Tag Archives: investing

Gone Astray

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The ADP Labor report
On Wednesday, came up a bit short
Investors decided
That they would be guided
By this and bought bonds like a sport
 
As well, there’s a story today
The BLS has gone astray
It seems that their data
Might have the wrong weight-a
So, CPI’s not what they say

 

It has been another very dull session in most markets although yesterday did see a strong bond market rally after the ADP Employment Report was released much lower than expected at just 37K jobs created.  Certainly, the trend has been lower for the past three years as you can see in the below chart from tradingeconomics.com, so I guess we cannot be that surprised.

You will also not be surprised that this data brought out the recessionistas as they jumped all over the release to make their case that recession was just around the corner, and quite possibly stagflation.  Adding to their case was the ISM Services data which also disappointed at 49.9 and has also been trending lower for the past three years.  As well, they were almost gleeful in their description of the Prices Paid sub index rising to 68.7, its highest print since November 2022.  Alas, while Pries Paid have been rising for the past year or so, a look at the trendline shows they are continuing to retreat from the highs seen during the Bidenflation of 2022.

Source: tradingeconomics.com

In the end, although this data was unquestionably disappointing, it feels a bit too early, at least to me, to declare the recession has arrived.  But not too early for the bond market where 10-year yields tumbled 11bps on the day and almost all the damage was done in the first hour after the ADP release although the ISM helped things along as well.

Source: tradingeconomics.com

Perhaps we are going into a recession, or even already in one, but overall, the data so far are just showing the beginnings of that.  I imagine opinions will be strengthened one way or another tomorrow when the NFP report is released, but for now, the recessionistas appear to have the upper hand, at least in the bond market.

The other story that is getting a response, at least amongst the Twitterati (X-eratti?) is the WSJ article about how the BLS, due to President Trump’s hiring freeze, is suddenly calling into question the accuracy of their statistical releases, notably the CPI report due next week.  I will let my friend, The Inflation Guy™, Mike Ashton, explain why this is a nothing burger. [emphasis added]

“WSJ story about how staff shortages at BLS are affecting how many estimates the staff has to make instead of collecting actual data. It is very hard to make these errors accumulate to as much as 1-2bps on the monthly number.

UNLESS: there is bias in the estimating, or there are very large categories affected, or there are HUGE errors in some categories. Lots of random errors increases the overall error but is unlikely to affect the mean. And be honest. Do you have any idea what the MSE (mean standard error) of the CPI is?

People really should care about the error bars but even most economists almost never do. Unless it’s an opportunity to complain about budget cuts to economists, which is what this is. Nothing to see here.”

Otherwise, folks, another day in paradise with nothing else new, at least on the market front.  At some point, domestic politics, or geopolitics or war or something else is going to catch the fancy of the algos and change trading, but right now, that does not appear to be the case.  Perhaps Friday’s NFP data will be the catalyst to start a serious change in attitudes but I’m not holding my breath.

In the meantime, let’s survey market activity.  Yesterday’s US session was quite dull with limited movement and low volumes. Asia saw a mixed picture with the Nikkei (-0.5%) slipping, ostensibly, on concerns that a weaker US would negatively impact their export sector, tariffs be damned.  Hong Kong (+1.1%) though, rallied on Chinese PMI data holding on to recent levels rather than slipping further.  The rest of the region was far more positive, led by Korea (+1.5%) although the gains were more on the order of +0.5%.  Europe is all green this morning, with the CAC (+0.5%) leading the way, although the DAX (+0.4%) and FTSE 100 (+0.3%) are also holding up well on the back of positive German Factory orders data and solid UK Retail Sales.  Meanwhile, at this hour (7:00), US futures are ever so slightly firmer, +0.15% or so.

In the bond market this morning, after the big rally yesterday discussed above, Treasury yields this morning have edged lower by 1bp and European sovereigns have seen yields slide by between -3bps and -5bps as inflation data on the continent continues to soften encouraging the belief that the ECB, later this morning, may even consider more than the 25bp cut that is priced in.

The one true consistency lately has been gold (+0.8%) which has no shortage of demand, especially in Asia, and certainly feels like it is going to test, and break, the previous high of $3500/oz, which is now just $100 away.  But this has encouraged silver (+4.0%), copper (+2.65%) and now even platinum (+3.8%) has been invited to the party.  Regardless of the macroeconomic statistics, the ongoing global monetary policy of fiat debasement seems set to continue which can only help these metals.  As to oil (+0.3%), it continues to sit near its recent highs with not much activity in either direction.  It feels like we will need a major event/pronouncement of some sort, whether wider war in the Middle East or a change in OPEC policy to move this thing.

Finally, the dollar can best be described, again, as mixed.  While the euro and pound are marginally higher, the yen is marginally weaker.  In the EMG bloc, both KRW (+0.4%) and ZAR (+0.5%) are showing gains this morning, but nothing else of note is moving.  And when looking at the broad DXY, unchanged is where it’s at.  As with most markets right now, metals excepted, doing nothing seems the best choice.

On the data front, this morning brings the weekly Initial (exp 235K) and Continuing (1910K) Claims as well as the Trade Balance (-$94.0B) which if correct will almost certainly bring on a lot of White House crowing but is likely inconsequential with respect to the overall scheme of things.  We also see Nonfarm Productivity (-0.7%) and Unit Labor Costs (+5.7%) a combination of expectations that does speak to stagflation.  The ECB meeting will get some eyeballs, but unless they cut 50bps, a very low probability event based on current market pricing, it is hard to see much impact there either.

We are in a rut for now.  Whatever the catalyst that is required to change views substantially, it is not obvious at this point.  Bigger picture, nothing indicates any government is going to slow their spending or their money printing.  There is too much debt to ever be repaid, so a slow inflationary debasement is very likely our future.  I still think the dollar slides further, but it could be a few months before the current range breaks.

Good luck

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Gnashing and Wailing

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The narrative writers are failing
To keep their perspectives prevailing
They want to blame Trump
But if there’s no slump
They’ll find themselves gnashing and wailing
 
Economists have the same trouble
‘Cause most of their models are rubble
The change that’s been wrought
Requires more thought
Than counting on one more Fed bubble

 

Investors seem to be growing unhappier by the day as so many traditional signals regarding market movement no longer appear to work.  Nothing describes this better, I think, than the fact that forecasts for 10-year Treasury yields by major banks are so widely disparate.  While JPMorgan is calling for 5.00% by the end of the year, Morgan Stanley sees 2.75% by then.  What’s the right position to take advantage of that type of knowledge and foresight?

One of the most confusing things over the past months, has been the growing dichotomy between soft, survey data and hard numbers.  But even here, it is worth calling into question what we are learning.  For instance, this week we will see the NFP data along with the overall employment report.  That data comes from the establishment survey.  It seems that just 10 years ago, more than 60% of companies reported their hiring data.  Now, that is down to ~43%.  Does that number have the same predictive or explanatory power that it once did?  It doesn’t seem so.

Too, if we consider the Michigan Sentiment data, it has become completely corrupted by the political angle, with the current situation being Democrats answering the survey anticipate high inflation and weak growth while Republicans see the opposite.  Is that actually telling us anything useful from an economic perspective let alone a market perspective?  (see charts below from sca.isr.unmich.edu)

But this phenomenon is not merely a survey issue, it is an analysis issue.  At this point, I would contend there are essentially zero analysts of the US economy (poets included) who do not have a political bias built into their analysis and forecasts.  Consider that if you are in a good mood generally, then your own perspective on things tends to be brighter than if you are in a bad mood.  Well, expand that on a political basis to, if you are a Democrat, President Trump has been defined as the essence of evil and therefore your viewpoint will see all potential outcomes as bad.  If you’re a Republican, you will see much better potential.  It is who we are and has always been the case, but it appears a combination of President Trump and social media has pushed this issue to heretofore unseen extremes.

There are two problems with this.  First, for most consumers of financial information, the decision matrix is opaque.  Who should you believe?  But perhaps more concerningly, as evidenced by the decline in the response rate to hard data, for policymakers like the Fed and Treasury, what should they believe?  Are they receiving accurate readings of the economic realities on the ground?  Is the job market as strong (or weak) as currently portrayed?  Is the uncertainty in ISM data a result of political bias?  And if politics is an issue in these situations, who is to say that answers to questions will be fact-based rather than crafted to present a political viewpoint?

