Tag Archives: #oil

What He Will Mention

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Last night there was, briefly, a peace
This morning, though, that seemed to cease
But worries Iran
From Hormuz, would ban
Most ships, have now greatly decrease(d)
 
So, markets have turned their attention
To Powell and what he will mention
When he sits before
The Senate once more
Though most seated lack comprehension

 

Talk about yesterday’s news!  While I am pretty confident we have not heard the last of the Iran/Israel conflict, it has dropped off the radar in a NY minute.  Last night President Trump announced a cease fire between the two nations and while Israel alleged that Iran already broke the peace, the market has clearly moved on from the erstwhile WWIII concept to WWJS (What Will Jay Say).  In that vein, this morning’s WSJ had an articlefrom the Fed whisperer, Nick Timiraos, describing the trials and tribulations of poor Chairman Powell as he tries to fend off those mean words from President Trump.  

Powell sits down before the Senate Banking Committee this morning, and the House Financial Services Committee tomorrow, ostensibly to describe the state of the economy and the Fed’s current thinking.  I have begun to see discussions that two Trump appointed governors, Bowman and Waller, are now interested in potentially cutting the Fed funds rate in July and the futures market has raised the probability of a cut next month to 23%, back to the levels seen a month ago, pre-war and prior to a run of stronger than expected economic data.

Source: cmegroup.com

Frequently mentioned throughout the WSJ article was the idea of Fed independence and how critical that is for monetary policy to be effective.  As well, the fact that the comments on rate cuts are from governors Trump appointed, and that is being highlighted in a negative fashion, is further evidence that the Fed remains a highly political, and quite frankly, partisan organization.  One cannot look at the rate cuts last autumn ahead of the election, which were certainly not warranted by the data, as anything other than the Fed’s attempt to support VP Harris’s presidential campaign.  And when inflation was still quite high, although starting to decline, calls for cuts by Biden appointees Cook and Jefferson, were also likely politically motivated given the still high inflation rate.  

In fact, I wonder where Governor’s Cook and Jefferson are today with respect to rate cuts.  After all, both have demonstrated dovish biases throughout their tenure at the Fed, but suddenly they are strangely silent on the subject.  I’m sure that is not a political bias showing, but rather deeply considered economic analysis. 🙃

I do find it interesting that there is an underlying presumption that the Fed funds rate is always too high, at least for the narrative, although I guess that is because most narrative writers believe strongly in the idea if rates are low, stock prices will rise.

Regardless of the politics, Powell will very likely explain that there is still concern that tariffs could raise prices and while there is the beginning of concern over the labor market, it remains solid and does not warrant rate cuts at this time.  Of course, we will also be subject to the preening of all those senators (what is the probability that Senator Van Hollen brings up deportations?) with no useful discussion.  It seems unlikely that Chairman Powell will alter his message from the post meeting press conference which remains, patience is a virtue.

Ok, now that the war has ended, let’s see how markets have behaved.  I must start with oil (-3.0% today, -12.0% since yesterday morning) where traders have removed the entire Hormuz closing premium and are now dealing with the fact that there are more than ample supplies around.  Recall, OPEC+ continues to increase production, and the macroeconomic narrative remains one of slowing economic activity.  Happily, gasoline prices are following oil lower so look for less inflation concerns for next month.

Source: tradingeconomics.com

Meanwhile, with war off the table, gold (-1.3%) is no longer in such great demand although silver (unchanged) and copper (+0.7%) continue to find support.  Net, my longer-term views remain that oil prices have further to decline while metals prices should grind higher over time.

In the equity markets, you have to search long and hard to find a market that didn’t rally overnight or is in the process of doing so this morning.  After yesterday’s strong US closing (all three main indices up about 0.9%), Asia (Nikkei +1.1%, Hang Seng +2.1%, CSI 300 +1.2%) rallied sharply with Korea (+3.0%) really popping and only one negative, New Zealand (-0.5%) where local traders cannot seem to get on board with the better news.  In Europe, the gains are also substantial (DAX +1.8%, CAC +1.2%, IBEX +1.4%) although the UK (+0.3%) is lagging given the large weighting of energy in the index.  US futures are also pointing higher this morning, about 0.8%.

In the bond market, Treasury yields are unchanged this morning after slipping -3bps yesterday, but we are seeing yields rise in Europe (Bunds +5bps, OATs +3bps) after the Germans announced they would be borrowing 20% more this quarter than initially expected to help their rearmament program.  I guess investors had a mild bout of indigestion.

Finally, the dollar, which rallied nicely into yesterday’s NY opening has basically reversed all those gains since then and is back trading near 98 on the DXY. While there are various relative sizes of movement, it is all in the same direction and entirely driven by the Iran/Israel war story.  Perhaps we are starting to see some pricing of a Fed rate cut, and if they do act in July, I would expect the dollar to fall, but right now, it feels much more like unwinding the war footing.

On the data front, aside from Chairman Powell at 10:00 this morning, we see Case Shiller Home Prices (exp +4.0%) and Consumer Confidence (100.0).  However, I suspect that neither of those will matter very much.  The equity market has the bit in its mouth and is looking for reasons to go higher.  Any dovish hints by Powell will set that off, as well as undermine the dollar.  We shall see.

Good luck

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A Weapon of War

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The Hammer’s a weapon of war
Just ask those who fought against Thor
At midnight on Friday
Iran learned the hard way
That Trump wields one too when called for
 
The interesting thing early on
Is this clearly ain’t a black swan
While oil did rise
Which was no surprise
Most risk gave an aggregate yawn

 

Obviously, the big news this weekend was the extraordinary attack and destruction of Iran’s three key nuclear enrichment and engineering sites.  While this poet has opinions, since I am just like the rest of you, limited to the peanut gallery and with no voice in the matter, they are not relevant for this discussion.  However, what is relevant is the early movement in markets once they reopened Sunday night in NY.  While it is no surprise that oil’s price rose as you can see below, the early 2.2% gain is pretty lackluster for the alleged (by some) beginning of WWIII.

Source: tradingeconomics.com

As to the rest of the markets early price action, it’s largely what you would have expected directionally, although unimpressive overall with equity indices modestly lower, about -0.35%, the dollar modestly higher, about 0.2%, and bonds little changed.  Gold, too, is little changed.  It appears that, at least initially, the market was anticipating something like this as you can see that even after the oil price spike, it didn’t reach the levels seen on Friday.

With two days to think it all through
Most traders appear to eschew
The idea that war
Is what is in store
Instead, buy more stocks is their view

 

So, as we wake up Monday morning, despite all the weekend news and the fear mongering thus far, and even though Israel and Iran continue to trade missile fire, the early consensus is that we have seen the worst already.  Iran’s parliament voted to block the Strait of Hormuz, but they have no power to drive actions, that resides with the Supreme Council and as of yet, they have not acted.  In fact, they are in a tricky position for several reasons.  First, China is their largest oil customer by far and 20% or more of their oil transits the Strait which means China’s deliveries would slow dramatically and China is one of their only supporters.  Second, the US navy has significant assets in the region and appears quite ready for that move, likely being able to reopen the Strait quickly.  And third, if they follow through and their objective fails (remember, their objective in this would be to spike the oil price and hurt Western economies accordingly) then they will prove conclusively that they are irrelevant militarily.  That is likely not what the regime there wants to demonstrate.

But the market is pretty smart about these things as the collective wisdom and thoughts of traders and investors is an excellent proxy for issues of this nature.  Therefore, we cannot be surprised that after that initial spike in oil prices, they have retreated to Friday’s pre-attack levels as investors await more information.

