Tag Archives: #iran

Terribly Keen

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The evidence, so far, we’ve seen
Is nobody’s terribly keen
To stop all the shooting
In wars, or the looting
In riots, at least so I glean
 
But can stocks and bonds still maintain
The heights they consistently gain
Or will, one day soon
Risk assets all swoon
As traders turn to their left-brain?

 

I am old enough to remember when Israel’s attack on Iranian nuclear facilities was considered a risk to global financial assets.  Equity prices fell around the world as investors scrambled to find havens to protect their assets.  Alas, these days, the only haven around seems to be gold as Treasury yields, after an initial slide, rebounded which implies investors may have questioned their safety and the dollar, after a slight bump, slipped back.

But that is clearly old-fashioned thinking as evidenced by the fact that fear is already ebbing in markets with equities rebounding this morning, the dollar under pressure and both gold and oil slipping slightly.  Now, it is early days but a look at the chart below of oil shows that it took about 9 months for oil prices to retrace to their pre-Russia invasion levels.  Obviously, this situation is different than that from the perspective that prior to Russia’s invasion, there were no energy market sanctions while Iran has been subject to sanctions for years.  However, the larger point is that the market, at least right now, seems to have adjusted to what it believes is the appropriate level to account for changes in production.

Source: tradingeconomics.com

Now, as of January 2025, at least as per the data I could find, Russia produces 10.7 million barrels/day while Iran clocks in at just under 4 million.  As well, given the sanctions, much of Iran’s production has a limited market, with China being the largest importer.  I’m simply trying to highlight that Russia’s production was much larger and more critical to the oil market overall, so a larger impact would be expected.  However, the fact that Israel continues to destroy Iranian infrastructure, and has targeted oil infrastructure as well as nuclear infrastructure, suggests there could easily be more impacts to come.  This is especially true if Iran seeks to close the Strait of Hormuz, a key bottleneck exiting the Persian Gulf and where some 20% of global oil production transits daily.

But the market is sanguine about these risks, at least for now.  There is no indication that Israel has completed what they see as their mission, and that means things could well escalate from here.  In that case, I would expect another jump in oil prices, but overall, it is not hard to believe that we have seen the bulk of any movement.  It strikes me that we will need substantially stronger economic activity to push oil prices much higher from here, and that seems unlikely right now.

Meanwhile, near Banff there’s a meeting
Where heads of state are all competing
To help convince Trump
There will be a slump
Unless tariff pressures are fleeting

The other noteworthy story this morning is the G-7 meeting that is being held in Kananaskis, Alberta, near Calgary and Banff and how all the other members of the club, as well as invitees from Mexico, Brazil, South Africa, India and South Korea, will be trying to convince the president that his tariffs are going to be too damaging and need to be adjusted or removed, at least for their own nations.

Anyone who indicates they know how things will evolve is offering misinformation as Trump’s mercurial nature precludes that from being the case.  However, it would not be inconceivable for some headway to be made by some of these nations in certain areas although President Trump does appear to strongly believe tariffs are a benefit by themselves.  I am not counting on any major breakthroughs here, but small victories are possible.

One last thing before the market recap though, and this was a Substack piece I read this weekend from The Brawl Street Journal, that, frankly, shocked and scared me regarding the ECB and some plans they are considering.  While President Trump has consistently called the climate hysteria a hoax and his administration is doing everything it can to remove Net Zero promises and CO2 reduction from anything the government does, the opposite is the case in Europe.  The frightening part is that the ECB is considering adding effective mandates to lending criteria such that loans to support agriculture or fossil fuel production will require banks to hold more capital, making them more expensive.  The very obvious result is there will be less loans in this space, and things like agriculture and fossil fuel production will become scarcer in Europe than elsewhere.  

Yes, this is suicidal, but then we have already seen Germany (and the UK) attempt to commit economic suicide with its energy policy, and while many in Europe would suffer the consequences, I assure you the members of the ECB would not be in that group.  But my point, overall, is that if this plan is enacted, and the target date appears to be this autumn, it is a cogent reason for the euro to begin a structural decline to much lower levels.  This is not for today, but something to remember if you hear that the NVaR (Nature Value at Risk) plan is enacted.  Tariffs will be their last concern as the continent enters a long-term economic decline as a result.  The blackout in Spain in April will become the norm, not the unusual circumstance.

Ok, let’s see how little investors are concerned about war and escalation.  While equity markets were lower around the world on Friday, that is just not the case anymore.  Asia saw the Nikkei (+1.3%) lead the way higher with the Hang Seng (+0.7%) and CSI 300 (+0.25%) also gaining as well as strength in Korea (+1.8%) and India (+0.8%) as hopes rise some positive news will come from the G-7.  Europe, too, has seen gains across the board led by Spain (+0.9%) and France (+0.7%) with most other markets rising between 0.3% and 0.5%.  As to US futures, at this hour (6:50) they are higher by about 0.5% with the NASDAQ leading the way.

In the bond market, Treasury yields are backing up a further 3bps this morning but are still just above 4.40%.  European yields are +/- 1bp across the board as investors try to decipher ECB commentary about the next rate move.  The universal belief is there will be another cut, although Bundesbank president Nagel tried to pour cold water on that thesis this morning calling for caution and a meeting-by-meeting approach going forward.

Commodity markets, are of course, the real surprise this morning with oil (-1.1%) looking like it has put in at least a short-term top.  In the metals market, gold (-0.4%) is giving back some of last week’s gains although both silver (+0.2%) and copper (+1.1%) are rebounding after tougher weeks.  Metals prices seem to be pointing to less fear and more hope for economic rebound.

Finally, the dollar is under some pressure this morning, slipping vs. most of its counterparts in both the G10 and EMG blocs.  The euro (+0.25%) is having a solid session although both AUD (+0.4%) and NZD (+0.5%) are leading the G10 pack.   Even NOK (+0.1%) is rallying despite oil’s pullback.  In the EMG bloc, ZAR (+0.8%) is the leader right now, partially on continued gains in platinum and gold’s overall recent performance, and partially on hopes that their presence at the G-7 will get them some tariff relief.  Elsewhere, the gains have been less impressive with KRW (+0.5%) also benefitting from tariff hopes while the CE4 see gains of 0.3% or so.  No tariff hopes there.

It is an important data week with Retail Sales and housing data, but also because the FOMC leads a series of central bank decisions.

TodayEmpire State Manufacturing-5.5
TuesdayBOJ Rate Decision0.50% (no change)
 Retail Sales-0.7%
 -ex autos0.1%
 IP0.1%
 Capacity Utilization77.7%
WednesdayRiksbank Rate Decision2.0% (-25bps)
 Housing Starts1.36M
 Building Permits1.43M
 Initial Claims245K
 Continuing Claims1940K
 FOMC Rate Decision4.5% (no change)
ThursdaySNB Rate Decision0.00% (-25bps)
 BOE Rate Decision4.25% (no change)
FridayPhilly Fed-1.0

Source: tradingeconomics.com

So, Sweden and Switzerland are set to cut rates again, while the rest of the world waits.  Chairman Powell’s comments seem unlikely to stray from the concept of too much uncertainty given current fiscal policies so no need to do anything.  Thursday is a Federal holiday, Juneteenth, hence the early release of Claims data.  I have to say the Claims data is starting to look a bit worse with the trend clearly climbing of late as per the below chart.

Source: tradingeconomics.com

I continue to read stories about the cracks in the labor market and how it will eventually show itself as weaker US economic activity, but the process has certainly taken longer to evolve than many analysts had forecast.  One other thing to remember is that Congress is still working on the BBB which if/when passed is likely to help support the economy overall.  The target date there is July 4th, but we shall see.

Summarizing the overall situation, many things make no sense at all, and others make only little sense, at least based on more historical correlations and relationships.  I think there is a real risk of another sell-off in risk assets, but I do not see a major collapse.  As to the dollar, the trend remains lower, but it is a slow trend.

Good luck

Adf

Much Hotter

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Remember when riots were seen
Across every TV’s flat screen?
Well, that’s in the past
As news of a blast
In Tehran, just one thing, can mean
 
The Middle East just got much hotter
And now every armchair war plotter
Will offer their views
Of which side will lose
So, traders, keep watch o’er your blotter

 

Is it a coincidence that Israel’s attack on Iran’s nuclear sites occurred on Friday the 13th, or was it meant as a message that luck, both good and bad, can be manufactured? Whatever the driver, the market reaction has been instantaneous.  Here is a look at the five-minute chart in oil with the black sticky stuff jumping more than 8% on the news.

