Tag Archives: investing

Quite Dreary

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While pundits expected inflation
Would rise with Trump as the causation
The data has not
Shown prices are hot
Since tariffs joined the conversation
 
In fact, there’s a budding new theory
That’s made dollar bulls somewhat leery
If Powell cuts rates
While Christine, she waits
The dollar might soon look quite dreary

 

Well, it turns out measured inflation wasn’t quite as high as many had forecast, even if we ignore those whose views are completely political.  Yesterday’s readings of 0.1% for both headline and core were lower despite all the tariff anxiety.  The immediate response has been, just wait until next month, that’s when the tariff impact will kick in, you’ll see.  Maybe that will be the case, but right now, for a sober look, the Inflation_Guy™, Mike Ashton, offers a solid description of what happened and some thoughts about how things may be going forward.  Spoiler alert, tariffs are not likely the problem, let’s start thinking about money supply growth.

However, the market, as always, is seeking to create a narrative to drive things (or does the narrative follow the market?  Kind of a chicken and egg question) and there is a new one forming regarding the dollar.  Now, with inflation appearing to slow in the US, this is an opening for Chair Powell to cut rates again, despite the fact that inflation on every reading remains above their target.  Meanwhile, the uncertainty that US policy is having on economies elsewhere, notably in Europe as the tariff situation is not resolved, means Madame Lagarde is set to pause, (if not halt), ECB rate cuts for a while and voilà, we have the makings of a dollar bearish story.  

That seems likely to have been the driver of today’s move in the euro (+1.0%) which has taken the single currency back to its highest level since November 2021.

Source: tradingeconomics.com

Now, if you are President Trump and are seeking to reduce the trade deficit while bringing manufacturing capacity back to the US, this seems like a pretty big win.  Lower inflation and a lower dollar both work towards those goals.  Not surprisingly, the president immediately called for the Fed to cut rates by 100 basis points after the release.  As much as FOMC members seem to love the sound of their own voices, perhaps this is one time where they are happy to be in the quiet period as no response need be given!

At any rate, the softer inflation data has had a significant impact on the dollar writ large, with the greenback sliding against all its G10 counterparts, with SEK (+1.3%) leading the way, although CHF (+1.1%), NOK (+0.9%) and JPY (+0.8%) have also been quite strong.  However, the biggest winner was KRW (+1.3%) as not only has there been dollar weakness, but new president, Lee Jae-myung, has proposed tax cuts on dividends to help support Korean equity markets and that encouraged some inflows.  Other EMG currencies have gained as well, although those gains are more muted (CNY +0.3%, PLN +0.6%) and some have even slipped a bit (ZAR -0.5%, MXN -0.1%).  Net, however, the dollar is down.

Yesterday, I, and quite a few other analysts, were looking for more heat in the inflation story.  Clearly, if that is to come, it is a story for another day.  With this in mind, we shouldn’t be surprised that government bond yields have also fallen around the world with Treasuries (-5bps) showing the way for most of Europe (Bunds -6bps, OATs -5bps, Gilts -6bps) and even JGBs (-2bps) are in on the action.  

Earlier this week, the tone of commentary was that inflation was coming back, and a US stagflation was inevitable.  This morning, that narrative has disappeared.    Interestingly, I would have thought the combination of the cooler CPI and the trade truce between the US and China would have the bulls feeling a bit better.  Alas, the equity markets have not responded in that manner at all.  Despite the soft inflation readings, US equity markets yesterday edged lower, albeit not by very much.  But that weakness was followed in Asia (Nikkei -0.65%, Hang Seng -0.4%, CSI 300 -0.1%) with India, Taiwan and Australia all under pressure although Korea (+0.45%) bucked the trend on that dividend tax story.  And Europe, this morning, is also unhappy with the DAX (-1.1%) leading the way lower followed by the IBEX (-.9%) and CAC (-0.7%).  The FTSE 100 (-0.1%) is faring a bit better as, ironically, weaker than expected GDP data this morning (-0.3% in April) has reawakened hope that the BOE will get more aggressive cutting rates.  US futures are in the red as well this morning, -0.5% across the board.  Perhaps this is the beginning of the long-awaited decline from overbought levels.  Or perhaps, this is just a modest correction after a strong performance over the past two months.  After all, the bounce in the wake of the Liberation Day pause has been impressive.  A little selling cannot be a surprise.

