Tag Archives: #JPY

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

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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

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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

Adf

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

Adf

Does It Matter?

Posted on by 
Much ink has been spilled
Describing intervention
But does it matter?

It is still early days since the joint intervention in USDJPY by the US and Japan, and we know they spent a lot of money, but the question at this point is, has it really changed anything?  It is pretty easy to look at the chart below and see the pattern following previous interventions repeating already.  Major dollar decline followed by very gradual dollar strength.

Source: tradingeconomics.com

But as I said it is early days.  Now, I have made the point that unless more fundamental changes are made in Japan, whether that is reining in spending (which seems highly unlikely) to reduce the budget deficit and ongoing increases in debt issuance, or tightening monetary policy by raising interest rates more aggressively, it strikes me that despite all the headlines, this won’t change the situation that much.  

If we use CME JPY futures positions as a proxy for the carry trade, as you can see in the below chart from cotsignal.com, that while we are not at record short positions in the large spec community, we are awfully close.

In fact, it is difficult to see at this point, although the data to be released tomorrow could well show it, much change in the short JPY positioning amongst the speculative set.  In fact, I would expect that would be the case to some extent.  And yet, as in the first chart, the yen appears to have begun to grind lower again.

Much has been made of the potential ramifications of the fact that the Foreign and International Monetary Authority (FIMA) swap lines were used to fund this intervention rather than Japan simply selling some of its Treasury holdings (remember, it holds some $1.13 trillion), and what it means.  Some analysts are claiming Secretary Bessent is concerned over the reaction in the Treasury market if the Japanese sell their bonds and so was trying to prevent any additional pressure there.  And perhaps that is correct.  We will never really know as Bessent will certainly never admit that.  

But let me offer a different, simpler explanation.  The BOJ didn’t want to take the losses on their bonds which are probably quite large given where US yields have been.  Remember Silicon Valley Bank?  So, if the BOJ used a repo facility, they get the cash and don’t take the loss.  After all, that is not really a new idea.  Yet I haven’t heard a single analyst mention it.  I guess it’s not sexy enough.  Time will tell if things have really changed, but to my eyes, not yet.

Let’s turn now to Friday’s release
Of Payrolls, where there’s an increase
Expected and if
It comes, folks will sniff
A hike ere the summer does cease

On a subject that has not gotten a lot of press so far this week, tomorrow brings the NFP report where a solid growth in NFP is expected (80K) although yesterday’s ADP Employment number disappointed at just 44K.  Remember, since the change in immigration policy and the deportation of several million foreigners, it is becoming dogma that a stable Unemployment Rate can be achieved by simply not losing jobs as opposed to having to keep creating new ones. 

In this light, 80K indicates a still solid labor situation.  Now, the question at hand is how the market will absorb the data.  We continue to see equity market participants focused entirely on the earnings data being released, with macro concerns a distant third place on their worry list.  (I imagine oil is second). But for the fixed income market and the newly created Fed watchers, this is a critical piece of information.  

The few Fed speakers we have heard this week have all discussed how they are now very focused on inflation (where were they in 2022?) and may need to raise rates if it continues to rise although a look at the Fed funds futures market shows that the probability of a rate hike next month has declined to 55% from two-thirds earlier this week.  And while a second hike is still priced in the curve, it has been delayed until next spring from the earlier January expectations.

I find this quite interesting as all the Fed commentary has been hawkish and the data we have seen, notably ISM, continues to show economic strength.  So, too, does the corporate earnings data and forecasts, with strength as far as the eye can see.  I have no explanation for this change, and, in fairness, it is a bit subtle, but the futures market appears to be pricing in a different outcome than the punditry or at least starting to.  We will need to watch this carefully as it may be a harbinger for more substantive changes in the narrative and future price action.

Ok, let’s quickly look at markets.  The outstanding performer yesterday was clearly the precious metals space with gold (+4.1% yesterday, +0.3% this morning) having its largest gain since the late March bounce.  Whether I draw a trend line or look at the 50-day moving average, it seems like a clear break higher after six weeks of consolidation around the $4000/oz level.

