Tag Archives: #lowerdollar

Downward, Crawling

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The trends in the market of late
Continue, and there’s no debate
The dollar keeps falling
With stocks, downward, crawling
While gold never has looked so great
 
The latest concerns are that Trump
Chair Powell, is looking to dump
The narrative shows
That if Powell goes
That Treasuries clearly will slump

 

Europe remains closed today for its Easter Monday holiday, as was Hong Kong last night, but the rest of Asia and the US are open.  With that in mind, though, I’m guessing there are many who would prefer markets to remain closed given the price action.  At least those who remain invested in the US as equity futures are pointing lower, yet again, this morning, with all three major indices down by about -1.0% at this hour (6:00).  But really, the market story that is atop the headlines today is the dollar and its continued weakening.  Since President Trump’s inauguration, so basically in the past three months, the euro (+1.3% today) has climbed about 11% as you can see in the chart below.

Source: tradingeconomics.com

While that is not an unprecedented move, it is certainly swift in the world of foreign exchange.  Of course, it is important to remember that the current level, and higher levels, were extant for more than a year (July 2020 – November 2021) not all that long ago.  My point is perspective is key, and while the dollar has been declining sharply of late, this is not unexplored territory.  In fact, stepping back a bit, as I’ve shown before, the euro remains in the lowest quartile of its value over the past twenty years.

Source: finance.yahoo.com

One of the interesting ways in which the narrative has changed has been that prior to the imposition of tariffs by President Trump, when they were only threatened, the economic intelligentsia were convinced that the only outcome would be other currencies declining in value sufficiently to offset the tariff, thus a stronger dollar with the end result that US exports would no longer be competitive.  Now those same analysts are explaining that the weaker dollar is a problem because imports will be more expensive, thus raising the inflation rate.  

However, the lesson I have learned throughout my career is that movement in the dollar, while important on a very micro level for businesses and foreign earnings calculations, is rarely a driver of any macroeconomic trend.  In fact, it is a response.  Other things happen and the dollar adjusts based on the flows that occur. While theoretically, at the margin, a weaker dollar will tend to result in higher import prices, and ceteris paribus, that would feed through to the inflation rate, no ceteris is paribus these days.  For one thing, oil prices are lower by nearly 18% since the inauguration and oil prices have a far larger impact on inflation than does the value of the dollar.  My point is that neither the dollar’s level nor the fact that it is declining is a sign of the end of times.

Source: tradingeconomics.com

Of more concern to many is the Treasury bond market as that is a true Achilles heel for the US.  Given the massive amount of debt outstanding, and the fact that there is so much to roll over this year, and the fact that the budget is still running a massive deficit, the need to refinance is the biggest issue facing the US economy in my view.  Of course, the US will be able to refinance, the question is the price.  

Since we’ve been measuring things from Trump’s inauguration, a look at 10-year Treasury yields shows they have declined a modest 28bps as of this morning’s pricing.  There has also been some volatility, but again, hardly unprecedented volatility.

Source: tradingeconomics.com

For instance, a widely followed measure of bond market volatility is the MOVE Index, currently produced by BofA.  At Friday’s close, it sat at 114.64.  A quick look at this chart shows the index, and by extension bond market volatility, is in the upper one-third of its range since inflation kicked off in 2022.  Again, it has spent a lot of time at higher levels and a lot of time at lower levels.

Source: finance.yahoo.com

There are numerous stories being written these days about reduced liquidity in the bond market, and there are many stories being written about how the Chinese, or the Japanese, or Europeans are selling Treasury bonds as a signal that all is not well.  First, we know all is not well, so that should not be a surprise.  Second, there has been no indication that Treasury auctions are failing, in fact the opposite, with the most recent 10-year and 30-year auctions showing substantial foreign demand.  

The funny thing about the bond market is to many it is a Rorschach test as people see what they want to see. To some, it is entirely about inflation and inflation expectations, so rising yields portend inflation on the horizon.  To others, it is a recession/growth indicator, which for most people is a coincident indicator, higher growth leads to higher inflation in that view.  But these days, much ink is spilled discussing how it is now and indicator of confidence in the US, especially with the growing antagonism between President Trump and Chairman Powell.  The same folks who lambasted Powell for keeping rates too high, now seem to be cheering him on to keep rates “too” high as a sign of his independence.

There is no doubt that despite the fact that the Fed’s press has diminished, and the market’s focus on the Fed has waned, their actions remain important to the US economy.  But is Jay Powell the last bastion of confidence in the US?  That, too, seems a stretch.

Trying to summarize, things in the US are quite messy right now.  For many investors, and hedgers, the previous status quo was so comfortable, and actions were easy to take.  However, Donald Trump’s election back in November was a very clear signal that things were going to change.  And they are changing.  In situations like this, investors tend to bring their money as close to home as possible.  This process has only just begun.  Since March, I have maintained that I see the dollar lower, and for a long time that the equity market was overvalued.  While the recent speed of movement is unlikely to be maintained, I expect the direction is pretty clear.

Ok, a really quick tour of markets overnight.  In Tokyo (-1.3%) equity markets slumped further as the yen strengthened and the status of the trade talks with the US remains unclear.  Chinese shares (+0.3%) edged higher and the rest of Asia that was open was mixed.  With all of Europe closed today, all eyes will be on the States where things are pointing to a lower opening.

Treasury yields have risen 4bps this morning and European sovereign markets are all closed.  Last night, JGB yields edged higher by 1bp, but the narrative of Japanese interest rates rising closer to other national levels has not had much press lately.

The commodity markets have been where all the action is, with oil (-2.5%) lower this morning as I have seen comments that the US-Iran talks are making progress.  As well, it appears that the Russia / Ukraine peace talks are reaching a denouement.  Successful conclusions in either, or both, of these discussions would very likely point to a lot more available crude on the market, and lower prices ahead.  I still think $50/bbl is in the cards.  But gold (+1.9%) is the story of the day here as the barbarous relic makes yet another new all-time high vs. the dollar dragging silver (+1.3%) and copper (+3.9%) along for the ride.  Not only are foreign central banks continuing to buy, as well as populations in China, India and elsewhere in Asia, but it appears that US retail is waking up to the fact that gold has been the best performing asset for the past year (+45%).  I continue to see the metals complex benefitting from the current macro environment.

Finally, we have already discussed the dollar which is lower this morning against virtually all its counterpart currencies in Europe and Asia.  As it happens, LATAM currencies are gaining the least and BRL (-0.1%) has even managed a slight decline on the opening.  But overall, this is a dollar selling day.

On the data front, today brings Leading Indicators (exp -0.5%) at 10:00 and that is all that is on the calendar.  It is a quiet week, and I will outline the rest tomorrow.

It should be a quiet market given Europe’s absence, and given how far the dollar has fallen leading into the open, I wouldn’t be surprised to see a modest bounce, but the trend, as I explained, remains clearly for a lower dollar going forward.

Good luck

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The Tariff Explosion

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In China, Xi’s ‘conomy grew
Quite nicely, but now in Q2
The tariff explosion
Ought lead to erosion
Of growth, lest we see a breakthrough

 

Chinese economic data was released last night, and the numbers were far better than expected, well most of them were.  The below table from tradingecoomics.com highlights the big numbers showing strength in GDP, IP and Retail Sales although Capacity Utilization was soft.

But this is Q1 data, and pretty early at that, just two weeks past the end of the quarter.  As well it reflected activity prior to the tariffs imposed by President Trump, and subsequently the Chinese themselves.  Just as we saw massive increases in the trade deficit here, as companies were front-running the tariff threat, I imagine we saw a lot more activity brought forward by the Chinese to both satisfy that front-running, as well as some front-running of their own.  I guess the question to ask is, how much information does this data provide regarding potential future outcomes and I suspect the answer is, not much.  

Already we are seeing global economists reducing their forecasts for Chinese annual GDP growth this year, with the lowest number I have seen at 3.5% (Goldman).  That is far below the ‘about 5%’ that President Xi targeted back in February and clearly assumes tariffs will remain in place.  And perhaps that is the biggest unknown.  The current state of play between Trump and Xi is that Trump said, call me, maybe and we can talk while Xi has said, show some respect and we can talk.

At this point, it is all theater, with both men playing to their bases and trying to show strength.  I do believe that Trump is seeking to isolate China, but the ultimate end game may well be to get them to alter their behavior.  If history is any guide, I imagine that this won’t be settled quickly, but that by summer, both sides will be feeling the heat on the economy.  Alas, that’s a long time from now and there is ample opportunity for significant market gyrations between now and then.

Like Fujiyama
Successful trade talks will be
A beautiful thing

On the other side of the tariff sheet is Japan, which is priority number one for the US.  PM Ishiba has sent his chief trade negotiator, Ryosei Akazawa, to the US to sit down with Treasury Secretary Bessent who has been named the lead in these negotiations.  While there is much discussion on autos, another very sticky subject is rice, on which Japan imposes a very high tariff.  President Trump claims it is 700%, others say less, more like 400%, but whatever it is, clearly the Japanese are protecting their rice farmers.  Ironically, Japan is in the middle of a rice shortage and has been pulling from strategic stockpiles to prevent prices there from rising too sharply.  Meanwhile, the US has ample export capacity.  It seems like a win-win opportunity, but politics is convoluted and from what I have read, the Japanese farmers don’t want to cede any market share to imports.  

