Tag Archives: #iran

No Black Swan

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For all of the angst that Iran
Has ended the talks and moved on
The market for oil
Has come off the boil
As risk takers see no black swan

So, stocks keep on making new highs
And it cannot be a surprise
That bond yields have slipped
While in today’s script
Elections will garner all eyes

Once again, I am having a hard time reconciling the narrative and the price action.  Yesterday saw a sharp rally in oil as the talks between the US and whoever is representing Iran apparently collapsed.  Yet, as you can see from the below chart, while that was worth nearly $5/bbl early in yesterday’s session, those gains dissipated over time and this morning, oil (-1.2%) continues that slide.

Source: tradingeconomics.com

One thing I saw on X this morning claimed Iran was done talking, had received a nuclear bomb from a third party (Pakistan? North Korea?) and was going to detonate it somewhere.  Another was that the talks are still ongoing.  I do find it interesting that so many are willing to take statements from the Iranian news agency, TASNIM, a body that has lied repeatedly for 47 years, and assume their claims are gospel.  Propaganda is always an ongoing project on both sides (in truth from every government everywhere) and thus every claim must be seen for what it is, speaking to a specific audience to achieve a response, not an unbiased description of reality.  Thus, it seems many folks see what they want to see to confirm their prior beliefs.  I come back to the market as the most unbiased arbiter, and it continues to point to an end to the conflict on a relatively short timeline.

Which takes us to the other story today, US primary elections, notably in California where there is a gubernatorial primary and a mayoral one in LA that has garnered the most attention based on the seeming outstanding performance of former reality-TV star (?) Spencer Pratt running against the incumbent Karen Bass.  This race seems like it may be quite important nationally as it would offer the possibility that the deepest blue of cities may finally have had enough incompetence in the mayor’s office and wants to change directions, at least a little bit.  Of course, NY just elected an incompetent mayor, as did Seattle and Chicago before them, so maybe the people in these cities like the situation.  I’m hopeful that is not the case.

But otherwise, it is hard to get too excited about much this morning.  equity markets in the US made yet another set of new highs yesterday across the major indices as no matter the news, it appears there is a bullish spin.  So, let’s turn to markets this morning.  Asian equity markets were mixed overnight with Tokyo (-0.3%) slipping slightly although HK (+2.5%) and China (+1.5%) both rallied nicely on the back of the US tech rally.  Net, there were far more winners in the region (Korea, India, Taiwan, Philippines, Thailand, Singapore, Indonesia), than laggards (Australia, New Zealand, Malaysia) with the laggards barely slipping at all.  So, despite all the angst over Asian nations running out of oil and oil products, equity investors are all in there!

In Europe, it’s happy days as well as per the below Bloomberg screenshot.

This is despite Eurozone inflation rising to 3.2%, its highest level since September 2023, and, as per the below chart, certainly looking like it is beginning to trend higher on the back of 3+ months of higher oil prices feeding through the entire economy.

Source: tradingeconomics.com

Of course, given Eurozone GDP is indistinguishable from zero (see below chart), and has been for 3 years, it is fair to wonder if this is setting up to be a particularly egregious central banking error by Madame Lagarde.  

Source: tradingeconomics.com

Too, while short-term inflation expectations have unsurprisingly risen, a look at the 5-year result shows limited concern by consumers.  As an aside, there is good reason to believe that inflation expectations are irrelevant in future inflation readings, at least according to the academic literature, but it is a driving force in current central banking models, so needs to be considered.

In the end, though, the ECB is going to hike rates next week, on that you can depend, and if when economic activity declines, they will blame Putin or Trump or Elon or anything but their own failed policies.

As to US futures at this hour (7:10), they are modestly lower, maybe -0.2% or so across the board.

