Tag Archives: #oil

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

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Everyone’s Bitching

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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

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The Future As Fraught

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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

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

 

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

Source: tradingeconomics.com

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

Source: finance.yahoo.com

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

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

Source: tradingeconomics.com

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

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

Source: tradingeconomics.com

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

Source: finance.yahoo.com

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

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

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

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

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

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

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

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

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

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

Good luck

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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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Hair All on Fire

Posted on by

There once was a group of old men
Who spoke via paper and pen
Last week, this odd choir
With hair all on fire
Explained that the world would soon end
 
I wonder if this week we’ll learn
This group now has nought left to burn
If so, we may find
That all of mankind
Could yet weather any downturn

 

I have no idea how this is going to play out and truthfully neither does anybody else.  While I am happy to admit that fact, my sense is others will not be so forthcoming.  President Trump made clear that he wanted to change the way things are done.  He was explicit in his efforts to rearrange the global trading system, and by extension the global economy, so that it was less punitive to American businesses.  At least in his mind.  

I think the other thing to remember is he was elected by Main Street, not Wall Street.  The MAGA movement was originally composed of small-town folks who had not benefitted from the financialization of the economy that really accelerated with the GFC.  And most of these folks don’t look at the stock market every day, nor the bond market nor the value of the dollar in the FX market.  They do see the price of gasoline at the pump, and the price of groceries in the store, but otherwise, market activity is not a primary focus.

I mention this because I think it is critical to remember Trump’s primary audience if we are to understand why he is doing what he is doing.  Bill Ackman screaming on X is not the president’s concern.  Redeveloping the US manufacturing base is his goal.

Now, will his actions lead to that outcome?  There are many naysayers and most of them write for major news outlets or are politically motivated (isn’t that the same thing?).  But remember, Trump doesn’t have to run for office again.  I suspect the fact that the Senate passed their version of the “big, beautiful bill” for taxes and the budget last week was of far more interest to the President than the fact that Senator Chuck Schumer is calling his actions reckless.  

My point here is to highlight that all those who believe that President Trump will succumb and change his stance because equity prices have fallen are still not listening to the man.

Speaking of prices at the pump, there was news last week that was missed by many, if not most, people, and that is likely to have a significant impact on oil prices.  It turns out, that in the wake of the tariff announcements, OPEC explained they would be increasing production by 411K bbl/day beginning in May with potentially larger increases going forward.  It appears that the loss of market share is becoming untenable in their eyes, and so they are on their way to regaining that, even if prices are to decline further.  

There are some who speak of a deal with President Trump, who you may recall has been seeking to lower oil prices, and I suppose that is quite possible.  But, regardless of the driving force behind the action, as my friend Alyosha on Substack explains eloquently, it is quite possible that we are entering a new regime in oil prices.  This chart from his most recent Substack posting is instructive.  

In essence, his theory, which this chart describes, is we may well be heading into a new long-term range of oil prices that is far below what we have been used to, especially since the Russian invasion of Ukraine.  Remember, if energy prices decline, that reduces cost pressures for the entire economy.  And here we are this morning with oil (-4.0%) breaking below $60/bbl and down -10% in the past month.  Despite all the headlines that tariffs are going to raise prices, this is something that will clearly offset any general rise in price pressures.

But markets are still digesting the tariff news and are not happy about it.  Apparently, several nations have reached out to the president to discuss what can be done to address this change in tariff behavior, including the UK, Japan and Taiwan.  As a negotiating tactic, it strikes me that Trump will not want to waver if he is to achieve better trade deals for the US.  And while he may be subject to the slings and arrows of a negative press in the US, there is nobody on the planet who is more capable of absorbing those and continuing on his merry way.

Ok, let’s see the damage wrought in the overnight markets, where adjustments are still being made.  Before we start, though, remember, US share prices were at extremely high valuations prior to all this with just seven companies representing nearly one-third of the value of the S&P 500.  The common refrain was that these conditions could not be maintained forever.  That refrain was correct, but the speed of the adjustment has clearly been more rapid than many had hoped expected.  The below reading of the Fear and Greed Index speaks for itself.  But remember, this is seen as a contra-indicator, where extreme fear is seen as a buying opportunity.

