Tag Archives: #NFP

Really Vexed

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Said Warsh, when I think of what’s next
For prices, I’m not really vexed
The narrative’s starting,
A new view, imparting
That lower, is what it expects

While futures have yet to adjust
The more this idea gets discussed
The more it’s presumed
The hike story’s doomed
While negative vibes turn to dust

Fed Chair Warsh was in Sintra, Portugal yesterday on a panel with Madame Lagarde, BOE Governor Bailey and BOC Governor Macklem answering questions about monetary policy, forward guidance, and the future of economies as they are impacted by AI.  Now, despite Mr Warsh’s adamant explanation at the last FOMC presser that forward guidance was dead, that didn’t stop the interviewer from asking about the Fed’s likely future moves repeatedly.  This is getting tiresome.  

Nonetheless, here is the comment I believe was most important. “Expectations of future inflation [over the last four weeks] have come down. Inflation risks have come down,” and anyone expecting the Fed would tolerate inflation running above its 2% goal “would be disappointed,” he added.

So, the first thing I did was look at the CME’s probability matrix based on its Fed funds futures contract, and there is no evidence to support Warsh’s comments there.  As you can see from the below table, it looks virtually identical to what we have seen over the past week, a hike in October and a 40% chance of a second one in December.

Now, I will cut him some slack because, while I agree with him and expect that we will see lower inflation readings this month, simply on the back of the decline in energy prices, the rate hike narrative has been building for a while and has many adherents.  My take is that the above table will not change very much until we have seen the two key data points this month, today’s NFP and CPI which is due to be released on Bastille Day.

While I’m on the subject, here is the current view of today’s median expectations according to tradingeconomics.com

Nonfarm Payrolls110K
Private Payrolls110K
Manufacturing Payrolls3K
Unemployment Rate4.3%
Average Hourly Earnings0.3% (3.5% Y/Y)
Average Weekly Hours34.3
Participation Rate61.7%
Initial Claims220K
Continuing Claims1810K
Factory Orders-1.8%
-ex Transport0.4%

Yesterday saw a slightly softer than expected ADP employment number, 98K vs. the 113K expected and 122K last month, but as you can see from the chart below, comparing ADP to NFP, while the trend remains similar in both, there are an awful lot of wiggles in any given month.

Source: tradingeconomics.com

As things currently stand, the market’s strong Keynesian belief is if NFP is strong, that will be inflationary although it is quite clear that Chairman Warsh does not adhere strictly to that viewpoint (another reason I like him) as he anticipates significant productivity enhancements going forward on the back of AI adoption.  But my point is, if we see a strong print this morning, I would look for the market to price more aggressively for a rate hike.  I guess we’ll find out shortly.

In the meantime, let’s see what happened overnight.  Starting with commodity markets, oil (-1.5%) continues to slide regardless of the group of doomporners who insist that we are about to run out of oil, or that Iran now controls the Strait of Hormuz and will kill the global economy.  In fact, from a technical perspective, we have filled the gap that opened back on March 2nd, the first day markets were open after the conflict began.

Source: tradingeconomics.com

My question for all those who remain certain that we have merely delayed oilmageddon is, how low will prices need to fall before they are willing to admit they misread the reality of the global oil market?  And, with oil sliding, precious metals (Au +0.8%, Ag +1.1%) are finding support.  It seems to me there is a lot of wood left to chop in the PM market, but I maintain my longer-term bullish outlook.

Turning to the bond market, yields rose again yesterday in the US (10-year +6bps) and have edged higher again this morning by 1bp.  My sense is this is based on the idea that Warsh’s final comment from above about tolerating above-target inflation has the hawks all bulled up.  Perhaps, Sintra helped the hawkish case elsewhere as well as European sovereign yields are all higher this morning by between 4bps and 5bps and JGB yields overnight jumped 8bps.

But there is a kink in the narrative now as despite this perceived hawkishness in the bond market, the FX market clearly heard a different tune.  This is clearest in USDJPY, my favorite recent discussion, as you can see in the chart below.  The yen jumped 0.7% ostensibly on the idea that Warsh’s comments about reduced inflation expectations implied a less hawkish Fed, despite the bond market reading the comment about unwillingness to tolerate inflation as a more hawkish Fed.

Source: tradingeconomics.com

But it’s not just the yen.  The dollar is lower vs. virtually all its counterparts in both G10 and EMG spaces.  So, the question you need to ask yourself is, who do you believe?  Bond traders or FX traders?  Historically, observers call bond investors/traders the ‘smart’ money, but they have made plenty of mistakes in the past.  And the thing about FX traders is they seem to be far nimbler.  Of course, you know I am an FX guy, and as it happens, I think this is the market that has it right.

Finally, equity markets had a mixed performance in Asia (Japan -2.5%, China -3.0%, Korea -7.9%) as tech stocks have been feeling some pain, but we did see gains in HK (+0.8%), India (+0.8%) and Singapore (+1.1%) as a counterbalance.  That Korean number was impressive, but mostly what we are seeing there is serious volatility as the KOSPI is even more concentrated than the NASDAQ with just two companies, Samsung and SK Hynix, representing about 40% of the index.  If they have a bad day, the index does as well.

In Europe, though, things are brighter this morning with gains across the board (Germany +0.9%, Spain +0.9%, France +0.8%, UK +0.5%) although there is no obvious catalyst for the move.  There was no data of note (Eurozone Unemployment fell to 6.2% but that seems unlikely to be the driver) so perhaps the very fact there are no tech companies in Europe and tech is what is currently under pressure makes Europe seem a bargain.  As to US futures, ahead of all the data this morning, they are little changed.

And that’s really it for today.  As tomorrow is a holiday, there will be no poetry, so I wish you all a wonderful holiday weekend.  3 Cheers for the USMNT after their Round of 32 victory last night (alas it was on way too late for me to watch, but we will all be cheering on Monday night.

Good luck and good weekend

Adf

Peace Was in Sight

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The weekend saw missiles in flight
As both sides continued the fight
But just ere the open
The market put hope in
The idea that peace was in sight

So, here we are first thing today
And focus has moved far away
We’re back to AI
And pie in the sky
As stocks, once again, make more hay

Much has been made of the fact that President Trump is hyper aware of financial markets and seeks to ensure that whatever is happening in the world, it happens on weekends so that by the time markets reopen, the situation appears far less dire, hence less need to sell stocks.  This weekend is a perfect example as Friday after the close, it was announced that the US had responded to the several Iranian attacks on ships in the Strait of Hormuz last week with significant force.  The early punditry on Friday night and Saturday was that when markets reopened, the recent decline in oil prices would reverse as that has been predicated on a more lasting peace.  But then, last night shortly before futures markets opened, there were announcements that the US had finished its response and that the peace talks were back on under the guise of the 60-day ceasefire.  

I have to say, though, it almost appears as if Iran is in on the joke.  After all, if not, wouldn’t they try to force Trump’s hand during market hours?  Just asking.  Whatever the case, the situation as we wake up this morning is that oil (+0.8%) has edged back higher near $70/bbl but certainly doesn’t have the feel of breaking out higher.  Meanwhile, equity markets are generally positive and have been overnight while bond yields and the dollar are little changed.  in other words, there’s not much happening this morning.

In reality, it is not that surprising that things are quiet.  It is summer and summer markets are typically somewhat less active.  As well, away from the uncertainties of the Iran conflict, economic activity seems to be ticking along pretty well.  Arguably, the biggest story remains AI and both its potential impact on workers and the economy as well as the questions about its ability to generate sufficient revenue to repay the hundreds of billions of dollars being spent on it.  But those are longer-term stories, not day-to-day.

Which takes us to this morning.  Frankly, I don’t think there is an interesting market related them right now.  Instead, we have much time-biding until the next big thing.

Let’s start with commodities as oil continues its multi-month decline from the early April peak.  it remains very difficult to look at the below daily chart and think, damn, oil is about to run away higher.  At least for me.