Source: tradingeconomics.com

Silver (-0.5%) had a similar move yesterday while copper (+0.9%) is in the process of making yet more new highs this morning although this move has been far steadier.  I’ve seen explanations about how yesterday, the market suddenly realized that inflation was a problem or other such nonsense, but my experience tells me this is more likely a positioning event with new money entering after the markets demonstrated a more certain bottom.  In other words, since it couldn’t go down despite bad news, the only direction left was up.

Oil (+1.0%) is almost an afterthought these days, remarkably.  There is a lot of discussion about an imminent deal between Oman and Iran on the Strait of Hormuz, but my impression is that the market has pretty much moved beyond that story.  EIA inventories rose, inventories at Cushing rose and there is no evidence of shortages anywhere in the West.  

In the equity markets, yesterday’s mixed US session was followed by a generally weaker one in Asia (Japan -0.9%, China -0.2%, HK -1.5%, Korea -4.6%) although there were some gainers as well (India +0.5%, Australia +0.5%, Singapore +1.0%, Thailand +0.7%).  The tech story continues to be the driver and yesterday was a clear demonstration of tech concerns compared to basic materials bullishness.  Europe, though, is firmer this morning led by Spain (+1.1%) and France (+0.6%) after some positive data was released (Spanish IP, French Construction PMI, German Factory Orders) although the DAX (+0.25%) is lagging the group.  As to US futures, at this hour (7:40) while the NASDAQ (-0.4%) is lower, the other two indices are firmer by 0.2%.

In the bond market, yields are edging higher this morning with Treasuries (+2bps) leading the way and most European sovereign yields higher by 1bp.  While yields across the board are at the high end of their recent ranges (see chart below), they do not appear to be breaking out  Although for now, the trend across the board does seem to be modestly higher.

Source: tradingeconmics.com

Finally, the dollar is a bit firmer this morning, but only just.  In fact, there is really no currency movement of note to discuss.  Brazil cut its SELIC rate to 14.0% as expected and the BRL (+0.3%) is a touch firmer, but really, other than that, 0.1% is today’s story and that is not much of a story.

Today’s data releases include Initial (exp 202K) and Continuing (1790K) Claims as well as Nonfarm Productivity (0.6%) and Unit Labor Costs (2.1%) and that’s really it.  There is another speech by St Louis Fed president Alberto Musalem, but we already know he is a hawk, so there will be nothing new there.

While we need to keep our eye on how things play out in the yen, there seem to be fewer stories of interest right now, at least marketwise.  Perhaps we are finally in the summer doldrums.

Good luck

Adf

Smart or Insane

Posted on by 
While pundits all like to complain
About everything, smart or insane
When stock markets rise
It’s no real surprise
That few people care what they’re sayin’

As penance for yesterday’s overly long diatribe, I will keep this morning’s much shorter, especially since there is not nearly so much interesting to discuss.  There are still many discussions on the whys and wherefores of the US joining with Japan in intervening in the FX markets, with a pretty even mix of those saying it won’t matter and those saying it is a game changer.  As you can see from the chart below, this morning the beleaguered JPY (-0.45%) is slipping a little, but hardly enough to matter in the context of last week’s gains.

Source: tradingeconomics.com

Of course, we won’t really know how effective this bout of intervention has been for at least a few weeks/months, as the history, clearly shown on the chart is a big move higher followed by a gradual depreciation in the yen.  Will that play out again?  My suspicion is that absent a policy change by the BOJ (i.e. a more aggressive rate hike schedule) or the Japanese government (i.e. less fiscal stimulus) the answer is no.  This is especially true if the Fed raises rates, although I still do not believe that is coming soon.  

However, it is important to remember that the Fed funds futures market is confident of a hike by October, with a two-thirds probability of one next month as per the below cmegroup.com table.

