Tag Archives: #michigansentiment

Nobody Knows

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The punditry’s now out in force
As they hope, their views, we’ll endorse
When tariffs arrive
On Wednesday they’ll strive
To claim they were right, but of course
 
The problem is nobody knows
Exactly what Trump will propose
So, models will fail
While Trump haters wail
More chaos is all that he sows

 

Well, folks, it’s month and quarter end today and many are decrying that President Trump’s policies have derailed the bull market in risk assets.  And they are almost certainly correct.  Yet, at the same time, there has been a broad recognition across a wide spectrum of analysts and politicians that the situation he inherited was unsustainable.  Whether the 7% budget deficits, the $36+ trillion in government debt or the ongoing inflationary pressures, the only people who were happy were those who saw their equity portfolios rise against all odds.  (I guess the gold holders have been pretty happy too, in fairness.)

However, the underlying reality of a situation is rarely enough to alter a good story, or a story that somebody wants to tell.  For instance, the Michigan Consumer Survey was released on Friday, and it fell more than expected to a reading of 57.0, its lowest reading since July 2022, when inflation was peaking.

Source: tradingeconomics.com

But the story that has been getting all the press is the extraordinary rise in inflation expectations.  As you can see below, both 1-year (blue line) and 5-year (grey line) have risen sharply in 2025.  Conveniently for the mainstream media this has been blamed on President Trump’s policies given their efforts to discredit everything the president does.

However, the Michigan Survey, while having a long pedigree, isn’t that large a survey.  As such, it is possible that non-economic factors may be impacting the results.  For instance, when the survey is taken, the respondents’ political leanings are asked as well.  Now, take a look at the data when split by political views as per the below.  Perhaps, we need to take this survey with a grain or two of salt as it appears the question may be seen as a way to express one’s opinion about the current administration rather than unbiased views of future inflation.

This is especially true when we look at other measures of expected inflation, like the NY Fed’s Consumer inflation survey shown below with the green line compared to that Michigan survey in red.

Source: zerohedge.com

My point is, we need to be careful to notice the non-economic factors that enter into things like expectations surveys.  As well, the idea that inflation expectations are a critical driver of future inflation, although a staple of current central bank thinking, does not have much empirical backing.  For instance, my friend Mike Ashton, the Inflation Guy™, explained in this article way back in 2015, that inflation expectations do not have much empirical proof of effectively forecasting future inflation.  But perhaps, if you don’t believe him, you will consider a scholarly paper by a Fed economist, Jeremy Rudd, written in 2021 that is pretty damning with respect to the idea that the Fed relies on this data as part of their policy toolkit.  

In the end, the one truism of which I am highly confident is that pretty much all the models that have been utilized for the past twenty plus years are no longer reflective of the reality on the ground today.  Not just for inflation, but for growth and trade and every other aspect.  President Trump has not merely upset the applecart; he has broken it into pieces and burned them all to cinders.  All the fiscal problems mentioned above are still extant, but President Trump appears set on changing them in the direction desired by almost all mainstream economists.  They don’t like his methods, but it’s not clear how changes of this magnitude can be made smoothly.  So, perhaps the proper question is just how rough things are going to be.  If the overnight session is any indication, they could get pretty rough.

The dominant feature today
Is fear is what’s now holding sway
As markets decline
More pundits consign
The blame on Trumps tariff pathway

Investors have risk indigestion this morning, as their appetite to own equities anywhere in the world has significantly diminished.  After a rough week ending session on Friday in the US, equity markets in Asia have almost universally declined led by Tokyo (-4.05%) but with sharp declines seen in Korea (-3.0%), Taiwan (-4.2%), Australia (-1.75%), Malaysia (-1.45%) and Thailand (-1.5%).  Chinese (-0.7%) and Hong Kong (-1.3%) shares also fell, although perhaps not quite as far as others.  The entire conversation today is about President trump’s promise to impose tariffs around the world on Wednesday, with many analysts trying to estimate what damage will occur despite no clarity on the size and breadth of the tariffs.  But investors have decided that havens are a better place to hide for now.

European bourses are also sharply lower, although more in the -1.7% to -2.0% range, with every major index in Germany, France, Spain and Italy down by those amounts.  There continues to be a great deal of discussion amongst the European leadership about how they will respond to the mooted tariffs, but of course, like everybody else, they have no idea exactly what they will be.  As to US futures, at this hour (6:45) the picture is grim with declines between -0.6% (DJIA) and -1.3% (NASDAQ).  Right now, the only people who are happy are those holding puts.