Source: tradingeconomics.com

Too, gold jumped (+1.2%) as did the dollar (EUR -0.4%, AUD -1.0%) although both JPY (+0.3%) and CHF (+0.4%) showed their haven characteristics.  Treasury bonds rallied with yields slipping an additional -3bps in the evening session on top of the -5bp decline during the day, and stock futures are under pressure around the world (S&P500 -1.6%, Nikkei -1.5%, DAX -1.5%).  This was the early price action.

Those were last night’s initial moves and thus far, things have moderated a bit.  For instance, oil has fallen back about 1%, though remains higher by 7.3% and that big gap down on the charts from April has been filled.  

Source: tradingeconomics.com

Of course, there is now a new gap below the markets to fill, but that is a story for another day.  Equity markets are also finding their footing, bouncing off their lows as the 20-day moving average has held and dip buyers see this as an opportunity.  However, the dollar is little changed from its initial moves as is gold, and overall, not surprisingly, risk-off defines the overnight session and likely will be today’s focus.

Now, there is nothing funny about this situation with more death and destruction occurring and likely in our immediate future.  However, I could not help but chuckle at the Russian statement that Israel’s actions were “unprovoked” and “a violation of UN principles and international law.”  Of course, I guess President Putin would know all about unprovoked attacks and violating UN principles and international law given his ongoing efforts in Ukraine.

Ok, I am not a war plotter, nor a war monger, so let’s see how this and any other things are developing in the markets.  While the war discussion will dominate the headlines, there are other things ongoing that are worth considering.  For instance, though the dollar is performing as its historical safe haven this morning, SocGen analysts highlighted a very interesting relationship that has developed in the dollar with respect to inflation surprises over the past four months.  As you can see in the chart below, it appears that as we have seen a series of lower-than-expected inflation readings, the dollar has fallen in step.  Now, correlation is not causality but one could make the case that reduced inflation will lead to a more aggressive easing policy by the Fed and that could be the mechanism by which this relationship operates.

Along the same lines, there have been more stories regarding the softening in the US labor market and at what point the Fed is going to need to focus on that, rather than inflation, as they consider their policy objectives.  As well, the large contingent of analysts who expect the US to enter a recession soon have pointed to the labor market and the fact that much of the underlying data appears to show a less robust situation than the headlines have thus far revealed.  

I have two anecdotes to recount here, neither of which indicates the labor market is softening.  First, the local pizza parlor is at wits’ end trying to hire people to work there, a common high school summer or after school job but there are no takers.  Second, my daughter works for a TMT consulting firm in HR, and they are seeking to hire several new analysts and junior consultants, jobs that pay six figures out of college, and they, too, are having difficulty filling the roles.

I know that anecdata is not definitive, but two very disparate service industries are facing the same issue, and it is not a question as to whether to reduce headcount.  Consider the idea that the recent declines in inflation readings are a short-term outcome and that underlying inflation remains in the 3.5%-4.0% range.  Given median CPI is still running at 3.5%, that is entirely feasible.  If, as we go forward, we start to see high side surprises in inflation, and this relationship has meaning, that could well imply we are looking at a short-term dip in the dollar and that as the year progresses, this will reverse.  My take is that the Fed will only consider cutting rates, at least as long as Powell is Chair, if inflation remains quiescent and unemployment starts to rise.  But if inflation rebounds, I believe they will be reluctant to go there.

Now, as the morning progresses, the dollar is picking up steam with the euro (-0.8%), pound (-.6%) and JPY (-0.6%) all falling, even the havens yen and CHF (-0.5%).  In fact, looking across the board, every major currency is weaker vs. the dollar at this point in the morning (7:15).  As the US has awakened, it seems that the haven status of the dollar is reasserting itself.

Perhaps more surprisingly, Treasury yields have turned around and are now higher by 2bps, which has dragged all European sovereigns along for the ride.  In fact, the weakest nations (Italy +4bps, Spain +5bps) are faring even worse, as is the UK (Gilts +5bps).  Apparently, the recent ideas of the BOE getting more aggressive in its rate cutting is no longer the idea du jour.

In the equity markets, red remains the only color on the screen with Asian markets (Nikkei -0.9%, Hang Seng -0.6%, CSI 300 -0.7%) all rebounding from their early worst levels, but slipping on the day, nonetheless.  I guess there are dip buyers in every market 😃.  In Europe, continental bourses are all sharply lower (DAX -1.4%, CAC -1.1%, IBEX -1.6%) although the FTSE 100 (-0.4%) is holding up better.  As to US futures, they have rebounded slightly from their earliest lows and are now down about -1.0% at 7:20.  Wouldn’t it be something if they closed the day higher?  I don’t think we can rule that out!

Finally, commodities continue to show oil much higher, no retracement there, and gold also holding its gains although copper (-2.5%) is under pressure.  This is a bit odd to me as I would have thought war would bring more copper demand to a market that is physically undersupplied, but then the LME price of copper and the COMEX price of copper seem unrelated to the industrial flows of late.  At this time, everyone is waiting for the Iranian response, although apparently, the first response, a wave of drone attacks on Israel, was completely thwarted.  Not only did Israel destroy some key nuclear sites, but they were able to eliminate almost the entire leadership of the Iranian army and special forces, so any response is likely to take a little time to be created. No oil facilities were targeted, although the Strait of Hormuz is a key chokepoint in the oil market and Iran is likely able to disrupt the flow of tankers through there for now.  What we know is that everyone who was short oil as a trade has likely been stopped out.  It will likely take a little time before new shorts come back to play, so I expect a few days of prices at these levels.  However, the longer-term trend remains lower, so absent a destruction of oil producing fields, I expect that prices will retreat ahead.

On the data front, this morning brings only Michigan Consumer Sentiment (exp 53.5) and with it the inflation expectations piece, although that has been shown to be a political statement, not an economic one.  I cannot shake the feeling that by the time we head to the weekend, equities will have recovered their early losses, and the dollar will cede some of its gains.

Good luck and good weekend

Adf

Everyone’s Bitching

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With President Trump on the road
The market has heard a boatload
Of ideas and plans
Including Iran’s
Return to a more normal mode
 
There’s talk of a nuclear deal
Audacious, if it’s truly real
Instead of enriching
While everyone’s bitching
A partnership deal they would seal

 

One is never disappointed with the tone of the overnight news when President Trump is traveling.  Between his flair for the dramatic and his desire to conclude deals, it seems like there is always something surprising when we awake each morning.  This morning is no different.  

While the mainstream media has been harping on the audacity of Qatar gifting a “flying palace” to the US for President Trump to use as Boeing’s delivery of the newest Air Force One is something like 10 years behind schedule, Mr Trump has indicated he is quite keen to make a deal with Iran that would bring them back into the fold of good neighbor nations.  Ostensibly, Iran has suggested that they work with the Saudis, Emiratis and the US to enrich uranium together in order to develop nuclear power in the Middle East.  As the Saudis and Emiratis have already expressed interest in building more nuclear power plants, it is not a stretch for them.  But bringing Iran into the fold, so that enrichment activities are done jointly, and therefore can be closely overseen by the US and Saudi Arabia, would be a remarkable outcome.

The JCPOA deal signed by President Obama was a nullifying deal, one that was designed to prevent an activity, the enrichment of uranium to the required concentrations sufficient to build a bomb.  But this is an encompassing deal, one that would join erstwhile enemies into a partnership to jointly produce uranium sufficiently enriched for nuclear power, without pushing toward weapons grade material.  Now, this would be a remarkable change in attitude in Tehran as the theocracy there has basically made the end of the US and Israel their motto ever since 1979 and the revolution that brought them to power.  But things are tough in Iran right now and the funny thing about power is that those who hold it are really reluctant to let go.  It would not be unprecedented for a nation’s leadership to reverse course completely in order to maintain their grip, and it is also not hard to believe that a softer tone would be welcome in Iran by the populace.