Source: tradingeconomics.com

There are still numerous analysts who maintain that the drawdown of reserves is going to come back and haunt the market, driving prices much higher as inventories fall and tank bottoms are reached.  And I am sure they earnestly believe those outcomes are ordained.  But the relative wisdom of market prices disagrees.

Remember back when this all started, there was another point that was made by these same analysts, that fertilizer shortages would be manifest and food prices would rise much higher.  The story was that the closing of the Strait would reduce the ability of Qatar to produce and ship LNG and that was a critical input into the making of Urea.  Let me show you the price chart for Urea.

Source: tradingeconomics.com

While it certainly rose initially, apparently there is sufficient urea around to continue with agriculture as we know it.  Again, much of the initial fear seems to have been misplaced.  I do not know if that is because analysts didn’t really understand the way these markets operated, or because they have models that they have used for years, and those models are no longer fit for purpose.  My observation is that many analysts try to determine the price trends by looking at their understanding of both supply and demand of a given commodity.  But I might argue that the price is what defines both supply and demand, and that at given prices, those two curves adjust to make the system work.  Think of it as price is the independent variable, not supply/demand.

Moving on to the metals markets, they remain under pressure this morning with both gold (-1.3%) and silver (-1.9%) unable to find support, especially the latter.  Copper (-0.3%) is holding up better and I continue to believe that all three will fare well over time, but not right now.

In the equity markets, Friday’s nondescript US markets were followed by more strength (Tokyo +0.15%, HK +1.6%, China +1.2%, Australia +0.7%, Taiwan +1.0%) than weakness (Korea -0.2%, India -0.5%, Indonesia -1.3%) in Asia.  The big news overnight was the South Korean government supporting a massive semiconductor investment by the two big Korean firms, SK Hynix and Samsung, to build four more fabs.  In Europe, though, things are less positive with Germany’s unchanged performance leading the way although the declines elsewhere (UK -0.2%, France -0.3%, Spain -0.4%) are hardly devastating.  We ought not be surprised that US futures are higher this morning as I type (7:25) led by the NASDAQ (+0.9%) as the AI/semiconductor theme continues.

Bond markets continue to do very little with yields essentially unchanged on the day in Europe or the US.  10-year Treasury yields are currently 4.37%, well off the highs seem a month ago near 4.70% when there was much discussion about a breakout higher.  But look at the below longer-term chart of the 10-year Treasury yield and tell me that anything substantive has happened in the past 3+ years.  Since yields rise alongside the 2022 inflation surge, we have seen very little net movement.

Source: tradingeconomics.com

Finally, the dollar is a bit softer this morning but is clearly not the focus today.  I continue to read analyses about Chairman Warsh and what he is going to do and why he will not be able to achieve his goals.  The implication is that either he will need to be ultra hawkish, raise rates quickly and the dollar will soar, or he will wind up with QE 5 or 6 or whatever number we are on, and the dollar will collapse.  My personal view is neither of those scenarios will play out.  As I wrote in the wake of his first meeting, I expect inflation data will ease along with the recent decline in energy prices, and he will be able to do nothing without consequences as he works to change the way things work there.  In the meantime, the dollar will remain supported by real investment flows.

On the data front, even though it is a holiday-shortened week with markets closed Friday for July 4th, we get a lot of data.

TuesdayCase-Shiller Home Prices0.8%
 Chicago PMI60.0
 JOLTS Job Openings7.28M
 Consumer Confidence94.2
WednesdayADP Employment113K
 ISM Manufacturing54.0
 ISM Prices Paid79.0
ThursdayNonfarm Payrolls110K
 Private Payrolls115K
 Manufacturing Payrolls3K
 Unemployment Rate4.3%
 Average Hourly Earnings0.3% (3.5% Y/Y)
 Average Weekly Hours34.3
 Participation Rate61.7%
 Initial Claims220K
 Continuing Claims1825K
 Factory Orders-2.1%
 -ex Transport0.4%

Source: tradingeconomics.com

Obviously, all eyes will be on the payroll data on Thursday.  But Chairman Warsh will be at Europe’s version of Jackson Hole, in Sintra Portugal and speaking at 9am Wednesday morning.  It will certainly be interesting to hear what he has to say there.

It doesn’t seem like there is much about which to get excited today, or tomorrow frankly.  So, Warsh and then NFP will be this week’s story absent another major flareup in the gulf.

Good luck

Adf

The Narrative Shatter(ed)

Posted on by 
For months data just did not matter
Twas oil that drove all the chatter
But Friday that changed
As NFP ranged
So high that the narrative shatter(ed)

Now suddenly, eyes have all turned
To data, with many concerned
Their previous views
Will naught but confuse
All efforts, more cash, to be earned

Since the Iran conflict began on the 1st of March, pretty much the only key variable in financial markets has been the price of oil.  As you can see in the chart below, the price gapped higher that Monday morning and has been the major topic of conversation ever since.

Source: tradingeconomics.com

There continues to be a large contingent of analysts who, once the Strait of Hormuz was closed, have been calling for a substantial rise in the price of the stuff, but here we are this morning, back below $90/bbl and lower by -2.3% on the day.  Stories about declining reserves, floating reserves, demand destruction and new production are all available on any given day, and all certainly have facts to support them.  But the big picture, at least so far, has been that the market has found a clearing price between the release of strategic reserves and some amount of demand destruction, which has kept prices in check.

The greatest irony to me is that all the discussion regarding the long-term damage high oil prices are going to inflict on the economy seems to ignore the cardinal rule of commodities; the cure for high prices is high prices.  Last week I highlighted comments from an Exxon SVP about the coming crisis.  If that is Exxon’s corporate belief, they will be drilling like there is no tomorrow as their costs are far below current price levels, let alone the mooted rise to $150/bbl.  However, if we look at the one source of data that discusses drilling, the Baker Hughes oil rig count, you can see in the below chart that while it is a few rigs off its recent lows, there is still limited oil industry belief that the price is going to remain this high for any extended length of time.

Source: tradingeconomics.com

I think what last Friday’s very surprising employment report has done is to change some of the thinking of investors, turning their attention from exclusively oil to the rest of the economy and, now that we are 3+ months into this adventure, to how the rest of the economy is behaving.

This brings us to the two key pieces of information that are upcoming in the US, tomorrow’s CPI report and then next Wednesday’s FOMC meeting.  But it also has market participants going back to their more regular processes with discussion of market technicals, earnings, and global policy decisions.  So, let’s look in those areas this morning.

On the policy front, a few things happened overnight.  First, Bank Indonesia raised their base rate 25bps, to 5.50%, in an emergency meeting as the rupiah continues to decline to record lows, although in the wake of the rate hike, it rebounded some 0.8% as per the below chart.  Another data point is the fact that their FX reserves have fallen by >$1 billion in the past month indicating that they are actively intervening to prevent a further decline.  Too, this comes after a 50bp hike just two weeks ago.

Source: tradingeconomics.com

Elsewhere on the central bank front, Nikkei news reported that the BOJ will be raising its base rate by 25bps, to 1.00%, the highest level since 1995, when it meets next Monday night (recall, Nikkei has a perfect track record when calling these moves).  This has been widely expected in the market, and so there was no reaction in the FX market, although with USDJPY hovering just above 160.15 this morning, I imagine there is a bit of nervousness at the Ministry of Finance there.  Interestingly, the word from Nikkei is also that they may end the tapering of the balance sheet next year, which certainly detracts from the hawkishness of the rate move.

Moving on to data, the noteworthy datapoint overnight was the Chinese Trade Balance ($105.4B), which while somewhat larger than expected is right in line with recent activity as per the below chart.  It seems that demand for semiconductors has been significant and while trade with the US continues to remain moderate, the rest of the world is getting inundated with Chinese stuff.

Source: tradingeconomics.com

The one other major topic of conversation is the SpaceX IPO set for Thursday and the fact that OpenAI filed to go public as well.  I expect that those discussions are going to be a large part of the equity market narrative for a while yet, but that is well outside the purview of this note.