Turning to the other major discussion from yesterday, the ongoing feedback/blowback from the Fed’s no movement, and more importantly from Warsh’s behavior during the press conference, that too remains a topic of discussion with pundits on both sides adamant that he was either right or wrong on both measures.  The only thing I am sure about is that he doesn’t care much about what the pundits are saying.  Rather, he is very likely focusing on getting his points across to the rest of the committee, and that will be a tough job.

In 2025, FOMC members gave, on average, one speech a day which added to the forward guidance which was a key tool in their toolbox.  You know I often railed against the ongoing verbal diarrhea from these folks as from the best I could tell, nothing said was ever designed to sway opinion, merely to burnish each speaker’s credentials.  And they clearly loved the quasi fame that came with it.  In fact, I suspect it is that very quasi fame the committee is most reluctant to cede.  Chairman Warsh has his work cut out for him.

As to today’s new stories, there are none, at least none of note.  There are more conflicting comments from President Trump and the Iranians about negotiations or not.  Yesterday’s ISM data was quite positive, coming in at 55.6 vs 54.0 expected, just another indication that the US economy continues to tick along quite nicely.  After that, the news heads towards the political with several key primary elections to be held today with DSA candidates picked to win and run in the general elections in November.

But what has everybody happy is the fact that equity markets are showing strength once again.  I read that of the S&P companies that have already reported, 85% have beaten estimates, a much higher than normal percentage (76% is the norm), and another positive for market bulls.  

So, let’s take a look at how markets behaved overnight with that theme.  The strong US performance was followed by a more mixed session in Asia, although there were more gainers (Tokyo, China, Korea, Australia, Indonesia, New Zealand) than laggards (HK, India, Philippines).  The tech story remains the major story since the oil story has become so confusing on a daily basis, I feel like most investors have moved on.  Meanwhile, in Europe, it is a broadly positive session as well led by Germany (+0.6%) and the UK (+0.35%) while France (+0.1%) and Spain (0.0%) are not quite as happy.  Arguably, the biggest news in Europe continues to be the unprecedented flood of illegal immigrants into Ceuta, Spain and the punditocracy is actively expressing their opinions on the issue, although whether there is a direct impact on the equity market in Madrid is unclear.  Lastly, US futures at this hour (7:20), are all pointing higher again as the market awaits earnings from SpaceX this afternoon after the close.

In the bond market, there continues to be a great deal of garment rending and teeth gnashing amongst the financial illuminati as yields hold the bulk of their recent gains.  This morning Treasury yields have backed up 1bp after yesterday’s -5bp decline, although European sovereign yields are generally lower by -1bp this morning.  As of now, there is no answer to the question of is the bond market focused on inflation or excess issuance although it could well be a little of both.

Remember when oil (-0.8%) was the only market that mattered, and all other trading looked there first.  We heard stories about $200/bbl coming soon and tank bottoms as reserves emptied and a growing concern about future economic activity.  Well, that never really happened.  As I type, WTI is back below $80/bbl and I particularly like this chart that calculates the mean price over the past 6 months ($86/bbl) and shows no trend whatsoever.  

Source: tradingeconomics.com

To me, this implies there is a new equilibrium although I suspect that when the hostilities cease, and I believe they will at some point this year, we will see sharply lower prices for crude and products.  As to metals markets, they remain relatively uninteresting with modest gains today (Au +0.2%, Ag +2.4%, Cu +1.7%).

Finally, in the FX markets, away from the yen the dollar is under a bit of pressure this morning.  First, for all of you who follow the DXY and were excited by the ostensible breakout above 100.50, as you can see in the below chart, that story appears to have ended for now.

Source: tradingeconomics.com

But away from the yen this morning, the rest of the G10 have all shown modest gains led by AUD (+0.5%) after some positive household spending data.  Otherwise, 0.1% to 0.2% is the state of the day.  In the EMG bloc, ZAR (+0.4%) is the leader of the pack on the combination of softer oil prices and stronger metals prices.  Too, BRL (+0.25%) and MXN (+0.25%) seem to be benefitting on the same basis.  Otherwise, it’s hard to get excited here.  Perhaps another bout of intervention will perk things up, but I doubt that will happen soon.