I would contend that the reason the narrative is breaking down everywhere is that the willingness of investors, as well as the proverbial man on the street, to listen to pronouncements from on high has diminished greatly.  After all, the mainstream media, which had always been the purveyor of the narrative, or at least its main amplifier, has lost its luster.  Or perhaps, they have lost all their credibility.  Independent media, whether on X, Substack or simply blogs that are posted all over the internet, have demonstrated far more clarity and accuracy of situations than anything coming from the NYT, WSJ, BBG or WaPo, let alone the TV “news” programs.

We are on our own to determine what is actually happening in the world, and that is true of how markets will perform going forward.  I have frequently written that volatility is going to be higher going forward across all markets.  President Trump is the avatar of volatility.  As someone whose formative years in trading were in the mid 80’s, when inflation was high, and Paul Volcker never said a word to anyone about what the Fed was doing (and even better, nobody even knew who the other FOMC members were), the best way to thrive is to maintain modest positions with limited leverage.  The time of ZIRP and NIRP will be seen as the aberration it was.  As it fades, so, too, will the ability to maintain highly levered positions because any large move can be existential.

With that cheery opening, let’s take a look at what has happened overnight.  Friday’s US session was not very noteworthy with mixed data leading to mixed results but no real movement.  Alas, things have taken a turn lower since then.  Asian markets were weaker overnight (Nikkei -1.3%, Hang Seng -0.6%, CSI 300 -0.5%) with most other regional markets having a rough go of things as well.  Concerns over further tariffs by the US (steel tariffs have been raised to 50%) and claims by both sides of the US – China trade debate claiming the other side has already breached the temporary truce have weighed on sentiment overall.  Meanwhile, PMI data from the region was less than inspiring with China, Korea, Japan and Indonesia all showing sub 50 readings for Manufacturing surveys.

In Europe, equity markets are also generally softer (DAX -0.5%, CAC -0.7%) although the FTSE 100 (0.0%) has managed to buck the trend after data this morning showed Housing Prices firmed along side Credit growth.  As investors await the US ISM/PMI data, futures are pointing lower across the board, currently down around -0.4% at 7:15.

In the bond market, yields all around the world are backing up with Treasuries (+3bps) bouncing off the lows seen on Friday, although remaining below 4.50%, while European sovereigns have climbed between 3bps and 4bps across the board.  JGB’s overnight (+2bps) also rose, although the back end of that curve saw yields slip a few bps.  It seems the world isn’t ending quite yet, although there does not seem to be any cure for government spending and debt issuance anywhere in the world.

Commodity prices, though, are on the move as it appears investors are interested in acquiring stuff that hurts if you drop it on your foot.  Gold (+1.85%), silver (+0.9%) and copper (+3.6%) are all in demand this morning, the latter ostensibly benefitting from fears that the US will impose more tariffs on other metals thus driving prices higher.  But the real beneficiary overnight has been oil (+4.0%) which rose on the back of an intensification of the Russia – Ukraine war as well as the idea that OPEC+ ‘only’ raised production by 411K barrels/day, less than the whisper numbers of twice that amount.  As I watch the situation in Ukraine, it appears to have the hallmarks of an imminent peace process as both sides are pulling out all the stops to gain whatever advantage they can ahead of the ceasefire and both recognizing that the ceasefire is going to come soon.  But despite the big jump in the price of WTI, you cannot look at the chart below and expect a breakout in either direction.  If I were trading this, I would be more likely to fade the rally than jump on board the rise.

Source: tradingeconomics.com

Finally, the dollar is under the gun this morning, falling against pretty much all its major counterparts.  Both the euro (+0.7%) and pound (+0.6%) are having strong sessions although JPY (+1.0%) and NOK (+1.3%) are leading the way in the G10.  NOK is obviously benefitting from oil’s rally, while there remains an underlying belief that Japanese investors are slowing their international investments and bringing money home.  Now, the ECB meets this week and is widely anticipated to be cutting rates 25bps, but my take is, today is a dollar hatred day, not a euro love day.  As to the EMG bloc, gains are evident across regions with CZK and HUF (both +1.0%) demonstrating their beta to the euro although PLN (+0.5%) is lagging after the presidential election there disappointed the elites with the Right leaning candidate winning the job and likely frustrating Brussels in their attempts to widen the war in Ukraine.  In Asia, CNY (+0.1%) was relatively quiet but KRW (+0.5%), IDR (+0.8%) and THB (+0.9%) all benefitted from that broad dollar weakness.  So, too, did MXN (+0.65%) although BRL has not participated.

There is plenty of data this week culminating in the payroll report on Friday.

TodayISM Manufacturing49.5
 ISM Prices Paid70.2
 Construction Spending0.3%
TuesdayJOLTS Job Openings7.1M
 Factory Orders-3.0%
 -ex Transport0.2%
WednesdayADP Employment115K
 BOC Rate Decision2.75% (current 2.75%)
 ISM Services52.0
 Fed’s Beige Book 
ThursdayECB Rate Decision2.00% (current -2.25%)
 Initial Claims235K
 Continuing Claims1910K
 Trade Balance-$94.0B
 Nonfarm Productivity-0.7%
 Unit Labor Costs5.7%
FridayNonfarm Payrolls130K
 Private Payrolls120K
 Manufacturing Payrolls-1K
 Unemployment Rate4.2%
 Average Hourly Earnings0.3% (3.7% Y/Y)
 Average Weekly Hours34.3
 Participation Rate62.6%
 Consumer Credit$10.85B

Source: tradingeconomics.com

In addition, we hear from four more Fed speakers over five venues.  The thing about this is they continue to discuss patience as the driving force, except for Governor Waller, who explained overnight that he could see rate cuts if inflation stays low almost regardless of the other data.

The trade story remains the topic of most importance in most eyes it seems, although it remains a mystery where things will wind up.  The narrative is lost for all the reasons above, but I will say that it appears risk aversion is today’s theme.  The new part is that the dollar is considered a risk asset.  

Good luck

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A New Paradigm

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No matter the asset you trade
For weeks, every move’s been a fade
As headlines decry
Each thing Trump does try
Investors are feeling betrayed
 
They want to go back to the time
When markets did, every day, climb
But that time has passed
And I would forecast
We’ve entered a new paradigm

 

The following onslaught of charts from tradingeconomics.com are meant to highlight that for the past several weeks, basically nothing has gone on in markets.  Every day is like every other, and the only trend is a horizontal line.

Now, this is not to say that each movement is identical, just that any longer-term trends that may exist are not evident lately.  For traders, this can be terrific because there has been volatility which can be captured.  Of course, since much of the volatility has been headline bingo, that reduces the appeal.  But for longer term investors, it is a more difficult situation as those same headlines can call into question the underlying thesis of any or every trade.

Are the tariffs here to stay?  Or will they be overruled?  Is the “Big Beautiful Bill” going to be a benefit?  Or are there too many things hidden within that will impact the economy, markets and investor behaviors?  Is there going to be a Russia/Ukraine peace?  Is Iran going to sign a deal?  Will the US and China agree a trade deal?  Obviously, there are many very large issues currently outstanding with no clear resolutions in any of them as of now.  When you consider not only that the future is uncertain (which is always true) but the potential outcomes are diametrically opposed, it is easier to realize why markets are stuck in the mud.  But hey, nobody ever said trading was supposed to be easy!

There is, however, one issue I think worth highlighting that has seen an increase in discussion, and that is Section 899 of the reconciliation bill.  It is titled, “Enforcement of Remedies Against Unfair Foreign Taxes” and Bloomberg has a solid description here.  The essence of this clause is it increases taxes on nations, and individuals in those nations, who discriminate against US companies.  The idea is that Europe, especially, is busy enacting “Digital Services Taxes” which are designed to extract revenue from the large US tech companies that dominate particular spaces, like Meta, Google and Microsoft.  But these tax laws have thresholds such that essentially no other companies will be impacted.  This is the US response.  