So, let’s look at market behavior and then see what is on tap for the week data wise.  Friday’s equity declines in the US were like a bad dream, they felt terrible but now it seems everybody has awakened and the world did not end.  Yesterday saw a steady climb from opening lows all day with the NASDAQ closing higher by +0.9%.  The upshot is that Asian markets broadly followed that movement with Japan (+2.2%), China (+1.9%), Korea (+8.2%!), Taiwan (+2.8%) and Indonesia (+7.6%!) all shaking off fears and rebounding sharply.  While HK (-0.4%) and Australia (-0.2%) both lagged, the other regional markets were broadly positive.  I continue to be amazed at the idea that Asia is in the worst energy shape and yet its equity markets are screaming higher.

In Europe, there is also a positive vibe with Spain (+1.2%), France (+0.9%) and Germany (+0.7%) all having solid sessions.  In fact, only the UK (-0.2%) is lagging this morning and not based on any data, but it seems more like some idiosyncratic stories regarding pharma companies there.  As to US futures, at this hour (7:20), they are firmer by 0.5% or so across the board.

In the bond market, yields, which have been moving higher for the past week, have backed off a bit with Treasury yields down -2bps while European sovereign yields have also slipped, mostly by -1bp or -2bps.  Last night, JGB yields (-4bps) fell after the story about the rate hike.  Perhaps investors believe Ueda-san is going to be more hawkish.  But it seems they missed the story about ending QT.

In the commodity space, with oil lower, as discussed above, it is no surprise that gold (+0.5%), silver (+0.6%) and copper (+1.7%) are all higher.  In the gold market, much has been made of the fact that technically, gold closed below its 200-day moving average Friday and has stayed there so far.  If this continues, it will be seen as a negative medium-term signal.  (my chart is showing the 40-week as I cannot get a long-term chart of the 200-day, but it is essentially the same thing.)

Source: tradingeconomics.com

Finally, in the currency markets, the dollar has backed off its recent highs this morning with the DXY (-0.3%) back below 100 and its decline a pretty good proxy for most of the G10 currency’s movements.  This is in no way a rout, but a correction after a strong move higher over the past month as you can see in the below chart.

Source: tradingeconomics.com

On the data front, we see the following this week.

TodayTrade Balance-$56.1B
 Existing Home Sales4.07M
WednesdayCPI0.5% (4.2.% Y/Y)
 Ex-food & energy0.3% (2.9% Y/Y)
ThursdayInitial Claims219K
 Continuing Claims1780K
 PPI0.7% (6.4% Y/Y)
 Ex-food & energy0.4$ (5.3% Y/Y)
FridayMichigan Sentiment46.0

Source: tradingeconomics.com

So, all eyes will be on CPI tomorrow as Fed speakers are now in their quiet period ahead of next week’s meeting.  Certainly, there is very little I have seen that is going to moderate inflation in the near term, but perhaps, if we do see an end to the Iran conflict, that will remove a key price support, although I imagine it will take time to feed through.  But inflation is highly dependent on how much money is around, and that is what makes the FOMC next week so critical.  Until then, it feels like a limited price action day today as we all await CPI tomorrow.

Good luck

Adf

In Secret, Would Toil

Posted on by 
Since March, traders focused on oil
Where every explosion could roil
The bulls and the bears
In bonds and in shares
While data, in secret, would toil

Today, though, the payroll report
Is taking bows on center court
For those who are long
The buck, they need strong
Results, while a weak one helps short(s)

For a change of pace today, the market truly seems to be looking at the data release rather than the latest zig or zag in Iran.  It has been at least four months, since before the first bombs dropped in March, that this data point has had any real import for the narrative, so it is a welcome return to what we used to consider normal.  With that in mind, let’s look at what the current expectations are:

Nonfarm Payrolls85K
Private Payrolls85K
Manufacturing Payrolls2K
Unemployment Rate4.3%
Average Hourly Earnings0.3% (3.4% Y/Y)
Average Weekly Hours34.3
Participation Rate61.7%

Source: tradingeconomics.com

While 85K is much lower than the pre-Trump 2.0 level deemed necessary to maintain a strong labor market, it is abundantly clear that between the closure of the borders and the deportations, that is no longer the situation.  Estimates I have seen to achieve labor stability have been between 0 and 50K, and that includes comments from former Fed Chair Powell.  While an outturn at the forecast level would be lower than last month, it would still indicate the labor market is in decent condition.  Of course, one of the hardest things is to see through the revision noise as the BLS birth/death model describing new companies is clearly not representative of the current economy.  Below is a look at the past five years of monthly reports which is showing a clear trend lower, but as per the above, that may not be a problem.

Source: tradingeconomics.com

However, the other data we have seen lately, notably the strong ADP number, the solid employment subindices from the ISM data and the fact that claims data, although a touch higher yesterday, remains very contained, tells me that we are going to see a better number than forecast, something around 115K like last month.

Perhaps the real question is why this matters now.  Well, as the war fades into the background, and remarkably that is what is happening, investors are back to looking for clues as to how the economy is performing and how the Fed is likely to behave going forward.  Several times this week I have highlighted the importance of capital flows, and a key part of that story is central bank liquidity being available to flow.  Thus, if the Fed sees this data and leans more toward tightening, that is likely to have a negative impact on those markets that require easy money like stocks, high-yield debt and private markets.  Interestingly, if bond traders sense that the Fed is going to pay closer attention to inflation, that should help the long end of the bond market, and we could see a bull flattener result.  Nothing has changed in the Fed funds futures market, but that is something that could really move on an outlier number here.  We will learn soon enough.

Away from that, though, the most interesting thing I have seen is the below tweet although the commentary was strongly of the opinion that this is fake news.  If it is real, that is a major breakthrough in leading to the end of the war, however, based on the fact that oil prices are essentially unchanged (-0.15%), the market does not appear to believe the story.

Ok, let’s see what else is happening in other markets.  Not surprisingly, gold (-0.25%) is also not doing much but both silver (-1.7%) and copper (-1.6%) are softer despite the fact oil’s little changed.  Metals appear to have lost some of their luster for now, but I do believe that their long-term prospects remain strong.

In the stock markets, yesterday saw the DJIA take the lead for a change, rallying to a new all-time high although the NASDAQ went nowhere as questions about the AI story are beginning to be raised.  Too, semiconductor stocks, which have been extraordinarily strong, are beginning to be questioned given the highly cyclical nature of that business.  Yesterday Harris Kupperman wrote a very interesting piece on semiconductors which I think is worth reading.

In the meantime, Asian markets followed the tech lead from NASDAQ and were virtually all lower, some extremely so.  The worst case was Korea (-5.5%) followed by Indonesia (-4.2%) but the major indices all fell as well (Tokyo -1.3%, HK -1.15%, China -1.8%).  Tech took a beating.  Of course, for Europe, since they basically have no tech, markets are having a much better day with Spain (+1.1%) leading the way followed by France (+0.5%), the UK (+0.4%) and Germany (+0.2%).  Perhaps the fact that Eurozone GDP for Q1 was revised down to -0.2% Q/Q and +0.3% Y/Y has some thinking the ECB may not (stupidly) raise rates due to the oil shock.  But if that’s the case, you cannot tell by the interest rate markets which show the current probabilities as per the ECB itself.

At this hour (7:40) US futures are mixed with the NASDAQ (-0.9%) still suffering while the DJIA (+0.2%) continues to smile.

Apparently, global bond markets are collectively holding their breath ahead of the data point as yields are essentially unchanged in the US, Europe and were unchanged last night in Asia.

Finally, the dollar is slightly softer this morning, although remains above 99 on the DXY and is merely chopping back and forth within the extremely tight range of the past 3 weeks I show, once again, below.

Source: tradingeconomics.com

Most movement today across both the G10 and EMG blocs is +/-0.25% or less, hardly the sign of a trend.  The one exception is INR (+0.8%) after the RBI left rates on hold, as expected, but instituted several measures to try to attract foreign capital such as easing investment rules for foreigners.  We shall see if that has a long-term benefit, but at least the rupee has put a little space between the current level and the bottom (dollar top) seen two weeks ago.