Nonetheless, I expect that this will be a successful outcome as it is too important to fail.  While President Trump continues his bluster, he needs a win economically, and if Japanese talks are successful, we will see many more versions completed within the 90-day period in my view.  Things won’t go back to the way they were before Liberation Day, but if trade questions are answered, all eyes will turn to the budget, which is going to be a different kind of messy.  As I have written before, the greatest potential irony from this tariff war is that we could see lower tariffs around the world, something that all that WTO hobknobbing could never obtain.

One other mooted issue between the US and Japan is the exchange rate, which, while the yen has strengthened more than 10% since its low (dollar high) back just before the inauguration, remains far above levels seen before the Covid inspired inflation resulted in the Fed tightening policy aggressively.  The chart below is quite clear in displaying just how weak, relative to the past 30 years of history, the yen remains.  That last little dip is the move so far this year.

Of course, given the yen’s most recent bout of weakness dates from 2022, when US interest rates started to climb, if Treasury Secretary Bessent is successful in getting rates lower, that will be a natural driver of a weaker dollar, stronger yen.  Especially if Ueda-san does tighten policy further.

We have much to anticipate as the year progresses.  Ok, let’s turn to the overnight session and see what’s happening.  Yesterday’s lackluster US equity performance was followed by a terrible earnings discussion for Nvidia and much more extended weakness in Asia.  The Nikkei (-1.0%) and Hang Seng (-1.9%) fell sharply as did Korea (-1.2%) and Taiwan (-2.0%).  China (+0.3%), however, bucked the trend likely on the support of the plunge protection team there buying to prevent a rout.  Certainly, the positive data didn’t hurt, but I doubt that was enough.  In Europe, screens are all red as well, with declines on the order of -0.3% (UK and Spain) to -0.6% (Germany and France).  It is, however, universal with every market there declining.  As to US futures, while the DJIA is unchanged, both the NASDAQ and SPX are down sharply on that Nvidia news.

In the bond market, yields have been edging lower despite (because of?) all the tariff anxiety.  While Treasuries are unchanged this morning, they drifted off 3bps yesterday.  European sovereign yields are all lower by -2bps to -3bps and the big news was JGB yields tumbling -10bps last night.  There continues to be a great deal of discussion about China using its Treasury holdings as a weapon, but I find that highly unlikely.  Unless they could literally find a bid for all of them at once, to prevent further losses, it would self-inflict too much damage.  My take is they are essentially performing their own version of QT, allowing Treasuries to mature and slowly replacing them with other things, Bunds, gold, oil, copper.  One of the biggest problems is there are precious few asset classes that are large enough to absorb all that money, so they will continue to hold Treasuries in some relatively large amount, probably forever.

Turning to commodities, oil (+1.0%) continues to trade quietly and hang around just above $60/bbl.  It feels to me like there is a lot more room on the downside than the upside, but that is just me.  In the metals markets, gold (+1.5%) is glittering again, making yet another new all-time high this morning.  Remember a week ago when the market was correcting and there was discussion about gold losing its luster?  Me neither!

Source: tradingeconomics.com

This chart is a perfect example of the idea that nothing goes up in a straight line.  But the trend here is strong.  Silver (+1.6%) is following in gold’s footsteps today but copper (-0.4%) is lagging.  No matter, I continue to think commodities have more strength ahead.

One of the reasons is that the dollar remains under pressure.  Last night, further weakness was manifest with the euro trading back close to the highs touched on Friday at the 1.14 level.  Prior to Friday, the last time the euro was here was in February 2022.  But again, like the yen chart above, the euro’s strength is a very recent, short-term phenomenon.  A look at the chart below demonstrates just how “weak” the dollar is vs. the single currency on a long-term basis.  The answer is not very.

But overall, the dollar is weaker this morning across the board against both G10 and EMG currencies.  I do agree with the idea that foreign investors have been liquidating their US equity holdings slowly and repatriating the funds home.  If that continues, and it could, a continued decline in the dollar, especially if US yields slide, is likely.

On the data front, Retail Sales (exp 1.3%, 0.3% ex-autos) is the headliner at 8:30 then IP (-0.2%) and Capacity Utilization (78.0%) at 9:15.  We also hear from the BOC, although they are expected to leave their base rate on hold at 2.75%.  EIA oil inventory data is due later this morning with a decent sized draw of more than 5mm barrels across products expected.  There are Fed speakers including Chair Powell at 1:30 this afternoon, but they have just not had much sway lately, and I think they are ok with that.

Putting it all together, at least in the FX framework, my take is the dollar has further to fall.  There is no collapse coming, but steady weakness seems realistic.  However, given the overall uncertainty at the current time, I would be maintaining hedges rather than anticipating that weak dollar.

Good luck

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End of Days

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The one thing about which we’re sure
Is risk assets lost their allure
It’s not clear quite yet
How big a reset
Is coming, and what we’ll endure


Now, I don’t think its end of days
And this could be quite a short phase
But don’t be surprised
If answers devised
Result in a lack of real praise

Chaos continues to reign in the markets as volatility across all asset classes has risen substantially.  Perhaps the best known indicator, the VIX, is back at levels seen last during the Covid pandemic.  Remember, the VIX is a compilation of the implied volatility of short-term equity options, 1mo – 3mo.  While markets can technically be volatile moving in either direction, the VIX has earned the sobriquet of ‘fear index’ as equity volatility most typically rises when stock markets fall.  As you can see from the below chart, the movement has not only been large, but very quick as well.

Source: finance.yahoo.com

The key thing to remember is that while volatility levels can rise very quickly, as the chart demonstrates, their retracement can take quite a long time to play out.  Part of that is that even when things start to calm down, many investors and traders are worried about getting burnt again, so prefer holding options to underlying cash positions.  At least until the time decay becomes too great.  My point is that look for trepidation amidst the trading community and markets in general for a while yet, even if by Friday, the tariff situation is made perfectly clear.  Of course, with that as background, we cannot be surprised that the Fear & Greed Index has made new lows.

Source: cnn.com

However, arguably of more concern is the price action in US Treasuries, which despite the havoc in the market, are not playing their historical safe haven role.  Instead, Treasury bond yields are rising, actually trading as high as 4.50% around midnight last night although they have since retraced a bit.  The bond market has a generic volatility index as well, the MOVE index, and it, too, is trading at very high levels, the highest since the GFC.

Source: finance.yahoo.com

In many ways, this is of much greater concern to markets, as well as both the Treasury and the Fed.  The 10-year US Treasury is the benchmark long-term rate for the entire world.  A rise in the MOVE index may indicate that there is something wrong with the bond market and its inner workings, or it may be an indication that inflation expectations are rising quickly.  Whatever the reason, you can be certain the Fed is watching this far more carefully than the VIX.

I have heard two explanations for the bond market’s recent performance as follows:  first, there are those who are saying that China is selling its Treasury bonds and using the dollar proceeds to buy gold.  Now, while their holdings have been slowly shrinking, they still have just under $800 billion, so that is a lot of paper and would clearly have an impact.  The thing about this thesis is we will be able to determine its reality when China next reports their reserve numbers next month.  

The other explanation rings truer to me and that is the bond basis trade may be unwinding.  Briefly, the bond basis trade is when investors, typically hedge funds, arbitrage the difference in price between cash Treasury bonds and Treasury bond futures on the exchange.  The current positioning is these funds are long cash and short futures, and since it is a basis trade, they typically lever it up significantly, with leverage ratios of up to 100x I understand.  The total size of this trade is estimated at > $1 trillion.  Now, if this arbitrage disappears, or these funds are forced to liquidate this strategy quickly, it could be a real problem for the Treasury market.  

Ever since the GFC and the Dodd-Frank legislative response, banks no longer carry large bond risk positions and are not able to absorb large transactions seamlessly.  During Covid, you may remember that Treasury yields were all over the map, crashing and then exploding higher one day to the next, and that was caused by this basis trade unwind.  Back then, the Fed purchased nearly $1.7 trillion in QE to stabilize the market, and by all accounts, the basis trade was half the size then that it is now.

Remember, too, arguably the most important part of the Fed’s mandate is to maintain Treasury bond market stability.  Without this, the US will not be able to fund its debt and deficits.  So, whatever your view of how Chairman Powell may respond to the tariff story, which seems to be patience for now, if the bond market starts to break, you can be sure the Fed will step in.  QT will reverse to QE in a heartbeat as they offset the impact of this position unwinding.  If that is the case, I anticipate we will see further weakness in equities and the dollar, while gold will truly shine both literally and figuratively.  I’m not saying this is what is going to happen, just that this explanation makes more sense to me.  

