Tag Archives: #Japan

Jobs is Passe

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The usual story today
Would be NFP’s on its way
But with BLS
On furlough, I guess
The story on jobs is passe
 
But ask yourself, if we don’t get
A data point always reset
That’s only a fraction
Of total job action
Is this something ‘bout we need fret?

 

I guess the question is, is the government shutdown impacting markets?  Frankly, it’s hard for me to see that is the case. Today offers a perfect scenario to see if it is true.  After all, if the government was working, the BLS would have released the weekly Claims data yesterday and market participants would be waiting with bated breath for today’s NFP number.  As I said yesterday, while Ken Griffin is likely quite annoyed because I’m sure Citadel makes a fortune on NFP days, the rest of the world seems to be getting along just fine.  In fact, maybe this is exactly what market participants need to learn that the data points on which they rely don’t really matter.  

With NFP in particular, the monthly number, which since 1980 has averaged 125K with a median of 179K seems insignificant relative to the number of people actually employed, which as of August 2025 was recorded as 159.54 million.  Now I grant, that the employed population has grown greatly in the past 45 years, so when I take it down to percentages, the average monthly NFP result is 0.10% of the workforce during that period, with the median a whopping 0.14%.  The idea that business decisions are made, and more importantly, monetary policy decisions are made on such a tenuous thread is troublesome, to say the least.  Did this report really tell us that much of importance?  Especially given its penchant for major revisions.

Below is a graphic history of NFP (data from FRED) having removed the Covid months given they really distorted the chart.

And below is a chart showing total payrolls (in 000’s) on the RHS axis with the % of total payrolls represented by the monthly change in NFP on the LHS.  Notice that almost the entire NFP series, as a %age of total employment, remains either side of 0 with only a few outcomes as much as even 0.5%.  My point is, perhaps the inordinate focus on this data point by markets and policymakers alike, has been misguided, especially as the accuracy of the initial releases seems to have worsened over time.  Maybe everybody will be able to figure out that they can still do their jobs even without this data.  (Ken Griffiin excepted. 🤣)

Food for thought.

Like swallows return
To Capistrano, Japan
Votes again this year

 

The other notable news story is tomorrow’s election in Japan’s LDP for president of the party and the likely next Prime Minister.  While there are technically 5 candidates, apparently, it is really between two, Sanae Takaichi, a former economic security minister and a woman who would be the first female PM in the nation’s history, and Shinjiro Koizumi, son of former PM Junichiro Koizumi, and a man who would become the nation’s youngest prime minister.  There are several others, but these are the front runners.  From what I gather, Takaichi-san is the defense hawk and the more conservative of the two, an updated version of Margaret Thatcher, to whom she will constantly be compared if she wins.  Meanwhile, Koizumi is more of the same they have had in the past.

There are some analysts who are trying to make the case that this election has had a major impact on Japanese markets, and one might think that makes sense.  But if I look at USDJPY (0.0% today), as per the below chart, I am hard pressed to see that the election campaign has had any impact of note.

Source: tradingeconomics.com

If we turn to the Nikkei (+1.9%) which made a new high last night, it seems that is tracking US technology shares and is unconcerned over the election.  

Source: tradingeconomics.com

Arguably, if the equity market is forward looking (which I think is true) investors are indifferent to the next PM.  Finally, a look at JGBs shows that yields continue to climb there, albeit quite slowly, but consistently make new highs for the move and are back to levels last seen in 2008.

In fact, like almost everything since the GFC, perhaps the recent run of incredibly low yields in Japan is the aberration, not the rule!  But the argument for higher Japanese yields is more about the fact that inflation there is running at 3.5% and the base rate remains at 0.50%.  Investors remain concerned that the recent history of virtually zero inflation in Japan may be a thing of the past and so are demanding higher yields to hold Japanese debt.

I have no idea who will win this election, although I suspect that Takaichi-san may wind up on top.  But will it change the BOJ?  I don’t think so.  And the fact that the LDP does not have a working majority means not much may get done afterwards anyway.  All told, it is hard to be excited about holding yen in my eyes.

Ok, let’s look at the rest of the world quickly.  Despite a soft start, US equity markets managed to close in the green and this morning all three major indices are pointing higher by 0.25%.  Away from Japan, Chinese markets are closed for their holiday, and most of the rest of Asia followed the US higher, notably Korea (+2.7%) and Taiwan (+1.5%).  The only outlier was HK (-0.5%) which looked to be some profit taking after a sharp run higher in the past week.  In Europe, Spain (+0.8%) and the UK (+0.6%) are the best performers despite (because of?) slightly softer PMI Services data.  Either that, or they are caught up in the US euphoria.

The bond market saw yields slip a few basis points yesterday and this morning, while Treasury yields are unchanged at 4.08%, European sovereigns are sliding -1bp across the board.  I think the slightly softer data is starting to get some folks itching for another ECB rate cut, or at least a BOE cut.

In the commodity markets, oil (+0.4%) which continued to fall throughout yesterday’s session to just above $60/bbl, looks like it is trying to stabilize for now.  There continues to be discussion about more OPEC+ production increases, and it seems that whatever damage Ukraine has done to Russia’s oil infrastructure is not considered enough to change the global flows.  As to the metals, gold (+0.2%) and silver (+1.2%) absorbed a significant amount of selling yesterday in London, which may well have been one account, as they reversed course late morning and have been climbing ever since.  Copper (+1.1%) is also pushing higher and the entire argument about the defilement of fiat currencies remains front and center.  I guess JP is now calling it the debasement trade as Gen Z, if I understand correctly, is selling other assets and buying a combination of gold and bitcoin.

Finally, the dollar is…the dollar.  Back on April 20, DXY was at 98.08.  This morning it is 97.75.  look at the chart below from tradingeconomics.com and tell me you can get excited about any movement at all.  We will need a major outside catalyst, I believe, to change any views and right now, I see nothing on the horizon.

And that’s really all there is.  We do get ISM data this morning as it’s privately compiled and released (exp 51.7) and Fed speakers apparently will never shut up.  What is interesting there is that Lorrie Logan, Dallas Fed president, has come out much more hawkish than some of her colleagues.  That strikes me as a disqualification for being elevated to Fed chair.

I continue to read lots of bear porn and doom porn, and it all sounds great and markets clearly don’t care.  The government shutdown has been irrelevant and that should make a lot of people in Washington nervous given this administration.  President Trump has been angling to reduce government, and if it is out of action and nobody notices, it will make his job a lot easier.  But for now, nothing stops this train with higher risk assets the way forward.

Good luck and good weekend

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Naught But Dismay

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Ishiba’s fallen
Who’ll grab the poisoned chalice
For the next go round?

 

Well, it was inevitable after the LDP lost the Upper House election a few weeks ago, but now it is official, Japanese PM Shigeru Ishiba has resigned effective today and will only stay on until a new LDP leader is chosen.  You must admit, for a politician he was exceptionally ineffective.  He managed to lead the LDP to two major election losses in the span of 10 months, quite impressive if you think about it.  However, now that he has agreed a trade deal with the US, where ostensibly US tariffs on Japanese autos will be reduced from 25% to 15%, he felt he had done enough damage and is getting out of the way.  Frankly, I wouldn’t want to be the next man up here as the situation there remains fraught given still high inflation and a central bank that is so far behind the curve, it makes the Fed seem like it is Nostradamus!

The intricacies of Japanese politics are outside the bounds of this note, but the initial market response is a weaker yen (-0.7% as of 7:30pm Sunday night) and 1% gain in the Nikkei.  JGB yields have barely moved at all as it seems Japanese investors are not yet abandoning ship in hopes of a stronger PM.  However, my take is they have further to climb going forward as the BOJ’s ongoing unwillingness to tackle inflation will undermine their value.  Japan has a world of hurt and lacking an effective government is not going to help them address their problems.  It is hard to like Japanese assets or the yen in my view, at least until something or someone demonstrates competence in government.