Source: tradingeconomics.com

And that’s really all for today.  So, absent news about real movement toward the end of the Iran conflict, it’s payrolls then a summer Friday where many will be seeking to leave early.  If I am correct and we see a stronger number, I see the dollar benefitting which should hurt the metals, although oil is independent of this news.  Since this would imply more chance of a Fed rate hike, I expect stocks would not be pleased, nor will bonds.  We shall see.

Good luck and good weekend

Adf

Tough Call

Posted on by 
The peace talks have yet to conclude
And yesterday, both sides pursued
A little more fighting
Despite the gaslighting
Which helped push the price up in crude

But it still remains far below
The levels where it needs to go
To foster more drilling
And help in refilling
The buffers from which barrels flow

As we start the week, oil prices have rebounded from last week’s close (as per the below chart) as progress on the peace talks remains slow, at best, and there was another series of military attacks by both sides, with each side claiming defensive maneuvers. 

Source: tradingeconomics.com

Now, I am not a military scholar, but firing missiles at another nation doesn’t sound defensive, rather I would use the word retaliatory.  And there is no way we can know who initiated what during the latest exchange, as both sides claim the other did and there is no neutral arbiter.  But my take is that there is still a way to go before this is over.  Certainly, the IRGC seems committed to the last man, at least for now, and President Trump has indicated he is in no hurry.  Personally, I am still thinking a July 4th resolution timeline.

I did, however, see an increase in the discussion about the imminent collapse of supplies and the estimates that oil prices will finally (?) head up to the $150-$200/bbl level that a number of pundits have forecast.  But looking through these X posts, they are retweeting the comments I posted on Friday from the Exxon SVP Neil Chapman.  Time will tell if they are correct and the changes in the system have not been sufficient, at least not yet, to address the reduction of available oil from the Gulf.  But so far, whatever calculations have been made regarding demand destruction and additional production elsewhere, plus the rerouting of oil away from the Strait has been sufficient to prevent the worst-case scenarios that have been painted since this began back in March.  Plus, the one thing of which I am highly confident is that going forward, the Strait of Hormuz will not be nearly as strategic as it currently seems.  Production elsewhere and pipelines will reduce its importance dramatically.

The BOJ meets
In two weeks’ time.  Do rate hikes
Still matter? Tough call.

Two weeks from tomorrow, the BOJ meets to discuss monetary policy with the backdrop that the yen is essentially back to the levels seen in April just before the most recent bout of intervention.

Source: tradingeconomics.com

The swaps market is pricing in a 78% probability of a 25bp rate hike, which would take the base rate to 1.00%, still amongst the lowest in the world, but its highest level since September 1995 as you can see below in the chart from tradingview.com

Think about that for a moment, interest rates in Japan have been below 1.0% for more than 30 years.  That is an extraordinary situation.  Consider the bubble that was blown in the US by having rates that low for ‘only’ a decade following the GFC, or for an even shorter time post-Covid.  I guess we need to ask why Japanese equities never inflated the same way.  Perhaps that is the best evidence of the financialization of the US economy vs. that of Japan.  Liquidity in Japan didn’t lead to FOMO of the latest investment thesis.

Nonetheless, my take is there is a modest fear about the yen weakening much further and so the BOJ will hike rates.  Alas, since the market is already priced for that outcome, it is not clear it will do much to moderate the yen’s weakness, at least if they only go 25bps.  Now, if they hike 50bps and explain more hikes are on the way, that will matter.  The problem with that theory is that the latest CPI reading in Japan was 1.4%, well below their 2.0% target, and it has been that way since January as per the below chart.  It seems it could be tricky for Ueda-san to explain a very aggressive rate hike with the current inflation reading.

Source: tradingeconomics.com

Ok, I think those are the stories of note so let’s review market activity overnight.  let’s finish with commodities where oil’s gains (+3.6%) are not having the typical response in the metals markets with gold ‘only’ lower by -0.8% and silver (+0.6%) and copper (+2.5%) higher.  I don’t believe we are at the point where these markets are truly independent, but perhaps some of this negative correlation has been overdone.

In the FX markets, the dollar is modestly higher vs. most of its G10 counterparts with NZD (-0.6%) the laggard, but the rest of the group mostly softer by between -0.1% and -0.2%.  In other words, not too significant, and this includes the yen (-0.1%).  I believe all the yen talk is based on the idea that the BOJ meeting is close enough that it is a topic of conversation in a dull market.  Now, if the yen were to weaken dramatically ahead of the meeting, that would certainly change some views.  As to the EMG bloc, it is a bit more mixed although movement, overall, remains muted.  BRL (+0.4%) is the biggest winner with no particular newsworthy events to note, but when looking at the chart, it really hasn’t done too much since the middle of last month when the news about Lula’s competition broke with Bolsonaro fils suddenly less likely to compete for president.

Source: tradingeconomics.com

But otherwise, it is a mix of gainers and laggards on the order of 0.1% to 0.3% in either direction.

In the bond market, yields have ticked higher everywhere following oil’s rebound with Treasury yields higher by 2bps and most of Europe higher by 4bps.  US yields continue to drive the global situation, certainly directionally, if not in magnitude.  

Finally, equity markets appear quite sanguine regarding the oil price rise as Asian markets saw a mix of gainers (Tokyo +0.9%, HK +0.9%, Korea +3.7%! Taiwan +1.4%, Singapore +1.0%) and laggards (China -1.0%, India -0.7%) although clearly far more positive than negative.  Meanwhile, in Europe, the picture is mixed but with much less movement as Germany (+0.4%) and France (+0.1%) edge higher while Spain (-0.2%) and the UK (-0.2%) both slipped.  The news here was the PMI data which largely declined from last month, but not quite as far as forecast.  At this hour (7:30) US futures are all pointing higher between 0.2% and 0.6%.

On the data front, as it is the beginning of a new month, we get plenty including the NFP report on Friday.

TodayISM Manufacturing53.0
 ISM Prices Paid85.5
TuesdayJOLTs Job Openings6.82M
WednesdayADP Employment110K
 ISM Services53.7
 Factory Orders4.6%
 -ex Transport0.8%
ThursdayInitial Claims213K
 Continuing Claims1790K
 Nonfarm Productivity0.8%
 Unit Labor Costs2.3%
FridayNonfarm Payrolls85K
 Private Payrolls78K
 Manufacturing Payrolls0K
 Unemployment Rate4.3%
 Average Hourly Earnings0.3% (3.4% Y/Y)
 Average Weekly Hours34.3
 Participation Rate61.7%
 Consumer Credit$16.0B

Source: tradingeconomics.com

The labor market is certainly confusing compared to what many of us have known throughout our careers.  It is obvious the change in immigration stance by this administration has had a major impact, but so, too, has AI and company responses to that.  I continue to read bifurcated takes on AI either destroying everybody’s jobs or creating many new ones with both sides absolutely certain of the outcome.  One thing I will note is that while the BLS NFP numbers have been subject to major revisions given the inadequacies of the birth/death model for small businesses, I wonder about the ADP data, which I understand is a count of all the paychecks they distribute.  But that data also gets revised, so there is no perfect solution.  What I do think is clear is that less new jobs are necessary to maintain the Unemployment Rate at levels which, in the past, would have been deemed a huge success for the Fed and government.

As to today, headline bingo remains the biggest risk, but there is an awful lot of belief that the equity train rolls on and with it, so too with the dollar’s broad strength in my view as funds flow into the US to hop on board.

Good luck

Adf

Ere Fears They Shed

Posted on by 
The status is still very quo
As ships still cannot come or go
However, Iran
Proposed a new plan
With nukes as a part of the show

But thus far, whatever they said
Has not moved discussions ahead
So, oil’s crept higher
As traders require
More certainty ere fears they shed

While President Trump has announced a new plan to help escort ships trapped in the Persian Gulf through the Strait of Hormuz, thus far, none have taken the chance.  Over the weekend, Iran ostensibly put forth another peace proposal, and this time their nuclear activities were part of the plan, a major change, although President Trump has rejected it overall.  To me, though, this is major progress as it demonstrates that there is a negotiation ongoing.  