Much of the discussion thus far has focused on the idea that this will discourage investment in US financial assets, potentially reducing the market for Treasury bonds and adding to the destruction of American exceptionalism in financial markets.  And it may well do that.  However, the thing to consider is that one of the reasons that the US has drawn so much investment is that there are so many investable securities here in the US, and that property rights remain sacrosanct.  Yes, taxation matters, but if you are a sovereign wealth fund with $100 billion in assets or more, where are you going to invest that money if not in the US, at least in some part?  And remember, this is only to be focused on nations with discriminatory taxes vs. US companies.  So, the Saudis, for example, or the Japanese need not worry.  It strikes me that at the margin, this could have a modest impact on prices, perhaps softening the dollar some and reducing future gains, but this is unlikely to end investment into the US.

Ok, let’s quickly run through the lack of overall movement last night.  Yesterday’s early US equity gains (triggered by the tariff ruling) faded all day and markets here closed very modestly higher.  In Asia, gains from yesterday were largely reversed as an appeals court stayed the ruling, so the tariffs remain in place as of now.  Thus Japan (-1.2%), Hong Kong (-1.2%) and China (-0.5%) basically reversed yesterday’s closings.  In Europe, though, things are a bit brighter. With gains across the board as inflation data released showed that it continues to drift lower across the continent.  This has encouraged traders to believe that more ECB rate cuts are coming, which was confirmed by the Bank of Italy’s Fabio Panetta, an ECB Governing Council Member, who exclaimed that inflation is nearly beaten.  Meanwhile, bank economists are now warning that further rate cuts need to come more quickly.  All this, of course, is music to equity investors’ ears.  As such, gains range from +0.3% (France) to 1.0% (Germany) and everywhere in between.  As to US futures, they are unchanged at this hour (7:30).

In the bond market, Treasury yields are unchanged this morning after sliding 8bps yesterday.  Interestingly, European sovereign yields, which also fell yesterday, have rebounded 3bps this morning despite the happy talk of more ECB rate cuts and the imminent death of inflation.  Too, last night saw yields decline in Japan (-3bps) and Australia (-11bps), following in the footsteps of yesterday’s Treasury market.

In the commodity markets, oil (+1.3%) is higher after EIA data yesterday showed modest inventory draws while gold (-0.75%) is giving back yesterday’s gains which came on the back of a weak dollar.  But as mentioned at the beginning of this piece, in the end, trends in both directions are on hold for now.

Finally, the dollar is firmer this morning, unwinding some of yesterday’s declines which grew throughout the day.  Right now, in the G10, the euro (-0.3%) is a pretty good proxy for the entire bloc, although JPY (+0.15%) is sticking out like a sore thumb.  In the EMG bloc, we see declines on the order of -0.5% (KRW, PLN, ZAR) although MXN (+0.2%) is also an aberration this morning.  Alas, I see no particular reason for this move.  However, as mentioned above, the recent trend is flat, although I cannot get over the idea that the dollar has further to decline going forward.

On the data front, this morning brings Personal Income (exp 0.3%), Personal Spending (+0.2%), PCE (0.1%, 2.2% Y/Y), and Core PCE (0.1%, 2.5% Y/Y) as well as the Goods Trade Balance (-$141.5B) all at 8:30.  Then we see Chicago PMI (45.0) and Michigan Consumer Sentiment (51.0) at 10:00.  There is one final Fed speaker this week, Atlanta’s Bostic this afternoon.  However, when it comes to the Fed, again yesterday we heard that patience is the watchword with no hurry to adjust policy right now.  As well, we learned that Chairman Powell had lunch with President Trump yesterday, where Trump asked him to lower rates, and Powell said they are following their long-proscribed tasks of responding to economic outcomes. 

There is nothing that seems likely to excite anyone today, so I look for a quiet session overall.  It seems unlikely that anything of note will be resolved, whether on a political or international relations basis, so look for a quiet session and a relatively early close as traders and investors head out for a summer weekend.

Good luck and good weekend

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Eighty-Sixed

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The data remains rather mixed
But traders are still all transfixed
By tariffs and trade
As JGBs fade
And new ideas get eighty-sixed
 
Despite signs that peace in Ukraine
Is further away and hopes wane
It seems all that matters
Is whether Huang flatters
Investors, so stock markets gain

 

Apparently, at least based on yesterday’s equity market performance, concerns over the eventual outcome of the current global fiscal and monetary regimes remains far down everyone’s list of worries.  Rising inflation?  Bah, doesn’t matter.  Increasing tensions between Presidents Trump and Putin as Russia continues, and arguably increases its aggression?  No big deal.  But you know what has tongues wagging this morning?  Nvidia earnings are to be released after the close, and as we all know, if they are strong (everyone is counting on Jensen Huang, the CEO), then every other concern pales in significance.  After all, a global conflagration is no match in the imagination compared to your stock portfolio increasing in value!

Once upon a time, investors in the stock market sought companies that had good business models and good management who were able to grow their businesses.  These investors were buying a piece of a business in which they believed.  Analysts looked at metrics like P/E ratios and book value to determine if the price paid offered future opportunities as an investment, but the underlying company was the focus.  Of course, that is simply a quaint relic of times long ago, pre GFC.  Today, there is only one metric that matters, ‘NUMBER GO UP’!  While this concept was originally ascribed to Bitcoin and the crypto universe, it has spread across virtually all financial markets.  Nobody cares what a ticker symbol represents, they only care if the number next to the ticker symbol rises, and how rapidly it does so.  Welcome to the future.

I highlight this because it has become increasingly clear that the macroeconomic landscape is an anachronism for analyzing financial markets.  At this point, whether or not a recession is on the horizon, or inflation is rising, or unemployment is rising or falling seems to have only a fleeting impact on market movements.  Rather, the true driver appears to be the flow of all that money that has entered the global financial system since the GFC.  The below chart from streetstats.finance shows the last 10 years of the growth in the global money supply and the corresponding move in the S&P 500.  You may not be surprised at the tight correlation.

My point is that all the news items that draw our attention may not matter at all in the broad scheme of things.  As long as money continues to be printed and injected into the financial system, while some assets will outperform others, the trend remains sharply from the lower left to the upper right.  Going back to my discussion yesterday, since the overriding goal of every global central bank is to ensure that their governments can issue bonds to finance their spending, I see no end to this trend.  While the speed of the increase may ebb and flow slightly, the direction will only change under the most egregious circumstances, something like the aftermath of WWIII.

In a funny way, this highlights that FX markets have the opportunity to be the most interesting trading markets going forward given the relativity of their underlying basis.  Assets, whether debt, equity or commodity, are all priced on demand functions while FX is priced on relative demand for each side of the cross.  Perhaps FX will be the last bastion of macroeconomic analysis.

But not today!  Starting with FX, the dollar is little changed to slightly higher this morning, consolidating yesterday’s gains but things are quiet.  In fact, across the main markets, the largest movement in either direction is NZD (+0.25%) after the RBNZ cut rates as expected by 25bps, but the market reduced the probability of another rate cut in July.  But away from that move, +/-0.1% is the norm today.  Discussion about tariffs continues to be the major talking point, but as of now, it appears nobody has a clue as to how things will evolve, so everybody is just hunkering down.  

Turning to equities, while yesterday saw a very large rally in the US, that sentiment was absent overnight with Asian markets generally drifting slightly lower although New Zealand (-1.7%) was clearly unhappy with the RBNZ mild hawkish view.  But elsewhere, movement was far less than 1.0%.  In Europe, it is a similar tale, very modest declines across the board as data showed German Unemployment rising slightly, Eurozone Consumer Inflation Expectations also rising slightly while French GDP disappointed on the downside, just 0.6% Y/Y.  You can appreciate the lack of enthusiasm there, although the story that Madame Lagarde is considering stepping down from the ECB to take over WEF should put a spring in the step of European investors as perhaps the next ECB president will understand economics and central banking.  As to US futures, they are little changed at this hour (7:35).