Source: cnn.com

Ok, now to markets.  The nearly -6% declines across the board in the US on Friday have been followed by even large declines in Asia, with the Nikkei (-7.8%), Hang Seng (-13.2%) and CSI 300 (-7.1%) all suffering greatly.  Taiwan (-9.7%) and Singapore (-7.6%) were the other largest movers with the rest of the region declining on the order of -4.0% give or take a bit.  In Europe, the losses are not quite as severe, with declines on the continent averaging -6.2% or so and UK shares slipping “just” -4.8%.  interestingly, US futures, which had been down as much as a further -6.0% in the early part of the overnight session, have rebounded slightly and now (5:40) sit lower by around -3.4% or so.  It appears we are seeing the first nibbles of value buyers.

Bond yields continue to decline as the flight to the relative safety of government debt is rampant.  While Treasury yields (-4bps) are only a bit lower, in Europe, German bunds (-12bps) and French OATs (-8bps) are leading the way.  Recession concerns have risen everywhere, with the punditry now highly convinced a recession is a given and the only question is whether or not this will turn into a depression.  That feels premature to me, but I’m just a poet.  As to JGB yields, they, too, have tumbled further as funds flow back to Japan, and are down a further -8bps this morning, now yielding just 1.09%, a far cry from the 1.60% level just two weeks ago.

I’ve already discussed oil so a look at metals shows gold (-0.3%) consolidating last week’s declines and still above $3000/oz.  My take is gold’s decline was a result of equity losses and margin calls being covered by gold positions.  I do not believe the barbarous relic has seen its highs.  As to the other metals, silver (+2.3%) is bouncing this morning, although it did fall more than 10% in the past week, and copper (-1.4%) is under increasing pressure on the weakening economic growth story.

Finally, the dollar is all over the map, showing net strength this morning, but weaker vs. the two main havens, JPY (+0.55%) and CHF (+0.9%).  Interestingly, the euro is unchanged on the day as it appears traders cannot decide who will be more greatly impacted, the US or Europe.  But otherwise, the dollar is generally firmer with NOK (-1.75%) suffering alongside oil, MXN (-1.5%), ZAR (-1.3%) and CLP (-1.7%) all feeling the pressure from the tariffs.  Other G10 currencies are softer, but not as dramatically, with AUD and NZDZ (both -0.5%) and CAD (-0.3%) moving more in line with a normal session.  While we have gotten used to the idea that the dollar rallies on a risk-off thesis, given the nature of this particular version of risk-off, I have a feeling the dollar’s gains may be capped.  However, my previous thesis on the declining dollar is much harder to discern given the changing nature of economic outcomes.

As an aside, the Fed funds futures market is now pricing a 50% probability of a Fed cut in May and a total of 113bps of cuts by the end of 2026.  However, this will all depend on the evolution of things going forward, and, similar to the fear and greed index above, may represent an extreme view right now.

On the data front, Friday’s better than expected NFP data was lost in the shuffle.  The front of this week doesn’t have much although we do get CPI on Thursday.

TodayConsumer Credit$15.2B
TuesdayNFIB Small Biz Optimism101.3
WednesdayFOMC Minutes 
ThursdayInitial Claims224K
 Continuing Claims1915K
 CPI0.2% (2.6% Y/Y)
 Ex food & energy0.3% (3.0% Y/Y)
FridayPPI0.1% (3.3% Y/Y)
 Ex food & energy0.3% (3.6% Y/Y)
 Michigan Confidence54.7

Source: tradingeconomics.com

It’s hard for me to believe the FOMC Minutes will matter much given all that has transpired since then.  We do hear from seven more Fed speakers this week, but their comments have been swallowed by the ether as none of them, Chairman Powell included, has any inside track as to how things will evolve going forward.  

My experience is that markets have a great deal of difficulty remaining in max fear mode for very long as it is simply too tiring for market participants.  I don’t ever recall seeing the fear and greed index at 4, even during Covid (it is only about 12 years old), but my take is we are likely to see at least a respite here, before any significant further declines in risk assets.  As to the dollar, if that is the case, I expect it will cede some of its recent gains, at least vs. the EMG bloc.  