Ok, now that tariffs have officially kicked in as of midnight last night, let’s see how markets are responding this morning.  Most equity markets continue to struggle after yesterday’s disappointing US session, where higher opens eroded all day with the major indices all closing on their session lows.  This bled into Asia where Japan (-3.9%) gave up most of yesterday’s gains although both China (+1.0%) and Hong Kong (+0.7%) held up well amid government support.  As to the rest of the region, Taiwan (-5.8%) was worst off, but other than Thailand and the Philippines, both of which managed gains, every other index was lower, often sharply.  In Europe, the realization of the tariffs is hurting with declines of -3.0% to -4.0% across the board.  As to the US futures market, at this hour (7:25), all three major indices are lower by at least -1.0%.

Bond yields are all over the place this morning with Treasuries (+8bps) continuing their recent climb amid the fears discussed above.  However, in Europe, things are such that German yields (-1bp) are doing fine while UK Gilts (+9bps) are suffering along with Treasuries.  The rest of the continent, save the Netherlands, has also seen yields rise, but much less, between 2bps and 5bps.  Overnight, JGB yields were unchanged as players are uncertain as to the next steps by the BOJ there.

In the commodity market, oil (-5.6%) is once again under major pressure.  This feels like a confluence of both technical factors (the price has broken below long-term support at $60/bbl and is now testing for lows) and fundamental factors, with OPEC raising output and the mooted recession likely to reduce demand.  Interestingly, lower oil prices are a tremendous geopolitical weapon for the US as both Russia and Iran are entirely reliant on them for financing their activities.  As to the metals complex, gold as regained its luster (sorry 😁) rallying 2.8% and well above the $3000/oz level.  This has taken silver (+3.1%) and copper (+3.5%) along for the ride.  It seems to me the copper story is not in sync with the oil story as a recession would likely drive copper prices lower, but that is this morning’s movement.

Finally, the dollar is softer again this morning with the euro (+0.8%) trading through 1.10 and the yen (+1.0%) back below 145.00.  It’s interesting because there was a story last night about how the new Mr Yen, Atsushi Mimura, was speaking to the BOJ amid concerns that the yen has been too volatile.  However, to my eye the movement has been relatively sedate, strengthening gradually and still, as can be seen in the chart below, substantially weaker than for the many years prior to the Fed beginning to tighten policy in 2022.

Source: finance.yahoo.com

The other noteworthy move is CNY (+0.5%) which after slipping to levels not seen since 2007, has retraced somewhat.  If Treasury bonds are not seen as haven assets for now, the dollar has further to fall.

On the data front, the FOMC Minutes at 2:00pm are released, but given all that has happened since then, it is hard to get excited that we will learn very much new.  We also see EIA oil inventories with a modest build expected, but this market seems likely to have adjusted those numbers outside any forecasting error bars.

The tariff story will continue to drive markets for now as investors try to determine the best way to protect themselves until things settle down.  And things will settle down, but when that will happen is the $64 trillion question.  FWIW, which is probably not much, my sense is that we have a few more weeks of significant chop, as we await clarity on the tariff policy (meaning its goals).  I still believe there will be a number of deals that will reduce the initial numbers, but the ultimate goal is to isolate China.  It is going to be messy for a while yet.  As to the dollar through all this, my sense is lower, but not dramatically so.

Good luck

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Quite Miffed

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By now, each of you is aware
More tariffs, the Prez did declare
Some nations will scream
While others will scheme
To Trump, though, in war all is fair
 
The market reaction was swift
With equities in a downshift
While Treasuries rallied
Pure gold, lower, sallied
And everyone worldwide’s quite miffed

 

Once again, President Trump did exactly what he told us he was going to do from the start.  He applied reciprocal tariffs on virtually every nation in the world, although at a rate claimed to be ~50% of their tariffs on the US, (as calculated by the White House and which included quotas and non-tariff barriers as well.)  In addition to Israel, which pledged to reduce tariffs to 0% on US goods if the US would do the same, it appears Canada has also agreed that deal.  I expect that we will hear different responses from nations all around the world, but remember, the one thing the president has made clear is that retaliation by other nations will be met with a significantly higher response from the US.  I expect that smaller nations may find themselves in very difficult straits, although larger ones have more potential to respond.  But, in the end, the US remains the consumer of last resort, and every nation on the list realizes that losing the US market will not help their economies.

The market response was immediate with US equity futures plummeting on the open of the evening session and sharp declines in Asian equities as well.  Treasury yields fell along with the dollar, while gold after an initial rally, reversed course and is now lower on the day as well.

Analysts around the world are out with early forecasts of the “likely” impacts of these tariffs although I would take them with a grain of salt.  Remember, analyst macro models have been pretty useless for a while, ever since the underlying conditions changed as I described earlier this week, so it is not clear to me that applying broken models to a new event is likely to offer accurate estimates of future activity.  However, there is a pretty clear consensus, which is that inflation is going to rise while economic activity is going to decline, probably into a recession.  Personally, I am confused by this analysis as every one of these analysts continues to believe that a recession drives prices lower and reduces inflation, but I’m just reporting on what I have seen.

If pressed, I expect that we will see several nations reduce their tariff structures in response to this, similar to Canada and Israel, and US tariffs will decline there as well.  Other nations will dig in their heels and trade activity between the US and those nations will decline.  But I will not even hazard a guess as to which nations will do what.  Political pain is a funny thing, and different leaders respond differently.

My sincere hope is that now that the tariffs have been imposed, we can move on with our lives and discuss other issues because frankly, I am really tired of this topic.

Masked by the tariff mania was news that the US Senate has moved forward on its budget resolution bill which if passed and combined with the House, will allow the process to start to legislate for fiscal year 2026.  Both versions maintain the 2017 tax cuts, both seek unspecified spending reductions and while each has a different price tag, my take is this process will be completed before too long.  It would truly be miraculous if Congress actually submitted department spending bills on a timely basis, rather than the omnibus bills that have been the norm for quite a while.  That would be true progress in how the government works.

Anyway, let’s see where things stand this morning.  The one thing we know is that despite President Trump’s constant discussion on tariffs, market participants were not prepared.  Ironically, yesterday saw modest gains in US equity indices but as of now (6:40) US futures are sharply lower (NASDAQ -3.8%, SPX -3.6%, DJIA -2.6%).  Of course, the damage has been significant everywhere with equities lower worldwide.

In Asia, Vietnam (-7.2%) was the worst hit index, actually the worst in the world, as tariffs there rose to 46%.  Given Vietnam has been a way station for exports from China to the US, I expect that we will see some swift action by the government there to address the situation.  But elsewhere in Asia, while the losses were universal, they were not as bad as might be expected.  Tokyo (-2.6%) led the way lower with Chinese shares (Hang Seng -1.5%, CSI 300 -0.6%) also falling, but not collapsing.  Korea (-0.8%) and India (-0.4%) fell but were also not devastated.

In Europe, though, the pain is more consistent and larger, net, than Asia as per the below snapshot from Bloomberg.  This will be the most interesting thing to watch as there has been a great deal of huffing and puffing about a response, but will European nations, who sell a great deal into the US, risk a worse outcome, or will they reduce their own tariffs?

Something else that has declined sharply is bond yields around the world.  Treasury yields are lower by a further -6bps, and that is the basic decline seen across Europe as well.  Asia saw even greater drops in yields with JGB’s (-12bps) breaking the trendline that had been in place since the BOJ first started hiking rates last year and Governor Ueda made clear his intention to continue to do so.  

Source: tradingeconomics.com

It appears that investors are anticipating a global recession, at least based on the movements in government bond yields around the world.

In the commodity space, oil (-4.7%) has reversed much of its recent gains as the recession narrative has eclipsed the Iran war/sanctions narrative.  However, despite the sharp decline, oil remains nearly $3/bbl above the lows seen at the beginning of March, just one month ago.  In the metals market, gold, which initially traded to new highs on the tariff announcement reversed course about lunchtime in Asia and is now down by more than -2.0%.  My take is this is a short-term impact as investors sell liquid assets with gains to cover margin calls, rather than any negative feelings about gold in the wake of the news.  Instead, I suspect that the barbarous relic will regain its footing shortly as the ultimate haven asset in difficult times, and clearly many now see difficult times ahead.  Silver (-3.9%) and copper (-0.4%) are also softer, much more on the economic concerns than the risk concerns.

Finally, the dollar, shockingly, is broadly lower this morning.  While we have been consistently informed that a very clear response to the US imposing tariffs would be other currencies weakening vs. the dollar to offset the impact, apparently that model is also broken.  Versus it’s G10 counterparts, the dollar is under severe pressure today.  EUR (+1.75%), JPY (+1.7%), CHF (+2.1%), SEK (+2.1%) and even NOK (+1.1%) despite the collapse in oil prices, have all moved to within 1% of the dollar’s lows seen last September.  But to keep things in perspective, I don’t know that I would call the dollar “weak” here.  The below chart of DXY shows that even over the past 20 years, the dollar has been MUCH lower and only spent a relatively small amount of time above current levels.  