In the bond market, Treasury yields have fallen back -3bps this morning after round-tripping 5bps higher yesterday and finishing the day unchanged.  European sovereign yields are having a better day, with declines of -6bps to -7bps across the continent and JGB yields (-11bps) are really falling.  My conclusion is that investor concerns over runaway inflation simply do not exist despite the narrative pushing that story.  The ostensible crises in May apparently never arrived, at least not yet.

In the commodity market, it can be no surprise that metals prices (Au +1.0%, Ag +1.8%, Cu +1.0%) are higher this morning given the overall risk environment.  The negative correlation between metals and oil remains largely intact for now.  The interesting thing to note, though, is that despite the daily gyrations, in reality, neither oil nor the precious metals have gone anywhere in a while.  The same is not true for copper which is at new all-time highs.

Finally, the dollar is modestly softer this morning, on the order of 0.1% against its G10 counterparts with AUD (+0.3%) the best performer.  In the EMG bloc, ZAR (+0.6%) is responding to the combination of lower oil and higher gold prices and MXN (+0.4%) is also having a pretty good session, but that seems more like beta vs. the dollar than anything else.  I would be remiss if I didn’t spotlight JPY (0.0%) which continues to edge closer to the 160.00 level as per the below chart, but was also the subject of much discussion as FinMin Katayama was out explaining that, “As for foreign exchange, we continue to maintain our stance that we stand ready to take appropriate action at any time, as needed.”  However, while the market expects a 25bp rate hike in two weeks, that is already in the price.  In order to stop the yen’s slide, they will need to really change policy, something which I maintain is not in the cards for now.

Source: tradingeconomics.com

On the data front, this morning brings only the JOLTs Job Openings (exp 6.88M), essentially unchanged from last month.  Yesterday’s ISM Manufacturing data was quite solid across the board except for the employment subindex, which remains lackluster as companies expand with more automation.

I think it is fair to say nobody knows what will happen in the Iran conflict nor the timing.  While markets can be completely wrong, and forced to reprice suddenly, that is an extremely rare occurrence.  Too, the one thing on which we can count is if something hugely negative occurs, central banks around the world will step in, add liquidity and cut rates, to ameliorate the slide.  My point is, I will not bet against the market view that this will end sooner rather than later.

Good luck

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Tough Call

Posted on by 
The peace talks have yet to conclude
And yesterday, both sides pursued
A little more fighting
Despite the gaslighting
Which helped push the price up in crude

But it still remains far below
The levels where it needs to go
To foster more drilling
And help in refilling
The buffers from which barrels flow

As we start the week, oil prices have rebounded from last week’s close (as per the below chart) as progress on the peace talks remains slow, at best, and there was another series of military attacks by both sides, with each side claiming defensive maneuvers. 

Source: tradingeconomics.com

Now, I am not a military scholar, but firing missiles at another nation doesn’t sound defensive, rather I would use the word retaliatory.  And there is no way we can know who initiated what during the latest exchange, as both sides claim the other did and there is no neutral arbiter.  But my take is that there is still a way to go before this is over.  Certainly, the IRGC seems committed to the last man, at least for now, and President Trump has indicated he is in no hurry.  Personally, I am still thinking a July 4th resolution timeline.

I did, however, see an increase in the discussion about the imminent collapse of supplies and the estimates that oil prices will finally (?) head up to the $150-$200/bbl level that a number of pundits have forecast.  But looking through these X posts, they are retweeting the comments I posted on Friday from the Exxon SVP Neil Chapman.  Time will tell if they are correct and the changes in the system have not been sufficient, at least not yet, to address the reduction of available oil from the Gulf.  But so far, whatever calculations have been made regarding demand destruction and additional production elsewhere, plus the rerouting of oil away from the Strait has been sufficient to prevent the worst-case scenarios that have been painted since this began back in March.  Plus, the one thing of which I am highly confident is that going forward, the Strait of Hormuz will not be nearly as strategic as it currently seems.  Production elsewhere and pipelines will reduce its importance dramatically.

The BOJ meets
In two weeks’ time.  Do rate hikes
Still matter? Tough call.