Good luck (we all need it!)

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Another Broadside

Posted on by

Investors don’t know where to hide
As Trump lands another broadside
Last night he did roil
All those who buy oil
From Vene, with tariffs applied
 
But yesterday, too, he amended
How tariffs would soon be extended
The lesson to learn
Is you’ll ne’er discern
His methods, so don’t be offended

 

Once again, the tariff game changed yesterday, although this time in two directions.  The first, and newest idea is that the US will impose “secondary” tariffs on all nations that buy oil from Venezuela.  The idea is to pressure Venezuela to concede to US demands by reducing the market for their one exportable commodity, at least the only one in demand (Tren de Aragua gang members, while a key export, have limited demand it seems).  This decision is being described as a new tool of statecraft, but it strikes me this is no different than previous international efforts like the apartheid movement, by isolating a nation for its behaviors.  Regardless, this was seen as bullish for oil prices.  The reason, as eloquently explained by Ole Hanson, Saxo Bank’s Head of Commodity Strategy, as per the below, is that Venezuelan and Iranian oil production has risen significantly over the past 4 years, offsetting the production cuts of the rest of OPEC+.  Take that oil out, and the demand/supply balance tips toward more demand.

It remains to be seen how this impacts specific countries, but apparently, China is the largest importer of sanctioned crude, so obviously, not a positive for President Xi.  Alas for Chevron, the deal they cut with the Biden administration to restart activity in Venezuela is looking shakier by the day.

But that is only one of the tariff stories.  The other was that there may be changes to previously expected actions come April 2nd, with imposition of tariffs being a bit more gradual nor as widespread as initially feared.  Recall, the idea of the reciprocal tariffs was almost every other nation charges higher tariffs on US goods than the US charges on their goods, so simply raising US tariffs to their levels would be effective.  The next step was focusing on the so-called “Dirty 15” nations that run the major trade surpluses with the US, but now he has indicated that some nations will get breaks.  I particularly loved this comment, “I may give a lot of countries breaks. They’ve charged us so much that I’m embarrassed to charge them what they’ve charged us, but it’ll be substantial, and you’ll be hearing about that on April 2.”

In any event, Trump’s specialty is his ability to think outside the box, or perhaps more accurately, break the box and move to a different container.  There is much consternation amongst business managers, and understandably, since planning is much more difficult in this environment.  However, as I have repeatedly written, the one thing on which we can count is continued higher volatility across all markets.  That condition requires a robust hedging plan for all those who have exposures, that is your only realistic protection.

Other than the tariff story, though, we have not seen much new information so let’s take a look at how markets have handled the latest tariff saga.  Yesterday’s broad US equity rally, on the back of a reduced tariff outlook, was followed by less positive price action in Asia.  While the Nikkei (+0.5%) rallied, potentially on the yen’s recent weakness, Hong Kong (-2.4%) was under great pressure on a weaker tech sector as earnings there were disappointing last quarter.  However, the CSI 300 (0.0%) which has far less tech in its makeup, didn’t budge.  As to the rest of the region, there were more gainers (Taiwan, Malaysia, New Zealand, Indonesia) than losers (Korea, Philippines, Thailand), so arguably the US rally and tariff story helped a bit.

In Europe, though, things are looking solid this morning with green everywhere on the screen and generally substantially so.  The DAX (+0.9%), CAC (+1.2%) and IBEX (+1.1%) are all having solid sessions after German Ifo Expectations data was released a touch better than expected at 87.7, but as importantly, 2 points better than last month.  However, a look at the history of this index shows that while recent data has turned mildly positive, compared to its long-term history, things in Germany remain in lousy shape.

Source: tradingeconomics.com

As to US futures, at this hour (7:10), they are little changed on the day as traders await the next pronouncements with great uncertainty.

