Tag Archives: #oil

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

Close to a Deal

Posted on by 
Said Bessent, we’re close to a deal
Though not yet the President’s seal
Both sides have agreed
That two months they’ll need
To see if this outcome is real

It can, though, not be too surprising
That stock markets have resumed rising
While oil has slipped
And bond yields, down, dipped
All told, risk is quite appetizing

The major story, although it has been questioned by many, is that there is positive movement toward a deal to end the conflict in Iran.  While I’m sure you will have seen the terms, a quick recap shows that there is to be a 60-day ceasefire to work out the final details.  One of the things I saw this morning was that Iran would send its nuclear material to China, rather than the US, as a compromise, and frankly, that seems like a fine solution.  After all, China enriches the stuff all the time, has many nukes and has never used one.  While we may have disagreements with China on a geopolitical basis, Xi Jinping is not a religious fanatic.  While Treasury Secretary Bessent made the announcement yesterday, he cautioned that President Trump has not yet agreed the details, but it is certainly a hopeful situation.  

Of course, you know who saw it as a hopeful situation?  Risk takers.  The Bloomberg screenshot below is indicative of how things are going, with gains everywhere except China, where it appears that concerns over China-EU trade tensions are weighing on companies there.  With the US having dramatically reduced its market for Chinese exports, Europe had effectively become the major dumping ground, and now that Europe is starting to push back, the question is what will become of all the stuff they continue to produce.  Beggar thy neighbor policies are tougher to inflict on nations that also utilize those same policies.  Just sayin’.

Of course, you won’t be surprised that oil prices have fallen further this morning on the news, down another -1.6% and firmly below $90/bbl, actually below $88/bbl as I type as per the chart below.

Source: tradingeconomics.com

Now, clearly, prices are still substantially above levels seen prior to the Iran conflict, but as of now, the most apocalyptic predictions have simply not materialized.  I saw two interesting comments on this subject this morning with very opposite takes.  First, Javier Blas, the Bloomberg energy analyst/reporter, posted the following chart for jet fuel in Europe.  You may recall that early on, there were many forecasting Europe would run out of fuel and planes would stop flying.

The price action does not indicate a market concerned by imminent shortages of the stuff.  In fact, my understanding is that refineries are cracking so much oil to make jet fuel, that there is actually “excess” gasoline being produced, which would help explain my point yesterday about falling gasoline prices as you can see in the below chart.  Since May 18, wholesale prices have slipped 19%.

Source: tradingeconomics.com

However, there is another side to the argument, the apocalyptic side, which was recently made by Neil Chapman, an Exxon SVP at a conference as per the below X post.

Here’s the thing about comments like this.  First, I have no doubt that Mr Chapman is highly competent and explaining what he sees happening.  I would never suggest he has any motive other than conveying information he believes is important.  But I also have learned, over many years of experience, that arguing with the market is a very painful thing to do.  As Mr Keynes reputedly said almost 100 years ago, “markets can remain irrational a lot longer than you and I can remain solvent.”

So, what to think?  No matter the pedigree of the individual calling for a significantly different outcome than is current, it is very difficult for me to side with the apocalypse if the market disagrees.  And clearly the market disagrees with this thesis.  My understanding is refineries are running flat out right now, which means they have plenty of oil to process.  If, and it’s a big if, the Iran conflict is truly coming to an end, $70/bbl oil and $3.50/gallon gasoline will be with us by Labor Day.  At least that’s my view, and I’m pretty positive on it.

Looking elsewhere, it can be no surprise that bond yields around the world are slipping with Treasuries sliding -4bps yesterday, although they are unchanged this morning.  European sovereign yields were also softer yesterday but are now struggling between the positive idea of the end of the Iran conflict and the negative reality that inflation in Europe continues to rise as reported this morning (Italy 3.3%, Germany 2.6%, Spain 3.6%, France 2.8%), which has the ECB set to hike rates at their meeting as per their own market watch tool.

The problem with this is that economic activity across the continent continues to slow (GDP in Italy 0.8% Y/Y, France 0.9% Y/Y), and hiking rates on the back of a supply shock, especially one that has a fair chance of ending soon, would seem to be a catastrophic error in the making.  Of course, Madame Lagarde is no stranger to catastrophic errors, so, we should assume they will, indeed, hike rates in two weeks’ time.  Even the Fed, no stranger to catastrophic errors, is not prepared to hike rates, although cuts appear to be off the table for now.

Elsewhere, precious metals (Au +0.8%, Ag +0.1%) appear to have put in a short-term bottom while copper (-0.5%) is consolidating after its continued remarkable run.  

And finally, the dollar is stronger this morning, not aggressively so, and not universally, but on net I would say.  NZD (+0.5%) is bucking that trend as further hawkish comments from the RBNZ Governor have traders looking for a rate hike there while INR (+0.9%) has been the biggest beneficiary from the decline in oil prices as India has been one of the most severely impacted nations from the conflict.  Lastly, a note about the yen, where the MOF disclosed that they spent ¥11.73 trillion (~$73.6 billion) intervening in the FX markets last month, a larger amount than had been assumed by the market.  Here’s the problem, as evidenced by the chart below, it didn’t do much good, from the peak print of 160.72 on April 30th(the wick of the huge red candle), the yen is not even 1% stronger as of this morning.  As well, looking at the chart, you can see their subsequent minor interventions as the spikes down.  As I have repeatedly said, if they don’t change policy, the currency will continue to weaken.

Source: tradingeconomics.com

Otherwise, FX is dull and boring today.

Turning to the data, this morning brings the Goods Trade Balance (exp -$86.5B) and then Chicago PMI (50.5).  We also hear from 3 more Fed speakers, but it is hard to believe there is any change in viewpoint there.  Yesterday’s data was, on the whole, better than expected, I would say.  While GDP was a touch soft, Durable Goods was quite robust at 7.9% headline, 1.1% ex Transports.  PCE was as expected to a tick softer, although remains well above 3%, let alone the Fed’s alleged 2% target.  The biggest concern was Personal Income was flat, although Spending (+0.5%) continues apace.  Much has been made by analysts about how the savings rate is collapsing and this presages an economic collapse.  But these are the same folks who keep telling us that oil prices are going to explode as inventories collapse.  Maybe they are right, but as of now, there is no evidence that is the case, at least based on the data.

What to make of it all?  The idea that the Iran conflict is on course to end is clearly the top issue for the market and the economy.  I expect that if this is the case, things will get back to “normal” far more quickly than the pessimists insist as the one thing we have learned is that the ability to resume economic activity is quite robust.  If risk is warmly embraced, then one would assume that yields will decline and the dollar with them, at least for now.  But that also implies that funds will continue to flow into the US markets, which will prevent any significant decline.  And I cannot help but look at Europe with the prospect of hiking rates into an economic slowdown and wonder, again, why anybody wants to hold the euro.

Good luck and good weekend

Adf

Inciting

Posted on by 
It’s true that I may seem passe
But when I heard words people say
I truly expected
The words I detected
To mean what they did yesterday

So, words like cease-fire depict
A time when two sides don’t inflict
The other with fighting
Or, likewise, inciting
An outcome the words contradict

I have always been a plain meaning of the words sort of fellow, using words in their most common form unless there is some extraordinary opportunity for a pun.  And I don’t get many of those.  But these days, government spokespeople sound more like Humpty Dumpty than Walter Cronkite, that’s for sure.