Source: Koyfin.com

Interestingly, other than the CE4, which track the euro closely, most EMG currencies have not seen the same boost vs. the dollar, although most are somewhat higher.  MXN (+0.6%), KRW (+0.6%) and INR (+0.5%) have all gained modestly.  ZAR (0.0%) and CNY (-0.2%) are the only currencies that have bucked the trend and followed the economic theory.  

Turning to the data, this morning brings the weekly Initial (exp 225K) and Continuing (1860K) Claims as well as the Trade Balance (-$123.5B) at 8:30.  Then at 10:00 we see ISM Services (53.0).  The thing about this data is it ought to have no impact whatsoever as last night’s tariff announcements completely changed the playing field.  So whatever things were, they are not representative of the future, at least the near future.  There are also a couple of Fed speakers, but again, there is no way they can determine how they will react until the real economic effects of these tariffs start to play out.

There have been many analysts who continue to believe that President Trump will not be able to tolerate a substantial decline in the equity market despite the fact that he has not discussed it at all, and he, along with Treasury Secretary Bessent have consistently said their goal is a lower yield on 10-year Treasuries.  Well, they are getting their wish right now, regardless of the reason.  

The president has done virtually everything he said he was going to do regarding the border, government efficiency and now tariffs.  There are many skeptics who believe that he is out to force economic change on the backs of the bottom 90% of earners to benefit himself and others in the top 1%.  But he has consistently said his goal is to help the middle class.  His view of reindustrialization and more self-sufficiency while reduced international adventures continues to be the driving force of his policies.  There is no reason to believe he is going to change that view.  Do not look for a reversal of what he has done simply because the S&P 500 declines.  I think the trend is going to be for the dollar to continue to decline along with interest rates, while commodities rally.  Equity markets are going to be a tale of two markets, likely with previous highflyers suffering and previously overlooked companies benefitting.  

The world is changing a lot, so the best thing you can do is maintain your hedges to mitigate the impact.

Good luck

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Tripping Off Tongues

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Recession is tripping off tongues
And pundits ain’t twiddling their thumbs
Political shades
Are driving tirades
And screams at the top of their lungs
 
But are we that likely to see
A minus in our ‘conomy?
We certainly could
And probably should
But life doesn’t always agree

 

The major discussion point over the weekend has been recession, and how likely we are to see one in the US in the coming months.  Of course, this matters to the punditry not because of any concern over the negative impacts a recession has on the population, but ‘more importantly’ because recessions tend to result in sharp declines in equity values.  And let’s face it, do you honestly believe that the editors of the New York Times or the Wall Street Journal are remotely interested in the condition of the majority of the population?  Me neither. 

However, if they can call out something that they believe can impede President Trump, or detract from his current high ratings, they will play that over and over and over.  Funnily enough, when I went to Google Trends, I looked up “recession” over the past 90 days with the result below:

That peak was on March 11 although there was no data of note that day compared to a reading of 9 today. Looking at the news of that day, even CNN had a hard time finding bad news with the four top stories being 1) the Continuing Resolution vote in the House being passed, 2) the Department of Education announcing a 50% RIF, 3) 25% tariffs on steel and aluminum being imposed and 4) Ukraine accepting terms for a 30-day ceasefire.  From an economic perspective, the tariffs clearly will have an impact, but it seems a leap that the average American can go from 25% tariffs on imported steel and aluminum to recession in one step.  And based on the positive responses that continue to be seen regarding President Trump’s efforts to reduce the size of government, I doubt the DOE cuts were seen as the beginning of the end of the economy.  

And yet, recession was the talk of the punditry this weekend.  To try to better understand why this is the case, I created the following table of several major economic indicators and their evolution since December, prior to President Trump’s inauguration.

Key indicatorsDecJanFeb
NFP323125151
Unemployment Rate4.10%4.00%4.10%
CPI2.90%3.00%2.80%
Core CPI3.20%3.30%3.10%
PCE2.60%2.50% 
Core PCE2.90%2.60% 
IP1.10%0.30%0.70%
Capacity Utilization77.60%77.70%78.10%
ISM Mfg49.250.950.3
ISM Services5452.853.5
Retail Sales0.70%-1.20%0.20%

Source: tradingeconomics.com

Once again, while I am certainly no PhD economist, this table doesn’t strike me as one demonstrating a clear trend in worsening data, certainly not on an across-the-board basis.  Rather, while you might say January was soft, the February data has largely rebounded.  My point is that despite ABC, NBC, Bloomberg, the BBC and CNN all publishing articles or interviews on the topic this weekend, I’m not yet convinced that is the obvious outcome.

My good friend the Inflation Guy™, Mike Ashton, made an excellent point in a recent podcast of his that is very well worth remembering.   The breadth of the US economy is extraordinarily wide and covers areas from manufacturing to agriculture to finance to energy and technology along with the necessary housing markets as well as the entire population consuming both goods and services.  Added to the private sector, the government sector is also huge, although President Trump and Elon Musk are trying hard to shrink it.  But the point is that it is not merely possible, but likely, that while some areas of the economy may go through weak patches, that doesn’t mean the entire economy is going to sink into the abyss.

If we think back to the last two recessions, the most recent was Covid inspired, which resulted from the government literally shutting down the economy for a period of several months, while giving out money.  Net, things weakened, but even then, there were stronger parts and weaker parts.  Go back to the GFC and the housing bubble popped and dragged banks along with it.  That was the problem because banking weakness inhibits the free flow of money and that will impact everyone.

The question to be asked now, I would suggest is, are we likely to see another catalyst that will have such widespread impacts?  Higher tariffs are not going to do the trick.  Shrinking government, although I believe it is critical for a better long-term trajectory for the economy, will have a short-term impact, but it is not clear to me that it will negatively impact the economy writ large.  Certainly, the Washington DC area, but will it impact the Rocky Mountain area?  Or Texas and Florida?  

Now, a recession could well be on the way.  Running 7% budget deficits was capable of papering over many holes in the economy and pumping lots of liquidity into it as well.  If those deficits shrink, meaning spending shrinks, the pace of activity will slow.  But negative?  It seems a stretch to me, at least based on what we have seen so far.  One last thing here, is how might this potential weakening economic growth impact inflation? Now, we all ‘know’ that a recession causes inflation to decline, don’t we?  Hmmm. While that makes intuitive sense, and we hear it a lot, perhaps the Inflation Guy™ can help here as well.  Back in February he wrote a very good explanation about how that is not really the case at all, at least based on the macroeconomic data.  The truth is economic growth and inflation have very little correlation at all.

Of course, perhaps the most critical issue for the punditry is, will a recession drive stock prices lower?  Here the news is far less sanguine if you are a shareholder and believe there is going to be a recession.  As you can see from the below chart of the S&P 500, pretty much every recession for the last 100 years has resulted in a decline in stock market indices.

Source: macrotrends.net

This is a log chart so some of those dips don’t seem that large, but the average downturn during a recession is about 30%, although that number can vary widely.  To sum it up, while the data doesn’t scream recession to me, it cannot be ruled out.  As well, both President Trump and Secretary Bessent have indicated that weakness is likely going to be a result of their early actions, although the idea is to pave the way for a more stable economic performance ahead.  As I have written repeatedly, volatility is likely the only thing of which we can be certain as all these changes occur.  Hedge your exposures!

Ok, let’s look at the overnight activity.

The rumor is Trump may delay
His tariffs as he tries to weigh
How much he should charge
And how much, writ large,
These nations are going to pay

Equity futures in the US are higher this morning as the big story is that President Trump is considering narrowing the scope of nations who will have tariffs imposed on April 2nd.  Apparently, his administration has identified the “dirty fifteen” nations with the largest bilateral imbalances and they will be first addressed.  The telling comment in the WSJ article I read was when Trump said, “Once you give exemptions for one company, you have to do that for all. The word flexibility is an important word. Sometimes there’s flexibility, there’ll be flexibility.”  To my ear, the final plans are not in place, but my sense is he will impose then remove tariffs, rather than avoid them initially.  Interestingly, that story was written last night, yet Asian equity markets were not that ebullient.  Japan (-0.2%) saw no benefit although Chinese shares (HK +0.9%, CSI 300 +0.5%) fared better. Things elsewhere in the region were mixed with both gainers (India, Thailand) and laggards (Korea, Taiwan, Indonesia) with many bourses little changed overall.

In Europe, green is the predominant color this morning but movement is modest with Spain’s IBEX (+0.4%) the leader and lesser gains elsewhere.  While US futures are all higher by about 1% or more at this hour (6:45) apparently the Europeans aren’t as excited at the tariff delay process.

In the bond market, yields have backed up virtually across the board with Treasuries (+4bps) leading the way higher and most European sovereigns showing yields rising by 1bp or 2bps.  It’s interesting, while there has been much discussion regarding German yields having traded substantially higher in the wake of the effective end of the debt brake and anticipation of much further issuance, a look at the chart below tells me that after that gap higher on the news, concerns over German finances have not deteriorated at all.  And after all, the difference is about 25bps higher, hardly the end of the world.