In the bond market, though, yields have been climbing everywhere with Treasury yields higher by 2bps this morning after jumping 5bps yesterday.  In fact, we are back at the highest levels in a month, although still well below the peaks seen in early January or last spring.  But this move has dragged European sovereign yields along for the ride with across-the-board gains of 4bps-5bps and similar movement in JGBs overnight.  One of the alleged reasons for this bond weakness were hawkish comments from two ECB members, Slovakia’s Kazimir and Estonia’s Müller.  However, dovish comments from Greece’s Stournaras and Italy’s Cipollone would have seemed to offset that, and did so in the FX markets, but not in the bond market.

Turning to commodities, oil (+0.4%) continues to climb and is once again approaching $70/bbl.  In fact, since that fateful day, March 11th, it has rallied consistently as can be seen below.  I still don’t understand why that date seemed to offer a change of view, but there you go.

Source: tradingeconomics.com

In the metals markets, this morning is once again seeing a bullish tone with both precious and industrial metals in demand.  Gold (+0.5%) continues to be one of the best performing assets around, although so far this year silver (+1.5%) and copper (+1.15%) have been amongst the few things to beat it.  I believe this trend has legs.

Finally, the dollar is softer this morning, falling against both its G10 and EMG counterparts almost universally.  SEK (+0.9%) is the leader in the clubhouse, although we have seen solid gains from AUD (+0.5%) and NZD (+0.6%) with both the euro (+0.2%) and pound (+0.2%) lagging the pace but in the same direction.  JPY (+0.4%) which has suffered a bit lately, is following the broad dollar move this morning.  in the EMG bloc, the CE4 (+0.4% across all of them) is setting the tone with ZAR (+0.4%) right there.  Otherwise, the movement has been a bit more modest (MXN +0.2%, KRW +0.15%), but still putting pressure on the dollar.

Turning to the data, as I never got to show the week ahead, here we go:

TodayCase-Shiller Home Prices4.8%
 Consumer Confidence94
 New Home Sales680K
WednesdayDurable Goods-1.0%
 -ex Transport0.2%
ThursdayInitial Claims225K
 Continuing Claims1890K
 GDP Q4 Final2.3%
 GDP Final Sales Q43.2%
 Goods Trade Balance-$134.6B
FridayPersonal Income0.4%
 Personal Spending0.5%
 PCE0.3% (2.5% Y/Y)
 Core PCE0.3% (2.7% Y/Y)
 Michigan Sentiment57.9

Source: tradingeconomics.com

Obviously, the PCE data Friday will be the most interesting piece of data released, although we cannot ignore Case-Shiller today.  I keep looking at prices rising there at nearly 5% and wondering why economists expect inflation to fall.  If home prices are rising 5% per year, and they represent one-third of the CPI, it doesn’t leave much room for other prices to rise to achieve 2.0%.  Just sayin’.  In addition, we hear from seven different Fed speakers this week.  Now, I have been making a big deal about how Fedspeak doesn’t seem to matter as much anymore.  Perhaps this week, given the overall uncertainty across markets, it will matter.  However, the Fed funds futures market continues to price a bit more than two rate cuts for the rest of the year, which has not changed very much at all in the past month.  I still don’t think the Fed speakers matter right now.

Markets are highly attuned to whatever Trump says about tariffs.  Absent a new war, and maybe even if one starts, I suspect traders (or algos) will focus on that exclusively.  But despite all this, nothing has altered my longer-term view that the dollar will weaken, and commodities remain strong going forward.

Good luck

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Eyes Like a Bat

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The new Mr Yen
Is watching for excess moves
With eyes like a bat

 

While every day of this Trump presidency is filled with remarkable activity at the US government level, financial markets are starting to tune out the noise.  Yes, each pronouncement may well be important to some part of the market structure, but the sheer volume of activity is overwhelming investment views.  The result is that while markets are still trading, there seem to be fewer specific drivers of activity.  Consider the fact that tariffs have been on everyone’s mind since Trump’s inauguration, but nobody, yet, has any idea how they will impact the global macro situation.  Are they inflationary?  Will sellers reduce margins?  Will there be a strong backlash by the US consumer?  None of this is known and so trading the commentary is virtually impossible.

With that in mind, it is worth turning our attention this morning to Japan, where the yen (-0.4%) has been steadily climbing in value, although not this morning, since the beginning of the year as you can see from the chart below.