“When I use a word,’ Humpty Dumpty said in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.’
’The question is,’ said Alice, ‘whether you can make words mean so many different things.’
’The question is,’ said Humpty Dumpty, ‘which is to be master — that’s all.”

Lewis Carroll, Through the Looking Glass

Frankly, Humpty Dumpty had nothing on either the Iranians or the US in this regard.  After all, ostensibly there is a cease-fire underway, and yet two days in a row we have had Iran attack ships in the Strait of Hormuz and the US respond.  I’m sorry, that doesn’t sound much like a cease-fire to me, but then, I’m just a poet.

While Tuesday’s activities had virtually no impact on the oil markets, with crude slipping further, and equities continuing their ride higher, last night, there was a modest bounce although so far, WTI is still trading around $90/bbl, hardly a signal that the end is nigh.  But net, risk aversion is more evident this morning.  I guess one day’s worth of skirmishes were believed to be limited, but now, two days in a row, people have concerns.

And that’s where things stand this morning, uncertainty over whether the cease-fire is going to remain in place and uncertainty as to whether talks are going to continue.  My take is that, like every conflict, whether military or commercial or even governmental, the question is which side is feeling the pain more deeply such that they must alter their strategies.  There was an interesting article in the WSJ describing that exact tradeoff as the blockade is successfully hurting the Iranian economy more than the closure of Hormuz is hurting the US economy.  But given the lack of coherent leadership in Iran, with both IRGC hardliners and elected officials tending to be more pragmatic, it remains unclear who blinks first.

So, let’s see how markets are responding this morning.  Yesterday’s lackluster US equity session, where miniscule gains were seen was followed by a somewhat negative picture in Asia as the second attacks made headlines.  Tokyo (-0.5%) and HK (-1.3%) were under pressure as were Korea (-0.5%), Taiwan (-1.4%) and Australia (-1.4%).  In fact, almost every market in the region was lower except China (+0.1%) which managed a tiny gain.  European bourses are all lower this morning as well, with the UK (-0.8%) leading the way down while Spain (-0.4%), France (-0.3%) and Germany (-0.2%) slip less dramatically.  The little data we saw showed weak Spanish Retail Sales and negative Eurozone Confidence indicators (Consumer (gray bars) -19, Industrial (blue bars) -8).

Source: tradingeconomics.com

But let’s face it, looking at this chart, things have been pretty dire in Europe for a while now.  One wonders how long they can continue their current path of energy insanity and over regulation, although the current crop of leaders is clearly committed!  As to US futures, at this hour (6:30) they, too, are pointing lower led by the NASDAQ (-0.8%) with the other indices just barely down in the session.

In the bond market, the fears of runaway inflation and yields from earlier this month have clearly abated and the 10-year is back around 4.50%.  I am sure Secretary Bessent would like to see it somewhat lower, but this is hardly an apocalyptic level.  One of the things that appears to be underlying the recent rise in yields has been foreign central bank sales since the beginning of the war.  Not surprisingly, as the dollar rallied on its haven status, as well as the need for dollars to pay higher prices for oil, nations around the world needed to dip into their reserves to support their own currencies (recall, we have seen intervention from Japan, India and Indonesia for certain) and they sell Treasuries as part of that process.  Bloomberg had a nice explanation this morning.  But that takes me back to the idea that US yields are not running away, and if the Iran conflict ends soon, we will see yields head lower again.  As to today’s price action, most markets have seen yields edge higher by 1bp or 2bps, not really demonstrating much.

In the commodity space, oil (+2.5%) has rebounded from the lows yesterday, but as you can see in the chart below, remains right in the middle of its wartime trading range.

Source: tradingeconomics.com

However, something that hits much closer to home, I would suggest, is gasoline, and you can see how that has behaved over the past month.  While it has tracked oil higher today, we have seen a dramatic decline in the price there in the past week as you can see below.  I imagine that will begin to filter through to your local gas station pretty soon.

Source: tradingeconomics.com

Turning to the precious metals, they have been absolute dogs of late with both gold (-1.5%) and silver (-1.5%) finding no traction whatsoever.  One of the theories has been higher yields are weighing on them, and there is certainly truth there, but I must admit, there seems to be a glitch in the long-term story, a story I have long believed, regarding their ultimate value.  Now, remember, markets have a habit of finding the most painful outcome for the most participants, and long gold and silver has been a favorite trade for a while, so perhaps we are simply watching the weakest hands get forced out.  But whatever the case, it is certainly uncomfortable if you are long.

Finally, the dollar is modestly firmer again this morning, but looking at the DXY (+0.2%), it remains well within its trading range of 96.50 – 100.00, this morning trading at 99.38.  It is very difficult to get too excited about very much here as all the major currencies in both the G10 and EMG blocs are trading in lockstep this morning with one exception, BRL (+0.3%) which has managed a modest gain although it is hard to find a direct rationale for that movement.  After all, interest rates haven’t moved enough to change the carry characteristics.  My best bet is that this is simply a reflexive move after several days of weakness.

On the data front, it is a busy morning with Personal Income (exp 0.4%), Personal Spending (0.5%), Q2 GDP (2.0%), PCE (0.5%, 3.8% Y/Y), Core PCE (0.3%, 3.3% Y/Y), Initial Claims (211K), Continuing Claims (1780K) all at 8:30 and then New Home Sales (670K) at 10:00.  We also get the EIA oil inventory data today, with more draws expected.  Adding to that we get NY Fed president Williams speaking this morning.  Yesterday, Governor Cook explained that she was very focused on inflation and thought rate hikes may be needed if things don’t change.  However, that has been the basic understanding since the last FOMC meeting.  I don’t believe they will be hiking rates anytime soon, personally, although cuts are unlikely as well.

And that’s what we have today.  The war and oil remain the key drivers, but there will be keen interest in today’s PCE data to see if there need to be further worries about the Fed moving.  It is difficult to look at the current situation and think the dollar is going to decline soon, and frankly, my take is we are not going to see much movement at all with price consolidation the theme for the next several weeks.

Good luck

Adf

Actively Chided

Posted on by 
Ostensibly, talks are ongoing
However, some fighting is sowing
The seeds of more doubt
That they’ll work it out
Ere Tehran’s surroundings are glowing

But markets have clearly decided
An outcome will soon be provided
Thus, risk is embraced
And stocks, higher, chased
While bond bears are actively chided

I hope everyone had a nice Memorial Day weekend, although until Monday afternoon, I must admit the weather here in NJ was less than we might have hoped.  Of course, a few raindrops are nothing compared to the “defensive” attacks executed by US forces, sinking two Iranian boats while they were trying to lay mines in the Strait.  Apparently, Iran’s response, several volleys of surface-to-air missiles was met with the destruction of those launchers as well.  

There is nothing better, though, than the language Iran uses in situations like this.  According to the WSJ, the head of the national security committee of Iran’s parliament, Ebrahim Azizi, explained that any attacks on the country’s armed forces would be met with “a decisive, crushing and regrettable response.”  It certainly sounds impressive, but it is not clear they can back up those words that effectively.  I guess we shall see.

In the meantime, the other newsworthy item from the weekend was that the Supreme Leader, Mojtaba Hussein, was killed in a military strike and yet talks appear to be continuing.  President Trump explained that the framework for a deal was getting close and that was enough for traders to don their rose-colored glasses as oil gapped lower by more than $5/bbl when futures markets opened Sunday night and despite the recent “defensive” strikes mentioned above, remains far below levels seen last week.

