Tag Archives: #Iowa

Democracy’s Died

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There once was a fellow named Trump
Whose plan was, Joe Biden, to dump
He started last night
By winning the fight
And heads to New Hampshire to stump

Political pundits worldwide
Now claim that democracy’s died
But markets don’t seem
In touch with that theme
Instead, interest rates are their guide

The Iowa caucus results can be no surprise to anyone as the polls were quite clearly in Donald Trump’s favor.  In the end, he won with slightly more than 50% of the vote while Governor DeSantis came second, Ambassador Haley was in third and Vivek Ramaswamy was a weak fourth.  Ramaswamy has now dropped out of the race and thrown his support behind Trump.  Next week, is the New Hampshire primary and then two weeks later is the South Carolina primary.  After that, comes Super Tuesday in early March, and quite frankly, it would be shocking, at this point, if Trump did not wrap up the nomination by then.

I only mention this because of all the elections this year, arguably the US presidential one is the most impactful on the world at large as well as financial markets.  I will remind you of the equity market behavior in 2016 when Trump was elected the first time and as the evening progressed, the initial response was to see equity futures fall sharply as it became clearer that Trump was going to win, but by the time the markets opened in NY, they had completely reversed and rallied quite sharply, several percent.  Ultimately, I would not be surprised to see more market impacts this year as well.  It is one of the reasons that I believe the major theme this year is going to be more volatility across all markets than we have seen in the past several years combined.

However, right now, we are too early in the cycle and there has been no change of views or broad polling results, so investors are going to focus elsewhere, namely central bank actions.  This brings us to the question of will the Fed actually be cutting interest rates six times in 2024, or more accurately, will they be reducing the Fed funds rate by 150bps?  Funnily enough, I think that may be the least likely outcome of the array of possibilities that exist.  Instead, I expect that the futures market is pricing in an almost binary outcome.  On the one hand, the Fed remains true to their comments that inflation remains too high and while some cuts will come, it is very premature, so perhaps only one or two cuts this year.*  On the other hand, the recessionistas are correct, a hard landing is coming and the Fed is going to have to cut by 300bps or 350bps to support the market.  Play with these probabilities and it is pretty easy to come up with a scenario that shows 150bps of cuts this year.

But for now, whatever my views on how the Fed and other central banks are going to behave, the only important thing is what the market is anticipating.  This takes us back to the market’s assumption about the Fed’s reaction function regarding all the data that is coming our way.  Hence, the fact that the market largely ignored what appeared to be a hotter than expected CPI print last week, but jumped all over a softer than expected PPI print is telling in and of itself.  The market is desperate for the Fed to cut rates which will open the doors for all the other central banks to cut rates.

And in truth, I think this is exactly what we should expect for the time being.  The market is all-in on the idea that not only has the peak in inflation been seen, but that it is quickly falling back to the 2% target that is almost universal.  And they are all-in on the idea that central banks will be able to lower rates back to much more comfortable levels for those in debt while supporting risk asset prices.  My take is we will need to see a long series of data that indicates anything other than this scenario before market views change.  So, any data that indicates inflation remains sticky will be ignored, while data that indicates it is falling sharply will be regurgitated constantly.  The same will be true in the employment and production data.  All I’m saying is we need to be prepared to see certain data that doesn’t fit the narrative get completely ignored for now.  Manage your risk accordingly.

As to the overnight session, things have been less optimistic overall with most stock markets in Asia under pressure, even Japan (Nikkei -0.8%) and Hong Kong (-2.2%) really feeling pressure although mainland Chinese shares held in there after word that the Chinese government would be issuing an emergency CNY 1 trillion (~$139 billion) of debt to fund spending domestically.  As to Europe, all red there, albeit only on the order of -0.4% across the board and US futures are also lower this morning, something around -0.25% at this hour (7:45).

