Tag Archives: #JPY

All-Knowing

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The war in Iran’s getting hotter
With tankers now under the water
So, oil is climbing
Which right now is priming
A stock market starting to totter

Meanwhile, Scotty Bessent is crowing
Take care ‘bout the shade that you’re throwing
Now, I am the house
And while you may grouse
In markets, I now am all-knowing

Remember back at the end of July when the MOF/BOJ intervened in the FX markets and the US Treasury was ostensibly right alongside them, selling €13 billion vs. yen, give or take a nickel.  And then, for the next month, the yen behaved as it ordinarily does after an intervention, it slowly crawled lower (dollar higher) as per the chart below.

Source: tradingeconomics.com

So far, so normal.  But something changed a week ago as there has been another significant leg lower in the dollar with no sign of official activity.  The story at the time, which has been neither confirmed nor denied, was that the GPIF was moving funds back into Japan to the tune of several billion dollars’ worth, and that certainly fit the price action.  But that was a one-day event.  And yet, here we are this morning with USDJPY plumbing new lows for the move, more than 2% below levels reached last week.  Something else is happening.

Which brings us to Secretary Bessent.  Yesterday, speaking at an event at SMU in Dallas, he made the following comments, “I am the house now, so when we intervene with the Japanese yen, I have pretty good insight into what the Japanese, what the Bank of Japan is going to do, what Japanese policymakers are going to do.  And you can bet against me if you want.”   On the one hand, those are pretty arrogant comments to come from any politician, especially one who knows exactly the limits of power governments have when it comes to markets.  (Remember, he was instrumental in the trade that broke the pound back in 1992 and forced it out of the Exchange Rate Mechanism).  On the other hand, not only does he understand markets extremely well, he also has a setup where one of the key drivers of the market he is pushing against has been increasing leverage, and leverage is very fragile.  

If we look at futures positioning as our proxy, you can see in the below chart from cotsignal.com that there are still quite a few net short JPY futures positions, although those positions have been reduced over the past month.

Remember, too, when looking at currency futures positions, they represent a tiny fraction of the market, <1%, but they do offer directional views.  The point is that the net short JPY trade remains quite large, and if Japanese investors are truly starting to bring their money home, the yen can strengthen quite a bit further.  As an aside, while this may correlate with a sell-off in risk assets, it is important to understand that the causality in this case would be reversed, so yen strength would be the driver, not the risk-off response.  As I wrote yesterday, my take is 140-145 is a viable target, a level that would offer a solid adjustment without necessarily resulting in a major negative response in other risk assets.  We shall see.

Turning to oil (+2.3%), over the past two months, we have seen WTI rally from a low of $67.0/bbl to today’s price of $95.17/bbl, a 42% climb as per the below chart.

Source: tradingeconomics.com

Clearly things are not getting better in Iran, or Russia/Ukraine, but the former appears to be the proximate cause for this move.  Ostensibly, the US sank three Iranian oil tankers near Kharg Island after the Iranians fired ballistic missiles at two US warships.  The Iranians claimed they hit the ships, the US claimed they didn’t and that is what you would expect to hear.  I have no idea what is true, although it appears to be true that those tankers are sunk.

My two cents, if they are worth even that, is that Iran has decided that if it can force gasoline and diesel prices high enough ahead of the midterm elections, that can serve to weaken President Trump and his resolve in this war if the Republicans lose power.  Maybe yes, maybe no.  Today is the beginning of the Republican mid-term convention in Dallas, a new idea designed to excite the Republican base to get out and vote.  From what I have read, polls remain close in several key states where senatorial elections are going to take place, and both the House and Senate are up for grabs.  This will certainly be the main story for the next two months.

Which takes us to action in other markets.  Equities remain under pressure almost universally.  After yesterday’s weak US performance, Asia had a more subtle performance with only a few markets showing substantial strength (Korea +1.4%) or weakness (India -1.1%, Singapore -0.7%) while the rest of the region saw movement of just +/-0.2% or so.  However, the same cannot be said for Europe, where substantial declines are the order of the day (Spain -2.3%, France -1.7%, Germany -1.5%, UK -0.8%) as rising oil prices, Brent is over $100/bbl, have weighed heavily on profit prospects there.  Too, US futures at this hour (7:10) are pointing lower with declines on the order of -0.5% or so.

In fact, Europe is having a rough day overall as bond markets there are all under pressure as you can see in the below Bloomberg screenshot.

While the ECB is almost certain to hike rates tomorrow by 25bps, it appears bond investors in Europe are seeking a greater commitment to fight inflation.  Alas for Madame Lagarde, the fact that Eurozone growth is hovering just below 1% per annum makes it hard for the Keynesian view of how to fight inflation (raise rates) to help the economies there.  As to Treasury yields, they continue to creep higher, up 2bp this morning at 4.81% and the recent winner continues to be JGB markets, with the 10yr yield there slipping -1bp.  However, before we get too enamored of the JGB price action, a quick look at the chart for the past 6 months shows that we have seen this type of movement, a move higher with a several session retracement, at least eight times during this period.  It could be nothing more than ordinary trading here.

Source: tradingeconomics.com

Looking briefly at the metals markets, gold (+1.1%) is rallying this morning despite the rise in oil, a break from that recent negative correlation, and it is dragging silver (+0.9%) along for the ride.  Copper (-0.8%) however, is not playing the same game.

Finally, the dollar…well away from the yen, the dollar is doing nothing.  The DXY is still hovering either side of 99.0 and other than the yen’s move today, +0.3%, there are really no currencies that have moved more than 10 basis points in either direction.  Right now, FX is secondary except USDJPY.

On the data front, there are no releases and as we are in the Fed’s quiet period, there are no Fed comments on the calendar.  For now, markets are going to maintain their focus on Iran and oil prices and on the yen story.  Absent more headlines in either of those, I see no reason for major excitement today.  But remember, we do get CPI on Friday, so there is still something critical on the near horizon.

Good luck

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Da Bomb

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The payroll report was da bomb
But markets remained rather calm
So, what will it take
To get stocks to break?
If job growth leaves nary a qualm

Perhaps this week’s ‘flation report
Will frighten the risk averse sort
If prices jump higher
The bond market choir
Will trill for a hike, costs, to thwart

By now, you have heard about the blowout NFP report on Friday, where new jobs totaled 162K with revisions higher of the previous two months by an additional 55K.  This was massively above the expectations going in of 56K.  Perhaps even more surprising was the other survey, the Household survey from which the BLS calculates the Unemployment Rate.  While the rate was unchanged at 4.1%, employment (+569K) and the labor force (+683K) both rose sharply compared to recent reports, although it does appear this was a catch up from weaker earlier data.

In the end, the idea that the economy is slowing has lost some of its mojo.  This is evident in the Atlanta Fed’s GDPNow Q3 estimate as per below, where it is now tracking to 4.7% real GDP growth.

Similarly, the Fed funds futures market has rebounded to a 60% probability of a hike next week and another one by March of next year.

Personally, my take is that Chairman Warsh is ecstatic that the probability continues to hover either side of 50%.  As I have written consistently, uncertainty may result in short-term volatility, but it forces position reductions and less market fragility.  Remember, fragile markets are the ones that need to get bailed out.

Under the guise of good news is bad, equity markets suffered a bit on Friday, with the major indices falling between -0.3% and -0.5%, not great, but seemingly not the beginning of the end.  Treasury yields did very little and the dollar slipped, but that was really all about the yen, which has been strengthening quite nicely over the past several sessions.  My thesis that the yen would continue to weaken is starting to look a little shaky as the dollar has now traded below its intervention lows and back to a level not seen since mid-February of this year as per the below chart from tradingecononomics.com.

While one hike is set
Is another coming soon?
And what of the Fed?

Which takes me to another question that has been difficult to answer; if both the BOJ and the Fed, as well as every other major central bank, raise rates this week and next, and are assumed to continue raising rates over the next year, as per the below chart from rateprobability.com, does that really change the relative situation and should FX rates move substantially on the news?  