Source: tradingeconomics.com

In the commodity markets, oil (+0.7%) is continuing its gradual rebound from the lows seen on, ironically, March 11th.  Arguably, what this tells us is that despite the weekend barrage of recession focused articles, the market doesn’t really see that outcome.  In the metals, strength is the word, again, with copper (+1.25%) making new all-time highs on the back of China’s stated goals of growing its strategic stockpile.  Not surprisingly, both gold (+0.2%) and silver (+0.6%) are also climbing this morning alongside copper as commodities remain in greater demand than a recession would indicate.

Finally, the dollar is a bit softer despite rising Treasury yields with both the euro (+0.3%) and pound (+0.4%) bouncing after last week’s modest declines.  And this is despite lackluster Flash PMI readings this morning out of Europe.  The biggest winner is NOK (+0.6%) which given the dollar’s broad weakness and oil’s rebound makes perfect sense.  Otherwise, while the dollar’s weakness is broad, it is no deeper than the aforementioned currencies.

Given the length of this note already (my apologies) and the dearth of data to be released, with only the Chicago Fed National Activity Index (exp +0.08), I will cover data tomorrow as we do end the week with GDP and PCE data.

Headline bingo remains the key concern for all market participants, but ultimately, my altered view of a softer dollar and higher commodities remains intact.

Good luck

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Dynamited

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Investors don’t seem that excited
‘Bout Germany’s now expedited
Designs to rearm
And that caused much harm
To Bunds, with their price dynamited

 

One of the biggest impacts of President Trump’s recent friction with Ukraine and its security is that European nations now realize that their previous ability to make butter, not guns, because the US had enough guns for everybody is no longer necessarily the case.  Mr Trump’s turn inward, which should be no surprise given his campaign rhetoric and America First goals, apparently was a surprise to most European leaders.  It seems they couldn’t believe the US would change course in this manner.  Regardless, the upshot is that Europe finds itself badly under armed and is now promising to change this.

The country best placed to start this process is Germany, where soon-to-be Chancellor, Friedrich Merz has promised a €500 billion spending spree on new defense items.  However, as the Germans don’t have this money laying around, they will need to borrow it.  The wrinkle in this plan is that enshrined in Germany’s constitution is a debt brake designed to prevent fiscal profligacy, kind of like this.  So, Merz has proposed waiving the debt brake for defense expenditures, but in order to do so, will need a two-thirds majority vote in the Bundestag (German parliament).  Now given AfD has been quite anti-war, it is not clear he will be able to obtain the requisite votes but for now, that is not the concern.

However, the German bund market clearly believes he will be successful as evidenced by the chart below. Overall, German 10-year yields rose 30bps yesterday, a dramatic move, and dragged most European sovereigns along for the ride as the new narrative is that all European nations will increase borrowing to spend on their defense.  It is worth noting, though, that the reason German yields have been so low is because the economy there has been exhibiting approximately 0% growth for more than a year as they continue to commit energy suicide seek to achieve their idealistic greenhouse gas emission goals.

Source: tradingeconomics.com

The trick, though, is that while Germany, with a debt/GDP ratio around 60%, has plenty of fiscal space to follow through, assuming they can alter their constitution, the rest of Europe is in a much more difficult spot with both France and Italy already under EU scrutiny for their budget deficits and debt/GDP ratios.  Recall, a key aspect of the Eurozone’s creation was the regulation designed to keep national budget deficits below 3% of GDP and drive the debt/GDP ratios to 60% or below.  Right now, Germany is the only nation that fits within those parameters. 

While I have no doubt that they will alter the rules as necessary elsewhere in Europe and certainly given the now perceived existential crisis for Europe, those limits are sure to be ignored, the story in Germany remains different because of the constitution.  Markets, though, clearly believe that a lot more debt is about to be issued by European nations, hence the dramatic decline in bond prices and jump in yields.  

But there are other knock-on effects here as well, notably that the euro is climbing dramatically against the dollar, up nearly 4% in the past week, and far ahead of the pound and most G10 currencies with only the SEK (+1.0% overnight, +6.1% in past week) outperforming the single currency.  For a while I have suggested that short-term rates were losing their sway over the FX markets and traders were looking at 10-year yields.  Certainly, the recent price action indicates that remains the case as Treasury yields (+2bps) have bounced off their lows but have risen far less than their G10 counterparts.  In fact, a look at the movement in 10-year government bond yields over the past month and year reveals just how significant these changes have been.

Source: Bloomberg.com

I feel safe in saying that for the next several weeks, perhaps months, this story of European defensive revival and the knock-on effects is going to be top of mind for both investors and pundits.  Only history will determine if these dramatic changes in policy stances will have been effective in reducing the chance of war or not and if they will have been beneficial or detrimental to economies around the world. As much of the current narrative is driven by politics rather than economics, punditry on the latter is going to be worse than usual.  Once again, I harken back to the need for a robust hedging plan for all those with exposures.  As recent price action across all markets demonstrates, volatility is back, and I believe here to stay for a while.

Ok, let’s run down the rest of the markets not yet discussed.  Yesterday’s US equity bounce was widely appreciated by many although this morning, futures markets are all pointing lower by between -0.75% and -1.25%, enough to wipe out yesterday’s gains.  As to Asia overnight, Japan (+0.8%) followed the US and both Hong Kong (+3.3%) and China (+1.4%) are continuing to get positive vibes from the Chinese twin meetings of policymakers.  More stimulus continues to be the driving belief there although China’s history has shown their stimulus efforts have tended to fall short of initial expectations.  As to Europe, this morning only the DAX (+0.5%) is continuing yesterday’s gains as concerns begin to grow that while Germany can afford to spend more money on defense, the rest of Europe is not in the same situation, so government procurement contracts may be less prevalent than initially hoped.  This is evident in the -0.4% to -1.0% declines seen across both the UK and most of the rest of the continent.

We’ve already discussed bonds, although I should mention that JGB yields have risen 10bps as well, up to new highs for the move and finally above 1.50%

In the commodity space, oil (+0.65%) which has had a very rough week, falling more than -5% in the past seven days, seems to be finding a bit of support.  Recall yesterday’s chart showing the bimodal distribution and that we are now in supply destruction territory.  Ultimately, that should support the price, but the timing is unclear.  In the metals markets, this morning sees red across the board, although not dramatically so, with both precious and base metals sagging on the order of -0.5%.

And lastly the dollar continues to decline, albeit not as swiftly as yesterday.  However, while it is considerably weaker vs. its G10 counterparts, versus the EMG bloc, the story is far less clear.  For instance, the only notable EMG currency gaining ground this morning is CLP (+1.2%) while virtually every other major emerging market currency is actually slipping a bit.  Look at this list; CNY -0.2%, MXN -0.25%, PLN -0.3%, ZAR -0.15%, INR -0.3% and HUF -0.5%.  I have a feeling we are going to see more behavior like this going forward, where G10 currencies are now trading on a different basis than EMG currencies.

On the data front, this morning brings Initial (exp 235K) and Continuing (1880K) Claims as well as the Trade Balance (-$127.4B) and Nonfarm Productivity (1.2%) and Unit Labor Costs (3.0%) all at 8:30.  We also hear from two more Fed speakers, Waller and Bostic later in the day.  Yesterday’s ADP employment data was much weaker than expected, falling to 77K, while the ISM Services data held up well although the prices paid piece did rise.  In addition, there has been a change in tone from the Fed speakers as we are now hearing mention of the possibility of stagflation due to the Trump tariffs, although there was no indication as to which way they will lean if that is the economic path forward.

I continue to highlight volatility as the watchword for now and the near future at least.  As long as politics has become the key driver, and as long as President Trump is that driver, given his penchant to shake things up, the one thing of which I am sure is we have not seen the last dramatic change in perception.  With that in mind, my view is the dollar will remain under pressure for a while yet.

Good luck

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Things Are Creaking

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Before Mr Trump started speaking
The Chinese explained things are creaking
As growth there is slow
So now they will blow
More funds to achieve what they’re seeking

 

The Chinese government has outlined a very active agenda for 2025 as the current pace of growth in their economy remains sluggish at best.  They continue to focus on a 5% headline GDP target and have promised to increase the budget deficit by a similar amount, so the idea of organic growth seems to be dead.  They reiterated their plan to recapitalize the big banks with CNY 500 billion and are looking to raise defense spending by 7.2%.  Long term debt issuance will increase with CNY 1.3 trillion planned for this year and they talk about adding 12 million urban jobs.  It all sounds fantastic.
 
But will it work?  Of course, there is no way to know yet, but if history is any guide, the mercantilist structure of the Chinese economy remains extremely difficult to overcome and replace with a more consumer-focused economy.  The property market there remains in terrible shape and that continues to be a drag on the overall economy as individuals, who had been encouraged to invest in property as a means of creating a retirement nest egg find themselves with much less disposable income and an illiquid and depreciating asset.
 
President Trump’s tariffs are not going to help them at all, but it is unclear if they will be significantly detrimental.  While I would not bet against China reporting 5% GDP growth in 2025, given the questionable reliability of their data, it is not clear it will be reflective of the state of the nation.
 