Source: tradingecomomics.com

Not surprisingly, as Monday night trading in Asia gets underway, risk is back on with equities and metals higher, and bond yields lower.  

And as we awaken Tuesday morning, very little new has occurred.  The market continues to believe in the idea that the war is over in all but the details, at least the Iran war.  Ukraine continues, alas.  

On Friday, the latest Fed Chair
A man with a full head of hair
Was sworn to uphold
The idea that gold
To dollars, must never, compare

Before the weekend began, Kevin Warsh was sworn in as the new Fed Chair and the man has a tough job, that is for sure.  As another indication that the Fed is not an apolitical institution (as if any institution based in Washington DC could be apolitical), he hadn’t even gotten the keys to the office before two Fed governors were out opposing his very existence. The WSJ editorial page had a nice summation here which explained that Michael Barr, the erstwhile Vice Chair for Supervision who oversaw the collapse of Silicon Valley Bank (perhaps not the best credentials) was adamant that shrinking the balance sheet would lead to problems, as though he could foresee them!  Then Chris Waller, who was in the hunt for the Chairman’s seat, reversed his recent views on interest rates, explaining hikes were likely in order.  I’m sure there are no sour grapes there!

From this poet’s perspective, the financialization of the economy has been one of the biggest long-term problems we have seen and part and parcel of that financialization has been the Fed bloating expanding its balance sheet from <$1 trillion prior to the GFC to nearly $9 trillion at the height of the Covid madness and still well above $6 trillion today.  It is much harder to financialize things if there is less money around.  I fully support the idea that shrinking the Fed’s balance sheet would be a good thing.  Alas, that will be a tough road to hoe for Mr Warsh.  Good luck to him.

And with that, there are few other stories of note, so let’s look at the market response to the latest peace initiatives.  While we’ve already discussed oil above, gold saw the initial move you would have expected, jumping sharply, but has since given back much of those gains, as per the below chart, and is now about 0.5% higher than Friday’s close.

Source: tradingeconomics.com

Silver has seen similar price action as has copper.  Certainly, if a deal is signed, I believe we can expect oil to head back toward $75 – $80 per barrel and gold and silver to rebound sharply as well.  

The other noteworthy mover was the bond market, which saw yields fall sharply on the news of the deal framework getting close.  You may recall the apocalyptic prognostications just last week when 10-year Treasury yields climbed near 4.70% with many discussions regarding the steepening of the yield curve and the trouble ahead for the economy.  But as I type this morning at 7:00am, the 10-year yield has dipped back below 4.50% in sync with the oil move lower as some of those inflation fears seem to be mitigating.

Source; tradingeconomics.com

Now, as I look across European sovereign markets, they all show modest rises in yields this morning, but that is because yesterday, they fell so sharply.  Net, over the two days, yields are lower across the board.  As an example, the chart below shows both German and Italian 10-year yields and I highlighted Friday’s closing levels.  As you can see, both fell sharply yesterday and bounce a bit this morning but remain much lower.

Source: tradingeconomics.com

Moving on to equity markets, we have observed the same phenomena there, where there was a gap opening higher on Sunday night in futures markets which continued in cash markets while the US markets were closed for Memorial Day.  So, while last night, the Nikkei (-0.25%) slipped, that was after a more than 3% rally on Sunday night/Monday.  Ultimately, given the US holiday and the news cycle over the weekend, we need to look at the movement since Friday to get a sense of things.  So, below is a chart of both the Nikkei and the German DAX showing the rally from Friday’s late trading.  Again, risk is back baby!!

Source: tradingeconomics.com

Finally, the dollar is, well, it is all over the place this morning.  I look at tradingeconomics.com as my source for currency prices as they are all in one place.  One of the weird things this morning is that the EUR (-0.1%), GBP (-0.2%), JPY (-0.15%), CAD (0.0%), CHF (-0.2%) and SEK (-0.2%), the components of the DXY, are all flat to weaker this morning, the DXY itself is also weaker.  I have no explanation for that.  Generally, I would say the dollar is a bit firmer overall this morning with one notable exception, KRW (+0.7%) which saw demand alongside the sharp rally in the KOSPI overnight.  but otherwise, the dollar is modestly higher against most of its counterparts.  Lastly there has been a lot more noise than signal here.

On the data front, the short week does bring some important information.

TodayChicago Fed National Activity-0.3
 Case-Shiller Home Prices1.0%
 Consumer Confidence92.0
ThursdayInitial Claims211K
 Continuing Claims1780K
 Durable Goods3.5%
 -ex Transport0.5%
 Personal Income0.4%
 Personal Spending0.5%
 GDP Q12.0%
 PCE0.5% (3.8% Y/Y)
 Core PCE0.3% (3.3% Y/Y)
 New Home Sales670K
FridayGoods Trade Balance-$87.0B
 Chicago PMI49.7

Source: tradingeconmics.com

Now, with PCE coming, we are going to have to get a new line there as Chairman Warsh likes trimmed-mean PCE, which not surprisingly, has been lower of late, as the key metric for the Fed to follow.  I assume that will become the newest thing to watch.  Of course, it is far too early to have any sense of anything at the Fed now, other than the fact that there will be lots of politicking going on.

So, what have we learned?  Markets are still hopeful that the Iran conflict will end soon with a satisfactory (meaning no SOH problems) conclusion.  In that circumstance, risk will be the ongoing preferred stance, and I expect the dollar will come under pressure in that scenario, at least for a time.

Good luck

Adf

The Drumbeat

Posted on by 
The drumbeat grows louder each day
Catastrophe’s soon on its way
Yet markets ignore
The impact of war
On how things, in future, will play

Right now, Iran says they need U
Although one might ask what they’ll do
As well, on the Strait
They want a toll gate
Methinks this deal, Trump, will eschew

So, are oil tanks running dry?
Will phosphate’s price rise to the sky?
Will food soon run out?
Again, I’m in doubt
But pundits, good times, need deny

This is either setting up to be the greatest market pricing mistake of all time, or the global situation is not as bad as many pundits would have you believe.  There are a bunch of very smart analysts out there who have great expertise in the commodity space, who have continuously explained that the closure of the Strait of Hormuz is setting the world up for catastrophe.  Amongst them are Luke Gromen (@lukegromen), Craig Tindale (@ctindale), Adam Rozencwajg (from Goehring & Rozencwajg Associates) and Javier Blas from Bloomberg.  I read all of them periodically as they have some excellent insights as to what is going on in commodity markets.  And, to a man, they are all singing the same tune that even if the Strait were reopened tomorrow, the damage done is so great that we are heading into a major global economic recession.

Undoubtedly, all of them are smarter than me, a simple FX poet, and while I read a lot, market price action is far too important to ignore, especially as the current situation is not exactly hidden from traders and investors.  Thus, at the end of the day, while I understand their thesis, market prices are telling a completely different story.  Oil and gas production is growing elsewhere in the world and deals are being signed all over the world for new opportunities (Alaska, Brazil, Guyana, Venezuela).  The oil market remains in a steep backwardation which is another sign that markets are not overly concerned about the future.  I’m sorry, I cannot get worked up about this stuff without some clearer price signals, perhaps WTI at $150/bbl or something like that.