The jobs report basically sucked
As companies smoothly conduct
More layoffs each week
While they try to tweak
Their staffing ere management’s f*cked

By now, I’m sure you’re all aware that the payroll report was pretty weak across the board.  NFP rose only 22K, well below expectations and although there was a marginal increase in last month’s results, just 6K, the overall picture was not bright.  The Unemployment Rate ticked up 0.1%, as expected with the labor force growing >400K, but only 288K of them getting jobs.  However, layoffs are down, and the real positive is that government jobs continue to fall, having declined 56K in the past three months with private hiring making up the slack.  In fact, if you look at the past three months, private job creation has been 144K or 48K/month.  That is the best news of the entire process.  Eliminating government employees will eventually result in lower government expenditures and let’s face it, if the government employees who leave become baristas at Starbucks, they are likely adding more value to the economy than their government roles!  The chart below from Wolfstreet.com does a great job of highlighting private sector jobs growth, which is slowing but still positive.  Maybe it is not yet the end of the world.

As to my efforts to prognosticate on the market behavior based on a range of outcomes, I mostly got the direction right, although some of the movement was a bit more aggressive than I anticipated.  The one place I missed was equities, which started higher, but ultimately fell on the day.  Nostradamus I’m not.

The last thing to mention today
Is France, where a vote’s underway
When finally completed
And Bayrou’s unseated
Macron will have naught but dismay

The last key story to discuss is the vote today in France’s parliament where another snap election has been called by a minority government (see Japan for previous results) and in all likelihood will result in the government falling.  The problem here, as it is pretty much everywhere in the Western world is that the government’s budget deficit is exploding higher and legislators cannot agree to cut spending.  The result is rising bond yields (see below chart as I discussed this last week here), and growing concern as to how things will ultimately play out.  The prognosis is not positive.  

Source: tradingeconomics.com

While the US is in a similar situation, we have substantially more tools available and more runway given our status as the global hegemon and owning the global reserve currency.  But France, and the UK or Japan for that matter, have no such backstop and investors are growing leery of the increasing risk of a more substantial meltdown.  Apparently, the results of this vote ought to be known by 3:00pm Eastern time this afternoon.

The question is, if/when he loses, what happens next?  The choice is President Macron appoints a different PM to head another minority government, which will almost certainly be unable to achieve anything else, or there is another parliamentary election, which at least could result in a majority government with the ability to enact whatever fiscal policies they believe.  Remember, France is the second largest economy in the Eurozone, so if it remains under pressure, it is difficult to make the case that the euro will rally very much, especially given Germany’s many issues.

And that feels like enough for one day.  Let me recap the overnight session but since there is no data of note today and the Fed is in its quiet period, I will list data tomorrow.  While US equity markets sold off a bit at the end of the day, that was not the vibe this morning anywhere else in the world as green is the predominant color on screens.  In Japan, no PM is no problem as the Nikkei (+1.45%) rallied after much stronger than expected GDP data (2.2% in Q2) helped convince investors things would be fine.  Hong Kong (+0.85%) and China (+0.2%) also managed gains as hopes for a Fed rate cut spring eternal.  In fact, the bulk of Asia saw gains on that basis.

Europe, too, has embraced the weaker US payroll data and prospective Fed rate cut to rally this morning, although in fairness, German IP rose 1.4% for its first gain in four months, so that helped the cause.  But even French stocks are higher despite the imminent collapse of the government.  I am beginning to notice a pattern of equity investors embracing the removal of ineffective governments, but perhaps I am looking too hard.  US futures are also modestly higher at this hour (7:15) this morning, rising about 0.25%.

In the bond markets, after Friday’s rally, Treasury yields have edged higher by 1bp while European sovereign yields are largely unchanged, perhaps +/- 1bp on the day.  Surprisingly, even JGB yields have not risen despite the lack of fiscal rectitude there.  It certainly appears that bond investors are ignoring a lot of potential bad news.  Either that or someone is buying a lot of bonds on the sly.

In the commodity markets, oil (+2.0%) after a down day Friday ahead of expectations that OPEC+ would be increasing production again, has rallied back as those increases were less than feared by the market.  But net, oil is just not going anywhere these days, trading between $62/bbl and $66/bbl for the past month.  It feels like we will need a major demand story to change this narrative, either up or down.  As to metals, they continue to rally sharply (Au +0.7%, Ag +0.7%, Cu +0.5%, Pt +1.9%) as no matter the bond markets’ collective ennui over global fiscal profligacy, this segment of the market is paying attention.  If this week’s CPI data is cooler than expected, I suspect that 50bps is going to be the default expectation and metals will climb further.

Finally, the dollar is under modest pressure this morning, with the euro and pound both rising 0.2% although AUD (+0.6%) and NZD (+0.8%) are having far better sessions on the back of commodity price strength.  JPY (-0.3%) has recouped some of its early losses from the overnight session, though my money is still on weakness there.  In the EMG bloc, it is hard to get excited about much with ZAR (+0.25%) appreciating the rally in gold and platinum, but only just, while the rest of the bloc hasn’t even moved that much.  

And that’s really all for today.  The discussion will continue around the Fed and whether 50bps is coming with Thursday’s CPI the last big piece of data that may sway that conversation.  Personally, I am surprised that the government upheavals in Japan and France (with the UK also having major fiscal problems) have not had a bigger impact on markets.  My sense is that there is an opportunity for more fireworks in those places in the near future.  But apparently not today.  As investors whistle past those particular graveyards, I imagine we will see a risk-on session continue with the dollar remaining under modest pressure.

Good luck

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Got Smote

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There once was a poet that wrote
‘Bout bonds and the fact they got smote
So, yields, they did rise
And to his surprise
Most pundits, this news did promote
 
Now turning to stories today
The biggest one, I’d have to say
Is how, in Japan
Ishiba’s grand plan
Has failed, thus he’ll be swept away

 

The number of stories this morning regarding the synchronous rise of long-dated bond yields around the world has risen dramatically.  While yesterday, I highlighted this fact, I certainly didn’t expect it to be the key narrative this morning.  But such is life, and virtually every news outlet is focusing on the subject as both a reason for the poor equity performances yesterday as well as a way to highlight government profligacy.  I do find it interesting, though, that the same publications that push for more spending for their preferred causes have suddenly become worried about too much government spending.  But double standards are nothing new.   A smattering of examples show Reuters, Bloomberg and the WSJ all feigning concern over too much government spending.

I say they are feigning concern because all these publications are perfectly willing to support excess government spending if it is spent on the things they care about.  Regardless, the fact that this has become one of today’s key talking points is evidence that some folks are starting to recognize that trees cannot grow to the sky.  Even though almost every major central bank is in easing mode, long-term yields keep rising.  Alas, the almost certain outcome here, albeit likely still well into the future, is some form of yield curve control as central banks will be forced to prevent yields from rising too high lest their respective governments go bust.  I expect that the initial stages will be regulations requiring banks and insurance companies, and maybe private, tax-advantaged accounts like IRA’s and 401K’s, to hold a certain percentage of Treasuries.  But I suspect that eventually, only central banks will have the wherewithal to prevent runaway yields.  Welcome to the future; got gold?

However, you can read about this everywhere, and after all, I touched on it yesterday so let’s move on.  Government stability/fragility is the topic du jour in this poet’s eyes.  We already know that the French government is set to fall on Monday when PM Bayrou loses a confidence vote.  It is unclear what comes next, but French finances are in bad shape and getting worse and they don’t print their own currency.  This tells me that we could see a lot more social unrest in France going forward given the French penchant for nationwide strikes.  