Source: tradingeconomics.com

It is also worthwhile to recognize that speculative trader positions in oil are net long just under 200K contracts, so there is no short-covering spree that is likely to arrive and drive prices higher.

Source: en.macromicro.me

The point is that if oil is basically unconcerned with the potential issues in Iran, then other markets will completely ignore the situation.  And that is pretty much exactly what we are seeing this morning.  In Asia, equity markets were mixed with modest overall movement.  The Nikkei (-0.15%) and Australia (-0.35%) slid while Hong Kong (+0.7%) and China (+0.3%) rallied showing no trends whatsoever.  The rest of the region did have more laggards than gainers, but other than smaller markets like Indonesia and Taiwan, both falling -1.5% or more, movement was muted.  In Europe, modest losses are the thing with the DAX (-0.4%), CAC (-0.4%) and IBEX (-0.2%) slipping a bit while the FTSE 100 is unchanged on the morning, but there is certainly no panic.  As to US futures, while they opened lower last night, as I type at 6:30 this morning, they are back to flat on the session.

In the bond market, yields have basically edged higher by 2bps across the US, Europe and Japan, either demonstrating that government bonds are no longer a safe haven, or that no haven is necessary because fears of escalation are minimal.  Despite all the negative talk about bonds, I would still opt for the latter explanation.

In the commodity markets, we’ve already discussed oil at length.  In the metals markets, gold is essentially unchanged this morning although we are seeing a mild divergence between silver (+0.6%) and copper (-0.7%), implying to me that there is no underlying risk trend here.

Finally, the dollar is the one thing that is flexing its muscles from a risk perspective as it is pretty sharply higher across the board.  In the G10, NZD (-1.4%) is the laggard followed closely by the yen (-1.25%), which given the weekend’s events is pretty surprising to most folks.  Perhaps yen is not as haven-like as previously thought.  But AUD (-1.1%) is sliding and the euro and pound are both lower by -0.5%.  In the EMG bloc, the dollar is firmer everywhere, but the moves, other than KRW (-1.2%) are less than might have been expected.  HUF (-0.9%) is the next worst performer with PLN (-0.75%) and CZK (-0.75%) all showing their high beta to the euro.  In Asia, CNY (-0.15%) remains dull and INR (-0.2%) is also lackluster.  LATAM currencies are showing little movement as well, with MXN (-0.4%) the laggard of the bunch.

Looking at data this week shows the following:

TodayFlash Manufacturing PMI51.0
 Flash Services PMI52.9
 Existing Home Sales3.96M
TuesdayCase Shiller Home Prices4.2%
 Consumer Confidence99.8
WednesdayNew Home Sales700K
ThursdayInitial Claims247K
 Continuing Claims1947K
 Durable Goods7.2%
 -ex Transport0.1%
 Final Q1 GDP-0.2%
 Goods Trade Balance-$92.0B
FridayPersonal Income0.3%
 Personal Spending0.1%
 PCE0.1% (2.3% y/Y)
 Ex Food & Energy0.1% (2.6% Y/Y)
 Michigan Sentiment60.3

Source: tradingeconomics.com

As well as all this, with most folks looking forward to Friday’s PCE data, we hear from Chairman Powell as he testifies to the Senate on Tuesday and the House on Wednesday.  In addition, there are 13 more Fed speeches from 10 different speakers.  Too, Madame Lagarde regales us three different times.  A cynic might think that central bankers are concerned their comments are losing their importance!

One never knows what is truly happening on the ground in Iran as all news organizations and governments are trying to tell their own story.  However, I do not believe that this is going to escalate into a greater problem going forward, but rather that there is every chance that tensions reduce over time.  I do not believe Iran will even attempt to block the Strait of Hormuz and if this is the worst that the Middle East can produce in the way of war, look for oil prices to slide back toward $65-$70.  As to the dollar, it feels a bit overdone here, so a modest retracement seems viable as well.

Good luck

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Terribly Keen

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The evidence, so far, we’ve seen
Is nobody’s terribly keen
To stop all the shooting
In wars, or the looting
In riots, at least so I glean
 
But can stocks and bonds still maintain
The heights they consistently gain
Or will, one day soon
Risk assets all swoon
As traders turn to their left-brain?

 

I am old enough to remember when Israel’s attack on Iranian nuclear facilities was considered a risk to global financial assets.  Equity prices fell around the world as investors scrambled to find havens to protect their assets.  Alas, these days, the only haven around seems to be gold as Treasury yields, after an initial slide, rebounded which implies investors may have questioned their safety and the dollar, after a slight bump, slipped back.

But that is clearly old-fashioned thinking as evidenced by the fact that fear is already ebbing in markets with equities rebounding this morning, the dollar under pressure and both gold and oil slipping slightly.  Now, it is early days but a look at the chart below of oil shows that it took about 9 months for oil prices to retrace to their pre-Russia invasion levels.  Obviously, this situation is different than that from the perspective that prior to Russia’s invasion, there were no energy market sanctions while Iran has been subject to sanctions for years.  However, the larger point is that the market, at least right now, seems to have adjusted to what it believes is the appropriate level to account for changes in production.

Source: tradingeconomics.com

Now, as of January 2025, at least as per the data I could find, Russia produces 10.7 million barrels/day while Iran clocks in at just under 4 million.  As well, given the sanctions, much of Iran’s production has a limited market, with China being the largest importer.  I’m simply trying to highlight that Russia’s production was much larger and more critical to the oil market overall, so a larger impact would be expected.  However, the fact that Israel continues to destroy Iranian infrastructure, and has targeted oil infrastructure as well as nuclear infrastructure, suggests there could easily be more impacts to come.  This is especially true if Iran seeks to close the Strait of Hormuz, a key bottleneck exiting the Persian Gulf and where some 20% of global oil production transits daily.

But the market is sanguine about these risks, at least for now.  There is no indication that Israel has completed what they see as their mission, and that means things could well escalate from here.  In that case, I would expect another jump in oil prices, but overall, it is not hard to believe that we have seen the bulk of any movement.  It strikes me that we will need substantially stronger economic activity to push oil prices much higher from here, and that seems unlikely right now.

Meanwhile, near Banff there’s a meeting
Where heads of state are all competing
To help convince Trump
There will be a slump
Unless tariff pressures are fleeting

The other noteworthy story this morning is the G-7 meeting that is being held in Kananaskis, Alberta, near Calgary and Banff and how all the other members of the club, as well as invitees from Mexico, Brazil, South Africa, India and South Korea, will be trying to convince the president that his tariffs are going to be too damaging and need to be adjusted or removed, at least for their own nations.

Anyone who indicates they know how things will evolve is offering misinformation as Trump’s mercurial nature precludes that from being the case.  However, it would not be inconceivable for some headway to be made by some of these nations in certain areas although President Trump does appear to strongly believe tariffs are a benefit by themselves.  I am not counting on any major breakthroughs here, but small victories are possible.

One last thing before the market recap though, and this was a Substack piece I read this weekend from The Brawl Street Journal, that, frankly, shocked and scared me regarding the ECB and some plans they are considering.  While President Trump has consistently called the climate hysteria a hoax and his administration is doing everything it can to remove Net Zero promises and CO2 reduction from anything the government does, the opposite is the case in Europe.  The frightening part is that the ECB is considering adding effective mandates to lending criteria such that loans to support agriculture or fossil fuel production will require banks to hold more capital, making them more expensive.  The very obvious result is there will be less loans in this space, and things like agriculture and fossil fuel production will become scarcer in Europe than elsewhere.  