Source: tradingeconomics.com

Lastly, we turn to commodities where the one consistency is that gold (+0.5%) has no shortage of demand, at least in Asia.  It seems that despite a 29% rise year-to-date in the barbarous relic, US investors are not that interested.  Those gains dwarf everything other than Bitcoin, and yet they have not caught the fancy of the individual investor in the US.  However, I believe that demand represents an important measure of the diminishing trust in the US dollar, at least for the time being.  The other metals are less interesting today.  As to oil (-1.9%), it has rallied despite alleged production increases from OPEC and weakening demand regarding economic activity.  Some part of this story doesn’t make any sense, although I don’t know which part yet.

This morning’s data brings Initial (exp 240K) and Continuing (1910K) Claims as well as PPI (0.2%, 2.6% Y/Y headline; 0.3%, 3.1% core).  While there are no Fed speakers, there is much prognostication as to how the CPI data is going to alter their DOT plot and SEP information next week at the Fed meeting.  

Finally, the situation in LA does not appear to have improved very much and it is spreading to other cities with substantial protests ostensibly planned for this weekend.  However, market participants have moved on as nothing there is going to change macroeconomic views, at least not yet.  If inflation is quiescent, the Fed doesn’t have to cut to have the tone of the conversation change.  That is what we are seeing this morning and this can continue quite easily.  When I altered my view on the strong dollar several months ago, I suggested a decline of 10% to 15% was quite viable.  Certainly, another 5% from here seems possible over the next several months absent a significant change in the inflation tone.

Good luck

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PS – having grown up in the 60’s I was a huge Beach Boys fan and mourn, with so many others, the passing of Brian Wilson.  In fact, I wanted to write this morning’s rhyme as new lyrics to one of his songs, either “Fun, Fun, Fun” or “Surfin’ USA” two of my favorites.  But I realise that I have become too curmudgeonly as both of those are wonderfully upbeat and I just couldn’t get skeptical words to work.

Rate Cutting Pretension

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The US and China have shaken
Their hands, as trade talks reawaken
And while it’s a start
It could fall apart
For granted, not much should be taken
 
So, markets have turned their attention
To ‘flation with some apprehension
This morning’s report
Might help, or might thwart
Chair Powell’s rate cutting pretension

 

Starting with the trade talks between China and the US, both sides have agreed that progress was made. Here is a quote from a report on China’s state broadcaster, CCTV, last night.  “China and the US held candid and in-depth talks and thoroughly exchanged views on economic and trade issues of mutual concern during their first meeting of the China-US economic and trade consultation mechanism in London on Monday and Tuesday. The two sides have agreed in principle the framework for implementing consensus between the two heads of state during their phone talks on June 5, as well as those reached at Geneva talks. The first meeting of such consultation mechanism led to new progress in addressing each other’s economic and trade concerns.”  I highlight this because it concurs with comments from Commerce Secretary Lutnick and tells me that things are back on track.

Clearly, this is a positive, although one I suspect that equity markets anticipated as they have been rallying for the past several sessions prior to the announcements.  Certainly, this is good news for all involved as if trade tensions between the US and China diminish, it should be a net global economic positive.  While anything can still happen, we must assume that a conclusion will be reached going forward that will stabilize the trade situation.  However, none of this precludes President Trump’s stated desire to reindustrialize the US, so that must be kept in mind.  And one of the features of that process, at least initially, is likely to be upward price pressures in the economy.

Which brings us to the other key story today, this morning’s CPI report.  Expectations for headline (0.2% M/M, 2.5% Y/Y) and core (0.3% M/M, 2.9% Y/Y) are indicating that the bottom of the move lower in inflation may have been seen last month.  However, these readings, while still higher than the Fed’s target (and I know the Fed uses Core PCE, but the rest of us live in a CPI world) remain well below the 2022 highs and inflation seems to be seen as less of a problem.  Yes, there are some fears that the newly imposed tariff regime is going to drive prices higher, and I have seen several analysts explain that we are about to see that particular process begin as of today’s data.  