In the bond market, after the US holiday prevented any changes of note yesterday, we see Treasury yields backing up 7bps this morning, a similar move to what we saw in Europe yesterday.  Arguably, this seems like a catch-up move.  In fact European sovereign yields are essentially unchanged on the day as German GDP data confirming the recession of 2023 did nothing to change views, nor surprisingly, did slightly better than expected UK employment data where wage growth was seen rising less rapidly than anticipated.  JGB yields remain moribund and the idea that the BOJ is going to change anything seems a more and more distant prospect for now.

Oil prices (+0.6%) are a touch higher amid further threats from the Houthis as well as some missile attacks by Iran on areas in Iraq and Syria.  I cannot keep up with all the different allegations here, but we cannot ignore the fact that things seem to be escalating.  This cannot be a good outcome for oil prices, or perhaps more accurately, seems likely to push them higher.  The higher interest rates are weighing on precious metals with gold and silver both lower, but surprisingly, copper and aluminum are both rallying this morning.

Finally, the dollar is flexing its muscles this morning, higher against all its counterparts in both the G10 and EMG spaces.  AUD, NOK and SEK have all declined by -0.8% or so, leading the way in the G10 space, although -0.6% covers the bulk of the rest of the bloc.  In the EMG space, KRW (-1.25%), PLN (-1.0%) and MXN (-1.0%) are the laggards across an entire bloc that is under pressure.  This is all about the dollar this morning with no idiosyncratic stories to drive things.

On the data front, we only have the Empire State Manufacturing Index (exp -5.0) and we hear from Fed Governor Waller as well at 11:00.  It seems to me that the market has really gone a bit too far in its bullish beliefs and today is a bit of a correction.  Unless we start to see a lot more push back regarding policy ease though, I expect this movement will be short-lived.  Although ultimately, I believe that we will see a weaker economy, higher inflation and weaker asset prices, I do not think that is the near-term view.  Rather, I expect we will see more dip buying for risk assets by tomorrow at the latest.

Good luck
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*I am well aware that the recent dot plot indicated a median expectation of 75bps of rate cuts this year, but do not forget that the dispersion of that grouping was quite wide, with one assuming no cuts and several assuming just one or two.  I feel it is very weak thinking to say the Fed has indicated three rate cuts this year, they have done no such thing!

Xi’s Heart Was Broken

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The Taiwanese people have spoken
And President Xi’s heart was broken
The DPP won
Convergence is done
And Xi’s wrath has like been awoken

The results of the first presidential election around the world in 2024 are in and Lai Ching-te, the ruling Democratic Progressive Party’s candidate, and sitting vice-president, has won.  This is absolutely not the outcome that Chinese President Xi Jinping was looking for as his administration apparently orchestrated a great deal of election interference in order to get the opposition candidate into the seat.  Overall, the DPP does not have a majority in the Legislature so getting things done will be a challenge for Mr Lai, but as sitting VP, he is clearly quite politically capable.  It is important to know that he has not advocated for independence, which is the brightest red line President Xi sees, but his attitude is quite interesting now with his view that Taiwan is already, de facto, a state, and therefore doesn’t need to declare independence.

At this time, it doesn’t appear as if there will be any change in the status quo in the Taiwan Strait.  I imagine that Xi will continue to order periodic harassment of Taiwanese shipping and encroach on their airspace, but it strikes that the odds of invasion, at least currently, remain extremely low.  If Xi learned nothing else about war from the Russian invasion of Ukraine, it is that things don’t always work out as assumed.  Add to this lesson Xi’s recent purging of numerous high-ranking military officers on corruption and incompetence charges, and I suspect that the stalemate here will continue.  As such, I don’t anticipate any economic impact of note from this particular situation going forward.  At least not this year or next.

In Iowa, temps are sub-freezing
In Davos, it’s not as displeasing
The difference is stark
As both places mark
Their efforts, control, to be seizing

As it is Martin Luther King Day here in the US, so banks and the stock market are closed, I thought it might be a good time to discuss two events that are occurring in very different parts of the world and with very different views of the world, namely the Iowa caucuses and the beginning of the World Economic Forum (WEF) in Davos, Switzerland.