My take on market impacts are as follows: Chinese yields will climb as more debt is issued while growth will allegedly increase, Chinese equities should benefit If they are successful at getting things moving, but the yuan will have a harder time in my view, as capital flows to the nation remain stunted.  Of course, much will also depend on the evolution of US policy, which has been erratic, to say the least.

Said Trump, It’s a “new golden age”
As finally, we turn the page
On four years of waste
And so, we’ll make haste
With changes despite Dem outrage

Of course, the other big news was last night’s speech by President Trump to a joint session of Congress where he outlined both the many things he has accomplished in the first 6 weeks of his presidency, but also his plans for the rest of the time.  While many are still reeling from the speed with which changes are being made, there was no indication that his pace is going to slow.

Mr Trump did acknowledge that there may be some short-term pain as the economy adjusts to the changes he has wrought, but he remains focused on the long-term and how to achieve a strong economy with a far better balance sheet and a smaller government.  The implication is that he is still the avatar of volatility, and that aspect will not be changing.

Let us, though, take a step back and look at a much bigger picture.  For the past seventeen years, the US economy was the clear leader in global growth with massive government spending and budget deficits incurred to drive the process.  Meanwhile, while most of the rest of the world exited the pandemic with a burst of reopening growth, they have all lagged the US.  The chart below shows the ratio of the MSCI US index / MSCI World index and demonstrates that investment into the US, following that leading growth profile, has been historic in its effects.

Source: longtermtrends.net

But that situation seems to be changing.  President Trump is openly seeking to reduce the size of the US government and withdraw spending on many foreign adventures while the rest of the world is doing the opposite.  As per the above, China has just announced significant new stimulus.  As well, Europe, now that they need to become more responsible for their own defense, has also announced a major spending plan to rearm themselves.  This is the real sea change, I think, and the one that is going to have the biggest medium and long-term impacts on markets everywhere.  Changes in the level of capital flows and changes in trade patterns are going to significantly impact the value of the dollar as well as stocks, bonds and commodities.  It is a brave new world, so attention must be paid.

In the meantime, let’s see the markets’ initial response to the recent spate of news.  The tariff news has served to undermine US equities for the past two sessions and is still dragging on some markets, but the new spending promises are the new drivers.  So, in Asia, while the Nikkei (+0.2%) managed only a modest rally, the Hang Seng (+2.8%) exploded higher on the Chinese stimulus story although surprisingly, the CSI 300 (+0.5%) did not do nearly as well.  But elsewhere in the region, it was mostly large gains with Korea, India, Taiwan, Indonesia and Thailand all rallying more than 1%.  The laggards were Australia and New Zealand, which seemed to focus on the negatives of tariffs.

In Europe, Germany’s DAX (+3.4%) is the beneficiary of most of the mooted defense spending as not only are there quite a few defense focused firms, but rumors are that the government is going to coopt the auto manufacturers into building defense equipment (shades of WWII).  As well, the rest of the continent is flying (CAC +1.9%, IBEX +1.6%) and even the UK (+0.45%) is benefitting although there is growing concern that the BOE is not going to be aggressively cutting rates to support the economy because of still sticky inflation.  As to US futures, they are bouncing this morning and higher by 0.4% at this hour (7:00).

In the bond market, while Treasury yields rebounded from their recent lows yesterday, gaining 9bps on the day, this morning they are unchanged.  However, a look at European sovereigns tells the story of investors anticipation of a big uptick in new issuance to fund that defense spending.  The picture below is that of German yields, as an example, showing its 20bp rise this morning, but the entire continent has seen yields rise by at least 16bps!

Source: tradingeconomics.com

The market clearly believes the Europeans are going to move forward!

In the commodity markets, oil (-1.6%) remains under pressure as despite the mooted fiscal stimulus, there continues to be more concern over excess supply than newly created demand.  The below chart is quite interesting as a history of long-term price activity in oil with the interpretation that if we are near the supply destruction level, the future for prices is likely to be bullish.  Something to keep in mind. (as an aside, Josh_Young_1 is an excellent follow on X for oil ideas and information.)

As to the metals markets, gold is little changed but copper (+4.7%) has clearly gotten excited over the Chinese stimulus as well as the European defense spending, where copper will be an important piece of the puzzle.

Finally, the dollar is under substantial pressure this morning vs. both G10 and EMG currencies.  Given the yield changes, and my view that 10-year yields have become the FX driver, rather than short-term rates, it should be no surprise that the euro (+0.6%) is rallying to levels not seen since November.  The pound (+0.3%) is following suit, also making 5-month highs.  But the really impressive moves are in the peripheral European currencies with SEK (+1.1%) and PLN (+1.1%) both trading back to levels not seen since September.  On the tariff front, both MXN (+0.25%) and CAD (+0.1%) are lagging the main move but still managing a very modest rally v. the greenback.

In this brave new world, where the US is not the fiscal profligacy leader, but that role is assumed by others, my sense is that the dollar may well have topped for a much longer-term period.  While at the beginning of the year I was confident that the dollar would outperform, the policy changes we have seen since then have altered my views.  While volatility will still be rampant, I believe the broad direction will be a lower dollar going forward.

On the data front, this morning brings ADP Employment (exp 140K) as well as ISM Services (52.6) and Factory Orders (1.6%).  Then we see the EIA oil inventories where a small draw is expected and at 2:00pm, the Fed’s Beige book.  Perhaps the best thing about the changing world order is that central banks are losing some of their market power.  As I wrote yesterday, perhaps US rates are destined to fall as both the president and Chair Powell are keen to see that happen.

At this point, I think the dollar may have seen its highs for quite a while.  Remember, FX trends tend to be very long-term in nature.  For those of you who are payables hedgers, keep that in mind going forward.

Good luck

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Recession in Sight

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There once was a policy view
That tariffs, we all should eschew
But President Trump
Explained on the stump
To this idea, he wouldn’t hew
 
And so, as the clock struck midnight
Trump’s tariffs once more saw the light
Most analysts say
The tariffs will weigh
On growth, with recession in sight

 

By now you are all aware that as of 12:01 EST this morning, 25% tariffs have been imposed on all imports from both Canada and Mexico except energy products, which have seen 10% tariffs imposed.  As well, all Chinese imports have been hit with an additional 10% tariff.  Once again, President Trump has proven to be a man of his word, promising these tariffs during his election campaign and imposing them now.

The mainstream view is that these tariffs are a disaster and will send the economy into a recession.  In fact, the International Chamber of Commerce said a depression was likely.  As well, there is much concern that inflation will rise during the recession, which for Keynesians must be a very difficult concept to grasp given their strongly held belief that a recession will result in declining inflation.

Now remember, I am just a poet, so please take that into account when I offer my views here.  First, we have no idea how things will play out.  The one thing about which I am extremely confident is that there will be numerous behavioral changes by everyone because of these tariffs.  The first question is who will absorb the cost of the tariffs.  Remember, essentially the definition of a recession is that demand is declining.  Will companies be able to pass through the higher costs?  In some instances, they likely will, but in others probably not.  Anecdotally, there was a story in the WSJ that Chipotle will see its costs rise because of the tariff on avocados from Mexico but will not change their prices to account for that.  I’m confident they are not the only company who will absorb those costs.

However, there will certainly be companies that believe they can raise prices and maintain their sales and will try to do that.  My point is each company will evaluate the environment under which they operate and respond in the profit-maximizing manner, but each company’s scenario will be different.

Second, let’s consider the reason that President Trump is such a strong believer in tariffs.  He sees them as the stick to achieve his goals.  I would argue there are two goals in sight.  With Canada and Mexico, he is still unsatisfied with their efforts on the border and with fentanyl smuggling and is very keen to push that to completion.  However, the broader goal is to return manufacturing to America from its decampment overseas, mostly to Southeast Asia, during the past forty years.  And remember, he is seeking to implement a carrot as well, looking to cut corporate taxes to 15% going forward, which would put the US in the lowest quartile of corporate tax rates in the world.  While this morning the headlines are all about the tariffs and their potential destruction, just yesterday, Taiwan Semiconductor announced they would be investing $100 billion to build new fabrication plants in Arizona.  That is exactly the response Trump is seeking.

We all recognize that the world today is very different than it was even two months ago as President Trump has taken an extraordinary number of steps to implement the ideas upon which he was elected.  Interestingly, a large majority of the public remains strongly in his camp with approval ratings for many of his policies well above 60% and as high as 80%.  While markets are clearly unhappy as they have no idea how things will play out, and companies are now faced with far more uncertainty as they attempt to plan for their future, there is no reason to believe this process is going to change anytime soon.  

Keep one other thing in mind, unlike Trump’s first term in office, where he was constantly touting the strength of the stock market as a vote of confidence, this time around he and Treasury Secretary Bessent have been entirely focused on the 10-year yield and getting that rate down.  After a 7bp decline yesterday, he has been successful there. (see chart below) I would be surprised if Trump speaks about the stock market much at all for a while.