Two weeks from tomorrow, the BOJ meets to discuss monetary policy with the backdrop that the yen is essentially back to the levels seen in April just before the most recent bout of intervention.

Source: tradingeconomics.com

The swaps market is pricing in a 78% probability of a 25bp rate hike, which would take the base rate to 1.00%, still amongst the lowest in the world, but its highest level since September 1995 as you can see below in the chart from tradingview.com

Think about that for a moment, interest rates in Japan have been below 1.0% for more than 30 years.  That is an extraordinary situation.  Consider the bubble that was blown in the US by having rates that low for ‘only’ a decade following the GFC, or for an even shorter time post-Covid.  I guess we need to ask why Japanese equities never inflated the same way.  Perhaps that is the best evidence of the financialization of the US economy vs. that of Japan.  Liquidity in Japan didn’t lead to FOMO of the latest investment thesis.

Nonetheless, my take is there is a modest fear about the yen weakening much further and so the BOJ will hike rates.  Alas, since the market is already priced for that outcome, it is not clear it will do much to moderate the yen’s weakness, at least if they only go 25bps.  Now, if they hike 50bps and explain more hikes are on the way, that will matter.  The problem with that theory is that the latest CPI reading in Japan was 1.4%, well below their 2.0% target, and it has been that way since January as per the below chart.  It seems it could be tricky for Ueda-san to explain a very aggressive rate hike with the current inflation reading.

Source: tradingeconomics.com

Ok, I think those are the stories of note so let’s review market activity overnight.  let’s finish with commodities where oil’s gains (+3.6%) are not having the typical response in the metals markets with gold ‘only’ lower by -0.8% and silver (+0.6%) and copper (+2.5%) higher.  I don’t believe we are at the point where these markets are truly independent, but perhaps some of this negative correlation has been overdone.

In the FX markets, the dollar is modestly higher vs. most of its G10 counterparts with NZD (-0.6%) the laggard, but the rest of the group mostly softer by between -0.1% and -0.2%.  In other words, not too significant, and this includes the yen (-0.1%).  I believe all the yen talk is based on the idea that the BOJ meeting is close enough that it is a topic of conversation in a dull market.  Now, if the yen were to weaken dramatically ahead of the meeting, that would certainly change some views.  As to the EMG bloc, it is a bit more mixed although movement, overall, remains muted.  BRL (+0.4%) is the biggest winner with no particular newsworthy events to note, but when looking at the chart, it really hasn’t done too much since the middle of last month when the news about Lula’s competition broke with Bolsonaro fils suddenly less likely to compete for president.

Source: tradingeconomics.com

But otherwise, it is a mix of gainers and laggards on the order of 0.1% to 0.3% in either direction.

In the bond market, yields have ticked higher everywhere following oil’s rebound with Treasury yields higher by 2bps and most of Europe higher by 4bps.  US yields continue to drive the global situation, certainly directionally, if not in magnitude.  

Finally, equity markets appear quite sanguine regarding the oil price rise as Asian markets saw a mix of gainers (Tokyo +0.9%, HK +0.9%, Korea +3.7%! Taiwan +1.4%, Singapore +1.0%) and laggards (China -1.0%, India -0.7%) although clearly far more positive than negative.  Meanwhile, in Europe, the picture is mixed but with much less movement as Germany (+0.4%) and France (+0.1%) edge higher while Spain (-0.2%) and the UK (-0.2%) both slipped.  The news here was the PMI data which largely declined from last month, but not quite as far as forecast.  At this hour (7:30) US futures are all pointing higher between 0.2% and 0.6%.

On the data front, as it is the beginning of a new month, we get plenty including the NFP report on Friday.