Of course, in this risk-off environment, it should be no surprise that bond yields have slipped a bit as, at the margin, investors are flocking to own Treasuries (-5bps) and European sovereigns (Bunds -3bps, OATs -2bps, Gilts -4bps).  Even JGBs (-5bps) saw yields decline last night with any thoughts of the BOJ hiking rates in the near term fading away completely.  

On the other hand, commodities are finding a lot more interest this morning with gold (+1.15%) leading the way higher and proving itself to continue to be one of the most consistent safe havens available.  Interestingly, oil (+0.5%) is rallying this morning despite a number of Wall Street analysts upping their estimate of the probability of a US recession.  However, offsetting the potential future demand weakness is the news that President Trump is “pissed off” at Vladimir Putin for his ongoing aggression in Ukraine and seeming unwillingness to move to a ceasefire.  This has raised the specter of further sanctions on Russian oil output, potentially reducing supply.  As well, the Trump administration continues to tighten the noose on both Iranian and Venezuelan oil sales, so potentially reducing supply even further.  I guess this morning, the supply story is bigger than the demand story.

Finally, as we turn to the currency markets, the dollar is generally firmer this morning, although by widely varying amounts depending on the currency.  For instance, in the G10, NOK (-0.75%) is the laggard despite oil’s gains, followed by AUD (-0.6%) and NZD (-0.55%), with all three of these being major commodity producers at a time when commodities are doing well.  As to the rest of this bloc, JPY (+0.35%) is off its best levels, but behaving as a haven, and the others are just marginally changed from Friday’s closing levels.  In the EMG bloc, ZAR (+0.25%) is the exception this morning, clearly benefitting from gold’s ongoing run to new all-time high prices, but otherwise, most of these currencies are modestly softer (MXN -0.2%, PLN -0.2%, KRW -0.25%).

Speaking of currencies, though, there is an article on this morning’s Bloomberg website that is worth reading, I believe, for everyone involved in the FX market.  The gist of the article is something that I have been discussing for the past several years, the fact that market liquidity here, despite the extraordinary volumes that trade on average each day (currently estimated by the BIS at $7.5 trillion across all FX products) is not nearly as deep as might be anticipated.  

My observation from my time on bank desks was that while there was a great deal of electronic flow, likely driven by HFT firms seeking to extract the last tenth of a pip out of thousands of transactions, when a real client, generally a corporate, had a need to do something specific to address a business need, and that amounted to more than $100 million equivalent, the liquidity situation was far more suspect. 

My personal theory was as follows: bank consolidation reduced the net amount of risk-taking appetite as larger banks did not increase their risk-taking commensurate with the reduction that occurred by small banks being gobbled up.  Combining this with the introduction of high-frequency trading firms in the business, who had no underlying client base to whom they owed a price, and therefore, could turn off their machines in a difficult market, further reducing liquidity, led to a situation where liquidity was a mile wide and an inch deep.  My point is for all the corporates out there who have significant transactions to execute, you must carefully consider the best way to approach the situation to avoid a potentially significant increase in execution costs.

Turning to the data, before we look at this week, which ends with NFP, a quick word on Friday’s core PCE data, which came in at a hotter than expected 0.4% taking the YY number to 2.8%.  The Fed cannot be happy with this outcome as a quick look at the recent readings makes it hard to accept inflation is continuing its decline from the 2022 highs.  Rather a look at the below chart, at least to my eye, shows me a stability in Core PCE of somewhere between 2.5% and 3.0%, well above the Fed’s target range, and hardly a cause to cut rates further.

Source: tradingeconomics.com

As this note has already gotten a bit longer than I like, I will list the week’s data tomorrow but note that Chicago PMI (exp 45.4) is the only noteworthy data point to be released today.  

Absent a complete reversal of Trump’s tariff plans, I see nothing positive on the horizon for risk assets, and expect that equities will maintain, and probably extend the overnight losses while gold and bonds both rally, at least for now.  As to the dollar, my take is it will not benefit universally in this risk-off scenario, although there are currencies that will clearly suffer.  Remarkably, despite the performance of Aussie and Kiwi overnight, I do believe the commodity bloc has the best prospects for now.