Regardless, this is a bold and audacious idea, but one that could just work.  Now, we should all care not simply because anything that could lead to less terrorism and destruction is an unalloyed good, but because the impact on the global economy would be significant, namely, the price of oil is likely to decline further.  A deal like this is likely to include the end of restrictions on Iranian oil sales, or at least a dramatic reduction in those restrictions.  While Iran has been producing and selling oil all along this would change the tone of the oil market with another major player now actively looking to expand production and sales.  (After all, the Iranian economy is desperate and the ability to generate more revenue without restrictions would be an extraordinary carrot for the mullahs.)

With this in mind, it should be no surprise that the price of oil (-3.65%) has fallen sharply today, and the real question is just how low it can go.  A look at the chart shows that the trend has been lower for the past year although it seems to have found a temporary bottom just above $56/bbl. 

Source: tradingeconomics.com

I have maintained for the past year and a half that the ‘peak cheap oil’ thesis has been faulty and that there is plenty of the stuff around with political, not geological restrictions the driving force toward higher prices.  This is Exhibit A on the political restriction case.  President Trump is quite keen to see oil prices lower as it suits both the inflation story in the US as well as offers a significant advantage to US manufacturing facilities with access to cheap energy.  I would guess this was not on anyone’s bingo card before today but must now be taken seriously as a potential outcome.  While I’m not an oil trader, I suspect we will test, and break, through those lows just above $56 in the coming weeks and find a new home closer to $50/bbl.

This is such an extraordinary story, I could not ignore it.  But as an aside, President Trump also mentioned that India has allegedly offered to cut their tariff rates on US goods to 0.0%!  I don’t know if that would be reciprocal, and that has not yet been verified by India, but again, it demonstrates that many of the things we believed to be true regarding international relations are not carved in stone.

Ok, let’s look at how markets are absorbing these latest surprises.  Yesterday’s price action could best be described as dull, with US equity markets doing little all day, although the NASDAQ managed to edge higher into the close.  In Asia overnight, the major markets (Japan -0.9%, China -0.9% and Hong Kong -0.8%) all came under pressure although there doesn’t appear to have been a particular story.  There were no new trade related comments, so I sense that the recent uptick just saw some profit-taking.  Elsewhere in Asia, the biggest winner was India (+1.5%) and then it was a mixed bag.  In Europe, equity markets have done very little overall after Eurozone data showed GDP activity was more disappointing than first reported with Q1’s second estimate down to 0.3%.  As to US futures, at this hour (7:10), they are pointing lower by about -0.4% or so across the board.

In the bond market, Treasury yields, which have been climbing relentlessly all month as per the below chart, have backed off -2bps this morning, but 10-year yields are still above 4.50%, a level Mr Bessent is clearly unhappy with.  But today’s price action has also seen European sovereign yields slide a similar amount, with the softer Eurozone growth one of the reasons here as well.

Source: tradingeconomics.com

Turning to the metals markets, the shine is off gold (-0.2%) which has fallen more than 4% in the past week, although remains well above $3100/oz.  It seems that much of the fear that drove the price higher is being removed from the markets by the constant updates of trade and peace deals that we hear regularly.  It remains to be seen if this lasts, and how the Fed will ultimately behave, but for now, fear is fading.

Finally, the dollar is a touch softer overall, but not universally so.  In the G10, the euro (+0.2%) and pound (+0.2%) are both edging higher with UK data looking a tad better compared to that modest weakness in Eurozone data.  But the yen (+0.6%) and CHF (+0.5%) are both nicely higher as there continues to be a strong belief that President Trump is seeking the dollar to decline in value.  In the EMG bloc KRW (+0.7%) and ZAR (+0.8%) are the leaders with most of the rest of the bloc making very modest gains on the order of 0.2% or less.  It appears that the dollar has decoupled from the US rate picture for the time being.  I wonder if it is presaging lower US rates, or if this relationship is going to change for a longer time going forward.  We will need to watch this closely.

On the data front, there is a bunch this morning as well as comments from Chairman Powell at 8:40.  

Initial Claims229K
Continuing Claims1890K
Retail Sales0.0%
-ex autos0.3%
PPI0.2% (2.5% Y/Y)
-ex food & energy0.3% (3.1% Y/Y)
Empire State Manufacturing-10
Philly Fed Manufacturing-11
IP0.2%
Capacity Utilization77.8%

Source: tradingeconomics.com

I don’t see PPI as having much impact, but Retail Sales will get some discussion as will the manufacturing indices as weakness there will help the negative narrative that some are trying to portray.  Net, though, the story seems likely to continue to be the announcements of deals as they come in.  It is not clear to me that they will all be net positives, and I believe that much positivity has already been absorbed so we will need to see data that backs up the narrative and that could take a few quarters.  In the meantime, my lower dollar thesis seems to fit better today.  That’s my story and I’m sticking to it!

Good luck

Adf

All Goes to Hell

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The Turning is coming much faster
Than forecast by every forecaster
Now Syria’s fallen
And pundits are all in
Iran will soon be a disaster
 
However, the impact on trading
Is naught, with no pundits persuading
Investors to sell
As all goes to hell
Is narrative power now fading?

 

The suddenness of the collapse of Bashar Al-Assad’s control of Syria was stunning, essentially happening in on week, maybe less.  But it has happened, and it appears that there are going to be long-running ramifications from this event.  At the very least, the Middle East power structure has changed dramatically as Russia and Iran both abandoned someone who had been a key ally in their networks.  Russia is clearly otherwise occupied and did not have the wherewithal to help Assad, but it is certainly more interesting that Iran did not step up.  Rumors are that the government there is growing concerned that an uprising is coming that may change the Middle East even more dramatically.

I have previously discussed the idea of the Fourth Turning when events arise that shake up the status quo, and this is proof positive that Messrs. Howe and Strauss were onto something when they published their book back in 1997.  The thing is, even those who believed the idea and did their homework on the timing of events have been caught out by the speed of recent activities.  Most of the punditry in this camp, present poet included, didn’t expect things to become unruly until much closer to the end of the decade.  And maybe it will be the case that the collapse of Syria is just an appetizer to a much larger conflagration.  (I sincerely hope not!). But my take is these events were not on many bingo cards, certainly not in the financial punditry world.

Now, the humanitarian situation in Syria has been a disaster for the past 13 years, ever since the civil war there really took shape and fomented the European migration crisis.  Alas, it seems likely to worsen for the unfortunate souls who still live there.  But for our purposes, the question at hand is will this have an impact on markets?

Interestingly, the answer, so far, is none whatsoever.  The obvious first concern would be in oil markets given the proximity to the major oil producing regions in that part of the world.  However, while oil (+1.4%) is a bit higher this morning, it remains well below $70/bbl and while I am no technical analyst, certainly appears to be well within a downtrend as per the below chart.

Source: tradingeconomics.com

Next on our list would be the FX markets, perhaps with expectations that haven currencies would be in demand.  Yet, the dollar is sliding against most of its counterparts this morning, with the notable exception of the yen (-0.3%) which is the one currency under more pressure.  That is the exact opposite behavior of a market that is demonstrating concern over future disruptions.  As to securities markets, they are much further removed from the situation and while US futures are edging lower at this hour (6:20), slipping about -0.15%, overnight activity showed no major concerns and European bourses are mixed, but all within 0.3% of Friday’s closing levels.  

Finally, bond markets are essentially unchanged this morning, with Treasury yields higher by 1bp and European sovereigns almost all unchanged on the day.  We did see yields slip a few bps in Asia, likely on the back of the weaker than forecast Chinese inflation data, but the bond market is certainly showing no signs of concern over the geopolitics of the moment.

On Sunday the Chinese did meet
And promised they’d finally complete
Their stimulus drive
And therefore revive
The growth that has been in retreat

A story that has had an impact on markets this morning is the Chinese Politburo’s comments that they are going to implement a “more proactive” fiscal policy in the upcoming year along with “moderately loose” monetary policy as President Xi scrambles to both improve the growth impulse and prepare for whatever President-elect Trump has in store for China once he is inaugurated.  Now, we have heard these words before and to date, each effort has been, at the very least, disappointing, if not irrelevant.  But hope is a trader’s constant companion and so once again we saw specific markets respond to the news.

