Tag Archives: #politics

The Doctrine, Donroe

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There once was a time in the past
When Vene-zu-ela was cast
As queen of the ball
With Maduro’s fall
But life around Trump moves so fast
 
He’s already moved to expand
His target to Denmark’s Greenland
The EU’s gone crazy
And called Trump fugazy
While claiming that they’ll take a stand
 
But really, the Doctrine, Donroe
Explains that the US most grow
Its regional strength
And keep at arm’s length
It’s foes from Beijing to Moscow

 

It is truly difficult to keep up with all the things that are ongoing in the world these days as so much is happening so quickly.  It is very easy to understand Lenin’s quote, “there are decades where nothing happens; and there are weeks where decades happen” given recent events.  This is clearly one of the latter weeks.

So, Trump, after successfully taking down Maduro has turned his sights on Greenland, something he has discussed from Day 1 of this administration, but apparently now, there seems to be a willingness to discuss things on the other side.  At the same time, from what I read on X, the city of Abadan in Iran has basically ‘fallen’, at least with respect to the Iranian regime’s control as the police are marching with the protestors now.  The rumors are that the Ayatollah has already made escape plans to Moscow.

From a geopolitical perspective, if Iran sees a regime change, which appears increasingly likely, and if the US throws its support behind the replacement regime, it would appear to be a significant power play against China.  After all, if sanctioned Iranian and Venezuelan oil was no longer being sold on the cheap to China, two places where they receive a significant amount of their daily requirements, (between 20% – 25% according to Grok) it would be a major blow.  

But from our lens in markets, if the Iranian regime falls and sanctions are lifted, suddenly there is much more unsanctioned oil available, and its price is likely to decline further.  This morning, oil (-0.6%) is slipping further after a sharp decline yesterday with Monday’s rally a wispy memory.  I have maintained the trend here remains lower, and that was without government changes in sanctioned nations.  As you can see from the chart below, nothing about this story has changed.

Source: tradingeconomics.com

In the meantime, be prepared for all those who had just shown their new bona fides about Venezuela to be explaining the Greenland story from their newly acquired “deep” knowledge.  This poet certainly doesn’t know enough about Greenland to make any prognostications, but it would not surprise me if within a matter of weeks, we reach an accord with the territory where the US plays a much greater role in its activities while increasing its military presence on the island.  

And to think, we are just finishing the first week of 2026.  Do not be surprised if, as the year progresses, there are more government changes in Europe as the current leadership there has been shown to be weak and ineffective, and an increasing number of people are unhappy with the situation.  While fears over the fall of NATO are rife now, if Germany, France and the UK wind up having snap elections, a distinct possibility at this point, and the new regimes are AfD, RN and Reform UK led, there could well be much greater agreement on the way forward for the alliance.

However, like most of you, I am neither a politician nor geopolitical analyst, I’m just a poet who watches the world and tries to make sense of how it impacts markets.  So, let’s go down that road.

After another strong equity session in the US, where both the DJIA and S&P 500 made new all-time highs, the story in Asia seemed to be one of some early profit-taking after strong rallies.  So, Japan (-1.1%), China (-0.3%) and HK (-0.9%) all slipped during the session with generally less excitement seen overnight than earlier in the week.  India (-0.1%) continues to lag, and while Korea (+0.6%) managed to maintain its upward momentum, the rest of the region was relegated to +/- 0.4% or less in their movement.  

As to Europe, only the DAX (+0.6%) is showing any positivity this morning, mostly on defense names still performing well, while the UK (-0.6%) is lagging after weaker than expected Construction PMI data (40.1 vs. 42.5 exp) and the rest of the continental bourses are little changed overall.  Eurozone inflation was confirmed at 2.0%, cementing the idea that the ECB will remain on hold, so I suspect opportunities here will rely on global trends.  As to US futures, at this hour (7:10) they are mixed, but with movement less than 0.2% in either direction.

In the bond market, yields are sliding around the world, perhaps on the understanding that oil prices are likely to slide given the potential for new, unsanctioned supply hitting the market.  Certainly, there is no indication that government spending anywhere in the world is going to slow down, so that avenue is still closed.  But, recapping, Treasury yields (-3bps) are not declining as much as most of Europe (-4bps to -5bps) or the UK (-8bps after the weak data).  I continue to believe that this year is going to be extremely dull in bond land as central bank support is going to offset additional issuance.

We’ve already discussed oil, but metals, which is where the real action has been, are all lower this morning, very clearly on profit taking activity.  Consider that gold (chart below from tradingeconomics.com) has been the least remarkable and still rallied 4% since the beginning of the year, so slipping -1.2% this morning can be no surprise.

Meanwhile platinum (-6.1%) which is the least liquid of all the precious metals, saw a nearly 20% gain this week prior to today’s decline.  The chart below is not for the faint of heart!

Source: tradingeconmics.com

Silver (-3.1%) is somewhere in between these two, but the story has not changed at all.  There continues to be significant demand for physical metals with paper futures no longer able to control the price action.  One way to follow this is to look at the price on the Shanghai Futures Exchange where it is all delivery settlement and where the price trades at a substantial premium to the COMEX, on the order of $3-$4/oz.

Finally, the dollar is still there, and vs. most of its counterparts, doing very little this morning.  the outlier today is ZAR (-0.5%) which is obviously hurting on the back of gold and platinum’s weakness.  In fact, it is worth looking at the relationship between ZAR and gold, as per the below chart, to help you understand just how closely tied is the price action between the two.

The other currency that has been trending steadily is CNY, with it breaching the 7.00 level at the end of 2025 for the first time since September 2024.  While this trend has been steady for the past year, a look at the longer-term chart shows the renminbi is nowhere near an extreme in either direction. 

Source: tradingeconomics.com

I maintain my view that if China really does create domestic demand for its products, the renminbi will continue this rally and strengthen further.  But we have heard this same story of Chinese government support for the domestic economy for at least a decade, and it hasn’t shown up yet.

On the data front, ADP Employment (exp 47K), JOLTs Job Openings (7.6M), ISM Services (52.3) and Factory Orders (-1.2%, -0.3% ex Transport) are the key releases this morning.  we also get EIA oil inventory data with expectations for a decent build.  There is only one Fed speaker, Governor Bowman, but the Fed just doesn’t seem as important this year as last.

The dollar is not the focus right now, neither are bonds.  Metals remain top of mind with oil a close second.  While recent price action in the former has been extremely volatile, nothing has changed my view that the long-term trend remains higher there.  Similarly for oil, the long-term trend remains lower with recent events simply adding to the weight.

Good luck

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First Black Swan

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‘Ought Twenty-Six barely got started
And Trump has already departed
From previous norms
Of post-Cold War forms
Now socialists are broken-hearted
 
Their man in Caracas is gone
With outrage from Beijing to Bonn
But folks on the street
Believe it’s a treat
Please welcome this year’s first black swan

 

I certainly didn’t have the exfiltration of Venezuelan strongman Nicholas Maduro from his palace in the middle of the night on my bingo card, did you?  But that is what we all woke up to Saturday morning.  In a way, we cannot be surprised as President Trump indicated several weeks ago that he spoke with Maduro, told him if he left, he could have safe passage, and be left alone, but ostensibly Maduro turned him down.  I’m guessing old Nick is questioning that decision right now.

As this all took place Saturday morning, no financial markets, other than cryptocurrencies, are open and based on Bitcoin’s movement of 0.1% as I type, it appears the issue is not seen as a major concern.  There is much discussion regarding what will happen to the price of oil, as unquestionably, Venezuelan oil was part of the decision equation.  But the Venezuelans have been producing less than 1 million bpd, far below their pre-socialist levels, and given they sit on the largest known oil reserves on the planet, far below what their ultimate capabilities can be.  If you’re Chevron’s CEO, you must be thrilled this morning, as they are already operating in country there.