On the data front, there’s quite a bit to be released this week culminating in the Friday NFP report.

TodayTrade Balance-$73.0B
 JOLTs Job Openings7.4M
 Factory Orders0.2%
 -ex Transport0.5%
WednesdayASP Employment70K
 ISM Services54.5
ThursdayInitial Claims202K
 Continuing Claims1790K
 Nonfarm Productivity0.6%
 Unit Labor Costs2.1%
FridayNonfarm Payrolls80K
 Private Payrolls79K
 Manufacturing Payrolls4K
 Unemployment Rate4.2%
 Average Hourly Earnings0.3% (3.5% Y/Y)
 Average Weekly Hours34.3
 Participation Rate61.6%
 Consumer Credit$10.85B

Source: tradingeconomics.com

In addition, there are three Fed speakers, and I wonder (and am hopeful) that we hear less and less from them going forward.  Obviously, all eyes will be on the payrolls on Friday, and we can dive into that later in the week.  But today, it is hard to get excited about anything.

Good luck

Adf

Pundits and Bores

Posted on by 
The fallout from Warsh’s decision
To leave rates without a revision
Has opened the doors
For pundits and bores
With hawks and doves set for collision

For some, Warsh has failed from the start
As they felt a rate hike was smart
But others explain
That under his reign
It’s markets that play the main part

For a no action outcome by the Fed last week, it certainly is interesting how much digital ink has been spilled discussing the outcome of that meeting and, depending on which side of the argument you fall, whether it was the right move or an error.  You know I have been of the belief that there will be zero rate hikes this year and nothing has changed that opinion yet.

There is a great deal of conversation regarding the Fed’s credibility and how despite Warsh’s tough talk about achieving their 2% inflation goal at his first meeting, by doing nothing last week, he has trashed that credibility.  My first thought here is, given the Fed has failed in its key objective for more than 5 straight years on its own terms, it is difficult for me to accept they had a lot of credibility left to trash.  But my second thought is to listen to the Chairman’s words about allowing the market to do its job, and not simply watch the Fed, and I realize there are an awful lot of analysts and pundits who don’t know how to do that and therefore are extremely uncomfortable now.  As I wrote last week, these folks get paid a lot of money by Wall Street and now they have to earn it.  So perhaps that explains the ongoing diatribes.

Much has been made of the fact that between the June and July FOMC meetings, US Treasury yields rose substantially as you can see from the below chart.

Source” tradingeconomics.com

At the close on Friday, they had risen 34bps in the 30-year and 28bps in the 10-year), although this morning, with oil prices (-5.6%) falling on the back of a renewed diplomatic initiative in Iran, both of those bonds have seen yields back off by 5bps. 

Now, one of the things that Warsh specifically explained in the press conference was that the market had raised rates already, effectively doing the Fed’s job for them.  And here is the point of departure, I believe, regarding the punditry viewpoint and the Warsh viewpoint.  Warsh has been explicit in saying he wants the Fed’s footprint in the markets to shrink.  He wants market participants to, “play the ball, not the referee”.  However, the pundits claim that the only reason rates rose was in anticipation of the Fed hiking rates.  

So, let’s try a little thought experiment.  Assume there was no Fed, instead that money supply was mechanically increased by 2% per year and that all interest rates were determined by the market.  Do you believe that in this scenario, a government running consistent extremely large deficits would not drive interest rates higher than they otherwise would be, without a central bank to officially do so?  I know I do.  Is that any different than the market pushing yields higher because they are concerned with excess supply of Treasuries and other inflation concerns?  

The Fed has had a major, and in Warsh’s (and my) view, too large impact on markets for a long time, since Black Monday in 1987.  Change is hard and the punditry does not like the fact that they are going to have to actually think and pay attention to many variables in order to have a viable view on things, so they are all crying and claiming Warsh is making a huge mistake.  While not surprising, I think they are completely wrong.  