Interestingly, mainland Chinese shares did not respond as enthusiastically as one might have expected with the CSI 300 actually slipping -0.2%.  But the Hang Seng (+2.75%) embraced the news warmly.  In the FX markets, early weakness in CNY was reversed although the renminbi closed the onshore session essentially unchanged on the day.  The big winners were AUD (+0.9%) and NZD (+0.5%) as traders bid up the currencies of the two nations likely to benefit most given their export profiles of commodities to China.  But beyond those market moves; it is hard to make a case that anyone was listening.

Ok, let’s look at the rest of the overnight session and see what we can anticipate in the week ahead. Japanese shares (Nikkei +0.2%) were little changed overnight while the big mover in Asia was Korea (-2.8%) as the ructions from the brief interlude of martial law last week continue to weigh on the short-term future of the government and economy there.  However, away from those markets, the rest of Asia saw movement of just +/- 0.3% or less, hardly newsworthy.  In Europe, the story is also mixed with the CAC (+0.5%) leading the way higher, perhaps on the back of the successful reopening of the Notre Dame cathedral, or more likely on the back of hopes that the luxury goods sector would improve based on Chinese stimulus supporting that economy.  As to the rest of the continent, more laggards than winners but movement has been small, 0.2% or less, although the FTSE 100 (+0.4%) is also higher this morning led by the mining shares in the index, also related to Chinese stimulus.

We have already discussed the bond market, which has been extremely quiet ahead of this week’s CPI and next week’s FOMC meeting so let’s turn to the commodity markets, where not only is oil rallying, perhaps more related to China than the Middle East, but we are seeing metals markets rally as well with both precious (Au +0.9%, Ag +2.2%) and industrial (Cu +1.6%, Zn +2.0%) performing well.  Surprisingly, aluminum (-0.25%) is not playing along this morning but if the China story is real, it should follow suit.

Finally, the rest of the currency story shows KRW (-0.5%) continuing to feel the pain, along with its stock market, from the politics last week.  At the same time, we are seeing solid gains in ZAR (+1.1%) on the metals moves and NOK (+0.4%) on the back of oil’s rally.  Elsewhere, while the dollar is broadly softer, it is of a much lesser magnitude, maybe 0.2% or so.

On the data front, this week brings two central banks (BOC and ECB) and a bunch of stuff, although CPI on Wednesday will be the most impactful.

TuesdayNFIB Small Biz Optimism94.2
 Nonfarm Productivity2.2%
 Unit Labor Costs1.9%
WednesdayCPI0.2% (2.7% Y/Y)
 -ex food & energy0.3% (3.3% Y/Y)
 BOC Meeting3.25% (current 3.75%)
ThursdayECB meeting3.0% (current 3.25%)
 Initial Claims220K
 Continuing Claims1870K
 PPI0.3% (2.6% Y/Y)
 -ex food & energy0.2% (3.3% Y/Y)

Source: tradingeconomics.com

Last week saw what appeared to be stronger payroll data on the surface, with the NFP rising 227K and upward revisions, while the Unemployment Rate rose the expected 1 tick to 4.2%.  As well, Average Hourly Earnings rose more than expected, to 4.0%.  And yet, the Fed funds futures market raised the probability of a rate cut next week to 87% (it was over 90% for a while in the session).  Now, there has been a group of analysts who have been claiming that the headline payroll data is very misleading and actually the jobs market is much weaker than the administration is portraying, and it seems they got a bit more traction in their case last week.  Nonetheless, it is hard for me to look at the data and justify another rate cut by the Fed, at least if their objective is to push inflation back to 2.0%.  Of course, that is another question entirely!

Mercifully, the Fed is in their quiet period so we will not hear from them until they pronounce things at the FOMC meeting a week from Wednesday.  Until then, I expect that the China story, as well as assorted Trump related stories, will drive things although keep a wary eye on the Middle East for anything more explosive.  As to the dollar, I have consistently explained that if the Fed eases in the face of rising inflation, that will undermine the greenback.  It will be very interesting to see how things play out this week and next as a set-up for 2025.  For now, I don’t see a good reason for a large move, but if I were a hedger, I would make sure that I am as hedged as I am allowed to be.

Good luck

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Looking Elsewhere

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The Middle East story is back
With fears that Iran might attack
So, oil is rising
And it’s not surprising
The dollar is leading the pack
 
But til anything happens there
The market is looking elsewhere
The Payrolls report
May well be the sort
That causes Chair Powell to care

 

It was only a week ago when the Israeli response to the Iranian missile barrage was seen by market participants as a clear de-escalation of tensions in the Middle East.  The market’s response was to reduce the risk premium in the price of oil which promptly fell $5/bbl amid signs of slowing growth in China as well.  Alas, as can be seen in the chart below, that was Monday’s story and no longer pertains.  Rather, the new concern is that Iran is planning to launch yet another attack, this time via proxies in Iraq, with Israel vowing to respond more severely.  You cannot be surprised that oil has regained its levels prior to Monday’s narrative.

Source: tradingeconomics.com

Adding to the buying pressure for oil has been the better than expected growth data from China (Caixin Mfg PMI printing better than expected 50.3) and solid US GDP data on Wednesday along with stronger Personal Income and Spending data yesterday.  And remember, the market is also looking ahead to the Standing Committee of the National People’s Congress in China to add significant fiscal stimulus there, with CNY 10 trillion (~$1.4 trillion) the most popular number being bandied about.  If that comes to pass, it will seemingly increase demand for oil on China’s part.

Of course, there is another piece of news that the market is awaiting with the potential for a significant impact, today’s Employment Report.  Ahead of the release, these are the current consensus forecasts:

Nonfarm Payrolls113K
Private Payrolls90K
Manufacturing Payrolls-28K
Unemployment Rate4.1%
Average Hourly Earnings0.3% (4.0% Y/Y)
Average Weekly Hours34.2
Participation Rate62.5%
ISM Manufacturing47.6
ISM Prices Paid48.5

Source: tradingeconomics.com

You may remember that last month, the NFP number printed much higher than expected at 233K which began the questioning of the Fed’s expected rate cutting path.  Frankly, the data since then has done very little to argue for much policy ease as Retail Sales have held up, GDP was solid and prices appear to be moving higher, not lower.  In fact, you can see how things have played out over the past month in the chart/table below from the CME showing the market priced probability of future Fed funds rates.  Check out where things were a month ago, just prior to the last NFP report.

The market was pricing a more than 50% probability of at least 75 basis points of rate cuts by December. Obviously, that is no longer the case and if this morning’s data proves stronger than forecast (remember, ADP Employment was significantly stronger than expected) many more people are going to call into question the assumption that the Fed is going to be cutting rates at all.  If you think about it, GDP is growing above trend at 2.8%, inflation remains above target with core CPI 3.3% and Unemployment is at a still historically low 4.1%.  if I look at those three major economic guideposts, the one that stands out to be addressed is inflation, not Unemployment, and that takes tighter policy.

Now, maybe this morning’s data will be awful, with a 50K NFP print and a jump in the UR to 4.3%.  That would certainly bring the doves out more aggressively but absent something like that, I continue to scratch my head as to why the Fed is so keen to cut the Fed funds rate.  Let’s put it this way, if the data surprises to the upside, I expect the December rate cut probability to fall close to 50%.

At any rate, those are the topics du jour, away from the election stories that are suffocating most everything else.  So, let’s see how things behaved overnight.

Well, I guess there has been one other story that has gotten tongues wagging, the fact that US equity markets had their worst session in two months with all three major indices falling sharply.  This was blamed on weaker than forecast earnings releases from several companies in the tech sector, where even if the actual earnings were solid, there were other issues like guidance or breakdowns of revenues, that disappointed.  It is far too early to declare that the love affair with the tech sector, especially AI, is ending, but there are a few names in the sector that are suffering greatly.  This certainly bears close watch going forward, because if this theme starts to lose adherents, even in the short run, it appears there is ample room for a move lower in stocks.

Turning to other markets overnight, Tokyo (-2.6%) led the way lower in Asia with most regional exchanges falling and only Hong Kong (+0.9%) bucking the trend.  There are those who believe there is a causal relationship between the Nikkei, the NASDAQ and USDJPY with one theory that it is the FX rate that drives these movements.  While it is certainly true that we have seen correlation amongst these three markets, I find it difficult to make the case that USDJPY is the driver.   A quick look at all three on the same chart certainly shows that they regularly move in similar directions, but I have a harder time claiming which one is the leader.