Too, remember that Venezuelan crude is heavy and sour, which is what most Gulf Coast refineries are tuned to utilise to distill diesel, gasoline and other products.  It is too early to know what will happen to oil prices in the short run, but I would suggest that the longer-term view has to be lower prices going forward.  Consider that the US already is the largest producer of oil and oil equivalents (about 20mm bpd) in the world.  I would expect that Venezuela will be exiting OPEC under a new administration there, and with US oil expertise, will be seeking to expand that sector as rapidly as possible.  In fact, achieving 10mm bpd within a few years does not seem unrealistic. 

Now consider that by the end of the decade, the Western hemisphere could well be producing half the world’s oil supply, as already, despite degradation of capabilities in both Venezuela and Mexico, it produces more than one-third of the oil pumped.  That would certainly put a crimp in Russia’s war machine as the price seems far more likely to head toward $50/bbl than $80/bbl or higher, and by all accounts, that would be hard on Russia’s budget.

Too, consider the geopolitical ramifications if China were suddenly paying full price rather than whatever discounts they currently get for sanctioned oil purchases.  As well, what does a lower price do to the Iranian regime’s finances?  Probably not very helpful.

It is way too early to know how things will evolve, but between growth in production in Guyana and Argentina, and the prospects for significant growth in Venezuela going forward, it should become cheaper to fill up your tank going forward.

We will see how markets open Sunday night, and I would not be surprised to see oil rally at the start, but I would contend the politics points to lower prices not higher ones.  

Source: visualcapitalist.com

Note that neither Venezuela nor Argentina make this list individually.   I would wager that by 2027, both will be prominent producers, along with Guyana.

Welcome to 2026!  It is going to be an interesting year.

Good luck

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A Vision For ‘Twenty-Six

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(With apologies to Clement Clarke Moore)

Tis the first day of trading in Ought Twenty-Six
With too much attention on raw politics
At home, eyes have turned to the mid-term elections
To see if results will force mid-course corrections
In Europe, they’re going all-in on Ukraine
With more billions promised, though that seems insane
Meanwhile, Mr Xi is convinced he can fix
The problems at home with his policy mix
And this, my friends, just skims the surface of things
As pols everywhere suffer arrows and slings
Remember, though, markets are what I’m about
And while I could err, I am never in doubt.

Let’s start at the top with Growth here in the States
Which likely will show more than marginal rates
In fact, Four percent seems a viable goal
As inward investment and tax cuts take hold
Remember, for Trump, if there’s one thing he’s not
It’s timid, and so he’ll demand, “Run it hot!”
Thus, growth will expand, though inflation might gain
And for the elections, that could be a pain
The problem is Jay, and whoever comes next
Have come to believe two percent’s just subtext
The greatest unknown is on government spending
And whether it grows or, at last, starts descending

The punditry’s certain the government fisc
Is going to increase inflation’ry risk
If true, CPI of near Four percent’s apt
If not, then Inflation ‘neath Three, could be capped

And what about elsewhere, in Europe? Japan?
In markets, emerging, do they have a plan?
Will they grow their ‘conomies, drawing investment?
Or will we soon witness a large reassessment?

In Europe, they claim they’ll be building more guns
To help them defend all their daughters and sons
As well, they’re committed to helping Ukraine
Continue to fight, despite so many slain
They’re planning to borrow a cool 90 Bill
But energy costs, these grand plans could well kill
Meanwhile, M Lagarde claims that rates are just right
And given growth there’s One Percent, I won’t fight
So, weak growth and low rates and energy blues
Lead me to believe that come year-end, the news
Will be that the Euro is failing to thrive
Do not be surprised when it hits One oh-Five

In England and Scotland and all the UK
Just like in the EU, they can’t make much hay
The budget’s a wreck yet they want to raise taxes
Though history shows growth will wane ere it waxes
As well, they continue their crack down on speech
While crimping their energy industry’s reach
So, power is costly, and billionaires flee
From here, ‘cross the pond, this is what I foresee
A ‘conomy heading right into stagflation
As long as Kier Starmer is leading the nation
For markets, the Pound will lose all its allure
With One-Ten the Boxing Day screen price du jour

A turn to the East where the Sun Also Rises
Will teach us that, really, there are no surprises
To date you’ve heard much ‘bout the rise in yen rates
With pundits opining the Carry Trades’ fates
This year, so they say, look for much stronger yen
As local investors buy yen bonds again
Thus, all the hedge funds who’ve been funding their trades
By borrowing yen, and they’ve done so in spades,
Will need to buy back all that Japanese Money
The outcome, for yen shorts, will not be so sunny
But what if this idea of yen heading home
Is wrong?  This implies quite a different syndrome

At this point there’s no sign the government there
Is ready, more spending and debt, to forswear
Instead, what seems likely is more of the same
More government spending in all but its name
So, debt will continue to rise without end
And up to One-Eighty the buck will ascend

As well as Japan, in the continent vast
Of Asia, it’s China we come to at last
“Poor” President Xi has a problem at home
Consumption is not in the Chinese genome
For decades, the model’s been, build and export
Which helps explain why local usage falls short
But lately the rest of the world’s of a mind
That Chinese imports are a troublesome kind
So, Xi needs his people to learn how to spend
Else all that production may come to an end
But if they consume, what will that do to growth?
Its rate will decline, something for which Xi’s loath

Thus, GDP 5 means a weaker yuan
Well above Seven you can depend on
But if, against odds, Xi gets Chinese to spend
Six-Fifty is where yuan will be at year end.

Let’s shift our perspective to Treasury debt
A market of critical import, and yet
A market that’s been in a range for a while
So, what must occur for a change in profile?
The popular view is that deficit spending
Will drive an outcome of, high yields, never-ending
But Trump and his team are, quite hard, pushing back
Explaining that policy’s on the right track
Twixt tariffs and growth, tax receipts have been flying
While RIFs in the government are underlying
The idea that deficits soon will be shrinking
In truth, this is not what the punditry’s thinking
But one thing is clear that will keep yields from climbing
QE, which is back, is designed for pump-priming
So, Jay and his heir will keep buying and buying
And 10-Years at Four Percent seems satisfying

It’s not just the government, though, that’s in debt
Those corporates who borrowed at ZIRP, have not yet
Refinanced the trillions they owe, to this day
And now they’re competing with Bessent and Jay
While Scott will find buyers, if not least the Fed
For corporates that path may be flashing bright red
If credit spreads widen will companies fail?
And will that unravel the stock markets’ tale?
Right now, spreads for IG sit near one percent
And Junk’s above eight with investors content
However, the biggest risk this year could be
The absence of corporate debt liquidity
If IG spreads widen 200 bps more
The outcome could be a GFC encore

This takes us to stocks, both at home and abroad
Which last year saw rallies we all did applaud
But will this year bring us some more of the same?
Or have things been altered?  Is there a new game?
If my crystal ball is in any way clear
The outcome could well be a frightening year
Remember, the driver of last year’s returns
Was government spending which lacked all concerns
Thus, Cantillon nailed it with where cash would go
And stocks were the winner, of that much we know
But this year the mountain of debt coming due
Could well force decisions of what will ensue
And too, don’t forget if the deficit shrinks
It’s likely to be a great stock market jinx
So, don’t be surprised if December this year
A 10% fall ‘cross all stocks does appear

And what of that black, sticky stuff that they drill
Which powers the global economy still
When its price increases, it causes much pain
For most everyone, it can be quite the bane
Consumers, instead, like those prices to sink
But drillers, in that case, cause output to shrink
So, which will it be, will Trump’s mantra come true
Or will, new production, most drillers eschew
I think what is missed is technology’s traction
And how costs per barrel will tend toward contraction
As well, nations worldwide, at last understand
That Carbon Dioxide just cannot be banned
Come Christmas, next, we will see growth in supply
With Fifty per barrel the price we’ll espy

The last place to look is at bright things that shine
Which saw prices move in a vertical line
While gold was the starter, by year end t’was clear
That silver and platinum said, wait, hold my beer
The latter two rising thrice fifty percent
With neither responding to any event
Which brings us to this year, can these trends maintain?
Or are we now set up for infinite pain?
It seems to me that til the summer at least
All three will continue to rise, as with yeast
But when we reach solstice do not be surprised
If views on their future become bastardized
In other words, look for corrections in price
With early year gains given back in a trice
But still, by the end of the year I believe
Five Thousand in Gold is what we will perceive
For Silver, One Hundred could well be the spot
And Platinum, Three Grand, would not be too hot.