In the bond market, after a session where yields slid across the board yesterday, this morning brings a modest reversal with Treasuries (+2bps) right in line with most of Europe (+1bp across the board) although JGB’s (+5bps) suffered after another lousy long-dated auction last night where 40-year JGBs saw pretty weak demand overall.  The Japanese bond market remains a serious issue for many and a potential signal for the timing of next big move.  While risk assets rallied yesterday, nothing changed my description of the problems that exist globally.

Finally, in the commodity markets, oil (+0.7%) is modestly higher this morning but continues to trade within its range and shows no sign of breaking out in the near term.  Metals markets, which sold off aggressively yesterday have stopped falling, but are hardly rebounding, at least as of now.  

Let’s look at the data for the rest of the week though.

TodayFOMC Minutes 
ThursdayInitial Claims230K
 Continuing Claims1900K
 Q1 GDP (2nd estimate)-0.3%
FridayPersonal Income0.3%
 Personal Spending0.2%
 PCE0.1% (2.2% Y/Y)
 Core PCE0.1% (2.5% Y/Y)
 Goods Trade Balance-$141.5B
 Chicago PMI45.0
 Michigan Sentiment51.0

Source: tradingeconomics.com

In addition to the data, with all eyes really on Friday’s numbers, we hear from six more Fed speakers, although, again, will they really change their tune about patience in watching what the impact of tariffs are going to be on the economy?  I think not.  In the Fed funds futures market, the probability of a cut in June has fallen to just 2% while the market is now pricing just 47bps of cuts this year, the lowest amount in forever.  Unless the data completely fall off the map, I don’t see why they would cut at all, and that has just not happened yet.

The summer is upon us (although you wouldn’t know by the weather in the Northeast) and that typically leads to a bit less activity overall.  At this point, much depends on Congress and its ability to complete the budget bill to move the legislative process along.  Then the hard part of spending bills will be the next topic and you can expect a lot of screaming then.  In the meantime, though, I expect that we will hear of a number of other trade deals getting completed and a good portion of the trade anxiety ebbing from market views.  Alas, the peace/war equation is far more difficult to handicap as so many in power clearly benefit from war.

The prevailing view in the market is that the dollar has further to decline going forward as I think a majority of players are anticipating a recession in the US and the Fed to respond.  Under that scenario, a softer dollar feels right.  But is that the right scenario?

Good luck

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Need Some Revising

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The punditry fears that the bond
Is starting to move far beyond
A level at which
The US can stitch
Together a plan to respond
 
Meanwhile, though yields broadly are rising
The dollar, it’s somewhat surprising
Continues to sink
Which makes some folks think
Their models now need some revising

 

Perspective is an important thing to maintain when looking at markets as it is far too easy to get wrapped up in the short-term blips within a trend and accord them more importance than they’re due.  It is with that in mind that I offer the below chart of the 10-year US Treasury yield for the past 40 years.

Source: finance.yahoo.com

Lately, much has been made of the fact that 10-year yields have risen all the way back to where they were on…January 1st of this year.  But the long history of the bond market is that yields at 4.5% or so, which is their current level, is the norm, not the exception.  As you can see, in fact they were far higher for a long time.  Now, I grant that the amount of debt outstanding is an important piece of the puzzle when analyzing the risk in bonds, and the current situation is significant.  After all, even Moody’s finally figured out that the US’s debt metrics were lousy.  And under no circumstances am I suggesting that the fiscal situation in the US is optimal. 

But I also know that, as I wrote yesterday, the Fed is not going to allow the bond market to collapse no matter their view of President Trump.  Neither is the US going to default on its debt (beyond the slow pain of higher inflation) during any of our lifetimes.  I continue to read that the just-passed ‘Big, Beautiful Bill’ is going to result in deficits of 7% or more for the next decade, at least according to the CBO.  Alas, predicting the future is hard, and no one knows that better than the CBO.  Their track record is less than stellar on both sides of the equation, revenues and expenditures.  This is not to blame them, I’m sure they are doing their best, it is just an impossible task to create an accurate forecast of something with so many moving parts that additionally relies on human responses.

My point is that one needs to look at these forecasts with at least a few grains of salt.  While the current narrative is convinced that deficits are going to blow out and the nation’s finances are going to fall over the edge of the abyss, while the trend is in the wrong direction, my take is the end is a long way off.  In fact, the most likely outcome will be debt monetization around the world, as every government has borrowed more than they are capable of repaying without monetizing the debt.  The real question we need to answer is which nations will be able to do the best job of managing the situation on a relative basis.  And that, my friends, despite everything you read and hear about, is still likely to be the US.  This is not to say that US assets will not fall out of favor for a while relative to their recent behaviors, just that in the long run, no other nation has the resources and capabilities to thrive regardless of the future state of the world.

I guess the one caveat here would be that the entire global framework changes as the fourth turning evolves and old institutions die while new ones are formed.  So, the end of the IMF and World Bank, the end of SDR’s and even organizations like the UN cannot be ruled out.  And I have no idea what will replace them.  Regional accords may become the norm, CBDC’s may become the new money, and AI may run large swaths of both governments and the economy.  But in the end, at least nominally, government debt will be repaid in every G10 nation, of that I am confident.

One of the reasons I have waxed philosophical again is that market activity, despite all the chattering of the punditry, remains pretty dull.  For instance, in the bond market, despite all the talk, Treasury yields, after slipping a few bps yesterday, are unchanged today.  The same is true across Europe, with no sovereign bond having seen yields move by more than 1 basis point in either direction.  JGB’s overnight, despite CPI coming in a tick hotter than forecast, saw yields slip -4bps, following the US market from yesterday.  If the end is nigh, the bond market doesn’t see it yet.

In equities, yesterday’s lackluster session in the US was followed by a lackluster session in Asia (Nikkei +0.5%, CSI 300 -0.8%, Hang Seng +0.25%) with no overall direction and this morning in Europe, the movement has been even less interesting (CAC -0.5%, DAX +0.2%, FTSE 100 0.0%). Too, US futures are little changed at this hour (7:00).

In the commodity markets, gold (+0.9%) continues to chop around within a range that it entered back in early April.

Source: tradingeconomics.com

To me, this is the perfect encapsulation of all markets, hovering near recent highs, but unable to find a catalyst to either reject those highs, or leave them behind in a new paradigm.  You won’t be surprised that other metals are also a touch higher this morning (Ag +0.2%, Cu +0.7%), nor that oil (+0.3%) is also edging higher.  It strikes me that today’s commodity profile may be attributed to the dollar’s weakness.

So lastly, turning to the dollar, it is softer against virtually all its major counterparts this morning, with the euro (+0.6%) and pound (+0.6%) both having a good day.  In fact, the pound has touched 1.35 for the first time in three years.  But the dollar’s softness is widespread in both blocks; G10 (AUD +0.85%, NZD +1.0%, SEK +1.0%. NOK +1.0%, JPY +0.5% and even CAD +0.35%), and EMG (ZAR +0.7%, PLN +0.6%, KRW +1.0%, SGD +0.5% and CNY +0.35%).  The fact that SGD moved 0.5% is remarkable given its inherently low volatility.  But I assure you, Secretary Bessent is not upset with this outcome.

The only data this morning is New Home Sales (exp 692K) and we hear from yet another Fed speaker this afternoon, Governor Cook.  Chairman Powell will be speaking on Sunday afternoon, so that may set things up for next week, although with the holiday weekend, whatever he says is likely to be diluted by the time US markets get back to their desks on Tuesday.

In the end, the message is the end is not nigh, markets are adjusting to the changing realities of trade and fiscal policies, and monetary policies remain on a steady state.  The ECB is going to cut again, as will the BOE.  The BOJ is likely to hike again, and the Fed is going to sit on its hands for as long as possible.  The futures market is still pricing in two rate cuts this year, but I still don’t see that happening.  In fact, if the tax bill is enacted, I suspect that it will have a significantly positive impact on the economy, as well as on expectations for the economy, and interest rates are unlikely to fall much at all.  As well, absent a concerted international effort to weaken the dollar (those pesky Mar-a-Lago accords again), while the short-term direction of the dollar is lower, I’m not sure how long that will continue.  