Good luck

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Fight!

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When fired upon, his response
Was jumping back up at the nonce
His cry was to “Fight!”
And some on the right
Now claim he’s a man, renaissance!

 

As John Lennon told us in 1977:

Nobody told me there’d be days like these
Strange days indeed

While this poet tries to keep politics largely out of the discussion, during these strange days, it is THE story of note.  Of course, by now you all not only have heard of the assassination attempt on former President Trump’s life on Saturday at a political rally in Butler, PA, but you all almost certainly have your own opinions about all the different theories, conspiracy and otherwise, so I will not go down that road.  I will simply note that it speaks poorly of the current political zeitgeist.  And while cooler heads are calling for a step away from the abyss, I have not yet seen the public take that step backwards.  Maybe soon.

In the meantime, my efforts are designed to help make sense of how both the political and economic storylines may impact the markets, and correspondingly, try to help those of you who need to hedge financial exposures, with a little understanding.  But history shows, when politics leads the news, the degree of difficulty goes up significantly.

The first thing to note is that sometimes, when momentous things occur in the real world, any financial implications take some time to manifest themselves.  With that in mind, I thought I would take a 30,000 foot view of the macroeconomic situation as we head into the new week.

The data of late calls into question
If we are now in a recession
With joblessness rising
And prices downsizing
Perhaps growth is seeing regression
 
And it’s not just here in the States
Where growth appears in dire straits
In China, as well,
Things have gone to h*ll
As data of late demonstrates

The question that is being asked more frequently is, are we currently in a recession?  While the data that has been released of late has been slowing, in the US it has not generally reached levels consistent with inflation, although there are some outliers that do point in that direction.  For instance, Friday’s Michigan Sentiment reading was pretty lousy at 66.0, well below expectations, and as can be seen in the below chart from the FRED data base, seemingly heading toward, if not already at, levels consistent with recessions (gray shaded areas).

Source: FRED Data base

As well, a look at the Citibank Economic Surprise Index, an index that tracks the difference between the actual data releases and the consensus forecasts ahead of time, shows that data is consistently failing to meet expectations.

Source: Yardeni.com

Here, too, the data does not appear to have quite reached levels seen in the previous two recessions, but recall that those two recessions were not garden-variety, with the GFC the deepest recession since the global depression in 1929, and the Covid recession remarkably short and sharp in the wake of the unprecedented government shutdowns that occurred in early 2020.  But going back in time, it is generally true that if data released consistently underperform expectations, it is a signal of overall economic weakness.

There are many other data points that are showing similar tendencies like the Unemployment Rate, which I have discussed lately, and is gaining momentum in its move higher.  As well, a look at almost all production factors or Retail Sales, which are reported in nominal terms, shows that when they are deflated by the inflation data of the past several years, real activity has been minimal or even declining.  A look at the below chart shows Retail Sales in both nominal and real terms with the latter actually declining since 2021 despite the rising nominal figures.  In other words, people are simply paying more for the same amount or less of stuff.

Source: brownstone.org

And this is not just a US situation.  As is typically the case, if the US is slowing, the rest of the world is going to suffer given its place as both the largest economy overall, and the largest mass consumer of everybody else’s stuff.  So, last night when China released its latest data, it showed the Q2 GDP disappointed, printing 4.7% while Retail Sales rose only 2.0%, far below Industrial Production, which grew 5.3%.  

Source: Bloomberg.com

In fact, this chart is the graphic representation of why nations around the world are calling for more tariffs on Chinese goods.  The combination of a still-collapsing property market there with the absence of significant government stimulus and a massive debt overhang has led President Xi to seek to increase industrial output and exports (remember the trade data from last week where exports soared, and imports actually declined) thus flooding other markets with goods and harming local manufacturing in other nations.  This is merely one more issue that policymakers must navigate amid a growing global concern over both political and economic unrest.

Summing it all up, I believe the case for there being a recession is growing strongly, and while nominal GDP is likely to remain positive, especially in the US given the government’s nonstop spending spree, real economic activity is suffering.  This has major implications for markets, especially as they appeared to still be priced for that perfect 10-point landing.  As I have written consistently, if (when) things turn more sharply, the Fed will respond quickly and cut rates and the impact on markets will be significant, especially for the dollar which will almost certainly decline sharply.  Just be nimble here.