To all of my readers and friends, please forgive
My musings if they got too ruminative
This year will see change across many degrees
And some will be painful, while others will please

In sum, I think President Trump can succeed
In changing behavior, though not corporate greed
Reducing the number of government staff
As well as with regs, he can cut those in half
Inward investment will focus on stuff
Instead of on stocks, for the markets that’s rough
Dollars will still be in greater demand
While Treasury yields will be stuck in the sand
IG and Junk are unlikely to win
As rising expenses cut margins quite thin
And still, through it all, precious metals will gain
Though G7 central banks all will abstain
Come Christmas next, nothing will look quite the same
And maybe my views can help you build a frame.

Thank you all for tolerating my punditry and I hope that you all have a wonderful, healthy and successful year ahead.

Adf

Splitting More Hairs

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The data continues to be
Uncertain, and so what we see
Is both bulls and bears
Just splitting more hairs
Til markets reach their apogee
 
Meanwhile, throughout Europe concern
Is building, that no one did learn
Their energy dreams
Are nought but grift schemes
And growth’s in a long-term downturn

 

Once again, macroeconomic stories are light on the ground with no overarching theme atop the headlines.  As data continues to be released in the US post the government shutdown, we are seeing a similar pattern as before the shutdown, namely lots of conflicting data.  Yesterday was a perfect example as ADP Employment data was far weaker than expected printing at -32K (exp +10K) and indicative of a slowing economy.  At the same time, ISM Services showed unexpected strength, printing 52.6 with every sub indicator printing higher than last month except prices, which slipped 5 points.  While there was September IP and Capacity Utilization data, given it was so old, it just didn’t seem relevant.  

Depending on your underlying view, it was once again easy to point to recent data and make either the bull case on the economy and stocks or the bear case.  But there’s more.  A look at the last 5 years of ADP data shows a very distinct downward trend in employment as per the below.

Source: tradingeconomics.com

But as with so many things in the economy lately, it is fair to ask if the data we have known in the past is reflective of the current economic situation.  After all, if the Trump administration has deported 500K individuals, and another 1.5 million have self-deported, as the administration claims, it ought not be surprising that employment numbers are declining.  The implication is that population is declining, which would make sense.  So, I ask, does the declining ADP data signal what it did 5 years ago or 10 years ago?  I don’t believe the answer is that straightforward.

One of the things that has concerned me lately is the measurement of GDP.  My thesis has been that counting government spending in Keynes’s equation Y = C + I + G + (X-M) is double counting because, after all, if the government spends money, it goes into the economy and is recorded by the people/companies who receive it.  But perhaps my queasiness over the GDP idea is caused by something else instead, the fact that GDP measures credit creation, not economic activity.  This article by Alasdair Macleod, a pretty well-known economic analyst with a long career observing markets and economies, does an excellent job of identifying some really interesting problems that get accepted and assumed by many in their analysis of the current situation.  

For a while we have all seen, and probably felt, there is a disconnect between the data published and the feeling we get with respect to the current situation.  I highlighted the cost-of-living problem last week with the Michael Green articles.  This is another arrow in the quiver of things are not what they appear and that’s why so many people are so unhappy (even taking away TDS).

For me, where I try to synthesize a market view based on the information available, it is a very difficult time because of all the inconsistencies relative to what I have known in the past.  As well, I am being forced to reconfigure my mental models as the world has changed.  I suggest everyone do the same, as there is no going back to pre-Covid, let alone pre-GFC.

But the US is relatively well-off compared to most of the rest of the G10 as evidenced by this morning’s Eurozone data where Construction PMIs were, in a word, dreadful as can be seen below:

Source: tradingeconomics.com

No matter how you slice it, the fact that every reading is below 50 is a telling statement on the economic situation in Europe.  Adding to this problem is the fact that it appears, the EU, under the guidance(?) of President Ursula von der Leyen, is getting set to force the appropriation of Russian assets that were frozen at the outset of the Ukraine war, an act that Russia has indicated would, itself, be an act of war and they would respond in kind.  The US has unequivocally said they will not defend Europe if that is their decision, although we will continue to sell them weapons.  

For 80 years, NATO has been the defense umbrella allowing Europe to spend their money on butter, not guns.  Despite all the plans of rearmament, if Europe goes down this road, I suspect that there is nothing they can do to defend themselves without the US.  Once again, it is difficult to look at fiat currencies around the world, especially in Europe, and think they have more staying power than the dollar.  

Ok, let’s tour markets.  A solid day in the US was followed by strength virtually across the board in Asia (Japan +2.3%, HK +0.7%, China +0.3%) with the rest of the region +/- 0.3%, so not overwhelmingly positive or negative.  The Japanese outlier was based on news about Fanuc signing a deal with Nvidia to make AI industrial robots and that took the whole tech sector in Tokyo higher.  In Europe, green is also today’s theme as despite the weak data shown above, we started to get the first hints that the ECB may consider rate cuts after all.  While Madame Lagarde has been on her high horse saying there is no need to adjust rates, Piero Cipollone, a board member has highlighted concerns over further potential economic weakness going forward.  I look for others to come to the same conclusion and talk of an ECB cut to start to increase although swaps markets do not yet reflect any changes.  And at this hour (7:40) US futures are pointing slightly higher, 0.15% or so.

In the bond market, Treasury yields are reversing some of yesterday’s modest decline, rising 2bps this morning and that has helped pull European sovereign yields higher by similar amounts across the board.  The one exception here is UK gilts, which given the ongoing weak data seem to be anticipating a greater chance of a BOE cut than before.  in Asia, JGB yields rose 4bps and now sit at 1.93%, a new high for the move, but there is no indication we are near a top.  There is growing confidence the BOJ will hike rates later this month, although I would expect that should help slow the rise as at least it will have a modest impact on inflation readings going forward.

In the commodity markets, oil (+0.5%) continues to chop back and forth making no new ground in either direction.  Stories about peace in Ukraine don’t seem to matter much, nor do stories about a US invasion of Venezuela.  In fact, nothing seems to matter too much to this market other than actual supply and demand, and that seems pretty balanced, at least as evidenced by  the fact that for the past 2+ months, we have gyrated either side of $60/bbl with no impetus in either direction.  (see below)

Source: tradingeconomics.com

Metals markets are slipping a bit this morning (Au -0.25%, Ag -1.8%, Cu -0.6%) but that is simply part of the recent consolidation.  After all, metals have rallied forcefully all year, so taking a breather is no surprise. 