Good luck and have a great holiday weekend

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Struggling…Juggling

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For users of Bloomberg worldwide
This morning, the service has died
So, traders are struggling
As it’s like they’re juggling
With one hand, behind their back, tied

 

While market activity continues, it seems that the single issue receiving the most attention today is that the Bloomberg professional service is not working almost anywhere in the world.  From what I have seen so far, there is no explanation other than technical problems, and on the Bloomberg website that I reference (the professional service is way too expensive for poets) the only mention has been oblique in the news that auctions in the UK and Europe have been extended in time until the service is operational again.  However, on X, the memes are wonderful.  I’m sure they will fix things shortly, and the financial world will go back to worrying about things like interest rates and equity valuations, but right now, this is the story!

JGB markets
Are garnering far more press
Than Ueda wants

 

Yesterday’s story about JGB yields continues to be a key market issue this morning, and likely will be so for some time to come.  Yields there continue to climb and as we all know, the fiscal situation in Japan has been tenuous at best.  The Japanese government debt/GDP ratio is somewhere around 263%.  Consider that when the US has been deemed the height of fiscal irresponsibility with a number half that high.  Granted, Japan is a net creditor nation, which is why they have been able to maintain this situation for so long, but as with every other situation where trends seem to go on forever, at some point they simply stop. 

Sourve: tradingeconomics.com

The thing that seemed to allow Japan to continue for so long was the fact that inflation there had remained quiescent, for decades.  It has been more than twenty years since official Japanese policy was to raise inflation.  Alas, to paraphrase HL Mencken, be careful what you wish for, you just may get it good and hard.  It appears that the good people of Japan are beginning to feel what it is like when a government achieves a policy goal after twenty years.  Notably, the key issue is that inflation, after literally decades of negative or near zero outcomes, has risen back to levels not seen since the early 1990’s, arguably two generations ago.  (The blip in 2014 was the result of the rise in Japan’s GST, their version of VAT, to 10%, which was a one-off impact on prices that dissipated within 12 months.)

This lack of inflation was deemed the fatal flaw in the Japanese economy, despite the fact that things there seem to work pretty well.  The infrastructure is continuously modernized and works well and while my understanding is that a part of the population was frustrated because their nominal incomes weren’t rising, with inflation averaging 0.0% or less for 20 years, they weren’t falling behind.  However, the broad macroeconomic view from policy analysts around the world was that Japan, a nation with an actual shrinking population, needed to do everything they could to push inflation higher in order to better the lives of its citizens.  Well, they have done so with inflation there now higher than the most recent readings in the US.  I fear that the good people of Japan are going to be asking many more questions about why the government thought this was a good idea as prices continue to rise.  It is already apparent in the approval numbers of the current government with readings on the order of 27%.

So, now we must ask, how will different markets interpret the ongoing rise in inflation.  We are already seeing what is happening in long-dated JGB markets, with the 30yr and 40yr yields rising to record levels, albeit below, and barely at current inflation readings respectively.  But, as I mentioned yesterday, the broader market question will be at what point will Japanese investors, who are one of the key sources of global capital, decide that the yield at home is sufficient to bring assets back from around the world, notably the US.  That level has not yet been reached although I suspect we are beginning to see the first signs of that.  

In the event this occurs, and I believe it will do so, what will be the impact on markets?  The first, and most obvious outcome will be a significant rise in the JPY (+0.6%).  As you can see below, while the yen has strengthened compared to levels seen in mid and late 2024, it remains far weaker than levels seen over the past 30+ years, where the average has been 112.62, more than 20% stronger than the current levels.

As to Treasury markets, Japan remains the largest non-US holder of Treasuries and while I doubt they will sell them aggressively, it would certainly be realistic to see them allow current positions to mature and not buy new ones but rather bring those funds home (stronger yen) while removing a key bid for the market (Kind of like their version of QT!).  Higher US yields are a real possibility here.  As to equities, these will likely be sold, although the Japanese proportion of holdings is not as large relative to others, but with rising yields and a falling dollar, it doesn’t feel like a good environment for equities.

Of course, all of this is dependent on the status quo in US policy remaining like it is today.  If President Trump can get Congress to implement his policies and they are successful at reinvigorating the US domestic economy, two big Ifs, these views will be subject to change.  The key to remember about markets, especially currency markets, is that there are two sides to every story, and expecting a particular outcome because one side of the equation moves may be quite disappointing if the other side moves and was unanticipated.

Ok, I spent far too long there, but not that much else is exciting.  The other story with some press has been driving oil markets higher (WTI +0.85%) with a gap up on news that Israel was considering a strike against Iranian nuclear facilities.  Naturally, this has been denied, and oil’s price has retreated from the early highs seen below.

Source: tradingeconomics.com

Sticking with commodities, gold (+0.5%) continues to rally, perhaps on fears of that Israeli news, or perhaps simply because more and more investors around the world want to own something they can hold onto and has maintained its value for millennia.

In the equity markets, yesterday’s modest US declines were followed by weakness in Japan (-0.6%) but strength in China (+0.5%) and Hong Kong (+0.6%).  As to the rest of the region, there were many more gainers (Korea, India, Taiwan, Australia) than laggards (Malaysia, Thailand) so a net positive tone.  In Europe, though, modest declines are the order of the day with the CAC (-0.5%) the worst performer and the FTSE 100 (-0.1%) the best.  US futures are also pointing lower at this hour (7:50) down on the order of -0.5% across the board.

Treasury yields (+4bps) have moved higher again this morning and have taken the entire government bond complex along with them as all European sovereign yields are higher by between 4bps (Germany, Netherlands) and 6bps (Switzerland, UK).  We have already discussed JGB yields where 10yr yields have moved higher by 2bps.

Finally, the dollar is softer across the board this morning with the DXY (-0.45%) a good proxy of what is happening.  The outliers are KRW (+1.2%) and NOK (+1.1%) with the latter an obvious beneficiary of oil’s rise while the former seems to be climbing in anticipation of something coming out of the G10 FinMin meeting in Canada this week.  Otherwise, that 0.45% move is a good proxy for most things.

On the data front, we have another day sans anything important although EIA oil inventories will be released with a solid draw expected.  Fed speakers were pretty consistent yesterday explaining that patience remains a virtue in a world where they have no idea what is going on.  Fed funds futures markets have pushed the probability of a June cut down to 5% and only 50bps are priced in for all of 2025.  (Personally, I see no reason that a cut is coming.)

The dollar remains on its back foot, and I expect that the combination of pressure from the Trump administration to keep it that way is all that is going to be necessary to see things continue with this trend.  Of course, an Israeli strike on Iran would change things dramatically in terms of risk perception and likely support the dollar, but absent that, right now, lower is still the call.

Good luck

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Set Cash On Fire

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On Friday, the Moody’s brain trust
At last said it’s time to adjust
America’s debt
As we start to fret
That it’s too large and might combust
 
So, Treasury yields are now higher
As pundits explain things are dire
But elsewhere, as well
Seems bonds are a sell
As governments set cash on fire

 

Arguably, the biggest story of the weekend happened late Friday evening as Moody’s became the third, and final, ratings agency to downgrade US government debt to Aa1 from Aaa.  S&P did the deed back in 2011 and Fitch in 2023.  The weekend was filled with analyses of the two prior incidents and how markets responded to both of those while trying to analogize those moves to today.  In a nutshell, the first move in both 2011 and 2023 was for stocks to fall and bonds to rally with the dollar falling. However, in both of those instances, those initial moves reversed over the course of the ensuing months such that within a year, markets had pretty much reversed those moves, and in some cases significantly outperformed, the situation prior to the downgrade.  

Looking at Moody’s press release, they were careful to blame this on successive US administrations, so not putting the entire blame on President Trump, but in the end, it is hard to ignore that the nation’s fiscal statistics regarding debt/GDP and debt coverage are substantially worse than that of other nations that maintain a Aaa rating.  As well, their underlying assumption is that there will be no changes in the current trajectory of deficits and so no reason to believe things can change.