Yes, this is suicidal, but then we have already seen Germany (and the UK) attempt to commit economic suicide with its energy policy, and while many in Europe would suffer the consequences, I assure you the members of the ECB would not be in that group.  But my point, overall, is that if this plan is enacted, and the target date appears to be this autumn, it is a cogent reason for the euro to begin a structural decline to much lower levels.  This is not for today, but something to remember if you hear that the NVaR (Nature Value at Risk) plan is enacted.  Tariffs will be their last concern as the continent enters a long-term economic decline as a result.  The blackout in Spain in April will become the norm, not the unusual circumstance.

Ok, let’s see how little investors are concerned about war and escalation.  While equity markets were lower around the world on Friday, that is just not the case anymore.  Asia saw the Nikkei (+1.3%) lead the way higher with the Hang Seng (+0.7%) and CSI 300 (+0.25%) also gaining as well as strength in Korea (+1.8%) and India (+0.8%) as hopes rise some positive news will come from the G-7.  Europe, too, has seen gains across the board led by Spain (+0.9%) and France (+0.7%) with most other markets rising between 0.3% and 0.5%.  As to US futures, at this hour (6:50) they are higher by about 0.5% with the NASDAQ leading the way.

In the bond market, Treasury yields are backing up a further 3bps this morning but are still just above 4.40%.  European yields are +/- 1bp across the board as investors try to decipher ECB commentary about the next rate move.  The universal belief is there will be another cut, although Bundesbank president Nagel tried to pour cold water on that thesis this morning calling for caution and a meeting-by-meeting approach going forward.

Commodity markets, are of course, the real surprise this morning with oil (-1.1%) looking like it has put in at least a short-term top.  In the metals market, gold (-0.4%) is giving back some of last week’s gains although both silver (+0.2%) and copper (+1.1%) are rebounding after tougher weeks.  Metals prices seem to be pointing to less fear and more hope for economic rebound.

Finally, the dollar is under some pressure this morning, slipping vs. most of its counterparts in both the G10 and EMG blocs.  The euro (+0.25%) is having a solid session although both AUD (+0.4%) and NZD (+0.5%) are leading the G10 pack.   Even NOK (+0.1%) is rallying despite oil’s pullback.  In the EMG bloc, ZAR (+0.8%) is the leader right now, partially on continued gains in platinum and gold’s overall recent performance, and partially on hopes that their presence at the G-7 will get them some tariff relief.  Elsewhere, the gains have been less impressive with KRW (+0.5%) also benefitting from tariff hopes while the CE4 see gains of 0.3% or so.  No tariff hopes there.

It is an important data week with Retail Sales and housing data, but also because the FOMC leads a series of central bank decisions.

TodayEmpire State Manufacturing-5.5
TuesdayBOJ Rate Decision0.50% (no change)
 Retail Sales-0.7%
 -ex autos0.1%
 IP0.1%
 Capacity Utilization77.7%
WednesdayRiksbank Rate Decision2.0% (-25bps)
 Housing Starts1.36M
 Building Permits1.43M
 Initial Claims245K
 Continuing Claims1940K
 FOMC Rate Decision4.5% (no change)
ThursdaySNB Rate Decision0.00% (-25bps)
 BOE Rate Decision4.25% (no change)
FridayPhilly Fed-1.0

Source: tradingeconomics.com

So, Sweden and Switzerland are set to cut rates again, while the rest of the world waits.  Chairman Powell’s comments seem unlikely to stray from the concept of too much uncertainty given current fiscal policies so no need to do anything.  Thursday is a Federal holiday, Juneteenth, hence the early release of Claims data.  I have to say the Claims data is starting to look a bit worse with the trend clearly climbing of late as per the below chart.

Source: tradingeconomics.com

I continue to read stories about the cracks in the labor market and how it will eventually show itself as weaker US economic activity, but the process has certainly taken longer to evolve than many analysts had forecast.  One other thing to remember is that Congress is still working on the BBB which if/when passed is likely to help support the economy overall.  The target date there is July 4th, but we shall see.

Summarizing the overall situation, many things make no sense at all, and others make only little sense, at least based on more historical correlations and relationships.  I think there is a real risk of another sell-off in risk assets, but I do not see a major collapse.  As to the dollar, the trend remains lower, but it is a slow trend.

Good luck

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Much Hotter

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Remember when riots were seen
Across every TV’s flat screen?
Well, that’s in the past
As news of a blast
In Tehran, just one thing, can mean
 
The Middle East just got much hotter
And now every armchair war plotter
Will offer their views
Of which side will lose
So, traders, keep watch o’er your blotter

 

Is it a coincidence that Israel’s attack on Iran’s nuclear sites occurred on Friday the 13th, or was it meant as a message that luck, both good and bad, can be manufactured? Whatever the driver, the market reaction has been instantaneous.  Here is a look at the five-minute chart in oil with the black sticky stuff jumping more than 8% on the news.

Source: tradingeconomics.com

Too, gold jumped (+1.2%) as did the dollar (EUR -0.4%, AUD -1.0%) although both JPY (+0.3%) and CHF (+0.4%) showed their haven characteristics.  Treasury bonds rallied with yields slipping an additional -3bps in the evening session on top of the -5bp decline during the day, and stock futures are under pressure around the world (S&P500 -1.6%, Nikkei -1.5%, DAX -1.5%).  This was the early price action.

Those were last night’s initial moves and thus far, things have moderated a bit.  For instance, oil has fallen back about 1%, though remains higher by 7.3% and that big gap down on the charts from April has been filled.  

Source: tradingeconomics.com

Of course, there is now a new gap below the markets to fill, but that is a story for another day.  Equity markets are also finding their footing, bouncing off their lows as the 20-day moving average has held and dip buyers see this as an opportunity.  However, the dollar is little changed from its initial moves as is gold, and overall, not surprisingly, risk-off defines the overnight session and likely will be today’s focus.

Now, there is nothing funny about this situation with more death and destruction occurring and likely in our immediate future.  However, I could not help but chuckle at the Russian statement that Israel’s actions were “unprovoked” and “a violation of UN principles and international law.”  Of course, I guess President Putin would know all about unprovoked attacks and violating UN principles and international law given his ongoing efforts in Ukraine.

Ok, I am not a war plotter, nor a war monger, so let’s see how this and any other things are developing in the markets.  While the war discussion will dominate the headlines, there are other things ongoing that are worth considering.  For instance, though the dollar is performing as its historical safe haven this morning, SocGen analysts highlighted a very interesting relationship that has developed in the dollar with respect to inflation surprises over the past four months.  As you can see in the chart below, it appears that as we have seen a series of lower-than-expected inflation readings, the dollar has fallen in step.  Now, correlation is not causality but one could make the case that reduced inflation will lead to a more aggressive easing policy by the Fed and that could be the mechanism by which this relationship operates.

Along the same lines, there have been more stories regarding the softening in the US labor market and at what point the Fed is going to need to focus on that, rather than inflation, as they consider their policy objectives.  As well, the large contingent of analysts who expect the US to enter a recession soon have pointed to the labor market and the fact that much of the underlying data appears to show a less robust situation than the headlines have thus far revealed.  

I have two anecdotes to recount here, neither of which indicates the labor market is softening.  First, the local pizza parlor is at wits’ end trying to hire people to work there, a common high school summer or after school job but there are no takers.  Second, my daughter works for a TMT consulting firm in HR, and they are seeking to hire several new analysts and junior consultants, jobs that pay six figures out of college, and they, too, are having difficulty filling the roles.