Finally, the dollar is a nonevent today with the most noteworthy story the news that the PBOC fixing last night was 160 pips higher (weaker CNY) than forecast by the market.  As well, there have been several stories that Chinese state-owned banks are buying dollars in the market to help slow down the yuan’s recent appreciation.  I discussed the yuan yesterday so this should be no surprise.  The tension on China to maintain a weak enough currency to support their export industries is huge, so a quick appreciation would be extremely negative for the nation’s trade balance and economic activity.

On the data front, Initial (exp 220K) and Continuing (1960K) Claims lead us off and then Factory Orders from September (0.5%) come at 10:00.  There are still no Fed speakers, so markets remain subject to headline risk, notably from the White House.  As we are in December, my sense is that things will become increasingly uninteresting from a market perspective absent a major new event.  While price action will likely remain choppy, it is hard to see a major directional move until next year.

Good luck

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The Narrative’s Turned

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Last Friday it certainly seemed
The bears had achieved what they’d dreamed
Most bulls were in hell
As stock markets fell
While bears felt that they’d been redeemed
 
But since then, the narrative’s turned
And short-sellers all have been burned
In fact, round our sphere
Investors all cheer
For Jay to cut rates, Fed hawks spurned

 

The holiday spirit is alive and well this morning, and in truth has been all week.  And not just in the US, but around the world.  Literally, I am hard-pressed to find a stock market that has declined in the past twenty-four hours, with most on multi-day rallies.  And so, I must wonder, has everything really gotten that much better in the world?

A quick tour around the world of problems extant includes:

  • Russia/Ukraine war
  • Chinese property deflation
  • Net zero insanity
  • TDS
  • K-shaped economies
  • Rise of Socialism
  • Excessive global debt/leverage
  • Cost of living

I’m sure there are others, but I just wanted to touch on a few and try to figure out why investors have turned so positive.  After all, a look at the S&P 500 chart below shows that we are less than 2% from the historic highs set back on October 29th.

Source: tradingeconomics.com

So, let’s run through the list.

  • The war in Ukraine continues apace, although we cannot ignore the uptick in ostensible peace talks that have been occurring in the past week.  I’m game to accept those talks as a positive.
  • The Chinese economy continues to overproduce amid weakening domestic demand as property prices show no signs of bottoming.  This is one of the major reasons for the massive global imbalances we have experienced over the past two decades and President Xi has basically proven that they only model he understands is mercantilism.  With President Trump addressing that directly, this will continue to generate uncertainty and volatility, so there will be up days, but also plenty of down ones.
  • The ongoing waste of resources in this Quixotic effort, especially by the Europeans will serve only to further depress their economies while adding debt to pay for their ill-advised policies.  As long as this continues, Europe will be poorer in the future and that doesn’t bode well for their equity markets.
  • Nothing will change TDS but its bifurcation of the population, and not just the US but globally, is likely to be a net negative for everything.
  • The K-shaped economy is a major problem, and not one restricted to the US.  As long as this remains the case, it will breed social unrest, as we continue to see, and have encouraged policies that have proven time and again to be disastrous, but sound good to those in the bottom leg of the K, i.e. Socialism.  I assure you, Socialism will not enhance market capitalization.
  • See above
  • The global debt problem continues to hang over the global economy like the Sword of Damocles, ready to decimate economies with just the right (wrong?) catalyst.  Of course, this is why rate cuts are so favored, and QE more so, but while those may be solutions for government accounts, they will simply exacerbate the last on this list
  • I specifically point to the cost of living since the economists’ concept of inflation, the rate of change of prices, is irrelevant to most people.  The price level is the key, and there is no world where the price level will decline absent a major depression, which is why run it hot is the favored plan.  If growth can be raised sufficiently so that people believe life is affordable again, it will alleviate the K-shaped problem as well as the socialism problem.  But that is a big IF.

And yet, as you can see from this screenshot from Bloomberg.com, as I type, every market is in the green.

My conclusion is that either investors have grown to believe that the key short-term problems, like Russia/Ukraine will be effectively addressed, or under the guise of YOLO, they are all in on AI and the stock market and see it as the only way forward.  I wish I could be so sanguine, but then I am just an old misanthrope.  I hope they are right!

Ok, well, absent any real new news, and leading up to the Thanksgiving holiday here in the US, market signals are telling me everything is right with the world.  You see the equity markets above, and US futures are higher as well at this hour (7:30), albeit only about 0.2%.  

In the meantime, with risk in such demand, it is no surprise that bond yields are edging higher with Treasuries +2bps, after trading below 4.0% during yesterday’s session on a weak ADP weekly employment report (-13.5K) as well as PPI data that seemed less concerning.  European sovereign yields have all edged higher by 1bp this morning, again synchronous with risk on, and JGB yields also edged higher by 1bp after the government there explained they would be borrowing ¥11.5 trillion (~$73.5 billion) in extra debt to fund Takaichi-san’s supplementary budget.  The big outlier is Australia, where AGBs rose 10bps after CPI rose a hotter than expected 3.8% in October, not only putting paid any thoughts of a further rate cut but bringing rate hikes back into view.

In the commodity markets, oil (-0.2%) continues to slide lower, now below $58/bbl, and following its recent trend as per the below tradingeconomics.com chart.

Javier Blas, the widely respected Bloomberg oil analyst, put out an op-ed this morning explaining that he saw higher oil prices in the future.  That is at odds with my view, but I have linked it here so you can help determine if his reasons make sense.  I believe he underestimates both the impact of technology making it ever cheaper to get oil, and the political incentives to drill for more of the stuff by those nations that have it.  Net zero will not survive much longer in my view.

In the metals markets, prospects for lower interest rates have helped encourage further buying and this morning we see the entire complex higher (Au +0.7%, Ag +1.5%, Cu +1.3%, Pt +1.0%).  To the extent that the leverage story remains, and governments are going to continue to print money to pay their debts, metals prices across both precious and base, should continue to appreciate in price.

Finally, the dollar, which slipped a bit yesterday, is mixed this morning.  the yen (-0.3%) is sliding along with KRW (-0.6%), but really, there seem to be more gainers than that.  The biggest mover was NZD (+0.8%) after the RBNZ cut its base rate, as expected, but indicated the cutting cycle is over.  AUD (+0.3%) has also rallied on that inflation report.  I haven’t focused much on the renminbi (+0.1%) lately, largely because the daily movement is typically small, but if you look at the chart below, you can see that the trend has been steady all year, with CNY appreciating nearly 4% since the beginning of the year.  There are many analyses that indicate the renminbi is massively undervalued, so perhaps this is part of the trade deal with the US.  But it will be difficult for Xi to countenance too much strength as it will negatively impact his mercantilist policies.

Source: tradingeconomics.com

Lastly, the pound is gyrating this morning as Chancellor Rachel Reeves offers her budget.  The highlights are a larger than expected fiscal buffer of £22 billion achieved by raising taxes by more than £29.8 billion on gambling and real estate.  However, the recent history of tax hikes in the UK, as they try to tax the wealthy, is that the wealthy simply leave and the result is tax deficits.  Maybe it really is different this time!

And that’s what we have going into the weekend.  Data today brings September Durable Goods (exp 0.3%, 0.2% ex transport), Initial Claims (225K), Continuing Claims (1975K) and Chicago PMI (44.3).  I see no reason for this recent rebound to end as clearly everybody is feeling good into the holiday.  As I highlighted above, there remain myriad problems around, none of which will be solved soon, but apparently, that doesn’t matter.  So go with it!

There will be no poetry tomorrow or Friday so Monday, we will see how things have evolved.

Good luck and have a great holiday weekend

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Rare Earths No More

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Said Xi, we’ll sell rare earths no more
Said Trump, well that means we’re at war
The stock market puked
As traders got spooked
And Trump imposed tariffs galore
 
The question is just why would Xi
Get feisty when things seemed to be
Improved for both sides
With fewer divides
Did Mideast peace kill his esprit?