According to the chart, the BOJ is going to hike by 25bps more than the Fed over the next year.  Is that really worth 10 big figures in spot USDJPY?  More?  Less?  The interesting thing about the weekend is that Japanese 10-year yields slipped -2bps and appear to have broken free, at least temporarily, from the gravity of Treasury yields as the latter continue to edge higher, rising 2bps since Friday as per the below chart.  (Europe was basically unchanged.)

Source: tradingeconomics.com

As I weigh the evidence, it appears that the market is pushing to find the fail-safe point for carry traders, as well as Japanese investors writ large, and where interest rate differentials, as well as outright rates, need to be to alter decades worth of behavior.  Perhaps it is not the yield differentials that are driving the FX rate but the other way around.  If USDJPY falls far enough, that could well be the catalyst for a major change in the relative yield structure between dollars and yen.  Bessent certainly has a delicate task ahead of him.  On an unscientific basis, but rather one that is simply my feeling from experience, and looking at the yen chart for the past five years, I would suggest that while 150 is the next big round number, we are likely to head to somewhere between 140 and 145 as the new home, a place where the yen has strengthened sufficiently to impact trade, but not so far as to result in massive Treasury sales.  We shall see.

Source: tradingeconomics.com

Turning away from the eccentricities of the yen, oil prices are rising again, up another 2.7% this morning and now well above $90/bbl.  This is, not surprisingly, dragging both gasoline and diesel prices along for the ride, a situation that I’m sure has the White House plotting.  But the Houthis have attacked Saudi oil infrastructure and the ongoing tit-for-tat in the Gulf and the Strait continues.  The WSJ had a headline story about the US naval blockade really starting to bite there as oil revenues dry up.  This has certainly been effective, although it is taking longer than, I’m sure, the administration had wanted.  Elsewhere in the commodity space, while gold and silver are little changed to slightly lower this morning, copper (+2.0%) has continued to rally and has reached new all-time highs on both the LME and the COMEX.  This continues to be a story of insufficient supply for requisite demand, and demand continues to grow as data centers keep mushrooming up.  But copper mines take a decade or more to find, permit and bring online, and there haven’t been any in the works for years.  I think this is a market that despite being at record highs has room to run.

Equity markets have also been under pressure as the combination of anticipated rate hikes, increased war concerns and higher energy prices has weighed on markets writ large.  Obviously, oil companies and mining companies are benefitting from the price movement, although higher interest rates are a drag, but elsewhere, things are tougher.  So, looking across Asia, red was the color of the day (Japan -1.7%, China -0.4%, HK -0.4%, Korea -0.6%, India -0.7%, Taiwan -0.5%, Australia -1.0%).  In Europe, the picture is not quite as grim, with the declines smaller (Germany -0.2%, France -0.1%, Spain -0.3%) but declines they are.  As to US futures, at this hour (6:55), -0.6% seems to describe the situation.  Of them all, I think the yen’s strength has been the driver for Nikkei under performance.

Finally, the FX markets, away from the yen show modest dollar strength.  The euro (-0.1%), pound (-0.1%), CHF (-0.3%), AUD (-0.1%) are all slightly softer as trading desks get back to full strength now that the summer has unofficially ended.  While yen is the major topic of conversation, it is no surprise to see CLP (+03%) rally alongside copper and KRW (+0.2%) continues its several month appreciation, which has now reached 16% since July 1st.  Otherwise, it is not too exciting on this front this morning either. 

As I mentioned above, we have PPI, CPI and the first of the multiple central bank meetings this month, the ECB, on Thursday.

TodayConsumer Credit$11.7B
ThursdayECB rate decision2.50% (current 2.25%)
 Initial Claims205K
 Continuing Claims1790K
 PPI0.4% (5.3% Y/Y)
 Core PPI0.3% (4.6% Y/Y)
 Existing Home Sales3.99M
FridayCPI0.4% (3.4% Y/Y)
 Core CPI0.2% (2.4% Y/Y)
 Michigan Sentiment51.0

Source: tradingeconomics.com

Obviously, all eyes will be on the CPI data but as things heat up in the gulf, I suspect we can look for movement catalysts there as well.  In the meantime, the yen will be of great interest to one and all, whether traders, investors or Treasury Secretaries.  If we see this strength continue, look for more discussion and other market movement.  I don’t foresee a collapse in the dollar, but rather a steady reversal of what has been a steady trend higher in the dollar, lower in the yen.

Good luck

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Rumors Imply

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Did the BOJ
Intervene? Rumors imply
Lifers it the bid

Twenty-five? Fifty?
Do they really want yen strength?
Can they live with that?

When looking at charts, as I frequently indicate, the timeline of the chart matters a great deal.  For instance, if we look at this 1-year chart with daily candles of USDJPY after the yen jumped 1.8% yesterday, it would be easy to conclude there was another bout of intervention.  After all, the price action certainly seems to indicate a virtual gap move lower, just like the other interventions that we have seen during the past year.

Source: tradingeconomics.com

However, if we look at the chart with much shorter time increments, for instance 15-minute candles, we see that while there was significant selling pressure all day yesterday, and actually from the night before, there are really no gaps on the way down.  This is indicative of a large sell order that is relatively price insensitive meeting a market that is on edge, but absent a clearer signal of intervention, a market that is still willing to make prices.

Source: tradingeconomics.com

As it happens, from what I understand the market rumor was that the GPIF was moving funds out of dollars, something that had been mooted several weeks ago after Japanese FinMin Katayama discussed it in a news conference, but there was no sign of the BOJ.  And, of course, this morning JPY (-0.5%), has reversed some of that move.  Remember, the BOJ meets in two weeks’ time and as I mentioned on Wednesday, while a 25bp rate hike seems to be baked in the cake, there is increasing talk of 50bps.  Right now, the market is not pricing 50bps, in fact they are at 21bps, so not quite a full hike.  If Ueda-san really wants the yen to strengthen, 50bps will do the trick as it would really hurt the massive JPY shorts that are still rampant.  (see below chart from cotsignal.com). 

Now, over the past month, that net short position, at least in the futures markets, has been reduced, but there are still many short positions in various forms OTC.  A 50bp hike would definitely hurt them and a move to, and possibly through, 150 would be viable then.

Of course, none of that even considers things like this morning’s NFP or next week’s CPI.  There is still plenty of fun to be had!

The other big story today
Is whether a rate hike's in play
If NFP's strong
One could come along
If weak, there will be a delay

Which takes us to the NFP release this morning.  here are the current median estimates by the economist community

Nonfarm Payrolls56K
Private Payrolls45K
Manufacturing Payrolls5K
Unemployment Rate4.1%
Average Hourly Earnings0.3% (3.0% Y/Y)
Average Weekly Hours34.3
Participation Rate61.4%

Source: tradingeconomics.com

Now, ADP Employment was slightly weaker than expected on Wednesday at 38K, but again, this begs the question of how many jobs are necessary in the US economy to continue to maintain full employment and economic growth.  Remember, too, last month’s NFP was surprisingly weak at -23K.  If we were to see another zero to negative outcome, the Fed funds futures market would completely reverse its recent hawkishness, which moved from a ~35% probability of a hike before the Warsh Jackson Hole Speech to a ~65% probability afterwards, but has since drifted back to basically 50:50 after hearing Fed Governor Waller indicate he is a hold as long as data keeps pointing toward declining inflation.  Any weakness today, and especially in next Friday’s CPI reading will likely reverse that period of hawkishness.

At this point, a hike is still fully priced in by the end of this year, although if they hold now, it would be a surprise to see a move one week before the midterm elections.  Arguably, the biggest problem regarding inflation in the US right now is diesel fuel, which as you can see in the below chart has more than doubled in price since December.

Source: barchart.com

Diesel filters into the prices of virtually all goods as transportation for delivery costs rise, and the one thing we all know is that once a company raises prices because of a fuel surcharge, that surcharge never goes away, it is simply absorbed into the price at some point in the future.  In fact, this may well be the single most concerning issue regarding future inflation, at least until the military action in both Iran and Ukraine/Russia ends.  Of course, the Fed cannot print diesel, but do they really want to go down the route of demand destruction?  That is a tough call.  I guess we shall all learn more in two weeks’ time as the quiet period is beginning today.