Of course, from a markets perspective, the key issue with inflation is how it will impact interest rates.  In this case, I think the following chart from Nick Timiraos in the WSJ is an excellent description of how there is NO consensus view at all.

At the same time, Fed funds futures markets are pricing in the following probabilities as of this morning.

Source: cmegroup.com

The thing about the Fed is they have proven to be far more political than they claim.  First, it is unambiguous that there is no love lost between President Trump and Chairman Powell.  Interestingly, the Fed is strongly of the belief that when they cut rates, they are helping the federal government, and more importantly, the population’s impression of what the federal government is doing.  Hence, the 100bps of cuts last summer/fall never had an economic justification, they appeared to have been the Fed’s effort to sway the electorate to maintain the status quo.  With that in mind, absent a collapse in the labor market with a significantly higher Unemployment Rate, I fall into the camp of no Fed action this year at all.  And, if as I suspect, inflation readings start to pick up further, questions about hikes are going to be raised.

Consider if the BBB is passed and it juices economic activity so nominal GDP accelerates to 6% or 7%, the Fed will be quite concerned about inflation at that point and the market will need to completely reevaluate their interest rate stance.  My point is the fact that rate cuts are currently priced does not make them a given.  Market pricing changes all the time.

So, let’s take a look at how things behaved overnight.  After a modest US rally in equities yesterday, Asia had a solid session, especially China (+0.75%) and Hong Kong (+0.8%) as both responded to the trade news. Elsewhere in the region, things were green (Nikkei +0.5%), but without the same fanfare.  I have to highlight a comment from PM Ishiba overnight where he said “[Japan] should be cautious about any plans that would deteriorate already tattered state finances.  Issuing more deficit financing bonds is not an option.”  That sounds an awful lot like a monetary hawk, although that species was long thought to be extinct in Japan.  It will be interesting to see how well they adhere to this idea.

Meanwhile, in Europe, the only equity market that has moved is Spain (-0.6%) which is declining on idiosyncratic issues locally while the rest of the continent is essentially unchanged.  As to US futures, at this hour (7:30) they are pointing slightly lower, about -0.15% across the board.

In the bond market, the somnolence continues with yields backing up in the US (+2bps) and Europe, (virtually all sovereign yields are higher by 2bps) with only UK Gilts (+5bps) under any real pressure implying today’s 10-year auction was not as well received as some had hoped.  In Japan, yields slipped -1bp overnight and I thought, in the wake of the Ishiba comments above, I would highlight Japan 40-year bonds, where yields have collapsed over the past three weeks.  Recall, back in May there was a surge in commentary about how Japanese yields were breaking out and how Japanese investors would be bringing money home with the yen strengthening dramatically.  I guess this story will have to wait.

Source: tradingeconomics.com

Turning to commodities, oil (+1.5%), which reversed course during yesterday’s session, has regained its mojo and is very close to closing that first gap I showed on the chart yesterday.  Above $65, I understand most shale drilling is profitable so do not be surprised to hear that narrative pick up again.  In the metals markets, gold (+0.2%) now has the distinction of being the second largest reserve asset at central banks around the world, surpassing the euro, although trailing the dollar substantially.  I expect this process will continue.  Silver (-0.8%) and copper (-2.1%) are both under pressure this morning although I have not seen a catalyst which implies this is trading and position adjustments, notably profit taking after strong runs in both.

Finally, the dollar is slightly stronger this morning with the euro and pound essentially unchanged, AUD, NZD and JPY all having slipped -0.25%, and some smaller currencies (KRW -0.55%, ZAR -0.5%) having fallen a bit further.  However, for those who follow the DXY, it is unchanged on the day.  The thing about the dollar is despite a lot of discussion about a break much lower, it has proven more resilient than many expected and really hasn’t gone anywhere in the past two months.  If the Fed turns hawkish as inflation rebounds, I suspect the dollar bears are going to have a tougher time to make their case (present poets included.)