It is also important to understand that the current yields in the bond market are anything but ordinary. Below is a chart I created with FRED data and included the long-term average 10-year yield since 1962, which happens to be 5.81%, more than 100bps above current levels.  For a very long time, a good rule of thumb for the 10-year yield was it should be approximate the nominal GDP growth rate, but we have gone through such a long period of financial repression, that idea faded away.  Perhaps that is coming back into vogue, so at the long-term average, we could see 3.8% GDP growth and 2.0% inflation.  And even today, it could represent 2.7% GDP growth and 2.0% inflation.  I don’t think anybody would be unhappy with that outcome.

My understanding is the task forces will not be reporting until early next year.  At the same time, I am convinced that Mr Warsh is very serious about making significant changes at the Fed going forward, and I applaud that.  But it is going to require him to convince 18 other people who have been inculcated in a process that has proven to be a failure but offers comfort to those people because they know how it works.  Change is very hard, and this will be harder than most.  One last thing, the biggest change is going to be the balance sheet.  The Fed continues to buy T-bills and expand the balance sheet as they continue to seek to maintain “ample” reserves, so banks have liquidity.  I would not be surprised if when we hear from Chairman Warsh at the Jackson Hole meeting at the end of the month, he indicates the Fed will stop buying bills at the next meeting moving further down the path of change.

Surprising comments
Bessent admitted the Fed
Joined the Japanese

The following statement released by Japan’s MOF is quite a surprise, at least the fact that they admitted to the action, something that has rarely been the case in the past.  

Some have made the point that given Japan is the largest holder of Treasury securities in the world (other than the Fed) and that they would need to sell their Treasuries to fund intervention, this was the driving force.  Certainly, the US is not keen to have holders sell their bonds at this point.  As you can see in the chart below, this intervention has had a larger impact than the previous bouts which were solo Japanese efforts.

Source: tradingeconomics.com

At the dollar’s low, the yen appreciated about 5% in the past two sessions, certainly a very large move.  One of the other things that was interesting was that ostensibly, the Treasury sold EURJPY, not USDJPY.  Perhaps they had extra euros lying around they no longer wanted.  According to BOJ data, it appears the Japanese spent something like $33 billion on the intervention, but I have no indication as to the US effort.

Joint intervention is pretty rare, with the last time being in the wake of the earthquake/tsunami at Fukushima in 2011 when the yen strengthened dramatically.  But it also has a better track record than solo intervention, although absent significant fiscal changes, on both sides of this equation, I suspect that within a few months, the yen will weaken again.

Ok, I feel like that’s enough for one morning.  The oil story, as I mentioned, is that the President has called off the mooted weekend attacks and diplomacy is back on the table.  Interestingly, the metals markets are not as excited by that with gold (+0.15%), silver (+0.6%) and copper (+0.75%) all higher, but not by very much, especially given the size of the decline in crude prices.  And product prices (gasoline -3.4%, heating oil -3.0%) are also sharply lower.

As also mentioned above, bond yields have backed off with European sovereigns sliding far more than Treasuries, between -6bps (Germany, Netherlands) and -9bps (UK, Italy, Greece).  However, JGB yields (+3bps) did not get the memo although I suppose that has more to do with the belief that the BOJ is going to be forced to hike rates as part of the joint US-Japanese currency efforts.

As to the equity markets, after Friday’s US rally, the picture in Asia was mixed, despite the oil price decline, although for Japan, a stronger yen is often a problem for Japanese equities.  The worst performers were Korea (-5.1%), Tokyo (-0.9%) and China (-1.0%) while much of the rest of the region followed the US higher (HK +0.5%, India +0.7%, Taiwan +0.6%, Australia +0.5%) with the smaller exchanges mostly higher as well.