TodayISM Manufacturing53.0
 ISM Prices Paid85.5
TuesdayJOLTs Job Openings6.82M
WednesdayADP Employment110K
 ISM Services53.7
 Factory Orders4.6%
 -ex Transport0.8%
ThursdayInitial Claims213K
 Continuing Claims1790K
 Nonfarm Productivity0.8%
 Unit Labor Costs2.3%
FridayNonfarm Payrolls85K
 Private Payrolls78K
 Manufacturing Payrolls0K
 Unemployment Rate4.3%
 Average Hourly Earnings0.3% (3.4% Y/Y)
 Average Weekly Hours34.3
 Participation Rate61.7%
 Consumer Credit$16.0B

Source: tradingeconomics.com

The labor market is certainly confusing compared to what many of us have known throughout our careers.  It is obvious the change in immigration stance by this administration has had a major impact, but so, too, has AI and company responses to that.  I continue to read bifurcated takes on AI either destroying everybody’s jobs or creating many new ones with both sides absolutely certain of the outcome.  One thing I will note is that while the BLS NFP numbers have been subject to major revisions given the inadequacies of the birth/death model for small businesses, I wonder about the ADP data, which I understand is a count of all the paychecks they distribute.  But that data also gets revised, so there is no perfect solution.  What I do think is clear is that less new jobs are necessary to maintain the Unemployment Rate at levels which, in the past, would have been deemed a huge success for the Fed and government.

As to today, headline bingo remains the biggest risk, but there is an awful lot of belief that the equity train rolls on and with it, so too with the dollar’s broad strength in my view as funds flow into the US to hop on board.

Good luck

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Close to a Deal

Posted on by 
Said Bessent, we’re close to a deal
Though not yet the President’s seal
Both sides have agreed
That two months they’ll need
To see if this outcome is real

It can, though, not be too surprising
That stock markets have resumed rising
While oil has slipped
And bond yields, down, dipped
All told, risk is quite appetizing

The major story, although it has been questioned by many, is that there is positive movement toward a deal to end the conflict in Iran.  While I’m sure you will have seen the terms, a quick recap shows that there is to be a 60-day ceasefire to work out the final details.  One of the things I saw this morning was that Iran would send its nuclear material to China, rather than the US, as a compromise, and frankly, that seems like a fine solution.  After all, China enriches the stuff all the time, has many nukes and has never used one.  While we may have disagreements with China on a geopolitical basis, Xi Jinping is not a religious fanatic.  While Treasury Secretary Bessent made the announcement yesterday, he cautioned that President Trump has not yet agreed the details, but it is certainly a hopeful situation.  

Of course, you know who saw it as a hopeful situation?  Risk takers.  The Bloomberg screenshot below is indicative of how things are going, with gains everywhere except China, where it appears that concerns over China-EU trade tensions are weighing on companies there.  With the US having dramatically reduced its market for Chinese exports, Europe had effectively become the major dumping ground, and now that Europe is starting to push back, the question is what will become of all the stuff they continue to produce.  Beggar thy neighbor policies are tougher to inflict on nations that also utilize those same policies.  Just sayin’.

Of course, you won’t be surprised that oil prices have fallen further this morning on the news, down another -1.6% and firmly below $90/bbl, actually below $88/bbl as I type as per the chart below.

Source: tradingeconomics.com

Now, clearly, prices are still substantially above levels seen prior to the Iran conflict, but as of now, the most apocalyptic predictions have simply not materialized.  I saw two interesting comments on this subject this morning with very opposite takes.  First, Javier Blas, the Bloomberg energy analyst/reporter, posted the following chart for jet fuel in Europe.  You may recall that early on, there were many forecasting Europe would run out of fuel and planes would stop flying.

The price action does not indicate a market concerned by imminent shortages of the stuff.  In fact, my understanding is that refineries are cracking so much oil to make jet fuel, that there is actually “excess” gasoline being produced, which would help explain my point yesterday about falling gasoline prices as you can see in the below chart.  Since May 18, wholesale prices have slipped 19%.

Source: tradingeconomics.com

However, there is another side to the argument, the apocalyptic side, which was recently made by Neil Chapman, an Exxon SVP at a conference as per the below X post.