In addition to the CPI at 8:30, we see EIA oil inventory data with a modest build expected although yesterday’s API data showed a draw that surprised markets.  I must admit I fear inflation data is going to start to rebound again which should get tongues wagging about next week’s FOMC meeting.  However, for today, a hot print is likely to see a knee-jerk reaction lower in stocks and bonds and higher in the dollar.  But the end of the day is a long way away and could be very different, especially given the always present headline risk.

Good luck

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In a Trice

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While jobs data Friday was fine
The weekend has seen a decline
In positive news
As riots infuse
LA with a new storyline
 
The protestors don’t like that ICE
Is doing their job in a trice
So, Trump played a card,
The National Guard
As markets search for the right price

 

Despite all the anxiety regarding the state of the economy, with, once again, survey data like ISM showing things are looking bad, the most important piece of hard data, the Unemployment report, continues to show that the job market is in solid shape.  Friday’s NFP outcome of 139K was a few thousand more than forecast, but a lot more than the ADP result last Wednesday and much better than the ISM indices would have indicated.  Earnings rose, and government jobs shrunk for the first time in far too long with the only real negative the fact that manufacturing payrolls fell -8K.  But net, it is difficult to spin the data as anything other than better than expected.  Not surprisingly, the result was a strong US equity performance and a massive decline in the bond market with 10-year yields jumping 10bps in minutes (see below).

Source: tradingeconomics.com

But that is not the story that people are discussing.  Rather, the devolution of the situation in LA is the only story of note as ICE agents apparently carried out a series of court-warranted raids and those people affected took umbrage.  The face-off escalated as calls for violence against ICE officers rose while the LAPD was apparently told to stand down by the mayor.  President Trump called out the National Guard to protect the ICE agents and now we are at a point of both sides claiming the other side is acting illegally.  Certainly, the photos of the situation seem like it is out of hand, reminding me of Minneapolis in the wake of George Floyd, but I am not on site and can make no claims in either direction.  

It strikes me that for our purposes here, the question is how will this impact markets going forward.  A case could be made that the unrest is symptomatic of the chaos that appears to be growing around several cities in the US and could be blamed for investors seeking to move their capital elsewhere, thus selling US assets and the dollar.  Equally, a case could be made that haven assets remain in demand and while US equities do not fit that bill, Treasuries should.  In that case, precious metals and bonds are going to be in demand.  The one thing about which we can be sure is there will be lawsuits filed by Democratic governors against the federal government for overstepping their authority, but no injunctions have been issued yet.

However, let’s step back a few feet and see if we can appraise the broader situation.  The US fiscal situation remains cloudy as the Senate wrangles over the Big Beautiful Bill (BBB), although I expect it will be passed in some form by the end of the month.  The debt situation is not going to get any better in the near-term, although if the fiscal package can encourage faster nominal growth, it is possible to flatten the trajectory of that debt growth.  Meanwhile, the tariff situation is also unclear as to its results, with no nations other than the UK having announced a deal yet, although the administration continues to promise a number are coming soon.

If I look at these issues, it is easy to grow concerned over the future.  While it is not clear to me where in the world things are that much better, capital flows into the US could easily slow.  Yet, domestically, one need only look at the consumer, which continues to buy a lot of stuff, and borrow to do it (Consumer Credit rose by $17.9B in April) and recognize that the slowdown, if it comes, will take time to arrive.  Remember, too, that every government, everywhere, will always err on the side of reflating an economy to prevent economic weakness, and that means that the first cracks in the employment side could well lead to Fed cuts, and by extension more inflation.  (This note by StoneX macro guru Vincent Deluard discussing the Cancellation of Recessions is a must read).  I have spoken ad nauseum about the extraordinary amount of debt outstanding in the world, and how it will never be repaid.  Thus, it will be refinanced and devalued by EVERY nation.  The question is the relative pace of that adjustment.  In fact, I would argue, that is both the great unknown, and the most important question.