But a story that has gotten less press is in Japan, where PM Ishiba saw the LDP majority decimated in the Upper House two weeks ago and is now heading a minority government as the LDP does not have a majority in either house in the Diet.  One of the key members of the LDP, and apparently the glue that was holding together the fragile coalition was Hiroshi Moriyama, the LDP Secretary General, and he is now resigning along with several of his lieutenants, so it appears that Japan’s government is about to fall as well.  The upshot here is that the BOJ seems unlikely to raise interest rates given the political uncertainty, which is not only pressuring long-dated JGB’s but also the yen. (see chart below from tradingeconomics.com)

While I have not written extensively about the UK’s government, the situation there is quite similar, with massive fiscal problems driving yields higher while the government focuses on removing the right of free speech amongst its people if that speech is contra to the government’s policies.  While the next UK election need not be held for another 4 years, my take is it will be much sooner as PM Starmer has destroyed his legitimacy with recent policy decisions and will soon be unable to govern.  It will only be a matter of time before his own party turns on him.

The governments in Japan, France and the UK are all under increasing pressure as their policy prescriptions have not tackled the key problems in their respective economies.  Inflation in Japan and the UK and benefits in France need to be addressed, but it is abundantly clear that the current leadership will not be able to do so effectively.  Once again, please explain why people are so bearish the dollar, at least in the long run.  While inflation will be higher worldwide and fiat currencies will all suffer vs. real assets, on a relative basis, the dollar doesn’t appear so bad after all.

Ok, let’s move on to the overnight activity as it gets too depressing highlighting all the government failures around the world.  While US stocks closed above their worst levels of the session, they were all lower yesterday.  That bled into Asia with Japan (-0.9%), Hong Kong (-0.6%) and China (-0.7%) all falling with worse outcomes in some other parts of the region (Australia -1.8%, Philippines -0.75%) although there were winners as well (Korea, India, Taiwan) albeit in less impressive fashion.  Perhaps the surprise was Chinese underperformance after PMI Services data there printed at its highest level since May 2024.

But whatever the negativity that existed in Asia was, it did not translate to European shares as they are all higher (CAC +1.0%, DAX +0.8%, FTSE 100 +0.55%, IBEX +0.2%).  Now, clearly it is not confidence in government activity that has investors excited.  The only data of note was Services PMI, which was mostly as expected except in Germany where it fell to 49.3, far lower than the initial estimate of 50.1 and based on the chart below, seemingly trending lower.

Source: tradingeconomics.com

US futures, too, are higher this morning, with gains of 0.5% to 0.75% for the S&P and NASDAQ.

You won’t be surprised that bond yields continue to drift higher, even in the 10-year space with Treasuries higher by 2bps, although most European sovereign yields have edged down by -1bp in the 10-year space.  It is the longer dated yields that continue to see the most pressure with 30-year yields across the US, Europe and Japan all pushing to new highs for the move, and in the case of Japan, new all-time highs.

Source: tradingeconomics.com

This, of course, is the underlying story for virtually all markets right now.

In the commodity markets, oil (-2.1%) has given back yesterday’s gains after reports that OPEC+, which is meeting this weekend, will be raising their output yet again.  Whatever the situation is in Russia, whether Ukrainian attacks are reducing supply or not, it seems clear that OPEC is unperturbed and wants to pump as much as possible. In the metals markets, gold (+0.3%) has set another new all-time high and appears to be breaking out from its recent consolidation pattern.  I am no market technician (I’m a poet after all), but a consensus seems to be forming that $3700 is coming soon and $4000 will be achieved by early next year.

Source: tradingeconomics.com

The rest of the metals space is little changed this morning with silver holding at its 11-year highs and copper treading water at the levels that existed pre-tariff threats.

Finally, the currency markets, which saw the dollar rally sharply yesterday, are taking a breather with the dollar giving back some of those gains amid a consolidation.  In the G10, movement is 0.2% or less, so really nothing and in the EMG bloc, HUF (+0.6%), KRW (+0.5%) and ZAR (+0.3%) are the biggest gainers, with the latter following gold, while traders see the central bank in Hungary maintaining higher rates to fight still, too high inflation of 4.3%.  As to Korea, better than expected GDP data helped drive inflows to the currency.

On the data front today, we see JOLTs Job Openings (exp 7.4M) and Factory Orders (-1.4%) this morning and the Fed’s Beige Book is released at 2:00pm.  We also hear from two Fed speakers, which given the row over Governor Cook’s tenure at the Fed, may be interesting to see.  The market continues to price a 92% probability of a 25bp cut in two weeks’ time, but I suspect that Friday’s NFP data may be the ultimate arbiter there.

I cannot look at the world and conclude that the US is the biggest problem around.  However, if we do see weak data on Friday and the market starts to price 50bps of cuts by the Fed, the dollar will decline in the near term.  But longer term, the more I read, the more bullish I get on the greenback, at least relative to other currencies.

Good luck

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Panic They’re Sowing

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While eyes and ears focus on Jay
And whatever he has to say
Poor Germany’s shrinking
And it’s wishful thinking
Japan’s kept inflation at bay
 
But fears about Jay have been growing
That rate cuts he will be foregoing
If that is the case
Most traders will race
To sell things while panic they’re sowing

 

Clearly, the big story today is Chairman Powell’s speech with growing expectations that he will sound more hawkish than had previously been anticipated.  Recall, after the much weaker than expected NFP data was released at the beginning of the month, it appeared nearly certain that the Fed was going to cut at the next meeting with talk of 50bps making the rounds.  Now, a few hours before Powell steps to the podium, the futures market is pricing just a 71% probability of that rate cut with a just two cuts priced in for 2025 as per the CME’s own analysis below:

Arguably, this is one reason that equity markets have been having trouble moving higher as the Mag7 drivers of the market are amongst the longest duration assets around, so higher rates really hurt them.  While there has been a rotation into more defensive names, if opinions start to shift regarding the magnificence of AI, or perhaps just how much money they are spending on it and the potential benefits they will receive, things could get ugly.

I also find it interesting that the Fed whisperer, Nick Timiraos at the WSJ, has been running flack for Chairman Powell in this morning’s article, trying to get people to focus on the Fed’s framework as the basis of today’s speech, rather than policy per se.  Briefly, the current Fed framework, was designed right before COVID when for whatever reason they were concerned that low inflation was a problem, and they created Average Inflation Targeting (AIT) as a way to allow inflation to run above their target of 2.0% for a period if it had been below that level for too long.  We all know how well that worked out and, in fact, we are all still paying for their mistakes every day!  The word is they are going to scrap AIT although it is not clear what they will come up with next.  It is exercises like this that foment the ‘end the Fed’ calls from a growing group of monetarist economists and pundits.

At any rate, comments from other Fed speakers indicate that most are not yet ready to cut rates, so Powell will be able to have a significant impact if he turns more dovish.  But we have to wait a few more hours for that so let’s turn our attention elsewhere.

Germany GDP data (-0.3% Q/Q, +0.2% Y/Y) was a few ticks lower than expected and continues to point to an economy that has no positive momentum at all.  In fact, a look at the quarterly GDP data from Germany paints a pretty awful picture if growing your economy is the goal.

Source: tradingeconomics.com

Clearly, the US tariff changes have been quite negative, but in fairness, Germany’s insane energy policy is likely a much bigger driver of their problems as they have the most expensive power costs in the EU.  It is very difficult to have a manufacturing-based economy if you cannot power it cheaply.  Again, while the euro is more than just Germany, this does not bode well for the single currency.

Turning to Japan, inflation continues to run far above their 2.0% target, printing last night at 3.1% on both the headline and core metrics, which while 2 ticks lower than June’s data, was still a tick higher than expected.  It has now been 40 consecutive months that core CPI in Japan has been above the BOJ’s 2.0% target and Ueda-san continues to twiddle his thumbs regarding raising rates.

Source: tradingeconomics.com

It is very hard to watch this lack of policy response to a clear problem, that from all I read is becoming a much bigger political issue for PM Ishiba, and have confidence that the yen is going to strengthen any time soon.  Back in May, the talk was of the unwinding of the carry trade.  All indications now are that it is being put back on in significant size.  FWIW I think we will see 150.00 before too long, especially if Powell sounds hawkish.