 

Let’s talk about markets for a moment.  Sometimes they go down and go down fast when you’re not expecting it.  That is their very nature, so it is important to understand that Friday’s price action, while dramatic relative to what we have seen over the past 6 months, is not that uncommon at all over time.  It appears the proximate cause of the market decline was the word from China that they would stop selling and exporting rare earth minerals. 

It can be no surprise that President Trump immediately responded by threatening an additional 100% tariffs on all Chinese exports and new controls on software, all to be implemented on November 1st.  There is a lot of tit-for-tat in the dueling messages from China and the Trump administration and it is hard to tell what is real and what isn’t.  However, equity markets clearly weren’t prepared for a break in the previous expectations that the US and China were closing in on a more lasting trade stance.

But weekends are a long time for markets as so much can happen while they are closed.  This weekend was a perfect example.  After the carnage on Friday, we cannot be that surprised that both sides of this new tiff modified their responses.

First we saw this on Truth Social:

Then China backed off clarified that what they are really doing is require licensing for all rare earth minerals and products that contain them in exports.  China claims that applications that meet regulations will be approved although the regulations have not yet been defined. Ostensibly this is for national security reasons, and it is unclear exactly who will receive licenses, but this is clearly not the same as ending exports.  

And just like that, many of the fears that were fomented on Friday have been alleviated as evidenced by this morning’s equity market moves in the futures markets.

Source: tradingeconomics.com

But why did Xi make this move in the first place?  I have no idea, nor does anyone but Xi, although here are two completely different thought processes, one very conspiratorial and one rooted in the broader escalation of geopolitical affairs.

As to the first, (Beware, you will need your tinfoil hat here!) consider if the Israel-Gaza peace settlement, (with the hostages returned as of the time I am writing this morning at 5:30) does not serve China’s interest.  First, the one Middle East nation that will be on the outside is their ally, Iran.  Second, the ongoing problems there were always a distraction for the US, something that clearly suits Xi and China.  After all, if the US is focused there, they will have more difficulty paying attention to things Xi cares about like Taiwan and the South China Sea.  If the peace in Israel-Gaza holds, and the Abraham Accords extend to the bulk of the rest of the region, Xi loses a major distraction that cost him virtually nothing.  Plus, this opens the door for tightening sanctions on Iran even further, which could negatively impact China’s oil flows.  

The second is much more esoteric and I read about it this weekend from Dr Pippa Malmgren, someone who has a deep insight into global politics from her time as a presidential advisor as well as from her father, Harold Malmgren, who advised four presidents.  In her most recent Substack post she explained the importance of Helium-3 (3He), a rare isotope of helium that has major energy and military implications and where the largest deposit of the stuff known to man is on the moon.  Her claim is this is the foundation of the recent acceleration in the space race between the US and China and without rare earth minerals, the US ability to achieve its goals and obtain this element would be greatly hampered opening the door for China to get ahead.

Are either of these correct?  It is not clear, but I would contend each contains some logic.  In the end, though, as evidenced by the quick retreat on both sides, I suspect that the trade situation between the US and China will move forward in a positive manner, although there could well be a few more hiccups along the way.  And those hiccups could easily see equity markets decline such that there is a real correction of 15% to 20%.  Just not today.

So, what is happening today?  Let’s look.  First, I would be remiss if I didn’t highlight the following Bloomberg headline: ‘Buy the Dip’ Call Grows Louder as China Selloff Seen Contained, as it perfectly encapsulates the ongoing mindset in equity markets.  At least in US equities.  Asia had a much rougher session despite the backtracking with HK (-1.5%) and China (-0.5%) under pressure and weakness virtually universal in the time zone (Korea -0.7%, India -0.2%, Taiwan -1.4%, Australia -0.8%). Tokyo was closed.  It appears there are either still concerns over the trade situation, or perhaps the fact that globally, markets have had long rallies has led to some profit taking amid rising uncertainties.  

European bourses, though are all in the green, with the continent seeing gains of 0.5% or so across the board although the UK is lagging with a miniscule 0.05% gain at this hour (6:30).  As to US futures, as seen above, gains range from 1.0% (DJIA) to 2.0% (NASDAQ).

Meanwhile, bond yields also saw a dramatic move on Friday, tumbling -8bps and back to their lowest level seen in a month as per the below chart from tradingeconomics.com

This morning, those yields are unchanged.  European sovereign yields, which followed Treasury yields lower on Friday are also little changed at this hour, down another -1bp as concerns begin to arise that economic growth is going to be impaired by the escalation in trade tension between the US and China.  

I would argue that commodities are the one area where the back and forth is raising the most concern.  At least that is true in metals markets, with gold, which rallied 1% Friday amid the equity carnage, higher by another 1.6% this morning, to more new highs and we are seeing silver (+1.6%), copper (+4.2%) and Platinum (+3.6%) all in sync.  To me, this is the clearest indicator that there is an underlying fear pervading markets.  Oil (+1.8%) has rebounded from Friday’s rout as the easing of trade tensions appears to have calmed the market somewhat, although WTI remains just below $60/bbl at this point.  

Finally, the dollar is firmer again this morning as, although it softened slightly Friday, it has since regained most of those losses and is back on its recent uptrend as you can see below.

Source: tradingeconomics.com

While Tokyo was closed overnight, we did see further JPY weakness as the yen retraced most of its Friday gains like the rest of the market.  The biggest G10 mover was CHF (-0.9%) followed by AUD (-0.7%) and JPY (-0.7%) with other currencies less impacted and NOK (+0.2%) benefitting from the oil rally.  However, the EMG bloc has seen a much wider dispersion with MXN (+0.5%), ZAR (+1.1%) and CLP (+0.8%) all rallying sharply on the metals rally while PLN (-0.5%) and CZK (-0.4%) lag as they follow the euro lower.

And that’s enough for today.  With the government still on hiatus, no official statistics will be released although we do get a little bit of stuff as follows:

TuesdayNFIB Small Business Index100.5
WednesdayEmpire State Manufacturing-1.8
 Fed’s Beige Book 
ThursdayPhilly Fed Manufacturing9.1

Source: tradingeconomics.com

But, with the lack of data, it appears Chairman Powell has instructed his minions to flood the airwaves with a virtual cacophony of speeches this week, I count 18 on the calendar including the big man himself on Tuesday afternoon.  It seems difficult to believe that their opinions on the economy will have changed very much given the lack of new data.  The market is still pricing a 98% chance of a cut at the end of this month and another 91% chance of a cut in December.  With the increased trade tension, there is much more discussion regarding a slower economic course ahead, which would play into further rate cuts.  However, while that would clearly help precious metals as it ends any ideas of an inflation fight, it is not clear it will weaken the dollar very much as everybody else will almost certainly follow along.

Good luck

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The Winds of Change

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Takaichi-san
Her pronouns so very clear
Brings the winds of change

 

Japan has a new Prime Minister, Sanae Takaichi, the first woman to hold the position.  She was deemed by most of the press as the most right-wing of the candidates, which fits with a growing worldwide narrative regarding nationalism, antagonism toward immigration and concerns over China and its plans in the region.  However, in the waning days of the campaign, she moderated a number of her stances as she does not have a majority in either house of the Diet, and will need to persuade other, less rigid members to vote with her in order to pass legislation.