I know that anecdata is not definitive, but two very disparate service industries are facing the same issue, and it is not a question as to whether to reduce headcount.  Consider the idea that the recent declines in inflation readings are a short-term outcome and that underlying inflation remains in the 3.5%-4.0% range.  Given median CPI is still running at 3.5%, that is entirely feasible.  If, as we go forward, we start to see high side surprises in inflation, and this relationship has meaning, that could well imply we are looking at a short-term dip in the dollar and that as the year progresses, this will reverse.  My take is that the Fed will only consider cutting rates, at least as long as Powell is Chair, if inflation remains quiescent and unemployment starts to rise.  But if inflation rebounds, I believe they will be reluctant to go there.

Now, as the morning progresses, the dollar is picking up steam with the euro (-0.8%), pound (-.6%) and JPY (-0.6%) all falling, even the havens yen and CHF (-0.5%).  In fact, looking across the board, every major currency is weaker vs. the dollar at this point in the morning (7:15).  As the US has awakened, it seems that the haven status of the dollar is reasserting itself.

Perhaps more surprisingly, Treasury yields have turned around and are now higher by 2bps, which has dragged all European sovereigns along for the ride.  In fact, the weakest nations (Italy +4bps, Spain +5bps) are faring even worse, as is the UK (Gilts +5bps).  Apparently, the recent ideas of the BOE getting more aggressive in its rate cutting is no longer the idea du jour.

In the equity markets, red remains the only color on the screen with Asian markets (Nikkei -0.9%, Hang Seng -0.6%, CSI 300 -0.7%) all rebounding from their early worst levels, but slipping on the day, nonetheless.  I guess there are dip buyers in every market 😃.  In Europe, continental bourses are all sharply lower (DAX -1.4%, CAC -1.1%, IBEX -1.6%) although the FTSE 100 (-0.4%) is holding up better.  As to US futures, they have rebounded slightly from their earliest lows and are now down about -1.0% at 7:20.  Wouldn’t it be something if they closed the day higher?  I don’t think we can rule that out!

Finally, commodities continue to show oil much higher, no retracement there, and gold also holding its gains although copper (-2.5%) is under pressure.  This is a bit odd to me as I would have thought war would bring more copper demand to a market that is physically undersupplied, but then the LME price of copper and the COMEX price of copper seem unrelated to the industrial flows of late.  At this time, everyone is waiting for the Iranian response, although apparently, the first response, a wave of drone attacks on Israel, was completely thwarted.  Not only did Israel destroy some key nuclear sites, but they were able to eliminate almost the entire leadership of the Iranian army and special forces, so any response is likely to take a little time to be created. No oil facilities were targeted, although the Strait of Hormuz is a key chokepoint in the oil market and Iran is likely able to disrupt the flow of tankers through there for now.  What we know is that everyone who was short oil as a trade has likely been stopped out.  It will likely take a little time before new shorts come back to play, so I expect a few days of prices at these levels.  However, the longer-term trend remains lower, so absent a destruction of oil producing fields, I expect that prices will retreat ahead.

On the data front, this morning brings only Michigan Consumer Sentiment (exp 53.5) and with it the inflation expectations piece, although that has been shown to be a political statement, not an economic one.  I cannot shake the feeling that by the time we head to the weekend, equities will have recovered their early losses, and the dollar will cede some of its gains.

Good luck and good weekend

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The Mayhem-ber

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Five years ago, some will remember
George Floyd was the riotous ember
But while cities burned
What some of us learned
Was markets ignored the mayhem-ber
 
Of late, as the headlines are filled
With riots, no one’s been red-pilled
While some may disdain
Risk assets, it’s plain
That most buying stocks are still thrilled

 

The tragic goings on in LA remain the top story as we have now passed the fourth day of rioting.  It strikes me that ultimately, the constitutional question that may be addressed is how much power the federal government has in a situation where a state government seemingly allows rampant destruction of private property.  Of course, we saw this happen just over five years ago in the wake of George Floyd’s death in May 2020 and the ensuing riots in Minneapolis which ultimately spread to Portland, Oregon and Seattle.  

With this as a backdrop, I thought I would take a look at market behavior during that period, if for no other reason to be used as a baseline.  Of course, there are major caveats here as that was during Covid and the government had recently passed a massive stimulus bill while the Fed began to monetize that debt.  Now, we cannot ignore the BBB which looks a lot like a massive stimulus bill as well, so perhaps things are closer in kind than I originally considered.  At any rate, the chart below shows the S&P 500 leading up to and through the 2020 riots.

The huge dip before the riots began was the Covid dip, and the faint dotted line is the Fed Funds rate, so you can see things were clearly different.  However, the point I am trying to make is that despite the violence and disagreements over President Trump’s authority, I would contend the market doesn’t care at all about the situation there.  Investors remain far more concerned about the ongoing trade talks with China that are taking place in London and are “going well” according to Commerce Secretary Lutnick.  From what I read on X, it seems there is a growing expectation that a China deal of some sort will be announced soon and that will be the latest buy signal for stocks.  My larger point is that just because something dominates the headlines, it doesn’t mean that something is relevant in the financial world.

Funnily enough, because the LA riots are sucking the oxygen from every other story, there is relatively little to drive market activity, hence the relatively benign market activity we have been seeing for the past few days.  Yesterday was a perfect example with US equity markets trading either side of unchanged all day and closing pretty much in the same place as Friday.  In Asia overnight, the picture was mixed with the Nikkei (+0.3%) edging higher while both the Hang Seng (-0.1%) and CSI 300 (-0.5%) finished slightly in the red.  The one big outlier there was Taiwan (+2.1%) with other markets showing less overall interest.  I suspect this movement was on the back of the positive vibe the market is taking from the US-China trade talks.

As to Europe, the continent has a negative flavor this morning with the DAX (-0.5%) the laggard and other major indices edging lower by just -0.1% or so.  However, the FTSE 100 (+0.4%) has managed a gain after softer than expected employment data has increased discussion that the BOE will be cutting rates a bit more aggressively.  US futures are still twiddling their proverbial thumbs with no movement at this hour (7:10).

In the bond market, Treasury yields have slipped -3bps and we are seeing similar yield declines throughout the continent.  However, UK gilts (-7bps) are really embracing the slowing labor market and story of a more aggressive BOE rate cut trajectory.

In the commodity markets, oil (+0.5%) continues to climb higher despite the alleged increases in supply and is close to filling the first gap seen back in April (see chart below from tradingeconomics.com)

Given OPEC+ and their production increases, this is a pretty impressive move, especially as the recession narrative remains largely in place.  One tidbit of information, though, is that the Baker Hughes oil rig count is down 37 rigs since the 1st of May, a sign that US production, despite President Trump’s desires for more energy, may be slipping a bit.  As to the metals markets, gold (+0.45%) keeps on trucking, with a steady grind higher although both silver and copper are little changed this morning.  I must mention platinum as well, given I discussed it yesterday, and we cannot be surprised that after a remarkable run, it is softer by -1.3% this morning taking a breather.

Finally, the dollar, like equities, is directionless overall with the pound (-0.3%) slipping on the weak labor data but the rest of the G10 within 0.1% of Monday’s closing levels.  In the EMG bloc, KRW (-0.9%) is the outlier, apparently responding to the positive signals from the US-China trade talks.  However, I question that narrative as no other APAC currency moved more than 0.1% on the session in either direction.  And truthfully, that pretty well describes the rest of the bloc in LATAM and EEMEA.