Source: tradingeconomics.com

However, despite the negativity from yesterday’s US moves and the overnight sell-off and the sharp rise in oil prices, European bourses are all in the green today, higher by about 0.5% across the board.  In fact, this is in sync with US futures which are also trading higher, by about 0.4%, this morning.

In the bond market, other than UK Gilt yields, which rose 7bps net yesterday although traded as high as 20bps higher than Wednesday’s close during the session, the rest of the bond markets were quiet.  It seems that UK bond investors are not that happy with the recently promulgated budget, and neither are voters as there was a by-election in a “safe” Labour seat that went to Nigel Farage’s Reform UK party.  I have a feeling that bond markets are going to be the epicenter of market activity over the next week or two as huge differences of opinion remain regarding the potential outcomes of the US election.

Away from oil (+1.9%) this morning, the rest of the commodity sector is also doing well today with both precious and base metals all in the green.  But they have not recouped yesterday’s declines which saw gold fall back -1.5% with even larger losses in silver (-3.2%) although copper (-0.6%) didn’t have nearly as bad a day.  This morning, the metals are higher by between 0.2% (gold ) and 0.6% (silver), so it seems like it was a month-end position adjustment and profit-taking exercise.

Finally, the dollar is strong this morning, rallying against most of its G10 counterparts with JPY (-0.4%) the laggard while the pound (+0.1%) seems to be benefitting from higher yields.  Versus the EMG bloc, the dollar is also broadly higher with only MXN (+0.2%) showing any life.  The peso has a number of issues ongoing with concerns that a Trump victory may lead to tariff increases and strain on the economy while domestic issues have arisen over the potential resignation of eight of their Supreme Court Justices which will have a big impact on the judicial system and potentially the Morena party’s ability to rule effectively.  However, after a steady weakening of the peso throughout October, it appears we are seeing a bit of a bounce this morning.

And that’s really what we have today.  At this point, we will all await the NFP and respond accordingly.  Something to keep in mind is that the hurricanes last month could well impact the data, so whatever the outcome, you can be sure that there will be those saying to ignore it as incomplete.  Regarding the dollar, it is still hard to bet against in my mind given the US economic data continues to be the best around.

Good luck and good weekend

Adf

Awakened the Beast

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The longshoreman’s union conceded
And ports will now work unimpeded
But is that enough
To make sure that stuff
Gets everywhere that it is needed?
 


Arguably, one of the biggest stories this morning is that the fears over the longshoreman’s union strike dramatically weakening the US economy while pushing up inflation have passed as there has been a temporary agreement to raise workers’ pay by 62% over the next six years although it seems that the questions over automation remain.  However, the agreement will last until January 15th, so the 3-day work stoppage is unlikely to have a major impact on the US economy, although I’m sure there will be a few hiccups around.  But hey, at least one problem is off the docket.
 
Meanwhile, problems in the Mideast
Continuously have increased
Iran took their shot
And all that it wrought
Was fear they’ve awakened the beast

Which takes us to the next major story, the nature of Israel’s response to Iran’s missile attack from earlier this week.  From what I have read, the US is trying very hard to persuade PM Netanyahu to leave Iran’s nuclear facilities and oil production capabilities alone.  While I understand the latter, given an attack there would likely drive oil prices far higher and not help VP Harris’s election prospects, I cannot understand why the US would be so adamant that Israel not seek to destroy Iran’s nuclear capabilities.  At any rate, the headline in this morning’s WSJ, “Biden Sidelined as Israel Reshapes Middle East”, seems to say it all.  At this point, we can only watch and wait.  

However, consider the benefits of either of those targets.  As it remains unclear whether Iran has achieved the capability to create nuclear weapons, an attack on those facilities, which are hardened and underground, may or may not be effective at preventing a future nuclear Iran.  But an attack on the oil production facilities, which are wide open and not nearly as well-defended, would immediately limit Iran’s income despite the certain rise in oil prices, as they would not be able to sell any.  Starving Iran of capital to continue to run its military and fund its proxies would likely be extremely effective at dramatically reducing threats to Israel.  As well, I’m pretty confident the Saudis would not be unhappy if oil rose to $90 or $100 per barrel.  My point is the latter strategy is likely to be effective at reducing Iranian activities while being quite achievable.  We shall see.

And finally, early today
The payrolls report will hold sway
O’er markets worldwide
As traders decide
If more cuts are soon on their way

Which takes us to the big economic story today, the monthly payroll report.  Wednesday’s ADP Employment data was much better than expected, showing job growth of 143K.  Current expectations are as follows:

Nonfarm Payrolls140K
Private Payrolls125K
Manufacturing Payrolls-5K
Unemployment Rate4.2%
Average Hourly Earnings0.3% (3.8% Y/Y)
Average Weekly Hours34.3
Participation Rate62.9%

Source: tradingeconomics.com

One thing to keep in mind is this is going to be the last meaningful payroll report before the next FOMC meeting because the October report, scheduled to be released on November 1st, is going to be a complete wreck with virtually no information because of the impact of Hurricane Helene.  In fact, it will likely take several months before economic data gets back to whatever its underlying trend may be given the disruption over such a wide swath of the nation.

The question of the economy’s strength continues to be a hotly contested disagreement between those who believe that a recession is coming soon, or has already started, vs. those who believe that there is no recession coming in the near future.  The first group tends to look through the headline data and sees decreasing quit rates and reduced hiring offsetting reduced firing with the lack of hiring seen as an indication business activity is slowing.  They look at high household credit card debt and growing delinquencies and see analogies to past recessions.  Meanwhile, the bulls look at the headline data and say, GDP continues to grow, inflation continues to slide and while manufacturing has been weak for nearly two years, this is a services economy and that has been strong (yesterday’s ISM Services print was a much stronger than expected 54.9).

Now, the very fact that Powell cut rates two weeks ago is indicative of the fact that there is real concern at the FOMC that growth is slowing.  I will not discuss the political question here.  But data like TSA travel clearances and restaurant seatings and the crowds at events show that at least some portion of the economy is still doing well.  Yesterday’s Claims data was 225K, a few thousand more than expected but still nowhere near a level that would indicate there is an employment glut.  

I believe the idea of the K-shaped recovery is the best description of things around.  The top quartile of income earners is doing just fine while the rest of the economy is struggling.  But that top quartile represents an outsized amount of economic activity, so the data continues to be positive.  In fact, if you are looking for a reason that there is so much angst in the electorate, this is it.  With all that in mind, though, my take is this morning’s number is going to be better than expected, somewhere on the 175K – 200K level.

Ok, let’s quickly run through market activity overnight.  Yesterday’s modest decline in US markets did not really give much direction to the overnight session as the Nikkei (+0.2%) managed to continue its recent modest rally and the Hang Seng (+2.8%) continues to benefit from a belief that Chinese stimulus is coming to the rescue.  But the rest of Asia couldn’t make up its mind (China is still closed) with gainers (Korea, New Zealand, Singapore) and laggards (India, Australia , Taiwan).  In Europe, the picture is also mixed ahead of the US data with modest gainers (CAC, DAX) and laggards (FTSE 100, IBEX) as the US data is still the key driver.  One story here is that the EU decided to impose tariffs of as much as 45% on Chinese BEV’s, something that is likely to become problematic for European exporters going forward.  As to US futures, just ahead of the data (8:00) markets are edging higher by 0.2%.

In the bond market, yields are continuing to rise around the world with Treasuries higher by 2bps this morning after a 5bp climb yesterday afternoon.  European sovereign yields are also much firmer, between 3bps and 6bps across the continent as concerns over inflation reignite.  Both the price of oil and the Chinese tariff story are driving this bond move.  As to JGB’s, they jumped 6bps last night, but that was more on the back of the US rise than any domestic news.

Oil (+1.4%) is continuing to rally as fears over an Israeli attack on Iranian assets builds.  This has helped the entire commodities complex with metals markets also firmer this morning, albeit only on the order of +0.25%. Nonetheless, the commodity higher story remains a fundamental one in my world view, especially as food prices are picking back up again around the world.  The UN’s FAO Food price index rose to its highest level in more than a year and looks for all the world like it has based and is now going to trend higher again.