My armchair analysis, FWIW, is that Ahmed Vahidi is watching his nation crumble and beginning to really feel the pinch of the US naval blockade as his revenues shrink rapidly.  While there are many estimates of how long Iran can withstand a lack of revenue, and I have no idea what that answer is, I feel it is reasonable to assume that if he doesn’t have enough to pay his soldiers, many of them will simply go home.  Already I have read reports that many of their payments to soldiers and proxies have been dramatically reduced as the US continues to tighten the financial screws via sanctions on banks and companies that have been acting as Iran’s middlemen.  I believe it is widely agreed on all sides of the conversation that the Iranian economy has been virtually collapsing with the rial having fallen 95% in value, access to basic staples limited and suffering widespread.  

The one thing of which I feel certain is that Vahidi wants to remain in power, and I would estimate as the pain increases, and the money stops flowing, his grip on power is slipping.  Staying in power without nuclear weapons is likely much preferred to being deposed.  

In the end, like every negotiation, the parties start far apart and get closer over time.  Now, my view is likely not worth all that much, but the oil market’s view is worth billions of dollars and if we look at how the price of oil has behaved, while uncertainty remains, (especially after a report this morning that Iran fired on and struck a US naval vessel, although that report has been denied), the market does not appear to believe that this is going to continue that much longer.  

Source: tradingeconomics.com

Several things continue to occur as at $100/bbl; there is some level of demand destruction; production elsewhere in the world continues to grow (I read that Venezuelan production rose to 1.25 mm bpd ,more than had been assumed prior to the Iran war); and the Saudi east-west pipeline is now pumping its capacity 7 million bpd, thus the amount of oil ‘missing’ has been reduced from the initial headline 20 mm bpd to somewhere along the lines of 12 mm bpd, still extremely painful to the global economy, but obviously not (yet) catastrophic.  However, since oil prices remain around $100/bbl, and have not risen to $150/bbl or $200/bbl as many pundits had forecast, there remains a great deal of confidence that this is going to end before too much more time has passed.  I certainly hope so for everyone’s sake.

Away from that, there is precious little other news to note as Asia is basically on holiday until Thursday and the UK is closed today, so market activity has been more muted.  But let’s take a look.  In the equity markets, weirdly HK (+1.2%) was open despite both China and the UK being closed and given HK’s history, I would have thought it would have responded to one of those situations.  But the big news was Korea (+5.1%) which was dramatically higher on rallies in Samsung and SK Hynix shares, both of which have been major beneficiaries of their semiconductor businesses booming alongside AI demand.  I guess we shouldn’t be surprised Taiwan (+4.6%) followed that path and in truth, there were more positive outcomes (India, Philippines, Malaysia, Singapore, New Zealand) than laggards (Australia).  Remarkably, everything I read is that Asia is the region most negatively affected by the Iran war, yet here we continue to see equity markets rising.

In Europe, things are less optimistic this morning with red across the screen led by Spain (-1.6%) and France (-1.0%) although both the UK and Germany are nigh on unchanged.  One of the weekend stories is that the US is now going to be raising tariffs on European auto imports to 25% from the 15% initially agreed as Trump claims the Europeans weren’t following the agreement.  As to US futures, this morning they are marginally lower as I type (7:30) but remain just ticks away from the all-time highs set last week.  Again, it is difficult to accept the idea that the world is about to end based on the market’s current behavior.  Look at the chart below and worry does not seem to be prevalent, nor has it been for any extended length of time in the past 5 years.

Source: tradingeconomics.com

In the bond market, yields are higher this morning with Treasuries (+4bps) leading the way and European sovereigns all higher by between 3bps and 4bps as well.  It’s interesting that this is the behavior but I suppose it has to do with the Keynesian view that higher economic activity leads to higher rates.  If we look at the PMI data from around the US and Europe, manufacturing has been doing quite well.  Look at the ISM Manufacturing chart below for the past 3 years and it is clear that investment is growing there.

Source: tradingeconomics.com

It is a similar tale in Europe with Manufacturing PMI data this morning all being released healthily above the 50 level and rising from last month.  The market response to lift yields seems anachronistic, but such is life.  However, it is worth highlighting that if we take a bit of a longer-term perspective on 10-year Treasury yields, while they are pushing toward the top of a 4.00% – 4.50% range, you can see that range has largely been intact for the past 3 years.  It is not clear to me that it is time to panic on yields yet.

Source: tradingeconomics.com

In the commodity space, with oil (+3.3%) having risen on the reports of a US ship being attacked, we cannot be surprised to see gold (-1.2%) and silver (-2.6%) both slipping along with copper (-1.6%). This is especially true with China and most of Asia on holiday as official buying of gold is probably on hold for now.  

Finally, the dollar is firmer this morning as risk is under pressure across the board.  US futures are lower, European stocks are lower and oil is higher.  So, gains of 0.25% for the dollar against most currencies are the norm.  There was a very sharp appreciation in the yen early in the overnight session and another one a few hours ago, as you can see in the chart below, with many believing the BOJ was in again during quiet markets, but it has completely reversed.  My take is the BOJ would not have spent reserves like this and would have been far more emphatic if they wanted to move the market again.

Source: tradingeconomics.com

But, as market in Asia were quite thin, any large sell order would have been able to force a move like these.  In addition, with the dollar now several percent below their level of concern, I suspect they will save their ammunition.  In the EMG bloc, ZAR (-0.5%) continues to feel most of the pressure from Iran as the combination of higher oil prices and lower gold prices are a double whammy.  As well, NOK (+0.35%) continues to respond positively to the oil price.   Net, the dollar remains in demand for now.

On the data front this week, it is a mixed week until Friday’s NFP data is released.

TodayFactory Orders0.5%
 -ex Transport0.7%
TuesdayTrade Balance-$60.5B
 ISM Services53.7
 JOLTs Job Openings6.83M
 New Home Sales668K
WednesdayADP Employment99K
ThursdayInitial Claims205K
 Continuing Claims1800K
 Nonfarm Productivity1.4%
 Unit Labor Costs2.6%
 Consumer Credit$11.0B
FridayNonfarm Payrolls60K
 Private Payrolls73K
 Manufacturing Payrolls5K
 Unemployment Rate4.3%
 Average Hourly Earnings0.3% (3.8% y/Y)
 Average Weekly Hours34.2
 Participation Rate61.7%
 Michigan Sentiment49.5

Source: tradingeconomics.com

In addition, Fed speakers are back on the circuit (I sure hope Warsh shuts them all up) with 12 speeches from 9 different speakers.  The funny thing is, we already know their views, Miran wants to cut and everybody else is on hold, so what are they going to say?

The war remains the only thing that matters right now, so watch for headlines that an agreement is coming closer.  If that happens, oil will slide along with yields and the dollar while metals and stocks will rally.  (Of course, apparently, we don’t need anything else to get stocks to rally!)

Good luck

Adf

Analyst Glory

Posted on by 
On Friday, the Payrolls release
Described a much greater increase
Than pundits had thought
Thus, stocks were all bought
As well there was new hope for peace

This morning the story of note
Is ‘bout a cease fire anecdote
As well, there’s a story
‘Bout analyst glory
And how he learned much in a boat

Quickly, let’s recap Friday’s NFP report which showed payrolls jumped 178K, far greater than the 60K expected, although, as has been the case for a while, there was a revision lower to last month’s data.  Net, however, given the labor market dynamics discussed on Friday, where zero net job growth appears to equate to a stable, relatively low, unemployment rate, the data was indicative of solid economic activity.  Manufacturing Payrolls rose 15K, showing, as per the below chart from tradingeconomics.com, their strongest growth since November 2023 and hopefully the beginning of a trend back toward the levels seen in the wake of the Covid restart.  Perhaps President Trump’s reshoring efforts are beginning to pay off.