On the data front, the NFIB Small Business Optimism Index was released this morning at a better than expected 98.8, which as you can see below, is a solid reading overall, certainly compared to most of 2022-2024.

Source: tradingeconomics.com

And here is the rest of what we get this week:

WednesdayCPI0.2% (2.5% Y/Y)
 -ex food & energy0.3% (2.9% Y/Y)
ThursdayPPI0.2% (2.6% Y/Y)
 -ex food & energy0.3% (3.1% Y/Y)
 Initial Claims240K
 Continuing Claims1908K
FridayMichigan Sentiment53.5
 Michigan Inflation Expected6.6%

Source: tradingeconomics.com

However, we must take that Inflation expectation number with at least a few grains of salt (even assuming it has value as an indicator at all), as yesterday, the NY Fed released their own survey of Inflation expectations which fell to 3.2%.  A quick look at the two indicators overlaid on one another shows that the Michigan indicator, if nothing else, has much greater volatility which reduces its value as an indicator.

Source: tradingeconomics.com

It is difficult to get excited about movement in either direction right now.  At some point, the mayhem in LA will end and news sources will look for the next story.  I suspect that trade deals are going to grow in importance as Mr Trump will need to sign some more before long.  As well, the BBB, which I continue to believe will be passed in some form, is going to add some measure of certainty and stimulus to the economy, which, ceteris paribus, implies that the long-awaited reckoning in the stock market may be awaited even longer.  If that is the case, then the weak dollar story, one I understand, is likely to fade for a while as well.

Good luck

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Hard to Resolve

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The OECD has declared
That growth this year will be impaired
By tariffs, as trade
Continues to fade
And no one worldwide will be spared
 
The funny thing is, the US
This quarter is showing no stress
But how things evolve
Is hard to resolve
‘Cause basically it’s just a guess

 

The OECD published their latest economic outlook and warned that global economic growth is likely to slow down because of the changes in tariff policies initiated by the Trump administration.  Alas for the OECD, the only people who listen to what they have to say are academics with no policymaking experience or authority.  It is largely a talking shop for the pointy-head set.  Ultimately, their biggest problem is that they continue to utilize econometric models that are based on the last 25-30 years of activity and if we’ve learned nothing else this year, it is that the world today is different than it has been for at least a generation or two.

At the same time, a quick look at the Atlanta Fed’s GDPNow forecast for Q2 indicates the US is in the midst of a very strong economic quarter.

Now, while the US does not represent the entire OECD, it remains the largest economy in the world and continues to be the driver of most economic activity elsewhere.  As the consumer of last resort, if another nation loses access to the US market, they will see real impairment in their own economy.  I would argue this has been the underlying thesis of the Trump administration’s tariff negotiations, change your ways or lose access, and that is a powerful message for many nations that rely on selling to the US.

Of course, it can be true that the US performs well while other nations suffer but that is not the OECD call.  Rather, they forecast US GDP growth will fall to 1.6% this year, down from 2.4% last year and previous forecasts of 2.2%.

But perhaps now is a good time to ask about the validity of GDP as a marker for everyone.  You may recall that in Q1, US GDP fell -0.2% (based on the most recent update received last Thursday) and that the media was positively gleeful that President Trump’s policies appeared to be failing.  Now, if Q2 GDP growth is 4.6% (the current reading), do you believe the media will trumpet the success?  Obviously, that is a rhetorical question.  But a better question might be, does the current calculation of GDP measure what we think it means?

If you dust off your old macroeconomics textbook, you will see that GDP is calculated as follows:

Y = C + I + G + (X – M)

Where:

Y = GDP

C = Consumption

I = Investment

G = Government Spending

X = Exports

M = Imports

In the past I have raised the question of the inclusion of G in the calculation, as there could well be a double counting issue there, although I suppose that deficit spending should count.  But the huge disparity between Q1 and Q2 this year is based entirely on Net Exports (X -M) as in Q1, companies rushed to over order imports ahead of the tariffs and in Q2, thus far, imports have fallen dramatically.  But all this begs the question, is Q2 really demonstrating better growth than Q1?  Remember, the GDP calculation was created by John Maynard Keynes back in the 1930’s as a policy tool for England after WWI.  The world today is a far different place than it was nearly 100 years ago, and it seems plausible that different tools might be appropriate to measure how things are done.  

All this is to remind you that while the economic data matters a little, it is not likely to be the key driver of market activity.  Instead, capital flows typically have a much larger impact on market movements which is why central bank policies are so closely watched.  For now, capital continues to flow into the US, although one of the best arguments against President Trump’s policy mix (and goals really) is that they could discourage those flows and that would have a very serious negative impact on financial markets.  Of course, he will trumpet the real investment flows, with current pledges of between $4 trillion and $6 trillion (according to Grok) as offsetting any financial outflows.  And in fairness, I believe the economy will be better served if the “I” term above is real foreign investment rather than portfolio flows into the S&P 500 or NASDAQ.

There is much yet to be written about the way the economy will evolve in 2025.  I remain hopeful but many negative things can still occur to prevent progress.

Ok, let’s take a look at how markets are absorbing the latest data and forecasts.

The barbarous relic and oil
Spent yesterday high on the boil
While bond yields are tame
These rallies may frame
A future where risk may recoil

I’ll start with commodities this morning where we saw massive rallies in both the metals and energy complexes yesterday as gold (-0.8% this morning) rallied nearly 2% during yesterday’s session and both silver (-1.4%) and copper (-1.7%), while also slipping this morning, saw even bigger gains with silver touching its highest level since 2012.  Copper, too, continues to trade near all-time highs as there is an underlying bid for real assets as opposed to fiat currencies.  Meanwhile, oil (+0.3%) rallied nearly 4% yesterday and is still trending higher, although remains in the midst of its trading range.  Given the bearish backdrop of declining growth expectations and OPEC increasing production, something isn’t making much sense.  Lower oil prices have been a key driver of declining inflation readings around the world.  If this reverses, watch out.

Turning to equities, yesterday’s weak US start turned into a modest up day although the follow through elsewhere in the world has been less consistent.  Tokyo was basically flat while Hong Kong (+1.5%) was the leader in Asia on the back of the story that Presidents Trump and Xi will be speaking this week as well as some solid local news.  But elsewhere in Asia, the picture was more mixed with modest gains and losses in various nations.  In Europe, despite a softer than expected inflation reading this morning, with headline falling to 1.9%, equity indices have been unable to gain much traction in either direction.  This basically cements a 25bp cut by the ECB on Thursday, but clearly the trade situation has investors nervous.  Meanwhile, US futures are pointing slightly lower at this hour (7:25), but only on the order of -0.2%.

Bond yields, which backed up yesterday, are sliding this morning with -2bps the standard move in Treasuries, European sovereigns and JGBs overnight.  We did hear from Ueda-san last night and he promised to adjust monetary policy only when necessary, although given base rates there are 0.5% and CPI is running at 3.5%, I’m not sure what he is looking at.  The very big picture remains there is too much debt in the world and the big question is how it will be resolved.  But my take is that won’t happen anytime soon.