Finally, the dollar is mixed this morning, with no defining theme here.  The pound (+0.35%) and MXN (+0.4%) have rallied while KRW (-0.5%) and AUD (-0.25%) have declined with the euro virtually unchanged.  My point is there is nothing specific to explain the movement.

And that’s really it.  We hear from a couple of more Fed speakers but since Powell on Monday cooled the idea of another quick 50bp cut, they have not given us much new guidance.  If I am correct and the data is strong, I expect bonds to suffer along with commodities while the dollar should gain.  Stocks are a little less clear.  However, if it is a soft number, you can be sure that the 50bp talk will dramatically increase and stocks and commodities will soar as the dollar slides.

Good luck and good weekend

Adf

Impuissance

Posted on by

The world now awaits the response
Of Israel, which at the nonce
Has traders concerned
Restraint will be spurned
While mullahs pray for impuissance

Thus, oil continues to rise
And it oughtn’t be a surprise
The talk that inflation
Achieved its cessation
Has slowed while concerns crystalize

The most important market story this morning, I would contend, is the potential response by Israel after Iran’s missile attacks yesterday.  While only a handful of the approximately 180 missiles breached the Israeli aerial defenses, some damage was inflicted.  Israel has promised a response at their leisure and history has shown they have been effective in inflicting greater damage than they receive.

The major market concern is that Israel will attack Iran’s oil production capability, something which would certainly drive oil prices, which have spiked more than 8% in the past two sessions, higher still.  Currently, Iran is producing about 3.27 mm barrels/day, a solid 3% of global production and consumption.  Given the highly inelastic nature of the oil price, any attack there would have a substantial impact, at least in the short term.  Remember, though, that the Saudis have something along the lines of 3mm barrels/day of production shut in as OPEC+ has tried to support the price.  I expect that they would be able to bring that online quite quickly, so any price move would be short-lived.  The downside, though, is that it would use up the available spare capacity so any other event, say another hurricane which shuts in Gulf of Mexico production, would have an outsized impact.  Net, a response of that nature may only have a short-term impact on the price but would lead to more fragility overall.

As well, I am confident that the Biden administration is really working to convince Israel to leave the oil assets alone as during the campaign, a spike in oil, and by extension gasoline, prices will not be a welcome turn of events.  However, from Israel’s point of view, the destruction of Iran’s oil production capacity would result in a much weaker Iran, one that would have far more difficulty promoting their attacks on Israel.  At this point, we can only wait and see.

Away from that news, yesterday saw the PMI and ISM data releases which simply confirmed that global manufacturing activity remains in a slump.  The US report, printing at a weaker than expected 47.2, the 22ndmonth in the last 23 that the reading has been below the boom/bust line of 50.0, continues to drive concerns about economic weakness in the US.  Of course, manufacturing represents less than 25% of the economy directly, although many service jobs are dependent on the manufacturing sector.

Arguably, the perception of economic weakness that remains prevalent in the US stems from this situation, where manufacturing remains weak, and the ancillary activity typically driven by it remains weak as well.  These are the traditional blue-collar jobs, and it is those people who seem to be feeling the current economic malaise most severely.  In fact, this is as good an explanation as I can find for why despite some decent top line economic data, there are still so many people in the US who are highly stressed and living paycheck to paycheck.  While this is a macroeconomic discussion, it is also a key political discussion as it will highly likely be an important driver of voters come November.

As to the other topic that has traders engaged, central bank policy, the plethora of Fed speakers yesterday did nothing to alter any views on their next steps.  Currently, the Fed funds futures market is pricing a 35% probability of a 50bp cut in November, but still pricing an 85% probability that there will be 75bps of cuts by year end.  Now, this is less cutting than had been priced just a week ago, but that move was driven by Powell on Monday.  Given the amount of data that we will be receiving between now and the November meeting, including two NFP reports as well as a CPI and PCE report this month, and the first look at Q3 GDP, many views can change.

And that’s kind of it this morning.  Last night’s VP debate had no market impact, nor would I have expected it to do so.  Worries about the Middle East and questions about central bank policy are the current market drivers.

With that in mind, let’s see how things played out overnight after yesterday’s weak showing in US markets.  In Japan, the Nikkei (-2.2%) gave back Tuesday’s gains as the market tries to determine exactly how new PM Ishiba is viewing the economy and central bank.  In a statement, he indicated the government would work with the BOJ to achieve joint goals, and his initial hawkish perception has been walked back.  In fact, it is odd that Japanese stocks fell given JGB yields (-2bps) also declined alongside the yen (-0.7%) on those comments.  As to the rest of Asia, the Hang Seng (+6.2%) rocketed higher on the Chinese stimulus story (mainland markets are still closed for their holiday), but the other Asian markets that were open, including Korea, Malaysia and Indonesia, all saw selling pressure with declines on the order of -1.0%.

In Europe, continental bourses are all lower led by the DAX (-0.6%) and IBEX (-0.6%) although the FTSE 100 (+0.2%) has managed a small gain.  The UK move has been driven by energy stocks rallying on the Middle East story while the lack of energy stocks on the continent seems to be the key to losses as investors turn cautious.  As to US futures, at this hour (7:30), they are lower by between -0.2% and -0.4%.

Bond yields are lower this morning with Treasuries down -2bps while European sovereign yields have all fallen between -5bps and -6bps.  The weak PMI data there has increased the discussion about more aggressive policy ease from the central bank and the likelihood that inflation stays quiescent.

We have already discussed oil but a look at the metals markets shows that after a 1% rally yesterday, gold (-0.3%) is consolidating near its all-time highs, while both silver (+0.3%) and copper (+0.8%) continue to move higher.  For the latter two, everything I read is about how both metals are critical for building out the energy transition infrastructure and both metals are in structural shortage with stockpiles being utilized as mining output lags demand and getting new mines up and running is a decade long affair.  My take is both have further to rise.

Finally, the dollar is net little changed this morning after a very solid two-day rally.  Remember it was just Monday that I was discussing key technical levels in the DXY (100.00), EUR (1.1200) and GBP (1.3500).  Well, we have moved well away from all those levels as the dollar weakness story takes a break.  When Chairman Powell explained he was in no hurry to cut rates rapidly, that part of the narrative needed to change quickly…and it did.  So, this morning, aside from the yen’s weakness mentioned above, the other large mover is NOK (+0.7%) which is simply responding to the oil rally.  In fact, the commodity currencies are doing exactly what they are supposed to be doing with CLP (+0.5%) tracking copper and MXN (+0.4%) tracking both silver and oil.  ZAR (unchanged) is actually the surprise here although it has been rallying steadily since April on a combination of the strong metals markets and continued belief in a better economic situation based on the new government’s business friendly policies.

On the data front, this morning brings only ADP Employment (exp 120K) and the EIA oil inventories where further inventory drawdowns are anticipated.  We also hear from four more Fed speakers although given Powell’s lack of concern regarding the speed of cuts, it will be hard for these speakers to change the market perception in my view.  This leaves us with the big picture.  Right now, employment remains the most important data for the Fed and their policy views.  As such, this morning’s ADP is likely to have more importance than it ordinarily would, despite the limited correlation between this data and the NFP to be released on Friday.

It seems that there are some subtle changes in central bank views with market perceptions of FX moves impacted.  The Fed is now seen as not quite as dovish, while the BOJ and ECB are seen as a touch more dovish, hence the dollar’s gains against both the yen and euro.  However, I think the central bankers realize they are still feeling their way in the dark and will be slow to respond to outlier data, so this vibe seems likely to hold in the near term.

Good luck
Adf

None Be Unique

Posted on by

When looking ahead to this week
The noteworthy thing is Fedspeak
At least fifteen times
They’ll give us their dimes’
Worth of knowledge, though none be unique
 
For instance, we already know
Their confidence is rather low
So, absent new data
Do they have schemata
Designed to get ‘flation to slow?