In Europe, things are generally bright with Germany (+1.4%), France (+1.3%) and Spain (+0.75%) all nicely higher despite (because of) modestly weaker PMI data although the UK (0.0%) has not been able to overcome its PMI weakness.  Now, in fairness to the UK, its 51.9 reading, while weaker than last month and forecast, is still about the best in Europe.  As to US futures, they are all in the green, led by the DJIA (+0.8%) at this hour (7:00).

Finally, the dollar is kind of confused overall.  The big winner today is KRW (+1.0%) although that trade has been ongoing for more than a month and is approaching an 8% gain over that period.  The yen (+0.4%) continues to climb, albeit less aggressively, although the other G10 currencies are generally under pressure (GBP -0.15%, AUD -0.3%, CAD -0.2%, NOK -0.6%).

However, I must mention something that Alyosha wrote this morning in Market Vibes that is worth considering; two of the major positions in markets were short bonds and short yen.  Joint intervention by the US and Japan to sell EURJPY has likely forced a lot of covering in both of those markets and it would not be surprising to see more activity like that and further short covering.  Japan is the largest holder of French bonds as well as Treasuries and could easily sell those without a peep from the US.  

Ok, I have gone way over my daily quota this morning, although there were a couple of really big, and complex stories to discuss.  On the data front, today brings ISM Manufacturing (exp 54.0) and I will delve into the rest of the week’s data, including Friday’s payroll report tomorrow.

Good luck

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Dust in the Wind

Posted on by 
A line has been drawn
Is it steel reinforced? Or
Just dust in the wind?

Shortly after 9:30 yesterday morning, the BOJ entered the FX market aggressively selling dollars as you can see in the chart below.  While the amount sold is unknown at this time, it was likely pretty large, ~$10 billion – $15 billion would be my guess.  In addition to the sales, though, apparently the Fed called around the Street “checking rates”, although my understanding is the Treasury didn’t actually sell any dollars.

Source: tradingeconomics.com

Regardless, the signal of an approved, if not joint, intervention is powerful and I expect that the market will take some time before pushing the dollar back higher again.  Now, one of the themes yesterday was that the BOJ would also raise interest rates at their meeting last night in a surprise move as a way to reinforce this action.  I believe if they had done so, it could have been quite effective and we would have seen another sharp leg lower, as well as an overall reduction in pressure on the yen.  But they did nothing with their base rate remaining at 1.0% and, as you can see from the chart, the drift has already begun for the yen to weaken once more.

As I have maintained throughout this process, absent policy changes of substance, and at this point in Japan that includes fiscal as well as monetary, pressure on the yen is very likely going to be the norm.  Of course, if the Fed really does begin to ease policy at some point, that will alter opinions and I imagine soften the dollar universally.  

The pundits are still really pissed
That Warsh, their concerns, has dismissed
Get ready to hear
That Doomsday is near
If Warsh keeps ignoring their gist

Since we seem to be in an interlude in the war in Iran and the Middle East, so oil markets remain quiet and there has been little news from the White House, the punditry has continued its focus on Fed Chair Warsh and all the things they hate that he is doing.  This is well summed up in this morning’s WSJ article titled, ”Kevin Warsh’s Honeymoon with the Bond Market Is Already Over”  interestingly, this was not written by Nick Timiraos, but rather by Sam Goldfarb, their bond market guy.  Personally, I think he is completely wrong, but the punditry is consistent in their desperate desire for Warsh to tell them what the Fed is going to do so they can report it and seem smart.

However, my read on the bond market response is quite different, especially when put in context with other markets, notably inflation markets.  The fact that the 2-year yield has backed off, and we have already seen a modest pull-back in the 10-year tells me that there is limited fear of rampant inflation.  While the pundits, and many other central bankers (see Lagarde, Christine) think that hiking rates into an energy price shock is the right move, it has historically been a key policy error.  And what we have learned from financial history is that it is NEVER different this time.  And the folks who trade inflation have breakevens (the difference between nominal Treasury yields and TIPS yields of the same maturity) trading at very ordinary levels of 2.27% in the 10-year and 2.22% in the 30-year.  I thought that Alexandru Stefan Goghiedid an excellent job of describing the situation in his Substack article this morning.