Source: tradingeconomics.com

With that in mind, let’s see how markets have been handling the tariff imposition.  After yesterday’s rout in the US, where a higher open morphed into a sharply lower close on the day, we saw red throughout Asia (Nikkei -1.2%, Hang Seng -0.3%, CSI 300 -0.1%) and Europe (DAX -2.1%, CAC -1.2%, IBEX -2.3%).  In fact, it is far harder to find a market that has rallied at all, although US futures at this hour (6:40) are pointing slightly higher.  However, after the sharp declines, an early bounce is not uncommon though not necessarily a harbinger of activity for the day.  All of this makes sense as public companies are likely going to see impacts on their profitability either because of reduced sales or reduced margins, or both, with tariffs now in place.  (Well, private companies are going to feel the same pressures, but there are no markets for them to worry about.). The worry for investors is given the extremely high price multiples that currently exist across so many companies, margin pressures can be problematic for stock prices.  For the near term, it is easy to make the case that equities have further to fall.

In the bond market, after yesterday’s Treasury yield decline, there has been a modest 1bp bounce, although as per the above chart, the trend remains lower.  In Europe, the news just hit the tape that the Eurozone is creating a plan to rearm the continent allowing for European countries to exceed debt restrictions to enable them to borrow and spend the money on this task.  The mooted amount is €800 billion, meaning that markets can expect that much new debt issuance across the continent in the coming months and years.  However, it appears investors are viewing the situation overall and are far more concerned with potential slowing growth than on increased issuance as yields have slipped one or two basis points across all nations in Europe.  Perhaps that is a signal that there is little belief in the likelihood of this new plan coming to fruition.

In the commodity markets, oil (-1.4%) continues its slide as a combination of worries over future growth due to the US tariffs and the OPEC+ announcement that they would start to bring production back online beginning in April (just 138K bbl/day, but the signal is quite clear that more is on the way) has traders unnerved.  Certainly, this is part of what President Trump is seeking, lower oil prices to help keep a lid on inflation, and there is no doubt he has pressured OPEC+ on the issue.  Remember, too, that if gasoline prices fall at the pump, that is a key driver of inflation perceptions for everyone.  As to the metals markets, we are seeing a split this morning with precious (Au +1.0%, Ag +0.65%) rallying on uncertainty and fear while copper (-1.2%) seems to be suffering on recession fears.

Finally, the dollar is lower again this morning with the DXY breaking back below 106 for the first time since early December as a signal of the broad trend.  This is interesting as the textbooks claim that if the US imposes tariffs, the dollar will strengthen, or more accurately other currencies will weaken, to offset those tariffs, and yet this morning CNY (+0.55%) and CAD (+0.45%) are bucking that trend although MXN (-0.2%) is behaving as most would expect.  But the dollar’s weakness is broad based, and my take is given the movement in interest rates, which are suddenly declining far more rapidly than anticipated just a week ago (Fed funds futures are now pricing in 75bps of cuts this year with a 11% probability of a cut in March, up from 2% last week) the dollar bull case is under real pressure.  I have maintained all along that if the Fed reignited their easing policy, the dollar would suffer.  Funnily enough, despite any angst between Chairman Powell (remember him?) and President Trump, they both may see lower rates as their preferred outcome.  In that case, the dollar has further to fall.

There is no hard data set to be released today although we do hear from NY Fed President Williams this afternoon.  This could be the first hint that the Fed’s caution is abating, and further rate cuts are in store.  Of course, with Powell on the calendar for Friday, if there is a change in tone, most market participants will be waiting to hear it from him.

The watchword has shifted from caution to uncertainty.  The tariffs have thrown sand into the gears of the economy and markets.  It remains to be seen how much impact they will have, but for now, fear is rising although the dollar is not following suit.  I think Trump must be happy, but I’m not sure how many in the markets are.

Good luck

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Positioned Quite Well

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The Fed is positioned quite well
To leave rates alone for a spell
Employment is stable
Which means they are able
To try, high inflation, to quell

 

“In discussing the outlook for monetary policy, participants observed that the Committee was well positioned to take time to assess the evolving outlook for economic activity, the labor market, and inflation, with the vast majority pointing to a still-restrictive policy stance. Participants indicated that, provided the economy remained near maximum employment, they would want to see further progress on inflation before making additional adjustments to the target range for the federal funds rate.”

I would say that this paragraph effectively summarizes the Fed’s views during the January FOMC meeting and based on the comments we have heard since, nothing has really changed much.  If anything, there appeared to be more concern over the upside risks to inflation than worries over a much weaker employment picture.  As well, there was some discussion regarding the potential of tariffs impacting prices and economic activity, although they would never be so crass as to actually use the word.

I would argue we don’t know anything more about their views now than we did prior to the Minutes.  Interestingly, they continue to believe that the current policy rate is restrictive even though Unemployment has been sliding, inflation is sticky on the high side and equity and other financial markets continue to make record highs.  Personally, I would have thought the appropriate view would be policy is slightly easy, but then I’m no PhD economist, just a poet.  If we learned anything it is that they are not about to change the way they view the world.  This merely tells me they have the opportunity to double down on previous mistakes.

It’s almost as if
Japanese markets now see
Future yen glory

Meanwhile, away from the machinations and procrastinations of the Fed, if we turn East, we can see that last night the yen, for a brief moment, traded through the key 150 psychological level, although it has since edged back higher.  This is the strongest the yen has been in more than two months and, in a way, is somewhat surprising given the strong belief that tariffs imposed against a nation will result in that nation’s currency declining.  But that is not the case right now, where despite mooted tariffs on steel, autos and semiconductors, three things the Japanese export to the US, the yen is climbing again.  

Source: tradingeconomics.com

One of the interesting things about the interest rate market’s response to the FOMC Minutes is that there continues to be an expectation of 39bps of rate cuts this year in the US.  But then, I read the Minutes as somewhat hawkish, obviously a misconception right now.  Meanwhile, in Tokyo, we continue to hear comments from former BOJ members that further rate hikes are coming and the futures market there is pricing 36bps of rate hikes by the end of this year.  So, for now, the direction of travel is diametrically opposed between the Fed and the BOJ.  Last night also saw JGB yields edge higher by another 1bp, to 1.43% and another new high level for this move.  Add it all up and the rate movements are sufficient to be the current FX drivers.

Now, as per my opening discussion regarding the Fed, while I believe that the next move should be a hike, and that gained support from a WSJ article this morning telling us to expect higher rent prices ahead which implies that the shelter portion of US inflation is not going to decline anytime soon, perhaps this is another reason to consider that the dollar may decline.  After all, the textbooks all explain that a high inflation economy results in a weaker currency.  If the Fed is truly going to continue to try to ‘normalize’ rates lower despite rising inflation, that will change my broad view of the dollar, and I suspect it will weaken dramatically.  While the yen is the first place to watch this given the opposing actions by the Fed and BOJ, it could easily spread.

Too, it is important to remember that while we have lately become accustomed to the yen trading in the 140-160 range vs. the dollar, for many years USDJPY traded between 100 and 120 as per the below chart.  While the world has certainly changed, it doesn’t mean that we cannot head back to those levels and spend another decade at 110 give or take a bit.

Source: tradingeconomics.com

Ok, with that in mind, let’s take a look at how markets have handled the new information.  Clearly US equity markets are not concerned about a Fed volte-face as they closed at yet new record highs yesterday, albeit with very modest gains of about 0.2%.  Asian markets, however, were not so sanguine with red the dominant color as the Nikkei (-1.25%) suffered amid that strengthening yen while both the Hang Seng (-1.6%) and mainland (CSI 300 -0.3%) fell despite PBOC promises of more support for the economy and the property market.  If I’m not mistaken, this is the third time the PBOC has said they will be increasing support for property markets and prices there continue to decline.  In fact, every major index in Asia fell overnight, mostly impacted by tariff fears.

Meanwhile, European bourses are all modestly firmer save the UK (-0.4%) as we see a rebound after yesterday’s declines and earnings data from Europe continues to show decent outcomes.  While there is much talk and angst over the Ukraine situation and tariffs, right now given the uncertainty of the timing of any tariffs, as well as the possibility that they may be delayed further or deals may be struck, investors seem to be laying low.  Remember, though, that European equity markets have been outperforming US markets for the past several months, although that could well be because their valuations had become so cheap, we are seeing a rotation into them for now.  As to the US markets, futures are pointing slightly lower at this hour (7:15) down about -0.25%.

In the bond market, yesterday saw Treasury yields cede their early gains and slip 2bps on the session and this morning they have fallen a further 2bps.  Meanwhile, European sovereign yields, after jumping yesterday across the board, are falling back slightly with declines on the order of -1bp or -2bps.

In the commodity market, the one constant is that the price of gold (+0.4%) continues to climb.  Whether it is because of growing global uncertainty, concerns over rising inflation, or technical questions regarding deliveries in NY, it is not clear.  Price action is not volatile, rather it has been a steady climb for more than a year.  just look at the chart below.