 

Arguably, the biggest news this morning is the death of the Iranian President and Foreign Minister in a helicopter crash overnight as it opens a range of possibilities regarding the future stance of Iran in the Middle East.  Will it remain the strict theocracy that it has been?  Or will a new leadership recognize the people appear to be growing tired of that stance and want something different.  While it would seem unlikely that there will be a major change, at least from this view thousands of miles away, if one were to come about, it would have a major impact on the Middle East and the ongoing conflict in Gaza.  After all, if Iran stopped funding terrorist groups, that would de-escalate things dramatically and potentially see a significant decline in the price of oil.  At this time, however, there is no information as to who will step into the role and what policies will be followed, so it is a wait-and-see period.  As it happens, oil prices (-0.35%) have edged lower this morning, but this is hardly a sign of anything new.  This will be quite critical to watch going forward.

However, beyond that, there has been vanishingly little new information about which to speak regarding the macroeconomic situation around the world.  The Chinese left their policy rates unchanged, as universally expected, and there has literally not been any other data from any major nation since Friday.  In fact, looking ahead at the calendar for the week, arguably the most significant piece of data to be released is Canadian CPI, or perhaps UK CPI and then on Friday we see the Flash PMI reports. 

Which brings us back to the Fedspeak.  It is staggering to think that the FOMC believes they need to be so visible at this time, especially after Chairman Powell explained that rate hikes were off the table and that while it may take a little longer than they had initially expected, they were still certain that inflation was going to head back to their 2% target.

Speaking of inflation, over the weekend I was reading some analysis (sad, I know) that highlighted if the US used the European HICP calculation the core reading would already be below their target with April’s data coming in at 1.9%.  To me this is a similar stance to what we heard at the end of 2023 when numerous pundits were explaining that the 3-month trend or the 6-month trend was already at 2.0% so why wait to cut?  Of course, the sticky inflation camp (this poet included) was quick to hoist them on their own petard as the recent 3-month and 6-month trends are pointing to 4+% CPI readings going forward.  

In this particular instance the question I would ask is, other than the fact that the reading is lower, why would anyone think that the European HICP inflation reading is a more accurate representation than the BLS representation?  The difference lies in the fact that HICP doesn’t incorporate housing price changes, which given they remain stubbornly high, have been supporting higher CPI readings.  But don’t people pay for their housing?  Certainly, it would be easy to create a lower CPI if you simply remove all the items that are going higher in price.  Unfortunately, that process doesn’t really tell you anything about reality.

Below is a very interesting chart I found on X (nee Twitter) created by Professor Alberto Cavallo of Harvard and Oleksiy Kryvtsov, a Bank of Canada economist, which may be a better description of inflation as felt by the average person.

The fact that prices are rising fastest for the least expensive goods indicates that inflation is a major problem for Joe Sixpack, and no matter how pundits seek to adjust the measurement, so the numbers look better, reality is a harsh mistress.  (If you want to know why President Biden’s numbers are so bad, you needn’t look further than this chart.)  

Alas, there is no escaping the plethora of blather that will be coming from the Fed this week, although I sincerely doubt any of it will change anyone’s opinions about anything.  Ok, it was another generally quiet session overnight with the exception being the ongoing blast higher in metals markets.

Equity markets have performed well across the board, although the gains have not been too dramatic.  Japan (Nikkei +0.7%) was the best performer although the entire region was in the green to a lesser extent, about 0.35% or so.  In Europe, all the bourses are higher as well, but here the gains are even smaller, on the order of +0.25% across the board while US futures are essentially unchanged at this hour (6:30).

In the bond market, Treasury yields, which backed up 2bps on Friday are unchanged this morning while European sovereigns are higher by roughly 1bp across the board.  ECB speakers have conceded that a rate cut is coming in June, but many are pushing back hard against the idea that a July cut is a sure thing, preferring to wait until September.  However, the really interesting thing is in Japan, where JGB yields have traded up to 0.98%, a new high yield for this move and a level not seen since March 2012.  At this point, it would seem that 1.00% is a foregone conclusion so it will be interesting to see how the BOJ responds when that ‘magic’ number is finally traded.

But, as I mentioned above, it is a metals day with gold (+0.9%), silver (+1.1%) and copper (+0.9%) all continuing last week’s strong gains with gold making yet further new highs, copper pushing its historic highs and silver breaking above a key technical resistance level at $30/oz last week and now extending those gains.  While there have been many explanations for this price movement, I think you need to consider precious and industrial metals separately.  For precious, there continues to be a growing concern in the ongoing debasement of the fiat currency universe and both individuals and central banks are seeking to hold alternative assets.  On the industrial side, though, especially copper and silver which are both critical to electronics, the ten-year hiatus in investment due to the ESG cult combined with the recent recognition that all the new-fangled tech wizardry like AI is going to require gobs of power and electrical capacity has simply skewed the supply/demand curve to much more demand than supply.

Finally, the dollar is little changed this morning, pretty much at the same level overall since Thursday.  Given the lack of movement in the rates space, this ought not be a surprise.  It also ought not be surprising that the best performing currencies of the past week have been CLP (+3.5%) as it has simply traveled alongside its major export, copper, and ZAR (+5.1%) as it rallies alongside the precious metals complex.  Meanwhile, there has been no movement in the interest rate narrative with, perhaps, the exception of Japan, but what we have learned there lately is that higher JGB yields lead to a weaker yen.  Go figure!

On the data front, as I said earlier, it is extremely light this week,

WednesdayExisting Home Sales4.22M
 FOMC Minutes 
ThursdayInitial Claims220K
 Continuing Claims1799K
 New Home Sales680K
FridayDurable Goods-0.7%
 -ex Transport0.1%
 Michigan Sentiment67.6
Source: tradingeconomics.com

It is not clear, given how much we have already heard from Fed speakers since the last FOMC meeting, that the Minutes will be very informative.  Perhaps the discussion about QT will change some minds, but I doubt it.  Otherwise, if stocks continue to rally, market players will be happy and not try to rock the boat.  Meanwhile, the dollar will need a new impetus to break out of this narrow range, but that may not come until next month’s NFP data.

Good luck

Adf

Views Will Be Tested

Posted on by 
When looking ahead to this week
With data and central bank speak
Some views will be tested
And some have suggested
The market is reaching its peak

But there is a growing belief
The future (that’s AI in brief)
Is shiny and bright
And stocks will take flight
Beware though, it could lead to grief

First a correction to Friday’s note regarding the blip lower in oil prices.  It was not inventory data but a story on a relatively obscure website, Middle East Eye, (h/t @inflation_guy) that discussed a seeming breakthrough in US-Iran talks that would allow Iran to export up to 1 million bbl/day in exchange for an agreement to slow their Uranium processing.  However, the story was vehemently denied by both the Iranians and the US and has been consistently denied since then by both sides repeatedly.  Now, I am of two minds on this story as denials of this extremity tend to point to some reality underlying the situation, but politically it would seem very difficult for the Biden administration to be seen to be negotiating with Iran heading into an election.  Regardless of the driver though, oil (-2.2%) is falling sharply again today with WTI below $69/bbl now.  This continues to point to the dichotomy of commodity markets sensing significant global slowing in growth while the equity markets see the world growing gangbusters.  Both sides cannot be correct, so at least one set of markets will need to adjust going forward.

 

Meanwhile, after an extremely lackluster week regarding new information, this week is exactly the opposite with critical data points like CPI as well as three major central bank meetings, Fed, ECB and BOJ.

 

Tuesday

NFIB Small Biz Optimism

88.4

 

CPI

0.2% (4.1% Y/Y)

 

-ex food & energy

0.4% (5.2% Y/Y)

Wednesday

PPI

-0.1% (1.5% Y/Y)

 

-ex food & energy

0.2% (2.9% Y/Y)

 

FOMC Rate Decision

5.25% (unchanged)

Thursday

ECB Rate Decision

3.50% (0.25% increase)

 

Initial Claims

250K

 

Continuing Claims

1787K

 

Retail Sales

-0.1%

 

-ex autos

0.1%

 

Empire Manufacturing

-15.1

 

Philly Fed

-13.0

 

IP

0.1%

 

Capacity Utilization

79.7%

 

Business Inventories

0.2%

Friday

BOJ Rate Decision

-0.1% (unchanged)

 

Michigan Sentiment

60.1

Source: Bloomberg

 

So, clearly, we have a lot to absorb this week although today is lacking in new news.  A quick look at the PPI data shows why there is a growing cadre of people who are in the ‘inflation is over’ camp, as the Y/Y data is collapsing back to levels with which we are more familiar over the past decades.  However, I would highlight that core CPI remains well above the Fed target with only a very slow decline ongoing.  I remain in the sticky inflation camp on the basis of both personal experience and the fact that a critical part of the statistic, housing, is not actually showing any real declines.  Here is a link to an excellent article that helps explain the fact that rents are not declining very much at all, in reality, and if housing costs continue to climb, so will CPI.