Finally, the dollar, which had been under pressure yesterday has rebounded this morning, regaining much of the losses seen Monday.  The euro (-0.5%) and pound (-0.4%) are good proxies for the magnitude of movement we are seeing although SEK (-0.7%) is having a little tougher time.  In fairness, though, SEK has been the best performing G10 currency so far this year, gaining more than 13%.  In the EMG bloc, PLN (-1.0%) is the laggard, perhaps on the election results with the right-wing candidate winning and now calling into question the current government there and its ability to continue to move closer to the EU policy mix.  It should also be noted that the Dutch government fell this morning as Geert Wilders, the right-wing party leader, and leading vote getter in the last election, pulled out of the government over immigration and asylum issues.  (and you thought that was just a US thing!). In the meantime, I will leave you with the following 5-year chart of the DXY to allay any concerns that the dollar is about to collapse.  While we are at the bottom of the range of the past 3 years, we have traded far below here pretty recently, let alone throughout history.

Source: tradingeconomics.com

On the data front, JOLTs Job Openings (exp 7.1M) and Factory Orders (-3.0%, 0.2% ex Transport) are on the docket and we hear from 3 more Fed speakers.  But again, Fed comments just don’t have the same impact as they did even last year.  In the end, I do like the dollar lower, but don’t be looking for a collapse.

Good luck

Adf

Everyone’s Bitching

Posted on by

With President Trump on the road
The market has heard a boatload
Of ideas and plans
Including Iran’s
Return to a more normal mode
 
There’s talk of a nuclear deal
Audacious, if it’s truly real
Instead of enriching
While everyone’s bitching
A partnership deal they would seal

 

One is never disappointed with the tone of the overnight news when President Trump is traveling.  Between his flair for the dramatic and his desire to conclude deals, it seems like there is always something surprising when we awake each morning.  This morning is no different.  

While the mainstream media has been harping on the audacity of Qatar gifting a “flying palace” to the US for President Trump to use as Boeing’s delivery of the newest Air Force One is something like 10 years behind schedule, Mr Trump has indicated he is quite keen to make a deal with Iran that would bring them back into the fold of good neighbor nations.  Ostensibly, Iran has suggested that they work with the Saudis, Emiratis and the US to enrich uranium together in order to develop nuclear power in the Middle East.  As the Saudis and Emiratis have already expressed interest in building more nuclear power plants, it is not a stretch for them.  But bringing Iran into the fold, so that enrichment activities are done jointly, and therefore can be closely overseen by the US and Saudi Arabia, would be a remarkable outcome.

The JCPOA deal signed by President Obama was a nullifying deal, one that was designed to prevent an activity, the enrichment of uranium to the required concentrations sufficient to build a bomb.  But this is an encompassing deal, one that would join erstwhile enemies into a partnership to jointly produce uranium sufficiently enriched for nuclear power, without pushing toward weapons grade material.  Now, this would be a remarkable change in attitude in Tehran as the theocracy there has basically made the end of the US and Israel their motto ever since 1979 and the revolution that brought them to power.  But things are tough in Iran right now and the funny thing about power is that those who hold it are really reluctant to let go.  It would not be unprecedented for a nation’s leadership to reverse course completely in order to maintain their grip, and it is also not hard to believe that a softer tone would be welcome in Iran by the populace.

Regardless, this is a bold and audacious idea, but one that could just work.  Now, we should all care not simply because anything that could lead to less terrorism and destruction is an unalloyed good, but because the impact on the global economy would be significant, namely, the price of oil is likely to decline further.  A deal like this is likely to include the end of restrictions on Iranian oil sales, or at least a dramatic reduction in those restrictions.  While Iran has been producing and selling oil all along this would change the tone of the oil market with another major player now actively looking to expand production and sales.  (After all, the Iranian economy is desperate and the ability to generate more revenue without restrictions would be an extraordinary carrot for the mullahs.)

With this in mind, it should be no surprise that the price of oil (-3.65%) has fallen sharply today, and the real question is just how low it can go.  A look at the chart shows that the trend has been lower for the past year although it seems to have found a temporary bottom just above $56/bbl. 

Source: tradingeconomics.com

I have maintained for the past year and a half that the ‘peak cheap oil’ thesis has been faulty and that there is plenty of the stuff around with political, not geological restrictions the driving force toward higher prices.  This is Exhibit A on the political restriction case.  President Trump is quite keen to see oil prices lower as it suits both the inflation story in the US as well as offers a significant advantage to US manufacturing facilities with access to cheap energy.  I would guess this was not on anyone’s bingo card before today but must now be taken seriously as a potential outcome.  While I’m not an oil trader, I suspect we will test, and break, through those lows just above $56 in the coming weeks and find a new home closer to $50/bbl.

This is such an extraordinary story, I could not ignore it.  But as an aside, President Trump also mentioned that India has allegedly offered to cut their tariff rates on US goods to 0.0%!  I don’t know if that would be reciprocal, and that has not yet been verified by India, but again, it demonstrates that many of the things we believed to be true regarding international relations are not carved in stone.

Ok, let’s look at how markets are absorbing these latest surprises.  Yesterday’s price action could best be described as dull, with US equity markets doing little all day, although the NASDAQ managed to edge higher into the close.  In Asia overnight, the major markets (Japan -0.9%, China -0.9% and Hong Kong -0.8%) all came under pressure although there doesn’t appear to have been a particular story.  There were no new trade related comments, so I sense that the recent uptick just saw some profit-taking.  Elsewhere in Asia, the biggest winner was India (+1.5%) and then it was a mixed bag.  In Europe, equity markets have done very little overall after Eurozone data showed GDP activity was more disappointing than first reported with Q1’s second estimate down to 0.3%.  As to US futures, at this hour (7:10), they are pointing lower by about -0.4% or so across the board.

In the bond market, Treasury yields, which have been climbing relentlessly all month as per the below chart, have backed off -2bps this morning, but 10-year yields are still above 4.50%, a level Mr Bessent is clearly unhappy with.  But today’s price action has also seen European sovereign yields slide a similar amount, with the softer Eurozone growth one of the reasons here as well.

Source: tradingeconomics.com

Turning to the metals markets, the shine is off gold (-0.2%) which has fallen more than 4% in the past week, although remains well above $3100/oz.  It seems that much of the fear that drove the price higher is being removed from the markets by the constant updates of trade and peace deals that we hear regularly.  It remains to be seen if this lasts, and how the Fed will ultimately behave, but for now, fear is fading.

Finally, the dollar is a touch softer overall, but not universally so.  In the G10, the euro (+0.2%) and pound (+0.2%) are both edging higher with UK data looking a tad better compared to that modest weakness in Eurozone data.  But the yen (+0.6%) and CHF (+0.5%) are both nicely higher as there continues to be a strong belief that President Trump is seeking the dollar to decline in value.  In the EMG bloc KRW (+0.7%) and ZAR (+0.8%) are the leaders with most of the rest of the bloc making very modest gains on the order of 0.2% or less.  It appears that the dollar has decoupled from the US rate picture for the time being.  I wonder if it is presaging lower US rates, or if this relationship is going to change for a longer time going forward.  We will need to watch this closely.

On the data front, there is a bunch this morning as well as comments from Chairman Powell at 8:40.  

Initial Claims229K
Continuing Claims1890K
Retail Sales0.0%
-ex autos0.3%
PPI0.2% (2.5% Y/Y)
-ex food & energy0.3% (3.1% Y/Y)
Empire State Manufacturing-10
Philly Fed Manufacturing-11
IP0.2%
Capacity Utilization77.8%

Source: tradingeconomics.com

I don’t see PPI as having much impact, but Retail Sales will get some discussion as will the manufacturing indices as weakness there will help the negative narrative that some are trying to portray.  Net, though, the story seems likely to continue to be the announcements of deals as they come in.  It is not clear to me that they will all be net positives, and I believe that much positivity has already been absorbed so we will need to see data that backs up the narrative and that could take a few quarters.  In the meantime, my lower dollar thesis seems to fit better today.  That’s my story and I’m sticking to it!