The Unemployment Rate also ticked lower, to 4.3%, although earnings data was on the soft side, 3.5% annual growth. (My favorite part was government employment fell again, taking the federal, non-military, workforce to its smallest level since the mid 1960’s, a healthy trend I believe.)

The upshot is that Friday saw equity markets rebound from weaker opening levels, Treasury yields rise and oil prices jump along with the dollar while gold prices slid.  Of course, in today’s world, that news is completely out of date.

As I type Monday morning, with all of Europe closed for Easter Monday, and most of Asia having been closed as well, the two stories around are 1) talks about a 45-day cease-fire in the war, and 2) an analyst report from Citrini Research describing the traffic through the Strait of Hormuz being much greater than previously believed based on the tracking of ship transponders.

Regarding the first, it is always difficult to understand exactly what is happening with this administration during its conduct of the Iran war.  I don’t say that pejoratively, rather I believe it is entirely part of the plan of strategic ambiguity based on President Trump’s overall style.  Much of the weekend focused on the remarkable and successful rescue of the 2nd fighter pilot that was shot down late last week, and deservedly so.  But there are stories about the US, Iran and regional mediators (Pakistan? Egypt?) trying to get to a 45-day cease-fire that could lead to the end of the war.  Of course, we also had President Trump threaten to destroy all of Iran’s infrastructure if they don’t reopen the Strait of Hormuz.  As of now, the war continues apace with the latest key news being the killing of the IRGC’s spy chief in an Israeli attack.  

But it is the second story that has more punch, and that is that Citrini Research, recently noted for its late February report that described a fictional scenario in 2028 regarding major negative outcomes from the ongoing AI adoption and its impact on employment, the economy writ large, and markets, published a note where they had sent an analyst to the Strait of Hormuz who recorded what was happening there.  The upshot is that the activity through the Strait is far greater than had been reported as a number of ships have turned off their transponders and are transiting near the Omani coast.  

If one ever doubted the wisdom of the markets, this may be the best indication that markets really are an amazing source of information.  Consider the fact that despite the Strait of Hormuz being ostensibly closed, the waterway where ~20% of the world’s oil and LNG transits, the price for both products has been remarkably calm.  I am not denying oil (WTI -1.1% this morning) has risen significantly from pre-war levels, just that the fact it has not reached the levels of the Russian invasion spike, let alone the pre-GFC spike, even on a nominal basis, is incredible.  

Source: finance.yahoo.com

Russia did not interrupt 20% of the global oil flow.  At the margin, if 20% of global oil was not flowing, and given the inelasticity of demand for oil in the short run (estimated at just -0.05 to -0.3 according to Grok), prices above $150/bbl would seem to be more likely.  But here we are this morning at $110/bbl.  That tells me that the Strait is not shut, although the flow has slowed significantly.  But, if 20% of the regular traffic gets through, which seems to be what the Citrini report implies, and both the Saudis and Emiratis have the ability to pipe oil as well, to the tune of an extra 5mm-6mm/bpd, that means the shortage is half the initial fears.  (20% of 20mm/bpd + 5mm to 6mm piped).  It turns out the world, as a whole, is more resilient than many thought.  Certainly, there are nations that are going to suffer because they cannot compete with energy prices this high, but overall, my sense is that the global impact is going to be less than initially feared.

I am not trying to downplay the seriousness of the situation, but from a markets perspective, we need to recognize that perhaps the world is not about to end.  This is not to say that things cannot get worse, just that the starting point is probably better than we thought.

Ok, let’s tour the few markets that were open overnight before we’re done.  In equity markets, Tokyo (+0.6%) had a pretty good session all things considered as did Korea (+1.4%) and India (+1.1%), which were the major markets open.  The picture amongst the other regional exchanges was mixed, although probably a little more red than green.  Of course, Asia is the area most negatively impacted by the oil situation.  With Europe closed, a quick look at US futures shows that at this hour (8:10) they are modestly firmer.

In the bond market, Treasury yields have backed up another 2bps after climbing 4bps on Friday.  The only other market open was Japan, with JGB yields rising 3bps and trading at a new high for this move, thus the highest since January 1997 as per the below from Investing.com

We’ve already discussed oil prices with the real interest, to me, the fact that WTI is higher than Brent Crude, an indication that there is increased demand given its availability to any place in the world.  As to the metals markets, gold (-0.1%) and silver (+0.2%) are not really telling us much today.  There certainly doesn’t seem to be any new information to drive these markets right now.

Finally, the dollar is softer this morning in thin trading, which given the moves in oil and stocks, is not that surprising.  But the DXY remains basically right at 100.00 and the yen has been hovering just below the 160 “line in the sand” for the past three weeks as per the below chart from tradingeconomics.com

But with most European centers closed, as well as Canada, I expect that there will be little movement from current levels with very narrow liquidity.  Don’t try to do something large today.

Which takes us to the data this week, as follows:

TodayISM Service 550
TuesdayDurable Goods-0.5%
 -ex Transport0.5%
WednesdayFOMC Minutes 
ThursdayInitial Claims209K
 Continuing Claims1832K
 Q4 GDP (final)0.7%
 Personal Income (Feb)0.3%
 Personal Spending (Feb)0.5%
 PCE (Feb)0.4% (2.8% Y/Y)
 Core PCE (Feb)0.4% (3.0% Y/Y)
 Real Consumer Spending (Q4)2.9%
FridayCPI0.9% (3.3% Y/Y)
 Ex food & energy0.3% (2.7% Y/Y)
 Michigan Sentiment52.0
 Factory Orders0.0%

Source: tradingeconomics.com

Mercifully, there are only two Fed speakers this week, but again, who is listening to anything they say these days?  Certainly, other than Chair Powell, I don’t think they matter at all.  PCE and CPI are the big numbers this week, at least from the perspective of how markets are going to anticipate future outcomes, whether monetary policy or fiscal policy.  But still, the war is the thing that matters.  A cease fire ought to be quite bullish in the short term, for stocks, bonds and gold, while oil and the dollar fall.  But it’s anybody’s guess if something like that is going to happen.  I wish I had something better to say than play it close to the vest.  We are still in a hugely volatile environment with many potential exogenous factors.

Good luck

Adf

Not Right

Posted on by 
This Friday is labeled as Good
And markets worldwide understood
That trading’s not right
So closed with no fight
If only the government could!

Instead, they’ll release NFP
Though traders won’t be there to see
And Monday, as well
There will be no bell
Let’s hope war’s not raised a degree

Philosophers ask, if a tree falls in the forest and nobody is there, does it make a sound?  Today, investors will ask, if the NFP report is released and there are no markets to respond, does the data matter?

In a highly unusual circumstance, this morning’s NFP report is going to be released on Good Friday, the one day of the year when equity markets are closed but banks are open, as is the US government.  As well, given the holiday, many international markets were closed overnight and essentially all of Europe is closed right now.  Too, Monday is a holiday in many nations around the world, Easter Monday, so equity markets throughout Europe and all old Commonwealth nations will be closed for a very long weekend.

Which begs the question, does today’s data really matter?  After all, we have a long weekend ahead of us and the possibility of an escalation of fighting in Iran, which if that occurs will make any data today moot.  FWIW, here are the expectations for this morning:

Nonfarm Payrolls60K
Private Payrolls70K
Manufacturing Payrolls-5K
Unemployment Rate4.4%
Average Hourly Earnings 0.3% (3.7% Y/Y)
Average Weekly Hours34.3
Participation Rate62.3%

Source: tradingeconomics.com

Remember, too, ADP Employment was a touch better than expected.  As well, there is increasing evidence that the data with which we had become familiar regarding the number of new jobs necessary to maintain a stable employment market has fallen sharply.  For the longest time, econometric estimates were that somewhere between 150K and 200K new jobs were needed each month to prevent the Unemployment Rate from rising.  But the Dallas Fed just released a research report suggesting that is no longer the case.  In fact, they estimate the number is basically zero.

Obviously, the big changes have come from immigration policy in the US, with the closing of the border, the deportation of between 350K and 650K (depending on your source) of illegal immigrants by the government as well as the self-deportation of somewhere on the order of 2 million more people.  These actions have dramatically reduced the available work force and with that, the number of new jobs required to reach an employment equilibrium.