Which takes us to market activity.  Yesterday’s strong US equity performance was followed by a mixed picture in Asia, although there was far more strength (Tokyo +1.3%, HK +1.7%, Korea +1.6%, India +0.5%, Taiwan +1.5%) than weakness (China -0.1%, Australia -0.2%, Malaysia -0.4%, Indonesia -0.5%) with the rest of the bloc stronger rather than weaker.  In Europe, though, markets are essentially unchanged this morning ahead of the NFP number and US futures are also little changed at this hour (6:55).

In the bond market, Treasury yields (-1bp) have stopped climbing for now although remain at the upper end of their recent range as you can see in the below tradingeconomics.com chart

European sovereign yields have edged higher by 1bp across the board this morning and JGB yields, perhaps on the alleged buying by GPIF which led to USD sales in the FX market yesterday, have slipped by -4bps.  That is, of course, exactly what FinMin Katayama wants to see.

In the commodity markets, oil (-1.0%) is trading just above $90/bbl as the escalation of fighting in the Gulf has not had many headlines lately, although I think it continues.  Many have made the point, though, it is the products that are the driver, so diesel, jet fuel and gasoline are what matter to both measured inflation and the national zeitgeist.  In the metals markets, this morning prices are very little changed although as you can see in the chart below, gold’s recent sharp decline has been reversed to the tune of about 50% of the move.

Source: tradingeconomics.com

And finally, the dollar, away from the yen, is also largely holding its breath for the NFP report this morning.  KRW (+0.45%) continues to be the big winner over the past several months as capital continues to flow into Korea and its tech industry and tech stocks.  But if we look at the DXY, it is trading just above 99.0 this morning and frankly, if we step back and take a longer-term view of the dollar, away from the histrionics that many pundits try to add, it hasn’t gone anywhere since April 2025 as you can see below.  You may recall the gnashing teeth describing the dollar’s 15% decline in the first six months of 2025 as being ‘unprecedented’, but one need only look at the chart below to see a larger decline in the second half of 2023.  That was much ado about nothing.  But since then, 99 +/- 3 cents has been home.

Source: tradingeconomics.com

And that’s all there is today.  We simply await the data before the next move.

I want to thank all of you who mentioned Marvel, he showed beautifully yesterday but we did not get picked for an award.  We have two big shows this weekend and then the Nationals are the first weekend of October. 

Good luck and good Labor Day weekend

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Monet’ry Bleating

Posted on by 
Today it is all about Kevin
And whether, bond markets, he'll leaven
But what if his talk
Does naught to unlock
His views? For bond bears t'will be heaven

Remember, the them of this meeting
Is payments, not monet'ry bleating
Well, if that's the case
There will be a race
In which, only short, are competing

Markets have remained quiet for the past several sessions as investors, traders and algorithms all turn their focus to Jackson Hole, Wyoming this morning awaiting the sage comments of Fed Chair Kevin Warsh.  The market punditry seems convinced he will lay out things like his reaction function to data and his views on where monetary policy is headed.  Of course, I think they are talking their book as they are desperate to write about that.  We know this because all they have written about lately is how awful Warsh is for not telling them all that stuff.

But I have a sneaking suspicion that any discussion of monetary policy will be fleeting, at best, as the title of the symposium is “Financial Innovation: Implications for Payments and Policy.”  Frankly, this sounds like an opportunity for Warsh to wax poetic on the future of money and stablecoins and how the Fed will deal with these new vehicles and their impact on monetary policy.  I have already discussed the idea that stablecoins are going to be inflationary in their own right, and here is an article that describes the situation better than I can.  But in this context, and with the potentially major ramifications of the US government’s embrace of stablecoins, it would not be a surprise for Chairman Warsh to essentially ignore the current interest rate structure and focus entirely on the balance sheet.

If that is the direction of his speech, I expect that the bond bears will look to double down and really hit the futures market hard, driving yields higher extending the recent move seen in the chart below.

Source: barchart.com

But I also do not rule out Secretary Bessent taking advantage of that and buying them aggressively.  Would it really be a surprise if Bessent, a former hedge fund trader who understands both bond math and the way markets work extremely well, used his ‘at least’ $4 billion of buying power to purchase futures, utilizing leverage to expand the impact significantly?  At current margin levels, that $4 billion could purchase at least $60 billion equivalent in futures or 600,000 contracts in the first week of activity alone.  I think that could drive a pretty good short squeeze, exactly what Bessent wants to see.  Below is a chart of the Commitment of Traders report for 10-year note futures showing a net short of ~915k.  What kind of impact would buying 600k futures have?

Source: cotsignal.com

My take is there would be quite a few hedge fund traders whose bonuses would be negatively impacted!

This is all speculation, obviously, but from what I have read around, the market is really looking for something I sense Warsh is not going to give them.  Prepare for more volatility ahead after several weeks of limited movement.  Just sayin’.

In the meantime, let’s run down market movements overnight, although there was not a lot of excitement.  Yesterday’s US rally was followed by broad-based, albeit not excessive, strength throughout most of Asia (Japan +0.4%, HK +0.1%, Australia +0.6%, Taiwan +0.8%) although both China (-0.4%) and Korea (-1.8%) did not partake.  Given the Nvidiphoria, Korea is a surprising outcome, but volatility in that market has been extreme as I have shown in the past.  

European bourses are also higher this morning (France +0.9%, Spain +0.5%, German +0.5%) after data showed improved business confidence throughout the continent although GDP continues to be lackluster (e.g., France 0.7% Y/Y in Q2).  But sentiment indicators are picking up there slightly and, after all, equity markets are supposed to be forward looking.  Maybe things will get better in Europe, although given their energy policies and the fact that they are behaving far more like grasshoppers than ants these days with respect to Natural gas storage (see chart below), things may get tougher if they are wrong about global warming.

As to US futures, at this hour (7:15) while NASDAQ futures are softer (-0.6%) the other two major indices are essentially unchanged ahead of Mr Warsh.

In the bond market, yields continue to creep back higher with Treasury yields (+1bp) the best performer after JGB yields (+4bps) rose overnight and European sovereign yields have climbed between 2bps and 3bps this morning.  As I highlighted yesterday, or more accurately, the WSJ did the work for me, European yields have been climbing more rapidly than US yields lately as European nations have demonstrated no ability to rein in spending, and in fact, are planning the guns AND butter approach as they build out their defense capabilities while maintaining their nanny states.  What can possibly go wrong? 🙃

In the commodity space, we continue to hear that the Strait of Hormuz is either open or closed depending on the source, although the fact that oil continues to flow has me leaning toward more open than closed.  This morning WTI (-0.6%) is slipping a bit, although it rallied a bit yesterday.  There was a very interesting article in Bloomberg yesterday regarding the shale drillers’ ability to increase production dramatically by using more surfactants (soap) to help the oil flow, gains of 20% or more in a well, which simply reminds us of the amazing technology that exists in that sector.  There is no shortage of oil folks, and likely never will be.  As to the metals markets, gold is flat this morning and silver (+1.3%) is rising again, back above $70/oz.  Copper (+0.6%), too, is having a solid session.  Nothing has changed my views on the metals going higher over time.

Finally, the dollar has been stuck in neutral as we await Chairman Warsh with the DXY still hovering right above 99.00.  We have not discussed the yen (-0.2%) much lately as it has not been noteworthy, but now that it has been one month since the major intervention, I thought it worthwhile to take a peek at the chart and see how its doing.

Source: tradingeconomcis.com

I challenge you to explain the difference to me between the price action after the last interventions and this one.  The intervention in May took about 6 weeks to unwind and the yen continued lower for another 6 weeks before they stepped in again alongside the US.  Pretty much the only thing I can see that really stops this move is if I am right about Bessent squeezing the shorts and driving yields sharply lower.  In that case, USDJPY would fall sharply without intervention.  Otherwise, it’s hard to get excited about anything in the FX markets right now.

And that’s really it for today.  At 8:30 Canadian GDP (exp 3.4%) is released and then we see Chicago PMI (57.0) and Michigan Confidence (51.0) when Warsh starts to speak.  We also get the annual NFP revision although I have not seen any estimates for that.  But as I have said all week, it’s all about Kevin.  Now we wait and see.