Source: tradingeconomics.com

Amongst G10 currencies, the yen is the top performer thus far year-to-date, rising about 5%.  Arguably, the key driver here has been the ongoing narrative that the BOJ is going to continue to tighten monetary policy while the Fed, as discussed yesterday, is still assumed to be cutting rates later in the year.  

Let’s consider both sides of that equation.  Starting with the Fed, just yesterday Atlanta Fed president Bostic explained to a housing conference, “we need to stay where we are.  We need to be in a restrictive posture.”  Now, I cannot believe the folks at the conference were thrilled with that message as the housing market has been desperate for lower rates amid slowing sales and building activity.  But back to the FX perspective, what if the Fed is not going to cut this year?  It strikes me that will have an impact on the narrative, and by extension, on market pricing.

Meanwhile, Atsushi Mimura, the vice finance minister for international affairs (a position known colloquially to the market as Mr Yen) explained, when asked about the current market narrative regarding the BOJ’s recent comments and their impact on the yen, said, “there is no gap with my view.  Amid high uncertainty, we have to keep watching the impact of any speculative trading on, not only the exchange market, but also financial markets overall.”  

If I were to try to describe the current market narrative on the yen, it would be that further yen strength is likely based on the assumed future narrowing of interest rate differentials between the US and Japan.  That has been reinforced by Ueda-san’s comments that they expect to continue to ‘normalize’ policy rates, i.e. raise them, if the economy continues to perform well and if inflation remains stably at or above their 2% target.  With that in mind, a look at the below chart of Japanese core inflation shows that it has been above 2.0% since April 2022.  That seems pretty stable to me, but then I am just a poet.

Source: tradingecomnomics.com

Adding it all up, I feel far better about the Japanese continuing to slowly tighten monetary policy as they have a solid macro backdrop with inflation clearly too high and looking like it may be trending a bit higher.  However, the other side of the equation is far more suspect, as while the market is pricing in rate cuts this year, recent Fed commentary continues to maintain that the current level of rates is necessary to wring the last drops of inflation out of the economy.

There is a caveat to this, though, and that is the gathering concern that the US economy is getting set to fall off a cliff.  While that may be a bit hyperbolic, I do continue to read pundits who are making the case that the data is starting to slip and if the Fed is not going to be cutting rates, things could get worse.  In fairness to that viewpoint, the Citi Surprise Index is pointing lower and has been declining since the beginning of December, meaning that the data releases in the US have underperformed expectations for the past two months. (see below)

Source: cbonds.com

However, a look at the Atlanta Fed’s GDPNow estimate shows that Q1 is still on track for growth of 2.3%, not gangbusters, but still quite solid and a long way from recession.  I think we will need to see substantially weaker data than we have to date to get the Fed to change their wait-and-see mode, and remember, employment is a lagging indicator, so waiting for that to rise will take even longer.  For now, I think marginal further yen strength is the most likely outcome as we will need a big change in the US to alter current Fed policy.

Ok, let’s see how markets have behaved overnight.  Yesterday saw a reversal of recent US equity performance with the DJIA slipping while the NASDAQ rallied, although neither moved that far.  In Asia, the Nikkei (+0.3%) edged higher as did the CSI 300 (+0.2%) although the Hang Seng (-0.3%) gave back a small portion of yesterday’s outsized gains.  The rest of the region, though, was under more significant pressure with Korea, Taiwan, Indonesia and Thailand all seeing their main indices decline by more than -1.0%.  In Europe, red is the most common color on the screen with one exception, the UK (+0.35%) where there is talk of resurrecting free trade talks between the US and UK.  But otherwise, weakness is the theme amid mediocre secondary data and growing concern over US tariffs.  Finally, US futures are nicely higher this morning after Nvidia’s earnings were quite solid.

In the bond market, Treasury yields (+4bps) have backed up off their recent lows but remain in their recent downtrend.  Traders keep trying to ascertain the impacts of Trump’s policies and whether DOGE will be able to find substantial budget cuts or not with opinions on both sides of the debate widely espoused.  European sovereign yields have edged higher this morning, up 2bps pretty much across the board, arguably responding to the growing recognition that Europe will be issuing far more debt going forward to fund their own defensive needs.  And JGB yields (+4bps) rose after the commentary above.