The most popular weekend game was to try to estimate how things would play out this time although given the starting conditions are so different in the economy, I would contend past performance is no guarantee of future outcomes.  In this poet’s eyes, it is not clear to me that it will have a long-term material impact on any market.  We have already been hearing a great deal about how Treasuries are no longer the safe haven they were in the past.  I guarantee you that institutions looking for a haven were not relying solely on Moody’s Aaa rating for comfort.  In addition, given a key demand for Treasuries is as collateral in the financial markets, and the Aa1 rating is just as effective as a Aaa rating from a regulatory risk perspective, I see no changes coming

As to equities, I see no substantive impact on the horizon.  The equity market remains over richly valued and if it were to decline, I don’t think fingers could point to this action.  Finally, the dollar has been declining since the beginning of the year and remains in a downtrend.  Using the DXY as our proxy, if the dollar falls further, should we really be surprised?

source tradingeconomics.com

To summarize, expect lots more hyperbole on the subject, especially as many analysts and pundits will try to paint this as a failure of the Trump administration.  And while bond yields may rise further, as they are this morning, given the fact that yields are rising everywhere around the world, despite no other nations being downgraded, this is clearly not the only driver.

In fact, one could make the case that bond yields are rising around the world because, like the US, nations all over are talking about adding fiscal stimulus to their policy mix.  After all, have we not been assured that Europe is going to borrow €1 trillion or more to rearm themselves?  That is not coming out of tax revenue, that is a pure addition to the debt load.  As well, is not a key part of the ‘US will suffer more than China in the tariff wars’ story based on the idea that China will stimulate the domestic economy and increase consumption (more on that below)?  That, too, will be increased borrowing.  I might go so far as to say that the increased borrowing globally to increase fiscal stimulus will lead to higher nominal GDP growth everywhere along with higher inflation.  I guess we will all learn how things play out together. 

Ok, so now that we have a sense of THE big story, let’s see how markets behaved elsewhere.  I thought that today, particularly, it would be useful to see how bond markets around the world have behaved in the wake of the Moody’s news.  Below is a screenshot from Bloomberg this morning.  note that every major market that is open has seen bonds sell off and I’m pretty confident that Canada’s at the very least, will do so when they wake up.  Ironically, the European commission came out this morning and reduced their forecasts for GDP growth and inflation this year and next and still European sovereign yields are higher.  I have a feeling that this news is not as impactful as some would have you believe.

Turning to equity markets, Friday’s US rally is ancient history given the change in the narrative.  And as you can see below from the tradingeconomics.com page, every major market is softer this morning (those are US futures) with only Russia’s MOEX rising, hardly a major market.  Again, it appears the fallout from the ratings cut is either far more widespread, or not a part of the picture at all.  It seems you could make the case that if European growth is going to underperform previous expectations, equity markets there should underperform as well.  The other two green arrows are Canada and Mexico, neither of which is open as of 6:30 this morning.

Commodity markets are the ones that make the most sense this morning as oil (-1.3%) is under pressure, arguably on a weaker demand picture after softer Chinese data was released overnight.  While the timing of the impacts of the trade war is unsettled, there is certainly no evidence that China is aggressively stimulating its economy.  This was very clear from the decline in Retail Sales, Fixed Asset Investment and IP, although the latter at least beat expectations.  But the idea that China is changing the nature of their economy to a more consumption focused one is not yet evident.  Meanwhile, metals markets are all firmer this morning with gold (+1.2%) leading the way, arguably as a response to the ratings downgrade.  This has dragged both silver (+0.9%) and copper (+1.0%) along for the ride.  It is not hard to imagine that sovereign investors see the merit in owning storable commodities like metals in lieu of Treasuries, at least at the margin.  But also, given the dollar’s weakness, a rally in metals is not surprise.

Speaking of the dollar’s weakness, that is the strong theme of the day along with higher yields across the board.  Right now, the euro (+1.0%) and SEK (+1.0%) are leading the way higher although the pound (+0.9%) is also doing well.  Perhaps this has to do with the trade agreement signed between the UK and EU reversing some of the Brexit outcomes at least regarding food and fishing, although not regarding regulations or immigration.  JPY (+0.6%) is also rallying as is KRW (+0.75%) and THB (+0.9%) as there is a continuing narrative that stronger Asian currencies will be part of the trade negotiations.  Finally, Eastern European currencies are having a good day (RON +2.3%, HUF +1.8%, CZK +1.2%, PLN +1.0%) after the Romanians finally elected a president that was approved by the EU.  Yes, they had to nullify the first election and then ban that candidate from running again, but this is how democracy works!

On the data front, there is very little hard data to be released this week, although it appears every member of the FOMC will be on the tape ahead of the Memorial Day weekend.  Perhaps they are starting to feel ignored and want to get their message out more aggressively.

TodayLeading Indicators-0.9%
ThursdayInitial Claims230K
 Continuing Claims1890K
 Flash Manufacturing PMI50.5
 Flash Services PMI51.5
 Existing Home Sales4.1M
FridayNew Home Sales690K

Source: tradingeconomics.com

Actually, as I count, there are three members, Barr, Bowman and Waller who will not be speaking this week, although Chairman Powell doesn’t speak until next Sunday afternoon.  In the end, the narrative is going to focus on the ratings cut for a little while, at least for as long as equity markets are under pressure along with the dollar.  However, when that turns, and I am sure it will, there will be a search for the next big thing.  I have not forgotten about the potential large-scale changes I discussed on Friday, and I am still trying to work potential scenarios out there, but for now, that is not the markets’ focus.  Certainly, for now, I see no reason for the dollar to gain much strength.

Good luck

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More Pain

Posted on by

The data from China reflected
That tariffs have hurt, as expected
It’s likely more pain,
On China, will rain
As both nations are so connected
 
Meanwhile, in a German surprise
Herr Merz failed to get his allies
To name him to lead
Which seemed guaranteed
Could this presage his quick demise?

In the battle being waged between the US and China via tariffs, the first data indications have shown that the US is faring a bit better.  Yesterday’s ISM Services data was stronger than expected, remaining well above the 50 level although arguably slightly below the recent average reading.

Source: tradingeconomics.com

Meanwhile, last night, the Chinese Caixin Services PMI fell to 50.7, missing expectations and continuing its drift lower over time.  

Source: tradingeconmics.com

Are things really worse in China than the US, at least from the perspective of data releases?  I think both nations will suffer during this period as the impacts of the tariffs and reduced trade bleed into the data over the next months, but so far, it seems the US is holding its own.  One of the problems with analyzing the issue is that as the WSJ pointed out yesterday, when the data in China gets bad, they simply stop releasing it, so it may be difficult to see.

Now, last night, Chinese shares did manage a nice rally with the CSI 300 higher by 1.0% but that follows six consecutive down sessions, albeit of modest size.  

Source: tradingeconomics.com

As to the renminbi, after a 1% gain last Friday, it has done little and remains very much in line with its levels of the past year.  The thing about China is that nothing there moves quickly, so absent a policy announcement of some type, I expect this activity will continue to gradually adjust to the realities as they become clear to the market.  If President Trump reduces tariffs, as he implied he would eventually, things could work better, but again, given the time lags of moving products across the Pacific, we have a lot of time between now and whatever the new normal turns out to be.

But the more interesting story to me overnight was that Friedrich Merz, the ostensible winner of the German elections last month failed to achieve the votes to be named Chancellor despite his coalition having a 12-seat majority in the Bundestag.  As it was a secret ballot, nobody knows who didn’t support him, but this outcome certainly calls into question both his ability to lead Germany effectively, and correspondingly, Germany’s ability to lead Europe in the new world order.

Recall, Germany remains keen to support Ukraine in its ongoing war with Russia and even destroyed their once sacrosanct fiscal responsibility in order to be able to pay for that support.  But if they do not have an effective leader, one who can command their parliament to enact his policies, it is not clear why other European nations would follow their lead on anything.  It should not be surprising that the DAX (-1.3%) fell sharply when the news was released, and that has helped drag most European shares lower (CAC -0.7%, IBEX -0.3%, Poland -3.3%).  As to the euro, you can see from the below chart that the response, when the news was announced, that it slipped about 0.5%, basically wiping out the gains it had achieved prior to the vote.