Good luck and good weekend

Adf

Just a Ruse

Posted on by 
Said Scottie, since Congress keeps spending
And frankly, it seems never-ending
We’re going to buy
More bonds as we try
To stop yields from keeping ascending

The market response to this news
Was instant, as it did infuse
A bid to all risk
With movement quite brisk
Though skeptics claim it’s just a ruse

Boy, I leave you alone for one day and look what happens!

At 8:33 yesterday morning, the following announcement hit the US Treasury website [emphasis added]:

Treasury Announces Increased Sizes of Nominal Long-End Liquidity Support Buybacks Beginning September 9

WASHINGTON, D.C. —The U.S. Department of the Treasury is increasing, by at least double, the size of liquidity support buyback operations for longer-dated nominal coupon securities (the 10-year to 20-year sector and the 20-year to 30-year sector).  The current maximum size of $2 billion per operation will be at least $4 billion per operation. 

This change is effective September 9, 2026 and will be in effect for the remainder of this refunding quarter (through November 4, 2026).  Treasury will provide more information about future buyback sizes at the next Quarterly Refunding, scheduled for November 4, 2026. 

This increase in buyback operation sizes reflects Treasury’s desire to provide greater liquidity support in longer-dated nominal sectors where there is consistent strong sponsorship from market participants, as evidenced by the significant volume of high-quality offers Treasury routinely receives in longer-dated buyback operations.

An updated tentative Treasury buyback schedule will be released at a later date.

First, here is a picture of the market reaction in the DXY and gold, the two things that responded most aggressively.  (I inverted the scale for the DXY, so it fell on the news.)

Source: tradingeconomics.com

And here is the bond market response with that gap occurring between 8:30 and 8:35.

Source: tradingeconomics.com

Obviously, this was a big deal, right?  Well, that’s a good question and one worth discussing.  As a baseline, the size of the current program that they are doubling is a maximum of $2 billion per operation, which means that the new limit is at least $4 billion per operation.  Now, while an extra $2 billion of demand is nothing to sneeze at, we must consider how much of that debt is currently outstanding.  According to Claude, which took the data from the Treasury website, there is about $3.7 trillion of debt that currently has between 10 and 30 years left to maturity, held by private investors.  When adding the intragovernmental holdings and the Fed, that number appears to be about $5.4 trillion.  

There are seven more of these operations planned before the November deadline, so they will be purchasing an additional $14 billion of notional value, probably paying about $8 billion in cash given it all has much lower coupons so trades at a steep discount to par (and funding it by issuing T-bills).  And if we do the math, that means they will have absorbed (assuming the smaller outstanding of privately held debt) 0.38% of the notional.  

The caveat here is the ‘at least’.  Arguably they could buy any amount and stay within the confines of the announcement and that would certainly have a much larger impact.  But everything I have read is focused on the extra $2 billion.

With that in mind, and while I’m just an FX poet, my long experience in markets tells me that removing 38 basis points worth of some security or asset from a market is unlikely to have a major long-term impact on the supply/demand balance given there is real elasticity here.

So, while yesterday’s moves were certainly impressive (gold +4.3%! as an example) I might contend that the movement was based on the narrative rather than the actual market impact.  But the one thing we have learned of late is that the narrative matters.

Many in the market have immediately claimed that this is an act of desperation as Secretary Bessent seeks to drive longer end yields lower.  Others have claimed that this is the beginning of Yield Curve Control (YCC), although the fact they are issuing more T-bills to buy the bonds makes it a lot more like Operation Twist, when the Fed did the same thing, sold the front of the curve to buy the back, thus maintaining the same size balance sheet but removing duration from the market.  If this were YCC, they would need to print more money to buy those bonds, and the Treasury cannot do that, only the Fed can and they are not part of the process.

Here’s what I know, Scott Bessent is a very smart guy, and somebody who understands markets better than any Treasury Secretary since Bob Rubin and maybe better, certainly better than you or I.  I also know he has been dealt a very bad hand; 2,3,5,7,8, off-suit in poker terms, so doesn’t have many good options.  And I know that he has zero control over spending amounts which falls to Congress and the President, with him merely implementing the spending, not deciding how much to spend.  I don’t know if this will be effective beyond yesterday’s market movement, but if he is able to get the narrative moving in the right direction, (i.e. there is a reduction in duration available to the market so prices there should rise and yields concomitantly fall), it may offer some more breathing room.  The fact that he is using the tools available to manage the government’s balance sheet is a huge positive.  I can only say, good luck Scott.

While there are probably other stories of some import, this was the one that got the most engagement, and I think the one with the potential longest-term impacts on things.  So, let’s see how other markets responded.  It was interesting to me that the equity markets did not wholly embrace this action, although there was an initial rally, much of it faded by the end of the session with very modest gains at the end of the day.  Asian markets, however, fared very well with Tokyo (+1.4%), China (+0.1%), HK (+0.8%) and Korea (+5.9%!) all rallying and taking almost the entire region higher.  I think it is worth showing a chart of Korea’s KOSPI to demonstrate the increase in volatility we have seen on a regular basis there since the Iran war began.  Just look at the expansion of the daily ranges, especially since May, compared to the size of those bars for the prior six months.  This is another indication that the way things were is no longer the way they are.

Source: finance.yahoo.com

In Europe, though, equity price action is desultory this morning, with modest declines of about -0.4% or so across all major markets with Spain (-0.1%) the outlier.  As to US futures, at this hour (7:15), they are edging lower led by the NASDAQ (-0.5).

In the bond market this morning, yesterday’s euphoria is being tempered with Treasury yields backing up 3bps.  European sovereigns, though, are little changed to +1bp, although they didn’t respond to the Treasury market in any real sense yesterday.  That makes sense since Bessent’s announcement was highly US specific.  As to JGB yields, they did slip -4bps overnight, and there are many who draw a direct link to Treasuries and USDJPY, with official efforts by the US to cap both of those things.

Speaking of the yen (-0.3%), it was one of the largest beneficiaries of the announcement, rallying nearly 1% as you can see in the chart below.  However, this morning it is slipping a bit, and frankly, the post-intervention pattern has not been altered by yesterday’s move.

Source: tradingeconomics.com

In fact, most currencies rallied yesterday on the news but this morning, the picture is more mixed as we see both gainers (GBP +0.2%, EUR +0.15%, NOK +0.15%) and laggards (INR -0.25%, SEK -0.3%, ZAR -0.35%).  In essence, while yesterday’s moves were large and broadly dollar lower, this morning there is more nuance.  As it happens, the DXY (-0.1%) is edging lower today, but remains directly in the middle of that long-erm 96.50 / 100.50 range at 98.71.

Source: tradingeconomics.com

Finally, commodity prices show oil (+3.1%) continuing its recent rebound and back to its highest level in about a month.  But if I look at the chart below, it remains in the middle of its much wider range as well, if anything somewhat closer to the bottom than the top.  At this point, it is impossible to know what is happening in the Gulf war and frankly, I think market participants who don’t trade oil directly, have moved on to other drivers.  

Source: tradingeconomics.com

As to the metals markets, after yesterday’s remarkable rallies, it ought not be that surprising that they are consolidating this morning (Au -0.7%, Ag -0.3%. Cu -1.1%).  There are some analysts who believe that copper is getting set to roll over and decline in price as the narrative about shortages of supply for ever increasing data center and power production demand grow long in the tooth and may already be priced in.

On the data front, yesterday’s Minutes showed that there were non-voters who also would have been inclined to raise interest rates back in July, but we know that we have seen softer data since that meeting, so it is unclear if that is still the case.  As well, EIA oil inventories rose again, >4 million barrels, so tank bottoms are still covered!  This morning we get the weekly Initial (exp 210K) and Continuing (1790K) Claims as well as Philly Fed (25.0) and Leading Indicators (+0.1%).  There are still no Fed speakers, and I continue to believe that Chairman Warsh’s speech next week is the most important thing on the horizon.