As to the Iran news, it is impossible to tell truth from fiction regarding the negotiations as it remains unclear, who in Iran is negotiating and what power they have.  The uranium issue remains key, in my mind, as a nuclear weapon cannot be considered defensive, and given their stated goals of destroying the great Satans of Israel and the United States, I very much fear if they were to create one, they would launch it the next day.  Even Xi agreed they cannot get one.  

All this leads me to believe that there is still quite a bit more back and forth before things end, and if I had to pick a date, I am still in for July 4th as a time to announce an agreement.  We shall see.

So, given we are not going to solve the Iran conflict here, it’s time to observe how markets are behaving.  And frankly, there is not very much to observe.  Starting with equity markets, as you can see from the Bloomberg screenshot below, things look pretty good right now, regardless of the Iran situation.  Yesterday’s US rally (the concerns raised regarding Iran and its uranium were set aside, it seems) were followed by strength in Asia and this morning in Europe.

Earnings data continues to be released in a generally positive manner, and despite the ongoing angst amongst the punditry, as discussed above, there is, as yet, no sign that fear is growing amongst the investing set.  Below is a chart of the CNN Fear and Greed Index over the past year.  the current reading is 57, firmly in the Greed bucket and as you can see, the fear over the war began to dissipate at the end of March. 

If you think about it, this is really no different than the Ukraine War, which for a relatively short time was seen as catastrophic, and eventually faded into the background.  Honestly, when was the last time you saw an article on the subject?

As to the bond market, it continues its recent uncertainty as to what the future holds.  This morning yields are lower across the board with Treasuries (-2bps) after slipping -3bps yesterday, while European sovereign yields are all lower by between -4bps and -6bps.  The bond market appears to be caught between fears of rising inflation because of the impact of higher oil prices, not only on direct things like transportation, but also secondary impacts as those costs are passed on and adding in the potential for higher food prices if the fertilizer situation is as bad as some forecast.  However, the other side of that coin is the potential for a significant recession, which historically has resulted in substantially lower yields as governments around the world add both monetary and fiscal stimulus.  Place your bets!

Turning to the oil market, while WTI is higher by 1.8% this morning, as you can see in the chart below, it continues to go nowhere overall.  If the apocalypse is coming, the market is certainly not ready.  Either that, or there is a lot more oil around than people give it credit for.

Source: tradingeconomics.com

Of course, as has been the case, when oil’s price rises, gold (-0.6%) and silver (-1.1%) slide as that negative correlation has become firmly entrenched.  Copper (+0.7%) though, is bucking that trend this morning, albeit hardly running away.  I expect that these relationships are likely to hold until there is a resolution of some sort in the Gulf.

Finally, the dollar is generally firmer this morning despite the decline in yields.  In fact, if we look across markets, bonds are today’s outlier.  But back to FX, in the G10, all the currencies are weaker by between -0.1% and -0.3% although in the EMG bloc, there are two more substantial movers, INR (+0.5%) as the RBI continues its intervention process amid fears the rupee will collapse, while KRW (-0.8%) continues to see foreign outflows despite its equity market continuing to be one of the best performing in the world as you can see in the Bloomberg chart of the KOSPI below.

And that’s really it as we head into the weekend.  Perhaps the conflict will heat up during the long weekend, which would likely drive some real movement.  But for now, there is nothing new under the sun.

On the data front, yesterday saw generally solid data with the Philly Fed the lone, weak, exception.  Last night, Japanese CPI was released at a much lower than expected 1.4% for both headline and core.  While there is still a strong expectation that the BOJ is going to raise rates next month, if inflation is truly at 1.4%, that seems like it might be a mistake.  This morning we see Michigan Sentiment (exp 48.2) and Leading Indicators (-0.2%).  Here’s the thing about the Leading Indicators, though, as you can see from the chart below from the Conference Board’s website, it appears they may not be telling us the whole story anymore.

After all, they have been declining steadily since early 2022 despite an economy that has grown solidly during that period.  Again, maybe this truly is a harbinger for the future, but I am not convinced.

And that’s all there is.  Have a wonderful Memorial Day weekend and let’s see what the world looks like on Tuesday morning!

Good luck and good weekend

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Narrative Doom

Posted on by 
The crude price continues to fall
But one thing that has us in thrall
Is narrative doom
Where pundits all fume
God dammit, we’ll soon hit the wall

But under the headlines we learn
It’s really not quite the concern
The major details
Of SPR sales
Are by next year all will return

Oil puked yesterday, down nearly -6% despite the news that the EIA inventories fell dramatically as well.  The total draw was just under 18 million barrels, which on the surface is a new record draw.  Charts like the below were all over the place as the narrative writers were busy calling for the end of American Exceptionalism er.. the dollar, er.. US energy dominance.

However, I am not convinced that is the case.  The first clue is that oil prices collapsed and if the doom porn was accurate, I don’t believe that would be happening.  Instead, there is a far better explanation which I am lifting in its entirety from my friend JJ who writes market vibes and has been trading oil for as long as I have been trading FX.  If you care about oil markets, you really need to be reading what he says.

The DOE is releasing 172 million barrels of SPR oil with swaps rather than outright sales. Companies borrow SPR crude now and they pay it back plus a premium in more barrels later which based on the curve could be as much as 25% more barrels. This is explicitly designed to grow the reserve by at least 200 million barrels “at no cost to the taxpayer” and it will.

These are not “draws.” They are loans. The swaps are repaid ratably from November 2026 through September 2028. Earlier return structures have lower premiums.

In other words, the administration is taking advantage of the major backwardation in the oil futures curve and selling prompt and buying forward, taking oil instead of cash at a discounted basis.  If we understand this, it helps us understand why there is no panic in the oil markets, at least not in the US WTI market.

And, whether or not the IRGC is negotiating or getting ready to annihilate us all, my sense is this is a much bigger part of the picture than anyone is considering, except actual oil traders.  But it is not nearly as sexy a narrative, especially if you hate President Trump and can try to tar him with yet another problem.

And as we have learned lately, as goes oil, so goes the entire market.  So, it should be no surprise that equities and precious metals rallied as oil fell alongside Treasury yields and the dollar.  Pretty ordinary actually.

For Jay in his last time as Chair
Where soon, Kevin Warsh we’ll compare
The Minutes revealed
That rises in yield
Would soon change to common from rare

“A majority of participants highlighted…that some policy firming would likely become appropriate if inflation were to continue to run persistently above 2%.”  This statement from the FOMC Minutes of the last meeting at the end of April is actually quite galling.  Even though the FOMC has settled on the inflation reading that has historically run lower than all others, Core PCE, a metric, by the way, that doesn’t even try to represent a consumer’s experience, they have singularly failed to achieve their 2.0% target for more than five years running now.  In the chart below from tradingeconomics.com, the leftmost bar is at 2.2% from March 2021, right as the Covid monetary insanity started to accelerate.  This chart should be Jay Powell’s epitaph, a singular failure in the seat.  After all, as awful as I thought Janet Yellen was in the role, her track record was not this bad!

Of course, now that Mr Warsh is due to be sworn in tomorrow, you can be certain that the punditry will lay the entirety of blame on the fact that inflation is running hot on him directly because, well, President Trump appointed him and they generally hate President Trump.  Of course, I would contend this was not really a newsworthy release as we all already knew that the FOMC had turned more hawkish, and we have seen Fed funds futures begin to price in the probability of a rate hike by the end of the year.  