In the commodity markets, oil (+1.1%) is bouncing after a multi-day decline although it remains below that $70/bbl level.  The latest news is that Trump is reversing his stance on Venezuela as the nation refuses to take back its criminal aliens.  Meanwhile, gold (-1.1%) is in the midst of its first serious correction in the past two months, down a bit more than 2% from its recent highs, and trading quite poorly.  There continue to be questions regarding tariffs and whether gold imports will be subject to them, as well as the ongoing arbitrage story between NY and London markets.  However, the underlying driver of the barbarous relic remains a growing concern over increased riskiness in markets and rising inflation amid the ongoing deglobalization we are observing.

Finally, the dollar is modestly firmer overall vs. its G10 counterparts, with the yen decline the biggest in the bloc.  However, we are seeing EMG currency weakness with most of the major currencies in this bloc lower by -0.3% to -0.5% on the session.  In this case, I think the growing understanding that the Fed is not cutting rates soon, as well as concerns over tariff implementation, is going to keep pressure on this entire group of currencies.

On the data front, we see the weekly Initial (exp 221K) and Continuing (1870K) Claims as well as Durable Goods (2.0%, 0.3% ex Transport) and finally the second look at Q4 GDP (2.3%) along with the Real Consumer Spending piece (4.2%).  Four Fed speakers are on the calendar, Barr, Bostic, Hammack and Harker, but again, as we heard from Mr Bostic above, they seem pretty comfortable watching and waiting for now.

While I continue to believe the yen will grind slowly higher, the rest of the currency world seems likely to have a much tougher time unless we see something like a Mar-a Lago Accord designed to weaken the dollar overall.  Absent that, it is hard to see organic weakness of any magnitude, although that doesn’t mean the dollar will rise.  We could simply chop around on headlines until the next important shift in policy is evident.

Good luck

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A Fifth Wheel

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Confusion is clearly what reigns
As even the punditry strains
To understand whether
Investors will tether
Their future to stocks or take gains

 

As there was no activity in the US financial markets yesterday, it seems there was time for analysts to consider the current situation and make pronouncements as to investor behavior.  Ironically, we saw completely opposite conclusions from two major players.  On the one hand, BofA posted the following chart showing that investors’ cash holdings are at 15-year lows, implying they remain fully invested and quite bullish.

Meanwhile, the WSJ this morning has a lead article on how bearish investors are, claiming they are the most bearish since November 2023 according to the American Association of Individual Investors.  Apparently, 47.3% of investors surveyed believe stock prices will fall over the next 6 months.

So, which is it?  Are investors bullish or bearish?  To me this is a perfect description of the current situation.  Everyone is overloaded with information, much of which is contradictory, and so having a coherent view has become extremely difficult.  This is part and parcel of my view that the only thing we can clearly expect going forward is an increase in volatility.  In fact, someone said that Donald Trump is the avatar of volatility, and I think that is such an apt description.  Wherever he goes, mayhem follows.  Now, I also believe that people knew what they were voting for as change was in demand.  But for those of us who pay close attention to financial markets, it will take quite the effort to keep up with all the twists and turns.

Fed speakers are starting to feel
Like they have become a fifth wheel
So, let’s get prepared
For Fed speaking squared
As they work, their views, to reveal

Away from the conundrum above, the other noteworthy thing is that FOMC members are starting to feel left out of the conversation.  Prior to President Trump’s inauguration, market practitioners hung on their every word, and they apparently loved the power that came with that setting.  However, now virtually every story is about the President and his policies with monetary policy falling to a distant issue on almost all scorecards.  Clearly, for a group that had grown accustomed to moving markets with their words, this situation has been deemed unacceptable.  The solution, naturally, is to speak even more frequently, and I fear believe this is what we are going to see (or hear) going forward.  

Yesterday was a perfect example, where not only, on a holiday, did we have multiple speakers, but they actually proffered different messages.  From the hawkish side of the spectrum, Governor Michelle Bowman, the lone dissenter to the initial 50bp rate cut back in September, explained caution was the watchword when it comes to acting alongside President Trump’s mooted tariff and other policies, “It will be very important to have a better sense of these policies, how they will be implemented, and establish greater confidence about how the economy will respond in the coming weeks and months.”  That does not sound like someone ready to cut rates anytime soon.