Despite these changes, arguably the data ought still to matter as it represents a key part of the FOMC mandate.  But given the war has drowned out basically all economic data, it is not clear these numbers are going to be meaningful for a while yet.  All those who trade via algorithm are the ones who are most impacted as payroll day was always a huge winner for them.  And while US futures markets are open (currently -0.2% across the board at 7:25), there will be no arbitrage opportunities as the underlying markets won’t open until Monday in the US and Tuesday in Europe.

Which takes us to the other story, will there be an escalation of fighting in Iran over the long weekend?  Every story I have read in the MSM has written, almost glowingly, about how the Iranians are completely prepared for any US invasion and will inflict serious damage and casualties on the Americans if one comes.  Again, I am not a defense analyst, but to my understanding, the US does not yet have all its assets in theater which will preclude any opening salvos.  The other thing I would say is historically, I wouldn’t bet against the USMC achieving their objective.  

And that’s where we stand this morning, awaiting data to be released into a void with no opportunity to respond, really, until Monday, at least in the equity markets.

In fact, other than cryptocurrencies, which are always open, the only market of note that is open today is the FX market, and that is suffering from diminished liquidity because European centers are closed for the holiday, although US banks will be active.  Or perhaps active is the wrong term, they will be open.  With that in mind, it should not be surprising that the dollar is, overall, little changed from yesterday’s closing levels.  In fact, every G10 currency is within 0.1% of yesterday’s close although we have seen a touch of weakness in ZAR (-0.6%) which is still suffering from gold’s -2.25% performance yesterday.  

The only other currency that moved more than 10 basis points was INR (+0.3%) which continues to benefit from RBI efforts to prevent its complete collapse.  You can see the performance of the rupee over the past five years and that spike near 100 was seen as a near-death experience by the RBI and drove them to respond.  Alas, the war is not helping their cause at all and there are scant few reasons to buy the rupee for most traders these days.  

Source: tradingeconomics.com

Otherwise, all I can offer is for you all to have a wonderful Easter/Passover weekend and we will pick up again Monday, but really it will take until Tuesday before we get a better sense of how the news will be absorbed, whatever it may be.

Good luck and good weekend

Adf

No Death Knell

Posted on by 
While Friday, the world was on edge
And everyone wanted to hedge
This morning it seems
That Trump and his schemes
Have backed us away from the ledge

So, while Asian stocks mostly fell
In Europe, there’s been no death knell
And futures at home
Though not quite with foam
Are bubbling up, doing well

The bond market, though, is confused
With some analysts quite enthused
Recession is near
So, bond buys they cheer
Though holders, so far, have been bruised

The counter to this contestation
Is, soon we will feel more inflation
So, bonds are a sale
As Jay can’t curtail
That outcome, so short long-duration

Let me start by saying, we are still in a situation where nobody knows exactly what is happening in Iran and the Persian Gulf, although we continue to hear lots of propaganda from both sides.  It does appear that Iran’s military has absorbed a significant beating, but they continue to fire missiles in retaliation, albeit at a reduced pace.  It seems there are the beginnings of some discussions regarding ending the conflict, ostensibly with Pakistan taking the lead in speaking to both sides, but there have been no direct talks yet.  Time is still a critical issue as every day the Strait of Hormuz is closed, that adds further pressure to the global economy, especially in Asia and Europe which are the two areas most reliant on energy flowing through the Strait.

As I was considering the implications of oil prices at $100/bbl in the US, I realized that every fracking well in the US is going to be pumping at maximum capacity, and given how quickly DUC (drilled but uncompleted) wells can be brought on line, I expect that we will see US oil production rise from its recent 13.7 million bbls/day.  But alongside that, many, if not most, of these wells will be producing associated gas, i.e. natural gas that comes up with the oil, which is one reason, I believe, that Natural Gas prices in the US (-2.5% today) are essentially unchanged since the war began a month ago (green line).  Meanwhile, as you can see with the blue line on the chart, European Natural Gas prices have exploded higher.  In fact, this morning, US prices are just below $3.00/MMBtu while European prices are about $18.65/MMBtu.  (European gas is quoted in EUR/MWh, which is why the price looks so different.). Europe needs this war to end a lot sooner than the US from a pure economic perspective.

Source: tradingeconomics.com

Away from that stray thought, if we look at equity markets, you can see there has been a real turn.  Friday felt dreadful with every index falling and closing on its lows.  And Asia followed through with that thesis as virtually all bourses there were under real pressure.  Japan (-2.8%), Korea (-3.0%), India (-2.2%) and Taiwan (-1.8%) all fell sharply following the US lower.  Both China (-0.25%) and HK (-0.8%) also slipped, but not quite as aggressively.  The issue here is all these nations rely on energy transiting the Strait and are suffering accordingly.  My take is that not only will these equity markets have issues, but so, too, will their currencies until things in the Gulf are settled.

As to European equities, the story there is less dramatic this morning with a mixed picture as the UK (+0.5%) is higher along with Spain (+0.3%) and Italy (+0.3%), although Germany (-0.2%) and France (-0.1%) are slipping.  The big winner here, not surprisingly, is Norway (+2.0%).  We also saw the first March inflation data from anywhere in the world this morning from Germany, and not surprisingly, it was higher.  While the nationwide number has not yet been released, the individual Landers all show something between 2.5% and 2.9%, generally higher by 0.7% or more.  The market is looking for a 2.7% national reading, up from 1.9% February print.  US futures, meanwhile, are higher by 0.6% across the board at this hour (7:15).

In the bond market, though, inflation fears, which were all the rage on Friday, have abated somewhat with Treasuries (-4bps) seeing demand and European sovereign yields all softer by between -1bps and -3bps.  Even JGB yields (-2bps) have slipped, although the latter appears to be on the back of stories the BOJ is getting ready to hike rates in April and the question is how much, not if.  So, despite oil prices continuing to rise, and adding inflation pressure around the world, bond investors are relatively sanguine this morning.

In the FX markets, the story has been more mixed this morning with the dollar broadly firmer, but not universally so.  In the G10, the yen (+0.5%) is the outlier as having traded above the 160.00 level Friday, we heard more from Japanese authorities, specifically, the current Mr Yen, Mimura-san, that they did not welcome speculative trading and would address it if they believed that was driving the yen weaker than it should be.  Given the dollar is firmer vs. all its other G10 counterparts over the past month, it is surprising that is the case they are trying to make, but I guess they need to say something.  Otherwise, this bloc is mostly softer by about -0.2% or so across the board.  In the EMG bloc, INR had a little hiccup last night as per the chart below.

Source: tradingeconomics.com

It seems that the RBI reduced the size of positions that Indian banks are allowed to hold regarding short rupees every day, which forced a serious appreciation of the currency.  However, as you can see, it was relatively short lived and compared to Friday’s close, the rupee is weaker by -0.2% despite the new regulations.  Otherwise, ZAR (-0.3%) and KRW (-0.6%) are the weakest in the bloc with one outlier, MXN (+0.3%) rallying back from its close on Friday as it closed then at its lowest level since December.  In fact, this morning’s price action seems more like a trading reaction than a fundamental shift.

Finishing with commodities, oil (+1.1%) is back above $100/bbl in the US (above $115/bbl in Brent) although it is not really running away.  Traders are clearly uncertain what to believe with respect to the potential opening of the Strait.  We do get a lot of conflicting news from both sides, I must admit, and I find that reading either all the headlines or none of the headlines leaves you in exactly the same place, no idea what is reality.  The biggest change in the commodity space is in gold (+1.7%) and silver (+2.6%) as the past two days they have both risen alongside oil, rather than their behavior during the first month of the conflict.  It is easy to believe that the major downdraft in the precious metals was a result of liquidation during stress rather than gold’s loss of its haven status and I tend toward that view.  While I am no market technician, the little I do know is that the blow-off low last Monday at $4100/oz may well have defined the bottom of this move.