In the end, though, the oil price remains the key driver of all market activity for the foreseeable future.  So, let’s see how the rest of the markets behaved after yesterday’s sharp decline and given that the black, sticky stuff is sliding a little further this morning, currently down -0.75% at 6:00am.  Remember, too, that Monday afternoon, WTI was more than $10/bbl higher than it is right now.

Source: tradingeconomics.com

Finishing the commodity space, the metals, which all rallied yesterday, have slipped a bit despite oil’s slide this morning with gold (-0.3%), silver (-1.0%) and copper (-1.0%) all under modest pressure.  I must admit that the price action in both gold and silver is starting to make me question the long-term case, let alone the short-term case, to hold them.  Copper, however, seems like it will be in such demand as the electrification of everything increases, that any price declines should be snapped up.

In the equity markets, as mentioned above, yesterday saw gains in the US which were then followed up by what seemed to be a strong earnings report from Nvidia, although I read that there were those who were disappointed they didn’t guide things even higher.  The follow through in Asia was mixed with Tokyo (+3.1%), Taiwan (+3.4%) and Korea (+8.4%) following the tech lead from the US.  Interestingly, both China (-1.4%) and HK (-1.0%) did not follow along, but sold off, ostensibly on profit taking after their recent rallies.  The other big laggard in this time zone was Indonesia (-3.5%) which reacted negatively to government export restrictions on key commodities like palm oil and metals as still-high oil prices take their toll on the economy.

As to Europe this morning, there is not much of which to speak with the major indices all +/- 0.2% or less after Flash PMI data showed weakening activity, notably in Services, although the market is still pricing two rate hikes this year by the ECB.  US futures at this hour (6:35) are pointing slightly lower, with the NASDAQ (-0.6%) leading the way.

In the bond market, Treasury yields have backed up 3bps this morning after tumbling -8bps yesterday.  Right now, they sit right at 4.60%.  As it happens, yields fell everywhere yesterday alongside oil’s price decline, so it is no surprise that modest gains are the order of the day with German bunds (+1bp) outperforming the rest of the continent where yields are higher by 3bps to 4bps across the board.

Finally, the dollar, which had been very quiet all evening, virtually unchanged when I sat down at my desk a 90 minutes ago, is starting to rally a bit here, which explains all the movements.  Apparently, there was just an announcement by Iran regarding uranium, which not surprisingly, has changed the tone of the market.

This explains the dollar’s sudden revival, higher by 0.25% across the board, oil’s sudden rebound, it is now higher by 2.5% at 6:45, and the decline in metals prices.  It also neatly matches bond yields higher.  So, if negotiations are struggling, we should expect to see further risk-off behavior.

On the data front, this morning brings Initial (exp 210K) and Continuing (1790K) Claims, Housing Starts (1.41M), Building Permits (1.39M), Philly Fed (+18.0) and then a little later the Flash PMI readings (Mfg 53.8, Services 51.1).  But as we have just seen in the past 45 minutes, everything is still attached to oil, so that is the key to watch.  All the market correlations remain intact for now, and I suspect they will continue to do so until this conflict is well and truly over.  In fact, it is situations like this, where news changes market pricing so dramatically in short order, that demands hedging programs to be maintained for everyone.  Let’s face it, nobody is going to get it right all the time.

Good luck

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Starting To Bite

Posted on by 
The meeting between Trump and Xi
Had little but hyperbole
So, markets now turn
To their key concern
Inflation that’s grown one, two, three

While oil has garnered attention
Tis yields and their latest ascension
That’s starting to bite
And causing a flight
Of buyers, and lots of press mention

And one more thing that you should know
Is China continues to slow
Through all of Xi’s bluster
He simply can’t muster
His people to get-up-and-go

As we begin a new week, a quick review of the last one shows that the much-touted Trump-Xi summit didn’t seem to address any of the current problems, at least as defined by what financial markets deem problems.  These are the lack of transit ability through the Strait of Hormuz, with the resultant limit on oil supplies and the resulting rise in prices and inflation as energy prices feed into the price of everything else.  I guess it was always a great leap to believe that this summit was going to end the war, and depending on which side’s comments you read, China has either agreed, or not, to try to push Iran to reopening the Strait.  Certainly, they would like that to be the case, but thus far, as I type Monday morning, there has been no further movement.  In fact, last night, the President sent this message out.

I guess we cannot rule out a further escalation of military action in Iran at this point, and I imagine the oil market will not be pleased.

Speaking of China, though, while many want to continue telling the story that they are weathering the Iran conflict with limited impact because they had stockpiled so much stuff ahead of time, below are their latest economic data statistics, a grouping that does not shout, at least to me, of a nation hitting on all cylinders.

Source: tradingecomomics.com

I am confident that we will once again hear about all the stimulus that President Xi will soon add to the Chinese domestic economy as they seek to increase the proportion of domestic activity compared to their export focus.  But I would take the under there.  First, if you thought that politicians in the US didn’t care about their constituents, compared to Xi, they wait on their constituents hand and foot.  But history has shown that China’s model is to support chosen industries, as I showed on Friday, and subsidize them so they can learn to dominate all competitors.  

Arguably, the one time they were willing to subsidize the domestic economy was with the property market, although that simply led to the construction of the so-called “ghost” cities, where people invested in the property bubble, as they had few other outlets to save money, and enormous amounts of resources were consumed to build cities that never had any occupants.  Alas, for all those investors, those cities still don’t have occupants, and with a shrinking population, never will.  The property market has been shrinking in value for 4 years now and shows no signs of slowing as per the below chart of the House Price Index from above.  

Source: tradingeconomics.com

While things are certainly not perfect here, China’s got problems as well, just remember that.

But arguably the real story right now is bond yields as Treasury yields, and those almost everywhere else in the world, continue to rise.  As you can see from the Bloomberg screenshot below, while the overnight movement has not been excessive by any stretch, yields have now risen pretty aggressively over the past month, and year, and are trading at their highest levels since the 2022 inflation peaks.

Now, if we look at the below chart from tradingeconomics.com, it shows 10-year yields over the past 5 years.  You can see that US yields have not yet reached their October 2023 highs (driven then by the combination of strong economic growth and ongoing QT as inflation remained high from its Covid induced rise), but both Germany (green line) and Japan (brown line) are at their highest levels in quite a long time.  We have discussed Japan numerous times over the past months, but not spent much time on Germany.  However, the German story is one of stagflation.  I have shown how poorly German economic output has grown over the past 5 years, as it has essentially stagnated over the entire timeframe.  Now, add the self-inflicted energy policy insanity, that had already severely impacted Germany before the Iran conflict, and then the Iran conflict and $100/bbl oil prices, and the Germans have even more problems.  

Here in the States, the recent inflation data has been consistently higher, and higher than expected and the great white hope of AI-induced deflation seems to always be a little further away than hoped/expected.  It remains difficult for me to see a scenario where prices fall dramatically in the US anytime soon as there is too much economic stimulus to allow for a recession, let alone a depression, which is what I think would be needed to get prices to fall.  In this world, yields will continue to creep higher, at least until such time as Iran is no longer an issue.  One other thing to remember is that there is a massive short position in bond futures, upwards of $1 trillion across all maturities, although that is entirely driven by hedge funds in the basis trade, where they are long cash bonds and short futures as an interest rate hedge.  But that only works as long as the math works (funding costs are less than the carry they earn).  The point is, if short end rates start to rise such that funding is too expensive, we can see a massive unwind of that position, which would mean huge sales of cash bonds, and that will really drive yields higher.  However, if that were to start to play out, even Mr Warsh, he of the shrinking balance sheet idea, will be out there buying bonds to prevent a collapse.