However, the initial market response has been remarkable.  The Nikkei opened in Tokyo +5.5% and held most of those gains, closing higher by 4.75%.  USDJPY gapped 1.3% on the Tokyo opening and is currently higher by 2.0% and back above 150.  Perhaps the most interesting thing is that despite dollar strength, the precious metals have roared higher with both gold and silver gaining 1.4% as gold touches yet another new all-time high and silver pushes ever closer to $50/oz. Meanwhile, JGB yields are little changed as I imagine it will take a few days, at least, for investors to get a better sense of just how effective she will be at governing in a minority role.

Below is the chart for USDJPY, demonstrating just how big the gap was.  This appears to be another chink in the ‘end of the dollar’s dominance’ armor.  Just sayin’!

Source: tradingeconomics.com

In Europe, the powers that be
Have found citizens disagree
With most of their actions
Thus, building up factions
That want nothing but to be free
 
The most recent story is France
Where Macron’s PM blew his chance
He’s now stepped aside
But Macron’s denied
He’ll willingly exit the dance

However, the dollar’s gains today are not merely against the yen, but also, we have seen the euro (-0.7%) slide sharply with the proximate cause here being the sudden resignation of French PM LeCornu.  And the reason it seems like it was only yesterday that France got a new PM after a no-confidence vote in September, is because it basically was only yesterday.  PM LeCornu lasted just one month in the role as President Macron didn’t want to change the cabinet there, thus making LeCornu’s job impossible.  While the next presidential election is not scheduled until April 2027, and Macron is grasping to his role as tightly as possible, it appears, at least from the cheap seats over here in the US, that the vote will happen far sooner than that.  He appears to have lost whatever credibility he had when first elected, and France has now had 4 PM’s in the past twelve months, hardly the sign of a stable and successful presidency.

Like the bulk of the current European leadership, Macron has decided that nearly half the country should not have their voices heard by banning Madame LePen’s RN from government.  And while President Biden was never successful imprisoning President Trump, in France, they managed to convict LePen on some charge and ban her from running.  But that has not dissuaded her followers one iota.  We see the same behavior in Germany with AfD, and the Merz government’s attempts to ban them as a party, and similar behavior throughout Europe as the unelected Brussels contingent in the European Commission struggles to do all they can to retain power.

In fact, if you look at the most recent polls I can find for France, from Politico, you can see that RN, LePen’s party, is leading the polls while ENS, Macron’s centrist party has just 15% support.  The far left NFP is in second place and the center-right LRLC is at 12%.  It is difficult for me to believe that Macron can hold on until 2027, at least 18 months away, and if he does, what type of damage will he do to France?

The point of the story is that whatever you may think of Donald Trump, he has the reins of government and is doing the things he promised on the border and immigration, reducing government and reducing regulations.  In Europe, the entrenched bureaucracy is fighting tooth and nail to prevent that from happening with the result that economic activity is suffering and prospects for future growth are stunted.  And all that was before the US change in trade policy.  With that in mind, absent a massive Fed turnaround to dovishness, which doesn’t seem likely in the near term, the euro has more minuses than pluses I think and should struggle going forward.

Ok, two political stories are the driver today, and neither one has to do with Trump!  Meanwhile, let’s look at how everything else has behaved overnight.  Friday saw a mixed session in the US, and all I read and heard over the weekend was that the denouement was coming, perhaps sooner than we think.  The recurring analogy is Hemingway’s description of going into bankruptcy, gradually, then suddenly, and the punditry is trying to make the case that the ‘suddenly’ part is upon us.  I’m not convinced, and would argue that, at least in the US, things can go on longer than they should.  This is not to say the US doesn’t have serious fiscal issues, just that we have better tools to address them than anyone else.

Elsewhere in Asia, China is still on holiday while HK (-0.7%) could find no joy in the Japanese election.  But Korea (+2.7%), India (+0.7%) and Taiwan (+1.5%) all rallied nicely with only the Philippines (-1.8%) showing contrary price action as investors grew increasingly concerned over a growing corruption scandal with the government there and infrastructure embezzlment allegations.  I didn’t mention above but the rationale behind the Japanese jump is that Takaichi-san is expected to push for significant fiscal expansion on an unfunded basis, great for stocks, not as much for bonds.

In Europe, though, you won’t be surprised that France (-1.6%) is leading the charge lower, although in fairness, the rest of the continent is doing very little with the other major exchanges +/- 0.1% basically.  As to US futures, at this hour (7:15), they are all pointing higher by 0.5% or so.

In the bond market, Treasury yields have moved higher by 4bps this morning, adding to a similar gain on Friday as it appears there are lingering concerns over what happens with the government shutdown.  (Think about it, that issue hasn’t even been a topic of discussion yet this morning!). But remember, the government shutdown does not impact the payment of coupons on Treasury debt, so the issues are very different than the debt ceiling.  As to European sovereigns, not surprisingly, French OATs are the wors performers, with yields jumping 8bps (they have real fiscal problems) but the rest of the continent has tracked Treasury yields and are higher by 3bps to 4bps as well.

I’ve already highlighted precious metals, although copper (-0.7%) is bucking the trend, albeit after having risen more than 10% in the past month.  Oil (+1.4%) is also continuing to bounce off the bottom of the range trade and remains firmly ensconced in the $61.50 to $65.50 range as it has been for the past six months.  In fact, looking at the chart below from Yahoo finance, you can see that except for the twelve-day war between Israel and Iran, nothing has gone on here.  The net price change in the past six months has been just -0.19% as you can see in the upper left corner.  While this will not go on forever, I have no idea what will break this range trade.

Finally, the dollar is stronger across the board with the pound (-0.4%) and SEK (-0.5%) the next worst performers in the G10 while CAD and NOK are both unchanged on the day, reflecting the benefits of stronger oil and commodity prices.  In the EMG bloc, the CE4 are all softer by between -0.6% and -0.9%, tracking the euro, and we have seen APAC currencies slip as well (KRW -0.5%, CNY -0.15%).  MXN (-0.2%) and ZAR (-0.3%) seem to be holding in better than others given their commodity linkages.

And that’s all we have today.  With the shutdown ongoing, there are no government statistics coming but we will hear from 8 different Fed speakers, including Chairman Powell on Thursday morning, over a total of 15 different venues this week.  Again, there is a wide dispersion of views currently on the FOMC, so unless we start to see some coalescing, which given the lack of data seems unlikely in the near term, I don’t think we will learn very much new.  As far as the shutdown is concerned, the next vote is scheduled for today, but thus far, it doesn’t seem the Democratic leadership is willing to change their views.  Funnily, I don’t think the markets really care.

Overall, I see more reasons to like the dollar than not these days, and it will take a major Fed dovish turn to change that view.

Good luck

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No Cash Left in the Fisc

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Right now, markets keep taking risk
And lately, the pace has been brisk
But coming next week
We could see a peak
If there’s no cash left in the fisc
 
A government shutdown would raise
Concerns about ‘nomic malaise
As well, what I see
Is Trump’s OMB
Is planning a RIF anyways

 

Volatility remains absent from most markets these days, metals excepted, and given the dearth of data until tomorrow’s PCE report, the focus is beginning to turn elsewhere.  Perhaps the biggest story developing right now is the potential US government shutdown if no continuing resolution is passed by Congress.  The government’s fiscal year runs from October 1 through September 30, and the rules are if Congress hasn’t passed appropriations bills by the end of the fiscal year, nonessential services are ended, and government employees are furloughed until that process is completed.  As of right now, the House of Representatives has passed a clean bill, meaning it continues spending at the current rate, and we are all awaiting on the Senate.  However, the Senate needs 60 votes to pass it to overcome the filibuster and right now, the Democratic Minority Leader, Chuck Schumer, claims they will not support the bill.