Here’s the thing about comments like this.  First, I have no doubt that Mr Chapman is highly competent and explaining what he sees happening.  I would never suggest he has any motive other than conveying information he believes is important.  But I also have learned, over many years of experience, that arguing with the market is a very painful thing to do.  As Mr Keynes reputedly said almost 100 years ago, “markets can remain irrational a lot longer than you and I can remain solvent.”

So, what to think?  No matter the pedigree of the individual calling for a significantly different outcome than is current, it is very difficult for me to side with the apocalypse if the market disagrees.  And clearly the market disagrees with this thesis.  My understanding is refineries are running flat out right now, which means they have plenty of oil to process.  If, and it’s a big if, the Iran conflict is truly coming to an end, $70/bbl oil and $3.50/gallon gasoline will be with us by Labor Day.  At least that’s my view, and I’m pretty positive on it.

Looking elsewhere, it can be no surprise that bond yields around the world are slipping with Treasuries sliding -4bps yesterday, although they are unchanged this morning.  European sovereign yields were also softer yesterday but are now struggling between the positive idea of the end of the Iran conflict and the negative reality that inflation in Europe continues to rise as reported this morning (Italy 3.3%, Germany 2.6%, Spain 3.6%, France 2.8%), which has the ECB set to hike rates at their meeting as per their own market watch tool.

The problem with this is that economic activity across the continent continues to slow (GDP in Italy 0.8% Y/Y, France 0.9% Y/Y), and hiking rates on the back of a supply shock, especially one that has a fair chance of ending soon, would seem to be a catastrophic error in the making.  Of course, Madame Lagarde is no stranger to catastrophic errors, so, we should assume they will, indeed, hike rates in two weeks’ time.  Even the Fed, no stranger to catastrophic errors, is not prepared to hike rates, although cuts appear to be off the table for now.

Elsewhere, precious metals (Au +0.8%, Ag +0.1%) appear to have put in a short-term bottom while copper (-0.5%) is consolidating after its continued remarkable run.  

And finally, the dollar is stronger this morning, not aggressively so, and not universally, but on net I would say.  NZD (+0.5%) is bucking that trend as further hawkish comments from the RBNZ Governor have traders looking for a rate hike there while INR (+0.9%) has been the biggest beneficiary from the decline in oil prices as India has been one of the most severely impacted nations from the conflict.  Lastly, a note about the yen, where the MOF disclosed that they spent ¥11.73 trillion (~$73.6 billion) intervening in the FX markets last month, a larger amount than had been assumed by the market.  Here’s the problem, as evidenced by the chart below, it didn’t do much good, from the peak print of 160.72 on April 30th(the wick of the huge red candle), the yen is not even 1% stronger as of this morning.  As well, looking at the chart, you can see their subsequent minor interventions as the spikes down.  As I have repeatedly said, if they don’t change policy, the currency will continue to weaken.

Source: tradingeconomics.com

Otherwise, FX is dull and boring today.

Turning to the data, this morning brings the Goods Trade Balance (exp -$86.5B) and then Chicago PMI (50.5).  We also hear from 3 more Fed speakers, but it is hard to believe there is any change in viewpoint there.  Yesterday’s data was, on the whole, better than expected, I would say.  While GDP was a touch soft, Durable Goods was quite robust at 7.9% headline, 1.1% ex Transports.  PCE was as expected to a tick softer, although remains well above 3%, let alone the Fed’s alleged 2% target.  The biggest concern was Personal Income was flat, although Spending (+0.5%) continues apace.  Much has been made by analysts about how the savings rate is collapsing and this presages an economic collapse.  But these are the same folks who keep telling us that oil prices are going to explode as inventories collapse.  Maybe they are right, but as of now, there is no evidence that is the case, at least based on the data.