Ok, I’ve gone on too long, so a really quick tour of the markets overnight follows.  Friday’s US equity selloff was followed by weakness across the board in Asia (Japan -1.0%, HK -1.1%, China -0.5%, Taiwan -0.7%, Australia -1.5%) although somehow Korea (+0.3%) managed to hold in there ok.  In Europe, while the UK and Germany are essentially unchanged this morning, both France (-1.0%) and Spain (-0.7%) are under pressure, following the trend.  US futures, at this hour (7:30) are also lower across the board, on the order of -0.6% or so.

Of course, underpinning all of this is oil (+1.2%) which continues to climb slowly higher as fears over an escalation in Iran have removed hope for a resolution.  Oil is higher by nearly 9% in the past week and 22% since this time last month.  In the metals markets, gold and silver, which both fell sharply on Friday into what appears to have been some major option expiration liquidation, are little changed this morning although copper (-0.8%) is still sliding from its highs amid overall market concerns about risk.

Finally, the dollar, which had a very strong week last week, is ever so slightly softer this morning, -0.1% on the DXY although there are two currencies with more substantive moves, NOK (+0.5%) on the back of the oil rally, and COP (+1.1%) which seems odd given copper’s performance today, but remember, copper is still within spitting distance of its all-time highs set last week and higher by 35% in the past year.

On the data front, it is extremely quiet this week with only a handful of meaningful numbers, although all eyes will be on NVDA’s earnings Wednesday after the close.

WednesdayFOMC Minutes 
ThursdayInitial Claims210K
 Continuing Claims1790K
 Housing Starts1.41M
 Building Permits1.40M
 Philly Fed186
 Flash Manufacturing PMI54.0
 Flash Services PMI51.0
FridayMichigan Sentiment48.2
 Leading Indicators-0.3%

Source: tradingeconomics.com

We also get 7 Fed speeches, although only four speakers in total.  And remember, too, next weekend is the holiday weekend, so as summer approaches, trading desks will start to thin out.

My take is all eyes will be on the bond market for now, which will obviously be driven by oil prices, but also by the huge basis trade.  As to the dollar, I see no reason to sell it with any force, that’s for sure.

Good luck

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Prices Ain’t Tame

Posted on by 
The story today is the same
First China, then prices ain’t tame
The meeting twixt Xi
And Trump seemed to be
Successful as both sides will claim

But price data once again soared
Thus, PPI wasn’t ignored
But markets remain
Quite happy to feign
Indifference while traders are bored

China and prices remain the two dominant stories this morning, although despite much angst over yesterday’s MUCH hotter than expected PPI readings (Headline: 1.4% M/M, 6.0% Y/Y; Core 1.0% M/M, 5.2% Y/Y), markets did very little overall.  For instance, Treasury yields edged up 1bp yesterday and this morning have reversed that tiny move.  US equity markets were mixed with the DJIA slipping slightly while the NASDAQ (+1.2%) powered ahead oblivious to any potential negative issues with rising prices.  Oil barely budged, and the same was true with metals and the dollar.  In other words, despite a lot of analyst angst, and there was plenty regarding the data point, investors didn’t seem to care.

Now, while I am personally concerned over the trajectory of prices as I have seen nothing to indicate that governments anywhere are going to reduce their debt-financed spending nor are central banks going to stop supporting that activity, I clearly do not make up the majority view.  With that in mind, I do have a suspicion that something will come along that will shake the investor community’s faith in higher forever equity prices, but I have no idea what it will be.  After all, every other potential catalyst (e.g., oil at $100/bbl, 30-year Treasury yields at 5.00%, two hot wars involving nuclear powers) has been largely ignored.  So, let’s move on to the other story of note, Nixon Trump in China.

It is always interesting to see the framing of a particular story from different news outlets which is obvious based on how they lede a story.  But, trying to get through different versions of the same thing, it is clear that China’s primary concern is Taiwan and that there should be no US interference there.  The US’s primary concern appears to be solving the Iran situation with President Trump looking to President Xi to use his influence to get Iran to see the light.  Both nations agreed Iran should never have a nuke and that the Strait of Hormuz is an international waterway that should not be subject to blockage by one nation.  (China really cares about this because half of their oil also transits the Strait of Malacca, and if the precedent is set in Hormuz that it is not a free waterway, that could easily be extended to Malacca which would be a real problem for Xi.). 

Then there were trade talks, and discussion of fentanyl precursors and oil and agricultural trade as well as semiconductors, the usual stuff.  FWIW, which may not be much, I see this as the first major step to serious de-escalation between the two nations.  But here’s an interesting tidbit, and a critical piece of the Trump rationale behind tariffs on Chinese manufactured goods.  The below table from Nikkei News shows how much major Chinese companies (all listed on their stock exchanges) are getting in state subsidies.  This is, of course, the very definition of “cheating” on trade.

Ask yourself why profitable public companies that focus on exports would need state support.  This appears to be just another reason that Chinese manufactured goods are relatively cheap compared with elsewhere in the world.

Ok, enough about those stories as traders don’t seem to care about them.  In fact, right now, traders don’t seem to care about much.  But let’s look at the markets this morning.

Since there is not that much ongoing across all markets right now, I’m going to start in the FX world as yesterday saw a noteworthy move in the Brazilian real (-2.4%) as you can see in the chart below.

Source: tradingeconomics.com

While thus far this morning it has rebounded ever so slightly, +0.25%, the story is that Flavio Bolsonaro, former president Jair’s son and a leading candidate in the upcoming presidential election, has been caught up in a local financing scandal which may impact his electoral prospects and leave Lula, and his socialist policies, in charge.  Now, it must be remembered that this is a one-day movement but has done nothing to change the trend, as you can see below.  BRL has gained more than 21% in the past 18 months as real interest rates remain quite high and are drawing in carry traders from around the world.

Source: tradingeconomics.com

But away from that story in Brazil, FX is sound asleep across both G10 and EMG blocs.

Mixed is the only way to describe Asian equity markets last night with Tokyo (-1.0%), China (-1.7%) and Indonesia (-2.0%) all under pressure while Korea (+1.75%), India (+1.1%) and Taiwan (+0.9%) all rallied nicely.  As to the rest of the region, it was +/- a lot less movement.  Data overnight showed Chinese financing shrinking slightly, a surprising outcome, but one in sync with the reality on the ground there that the combination of a still imploding property market and a significant reduction in local government financing on the back of that is weighing on the economy overall.  They claim they will grow GDP at 4.5% to 5.0% this year, and I’m sure they will “meet” that target when the official data is produced, but all is not well there.

European bourses, though, are having a much better day with the DAX (+1.2%) leading the way higher although solid gains in France (+0.6%) and Spain (+0.8%) as well.  Everything I read about this price action this morning points to excitement over AI, but given Europe is virtually absent from the AI universe, I am not sure what they are implying.  It doesn’t seem likely there will be a European AI champion anytime soon, if ever.  But that’s the story I see.  Meanwhile, US futures continue to trade modestly higher at this hour (7:30).