And those are really the stories today ahead of Powell and the NY open.  So, let’s see how things behaved overnight.  After a modest down day in the US yesterday, and despite the poor inflation data, Japan was unchanged overall.  However, China (+2.1%) had a huge up move apparently on the idea that US-China trade tensions are easing and despite continued weak data from the country.  Apparently, there has been a rotation from bonds to stocks by local investors driving the move.  Hong Kong (+0.9%) also had a strong session as did Korea (+1.0%) although India, Taiwan and Australia all struggled with declines between -0.6% and -1.0%.  In Europe, the. screens are green, but it is a pale green with muted gains (DAX +0.1%, CAC +0.25%, IBEX +0.4%) despite the weak German data.  Perhaps the belief is this will encourage the ECB to ease policy further.  Meanwhile, at this hour (7:15) US futures are pointing higher by 0.25% or so.

In the bond market, after climbing a few basis points yesterday, Treasury yields are unchanged, trading at 4.33%, so still range bound.  European sovereign yields are softer by -1bp to -2bps, again likely on the softer German data with hopes for a more aggressive ECB.  JGB yields edged higher by 1bp in the 10-year but the longer end of the curve there has seen yields move to new all-time highs with 30-year yields up to 3.216%. it feels like things are starting to unravel in Japanese bond markets.

Turning to commodities, oil (+0.4%) is creeping higher again this morning but remains in its downtrend and activity is lacking.  Meanwhile, the metals markets (Au -0.35%, Ag -0.5%, Cu -0.3%) are all under pressure from a combination of a strong dollar and a lack of investor interest, at least in the West.

Speaking of the dollar, it rallied yesterday and is largely continuing this morning with one notable exception, KRW (+0.75%) which benefitted from trade data showing exports rose 7.6% in the first 20 days of the month on strong semiconductor sales.  But otherwise, +/-0.3% or less is the story of the day, with most currencies within 0.1% of yesterday’s closing levels.

And that’s really it.  There is no data so we are all awaiting Powell and then anything that may come from the White House regarding trade deals, or peace, I guess.  As the summer comes to a close, unless Powell says rate hikes are coming or promises cuts, I expect that traders will have gone for the weekend by lunch time and it will be a very quiet market.

Good luck and good weekend

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All Its Sophists

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The art of the deal
Tokyo and Washington
Birds of a feather

 

Seemingly, the biggest news story of the evening was the trade agreement between the US and Japan, where reciprocal tariffs have been set at 15%, including on Japanese autos, and Japan has pledged to invest $550 billion in the US, which I assume is from private corporations although that was not specified.  However, they did explain that one of the investments would be Alaskan North Slope natural gas liquification, a project that has been on the boards for more than 20 years.  Thus far, this seems like a big win and major milestone in President Trump’s trade strategy as it also opened Japanese markets to American products, including rice which had been a key sticking point.

The market response was as might be expected with the Nikkei (+3.5%) rallying sharply and taking virtually every regional Asian market higher for the ride as the conclusion of a deal in the preferred timeline was seen as a precursor to others falling in line.  It is quite interesting that this happened so shortly after PM Ishiba’s election disaster on Sunday, but perhaps that was his motivation.  He needed a big win and conceding on some points to get a deal was much preferred to holding out and getting nothing.  However, JGB markets saw things differently as a very weak 40-year JGB auction (lowest bid-to-cover ratio of 2.127 since 2011) led to long-dated yields rising between 8bps and 10bps last night, with the 10-year yield trading back to the highs seen in late March.

Source: tradingeconomics.com

While the stock market was giddy, apparently the only discussion in the bond market was whether Ishiba-san would be forced to resign, leaving Japan with a leadership vacuum.  Meanwhile, the yen (+0.3%) did very little overnight although it has been creeping higher since the election results.  My sense is Japanese investors are cautiously heading home, but I would not look for a major move lower in USDJPY, rather the current gradual pace makes sense.

A juxtaposition exists
Twixt Europe with all its sophists
And stolid Japan
Who finished their plan
On trade despite recent vote twists

As trade continues to be the topic du jour, it is no surprise that the chatter out of European capitals is that they will fight to get the best trade deal possible.  (I cannot help but laugh at Friedrich Merz saying, if they [the US] want war, we will give them a war).  However, it is also no surprise that markets have looked at the Japanese deal and increased the pressure on EU negotiators to achieve a solution by the end of the month.  First off, every European official wants to go on holiday in August, so they will want to have completed things.  But secondly, equity investors have taken the fact that deals with major counterparties can be accomplished as a sign that the EU is next.  And if they do not agree terms, it will be a double whammy of political and financial problems as you can be certain that the equity gains we are seeing today and have been steady so far this year (see below), will likely reverse on a failure to agree.

                                                                                     Today        1 Week        1 Month          YTD

Source: tradingeconomics.com

But, away from the trade story, and various political stories in the US that are unlikely to have any immediate impact on markets, that’s kind of all there is to discuss.  The Fed meets next week and there is no expectation of a rate move.  The ECB meets tomorrow and there is no expectation of a rate move.  Important data is scarce on the ground and the focus on crypto and meme stocks continues.  In fact, this is likely the best descriptor of a market that has abundant liquidity and shoots down the case for cutting rates at all.  In the meantime, let’s look at how other markets behaved overnight.

You will not be surprised that US equity futures are all pointing higher this morning, and we have already discussed the rest of the equity markets around the globe.  In the bond markets, after declining yesterday, yields have stabilized this morning (Treasuries +1bp, Bunds +1bp, OATs +1bp) although UK Gilt yields (+5bps) have underperformed as there continue to be concerns over the fiscal picture in the UK as well as questions about PM Starmer’s ability to stay in his seat.  In fact, UK 10-year yields are the highest in the developed world right now, and while they have been knocking back and forth for a few months, show no sign of falling regardless of the BOE’s future actions.

In the commodity space, oil (-0.7%) has been slipping back to the bottom of its post 12-day war range amid lackluster overall activity.  Just as there didn’t seem to be an obvious driver when oil rallied to $68/bbl, too there is no clear driver of the recent decline.  I continue to believe this is market internals rather than macro fundamentals.  In the metals markets, after a major rally yesterday across the board, gold (-0.25%) is consolidating but silver (+0.1%) is pushing within spitting distance of a major milestone, $40/oz, while copper (+1.2%) sees the benefits of the trade deal and is rallying nicely.

Finally, the dollar is mixed this morning.  While the yen is firming and the effects of the trade deal seem to be helping Aussie (+0.6) and Kiwi (+0.75%), the euro and pound are both little changed.  in fact, the rest of the G10 is +/- 0.1% on the day, so nothing at all happening.  In the EMG bloc, KRW (+0.3%) is the biggest mover with every other currency across regions +/- 0.15% or less and showing no signs of a trend right now.  Broadly, the dollar appears to be in a downtrend, but short dollars is one of the most crowded trades in the hedge fund and CTA communities, and that gets expensive given US funding costs are higher than pretty much everybody else’s right now.  Depending on how you draw your trend line (and I am no market technician), it appears that the dollar broke above that line and is now getting set to retest it.  I would not be surprised to see a more substantial bounce on the next move.

Source: tradingeconomics.com

And that is really all there is today.  This morning’s data consists of Existing Home Sales (exp 4.01M) and EIA oil inventories with a small draw expected.  The Fed is in their quiet period so no speakers which means that all eyes will, once again, turn toward the White House to see who has the right squares on their bingo card.

Good luck

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Flat On His Face

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Poor Ishiba-san
Started with so much promise
Fell flat on his face

 

In what cannot be a major surprise in the current political zeitgeist, a fringe party that focused all its attention on inflation and immigration (where have we heard that before?) called Sanseito, captured 12 seats, enough to prevent Ishiba-san’s coalition of the LDP and Komeito from maintaining control of the Upper House of Parliament there.  The electoral loss has increased pressure on PM Ishiba with many questioning his ability to maintain his status for any extended length of time.  While he is adamant that he is going to continue in the role, and that he is fighting the good fight for Japan with respect to trade talks with the US, it appears that the population has been far more focused on the cost of living, which continues to rise, and the increase in foreign visitors in the nation.  Sanseito describe themselves as a “Japan First” party.