Until then, I imagine yesterday’s surprise announcement is the biggest news we will get for a while and that we are likely to see markets return to their somnolence.  But there is a new narrative forming, the US is going to ignore inflation and push rates lower, which if it is followed implies higher commodity and equity prices and a falling dollar.

Good luck

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Literally Dying

Posted on by 
In China the people ain’t buying
Despite all the stuff their supplying
To nations worldwide
Seems Xi sits astride
A country that’s literally dying

Let’s start this morning with a quick look at the economic situation in China, where things are continuing to slide much to President Xi’s chagrin.

Source: tradingeconomics.com

As you can see from the listing above, every one of the key monthly statistics underperformed both last month and market expectations with Retail Sales continuing to shrink and the trend lower remaining steady as you can see in the chart below.

Source: tradingeconomics.com

To put a finer point on it, prior to Covid, the monthly gains were running in the 10% range compared to July’s 0.6% rise.  The ongoing implosion of the property market bubble there (see the Fixed Asset Investment outcome above) continues to weigh on the economy across the board and shows no sign of ending soon.  

The US has many issues in its economy including excessive debt and stickily high inflation, but from an economic activity perspective, the US is in far better shape.  Inward investment continues apace as reshoring of manufacturing and expansion in technology keep growing which will provide opportunities going forward.  That is not the case in China, and while they remain a manufacturing and export powerhouse, their future, especially given the demographic catastrophe that was Deng’s “One-child policy” results in a shrinking population.  After all, Xi has no problems policing his borders as nobody wants to go there, they all want to leave.

Keep in mind that according to the World Bank, the PPP for the Chinese yuan is approximately 3.46 as of 2025 compared to the current market rate of just below 6.74.  Sure, the dollar’s value has been declining steadily vs. the CNY all year, as per the below chart, but ask yourself how much China’s exports would be reduced if the currency traded at 3.50?  I’m guessing their trade surplus would disappear pretty quickly.

Source: tradingeconomics.com

Veering into geopolitics here, it is difficult to believe that China is ever going to make a military incursion into Taiwan, despite all the rhetoric.  I’m confident Xi has learned the lesson of drones being extremely effective defensive weapons, and Taiwan is armed to the teeth.  While Taiwan may decide to reunite on their own, it will not be conquered as China simply doesn’t have the ability to do it.  Especially given the problems Xi has at home.  

And remember, there are strict capital controls in China preventing citizens from getting money out of the country.  Ironically, if they opened that up, the CNY would fall sharply as money fled, even from current levels.  For all the talk of China’s long-term thinking and strategy, never forget they made the largest demographic blunder in history.

Japanese data
Turned up weak as a kitten
Can Ueda hike?

It seems that slowing growth in Asia is not confined to China as Japanese data last night was also softer than expected as you can see below:

Source: tradingeconomics.com

This begs the question regarding the BOJ’s potential rate hike come next month.  After all, if the economy is slowing while inflation remains sticky, will the BOJ be willing to raise rates?  Takaichi-san’s approval ratings are already slipping because of the ongoing inflation there, but if another hike pushes Japan toward recession, that would be a bigger problem, I believe.  

Now according to the OIS swap market, there continues to be a strong belief that Ueda-san will hike next month.  In fact, as you can see from the chart below from rateprobability.com, the market is increasingly sure this will be the outcome despite last night’s data releases.  And maybe that is the case.  But given the probability of a US hike continues to ebb, now down to 30% after Friday’s weaker than expected Retail Sales data (the 4th consecutive weak data point), I’m not so sure a hike is coming.  There continues to be much intrigue in the USDJPY exchange rate.

So, how did equity markets in Asia respond to this?  And elsewhere?  Better than you might have expected with Tokyo (+0.7%) and China (+1.6%) and HK (+1.3%) all showing nice gains.  To my eye, this response seems unusual as the combination of weaker growth and higher rates is typically a bad one for equities, but perhaps this is a new paradigm.  Tech shares led the way in all three markets, and we saw that in Korea (+2.4%) as well.  In fact, generally in Asia equity markets were solid (Indonesia, Thailand, Singapore) although there were a few laggards (Australia, New Zealand, India) though none of the losses were dramatic.

Europe, though, is deeply in the summer doldrums with tiny gains and losses across all the major markets, +/-0.2% or less.  And US futures, if you squint, are slightly higher at this hour (6:40).

In the bond markets, the outlier move was in JGB’s overnight, jumping 6bps to new multi-decadal highs at 2.91%, despite the weak economic data.  Arguably, this is why the probability of a rate hike has been climbing, although it seems to me that the back end of the yield curve can climb without the BOJ hiking.  This story goes back to the carry trade question and whether Japanese investors are bringing money home now that real yields in Japan, at least out the curve, have turned positive.   Alas, a look at USDJPY shows no indication that the post intervention price action has changed.

Source: tradingeconomics.com

As to the rest of the world’s government bonds, yields are basically lower by -1bp across the board this morning.

Despite the latest scare stories in the press, the oil markets remain nonplussed by everything with WTI (+0.5%) edging higher this morning but hanging out in the middle of the range, actually the lower half of that range, since the war began.  I continue to see stories about how soon we will see an escalation in fighting and oil inventories run down, but I keep looking at the price action, as well as the increased production from places like Venezuela, Guyana, Canada, Brazil and Argentina, and have a hard time seeing that outcome.

As to the metals markets, they are rallying further this morning with gold (+0.5%), silver (+1.5%) and copper (+1.2%) all firmly in the green.  Nothing has changed my views about the long-term prospects for these to go higher.

Finally, the dollar is softer this morning overall with the DXY (-0.2%) firmly back in its previous trading range.  Do you remember last year when the dollar happened to decline about 15% during the first six months of the year and the punditry was making a big deal about the decline as a tell on the US simply because of when it happened on the calendar?  If you look at the long-term chart of the DXY below, you can see that in the post-Covid world, the dollar exploded higher and then retraced much of those gains in two relatively short periods in late 2022 and early 2025.  But we have gone nowhere in more than a year and, frankly, at 99.50, the DXY is within 1SD of its long-term average.

Source: tradingeconomics.com

As to individual currencies, the dollar’s weakness is broad based and consistent in the 0.2% to 0.3% range with AUD (+0.6%) the outlier of note, taking advantage of the gains in metals prices.

On the data front, it’s a very slow weak for primary releases:

TodayEmpire State Manufacturing11.0
TuesdayHousing Starts1.35M
 Building Permits1.37M
 IP0.3%
 Capacity Utilization76.3%
WednesdayFOMC Minutes 
ThursdayInitial Claims212K
 Continuing Claims1808K
 Philly Fed25.0
 Leading Indicators0.1%
FridayFlash Mfg PMI53.8
 Flash Services PMI54.0

Source: tradingeconomics.com

The interesting thing to me is that there is not a single Fed speaker on the docket.  Perhaps Chairman Warsh is getting his point across, or perhaps they are all on summer vacation.  Whatever the case, I think that is a benefit, let the data speak.

While analysts will parse the Minutes with a fine-tooth comb, I don’t think anything is going to matter until Warsh speaks at the end of the month.  Until then, absent a major escalation in Iran, I don’t expect very much to happen although nothing seems set to derail the equity rally.

Good luck

Adf

Held At Bay

Posted on by 
The doldrums have finally arrived
As interest in markets nosedived
While stocks still creep higher
The marginal buyer
Is sleeping and must be revived

But it seems unlikely today
Is going to show us the way
I think, til Warsh speaks, 
And that’s in two weeks,
Excitement will be held at bay

While not every market is completely stagnating, for the past seven sessions, despite NFP, CPI and many stories about oil and war, market price action has been extremely dull.  Whether we look at stocks:

Source: tradingeconomics.com

Or bonds, which in fairness have been a little choppier but still gone nowhere:

Source: tradingeconomics.com

The dollar:

Source: tradingeconomics.com

Or even oil, which in the past week has barely moved on net:

Source: tradingeconomics.com

We are very clearly in the summer doldrums.  I think even the narrative writers have gone on summer holiday as there is precious little to discuss.  Yes, we’ve seen a soft NFP report and softer than expected CPI and PPI data, but that has not generated much excitement.  While the Iran situation can always find something for people to discuss, certainly based on the recent EIA oil inventory data, the ‘running out of oil’ story has been put to bed.