In the bond market, while JGB yields continued higher overnight by 4bps, making yet further 19-year highs, European sovereign bonds have all seen yields slide between -4bp and -5bps this morning, allegedly on optimism that the Trump-Xi meeting will lead to pressure on Iran to reopen the Strait and reduce oil prices.  But that seems misplaced in the short-term in my view.  Nonetheless, that’s the story.

Earlier this week I discussed the political sh*t show in the UK and how PM Starmer appears to be on his last legs.  One of the reasons for this is that his policies have not exactly helped the nation’s economy.  For instance, this morning, preliminary GDP figures were released, and the Y/Y number was a better than expected 1.1%.  Now, the fact that 1.1% annual growth is better than expected is a major part of the problem.  A look at UK GDP growth for the past 5 years gives a sense of why the people there are so unhappy.  Of course, hamstringing yourself with the worst energy policies on the planet are a big part of this outcome, and that defines the Starmer administration.

Source: tradingeconomics.com

Finally, a turn to commodity markets shows…almost no movement.  Both oil (-0.1%) and gold (+0.1%), the leaders in the category, are going nowhere right now.  We have seen other commodities sink a bit (silver -0.8%, copper -0.7%), but given their volatility, those are also limited moves in reality.  When it comes to the oil market, there is an enormous amount of discussion regarding the imminent collapse of the global economy as the shuttering of the Strait is going to lead to a virtual energy apocalypse.  But to my eye (and I am not an oil trader) I cannot help but look at the below chart and see a market that has found a pretty good balance between supply and demand at around $100/bbl.  

Source: tradingeconomics.com

It is also important to remember that the oil market remains in a steep backwardation which tells us that supply issues over time are not a great concern.  In fact, I read this morning that with the overall curve at current levels, some oil drillers are considering expanding operations to take advantage of the higher prices, yet another reason to expect that the fears of $200/bbl oil are massively overblown.  They ain’t coming, I think.

On the data front, this morning brings the weekly Initial (exp 205K) and Continuing (1790K) Claims data as well as Retail Sales (+0.5%, +0.6% ex-autos) and Business Inventories (+0.8%).  We hear from a few more Fed speakers but, again, I don’t think they are of much importance right now.  The market is not pricing in any Fed funds movement for the rest of the year, and then a 25bp hike is the new view after that.  But the one thing we know about Fed funds futures is they are subject to major changes based on policy comments.  I’m sure we are all anxiously awaiting Chair Warsh’s first meeting next month.

And that’s it for today.  Quiet markets and no reason to think that will change right now.  Remember, fiat currencies are still crap, but nothing has changed my view that the dollar is the best of the bunch.

Good luck

Adf

His Denouement

Posted on by 
In England and Scotland and Wales
Without getting into details
The PM has lost
Support, and will be tossed
But Labour, so far’s, moved like snails

Until the time comes when he’s gone
And Keir reaches his denouement
Both gilts and the pound
Will fall toward the ground
But they’ve no one to settle on

While the stalemate in the Gulf continues, although there is clearly less optimism that things are going to end quickly according to the oil market (+3.0% and back to $101/bbl), there are a few other things that are ongoing in the world that are impacting markets.  This morning, the most obvious is in the UK, where PM Keir Starmer, he of the <20% approval rating, is seeing his grip on power slip away, but like most politicians, he will hold on as tightly as possible for as long as possible regardless of the negative impact that has on his constituency, which in this case is the entire nation.

For instance, a quick look at the gilt market shows that yields there, this morning, have jumped 12bps in the 10-year, up to their highest level, at 5.11%, since April 2008, as per the below chart from marketwatch.com.

Perhaps, of more concern for the UK Treasury and the BOE is the fact that the spread between US Treasuries and UK Gilts has jumped 9bps this morning and, at 67bps, is now pushing back toward its upper quartile, also not seen since 2008 as per the below chart from worldgovernmentbonds.com.

The pound (-0.5%) is faring no better this morning, lagging the rest of the G10 while UK stocks suffer alongside with the FTSE 100 (-0.6%) adding to the overall pressure on Starmer. 

Now, in fairness to poor Keir, he has failed in essentially every aspect of government, notably as to his promises when elected, so this cannot be a surprise.  The question becomes; how much longer will he try to fight this very clear outcome to the detriment of his nation?  From a fiscal perspective, I imagine he will be seeking to offer money to specific constituencies in an effort to buy more time, but my take is the die is cast here.  For now, I expect UK assets and the pound are going to underperform and likely will until he is gone, regardless of his replacement.

However, aside from the war in Iran, where there is nothing new of note today, the next biggest stories are that President Trump is on his way to Beijing to meet with President Xi and this morning’s CPI report.  Since I can offer nothing of note on the summit meeting, let’s turn to inflation.

Expectations this morning are for the headline number to print 0.6% M/M and 3.7% Y/Y while the core (ex-food & energy) number is expected at 0.3% M/M and 2.7% Y/Y.  Below is a chart showing headline CPI for the past 10 years, which I believe is informative of the national mood.  In it, you can see both the annual rate of inflation (the red line, RH axis) and the steady growth of the underlying CPI index published by the BLS (blue bars, LH axis).  To get the full sense of things, though, make sure you look at the index level on the left, which has grown, in aggregate, 38.7% over the past 10 years.  It is this feature which drives the nation’s unhappiness with prices, I would contend, not the monthly data, but the cumulative nature of the problem.

Data: Fred, graphics: @fx_poet

All of us remember the peak inflation in the immediate post-Covid years.  In addition, I’m sure we all remember the government shutdown and the missing data point because of the inability to collect data and the known assumption that if data were not collected, it would be assumed to be 0.0%.  Well, not only is the Iran war having a direct impact on inflation, but that missing data is starting to leave the calculations, so the red line is going to continue to head higher.  I must admit, that if I were to guess how things arise this morning, I would suspect the estimates to be on the low side, but we shall see in a few hours.  The question here is; will the markets respond to this or are they focused on other issues?  I also suspect that this depends on the outcome.  If CPI is higher than forecast, it does not bode well for Treasury prices, nor likely stocks.  But, if it is softer than forecast, I would look for the equity rally to continue.

Ok, let’s see how markets are behaving as we await the data.  Yesterday’s nondescript and modest US rally was followed by a lot of nondescript trading in Asia (Tokyo +0.5%, HK -0.2%, China -0.1%), although both Korea (-2.3%) and India (-1.9%) had a bit more action with the former seeming a reaction to its recent moonshot rise while the latter continues to try to deal with a steadily weakening currency and the government’s efforts to address that without raising interest rates.  Otherwise, in the region there were both winners and laggards but nothing else noteworthy.

In Europe, though, red is the only color I see with the DAX (-1.1%) leading the way down despite a better than expected, although still negative, ZEW report of -10.7.  But Spain (-0.9%), Italy (-0.8%) and France (-0.6%) are all under pressure with only Norway (+0.6%) showing any life as its energy-centric market performs well with oil prices back up again this morning.  As to US futures, they, too, are red with the NASDAQ (-1.1%) the worst of them at this hour (7:10).

We’ve already discussed Gilt yields but yields around the world are higher this morning with US Treasuries (+2bps) adding to yesterday’s 5bp rise.  In Europe, and in Japan, yields are higher by 4bps to 5bps across the board.  This appears to be a combination of concerns over both increased supply as nations spend more than they tax and rising inflation.  It’s a pretty toxic combination for bonds.