Interestingly, from the dovish side of the spectrum, Governor Christopher Waller, an erstwhile hawk, explained in a speech in Australia (on the day the RBA cut rates by 25bps for their first cut of the cycle and ending an 18 month period of stable rates) that, “If this wintertime lull in progress [on inflation] is temporary, as it was last year, then further policy easing will be appropriate.”  I find it quite interesting that Governor Waller suddenly sounds so dovish as many had ascribed to him the intellectual heft amongst the governors.  This is especially so given that is not the message that Chairman Powell articulated either after the last meeting or at his Humphrey-Hawkins testimony recently.  

So, which is it?  Is the Fed staying hawkish or are they set for a turn?  That will be the crux of many decision-making processes going forward, not just in markets but also in businesses.  We will keep tabs going forward.

Ok, on to the market’s overnight performances.  Lacking a US equity market to follow, everybody was on their own last night which showed with the mixed results.  Japan (+0.25%) showed modest gains while the Hang Seng (+1.6%) rocketed higher on the belief that President Xi is going to be helping the economy, notably the tech firms in China, many of which are listed in Hong Kong.  Alas, the CSI 300 (-0.9%) didn’t get that memo with investors apparently still concerned over the Trump tariff situation.  Elsewhere in the region, Korea and Taiwan rallied while Australia lagged despite the rate cut.  In Europe, unchanged is the story of the day with most bourses just +/-0.1% different than yesterday’s close.  Right now, in Europe, the politicians are trying to figure out how to respond to the recent indication that the US is far less interested in Europe than in the past, and not paying close attention to financial issues.  As to the US, futures at this hour (7:25) are pointing higher with the NASDAQ leading the way, +0.5%.

In the bond market, yields are climbing led by Treasuries (+4bps) with most of Europe seeing yields edge higher by 1bp or 2bps as well.  Remember, yesterday European sovereign yields rose smartly across the board.  Also, I must note JGB yields (+4bps) which have made further new highs for the move and continue to rise.  It appears last night’s catalyst was a former BOJ member, Hiroshi Nakaso, explained he felt more rate hikes were coming with the terminal rate likely to be well above 1.0%.  While I believe the Fed will be cautious going forward, I still think they are focused on rate cuts for now.  With that in mind and the ongoing change in Japanese policy, I am increasingly comfortable with my new stance on the yen.

In the commodity markets, last Friday’s sell-off in the metals markets is just a bad memory with gold (+0.5%) rallying again and up more than 1% since Friday’s close.  I continue to believe those moves were positional and not fundamental.  Too, we are seeing gains in silver (+0.2%) and copper (+0.6%) to complete the triad.  Meanwhile, oil (-0.25%) continues to lag, holding above its recent lows but having a great deal of difficulty finding any buying impulse.  Whether that is due to a potential peace in Ukraine and the end of sanctions on Russian oil, or concerns over demand growth going forward is not clear to me, but the trend, as seen in the chart below, is clearly downward and has been so for the past year.

Source: tradingeconomics.com

Finally, in the FX markets, the dollar is firmer this morning rising against all its G10 counterparts with NZD (-0.6%) the laggard.  But losses of -0.2% are the norm this morning.  In the EMG bloc, we are seeing similar price behavior in most markets although MXN (+0.2%) is bucking the trend, seemingly benefitting from what appears to be a hawkish stance by Banxico and the still highly elevated interest rate differential in the peso’s favor.

On the data front, Empire State Manufacturing (exp -1.0) is the only data point although we will hear from two more Fed speakers, Daly and Barr.  I cannot believe that they have really changed their tune and expect that caution will remain their guiding principle for now, although I expect to hear that repeated ad nauseum as they try to regain their place in the spotlight.

Aside from my yen view, I still find it hard to be excited about many other currencies for now.  There is still no indication the Fed is going to move anytime soon, and other central banks are clearly in easing mode.  That bodes well for the dollar going forward.

Good luck

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