Source: tradingeconomics.com

Will this matter in the long run?  I believe that a weakened Germany, which is likely the outcome of this situation, will simply undermine the euro’s value.  As such, while I still believe the dollar has further to decline, the euro will probably not be a major winner.  Look for other currencies to outperform the euro going forward.

Ok, I think those are the real stories as we head into today’s session with most market participants remaining tentative in the face of the ongoing confusion over policies, counter policies and macroeconomic data.  Remember, too, we have the Fed tomorrow and the BOE on Thursday, so despite the fact that fiscal policy has been the driver, the Fed’s opinions still carry weight amongst the fixed income community, at the very least.

Looking at the price action overnight, the Nikkei (+1.0%) gained on some solid earnings data from Japanese companies as well as increased hopes that the US-Japan trade talks will be successfully completed by June.  Apparently, there is also some faith that the US and China will begin talking soon on this subject.  Hong Kong (+0.7%) also benefitted from these discussions, but the rest of the region showed very little movement overall, with gains or losses on the order of 0.3% or less.  As we have already discussed Europe, a look at US futures shows they are pointing lower by about -0.5% at this hour (7:10).

Bond markets remain very dull these days with Treasury yields edging higher by 1bp this morning after climbing 3bps yesterday.  European sovereign yields are also higher. By 1bp to 2bps although there is neither data nor a story that seems to have had much impact.  The Services PMI data that was released this morning was very much in line with expectations and continues to hover around 50.0 for the continent as a whole.  Meanwhile, JGB yields were unchanged last night and sit at 1.25%, well below the levels seen back in late March and having really gone nowhere for the past month.  It strikes me that JGB yields will respond to any trade deals but are likely to be quiet in the interim.

Commodity prices are rallying this morning with oil (+2.2%) rebounding from its level yesterday which happen to come quite close to touching the lows from April 9th.  It should be no surprise that there are up days in this market, but if the Saudis and OPEC are going to continue increasing production, I expect that prices have further to fall.  In the metals markets, gold (+1.4%) is having another blockbuster day, now having gained $150/oz in the past three sessions and bouncing off the correction lows.  Demand for the barbarous relic continues to come from Asia mostly with all signs showing that US investors are not interested in this trade.  As to silver (+1.7%) and copper (+0.6%), they are both still along for the ride.

It should be no surprise with the commodity markets showing strength that the dollar is under pressure this morning.  while we’ve discussed the euro already, the pound (+0.5%) is looking quite solid as it continues its rally from the lows seen in mid-January.  But the yen (+0.5%), SEK (+0.45%) and NOK (+0.35%) are all gaining today as well.  Interestingly, the impact in emerging markets is far less noticeable with none of the major EMG currencies moving even 0.2% this morning.

On the data front, there is very little hard data this week although we do have the Fed on Wednesday and then a whole bunch of Fed speakers on Friday.

TodayTrade Balance-$137.0B
WednesdayFOMC Rate Decision4.50% (unchanged)
 Consumer Credit$9.5B
ThursdayBOE Rate Decision4.25% (-0.25%)
 Initial Claims230K
 Continuing Claims1890K
 Nonfarm Productivity-0.7%
 Unit Labor Costs5.1%

Source: tradingeconomics.com

Today’s trade data is for March, prior to the tariff impositions, so will reflect significant tariff front-running.  But really, it’s about the Fed this week, and since they have lost much of their cachet lately, I think the market is really going to continue to look to the White House for trade news and react to that.  Net, I continue to believe that the dollar’s FX rate will be part of many trade discussions, like we saw with Taiwan (which by the way did reverse 3% of yesterday’s gain overnight) and that means further weakness is in our future.

Good luck

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Too Much Debt

Posted on by

In Spain, electricity failed
In Canada, Carney prevailed
But markets don’t care
As movement’s quite spare
It seems many traders have bailed
 
But problems, worldwide, still abound
Though right now, they’re in the background
There’s far too much debt
And still a real threat
That no true solutions are found

 

The two biggest stories of the past twenty-four hours were clearly the national scale blackout in Spain and Portugal yesterday, and the slim victory for Mark Carney in Canada, where the Liberal Party appears to have a plurality, but not a majority, and will oversee a minority government.

Touching on the second story first, in truth there is not much to discuss.  Much has been made of the vote being an anti-Trump statement with the idea that Carney is better placed to defend Canada from President Trump’s (imagined) predations.  However, given the lack of a majority government, it is not clear how effective this line of reasoning will prove.  As there is no futures market for the TSX, we really don’t have a sense yet of how the Canadian equity market will greet the news.  Yesterday’s modest gains of 0.35% amid a general atmosphere of modest gains doesn’t really tell much of a tale.  As to CAD (-0.1% today), a quick look at the past week shows it has done nothing even in the wake of the news. (see below).  My take is this is a nothingburger event, a perfect description for Mark Carney, a nothingburger of a politician.

Source: tradingeconomics.com

As to the story about Spain’s electricity, I think it may be more instructive on two levels.  The first is as a warning to the risks inherent of powering your electric grid with more than 25% – 30% intermittent, renewable energy sources like wind and solar.  It is somewhat ironic that just twelve days prior to the blackout, Spain’s entire electricity requirement was met by solar, wind and hydro power, the Green dream.  Alas, here we are now and while no answers have yet been forthcoming, and I assume the media will downplay any blame on too much renewable power, virtually every engineering study has shown that once a grid has more than that 25% renewables, it tends towards instability.  This issue will be argued by both sides for a while, although as always, physics will be the final arbiter.  

But I have to wonder if the sudden failure of the electric grid is an omen of sorts, for what may be happening in global markets.  If we analogize global supply chains to the electrical grid, over the course of the past 50 years, we have seen the world create a massively complex web of trade with raw materials, intermediate goods and final products all crisscrossing the world.  There have been myriad benefits to all involved with real per capita economic benefits abounding, and for everybody reading this note, the ability to essentially buy whatever you want/need with limited interference and trouble.  Certainly, the availability of everyday necessities like food and clothing is widespread.

However, underpinning that bounty were two networks.  The first being the obvious one, the supply chains which since Covid have been much discussed by the punditry.  But the second, which gets far less notice is the network of debt that is issued around the world by governments and companies, as well as taken on by individuals, and that has grown to be more than 3x the entire global economic output.  While we most often read about the US government debt which is quickly approaching $37 trillion, total global debt is much greater than that.  In fact, at this point, the debt market is not about issuing new debt to fund new investment, rather it is almost entirely a refinancing mechanism.  

It is this latter issue that should concern us all.  What happens if, one day, the ability to refinance some of that debt, whether US Treasuries, German bunds or Chinese government bonds, has a hiccup of some sort?  A failed US Treasury auction, where the Fed is required to purchase bonds, or a power outage in a key financial center that prevents trades from being confirmed/settled and moneys not moving as expected, or some other force majeure type event that disrupts the current smooth functioning of global debt markets.  

Frankly, the combination of the changes being wrought by President Trump to the global economy, where globalization is giving way to mercantilism, and the significant weight of global debt that hangs over the global economy and is given very little thought seems a potentially volatile mix.

Ironically, as much as I have lately been describing how the Fed’s role seems to have diminished, in the event that something upsets this apple cart, the Fed will be the only game in town.  While this is not a today event, it is something we must not forget.

I apologize for my little diatribe, but with so little ongoing in markets, and the parallel to the Spanish electrical grid, it seemed timely.  Let’s look at markets.  Asian equity markets were mixed with the main markets very quiet but a couple of 1% gainers (Australia, Taiwan and Korea) although the rest of the region was +/- 0.3% or less.  Too, volumes were quite lethargic.  In Europe, it should be no surprise that Spain (-0.8%) is the laggard today as the first economists’ to opine on the impact of the blackout said it could be a hit of as much as 0.5% of GDP.  Germany (+0.6%) is the other side of the coin after the GfK Consumer Confidence reading came out at a better than expected -20.6.  Now, maybe it’s just me, but if I look at the past 5 years’ worth of this index, it is difficult to get excited about German economic prospects.

Source: tradingeconomics.com

Yes, this was a better reading, but either the people of Germany are manic depressive, or the index is indicative of major structural problems in the country.  Maybe a bit of both.  As to US futures, at this hour (7:10) they are basically unchanged after being basically unchanged yesterday.