I am sorry for the extended opening, but obviously, there is much ongoing.  So, let’s take a look at how things are behaving this morning.  At the opening of trading on Sunday evening, arguably the market that was showing the most impact was FX, where the dollar, which had fallen sharply at the end of last week in the wake of that CPI data, had rebounded a bit.  The narrative seems to be that the assassination attempt will secure President Trump’s reelection and the dollar will benefit from the economic policies that are believed to come with that.  As well, at this hour, (6:30) we are seeing US equity futures rallying, up 0.4% across the board.  That’s quite the contrast with the overnight session where the Nikkei (-2.5%) came under severe pressure as investors grow concerned over potential JPY strength.  Too, the Hang Seng (-1.5%) fell sharply although mainland shares have behaved better, little changed overnight, as investors look toward the Third Plenum with hopes that President Xi will unveil something to help the Chinese economy.

In Europe, though, this morning sees red across the screens, albeit not dramatically so.  The CAC (-0.4%) in Paris and the IBEX (-0.5%) in Madrid are the laggards, unwinding some of last week’s rebound, but every major market is under pressure this morning.  The lone piece of data released was Eurozone IP (-0.6%) which fell back into negative territory for the 6th time in the past twelve months.  Certainly, this is not pointing to a robust economy in Europe.

In the bond market, Treasury yields have backed up 4bps, also on the “Trump” trade, as investors believe that a Trump victory will result in more aggressive growth policies and higher US yields.  However, in the Eurozone, and in Asia, government bond yields are essentially unchanged from Friday’s levels as I don’t think foreign investors know what to think now about the US and how it may impact other nations going forward.  After all, if the US does grow more quickly in response to a Trump victory, will that mean more or fewer opportunities for tariffs and other mechanisms to affect foreign nations?

In the commodity markets, things are quiet with oil essentially unchanged this morning, as it consolidates at its recent highs.  Market technicians are looking for a break above $85.00/bbl, but I think that will require some substantially better economic data, which as explained above, does not seem to be in our immediate future.  In the metals markets, precious metals are little changed with gold consolidating above the $2400/oz level near its recent all-time highs, although copper (-0.9%) and aluminum (-0.8%) are both under pressure on the weaker economic picture.

Finally, the dollar is little changed overall this morning from Friday’s levels.  The early dollar strength seen last night has ebbed a bit although we still are seeing some strength against peripheral currencies like ZAR (-1.2%), NOK (-0.5%) and SEK (-0.5%).  The rand story seems to be more about local politics and the inability to get the new government up and running, while deeper investigation into the Skandies shows that this is a phantom move based on an unusual close on Friday.  My sense is there has really been no net movement here, as we have seen in the euro and the pound, both of which are mere pips from Friday’s closing levels.

On the data front this week, there is some important news as well as a series of Fed speeches starting with Chairman Powell this afternoon at 12:30.

TodayEmpire State Manufacturing-6.0
TuesdayRetail Sales0.0%
 -ex autos0.1%
 Business Inventories0.3%
WednesdayHousing Starts1.31M
 Building Permits1.39M
 IP0.3%
 Capacity Utilization78.6%
ThursdayECB Rate Decision4.25% (unchanged)
 Initial Claims235K
 Continuing Claims1855K
 Philly Fed2.9
 Leading Indicators-0.3%
Source: tradingeconomics.com

While there is not as much information due as we saw last week, I think the Retail Sales data will be instructive as another indicator of whether the economy is starting to roll over.  As well, watch for revisions from previous data releases as history shows that revisions to weaker numbers are another signal of a recession.  It will be quite interesting to see if Powell hints at a cut at the end of the month.  Certainly, the Fed funds futures market is not looking for that with <5% probability currently priced in although the September meeting is now a near-lock at 94%.  Remember, too, that after Friday’s speeches conclude this week’s group of 10 Fed comments, they will enter their quiet period and we won’t hear anything else until the FOMC meeting on July 31st.

While there is much to digest, my take is that we have rolled over in the economy.  The real question is about inflation and its ability to continue to decline.  Friday’s PPI data was the opposite of the CPI data on Thursday, showing hot prints for both headline and core, and indicative of resurging price issues.  Alas, I don’t rule out more stagflationary outcomes.  Funnily, I think that will ultimately help the dollar after an initial dip.

Good luck

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