Starting with Iowa, this is the official beginning of the Presidential election cycle in the US with the first votes and the first delegates to be allocated.  This year, for the first time, it is only the Republicans caucusing as it appears President Biden, who came a weak 5th there in 2020, decided that he didn’t want to be embarrassed and so essentially canceled the vote.  As to the Republicans, they will be braving sub-zero temperatures throughout the state with the latest polls I have seen, courtesy of Five thirty-eight.com showing former President Trump with 52.7% of the vote, followed by Nikki Haley (18.7%), Ron DeSantis (15.8%) and Vivek Ramaswamy (6.4%).  This result is in line with the national polls and certainly indicates that, as of now, President Trump is going to be the Republican nominee.

That prospect is anathema to the entire Democratic Party, as well as to many Republicans, but even more interesting is how the rest of the world finds the prospects so alarming.  In fact, it seems to be a major topic at WEF as President Trump was essentially dismissive of the WEF agenda when he was last in office and if we have learned anything about WEF, it is they cannot stand being dismissed, especially by world leaders.

I might argue that the biggest problem WEF has is their agenda is running into the realities of physics and economics.  It turns out that many people are not willing to give up material progress that requires the use of fossil fuels or farming, and that seems to run contra to the WEF stated goal of, you will own nothing, and you will be happy.  For now, despite the vast amount of wealth that individual members of WEF control, its direct impact on the macroeconomy has been felt through government policies.  In fact, it seems clear these policies have been a driving force in the rise in populism around the world completely to oppose those policies, and that is not about to change.  At least not until the other 39 elections due this year around the world have been completed.  This is a key reason I believe we are going to see far more populism in many places, and that will have real economic consequences.

Consider for a moment, what populist policies might look like.  They are very likely to increase government spending on things like healthcare and retirement to the detriment of spending on things like energy and defense.  There will be an increase in the amount of reshoring manufacturing and buy local programs and I suspect that there will be more isolationism as a theme.  One of the things all these policies have in common is they will all be inflationary.  And that is something which will need to be considered in both investment and hedging decisions going forward.

Ultimately, the one thing of which I am confident is that the idea of a secular deflation makes very little sense.  Rather, a combination of current and potentially populist future policies is much more likely to result in higher inflation across the board.  Governments will find this convenient as it will help depreciate the real value of their growing debt piles and encourage them to continue to spend on these populist policies.  However, viewing this from a business’s point of view, it will require a focused approach on managing costs and pricing products and services appropriately.  Keep your eyes on the big picture, not just the most recent result.

Despite the fact that the holiday is a US holiday, it seems that most markets have decided to take the day off as well.  While European equity markets are drifting lower, that seems to be in response to the fact that Germany fell into official recession last year and its prospects remain dim for 2024.  Japanese equities continue their run as interest rates in Japan are drifting lower as all the talk of the end of ZIRP slowly fades away alongside fading inflation in the country.

Arguably, the one place where things are moving is European bond markets where yields have risen between 6bps and 8bps across the board despite what appears to be weaker than forecast Eurozone IP data.  On the surface, the data today would have indicated a bond rally, not sell-off, but it seems inflation remains a concern there as well.

Oil prices have slipped a bit overnight but remain in the middle of their recent trading range despite the escalation of tensions after the US and UK bombed Houthi sites in Yemen at the end of the week.  More and more shipping companies are avoiding the area driving up shipping costs, extending lead times, and adding to upward inflation pressures.  As to the metals markets, gold is little changed, and copper and aluminum are acting independently with copper higher and aluminum lower although there are no obvious catalysts for either.

Finally, the dollar is a bit stronger this morning, with JPY (-0.6%) continuing its recent slide as the market removes higher interest rates from its collective bingo card.  But the buck is strong pretty much everywhere with a few EMG currencies also falling by -0.5% or more (BRL, KRW, TWD).  However, with the US out, I don’t anticipate much further activity.

There is no data today nor Fedspeak so for those of you who are working today, it should be quiet in markets overall.

Good luck
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