Consider, for a moment, the cost of living in Japan.  For the 30 years up until 2022, as you can see from the chart below taken from FRED data, the average annual CPI was 0.44%.  

In fact, the imperative for Japanese monetary policy was to end the decades of deflation as it was deemed a tremendous drag on the economy.  This was the genesis of their Negative Interest rate policy as well as their massive QE program, which went far beyond JGBs into equities and ETFs.  Now, while the economists and politicians hated deflation, it wasn’t such a bad thing for the folks who lived there.  Think of your life if prices for stuff that you consume rose less than 1% a year for 20-30 years.  

But now, under the guise of, be careful what you wish for, you just may get it, the Japanese government has been successful in raising the nation’s inflation rate to their 2.0% target and beyond and have shown no ability to halt the process.  After all, the Japanese overnight rate remains at 0.50% leaving real rates significantly negative, which is no way to fight inflation.   So, while Ishiba-san explained to the electorate that he was defending Japan’s pride and industry, the voters said, we want prices to stop rising.  

The biggest problem for Japan is that they now have less than 2 weeks to conclude a trade deal with the US based on the latest timeline, and their government is weak with no mandate on trade.  It is not impossible that Japan caves on most issues because if they fight, given the government’s current status, it could be a lot worse.

Now, Friday, when I discussed this possibility, I made that case that if the LDP lost the Upper House majority, it would be a distinct negative for both the yen and the JGB market.  Well, as you can see in the chart below, the first call has thus far been wrong with the USDJPY falling a full yen right away, and after an initial bounce, it has resumed that downtrend.  Like the dollar’s strength when the GFC exploded in 2008, despite the fact that the US was the epicenter of the problem, it appears that Japanese investors are bringing more money home as concern over the future increases.  Over time, I expect that the yen is likely to weaken, but I guess not yet.

Source: tradingeconomics.com

As to JGBs, Japan was on holiday last night, celebrating Sea Day, so there was no market in Tokyo.  While there is a JGB futures market, there was very little activity, and we will need to wait until this evening to learn their fate. 

The deadline for trade talks is looming
And Europe, responses, are grooming
If talks fall apart
And cut to the heart
Of what people there are consuming

The other story that is getting discussed this morning is the fast-approaching trade talk deadline of August 1st.  The EU has been actively negotiating to achieve a deal and there appears to be a decent chance that something will be concluded.  However, this morning’s stories are all about how Europe is preparing a dramatic response (“if they want war, they’ll get war” according to German Chancellor Merz) if they cannot reach a deal and the US imposes much higher tariffs on EU exports.  It is actually quite amusing to see the framing of Europe as the righteous entity being unfairly treated and forced to create a response to the American bullies.  But, that is the message from the WSJ and Bloomberg, and I’m sure from the other news sources that I don’t follow.

Every time I consider the trade situation, and the speed with which President Trump is working to conclude deals, I am amazed at how quickly this is all coming about.  Consider that the Doha Development Round of trade talks was launched in 2001 and IS STILL ONGOING with no resolution yet.  The previous framework, the Uruguay Round took 8 years to complete.  Thus, perhaps the question should be, why have trade talks taken so long in the past.  Much has been made of how President Trump blinked when the original 90-day window closed and so extended the timeline for a few weeks.  Apparently, the use of more sticks and fewer carrots is what has been needed to get these things moving along.  Otherwise, trade negotiators had cushy jobs with no accountability and no responsibility, so no incentive to come to an agreement.

Many analysts have explained that the US will suffer from these deals as inflation will rise because of tariffs and growth will slow.  Of course, these were the same analysts who explained that tariffs by the US would result in other nations’ currencies weakening to offset the tariff.  Once again, I would highlight that old analyst models are not fit for purpose in the current world situation.  I have no idea if there will be a successful conclusion of these deals, but I won’t bet against that outcome.  In the end, as I have repeatedly explained, the US has been the consumer of last resort for nations around the world, and loss of access to the US market is a major problem for everybody else.  That is a very large incentive to agree to deals.

Ok, enough, let’s see how things look this morning.  Tokyo was closed last night but we saw gains in Hong Kong (+0.7%) and China (+0.7%) as the PBOC maintained its policy ease supporting the economy.  In fact, Chinese money supply has been growing recently which should help the economy there, although it is still struggling a bit.  The rest of the region was a mixed bag with some gainers (Korea, India, Indonesia) and some laggards (Taiwan, Australia, Malaysia).  In Europe this morning, equities are under some pressure with the CAC (-0.5%) the laggard, although all bourses are lower.  This appears to be trade related with some concerns things won’t work out.  As to US futures, at this hour (7:05), they are pointing higher by about 0.25%.

In the bond market, yields are falling everywhere with Treasuries (-4bps) lagging the continent where European sovereigns have all seen 10-year yields decline by -6bps to -7bps.  It seems that there is growing hope the ECB will cut rates this Thursday, although according to the ECB’s own Watch Tool, the probability is just 2.7% of that happening.  

In the commodity space, oil is unchanged this morning as the variety of stories around leave no clear directional driver.  However, remember, it has bounced off recent lows despite production increases, and if confidence in economic growth is returning, which it seems to be, then I suspect the demand story will improve.  Meanwhile, metals markets (Au +0.65%, Ag +0.89%, Cu +1.1%, Pt +1.2%) are all having a good morning as a combination of dollar weakness and better economic sentiment are supporting the space.

As to the dollar, it is broadly lower against all its major counterparties apart from NOK (-0.2%) and INR (-0.2%) as NY walks in the door.  While the yen has been the biggest mover, the rest of the world has seen gains on the order of 0.35% or so uniformly.  The INR story apparently revolves around the trade talks with the US and concerns they may not be completed on time, but looking at the krone, after a strong rally last week following oil’s recovery, this morning looks like a bit of profit-taking there.

On the data front, there is very little coming out this week amid the summer holidays.

TodayLeading Indicators-0.2%
WednesdayExisting Home Sales4.01M
ThursdayECB Rate Decision2.00% (no change)
 Initial Claims228K
 Continuing Claims1952K
 Flash PMI Manufacturing52.5
 Flash PMI Services53.0
 New Home Sales650K
FridayDurable Goods-10.5%
 -ex Transport0.1%

Source: tradingeconomics.com

In addition to this limited calendar, it appears the FOMC is on vacation with only two speakers, Chairman Powell tomorrow morning and Governor Bowman tomorrow afternoon.  It is hard to get too excited about much in the way of market movement today.  As has been the case for the past six months, we are all awaiting the next White House Bingo call, as that is what is driving things for now.

Good luck

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Not Crashing

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The data was pretty darn good
And so, it must be understood
The world is not crashing
Though some things are flashing
Red signs, where recession’s a ‘could’

 

A review of yesterday’s economic data shows that Retail Sales were stronger than expected on every metric and subcomponent, Import Prices rose a scant 0.1%, the Philly Fed Index was much stronger than expected and Jobless Claims fell on both an Initial and Continuing basis.  In truth, it was a sweep of positive economic news.  As such, we cannot be surprised that equity markets responded positively, as did the dollar, while bonds held their ground, given the lack of inflationary signals.  But if we look at the movements in markets, they remain very modest overall.  Sure, the S&P 500 made a new high, by 2 points, but if you look at the chart below, since July 3rd, the rally has been 26 points, or 0.4%.  This is hardly the stuff of excitement.

Source: tradingecononmics.com

Of course, this did not stop the pundits who are calling for recession to highlight any negative subtext, nor did it prevent Fed Governor Waller from claiming that a rate cut in July was appropriate because the labor market is on the edge.  But the naysayers find themselves with diminishing attention these days as market price action has been quite positive.  In fact, most markets have shown similar behavior.  Whether gold or oil or other equity indices or bonds, we have been in a narrow range for a while now and it is not clear what it will take to break us out.  But here’s one thought…

On Sunday, Japan
Will vote for their Upper House
Is there change afoot?