In the meantime, you know who else isn’t really worried about this?  Equity investors.  Broadly speaking, green is today’s color in that asset class, with some of the real movers not even shown in this Bloomberg Screenshot.  

For instance, the KOSPI rallied 17.9% last night after Amazon and Microsoft’s earnings got everybody reconvinced that the AI trade was not over.  This is the market that I had been highlighting as collapsing and it just did a major reversal.  Last night’s candle, on the right-hand side of the chart, is one of the largest you will ever see in a major equity market!

Source: finance.yahoo.com

So, we have made it through the major tech earnings releases and spirits are still high.  While the Fed funds futures markets are still pricing a two-thirds probability of a hike in September and the certainty of one by October, the recent cooler than expected CPI and PCE data will continue to give ammunition to remain on hold.  To me the real question is, will Chairman Warsh be able to convince the committee that reducing the balance sheet is the right thing to do (it is) as that will have a much stronger impact on inflation than raising rates into the energy price shock.

In an aside, lately I have been wondering if every Fed governor should be fired for ‘cause’.  After all, according to legal precedent, cause can mean:

  • Inefficiency – persistent inability or incompetence in performing the role’s administrative or official functions
  • Neglect of duty
  • Malfeasance in office

Now, I would not accuse them of the latter two, but let’s face it, they have completely failed in their official functions as evidence by the fact that even on their own terms of stable prices, it has been more than 5 years since they have achieved their goal.  That seems pretty inefficient or incompetent to me!

Ok, let’s run through the other markets.  Bond yields are higher by 1 tick around the world, and we have discussed them already.  JGB yields, have slipped -2bps, so maybe they are not as worried with the yen strength from yesterday.

Commodity markets are dull with oil (+1.5%) having rallied in the past hour but still hanging around the $85/bbl level with no new news on the war.  At the same time both gold (-1.2%) and silver (-2.0%) are under pressure this morning, although that doesn’t make a huge amount of sense to me given the dollar’s broad weakness.  Perhaps the fact that it is month end is driving flows there, but I am not close enough to those markets to know.

Finally, the dollar is softer, having fallen sharply yesterday although bouncing somewhat this morning.  As you can see in the DXY chart below, we are back within the 96.50/100.50 range that has prevailed for most of the past year and have traded below 100.00 several times yesterday and early this morning.

Source: tradingeconomics.com

To me, this is very interesting as FX traders seem to be taking different signals from the Fed than the short-term interest rate guys.  This does not feel like a market that is anticipating rate hikes in the US.  Now, historically, when it comes to opinion differences across markets, FX traders are the worst of the worst.  And, of course, I am an FX guy at heart, but I have a feeling they are correct here and I still see no rate hikes this year despite the Fed funds futures markets relative certainty.  So, right now, the dollar is broadly firmer by 0.3% across the board with the biggest outlier KRW (-1.35%) seeming to follow the KOSPI.

I think the really important thing to remember here is that the dollar has just not done very much, at least against the G10 currencies, for more than a year.  Certainly, LATAM currencies have performed well this year, but it remains difficult for me to look at the rest of the G10, a group with weak economic activity, and get excited about owning any of them.

On the data front, the PCE data was as expected to softer, but the real key yesterday was the GDP data which showed nominal GDP rose 7.9%, although the inflation adjusted number was just 1.5%.  But this is the very essence of running it hot, high nominal growth, which consisted of significant consumption and investment, while allowing inflation to run as well.  From a debt management perspective for the US, the debt/GDP ratio fell accordingly by about 1%.  While this trend remains higher, I expect we will see more of this type of outcome going forward.

As to today’s releases, Chicago PMI (ep 56.0) and Michigan Sentiment (54.0) are what we see, neither of which seems likely to matter to markets.  The equity bulls are back and that is going to be today’s story.  If those rallies fail, it will portend larger problems I believe, but my take is that is not going to happen.  I guess we shall see.

Good luck and good weekend

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