First, understand this is not unprecedented.  In fact, according to Grok, it has happened 21 times since 1980 with the longest being 35 days in 2018-19 over funding for the border wall.  Now, I ask you, can anyone remember the impact of any of those shutdowns, which in fairness typically last less than a week?  

Next, it is worth understanding what actually happens during a shutdown.  National Parks are closed, while passport services, HUD services, SBA services, scientific research and EPA inspections are the type of things that are put on hold.  Also, the BLS will pause data collection and calculations, although given their recent track record, that may be seen as a benefit!  But things like Social Security, Medicare, Medicaid and the Military are all unaffected.

Naturally, there is a lot of politicking ongoing with this process and apparently, President Trump has given marching orders for departments to begin a RIF if the government is shut down.  So, when things reopen, there will be fewer federal employees, one of the goals of this administration, and something that is anathema to his opponents.

From a market perspective, the impact on equity markets during the December 2018 – January 2019 shutdown was actually a rally of just over 10%, although the market did decline in the month leading up to the shutdown.  My point is, there is a lot more politics than economics in this process.

But away from that story, commodities remain the market with the most interest as oil (-0.5%) continues to trade within the range I highlighted earlier this week with a top at $65.50, but has made a technical break above its 50-day moving average, which has the bulls starting to get excited.  As well, the backwardation of the curve is increasing, another bullish sign and much of this is being laid at the feet of President Trump’s seeming turn on the Russia/Ukraine war, where he is quite tired of President Putin’s dissembling.  Certainly, a break above that range top would be at least short term bullish for crude.

Source: tradingeconomics.com

As to the precious metals, while gold continues to trade well, silver has taken the mantle and as you can see from the chart below, is accelerating higher at an even more impressive clip than the yellow metal.  This is a common occurrence as silver historically outperforms gold, on a percentage basis, when both are in bull markets like this.  Just wait until it reaches $50/oz, and makes new all-time highs, and you will see even more discussion of the metals and why they are rallying with inflation concerns a major part of that discussion.

Source: tradingeconomics.com

Meanwhile, financial instruments are far less exciting lately with equity markets stabilizing after their recent run and bond markets also doing little.  Granted, we have seen two consecutive down days in US equity markets, but the magnitude of the decline was de minimis, so it is not really telling us very much.  European markets appear more closely linked to the US, with all bourses there lower by between -0.1% and -0.5% this morning although we did see some modest gains in Asia (China +0.6%, Japan +0.3%).  Net, it seems investors are not certain where to turn right now and are waiting for more clarity from the Fed as to whether more rate cuts are on the way.

The same is true of bond investors who apparently are unconcerned over the shutdown threats, with yields unchanged despite the increasingly combative rhetoric.  We did hear from SF Fed president Daly yesterday, a known dove, who explained that she is coming around to the idea that more cuts are necessary, and they were simply waiting to see how tariffs were going to impact things.  I might argue that she is anxious to cut rates but also doesn’t want to seem to support President Trump’s demands.

Finally, the dollar, after a pretty solid rally yesterday, is essentially unchanged this morning as well.  (That seems to be the theme today, no change.). As I look across my screen, the largest move I see is 0.15%, which is how far CHF has declined on the session, otherwise things have been completely dead.

On the data front, this morning brings the weekly Initial (exp 235K) and Continuing (1930K) Claims data as well as Durable Goods (-0.5%, 0.0% ex-Transport) and the final Q2 GDP reading (3.3%) all at 8:30 with Existing Home Sales (3.96M) at 10:00.  Yesterday saw New Home Sales rise dramatically more than expected at 800K although most analysts expect that number to be revised lower as the Census Bureau gets more information.  Nonetheless, it is a sign that the economy is not collapsing, that’s for sure.  

We also hear from four more Fed speakers today, Williams, Bowman, Barr and Daly again, and we will need to see how they all interpret the current situation.  We learned from the dot plot that there are a lot of different opinions at the Fed right now, and personally, I am very glad to see that.  Given the overall confusion, and the asynchronous nature of the economy right now, it would be more concerning if everyone was on the same page.

As far as the shutdown is concerned, you can be sure that this process will continue until next Tuesday night, at the earliest, if the Democrats cave, and if not, we will then be bombarded by both sides claiming it is the other side’s fault.  Eventually a spending bill will be passed, and as we saw back in 2019, markets pretty much look through this stuff.  Meanwhile, unless the data starts to really deteriorate and brings Fed comments along for that ride, I think the dollar is probably in a rough equilibrium space for now.

Good luck

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He Axed Her

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The NFP data was weak
And President Trump did critique
The BLS head
But unlike the Fed
He axed her as pundits did freak

 

By now, I’m sure you are all aware that after a somewhat weaker than forecast NFP report, where the real damage was in the significant downward revisions to the previous months, President Trump fired Erika McEntarfer, the BLS Commissioner.  A quick perusal of her LinkedIn profile shows that she has been a government employee as a PhD economist since receiving her degree from Virginia Tech in 2002.  In other words, she has never had a real job.  

However, it is a fair question to ask if she was incompetent or politically motivated in her daily activities.  After all, it is abundantly clear there are many government workers who are ostensibly non-partisan who are, in fact, highly partisan.  As such, I took a look at the seasonally adjusted NFP data (the non-seasonally adjusted data is wildly volatile) to see if we could discern a pattern.  I created the chart below from BLS data on revisions with May 2025, the latest month with the normal two revisions, on the left and January 2007, prior to the GFC, all the way on the right.

If you look on the left side of the chart, you can see a great many negative revisions.  In fact, 21 of the last 29 months were revised lower from the original print.  If we assume that the BLS models are unbiased, then one would expect a roughly equal distribution of both positive and negative revisions over time.  It turns out, under the unbiased assumption, the probability of 21 out of 29 negative revisions is a very tiny 0.80%.

What conclusions can we draw from this?  My first thought is that the BLS models are not very effective at modeling reality.  I have raised this point many times in the past, the idea that the models that worked in the past, certainly pre-Covid, have been having trouble.  This begs the question as to why an economist of Ms McEntarfer’s long experience didn’t seek to develop a more accurate model.  As it is, there is no evidence that she did so.  I imagine as a government employee, the idea that one should change something that exists within the government framework is quite alien.  Thus, her competence could certainly be called into question, I think.

If we consider the alternative, that her actions were politically motivated, that will be more difficult to discern.  However, given the predominance of Democrat voting members of the federal government and given the fact she was appointed to this position by President Biden, it is fair to assume she is not in favor of the current administration, at the very least.  Now, during Mr Biden’s term, the initial NFP data was consistently better than expected, thus giving the impression that the economy was stronger than it may have otherwise been.  After all, stories about revised data are usually on page 12 of the paper, not headline news.  It is, therefore, possible that she was putting her proverbial thumb on the scale to flatter Biden’s economic performance.  As to her likely distaste of Mr Trump, I expect that to the extent she had the ability to do so, weaker headlines and large negative revisions would be exactly her contribution.

However, the political issue is largely speculation on my part, although I would argue it is plausible.  On the other hand, there is nothing in her background to suggest she is an especially thoughtful or creative economist and there is no indication that she examined the models she oversaw for flaws.  In the end, I come down on incompetence driving a political motive.  But I doubt we will ever know.  

Now, it is not a very good look for a leader to proverbially kill the messenger, which is essentially what Trump did.  Not surprisingly, much hair is on fire in the press and punditry, not because they though McEntarfer was particularly good at her job (I’m sure nobody had ever heard of her before) but because, as we have observed time and again, President Trump doesn’t follow their rules, and they don’t know what to do about it. 