Frankly, there is very little to discuss, and I have a feeling it is going to stay that way until we hear from Chairman Warsh at the Jackson Hole summer confab in exactly two weeks.  As it’s August, we already knew that Europe was on vacation, but other than some primary elections in the US, where the effort to generate excitement ahead of the midterms in November has not yet gained traction, what is really new?  Arguably, the most interesting story is Enes Kanter Freedom, the ex-NBA player declaring for the WNBA draft as the WNBA cannot seem to figure out how to define a woman.

So, to keep things brief, I will give a quick rundown now and send you on your way.  Yesterday’s modest gains in US equities were followed by a mixed session in Asia with Tokyo (+0.6%), Korea (+2.4%, which these days is a modest movement here) and Indonesia (+1.6%) all gaining while China was flat and HK (-1.1%), Australia (-0.8%) and Taiwan (-0.5%) all slipped a little.  It is hard to tell a story about this outcome.  

In Europe, only Germany (+0.7%) is showing any life, reaching another record high on the back of some more strong earnings reports, mostly from German defense manufacturers.  But the rest of the continent is little changed, +/- 0.1%.  And at this hour (7:10), US futures are also +/-0.1%, in other words flat.

In the bond market, Treasury yields, which slipped -5bps yesterday as both PPI and oil prices were softer, have edged higher by 1bp.  However, European sovereign yields are all higher by between 3bps and 4bps this morning, although it is not clear what is driving this movement.  In truth, if I use bunds as my example, while like Treasuries, the price action has been choppy, as you can see in the below chart from tradingeconomics.com, we haven’t gone anywhere in weeks.

As to JGB yields, this morning they are unchanged, hanging on just below the recently achieved multi-decade highs.  

But speaking of Japan, while the yen (+0.2%) is slightly stronger this morning, as you can see in the chart below, the post intervention pattern remains in force.  In fact, Bloomberg had an article about how speculators used the intervention to reload on short JPY positions.  But the more interesting thing I saw this morning was the following Tweet:

Now, I don’t know how they arrived at that number, and while I always thought the trade was in excess of $3 trillion, $20 trillion is much larger than I expected, but if this is true, it certainly adds a certain stress level to the global economy.  I have maintained that outward Japanese investment in financial products, so purchases of non-Japanese bonds and stocks buy Japanese institutions is a part of this process and adds to the number.  I assume that is part of the calculation Deutsche has made, but I could be wrong, I have not seen the actual report.  But along those lines, in the most recent week, Japanese investors purchased >¥1.6 trillion (~$10 billion) in foreign bonds, keeping up the flow.

If we look at just the G-SIB banks, the major players in international finance, according to Grok, their total combined balance sheets summed to about $78.4 trillion at the end of 2025.  Of course, assuming the carry trade makes heavy use of derivatives for financing, much of that alleged $20 trillion may not show up on their balance sheets, but perhaps it represents as much as 15% of bank assets.  This is quite a concern, especially as, again according to Grok, those same banks have only ~$4.7 trillion in Tier 1 capital.  

So, if these numbers are even in the ballpark, it tells a tale of a highly leveraged banking system that is subject to major convulsions if a certain series of events unfold, notably, the carry trade loses its luster.  (if you ever wondered why goldbugs are goldbugs, this is exhibit A).  The thing to remember is it has taken decades for this trade to accumulate, and it will not decumulate in weeks, or even months, but will take years to do so.  As well, if things start to turn, you can be certain that central banks will do their best to prevent a runaway train, and they have enormous power, specifically the power to print money, to slow things down.  But that doesn’t mean things won’t get ugly if this is the future.  I hark back to my comments regarding the end of forward guidance and how that will enhance markets’ collective anti-fragility.  It feels like the global financial system, if this is true, is seriously fragile!

Ok, let’s wrap up.  In FX, the dollar is softer this morning across the board, with the DXY (-0.4%) quite representative of the movement across both G10 and EMG currencies.  However, the thing to remember here is that we are still rangebound overall for the past year in G10 currencies, although we have seen broad based strength in a number of EMG currencies like MXN, BRL and ZAR , all of which have much higher real rates than the US.

Lastly, oil (+0.3%) is a touch higher, while metals prices (Au +0.3%, Ag +0.8%) are also firming up on the softer dollar.  But there is little to discuss here.  News that the US is sending another aircraft carrier to the Persian Gulf area got oil to rise earlier, but that is fading already.

On the data front, this morning brings Retails Sales (+0.1%, +0.2% -ex autos) and then Michigan Sentiment (54.5) at 10:00.  There is one Fed speaker, an Atlanta Fed VP and acting President as they seek a new President.  However, given her acting status and the fact Atlanta is not a voter, I don’t think anybody will even listen!

So, absent a seriously strong Retail Sales report, the die is cast for another slow day in my view. 

Good luck and good weekend

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Beguiled

Posted on by 
It turns out, inflation of late
Did not start to accelerate
Instead, it was mild
With doves now beguiled
But not yet declaring checkmate

The odds of a hike keep on sliding
But ere the Committee’s deciding
In two weeks, we’ll hear
Chair Warsh try to steer
The narrative with gentle (?) chiding

The fears over rising inflation have been allayed for the moment after yesterday’s CPI data was released right on expectations with monthly increases of 0.1% headline and 0.2% core and Y/Y results of 3.4% and 2.5% respectively.  For all those who have been pining for that rate hike ASAP, this was unwelcome news.  The below table from cmegroup.com shows how things have changed over the past month.

On July 13, markets were pricing a 75% probability of a hike in September with thoughts of a 50bp hike a reality.  This morning, the probability of that September rate hike has fallen to just 36%.  You may recall that I have been consistent in my views that there would be no rate hikes this year, and that continues to be my view.  If we look at the entire Fed funds futures curve, as per the next table, we now have one hike priced for December only, compared with two plus hikes several months ago.

This is not to say I believe that inflation is dead, just that it is not accelerating away.  As my friend The Inflation Guy points out in his piece on yesterday’s CPI, the data was boring, “Boring, right on expectations. The bad news is that it is boring and right on expectations…at 3%.”  This is still a far cry from the Fed’s self-defined 2% target, but fears of “Amerizuela” type outcomes are vastly overblown.  (However, you still want to protect you purchasing power and one effective way to do that is via USDi, the only inflation tracking cryptocurrency.)

Now, we still have a bunch more data before the next FOMC meeting, including today’s PPI, PCE at the end of the month and another NFP and CPI reading in September.  As well, we cannot forget that Chairman Warsh will have the opportunity to clarify his thinking at the Jackson Hole soiree on Friday morning, August 28th.

So, has anything really changed that much after the CPI report?  While the reality hasn’t shifted, it does appear that market participants are beginning to adjust their views a bit.  One number does not a trend make, nor will it have bolstered Warsh’s credibility, assuming that is in question, either.  This is a saga that will continue to play out over time.  It seems to me that if the Fed really wanted to fight inflation effectively, they would be digging much deeper into why they continue to hold >$1.9 trillion in MBS on their balance sheet and run an ample reserves framework.  Going back to scarce reserves allows the market to drive interest rates, something clearly on Chairman Warsh’s wish list.  But that will have to wait for the task force reports.

Ok, let’s see how markets other than Fed funds have responded to this news and data.  Since we are on the rates subject, let’s start there this morning with bonds which have seen yields slip -2bps in Treasuries and between -1bp and -3bps in Europe.  Oil prices (-2.1%) are slipping this morning so that appears to be the proximate cause of the yield move, a bit less concern over inflation.  Yesterday, after the CPI data, we also saw Treasury yields drop -2bps, so for now, fears of an imminent test of 5.0% on 10-year Treasuries seem overblown.  JGB yields, though, continue to creep higher, another 2bps overnight and are now just 3bps below their multi-decade high of 2.90% as per the chart below.