While market insiders will discuss today’s options’ expirations as the key driver of things in the short-term, I think we need turn our eyes Eastward to Japan’s Upper House elections this Sunday.  PM Ishiba’s LDP-Komeito coalition is already in a minority status in the more powerful Lower House, a key reason why so little has been accomplished there.  But at least he had a majority in the Upper House to rubber stamp anything that was enacted.  However, signs are pointing to the LDP losing their majority in the Upper House which could well lead to Ishiba getting forced out.

Now, why does this matter to the rest of us?  There is a case to be made that flows in the JGB market are an important driver of global bond flows, including Treasuries.  For instance, Japan is the second largest net creditor nation with about $3.73 trillion invested abroad (according to Grok), much of which is Japanese insurance companies searching for higher yields than have been available there for the past decades. You may remember back in May, when there was a spike in long-dated JGB yields as all maturities from 20 years on out reached new historic highs (see below chart), well above 3.0%. 

Source: tradingeconomics.com’

Now, consider if you were a Japanese life insurer looking to match your assets to your liabilities.  Historically, buying Treasury bonds, with their much higher yield, was the place to be, especially over the past several years when the yen weakened, adding to your JPY gains.  However, that is still a risky trade, and hedging the FX risk is expensive given the yield differential between the US and Japan.  (Hedgers need to sell USD forward and the FX points reduce the effective exchange rate and by extension the benefits of the higher bond yields.)

But now, for the first time ever, JGB yields are above 3.0%, and that can be earned by a Japanese life insurer with zero FX risk, a very attractive proposition.  In fact, Bloomberg has an article this morning discussing just such a situation with one of the larger insurers, Fukoku Life.

Circling back to the election, it appears that the key issues are the rising cost of living and what the government is going to do about it.  Apparently, there are two approaches; the LDP is talking about giving out cash bribes grants of ¥20,000 to individuals while the opposition is talking about reducing consumption taxes on necessities like food.  However, in either case, the reality is that fiscal policy would loosen further with the MOF needing to issue yet more JGBs to make up for either the increased outlays or reduced income.  Add to that the uncertainty over future Japanese policy if the LDP loses its majority, and the pressure from the US regarding tariff negotiations and suddenly, it makes a lot more sense that the knock-on effects of this election can be substantial, at least with respect to the global bond markets and the USDJPY exchange rate.  (It must be said that Japanese inflation data last night actually fell to 3.3%, but that was due entirely to declining oil prices as fresh food prices, the big issue there, continue to rise.)

An election outcome that weakens PM Ishiba, potentially leading to a fall of his government and new elections in the Lower House, would be a distinct negative for the yen, and likely for the JGB market.  The impact would be felt in global bond markets as yields in the back end would almost certainly rise everywhere around the world.  This is not to imply that yields would rise by 100bps or more, but rather that the current trend of rising long-dated yields would continue for the foreseeable future.  And that will make things tough on every government.

Ok, sorry, I went on a bit long there.  A quick turn through markets shows that other than Japan (-0.2%) Asian equity indices were mostly nicely in the green following the US lead with the biggest winners Australia (+1.4%), Hong Kong (+1.3%) and Taiwan (+1.2%).  Meanwhile, in Europe this morning, while green is the color, the movement has been miniscule, averaging about 0.1% gains.  And US futures are also modestly higher at this hour (7:00) about 0.15% across the board.

In the bond market, Treasury yields have edged lower by -2bps but European sovereign yields are all higher by 2bps across the board.  The talk in Europe is over concerns regarding the conclusion of a trade deal with the US, where concerns are growing nothing will be achieved by the end of the month.

In the commodity markets, oil (+1.3%) is continuing its rebound, perhaps on the beginnings of a belief that the economy is not going to crater in the US.  Certainly, yesterday’s data was positive.  As to the metals markets, they are in fine fettle this morning with both gold (+0.4%) and silver (+0.4%) trading back to the middle of their trading ranges and copper (+1.3%) pushing back toward its recent all-time highs.

Finally, the dollar is under pressure this morning, sliding against the euro (+0.25%), pound (+0.2%) and AUD (+0.4%).  But the real movement has been in the commodity space where NOK (+0.8%) and ZAR (+0.7%) are both having solid days.  There continues to be a great deal of discussion regarding President Trump’s desire to fire Chairman Powell with a multitude of articles describing how that would be the end of the world as we know it because the Fed cherishes their “independence”.  Let’s not have that discussion.

On the data front, this morning brings Housing Starts (exp 1.3M) and Building Permits (1.39M) and then Michigan Sentiment (61.5) at 10:00.  There are no Fed speakers on the slate for today although Governor Kugler, not surprisingly, explained that waiting was the right call for the Fed when she spoke yesterday.  

It is a Friday in the summer with relatively unimportant data.  Absent another surprise from the White House Bingo card, I expect a quiet session overall as most traders and investors leave the office early for the weekend.  The dollar’s biggest risk is the Fed does cut early, but if the data keeps cooperating, it will be much harder for dollar bears, especially since so many are already short, to sell it aggressively from here.

Good luck and good weekend

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A Reprieve

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Some nations have gained a reprieve
About a month left to achieve
A deal to prevent
The extra percent
Of tariffs that Trump can conceive

 

The news cycle continues to be bereft of new stories regarding finance and markets as there is continued focus on the tragedy in Texas after the flash floods that were responsible for over 100 deaths.  But in our little corner of the world, tariff redux is all we have.  So, to rehash, today marks 90 days since President Trump delayed the imposition of his Liberation Day tariffs back in April with the idea of negotiating many new trade deals.  Thus far, only two have been agreed, the UK and Vietnam, while there has clearly been progress made on several key deals including Japan, South Korea, the EU, India and Australia.  As such, the president has delayed the imposition of these tariffs now to August 1st, but we shall see what happens then.

It is worth noting that trade negotiations historically have taken a very long time, years if not decades, as evidenced by the fact that any time an agreement is reached, it is met with dramatic fanfare on both sides of the deal.  Consider, for a moment, that the EU and MERCOSUR finally agreed terms in 2024, after 25 years of negotiations, although the deal has not yet been ratified by both sides.  With this in mind, it is remarkable that as much ground has been covered in this short period of time as it has.

However, if I understand correctly, many other nations will be subject to tariffs starting today.  Of course, along with these tariffs are the resumed calls for a catastrophic outcome for the US with inflation now set to advance sharply while growth stagnates.  At least the naysayers are consistent.

Away from this story, though, the market is the very picture of the summer doldrums.  After all, nothing else has really changed.  The BBB solved the debt ceiling issue, with another $5 trillion added to the mix, so funding the government should not be a problem for several years at least.  Of course, this means the monetary hawks will re-emerge and complain that the government is spending too much (which it clearly is) and that the economy will collapse under the weight of all that debt.  After all, one needs a calamity to get one’s views aired these days, and doomporn is all the rage with President Trump in office.

So, I won’t waste any more time before heading into the market recap.  Yesterday’s US equity decline, catalyzed by the display of letters written to Japan and South Korea about the imposition of 25% tariffs, was halted after the delay was announced, but the markets still closed lower.  Overnight, Asian markets managed to rally a bit with the Nikkei (+0.3%) the laggard while Korea (+1.8%) really benefitted from that delay.  Meanwhile, China (+0.8%) and Hong Kong (+1.1%) were also solid as was most of the region although Thailand (-0.7%) which did not receive a reprieve, did suffer.

In Europe, the picture is somewhat mixed with the DAX (+0.45%) rising after a slightly wider than expected trade surplus was reported this morning while the CAC (-0.1%) has been under modest pressure after the French trade deficit rose slightly.  But the bulk of the market here is modestly higher on the reprieve concept, although only about 0.2%.  As to US futures, at this hour (7:05), they are basically unchanged to slightly higher.