While answering this is impossible, a few observations from recent data are worth remembering.  US economic activity, at least per the Atlanta Fed’s GDPNow continues to rebound dramatically from Q1 with a current reading of 3.8%.  Meanwhile, Chinese trade data showed a dramatic decline in exports to the US (-35%) but an increased Trade Surplus of $103.2B as they shifted exports to other markets and more interestingly, imports declined-3.4%.  in fact, it is difficult to look at this chart of Chinese imports over the past 3 years and walk away thinking that their economy is doing that well.  Demand is clearly slowing to some extent, and while their Q1 GDP was robust, that appears to have been a response to the anticipated trade war.  Do not be surprised to see Chinese GDP slowing more substantially in Q2 and beyond.

Source: tradingeconomics.com

Europe has been having a moment as investors listen to the promises of €1 trillion or more to build up their defense industries and flock to European defense companies that had been relatively cheap compared to their US counterparts.  But as the continent continues to insist on energy suicide, the long-term prospects are suspect.  Canada just promised to raise its defense spending to 2% of GDP, finally, a sign of yet more fiscal stimulus entering the market and the UK, while also on energy suicide watch, has seen its service sector hold up well.

The common thread, which will be exacerbated by the BBB, is that more fiscal spending, and therefore increased debt are the future.  Which nation is best placed to handle that increase?  Despite everything that you might believe is going wrong in the US, ultimately the economic dynamism that exists in the US surpasses that of every other major nation/bloc.  I still fear that the Fed is going to cut rates, drive inflation higher and undermine the dollar before the year is over, but in the medium term, no other nation appears to have the combination of skills and political will to do anything other than what they have been doing already.  And that is why the long-term picture in the US remains the most enticing.  This is not to say that US asset prices will improve in a straight line higher, just that the broad direction remains clear, at least to me.

Ok, I went on way too long, sorry.  As there is no US data until Wednesday’s CPI, we will ignore that for now.  A market recap is as follows:  Asia had a broadly stronger session with Japan, China, HK, Korea and India all following in the US footsteps from Friday and showing solid gains.  Europe, though, is mostly in the red with only Spain’s 0.25% gain the outlier amongst major markets.  As to US futures, they are essentially unchanged at this hour (7:00).

Treasury yields have backed off -2bps from Friday’s sharp climb and European sovereign yields are softer by between -3bps and -4bps as although there has been no European data released; the discussion continues as to how much the ECB is going to cut rates going forward.  JGB yields were unchanged overnight.

In the commodity space, while oil (+0.3%), gold (+0.1%) and even silver (+0.8%) are edging higher, platinum has become the new darling of speculators with a 2.8% climb overnight that has taken it up more than 13.5% in the past week and 35% YTD.  Remarkably, it is still priced about one-third of gold, although there are those who believe that is set to change dramatically.  A quick look at the chart below does offer the possibility of a break above current levels opening the door to a virtual doubling of the price.  And in this environment, a run at the February 2008 all-time highs seems possible.

Finally, the dollar is softer across the board this morning, against virtually all its G10 and EMG counterparts.  AUD (+0.55%) and NZD (+0.7%) are leading the way, but the yen (+0.5%) is having a solid session as are the euro and pound, both higher by 0.25%.  In the emerging markets, PLN (+0.7%) is the leader with the bulk of the rest of the space higher by between +0.2% and +0.4%.  BRL (-0.3%) is the outlier this morning, but that looks much more like a modest retracement of recent gains than a new story.

Absent both data and any Fedspeak (the quiet period started on Friday), we are left to our own devices.  My take is there are still an equal number of analysts who are confident a recession is around the corner as those who believe one will be avoided.  After reading the Deluard piece above, I am coming down on the side of no recession, at least not in a classical sense, as no politician anywhere can withstand the pain, at least not in the G10 and China.  That tells me that while Europe may be the equity flavor of the moment, commodities remain the best bet as they are undervalued overall, and all that debt and new money will continue to devalue fiat currencies.

Good luck

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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

Posted on by

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

Posted on by

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

Posted on by

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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