In the bond market, Treasury yields have bounced 2bps this morning after touching their lowest level in 3 weeks yesterday.  European sovereign yields, though, are all softer by 1bp to 2bps this morning as comments from ECB members seem to highlight more rate cuts as Europe achieves their inflation target and are now getting concerned they will fall below the 2.0% rate.

In the commodity markets, oil (-1.7%) is under pressure this morning ostensibly on a combination of concerns over slowing growth and little movement in the US-China trade talks as well as a report that Kazakhstan is pushing up output and other OPEC+ members are talking about increasing production further when they meet next week.  Meanwhile, gold (-0.75%), which rallied back to unchanged in NY yesterday is once again finding sellers at its recent trading pivot of $3340ish (H/T Alyosha).  However, gold’s slide has not impacted either silver (+0.4%) or copper (+0.9%) at least so far in the session.

Finally, the dollar is firmer, largely across the board, this morning.  The euro (-0.3%), pound (-0.4%), JPY (-0.4%) and CHF (-0.6%) are all under some pressure, perhaps profit taking.  But in truth, other than INR (+0.15%) the rest of the major currencies, both G10 and EMG, are all softer vs. the greenback.  I guess the dollar’s demise will need to wait at least one more day.

On the data front, the Goods Trade Balance (exp -$146B), Case Shiller Home Prices (4.7%) and JOLTs Job Openings (7.48M) are the main numbers, although we also see Consumer Confidence (87.5).  But with no Fed discussions much more crucial data on Thursday (GDP, PCE) and Friday (NFP) it seems that today is setting up for not much excitement.

In fact, lack of excitement seems the best description of markets right now.  I don’t know what the next catalyst will be to change things, but absent peace in one of the wars, kinetic or trade, or another force majeure event, it feels like range trading is the order of the day for a while.  My big picture view of a slowly declining dollar is still intact, but day-to-day, it’s hard to see much right now.

Good luck

Adf

That Man is Our Bane

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Apparently, back in the day
Investors and CEOs say
The future was clear
But now they all fear
Uncertainty is in their way
 
So, they will now clearly explain
When earnings and profits do wane
That they’re not to blame
Instead, they now claim
It’s Trump’s fault, that man is our bane

 

I’m having some difficulty understanding a number of the concerns about which I read every day as more and more corporate executives and investment managers have suddenly found a new scapegoat, uncertainty.  Apparently, I missed the time when the future was certain, as I have no recollection of that at all.  Perhaps you remember.  If so, could you remind me please?

For instance, I remember the certitude of the comments from the RBA back in April 2021 that interest rates would remain lower for longer, and that it would be at least three years before they would need to raise interest rates.  I also remember, as the graph below demonstrates, that certainty was misplaced as less than two months after those comments, the RBA started raising interest rates despite the clear directive they would not need to do so for years.

Source: tradingeconomics.com

While this is just one example, in my experience, certainty is not part of the mix when running a business or a portfolio of assets or a position in any financial market.  So imagine my surprise when reading Bloomberg this morning and finding that suddenly, the world is awash in uncertainty.  Has it ever not been the case?  Pretty much once you get beyond the laws of physics or mathematics, it strikes me that certainty in the future just doesn’t exist. (Even at 4Imprint).  Nonetheless, uncertainty because of President Trump’s trade policies is the latest rationale for every problem at every company right now.  In truth, I suspect that many executives are quite happy with this as the Covid excuse was wearing thin.

In the markets, too, uncertainty is the favored excuse for underperformance as how can anyone manage money with tape bombs constantly appearing.  Powell is a loser one day to I’m not going to fire Powell the next.  Tariffs are forever to a 90-day pause.  And of course, there are many other political stories that have limited impact on markets but seem to change regularly.  While this gets back to my view that President Trump is the avatar of volatility, I seem to recall long before President Trump that there were numerous presidential statements that had major market impacts.  My point is, nothing has really changed folks, other than the media dislikes this president more than any other in my lifetime so amplifies anything they think makes him look bad.

However, the one thing about which we cannot be surprised is that trading activity is waning, at least compared to what we saw since Trump’s inauguration.  Volumes of activity on the exchanges are sliding (see chart of S&P 500 volume below from ycharts.com) which makes perfect sense in a volatile and uncertain market.  

Now, as per the above, I would contend that the future is always uncertain.  Rather the real culprit here is volatility.  My take is that the future is going to continue to be volatile which implies, to me at least, that trading activity is going to remain on the low side and with it, liquidity for those who have significant real flows to transact.  It’s funny, volatility begets lower volumes, and lower volumes beget volatility due to reduced liquidity.  I’m not sure what it will take to break us from this cycle, but I have a sense that it will be with us for a while.

With that in mind, let’s see what happened overnight.  Yesterday’s strength in the US was followed by strength in Tokyo (+1.9%) although both China (+0.1%) and Hong Kong (+0.3%) didn’t really participate.  Interestingly, this morning I read that China was exempting a number of imports from the US from tariffs as apparently, it was hurting their businesses so severely it could cause closures.  Elsewhere in Asia, the picture was mixed although there were more gainers (Korea, Taiwan, Philippines, Thailand) than laggards (India, Singapore).  I do believe the tariff story is impacting these markets more than any as they are directly in the line of fire.

Meanwhile, in Europe, most markets are firmer this morning (DAX +0.6%, CAC +0.4%, IBEX +0.9%) but the UK (-0.1%) is lagging despite much stronger than expected Retail Sales data there this morning.  As to US futures, at this hour (7:00) they are pointing lower by about -0.35%.

In the bond market, Treasury yields continue to slide, down another -3bps this morning although Europe is moving in the opposite direction, with yields climbing between 2bps and 3bps in the session.  It’s odd because I continue to hear about European growth forecasts being cut and the ECB preparing for more rate cuts while the talk around the markets is that the US is going to see inflation from the tariffs.  Today’s bond moves don’t really speak to those narratives, but it is just one day.  I need to mention JGB yields, which rose 3bps overnight after Tokyo CPI came in 2 ticks hotter than forecast at both headline and core levels.  

In the commodity markets, oil (-1.2%) is slipping again and has consistently demonstrated it is unable to make any dent in the major price gap above the market.  To close that gap, WTI will need to rally more than $8/bbl from current levels, something I just don’t see happening in the current environment.  That would require a war in Iran I think.  As to metals, yesterday’s gold rally has been reversed (-1.5%) and today it is impacting both silver (-0.75%) and copper (-2.1%) as is the stronger dollar it seems.

Speaking of the dollar, Monday’s narrative that the dollar was about to collapse will need at least another day to come to fruition as it is modestly higher again this morning.  looking at the DXY as a proxy, it is trading just below 100, a level that many are watching closely.  A quick look at the chart below shows this is the third time in the past two years it has traded to this level, although the first of those times it broke through.  Of course, it was much lower just a couple years earlier.

Source: tradingeconomics.com

Today’s dollar strength is modest but broad-based with only CLP (+0.6%) higher this morning which makes absolutely no sense given copper’s slide today.  The worst performer is SEK (-0.8%) but given it has been the best performer YTD amongst the G10, perhaps this is just corrective.  Otherwise, we are looking at movements on the order of 0.25% to 0.45% across the board.

The only data this morning is Michigan Sentiment (exp 50.8).  We continue to see a dichotomy between the ‘hard’ data, Claims, NFP, CPI, Factory Orders, and the ‘soft’ data, Michigan Sentiment, PMI, inflation expectations with the former holding in well while the latter weakens.  Many analysts believe that recession is coming our way by summer, but these same analysts have been predicting the recession for the past 3 years.  The one thing about the US economy is that it is extraordinarily resilient despite all the things governments try to do to disrupt it.  I understand the concern, at least if you watch/read the news, but I have a sense that many people across the nation do not really do that.  While I believe that equity valuations remain too high to be sustainable, it is not clear to me that the economy is heading into a recession at this time.  As to the dollar, I wouldn’t write its obituary just yet, although I do think it will soften further over time.

Good luck and good weekend

Adf