What to make of it all?  The idea that the Iran conflict is on course to end is clearly the top issue for the market and the economy.  I expect that if this is the case, things will get back to “normal” far more quickly than the pessimists insist as the one thing we have learned is that the ability to resume economic activity is quite robust.  If risk is warmly embraced, then one would assume that yields will decline and the dollar with them, at least for now.  But that also implies that funds will continue to flow into the US markets, which will prevent any significant decline.  And I cannot help but look at Europe with the prospect of hiking rates into an economic slowdown and wonder, again, why anybody wants to hold the euro.

Good luck and good weekend

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Inciting

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

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

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

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

Lewis Carroll, Through the Looking Glass

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

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

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

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

Source: tradingeconomics.com

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

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

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

Source: tradingeconomics.com

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

Source: tradingeconomics.com

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

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

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

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

Good luck

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The Great Denouement

Posted on by 
While talks in Qatar carry on
No outcome, as yet, is foregone
Thus, traders are waiting
Before speculating
As all seek the great denouement

Range trading remains the norm, except for the S&P 500 which continues to make new highs almost every day.  At least that is true in US markets.  The KOSPI in Korea is also rocketing higher.  In fact, when comparing the percentage movement over the past 5 years, the S&P looks quite ordinary, but that is because the KOSPI has been insane!

Source: Bloomberg.com

But away from a few select equity markets, it is getting increasingly difficult to find markets that are doing much more than chopping back and forth.  This is especially true if we take a step back and look at movement over the past several years.  

For instance, if we look at the 10-year Treasury, where we saw all sorts of angst last week when it traded to its highest level, near 4.70%, in a year, realistically, we have been rangebound for more than two years as per the chart below.  And prior to that we were in the massive abnormality of ZIRP.  So, if we go back over a longer time frame, the current 10-year yield is right around the long-term average as per the second chart.  It is really hard to get excited about this movement.

Source: tradingeconomics.com

Source: finance.yahoo.com

Perhaps we ought not be surprised that bond market volatility is heading lower again as per the below chart of the MOVE Index from Hedgeye

The same story exists in currencies, where major currencies have been in a range for more than a year as per the below chart of the DXY from tradingeconomics.com.

Now, there are currencies that have seen substantial movement over the past year, in both directions.  For instance, both KRW and INR have been weakening consistently for the past five years, and this is despite a massive equity rally in both nations, although, in fairness, India’s market has not kept up over the past few months.

Source: tradingecoomics.com

At the same time, BRL has been broadly rallying vs. the dollar for almost 18 months, as per the below chart, as it remains a favorite in the hedge fund community for its high interest rates.  And the fact that they continue to find more oil offshore is only helping things.

Source: tradingeconomics.com

But these currencies are secondary in the FX market, which has generally been dull.

Meanwhile, the oil story appears to be one of increasing belief that a deal is going to be done soon.  This morning, WTI (-3.7%) is falling again and back to $90/bbl.  Obviously, this is higher than where things were before this all started, but if there really was a shortage of the stuff, I expect prices would be much higher.  From what I have read this morning, the two sides continue to talk with Iran looking for a release of frozen financial assets while the US still wants the nuclear material.  

To me, the interesting thing is the tone of the comments from both sides.  President Trump continues to highlight the positive view of a deal coming, although assuring us he won’t make a bad deal.  Iran, though, continues with its apocalyptic rhetoric, threatening extremely painful revenge for every US action, although not really doing much at this point.  It appears to me that both sides are speaking to the domestic audience, not each other.  Trump needs to show progress and a victory, however defined, is near.  Iran needs to show they are strong and will not be beaten by their sworn enemies.  But at this point, I think both sides really need this to end.  The fact that Iran is now talking about money is the tell.  They know they are just about broke, and if there is no money to pay their armies, will their armies fight for the leadership?  I maintain my July 4th deal timeline. 