Yesterday was a bit of an anomaly in the precious metals markets as despite the rise in oil prices we saw, gold, silver and copper all rally as well.  Recently, we would have expected the metals to trade lower in that circumstance.  And this morning, with oil (+3.0%) higher again, they are with gold (-0.9%) and silver (-3.3%) both under pressure although copper (+0.4%) continues to rise to new records.  It turns out, the electrification of everything, and the massive power requirements for data centers along with rebuilding aging electricity grid infrastructure will require a lot of copper, likely more than will be mined at the current prices.  It feels like this chart will continue to go higher.

Source: tradingeconomics.com

Finally, the dollar is back in form this morning against virtually all its counterparts in both the G10 and EMG blocs.  In fact, it is easier to discuss the outliers which are NOK (+0.3%) and BRL (+0.4%) both benefitting from rising oil prices (as is the dollar!) while the rest of the world collectively suffers.  The DXY (+0.35%) continues to ignore all the calls for its collapse and today’s weakest performers are KRW (-1.0%) and ZAR (-0.6%).  The latter continues to be buffeted by the combination of higher oil and lower gold prices, although remains well above the lows (below dollar highs) seen at the beginning of the war that started this price action as per the below chart.

Source: tradingeconomics.com

KRW, though, is a bit more confusing to me as while weakness overnight alongside the KOSPI, makes sense, it has, in truth, performed terribly compared to the KOSPI’s remarkable rally.  It would have made a great deal of sense to see significant foreign inflows to the won as investors jumped on that bandwagon, but I guess not.

There is nothing other than the CPI data released in the US this morning so that will be the driver for now.  I would be remiss if I didn’t highlight, again, that the best way to manage inflation risk for us all is to own USDi, the fully backed, inflation-tracking cryptocurrency that is returning 12.588% annualized this month and depending on the exact CPI print this morning, set to return something on the order of 8% or so in June.  Remember, Treasury bills return 3.6% annualized, so this is a way to keep up with prices.  Check out www.usdicoin.com for more information and the ability to mint your own!

Good luck

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Quite Sublime

Posted on by 
Though skeptics do not yet believe
That Trump, a peace deal, will achieve
The markets are saying
This sunshine they’re haying
And fading this move is naïve

So, oil continues to fall
And stocks are just having a ball
It’s peace in our time
And all quite sublime
To many, though, this tale is tall

It is not clear what else to say about the current situation other than the markets are starting to believe that the Iran conflict is coming to a close.  The headlines from the administration and news from Pakistan seem to indicate a deal is near, something we all should welcome.  Certainly, the market is ready to accept this as gospel, at least based on the current risk appetite being demonstrated across all markets.  So, this morning, oil (-2.8%) continues its rapid decline, down more than $18/bbl from its highs just one week ago.

Source: tradingeconomics.com

The commentariat refuses to accept that the conflict is ending and I cannot tell if that is because they hate President Trump so much, they cannot stand the idea of him concluding things having achieved objectives, or because if the conflict is over, they will need to find the next thing to prove their ‘expertise’ and they don’t know what that is yet (hantavirus anyone?)  Regardless, markets are on board with this narrative as the moves we saw yesterday are simply extending this morning.  

Meanwhile, the data from yesterday showing that ADP Employment was a stronger than expected 109K and the JOLTs quit numbers rose, meaning more people are willing to quit their jobs for a new one, indicating a growing confidence in the labor market, point to a continuation of the US equity rally, and by extension, the global rally.  (As an aside, I chuckled at the article in the WSJ this morning about how the next target of taxes should be ‘compute’ since AI is going to replace human workers.  My comment here, which has been confirmed by my time this week at the Consensus 2026 cryptocurrency conference, is that machines are great, but people still want to deal with people they can trust!)

Anyway, with the conflict ostensibly coming to a close, there is not much else to discuss outside actual market activity, so let’s see how things responded to this news.

By this time, you have all checked your PA’s and saw the green from yesterday there.  Overnight, Asian markets were also quite positive with Japan (+5.6%) exploding higher after their Golden Week holidays ended.  Excitement on tech as well as a market that is looking forward to Treasury Secretary Bessent’s visit were the drivers.  But we also saw strength in China (+0.5%), HK (+1.6%), Korea (+1.4%) and Taiwan (+1.9%).  In fact, looking across the region, you are hard pressed to find a true laggard, as India (0.0%) was the worst performer of note.  European markets, though, are not quite in as fine a fettle with most of them essentially unchanged this morning although the UK (-0.7%) is lagging after some underwhelming earnings reports as it appears profit taking is today’s motive.  As to US futures, at this hour (6:45), they too, like Europe, are essentially unchanged

In the bond markets, yields continue to slide with Treasury yields lower by -2bps and virtually all European sovereign yields slipping -1bp.  Overnight, JGB yields fell -3bps as markets there reopened and essentially all Asian government bonds saw yields decline as well.  Apparently, fears over rampant inflation are ebbing.  You may recall on Tuesday I discussed the 30-year Treasury as it traded above 5.0% on Monday and stayed there for about a minute.  That had engendered a great deal of apocalyptic discussion.  However, here we are this morning with 30-year yields slipping another -2bps, and now 10 bps below that little spike, and back below 5.0%.  But I think it is worthwhile to offer a little perspective on the 30-year bond and the idea that 5.0% is deadly.  Here is the chart of 30-year Treasury yields since 1985.  Perhaps the anomaly was much lower yields, not 5.0%!

Source: finance.yahoo.com

Precious metals are continuing to benefit from the peace initiative and oil’s delice with gold (+1.0%) and silver (+4.0%) both stronger again after big gains yesterday.  In fact, I am starting to read more about why silver is set to make massive gains because of shortages, a narrative that was set aside for the past two months but seems to be reawakening.  Now, I am no technician, but I am given to understand that if you look at this trend line in silver from its January peak, we have broken above the line and that portends a massive move higher.  (full disclosure, I am long silver so would be happy to see that but have not spent the extra money yet!)

Source: tradingeconomics.com

Finally, the dollar is softer again this morning, which should be no surprise based on the overall market zeitgeist this morning.  So, the DXY (-0.15%) is a pretty good approximation of what is happening, although we have seen some larger moves, notably NOK (+0.8%) which seems to be responding to the fact that the country is going to reopen some shuttered oil and gas drilling sites in the North Sea as Europe tries to figure out where to get energy from.  As to the yen (0.0%) after a series of what appeared to be modest interventions by the BOJ during Golden Week, it appears the market may be explaining that the fundamentals are still pointing to yen weakness and while the BOJ may be able to cap the dollar for a short time, establishing real JPY strength will take a lot more effort, and real policy changes (i.e. much higher interest rates).

Source: tradingeconomics.com

Turning to the data this morning, we get the weekly Initial (exp 205K) and Continuing (1800K) Claims data, which continues to hover near historic lows despite the angst over the labor market.  We also see Nonfarm Productivity (1.4%) and Unit Labor Costs (2.6%) and hear from several more Fed speakers, although most of their comments are back page news.  Of course, tomorrow we will see the NFP report, and that will certainly garner all the attention.  Personally, I will be focused on the Manufacturing Payrolls outcome as a proxy for the reshoring initiative and the potential for continued strong economic activity going forward.

And that’s really it.  Despite the ongoing narrative of the dollar’s demise, it remains well within its recent trading range, and I keep reading about other nations issuing dollar debt as that is the market with the most liquidity.  Over time, I continue to see the dollar as the best fiat around, although I still like stuff more than paper.

Good luck

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