Source: tradingeconomics.com

As to the other metals, both silver and copper are also continuing their climb and higher by 1.0% this morning.  Oil (+0.2%) is also edging higher which seems a bit odd given the fundamental news I keep reading.  First, OPEC+ is going to begin increasing production later this year, second, the prospects of a peace deal with Russia seems likely to result in Russian oil coming back on the market sans sanctions, and third, despite talk of Chinese economic stimulus, demand from the Middle Kingdom has not been growing.  Add to this the fact that supply is expected to grow by upwards of 1mm bpd from Guyana, Brazil and Canada, and it seems a recipe for falling prices.  Just goes to show that markets are perverse.

Finally, the dollar is under pressure across the board this morning with the yen (+0.95%) leading the way but commodity currencies (AUD +0.5%, NZD +0.5%, ZAR +0.4%) also showing strength.  In fact, virtually every currency has strengthened vs. the greenback this morning.  Looking at the charts, there is a strong similarity across almost all currencies vs. the dollar and that is the dollar put in a peak back in early January and has been gradually declining since then.  This is true across disparate currencies as seen below and may well represent the market deciding that President Trump would like to see the dollar decline and will enact policies to achieve that end.  (I used USDDKK as a proxy for EURUSD since the two are linked quite closely with a correlation of about 0.99.)

Source: tradingeconomics.com 

As I wrote above, my strong dollar thesis is based on the Fed continuing to fight inflation.  If they abandon that fight, then the dollar will certainly decline!

On the data front, this morning brings Initial (exp 215K) and Continuing (1870K) Claims as well as the Philly Fed (20.0).  In addition to the Minutes yesterday we saw Housing Starts tumble although Permits were solid.  However, there is clearly some concern over the housing market writ large, with fewer first-time buyers able to afford a new home, hence the rent story above.  We have 3 more Fed speakers today but again, I ask, are they going to change their tune?  I don’t think so.  I find it hard to believe that the Fed will allow inflation to rebound sharply, but if they remain focused on rate cuts while inflation continues to creep higher, I fear that will be the outcome.  And that, as I said above, will be a large dollar negative.  We shall see.

Good luck

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Having a Fit

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Seems Europe is having a fit
‘Cause Putin and Trump may submit
A plan for the peace
Where there’s an increase
In spending the Euros commit
 
Remarkably, though peace would seem
The basis of many a dream
Seems many despise
The fact that these guys
Don’t care Europe can’t stand this scheme

 

Here’s the thing about President Trump, you never know what he is going to do and how it is going to impact market behavior.  A case in point is the growing momentum for further peace negotiations between the US and Russia, with Ukraine basically going to be told how things are going to wind up.  On the one hand, you can understand Ukraine’s discomfort as they don’t feel like they are getting much say in the matter.  On the other hand, it seemed increasingly clear that the end game, if there is no US intervention of this nature, would be for Russia to bleed Ukraine of its fighting age population while systematically destroying its infrastructure.

The thing I find most remarkable is the number of pundits who hate this outcome despite the end result of the cessation of the fighting and destruction.  After three years of conflict, and with other nations willing to allow Ukrainians to die on the front lines while they preened about saving democracy, there was no serious push to find a solution.  I have no strong opinion on the terms that have been floated thus far, and I don’t believe rewarding a nation for aggressive action is the best outcome, but Russia has proven throughout history that they are willing to sacrifice millions of their own citizens in warfare, and the case for a Ukrainian victory seemed remote at best.  As experienced traders well understand, sometimes you have to cut your position so you can focus on something else.  Seems like a good time to cut the positions here.

Speaking of positions, let us consider what peace in Europe may mean for financial markets.  Yesterday I discussed how European NatGas prices have more than doubled since the war began.  If they return to their pre-war levels, that dramatically enhances Europe’s economic prospects, despite their ongoing climate policies.  Clearly, the FX market got that memo as the euro has rallied back to its highest level since December 2024 save for a one-day spike just after Trump’s inauguration.  In fact, it is not hard to look at the chart below and see a bottom forming in the single currency.  While the moving average I have included is only a short-term, 5-day version, you have to start somewhere.  While the fundamentals still seem to point to further downside in the single currency, between the Fed’s pause and more hawkish stance opposite the ECB’s ongoing policy ease, the medium-term picture could be far better for the Europeans.  If the war truly does end, it would likely see a significant uptick in investment and economic activity as they seek to rebuild Ukraine, and we could see substantial capital flows into the European economies.

Source: tradingeconomics.com

As well, oil prices, continue to trade near the bottom of their recent trading range as the working assumption seems to be that with a peace treaty, Russian oil would no longer be sanctioned, enhancing global supplies.  A look at the trend line in the chart below seems to indicate that is the direction of the future.

Source: tradingeconomics.com

The other remarkable thing is the decline in yields, where yesterday, despite a very hot PPI number, which followed Wednesday’s hot CPI number, Treasury yields fell back 7bps.  While there are likely some other aspects to this move, notably the ongoing story regarding DOGE and the attack on waste and fraud in the US, yesterday’s move was not indicative of fear, rather I read it as a positive sign that investors are betting on a chance that President Trump can be successful with respect to reducing the massive overspending by the government.  Clearly, this is early days regarding President Trump’s ability to get a handle on spending, and it could all blow up as legislative compromises may significantly water down any benefits, but I contend the market is showing hope right now, not fear.

And that, I would contend, is the big underlying driver of markets right now.  The prospects for peace and the potential impacts are the focus.  While tariffs are still a big deal, and yesterday’s talk about reciprocal tariffs is simply the latest in a long line of these discussions and pronouncements, the market seems to be getting tired of that conversation.  If we recap the current situation, central bank activities have lost their importance amid a huge uptick in governmental actions, both fiscal and geopolitical.  In many ways, I think this is great, the less central bank, the better.

Ok, let’s see how markets continue to absorb these daily haymakers from President Trump and the responses from other governments.  Clearly, the US equity market remains far more fixated on Trump’s actions than on higher inflation potentially forcing the Fed to raise rates.  In fact, despite the hot PPI print, the futures market has actually increased its expectation for rate cuts this year to 35bps.  That doesn’t make sense to me, but I’m just an FX poet. 

If we turn to Asian markets, Hong Kong (+3.7%) was the big winner overnight as a combination of growing expectations for more Chinese government stimulus to be announced soon, along with the ongoing tech positivity in the wake of the DeepSeek announcement got investors excited.  On the mainland, shares (CSI 300 +0.9%) were also higher, but not as frothy.  Meanwhile, the weaker dollar hindered the Nikkei (-0.8%) as the yen has gained 1.3% since the CPI data on Wednesday.  In Europe, the picture is mixed with the CAC (+0.4%) the best performer and the DAX (-0.4%) the worst performer.  Eurozone GDP surprised on the upside in Q4, growing…0.1%!! Talk about an explosive economy.  However, that was better than forecast and helped avoid a recession.  The interesting thing about European equity markets, though, is that despite a dismal economic backdrop, most major markets are trading at or near all-time highs.  Further proof that the market is not the economy.  As to US futures, ahead of this morning’s Retail Sales data, they are flat.

After several days of substantial movement in the bond market, it seems that traders have taken a long weekend given the virtual absence of movement here.  Treasury yields are unchanged on the day and European sovereign yields are higher by 1bp.  

In the commodity markets, on the day, oil prices are unchanged, although as per the above chart, it appears the trend is lower.  US NatGas (+1.8%) is rallying on forecasts for another cold spell, but European NatGas (-4.85%) continues to fall as prospects for peace indicate new supplies, or perhaps, renewed supplies.  In the metals markets, gold (+0.15%) is continuing its positive momentum but the big mover today is silver (+2.7%) which seems to be responding to some large option expirations in the SLV ETF (h/t Alyosha) which seem set to drive substantial demand for delivery.  

Finally, the dollar remains under pressure overall, although the movement has generally not been that large today.  The big outlier in the G10 is NZD (+0.9%) which has responded to the delay in the reciprocal tariff implementation until April.  Elsewhere in this bloc, gains are universal, but modest with movement between just 0.1% and 0.2%.  In the EMG bloc, the dollar is also under pressure with ZAR (+0.65%) a major gainer as precious metals continue to be in demand.  CLP (+1.15%) is also continuing to benefit from copper’s ongoing rally.  The exception to this movement has been Asia where most regional currencies are modestly softer this morning, KRW, TWD, INR, as the tariff talks still seem to be the driving force in these markets.

On the data front, we finish the week with Retail Sales (exp -0.1%, +0.3% ex autos), then IP (0.3%) and Capacity Utilization (77.7%).  Yesterday’s PPI data was several ticks hotter than forecast and seems to put paid to the idea that inflation is heading back to the Fed’s target.  This afternoon we hear from Dallas Fed president Lorrie Logan, but again, it is hard to make the case that the Fed is the driver of anything right now.

Fundamentals still point to dollar strength, I would argue, but the market is not paying attention. Rather peace and the peace dividend are now the driver in the FX markets and to me, that implies we are set to see the dollar give back some of its gains from the past 6 months.

Good luck and good weekend

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