In the bond market, though, yields continue to rise around the world this morning as it appears investors are growing somewhat concerned that all the government spending that is being enacted around the world is becoming a concern.  Treasury yields have risen 3bps and European sovereigns are higher by between 4bps and 5bps.  JGB yields, too, are higher by 4bps and in Australia, an 8bp rise was seen after the RBA failed to cut their base rate last night as widely expected.  Since the beginning of the month, 10-year Treasury yields have risen by more than 20 basis points (as per the chart below) a sign that there may be concern over excess supply…or that the BBB is going to encourage faster growth.  I’m not willing to opine yet.

Source: tradingeconomics.com

In the commodity markets, oil (-0.3%) has been trading in a $4/bbl range since the end of the 12-Day War and the US destruction of Iranian nuclear facilities removed the war premium from the market.  In truth, this is surprising given the ongoing increases in production from OPEC+ and the widespread belief that the economy is suffering and heading into a recession.  But it is difficult to look at the below chart and be confident of the next move in either direction.

Source: tradingeconomics.com

Meanwhile, metals markets this morning show gold (-0.35%) giving back some of its late day gains yesterday while silver and copper remain little changed.  Again, range trading defines the price action as gold has basically gone nowhere since late April.

Source: tradingeconomics.com

Finally, the dollar is mixed this morning with AUD (+0.6%) the leading gainer after the RBA no-action outcome, although ZAR (+0.6%) has gained a similar amount which appears to have been driven by Trump rescinding his threat to add a 10% additional tariff on all BRICS nations (the S is South Africa) that seek to avoid using the dollar for trade.  On the other side of the coin, the pound (-0.3%) and yen (-0.4%) are both slipping this morning with the former suffering from domestic finance problems as the Starmer government continues to flail in its efforts to pay for its promised spending.  In Japan, the Upper House elections, which are to be held July 20th, are a problem for PM Ishiba and his minority government.  One of the key issues is despite the fact that rice prices there have risen more than 100% in the past year, and the US is keen to export rice to Japan to help mitigate the problem, the farmers bloc in Japanese politics has outsized influence and is vehemently against the proposal.  If the government falls due to election losses, agreeing a trade deal will be impossible.  Perhaps this time, the yen will weaken in the wake of tariffs.  (As an aside, are any of you old enough to remember the death of the carry trade and how the yen was going to explode higher?  I seem to recall that was a strong narrative just a few months ago, but it is certainly not evident now.)

On the data front, the NFIB Survey was released this morning at 98.6, a tick lower than expected and 2 ticks lower than last month, but basically little changed.  I don’t think it provides much new information.  Later this afternoon we see Consumer Credit (exp $11.0B), potentially a harbinger of future spending outcomes.  But really, that’s it.

Headline bingo continues to drive markets with the narratives locked in place.  The dollar’s trend is clearly lower, but it remains to be seen if the oft-predicted collapse is on the cards.  Personally, while a bit further weakness seems reasonable, getting short here, with the market already significantly positioned that way, does not feel like the right trade.

Good luck

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Mind-Numbing

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According to those in the know
The BBB’s ready to go
The vote is this morning
So, this is your warning
That President Trump will soon crow
 
As well, ere the Fourth of July
The NFP may quantify
If rate cuts are coming
(A subject, mind-numbing)
Or whether Fed funds will stay high

 

Perhaps this will be the last day we hear about the Big Beautiful Bill, or at least the last day it leads the news, as it appears that by the time you read this, the House will have voted on the changes and by all accounts it is set to pass.  If so, the President will sign it tomorrow amidst great fanfare and then it will just be a secondary story when somebody complains about something that was in the bill.  However, the drama over passage will have finally ended.  

(I guess what has really led the news was that Diddy was found not guilty of the RICO charges and Kohburger in Idaho got a plea deal avoiding the death penalty, but neither of those are market related.)

At any rate, the question now to be asked is will the BBB perform as advertised by either side of the aisle?  Experience tells us that while the economy will not take off rapidly while inflation collpases, neither will there be people dropping in the streets because of the changes in Medicare, although if you listened to the pundits on both sides of the aisle, that is what you might expect.  While this is not quite as bad as Nancy Pelosi’s immortal words, “we have to pass the bill to find out what’s inside it”, the fact that it approaches 1000 pages in length implies there is a lot inside it.

From what I have read, and it has not been extensive, it appears that there is some stimulus in the bill in the form of tax relief on tips and overtime as well as reductions for seniors, and spending on defense and the border.  It also appears there have been several previous subsidies, notably for wind and solar, that are being removed.  The fact that the CBO is claiming it will increase the budget deficit by $1.5 trillion, and given the fact that Jim Cramer is the only one with a worse track record than the CBO, tells me it will have limited impact on the nation’s fiscal stance initially, although if growth does pick up, that will clearly help things.

Which takes us to the other story this morning, the payroll report.  Here are the current median forecasts by economists for the results, as well as the rest of the data to be released:

Nonfarm Payrolls110K
Private Payrolls105K
Manufacturing Payrolls-5K
Unemployment Rate4.3%
Average Hourly Earnings0.3% (3.9% Y/Y)
Average Weekly Hours34.3
Participation Rate62.3%
Initial Claims240K
Continuing Claims1960K
ISM Services50.5
Factory Orders8.2%
-ex Transport0.9%

Source: tradingeconomics.com

Some will point to yesterday’s ADP Employment report which showed a decline of -33K, the first decline in more than 2 years, as a harbinger of a bad number, but as you can see from the chart below, there has been a pretty big difference between ADP (grey bars) and NFP (blue bars) for a while now.

Source: tradingeconomics.com

Perhaps of more concern is the Unemployment Rate, which is forecast to rise a tick to 4.3%, which would be its highest print since October 2021 and if I look at the chart below, it is not hard to see a very gradual trend rising higher here.  While markets really focus on NFP, I learned a long time ago from a very smart economist, Larry Kantor, that the Unemployment Rate was the best single indicator of economic activity in the US, and that when it is rising, that bodes ill for the future.  

Source: tradingeconomics.com

You may recall there was a great deal of discussion about a year ago regarding the Sahm Rule, which hypothesized that when the Unemployment Rate rose more than 0.5% above its cycle average within 12 months, the US was already in a recession.  The discussion centered on whether it had been triggered although the final claim was it hadn’t when extending the readings out to the second decimal place.  Now, for the past year, the Unemployment Rate has hovered between 3.9% and 4.2%, so there doesn’t seem to be any chance of a trigger here, although if it does rise, you can be sure you will hear about it.

And that’s what is on tap ahead of the long holiday weekend.  With that in mind, let’s look at the market action overnight. Excitement is clearly lacking in the equity markets these days as the summer doldrums are universal.  Yesterday’s new closing highs in the S&P 500 seem like they should be exciting but were anything but amid low volume.  As to Asia, Japan was flat, China (+0.6%) and Hong Kong (-0.6%) offset each other and in the rest of the region, other than Korea (+1.3%) which is starting to see a steady stream of foreign investment on the premise that the country is set to improve the regulatory structure for equities there, things were +/- a bit.

Meanwhile, in Europe, there is little net movement on the continent but the UK (+0.4%) is bouncing off recent lows after PM Starmer reiterated his support for Chancellor Reeves.  A story I missed yesterday was that when she was trying to make a case in parliament for spending cuts, the back bench liberals revolted, literally bringing her to tears.  The market response was that the UK would blow up its fiscal situation which saw Gilts tumble and yields rise 15bps yesterday at one point, while stocks fell.  But that problem has been addressed for now.  However, looking at the statement Starmer made, it reminded me of a baseball GM’s comments supporting his manager right before he fires him.

In the bond market, yields are declining, led by Gilts (-9bps) which are retracing yesterday’s gains on the above story.  But Treasury yields are down (-2bps) and European sovereigns are all seeing yields lower by between -4bps and -5bps.  In Japan, JGB yields are unchanged as PM Ishiba grapples with a trade deal where the US is keen to be able to export rice to the nation and Japan has a rice shortage with prices rising sharply but doesn’t want to accept imports.  Go figure.