Source: tradingeconomics.com

Again, 5000 years of history tell me that people will still want to hold the stuff in times of crisis as a way to retain the value of their assets.

Turning to the data this week, while we start slow today (although Chairman Powell speaks at 10:30), we finish the week, on Good Friday, with NFP.

TuesdayCase Shiller Home Prices1.3%
 Chicago PMI55.8
 JOLTs Job Openings6.897M
 Consumer Confidence88
WednesdayADP Employment40K
 Retail Sales0.4%
 -ex autos0.2%
 ISM Manufacturing52.3
 ISM Prices Paid73.5
ThursdayTrade Balance-$59.2B
 Initial Claims212K
 Continuing Claims1825K
FridayNonfarm Payrolls55K
 Private Payrolls55K
 Manufacturing Payrolls0K
 Unemployment Rate4.4%
 Average Hourly Earnings0.3% (3.8% Y/Y)
 Average Weekly Hours34.3
 Participation Rate62.3%

Source: tradingeconomics.com

So, plenty of information this week, but with a holiday weekend coming up next weekend as US equity markets will be closed Friday and European ones on Monday as well, it remains unclear just how important the data is these days.  We are still headline driven although as the Marines make their way to the Persian Gulf, it has the potential to be a relatively quiet week ahead of any increase in military activity, maybe next weekend.  We shall see.  For now, the dollar continues to hold its own, and risk appetite is not collapsing in any meaningful way, yet.  We have to see how long that can last if the war continues to drag on.

Good luck

Adf

Sometime Soon Become Miffed

Posted on by 
At this point, I think we’d agree
It’s oil that seems to be key
As it keeps on rising
It’s not that surprising
That markets elsewhere lack much glee

So, how might the narrative shift?
One way is a noteworthy rift
Twixt Trump and our friends
Who seek different ends
And might, sometime soon, become miffed

The war continues to be the only story that matters to markets right now, although this morning we will be seeing the payroll report.  And no matter the information we receive from ordinary news sources, all of which have their own biases, the one thing that rings true is market prices.  People can say whatever they like, but when it comes to money, the truth will out.

With that in mind, a look at the oil market this morning is not very optimistic as the black, sticky stuff is sharply higher once again, up by 5.25% as I type at 6:45.  I have highlighted this week that thus far, the rise had not been excessive, but as we look at the chart this morning, that claim may no longer be correct.  While we remain far below the levels seen shortly after Russia invaded Ukraine in 2022, the price has risen 25% this week.

Source: tradingeconomics.com

As others have highlighted, while the price of crude gets all the market press, for the man on the street, it is really the price of gasoline that matters, and that has risen some 17% this week.  Arguably, markets are beginning to price the idea that this war will continue longer than initial thoughts, and that the key chokepoint, the Strait of Hormuz, will remain closed for longer than initially expected.  I have seen several models that indicate the impact on measured inflation if gasoline continues to rise in price, which indicate that we should expect CPI to be jumping in the next few months.  The upshot there is that do not be surprised if inflation is suddenly running above the Fed funds rate by the summer, a forecast that I don’t believe was on any bingo card at the beginning of the year.

Remember, though, the narrative prior to the onset of this military action that there was an oil glut.  Remember, too, there is a significant amount of oil in storage around the world, and as I continue to say, the Western Hemisphere is pumping as fast as they can.  (As an aside, I saw this morning that the US is going to restart diplomatic relations with Venezuela, an indication that things there are working far better than the critics implied.)  Clearly, fear is rampant in the oil markets right now, but that is subject to change in a heartbeat.

In the meantime, let’s see how markets have responded to the latest rise in oil prices.  Stocks cannot make up their mind, it seems, as the below chart of the S&P 500 shows the price action over the past week, since this started.

Source: tradingeconomics.com

I am hard pressed to discern a trend here, with the movement more akin to a sine wave than anything else.  Interestingly, yesterday’s weakness in the US was followed by a mix of strength and weakness in Asia with Tokyo (+0.6%), China (+0.3%) and HK (+1.7%) all gaining although there were declines in India (-1.4%), Australia (-1.0%) and Indonesia (-1.6%).  Not surprisingly, each nation in Asia is impacted by the war differently, although higher oil prices would seem to me to be quite a negative for the big 3 markets given how reliant each one is on imported oil, and how much of it transits the Strait of Hormuz.

As to Europe, this morning is all red, with losses between -0.1% (UK) and -0.5% (Spain) and everywhere in between.  I read a charming article in Bloomberg about how recent unseasonably mild and sunny weather in Germany has resulted in solar power generating more than 40GW of electricity for the 5th consecutive day this week, helping to keep prices in check despite the rise in energy prices elsewhere.  I hope, for the Germans’ sake, the weather stays more like Phoenix than Frankfurt going forward.  But reality is going to be a problem for them going forward, and high energy prices not only hurt consumers, but they are destroying what’s left of Europe’s industry.  As to US futures, at this hour (7:15) they are lower by -0.6% across the board.

Bonds continue to shun their safe haven role in this conflict with yields continuing to climb.  Treasuries are higher by a further 3bps this morning and approaching the 4.20% level that had been the top of the trading range.  European sovereign yields are all higher by between 3bps and 6bps as inflation concerns percolate amid higher energy prices.  Alas for Europe, this morning they released Eurozone GDP growth for Q4 at a softer than expected 1.2%.  I expect we will begin to hear more about stagflation there if the war continues.

In the metals markets, both gold (+0.1%) and silver (+0.1%) are marginally higher this morning although both suffered yesterday.  My friend JJ who writes the Market Vibes Substack made a very prescient statement last evening, “However, when the shit is hitting the fan, you don’t want safe assets, you want safe prices.”  Thus far, gold has not proven to have safe prices, as evidenced by the daily chop you see below, but my belief remains that it will continue to maintain its value over time, especially in a situation like this.

Source: tradingeconomcis.com

Finally, rumors of the dollar’s death continue to be exaggerated.  This morning, it is stronger vs. virtually all its counterparts in both the G10 and EMG blocs, even the traditional havens of CHF (-0.2%) and JPY (-0.3%).  As I have repeatedly written, I don’t believe you can look at the global energy equation without recognizing that the US combination of extraordinary resources and the willingness to exploit them is an unbeatable combination.  After all, despite 25% of global LNG shipping stopped due to the closure of Hormuz, natural gas prices in the US are just over $3.00/MMBtu, certainly above their levels from two years ago, but incredibly cost competitive on a global basis.  Just look at the chart below with European, UK and US gas prices and see how they have behaved.

Source: tradingeconomics.com

Back to the dollar, both the euro (-0.4%) and the pound (-0.3%) have slipped to their lowest levels vs. the dollar since late November 2025.  I believe that is a combination of both fear and the energy situation as it is aggravated by the war.  There are two currencies holding up this morning, NOK (+0.15%) and CAD (+0.15%) with the similarity that both are major oil exporters.  Oil continues to be the story driving everything.  Quite frankly, as long as the war continues, I find it hard to devise a scenario where the dollar declines in any meaningful way.

On the data front, this morning brings the payroll report with the following expectations:

Nonfarm Payrolls59K
Private Payrolls65K
Manufacturing Payrolls3K
Unemployment Rate4.3%
Average Hourly Earnings0.3% (3.7% Y/Y)
Average Weekly Hours34.3
Participation Rate62.5%
Retail Sales-0.3%
-ex Autos0.0%

Source: tradingeconomics.com

Yesterday’s Initial Claims data was in line and the productivity data was better than expected.  Wednesday’s ADP Employment Data was better than expected.  While there continues to be a lot of discussion about the economy setting to crack, at this point the data does not show that to be the case.  Remember, the tax impacts of the OBBB are starting to be felt, and that is a huge stimulus.  Remember, too, last month’s NFP was much stronger than expected.  A strong number will certainly support the dollar, although it will probably support oil prices as if the economy remains strong, it will encourage President Trump that he can continue in Iran for a longer time.

Good luck and good weekend

Adf