And that’s really today’s market story; oil’s slide is supporting other markets as we all await the end game.  Elsewhere in the news, there is far more excitement over the NY Knicks winning the NBA’s Eastern Conference than there is over the political stories of primary elections which are ongoing around the country.  While the mid-term elections are coming up in less than six months, the fields are not yet set, so it is difficult to handicap.  

On the data front, there is little of note today in the US although we do hear from several more Fed speakers.  But I maintain that their comments, today it is Governors Cook and Jefferson, are largely irrelevant and that can best be seen by the fact that the WSJ barely mentions any of their speeches anymore.  They are no longer newsworthy.  These two, though, will be an interesting case as both are avowed doves, but also hate President Trump, so will they vote with their belief set (rates should always go lower) or with their politics (Trump wants lower rates so they cannot vote that way)?  I guess we’ll find out in a few weeks at the next FOMC meeting.

One aside on central banking was last night the RBNZ met, left rates on hold at 2.25%, but were more hawkish than anticipated in their comments indicating rate hikes were coming.  This did help NZD to rally nearly 1%, an outlier in today’s market.

And that’s really it, I think.  Until the next headline on Iran, I cannot see a reason to trade in anything.

Good luck

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Actively Chided

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

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

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

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

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

Source: tradingecomomics.com

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

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

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

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

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

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

Source: tradingeconomics.com

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

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

Source; tradingeconomics.com

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

Source: tradingeconomics.com

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

Source: tradingeconomics.com

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

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

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

Source: tradingeconmics.com

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

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

Good luck

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The Drumbeat

Posted on by 
The drumbeat grows louder each day
Catastrophe’s soon on its way
Yet markets ignore
The impact of war
On how things, in future, will play

Right now, Iran says they need U
Although one might ask what they’ll do
As well, on the Strait
They want a toll gate
Methinks this deal, Trump, will eschew

So, are oil tanks running dry?
Will phosphate’s price rise to the sky?
Will food soon run out?
Again, I’m in doubt
But pundits, good times, need deny

This is either setting up to be the greatest market pricing mistake of all time, or the global situation is not as bad as many pundits would have you believe.  There are a bunch of very smart analysts out there who have great expertise in the commodity space, who have continuously explained that the closure of the Strait of Hormuz is setting the world up for catastrophe.  Amongst them are Luke Gromen (@lukegromen), Craig Tindale (@ctindale), Adam Rozencwajg (from Goehring & Rozencwajg Associates) and Javier Blas from Bloomberg.  I read all of them periodically as they have some excellent insights as to what is going on in commodity markets.  And, to a man, they are all singing the same tune that even if the Strait were reopened tomorrow, the damage done is so great that we are heading into a major global economic recession.

Undoubtedly, all of them are smarter than me, a simple FX poet, and while I read a lot, market price action is far too important to ignore, especially as the current situation is not exactly hidden from traders and investors.  Thus, at the end of the day, while I understand their thesis, market prices are telling a completely different story.  Oil and gas production is growing elsewhere in the world and deals are being signed all over the world for new opportunities (Alaska, Brazil, Guyana, Venezuela).  The oil market remains in a steep backwardation which is another sign that markets are not overly concerned about the future.  I’m sorry, I cannot get worked up about this stuff without some clearer price signals, perhaps WTI at $150/bbl or something like that.

As to the Iran news, it is impossible to tell truth from fiction regarding the negotiations as it remains unclear, who in Iran is negotiating and what power they have.  The uranium issue remains key, in my mind, as a nuclear weapon cannot be considered defensive, and given their stated goals of destroying the great Satans of Israel and the United States, I very much fear if they were to create one, they would launch it the next day.  Even Xi agreed they cannot get one.  

All this leads me to believe that there is still quite a bit more back and forth before things end, and if I had to pick a date, I am still in for July 4th as a time to announce an agreement.  We shall see.

So, given we are not going to solve the Iran conflict here, it’s time to observe how markets are behaving.  And frankly, there is not very much to observe.  Starting with equity markets, as you can see from the Bloomberg screenshot below, things look pretty good right now, regardless of the Iran situation.  Yesterday’s US rally (the concerns raised regarding Iran and its uranium were set aside, it seems) were followed by strength in Asia and this morning in Europe.