In the commodity markets, oil (-0.2%) is slipping slightly after a solid rally over the past seven sessions where it rose over $3.50/bbl.  Gold (-0.3%) continues to trade around its pivot level of $3350/oz while silver (+1.0%) continues its longer run rally.

Finally, the dollar, which fell during yesterday’s session after I wrote, is effectively unchanged net this morning ahead of the data with very modest moves of +/-0.2% or less almost universal.  KRW (+0.4%) is the outlier here and based on equity inflows discussed above, that makes sense.

So, that’s where we stand heading into the payroll report and the long weekend.  If pressed on the NFP outcome, I expect a weak outcome, 50K or so, as the birth/death model continues to be revised.  But remember, the error bars on this number are huge.  However, if it is weak, look for the probability of a July rate cut (currently 25.3%) to rise and the equity market to follow that higher.  As to the dollar, I think for now, lower is still the trend.

Good luck and have a wonderful long weekend

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Not Persuaded

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As tariff concerns are digested
By markets, Chair Powell’s been tested
Is cutting the move
They need to improve?
Or are they, to tightness, still vested
 
It sounds as though he’s not persuaded
A rate cut will soon be paraded
But markets still price
He’ll be cutting thrice
It could be that view should be fade

 

Perusing the WSJ this morning, I stumbled across the following article, “What the Weak Dollar Means for the Global Economy” and couldn’t help but chuckle.  It was not that long ago when the punditry was complaining about the strong dollar as a problem for the global economy.  The current thesis is that the weakening dollar will make foreign exports to the US more expensive, on top of the tariffs, and will reduce the number of US tourists traveling abroad.  Foreign companies will also suffer as they translate their US sales into their respective local currencies, negatively impacting their earnings.  A moment as I shed a tear.

Of course, when the dollar was strong, the concern for the global economy was that it was increasingly expensive in local currency terms to obtain the dollars necessary to service the massive amounts of USD debt that foreign companies and nations have issued, thus reducing their ability to spend money on other things to drive their domestic economy.

As they say, you can’t have it both ways.  While there is no doubt the dollar’s decline this year has been swift, it is important to remember we are nowhere near an extremely weak dollar.  As you can see from the below chart, the euro was trading near 1.60 back in 2008 and as high as 1.38 even in 2014.  When looking at today’s price of 1.1375, it is hard to feel overly concerned.

Source: finance.yahoo.com

As it happens, this morning the single currency has slipped back -0.3% from yesterday’s levels.  The dollar’s future remains highly uncertain given the potential policy changes that may unfold as the tariff situation becomes clearer.  Which leads us to the Fed.

For the first time in many weeks, the Fed became a topic of conversation for the market when Chairman Powell spoke to the Economic Club of Chicago.  “Our obligation is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem,” Powell explained.  “We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension. If that were to occur, we would consider how far the economy is from each goal, and the potentially different time horizons over which those respective gaps would be anticipated to close.”  

Let me start by saying, the Fed’s track record in anticipating economic outcomes is not stellar.  Equity markets were not encouraged by these comments and sold off during the discussion, although they retraced some of those losses before the end of the session.  At the same time, the Fed funds futures market, while having reduced the probability of a rate cut next month to just 15%, continues to price 88bps of cuts into the market by the December meeting.  Assuming there is no cut in May, that leaves five meetings for between three and four cuts.  Based on Powell’s comments, that seems like aggressive market pricing.

It appears that there is a growing belief that a recession is on its way and that will both reduce inflationary pressures and force allow the Fed to start to reduce rates further.  Of course, there are those, Powell included, who seem to believe that stagflation is a strong possibility.  If that were the case, especially given Powell’s new-found belief that price stability matters, and his clear distaste for the president, my sense is they will focus on inflation not growth if financial conditions (aka bond markets) remain in good shape.  Will the dollar continue to decline under that scenario?  That is a very tough call as a US recession would almost certainly spread globally, and other central banks will likely ease policy.  If the Fed stands pat amidst a global reduction in interest rates, I don’t see the dollar declining.  If for no other reason, the cost of carrying short dollar positions would become too prohibitive.

As usual, the future remains quite cloudy.  Cases can be made for Fed cuts, and against them.  Cases can be made for dollar weakness and dollar strength.  Arguably, the biggest unknown is how the trade talks are going to resolve.  Yesterday, President Trump explained that “big progress” has been made on the Japanese tariff talks.  If Trump is successful in creating a coalition of nations that have closer trade relations with lower tariffs, I expect that would be taken quite positively by the markets.  On the other hand, if those talks fall apart, I expect equity markets to start the next leg lower, and that is a global phenomenon, while the dollar sinks further.  There is much yet to come.

Ok, let’s see how things played out overnight.  After yesterday’s US rout, Trump’s comments on trade talks with Japan clearly helped the market there as the Nikkei (+1.35%) rallied nicely as did the Hang Seng (+1.6%).  In fact, gains were widespread with Korea, India and Australia, to name three, all rising nicely.  Alas, Chinese shares did not participate, and Taiwan actually slipped a bit.  In Europe, investors await the ECB’s outcome this morning, where a 25bp cut is the median forecast, but there are those hinting at a 50bp cut to help moderate strength in the euro as well as support the economy given the tariff situation.  Remember, we have heard from a number of ECB members that they are confident inflation is heading back to their target.  Ahead of the news, shares are softer across the board with declines on the order of -0.5% to -0.8% throughout the continent and the UK.  Remember, too, their tariff talks are after Japan.  Interestingly, US futures are mixed with DJIA (-1.3%) the laggard while the other two are both higher about 0.5%.  It seems United Health shares have fallen enough to take the DJIA down with it.

In the bond market, Treasury yields have regained the 3bps they fell during yesterday’s US session, so are unchanged over two days.  We have also seen European sovereign yields climb between 2bps and 4bps, rising alongside Treasuries and JGB yields jumped 5bps, responding to confidence that the US-Japan trade dialog will be successful and support Japanese risk.

Despite all the reasons for oil to decline, including recession fears and continued pumping by pariahs like Iran and Venezuela, the black sticky stuff is higher by 1.1% this morning, its highest level in two weeks.  But as you can see in the chart below, there remains a huge gap to be filled more than $8/bbl higher than current prices.  It is difficult to see a significant rally on the horizon absent a major change in the supply situation.

Source: tradingeconomics.com

As to the metals markets, gold (-0.6%) blasted higher to another new high yesterday, above $3300/oz, and while it is backing off a bit today, shows no signs of stopping for now.  Both silver and copper rallied yesterday as well, and both are also falling back this morning (Ag -1.4%, Cu -2.1%).

Finally, the dollar is modestly firmer across the board this morning, with the DXY seeming to find 99.50 as a key trading pivot level.  In the G10, JPY (-0.45%) is the laggard along with CHF (-0.4%) while other currencies in the bloc have fallen around -0.2%.  The exception here is NOK (+0.3%) as it benefits from oil’s rebound.  In the EMG bloc, the dollar is mostly firmer, but most of the movement has been of the 0.3% variety, so especially given the overall decline in the dollar, this looks an awful lot like position adjustments ahead of the long weekend with no new trend to discern.

On the data front, yesterday’s Retail Sales was stronger than expected, and not just goods that were bought ahead of tariffs, but also services and dining out, which would seem less impacted.  This morning, we see a bunch of stuff as follows: Housing Starts (exp 1.42M), Building Permits (1.45M), Philly Fed (2.0), Initial Claims (225K) and Continuing Claims (1870K).  As long as the employment data continues to hold up, my take is the Fed will sit on the sidelines.  If that is the case, I sense we have found a new range for the dollar, 99/101 in the DXY and we will need a headline of note to break that.

As tomorrow is Good Friday and markets are essentially closed throughout Europe, as well as US exchanges, there will be no poetry.

Good luck and good weekend

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