Source: tradingeconomics.com

Speaking of Japanese rates, Bloomberg has an article this morning explaining that the Takaichi administration is ok with the BOJ raising rates sooner, a change in the market’s perspective if not an outright change of view there.  Alas for those looking for a stronger yen and the end of the carry trade, the impact of the report was essentially nil as you can see in the chart below.  The three large, red candles just to the right of center represent the immediate aftermath of the release of the report.  Net, USDJPY is virtually unchanged on the day and the trend since the intervention remains for the dollar to move higher.  My sense is perceptions of Fed rate activity is going to have a bigger impact than the BOJ for now.

Source: tradingeconomics.com

As to the rest of the FX market, +/- 0.2% covers the gamut for both G10 and EMG blocs.  It wasn’t just the CPI report that was boring, so are FX markets overall.

Turning to equities, yesterday’s US market response was benign with only the NASDAQ showing much life, gaining 0.5%.  In Asia, though we did see Tokyo (+1.1%) rise despite talk of the BOJ being more aggressive.  Of course, the real price action remains in Korea (+3.6%), which is redefining what equity index volatility actually means.  Otherwise, there were some gainers (Taiwan, New Zealand, India) and more laggards (China, HK, Australia, Malaysia, Indonesia) but none of these moves topped 1% in either direction.  

European bourses, however, are feeling a bit better this morning led by Spain (+0.7%) and Germany (+0.5%) as earnings seem to be the driver here helping Spanish shares despite the tick higher in inflation there.  UK shares (-0.2%) are lagging after GDP and production data was on the disappointing side while the Trade Deficit expanded further.  And at this hour (7:30) US futures are little changed to slightly higher.

Finally, turning to commodities, oil’s decline seems to be attributable to the IEA reducing its global oil demand outlook (although they have been wrong about this for several years as they try to push a peak oil, transition to wind/solar narrative that is just not happening) as well as the fact that yesterday’s EIA data showed a 17+mm barrel build, a far cry from the slight draw expected and another blow to the tank bottoms story.  As to the precious metals, the luster is gone (Au -0.5%, Ag -0.6%, Cu -0.5%) although copper remains quite close to its all-time highs, and both gold and silver remain in short-term uptrends after seemingly having bottomed back in July.

On the data front, this morning brings the weekly Initial (exp 202K) and Continuing (1800K) Claims data along with PPI (0.2%, 4.9% Y/Y) and core PPI (0.3%, 4.2% Y/Y).  It strikes me that neither of these releases are going to be major market movers.

It is summer, and I assure you trading desk vacation schedules are far more important than secondary economic data releases.  I suspect another boring day overall here.  In fact, I suspect that until Warsh speaks in two weeks, we may see very little activity across most markets.

Good luck

Adf

They Mostly Confuse

Posted on by 
We’re back to the Strait of Hormuz
As driver to all traders’ views
Both Trump and Iran
Have proffered a plan
But really, they mostly confuse

The, otherwise, story of note
Is coming as CPI’s quote
If hot, Chairman Warsh
Will field comments, harsh
If cool, he’ll be able to gloat

Oil prices (+1.5%) are higher again this morning and have now been up five consecutive sessions, rising 10% in that run as you can see in the chart below.

Source: tradingeconomics.com

There is a theory that the rhetoric in Iran increases when they have oil to sell so need higher prices, but once those cargoes have been sold, they talk peace again.  I don’t think you can rule out that hypothesis although I certainly have no corroborating evidence it’s true.  The one thing I did note yesterday is an Iranian comment that as long as sanctions remain, diplomacy cannot happen which tells me that economic sanctions are biting harder.  Whatever, the situation on the ground (or water) is over there, I have no insight per se. 

Much has been made over the fact that the SPR is at its lowest level since 1983 and has fallen below 300 million barrels with all the attendant pearl clutching while simply ignoring the fact that the SPR releases have been oil swaps with the back ends starting to come back in the next several months in greater amounts than have been released.  Maybe the end is nigh regarding oil, and the doomsters will get their $200/bbl outcome, but I would still take the under there.

In sync with the oil price rise we have seen yields rise, as well (see chart below), around the world.  But here, it appears that Chairman Warsh is the favored scapegoat for all the world’s inflation problems.  To hear his critics explain, if only he would give us forward guidance, everything would be fantastic.  Hedge funds could load up on leverage and increase their profits, real money investors would be comfortable that future real returns would be acceptable and, most importantly, the punditry would be able to explain all this to us plebes and burnish their beliefs in their own brilliance.

Source: tradingeconomics.com

But I wonder if there is not another explanation for rising yields that has nothing to do with the Fed, the idea that debt issuance, from both government and private sources, is growing dramatically and all that supply is weighing on prices, hence driving up yields.  We already know that governments around the world continue to issue debt willy-nilly, so there is nothing to discuss there.  But now the AI hyper scalers are issuing massive amounts of debt to pay for all the GPUs and data centers and power as the race to “win” in AI continues at an increasing pace.  

It is, of course, this last issue which has many pundits explaining that QE will soon reemerge as the only viable way for all that debt to get bought.  If central banks buy government debt that will leave funds for private investors to buy AI related debt.  And maybe that is the way it will work out although Chairman Warsh has thus far only discussed shrinking the balance sheet, not expanding it.

Please understand I am not ignoring the many serious problems that exist within the current fiscal and monetary frameworks around the world.  Government spending remains excessive as evidenced by the fact that virtually every nation in the world is running significant budget deficits as per the below table from tradingeconmics.com (notice China, a country that seems to get a pass on this score from the punditry).

All I am saying is that the idea that all of this is going to fall apart quickly is highly improbable.  As much as purists would like for there to be consequences for bad policy decisions, governments everywhere have an enormous number of tools to delay the pain, and they use them all the time.  Whether that is subsidies or tax cuts or regulations prohibiting competition, all these things substitute short-term gains for long-term problems.  But they will still be used regularly.

So, to recap, increasingly hawkish rhetoric on the Iran situation has driven oil prices higher which is increasing inflation concerns.  Adding to that is the ongoing fiscal profligacy of virtually every major government which is also weighing on bond prices and driving yields higher in sync.  And basically, the punditry has decided it’s all Kevin Warsh’s fault.  Too much will be made of tomorrow’s CPI report, whether it is hot or cool, that is the one things of which I am certain.

Ok, yesterday’s lackluster US session with all three major indices slipping a bit was followed by weakness in China (-0.8%) and HK (-1.1%) but elsewhere in Asia, things were mixed with Korea (+0.7%) gaining and the other regional bourses generally +/-0.5% or so.  Tokyo was closed for Mountain Day and the only other news of note from the region was the RBA left rates on hold at 4.35%, as expected, but expressed concerns about both slowing growth and future inflation.  Interestingly, Australian stocks were slightly higher despite that news, +0.2%.

In Europe, Spanish stocks (+0.5%) are the leader on the strength of Banco Santander’s share repurchase announcement while the rest of the continent and the UK are little changed.  As to US futures, at this hour (7:35) they are little changed.

While we have broadly discussed bond yields rising, and yesterday they were higher by 4bps-5bps in the US and Europe, this morning they are unchanged across the board.  Now, they were higher again this morning when I started to write, but it seems there was just a comment from Pakistan that the US and Iran are close to an agreement which has turned things around.  Oil prices, too have slipped back to unchanged on the day from an hour ago.

In the metals markets, gold (-0.2%) and silver (-0.9%) are backing off solid sessions yesterday and copper (+0.8%) continues to march higher.

Finally, the dollar is, net, little changed this morning, although we cannot ignore the fact that the yen fell -1.0% during yesterday’s session.  In fact, a look at the yen chart continues to show the market response to intervention, an immediate rally and a gradual decline resuming.

Source: tradingeconomics.com

As to the rest of the space, KRW (+0.3%) is the actual largest mover today, and that is not enough of a move to spin any story.  The DXY remains just below 100 and firmly within its yearlong trading range and some pundits are saying the fact that it is not rallying during the current conditions, with yields rising and fear all about, is an indication that the dollar is losing its status.  However, I am confident if you offered those same pundits payment in dollars, they would grab them as greedily as possible!