Good luck

Adf

The Future As Fraught

Posted on by

Though I’ve been away near a week
From what I read things are still bleak
Two months have gone by
Since stocks touched the sky
And traders all want a new peak
 
Meanwhile, GDP fell ‘neath nought
And lots see the future as fraught
The popular claim
Is Trump is to blame
And rue all the things he has wrought

 

I worked hard not to pay close attention to markets while I was away last week in an effort to get some true relaxation.  And now that I’m back at my desk, I can see that I didn’t miss anything at all.  The narratives remain the same, the split between those who believe everything the president says/does is a disaster and those who believe everything he says/does is brilliant has not changed at all.  In other words, life continues as do all the arguments.

A review of the data last week showed two key outcomes, the labor market remains far more resilient than the recessionistas will accept and jobs continue to be created.  For some reason, that seems like good news to me, but then I am not a highly paid economist with a narrative to stoke.  On the other hand, Q1 GDP printed at -0.3%, the first negative print in 3 years, but also one that is easily explained by the rush of imports that occurred prior to the imposition of tariffs in early April.  Remember, imports subtract from Gross DomesticProduct.  However, a look under the hood of this number shows that the positive news was government activity declined while private sector investment exploded higher.  It strikes me that this is the best possible direction for the US economy going forward.

In China, it seems Xi’s decided
That data has been too one-sided
So, henceforth they’ll furnish
Just data to burnish
The views Xi and friends have provided

Turning to the more recent stories, though, the WSJ had a very interesting take on the fact that China’s statistical output is shrinking quite rapidly as data that has been trending lower suddenly stops being produced.  The below chart from the article on National Land Sales is an excellent depiction of things, and likely an indication that land sales, which are critical to local government finances, have become even a bigger problem over the past three years than when the property market first started melting down in early 2021.

It is worth noting that in this trade war between the US and China, while much of the punditry continues to insist that China has the upper hand as the stuff they sell to the US is more critical and less replaceable than the stuff the US sells to them, I have maintained things are not necessarily that easy.  The US is facing a supply shock, and will need time to work it through, but the US economy is the most dynamic in the world, and these issues will be resolved.  China faces a demand shock, which in economic theory should be easier to address, but which in China’s reality has not proven to be the case.  Consider that Xi and the CCP have been creating fiscal stimulus plans since Covid without any serious success.  In fact, the Chinese have openly stated that they are seeking to shift the production/consumption mix of the nation closer to Western standards of 60%-70% consumption from their current 45%-50% level.  It hasn’t worked yet, and I see no reason to believe that is going to change.  We must never forget the US is the consumer of last resort, and if China doesn’t have access to this market, it is a major problem for them.

I have no inside knowledge of how things are evolving on this issue, but here’s my take; while Xi doesn’t need to worry about being elected, he still needs to ensure that China’s economy grows sufficiently to increase the well-being of his population.  Whatever the official statistics have shown, it is clear that things in China are not what they would have the rest of the world believe and that is a problem for Xi.  Meanwhile, Trump will not face another election and was elected with a pretty broad mandate.  I believe given the timing of the mid-term elections, he has another 9-12 months to get things done and will play hardball with China to do so.  In fact, I have a feeling that Trump may have the upper hand.  This will be settled by the autumn is my view.

Ok, let’s turn to markets and what happened in the overnight session.  Looking first at currencies for a change, I couldn’t help but notice the following chart.

Source: tradingeconomics.com

I also couldn’t help but notice the following comment from the Taiwanese central bank in response to a question about whether the FX rate is on the table in the trade negotiations.  (As an aside, @PIQSuite is an excellent follow on X.  Key market headlines on a real-time basis with other things available as well.)

The question of whether FX rates would be part of the trade talks seems to have been answered, and the answer is yes.  Perhaps there will not need to be a Mar-a-Lago accord after all regarding revaluing gold and terming out bonds.  Instead, the pressures will be relieved on a country-by-country basis with each trade deal.  

While the TWD revaluation of 10% over the past 2 sessions is the most dramatic, the dollar is generally lower this morning against both G10 and EMG currencies.  In the G10, AUD (+0.85%) leads the way but JPY (+0.7%), NOK (+0.6%) and CHF (+0.5%) are all pushing higher.  This must be music to President Trump’s ears.  As to the emerging markets, KRW (+2.5%), is the next biggest mover although they admitted that FX rates were part of the trade discussions.  SGD (+0.8%) has also seen a relatively large move and INR (+0.4%) is moving in that direction.  It seems clear that Asia is the focus of both the administration and the markets this morning.  The rest of the EMG bloc has seen much smaller gains, between +0.25% and +0.5%, with CNY (+0.15%) really doing very little.

Turning to the equity markets, last week clearly finished on a strong note and, in fact, since I last wrote, the S&P 500 has rallied a bit more than 2% and is higher by more than 14% since April 8th.  Apparently, the world has not yet ended, but there hasn’t been a new high in the stock market in more than 3 months, and people are edgy!  As to the overnight session, the Nikkei (+1.0%) rallied along with the Hang Seng (+1.75%) although Mainland shares (CSI 300 -0.1%) showed little life.  Elsewhere in the region, Taiwan (-1.25%) and Australia (-1.0%) felt the most pressure and the rest were mixed with much smaller movements.  In Europe, indices are mixed as earnings data from each country are the drivers amid a lack of broad-based news.  So, the UK (+1.2%) and Germany (+0.6%) are firmer while France (-0.6%) is lagging on the back of some weaker earnings numbers.  As to the US, futures are pointing lower by about -0.7% across the board at this hour (7:15).

In the bond market, last week saw Treasury yields jump sharply after the better-than-expected payroll report, finishing the day 9bps higher, although still within the middle of the trading range since February and lower on the year.  This morning, they are basically unchanged while European sovereign yields have slipped by about -2bps across the board. The picture there continues to focus on the uptick in fiscal spending that is expected and the borrowing that will be needed to pay for it.  However, there is still a strong view that the ECB will be cutting rates going forward.

Lastly, in the commodity markets, oil (-1.15%) is sliding again as OPEC+ has promised to continue to increase production.  There are two takes on this activity, both of which probably have some truth.  First is the idea that President Trump has made a deal with MBS in Saudi Arabia to increase production and drive prices lower. Remember, lower energy prices are a boon to the US (and the world).  But added to that is the idea that MBS agreed so he can help force fracking production to pull back and regain market share for OPEC+.  However, regardless of the rationale, nothing has changed my view that oil prices are heading lower, and I still like the $50/bbl level as a target.  As to the metals, gold (+2.3%) which has been under pressure for several weeks in a correction, seems to have found support below $3300/oz and could well be setting up for another leg higher. This has taken silver (+1.3%) and copper (+.8%) along for the ride.  If the dollar is going to continue lower, metals prices should remain quite firm.

On the data front, today only brings ISM Services (exp 50.6), but really, all eyes will be on the FOMC meeting on Wednesday.  I will highlight the rest of the week’s data tomorrow morning.

The past month has seen significant volatility in markets as participants did not correctly estimate the potential moves in trade policy.  At this point, it seems those questions are being answered, with President Trump even hinting some deals could be finalized this week.  I believe we are going to see trade announcements that include new FX goals, and they will be pushing the dollar lower across the board.  While I don’t see a collapse coming, that is the trend for now.

