.  As to the metals markets, they are in fine fettle this morning with both gold (+0.4%) and silver (+0.4%) trading back to the middle of their trading ranges and copper (+1.3%) pushing back toward its recent all-time highs.

Finally, the dollar is under pressure this morning, sliding against the euro (+0.25%), pound (+0.2%) and AUD (+0.4%).  But the real movement has been in the commodity space where NOK (+0.8%) and ZAR (+0.7%) are both having solid days.  There continues to be a great deal of discussion regarding President Trump’s desire to fire Chairman Powell with a multitude of articles describing how that would be the end of the world as we know it because the Fed cherishes their “independence”.  Let’s not have that discussion.

On the data front, this morning brings Housing Starts (exp 1.3M) and Building Permits (1.39M) and then Michigan Sentiment (61.5) at 10:00.  There are no Fed speakers on the slate for today although Governor Kugler, not surprisingly, explained that waiting was the right call for the Fed when she spoke yesterday.  

It is a Friday in the summer with relatively unimportant data.  Absent another surprise from the White House Bingo card, I expect a quiet session overall as most traders and investors leave the office early for the weekend.  The dollar’s biggest risk is the Fed does cut early, but if the data keeps cooperating, it will be much harder for dollar bears, especially since so many are already short, to sell it aggressively from here.

Good luck and good weekend

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