On the data front, this is inflation week plus a few more things as follows:

TodayExisting Home Sales4.05M
WednesdayCPI0.1% (3.4% Y/Y)
 Ex food & energy0.2% (2.5% y/Y)
ThursdayInitial Claims202K
 Continuing Claims1800K
 PPI0.2% (4.9% Y/Y)
 Ex food & energy0.3% (4.2% Y/Y)
FridayRetail Sales0.1%
 -ex autos0.2%
 Michigan Sentiment54.5

Source: tradingeconomics.com

Obviously, all eyes will be on CPI tomorrow as investors and analysts look for clues as to how the Fed may behave going forward.  Speaking of the Fed, Cleveland Fed president Hammack said in an interview yesterday that she thought the Fed needed to raise rates more than 25bps to get inflation under control.  But as I think about the Fed and its dual mandate, of maximum employment and stable prices, I cannot help but wonder what they consider maximum employment.  While they have defined stable prices (incorrectly in my view) as Core PCE rising 2.0% per annum, they have never tied themselves to a number on employment.  So, here’s a thought.  Look at the Labor Force participation rate, which as per the data last Friday fell to 61.4%, that is the lowest level since 1975 (excepting Covid) as per the below chart from FRED.

That hardly seems maximal, but then, I’m just an FX guy, not a Fed PhD.  After all, if we take the plain meaning of the word maximum, as per the American Heritage Dictionary, I cannot look at the chart above and conclude they have achieved that part of their mandate either.

But that’s just me.  Anyway, if there is going to be movement on the Iran story, that will drive the immediate market movements, but you can be sure that in the current environment, it will all come back to the Fed and whatever they may do going forward.

Good luck

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Investors Are Troth

Posted on by 
The doom mongers are up in arms
As though they raise many alarms
Investors don’t care
And add risk with flair
Ignoring the much-mooted harms

So, war is no longer concerning
And though hyperscalers are burning
Through all of their cash
Amid much backlash
Investors, their shares, are still yearning

And what about data and growth?
Investors care naught about both
Concerns about yen?
Not that trope again!
To stocks most investors are troth

As I read through my X feeds in the morning, as well as the WSJ and Bloomberg, the overriding theme appears to be the end is nigh.  Whether discussing Iran and the oil price and the future of the Strait of Hormuz, AI and the bubble or the potential for massive job losses and the creation of Skynet, the economic data and the incipient recession coming because people cannot afford to continue their consumption habits, or the idea that we are on the precipice of a Treasury bond market collapse because the Japanese yen is weak, the dominant theme is disaster is around the corner.  It is really tiresome, I have to say.

Now, you might say that I simply follow the wrong people, and that may be true, but my feed hasn’t changed, and I never look at the algorithm’s selections for me, I only look at my followings.  So, I cannot tell if people have become that much more bearish on the overall situation, or if they simply write these things because they believe they will get more engagement.  I fear it is the latter, but that simply devalues anything useful they may have to say.  Mostly, it’s frustrating to try to get an unbiased sense of what is happening in the world these days.  After all, while I understand that governments put out propaganda constantly, I thought the idea behind X and Substack was you could avoid that.  I think I am going to go back to reading books!

So, as we await this morning’s payroll report, I’ll try to touch on the key issues I believe matter.  Starting with the yen, which continues to garner attention, or more accurately, the joint intervention garners attention, I first have to laugh at the following Bloomberg headline, “Yen Surrenders Nearly Half Its Gains From US-Japan Intervention”.  This was written by Mia Glass, and I don’t know anything about her except her grasp of arithmetic is tenuous.  Here is the chart of USDJPY and while the yen has been weakening steadily since the intervention last week, half?  Even taking the spike low into account, we are nowhere near a 50% retracement and on a closing basis, it is a ridiculous claim.

Source: tradingeconomics.com

There continues to be much fodder made about Secretary Bessent trying to prevent a meltdown in the Treasury market but Occam’s Razor tells me that it is far more likely that a too-weak yen is bad for Japan because of its inflationary impact and the US because it impedes US exports so joint intervention made sense.  And as I have maintained all along, unless underlying fiscal and monetary policies change, the yen is going to continue to weaken.

Turning to Hormuz, the press continues to write with glee about President Trump’s miscalculation and the US losing the war and whether Iran and Oman are going to come to some agreement on the Strait, but oil prices, while they rallied a bit yesterday, are lower this morning by -0.6% and -9.25% in the past week.  Looking at the chart below, despite all the discussion of inventory depletion, which are real, but obviously not as important to the price as many previously believed, the trend remains downward and we are well below the trend.  Frankly, at $75/bbl, it appears the world works fairly well.

Source: tradingeconomics.com

Look, I would rather pay less for my diesel, and I know you would all like to pay less for your gasoline, but here’s a 20-year history of the RBOB (NYMEX gasoline) contract.  We are hardly in unprecedented territory having spent a lot of time around here from 2011 through 2015 as well as the beginning of the Russia/Ukraine war.

I have no idea how things will end up in Iran, nor does any other commentator.  I know I am happier if Iran does not have a nuclear weapon and ballistic missiles that can reach Europe, let alone the US.  But I would say the market has almost lost interest in the war.

As to the hyperscalers and the AI bubble, in truth, it seems much of the animosity has been turned toward SpaceX as everyone loves to hate Elon almost as much as they love to hate Trump.  But it appears by many metrics that equity markets continue to benefit across the board from strong earnings results, with ~85% of companies (depending on your source) beating estimates which is well above the average of 77%.  So, the economy continues to grow pretty strongly, and companies continue to make money, and investors continue to want to buy shares.  The hyperscalers aren’t leading the pack anymore, but they have not collapsed either.  There are many who continue to explain this cannot go on forever and there will be a reckoning, and they may well be correct, but in this case, being early and being wrong are the same thing.

Ok, enough of that.  Let’s see if anything noteworthy has happened overnight.  The truth is, not especially.  Asian shares were mixed with Chinese shares doing well after solid trade data, but the rest of the region drifted lower.  European shares are firmer across the board after broadly positive data (German IP and Trade, French Trade) although the French Unemployment Rate ticked higher to 8.3%.  And US futures are higher this morning as well ahead of the NFP report.  Despite the doom and gloom, equity markets are doing fine.

Bond markets have barely moved overnight, although we did see Treasury yields back up 5bps yesterday.  That appears to have been on the back of the oil price rise, although as I look at probabilities of central bank rate hikes, there is a growing belief that the Fed, ECB and BOJ are all going to raise rates next month as hiking rates into an energy shock seems to be their MO.

Source: rateprobability.com

We discussed oil but gold (+2.0%) and silver (+4.1%) are the real story in commodities as both are extending their recent rallies from the consolidation lows.  For instance, silver is higher by 11% this week and $9/oz since July 17th.

Source: tradingeconomics.com

Finally, the dollar, despite all the anxiety about the yen, remains quiet overall.  The DXY is below 100, back in its range and showing no inclination to move in either direction.  This morning ZAR (+0.7%) is the king of the hill on the rally in gold while MXN (+0.3%) is a touch higher after Banxico left rates on hold.  But remember, peso rates are still high and economic growth continues apace so investment opportunities abound.  The peso has strengthened more than 17% since the beginning of 2025, shaking off any tariff concerns easily.

Source: tradingeconomics.com

As to the data, here are consensus forecasts:

Nonfarm Payrolls80K
Private Payrolls78K
Manufacturing Payrolls4K
Unemployment Rate4.2%
Average Hourly Earnings 0.3% (3.5% Y/Y)
Average Weekly Hours34.3
Participation Rate61.6%

Source: tradingeconomics.com

We also see Canadian employment data (exp 6.5% Unemployment Rate) and hear from Thomas Barkin, the Richmond Fed president.  But it is a summer Friday and typically, about an hour after the NFP release, traders are gone for the weekend so don’t expect too much today.

The world is not ending, the dollar is not collapsing, the Treasury market is not collapsing, and equity markets are not about to implode.  My take is the big stories from the past months have lost their luster and I suspect after a lull, we are going to start to focus on the politics of the midterm elections in November.  But until then, have a cold one and relax.

Good luck and good weekend

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