 

I think the real question is what will happen if the CPI number is hot, say 5.5% core and showing no indication that the much hoped for slowing is ongoing?  How will the Fed respond the following day?  Remember, the market is largely priced for a pause skip with a 27% probability of a rate hike currently in the futures market, although an 80% chance of one by next month.  However, we all thought Australia was done and they hiked last week.  We all thought Canada was done and they hiked last week.  Will the Fed be willing to ‘surprise’ the market if the data points to continuing inflation pressures? 

 

This is especially timely as this morning there was a story in Bloomberg explaining that the idea that wage pressures are driving inflation is losing credence with a far less certain outlook on that prospect.  Essentially, a Fed paper was published explaining that while wages and inflation are correlated, the direction of causality, if there is one, is not clear.  That seems like a way for the Fed to be able to pivot their views to a different underlying cause and given housing’s huge importance to the total CPI number, ongoing rises in rentals would certainly be a concern.  One thing we do know is that if the CPI data come out soft, the equity market will rocket higher, at least initially, as the working assumption will be that the Fed is done.  Like I said, lots to anticipate this week.

 

As to today, the bulls remain in control as Friday’s very modest US rally saw Asia follow higher and Europe currently showing gains on the order of 0.5% – 0.6%.  US futures are following suit, with NASDAQ futures up 0.5% at this hour (7:45) and leading the way.

 

Treasury yields are little changed this morning with the yield up just 1bp although European sovereign yields are all lower, especially Italy (-5.6bps) after the news that former Italian PM, Silvio Berlusconi, passed away overnight.  As he was still quite active in Italian politics and a key force in the Forza Italia party, the story is that his passing will have removed some anxiety from markets and allow the Bund – BTP spread to narrow further still.  Perhaps of more interest is the increasing inversion in the 2yr-10yr portion of the curve, now back to -86bps, and a direct result of the massive amount of Treasury issuance that has been happening since the debt ceiling was removed.  In fact, today there are auctions for 3m, 6m and 1y bills and 3y and 10y notes to the tune of $278 billion, a huge amount of supply.  Do not be surprised if the curve inversion continues further.

 

Finally, looking at the dollar, it is generally, though not universally softer.  Given oil’s decline, it is no surprise that NOK (-0.35%) is the G10 laggard, but there is also a bit of weakness in the CHF (-0.25%) on the back of a slight decline in Sight Deposits there.  Meanwhile, the rest of the bloc is modestly firmer with no outsized gainers.  In the EMG bloc, ZAR (+1.1%) continues its recent strength, having rallied 7% this month on continued belief that the electricity situation in the country is getting better.  But away from that, and the fact that TRY (-0.7%) continues to slide, the rest of the bloc appears to be awaiting the upcoming onslaught of news this week.

 

I have a sense that by the end of this week, we may have new marching orders from the markets.  I would not be surprised to see a hot CPI print get the Fed to hike instead of skipping and if we see something like that, I would look for the dollar to test its recent resistance levels and potentially break through.  Correspondingly, if CPI is soft, I imagine the market will assume the Fed is done, and we will see equities rally with the dollar falling, at least for the first leg of the move.  We shall see starting tomorrow.

 

Good luck

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Just Dreams

Posted on by

Last night saw a rocket attack
On assets, US, in Iraq
The oil price surged
While stocks were submerged
’neath selling by bulls who cut back

This morning, however, it seems
Concerns about war were just dreams
The losses reversed
As traders still thirst
For assets now priced at extremes

What a difference a day makes…or does it? Yesterday saw market participants’ initial evaluation of the threat of escalation in Iran/Iraq as limited with the result that early price action favoring haven assets reversed and most markets closed within a few basis points of Monday’s prices. The one exception to that rule was the dollar, which maintained its bid all day long, actually extending its gains late into the session. Other than the idea that international investors are buying dollars so they can buy US stocks, it is hard to come up with a short term rationale for the dollar’s recent strength. If anything, news this morning that the Fed’s balance sheet has grown even further, to $4.17 trillion, would imply that a weaker dollar is in the offing.

Of course, last night, shortly after the US markets closed, came the news that Iran fired a number of missiles at two different military bases in Iraq that are jointly used by the US and Iraqi militaries. There was a great deal of huffing and puffing from Iran, they announced the attacks themselves on Iranian TV, but in the end, they were nothing more than damp squibs. There was no material damage and no personnel killed, or even severely wounded. (And that is a good thing!) But at the time the news hit the tape, this outcome was not clear and risk assets plunged while haven assets soared. Thus, overnight saw gold trade up to $1610/oz, WTI rise to $65.65 (Brent to $71.75), Treasury yields fall to 1.74% and the yen rise to 107.65 (0.75%). But that price action, and the fear driving it, was quite short-lived. Once it became clear that the Iranian retaliation was completely ineffective, and they announced they were not interested in a major conflict, essentially all of that movement was reversed. So this morning we see gold at $1579/oz, WTI at $62.60, Treasury yields back to 1.82% and the yen actually net weaker on the day, at 108.70 (-0.25%).

This begs the question of how to consider this new potential risk going forward. The first rule of an exogenous market risk is the law of diminishing returns. In other words, even if there is another attack of some sort, you can be sure that the haven rally will be smaller and risk assets will not decline as much as the first time. And since this entire affair is occurring in a locale that, other than oil production, has almost no impact on the global economy, the impact is likely to be even smaller. Now I waved off oil production as though it is not important, but there is no question that the remarkable rise of US oil production has significantly altered the global politics of oil. When the Middle East was responsible for more than 50% of global production, OPEC ruled the roost, and anything that happened there had a global impact. But as oil production elsewhere in the world has grown and OPEC’s market share sinks below 40% (remember, the US is the world’s largest oil producer now), the impact of Middle Eastern conflagrations has fallen dramatically. The point is that short of a major attack by Iran on Saudi oil facilities or attempts to close the Persian Gulf, this situation has probably driven all the market excitement it is going to. In other words, we need to look elsewhere for market catalysts.

With that in mind, if we turn to the ongoing data releases, we find that German Factory Orders once again missed the mark, falling 6.5% Y/Y in November, highlighting that the industrial malaise in the engine of Europe continues. French Consumer Confidence fell more than expected, and Eurozone Confidence indices were almost uniformly worse than expected. It is difficult to look at this data and conclude that the situation in Europe is improving, at least yet. I guess, given this situation it should be no surprise that the euro is lower again this morning, down 0.3%, and actually trading at its lowest point this year (a little unfair, but the lowest level in two weeks). But the dollar’s strength is evident elsewhere in the G10 as the pound remains under pressure, -0.1% today and 0.45% this week. And the same is true pretty much throughout the space.

In the EMG bloc, the results have been a bit more mixed overnight with THB the worst performer (-0.5%) after comments from the central bank decrying the baht’s strength and implying they may do something about it. Remember, too, that APAC currencies, in general, saw weakness on the fear story, which dissipated after those markets closed. On the flip side, ZAR is the day’s biggest gainer, +0.6%, completely recouping its early-session Middle East related losses, as investors apparently focused on the incipient US-China trade deal and how it will benefit the global economy and South African interests.

On the US data front, yesterday saw a smaller than expected Trade Deficit and better than expected ISM data (55.0 vs. 54.5 exp). This morning we are awaiting the ADP Employment numbers (exp 160K) and Consumer Credit ($16.0B) this afternoon. We also hear from Fed Governor Lael Brainerd this morning, but it doesn’t appear as though she will focus on monetary policy as part of her discussion on the Community Reinvestment Act.

In the end, US data has continued to perform well, which thus far has been enough to offset the early impact of the Fed’s (not) QE. However, as the Fed balance sheet continues to grow, I continue to look for the dollar to decline throughout the year. As such, payables receivers should consider taking advantage of the dollar’s early year strength.

Good luck
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