Will this matter in the end?  This is merely the latest tempest in a teapot in my opinion and will do nothing to change the economy.  However, there is one interesting feature of the employment situation that can be directly attributed to the immigration situation.  As you can see in the FRED chart below, since March, the number of foreign-born workers has declined by 1.46 million while the number of US born workers has increased by more than 1.8 million.  I would say that as long as American citizens are finding jobs, President Trump is likely to remain quite popular across the nation despite all the negative press.

The weak NFP report altered the narrative on Friday, with bond yields, equity markets and the dollar all tumbling and the probability of a September rate cut jumping to 80%.  Perhaps President Trump is correct, and it is time to cut rates.

That’s all for this special Sunday night edition.

Good luck

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Europe Has Folded

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Last week Japan finally agreed
To tariffs as they did concede
Now Europe has folded
Their cards as Trump molded
A deal despite pundits’ long screed
 
So, now this week there’s lots of news
That ought to give markets more cues
Four central banks speak
And late in the week
Inflation and jobs we’ll peruse

 

All the talk this morning revolves around the announcement yesterday of a US-EU trade deal where the basics are a 15% tariff on all EU exports to the US and an EU promise to buy US energy and defense products totaling some $550 billion.  Many have said that the agreement means nothing because for it to become law, it requires both the European parliament and each nation to vote to agree on the deal.  As well, we are hearing from various nations how it is a terrible deal (French farmers are furious, German pharmaceutical manufacturers are furious and unions all over the continent are unhappy) and certain politicians (notably Marine Le Pen) are also extremely unhappy.  

It is far too early to understand if the deal will be implemented in full, but the precedent has been set that European exports to the US are going to be subject to higher tariffs than any time since prior to WWI and that is true whether the deal is ratified or not.  As analyst/trader Andreas Steno Larsen explained well this morning, “The EU vs. US trade deal highlights that the EU primarily exports ‘nice-to-have’ products rather than essential ‘need-to-have’ ones.  And if you think about it, arguably the best-known EU companies are luxury goods makers, whether in fashion or autos.  So, while there are women who swear they ‘need’ that Birkin bag, the reality is far different.  

Expect to hear a lot more about this deal going forward, but the market response has been quite positive with European equity markets (IBEX +1.0%, FTSE MIB +0.9%, CAC +0.6%, DAX +0.4%) all higher along with US futures (+0.3%).  Interestingly, Asian markets were mixed overnight as Japanese (-1.1%) and Indian (-0.7%) equities suffered, perhaps on the idea that their deals were no longer that special.  China (+0.2%) and Hong Kong (+0.7%), though, did well amid news that another meeting was scheduled between the US and China, this time in Stockholm, to continue the trade dialog.

Away from the trade discussion, market focus this week is going to be on a significant amount of news and data to be released as follows:

TuesdayTrade Balance-$98.4B
 Case Shiller Home Prices3.0%
 JOLTS Job Openings7.55M
 Consumer Confidence95.8
WednesdayADP Employment78K
 Q2 GDP2.4%
 Treasury QRA 
 BOC Interest Rate Decision2.75% (unchanged)
 FOMC Interest Rate Decision4.50% (unchanged)
 Brazil Interest Rate Decision15.0% (unchanged)
ThursdayBOJ Interest Rate Decision0.50% (unchanged)
 Initial Claims224K
 Continuing Claims19660K
 Personal Income0.2%
 Personal Spending0.4%
 PCE0.3% (2.5% Y/Y)
 Core PCE0.3% (2.7% Y/Y)
 Chicago PMI42.0
FridayNonfarm Payrolls102K
 Private Payrolls86K
 Manufacturing Payrolls0K
 Unemployment Rate4.2%
 Average Hourly Earnings0.3% (3.6% Y/Y)
 Average Weekly Hours34.2
 Participation Rate62.3%
 ISM Manufacturing49.6
 ISM Prices Paid66.5
 Michigan Sentiment61.8

Source: tradingeconomics.com

In addition to all of this, there are Eurozone GDP and inflation data, Japanese inflation data and PMI data from all around the world.  Happily, there is virtually no central bank speaking beyond the post meeting press conferences as I presume all of them will be seeking an escape.

There is far too much data to discuss in any depth this morning, but my take is that President Trump has managed to move the Overton Window significantly over the course of his first 6 months in office.  If you recall, it was on “Liberation Day” back in April, when he announced his reciprocal tariffs on the rest of the world, that the global economic community had a collective meltdown and proclaimed the end of the economy as we know it.  Equity markets around the world plummeted and the future seemed bleak, at least according to every economist and pundit who could get their views heard.  Now, here we are a bit more than three months later and tariffs of 15% on the entire EU as well as Japan, 10% on the UK and higher on other nations is seen as a solid outcome, sidestepping the worst cases promulgated, and the world is moving on.

It appears, at least for the moment, that Mr Trump understood that most nations need to export to the US more than the US needs to export to them. I would contend that is why these deals, which in many eyes seem unfavorable to the US counterparts, are being agreed.  It is far too early to ascertain if things will work out as Trump expects, as the naysayers expect or somewhere in between (or entirely different) but thus far, you have to admit that the president has largely gotten his way.

So, as we open the week, we have already seen equity markets are generally in a positive mood.  Bond markets are also behaving well, with Treasury yields edging higher by 1bp, still glued to that 4.40% level, while European sovereign yields have mostly slipped -2bps or so on the session.  And last night, JGB yields fell -4bps.  It appears that bond investors are not as concerned about the trade deals as some would have you believe.

In fact, the market with the biggest reaction overnight has been FX, where the dollar is showing strength against virtually all its counterparts in both G10 and EMG spaces.  EUR (-0.8%) is the G10 laggard, although CHF (-0.8%) is right there with the single currency as clearly, Switzerland will be impacted by the EU tariff deal.  But AUD (-0.6%), JPY (-0.5%) and SEK (-0.65%) are all under pressure as well as the DXY (+0.6%) continues its bounce.

Source: tradingeconomics.com

I continue to read about all the reasons why the dollar is losing its luster in the global community, because of tariffs, because of the Treasury’s actions freezing Russian assets after the invasion of Ukraine, because China and the BRICS are seeking other payment means to eliminate the dollar from their economies, because American exceptionalism is dead, and yet, while I am no market technician, I cannot help but look at the chart of the DXY above and see a broken downward trendline, indicating a move higher, and a bottoming in the moving average, also indicating further potential gains.  I am confident that if the FOMC cuts rates (which full disclosure I don’t believe makes sense given the current amount of available liquidity and global equity market performance) that the dollar will decline further.  But all those traders who are short dollars (and it is a very crowded position) are paying away between 25bps (long GBP) and 450bps (long CHF) on an annual basis so need to see the dollar’s previous downtrend resume pretty quickly. (see current overnight rates across major economies below from tradingeconomics.com)

The market is pricing just a 2% probability of a rate cut on Wednesday, and about 60% of a September cut. Unless this week’s data screams recession, I am having a hard time seeing the case for the dollar to fall much further, at least in the short and medium term.  And this includes the fact that it is pretty clear President Trump would like to see a lower dollar to help US export competitiveness.

Finally, a look at commodities shows that while oil (+1.3%) is having a solid session, it remains in the middle of its trading range for the past several weeks.  Meanwhile, metals prices (Au -0.1%, Ag -0.2%, Cu -0.4%) are feeling a little strain from the dollar’s strength but generally holding up well overall.  Too, while there has historically been a strong negative correlation between the dollar and metals, given the large short dollar positions that are outstanding, it would not be hard to see both cohorts rally in sync for a while going forward.

And that’s really all for today.  The data doesn’t really start until tomorrow, and as its summer, trading desks are already lightly staffed.  Look for a quiet session today and the potential for choppiness this week if the data is away from expectations.

Good luck

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