Earnings data continues to be released in a generally positive manner, and despite the ongoing angst amongst the punditry, as discussed above, there is, as yet, no sign that fear is growing amongst the investing set.  Below is a chart of the CNN Fear and Greed Index over the past year.  the current reading is 57, firmly in the Greed bucket and as you can see, the fear over the war began to dissipate at the end of March. 

If you think about it, this is really no different than the Ukraine War, which for a relatively short time was seen as catastrophic, and eventually faded into the background.  Honestly, when was the last time you saw an article on the subject?

As to the bond market, it continues its recent uncertainty as to what the future holds.  This morning yields are lower across the board with Treasuries (-2bps) after slipping -3bps yesterday, while European sovereign yields are all lower by between -4bps and -6bps.  The bond market appears to be caught between fears of rising inflation because of the impact of higher oil prices, not only on direct things like transportation, but also secondary impacts as those costs are passed on and adding in the potential for higher food prices if the fertilizer situation is as bad as some forecast.  However, the other side of that coin is the potential for a significant recession, which historically has resulted in substantially lower yields as governments around the world add both monetary and fiscal stimulus.  Place your bets!

Turning to the oil market, while WTI is higher by 1.8% this morning, as you can see in the chart below, it continues to go nowhere overall.  If the apocalypse is coming, the market is certainly not ready.  Either that, or there is a lot more oil around than people give it credit for.

Source: tradingeconomics.com

Of course, as has been the case, when oil’s price rises, gold (-0.6%) and silver (-1.1%) slide as that negative correlation has become firmly entrenched.  Copper (+0.7%) though, is bucking that trend this morning, albeit hardly running away.  I expect that these relationships are likely to hold until there is a resolution of some sort in the Gulf.

Finally, the dollar is generally firmer this morning despite the decline in yields.  In fact, if we look across markets, bonds are today’s outlier.  But back to FX, in the G10, all the currencies are weaker by between -0.1% and -0.3% although in the EMG bloc, there are two more substantial movers, INR (+0.5%) as the RBI continues its intervention process amid fears the rupee will collapse, while KRW (-0.8%) continues to see foreign outflows despite its equity market continuing to be one of the best performing in the world as you can see in the Bloomberg chart of the KOSPI below.

And that’s really it as we head into the weekend.  Perhaps the conflict will heat up during the long weekend, which would likely drive some real movement.  But for now, there is nothing new under the sun.

On the data front, yesterday saw generally solid data with the Philly Fed the lone, weak, exception.  Last night, Japanese CPI was released at a much lower than expected 1.4% for both headline and core.  While there is still a strong expectation that the BOJ is going to raise rates next month, if inflation is truly at 1.4%, that seems like it might be a mistake.  This morning we see Michigan Sentiment (exp 48.2) and Leading Indicators (-0.2%).  Here’s the thing about the Leading Indicators, though, as you can see from the chart below from the Conference Board’s website, it appears they may not be telling us the whole story anymore.

After all, they have been declining steadily since early 2022 despite an economy that has grown solidly during that period.  Again, maybe this truly is a harbinger for the future, but I am not convinced.

And that’s all there is.  Have a wonderful Memorial Day weekend and let’s see what the world looks like on Tuesday morning!

Good luck and good weekend

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Narrative Doom

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: tradingeconomics.com

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

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

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

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

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

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

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

Good luck

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Still on Hold

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

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

Source: tradingeconomics.com

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

Source: tradingeconomics.com

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

Source: tradingeconomics.com

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

Source: tradingeconomics.com

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

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

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

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

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

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

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

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

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

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

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

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

Good luck

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Massive Divides

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: tradingeconomics.com

Here are this week’s offerings:

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

Source: tradingeconomics.com

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

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

Good luck

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