Good luck

Adf

Downward, Crawling

Posted on by

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

 

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

Source: tradingeconomics.com

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

Source: finance.yahoo.com

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

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

Source: tradingeconomics.com

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

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

Source: tradingeconomics.com

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

Source: finance.yahoo.com

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

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

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

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

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

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

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

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

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

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

Good luck

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Their Own Ego Trip

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The talk of the town is the “Pause”
Which led to much market applause
Though naysayers still
Say Trump’s actions will
Result in bad outcomes…because


But yesterday saw markets rip
And all those who did buy the dip
Are feeling quite smart
When viewing the chart
Of prices, their own ego trip

 

See if you can guess when President Trump posted that there would be a 90-day pause on tariffs for everyone but China.

Source: tradingeconomics.com

By now, you are almost certainly aware that equity markets in the US rebounded massively in the US, with one of the biggest gains on record as the S&P 500 rose 9.5% and the NASDAQ 12.2%.  Of course, that merely retraced the bulk of the losses seen since the beginning of the month.  In fact, the S&P 500 is still lower by about 200 points since then.  Regardless, moods are much brighter today than they were yesterday at this hour.  And those equity gains are global.

I’ve seen several interpretations of the sequence of events and like virtually everything these days, it appears to have a partisan bias to people’s views.  There are those who claim President Trump could not stand the pressure of a declining stock market and “blinked” in the game of chicken he was playing.  There are also those who claim this was part of the strategy all along, essentially moving the Overton Window substantially in his preferred direction and now he is ready to reap the benefits of this move.  

Arguably, there is evidence for both sides of this argument and I suggest we will never really know. Remember, Trump is quite comfortable making outlandish pronouncements as he level sets for a negotiation.  But he is also quite the realist and while I do not believe he was concerned with his personal or family fortune, recognized that the speed of the pain inflicted could be damaging overall.  In the end, it is not clear the rationale matters, the action stands on its own merits.  

But remember this, equity valuations were very high before the decline last week, and were still quite high, although obviously less so, after the decline.  The rebound put them back in very high territory, especially with equity analysts revising profit forecasts lower on the back of the still 10% tariffs being imposed.  A truism is that the biggest rallies in the stock market occur during bear markets.  Keep that in mind as you assess risk going forward.

But let us turn our attention to a player who is not getting much attention these days, the Fed.  Many questioned the Fed’s rate cuts back in Q4 and attributed the moves to a partisan effort to help VP Harris get elected.  Certainly, there is no love lost between Chairman Powell and President Trump.  Of late, though, the commentary has focused on patience regarding any further policy ease as the impacts of Trump’s tariff policies are unknown at this stage.  Yet, it is not hard to read these comments and get a sense that the Fed is going to work at cross purposes to Mr Trump.  

For instance, yesterday, Minneapolis Fed President Neel Kashkari released an essay with the following comments, “Given the paramount importance of keeping long-run inflation expectations anchored and thelikely boost to near-term inflation from tariffs, the bar for cutting rates even in the face of a weakening economyand potentially increased unemployment is higher.  The hurdle to change the federal funds rate one way or theother has increased due to tariffs.”  While the words here don’t appear partisan per se, Mr Kashkari is one of the most dovish FOMC members and dismissed inflation concerns regularly for a long time.  This sudden change is interesting, at the least.  

At any rate, the market, which had been pricing a 50% probability of a rate cut next month just a few days ago and a total of at least 4 cuts this year, is back down to a <20% probability of a cut in May and about 3 cuts this year.  Truly the pause that refreshes.

So, let’s look at how other markets responded to the pause.  Markets everywhere, including China, rallied last night and this morning, with Tokyo (+9.1%) and Taiwan (+9.2%) leading the way in Asia although gains were universal.  Hong Kong (+2.1%) and China (+1.3%) were the laggards with gains between 2.5% and 5.0% the norm.  In Europe, too, equities are flying this morning as the threat of much higher tariffs is removed, at least temporarily, with the UK (+4.6%) the laggard and gains between 5.0% and 6.5% the story there.  Alas, futures this morning, at 7:00am, are pointing lower by -2.0% or so.  Is that profit taking or a harbinger of the day to come?

In the bond market, which has expressly been Trump and Bessent’s main concern, yields are a bit lower this morning, -3bps in 10-year Treasuries.  But the story in Europe is confusing to me, or perhaps not.  German bunds (+6bps) have seen the largest rise while UK Gilts (-10bps) have seen a sharp decline.  Too, Italy (-4bps and Greece (-2bps) have seen yields decline.  Could this be an illustration that bunds are a better safe haven than Treasuries? And now that haven status seems less important today, they are being sold off?  JGB yields (+9bps) are also rising, perhaps on the same notion.  The corroborating evidence is that nobody thinks Gilts are a good investment, so with risk back on, they are in demand given their highest yield in the G10.

In the commodity markets, oil rebounded sharply alongside equities yesterday although it has slipped 2.4% this morning.  I have altered the Y-axis on the chart below to percentages to give an idea of the magnitude of these moves in the past days, especially relative to the past 6 months.  Despite being the most liquid commodity market around (both figuratively and literally), it is far less liquid than bonds or FX or even stocks, so as commodities are wont to do, sometimes the moves are breathtaking.

Source: tradingeconomics.com

As to the metals markets, gold (+1.0%) continues its march higher, recovering more than 5% from the lows Tuesday morning.  I maintain that much of that selling was margin based, with positions liquidated to cover margin calls in other markets.  Now that the panic has passed, demand is likely increased given the new uncertainties.  However, both silver (-0.5%) and copper (-1.3%), which rallied sharply yesterday, have slipped back a bit.  These are different stories.

Finally, the dollar is lower this morning, having yo-yoed like every other market on the tariff news.  CHF (+1.9%) and JPY (+1.4%) are the big gainers in the G10 although the euro (+1.2%) is having a day as well.  However, there are currencies with less pizzazz this morning, notably ZAR (-0.9%), KRW (-0.6%) and MXN (-0.5%), as it remains difficult to know how to proceed going forward.  JPMorgan has a global volatility index which is a useful barometer of how things are going.  As you can see below, it is not surprising that volatility in this space has also risen sharply.

Once again, I return to the idea that President Trump is the avatar of volatility, and you must always remember that volatility can happen in both directions.  While financial assets tend to collapse (yesterday being the exception) when things get out of hand, commodities go the other way as supply interruptions are the big risk. Writ large, volatility simply means a lot of movement.

We finally get some meaningful data this morning with headline CPI (exp 0.1%, 2.6% Y/Y) and Core (0.3%, 3.0% Y/Y) along with the weekly Claims data (Initial 223K, Continuing 1880K).  Given all the focus on the tariffs, though, it is not clear to me what this data will imply on a forward-looking basis.  As we have seen with the Fed getting sidelined by Mr Trump, his tariff policies have also served to overshadow economic data, at least for now.  There are a couple of more Fed speakers and a 30-year bond auction as well.  Interestingly, I expect that auction may be the most important outcome of the day.  Will there be real demand or are investors shying away?

I expect that over the next few months, tariffs will be discussed on a nation-by-nation basis as new deals are struck.  But that will impede any medium-term views on the economy as until we have a much better sense of the end results, it will be difficult to assess things.  The upshot is, we may be entering a period where we chop up and down, but don’t go anywhere until the global trade situation is clearer.  Volatility with no direction is great for traders, less so for investors.  Headline bingo is still the game we are playing.

Good luck and good weekend

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