Everyone’s Bitching

Posted on May 15, 2025 by fxpoet

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 Claims	229K
Continuing Claims	1890K
Retail Sales	0.0%
-ex autos	0.3%
PPI	0.2% (2.5% Y/Y)
-ex food & energy	0.3% (3.1% Y/Y)
Empire State Manufacturing	-10
Philly Fed Manufacturing	-11
IP	0.2%
Capacity Utilization	77.8%

Source: tradingeconomics.com

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

Good luck

Adf

Huge Fluctuations

Posted on May 12, 2025 by fxpoet

There once was a war between nations
That led to some huge fluctuations
In markets worldwide
As pundits all cried
The world’s shaken to its foundations

In secret, though, pundits all cheered
‘Cause they all hate Trump, and thus steered
The narrative toward
This Damocles’ sword
That hung o’er the world and was feared

But now, twixt the US and China
There is just a bit less angina
Both sides, tariffs, slashed
And quite unabashed
These pundits said things were just fine-a

The wonderful thing about controlling the narrative is that it doesn’t matter if you are right or wrong at any particular time, because if you are wrong, you simply change the narrative. At least that’s my impression looking here from the cheap seats. At any rate, the news this weekend brought the end to the trade war, or at least a 90-day cease fire, as both the US and China slashed their announced tariffs dramatically, with US tariffs falling to 30% on Chinese goods and Chinese tariffs falling to 10% on US goods. Between now and August, Treasury Secretary Bessent will be leading trade talks with Chinese Vice Premier He to try to come up with a more permanent solution.

In the interim, it will be interesting to see how the narrative evolves. Certainly, I got tired of the different articles I saw explaining that there were no ships crossing the Pacific from China to the US and that store shelves would be empty by summer. I wonder if we will see any of those claims retracted. (I’m not holding my breath). I also wonder why that is the case simply from a mathematic perspective. After all, annual US GDP is ~$28 trillion and imports from China in the twelve months from April 2024 through March 2025 were ~$444 billion, according to the FRED database. So, does that mean that the other $27.56 trillion in economic activity was all services? A look at the charts below created from FRED data shows that not only has the amount of imports from China not been growing lately, as a percentage of GDP, they have been shrinking. I am not saying Chinese activity is unimportant to the US, just that the reduction in relative trade has been happening far longer than President Trump has been in office this time.

While certainly, low priced items could become a bit scarcer, it strikes me that there was more than a bit of hyperbole involved in those claims. Of course, the next question is, will those ships start sailing again? I guess we shall find out soon enough.

But stepping back a bit, I think it is critical to remember that prior to President Trump’s “Liberation Day” tariff announcements, it’s not as though the world trade system was all peaches and cream. In fact, this weekend I listened to an excellent Monetarymatters podcast with guest George Magnus discussing the trade situation and why it was untenable in its current form before President Trump tried to change things. He is far more eloquent and knowledgeable than a mere poet like me, and it is worth listening. In the end, as others have also said, the status quo was unsustainable as both US government spending needs to be cut and the US reliance on China (or any other nation) for things of national security importance could not continue without grave results for our nation.

I contend there is no easy way to change a system that has evolved over 80 years with goals changing during that period. I also contend that the idea that a proverbial scalpel would have been a better method to do things, as it would not have created the market ructions we have all felt for the past few months, would never have worked. Just like in changing the way the federal government works, the inertia in the trade system is far too great to be adjusted by tweaks here and there. To make a lasting change, major disruptions are needed and that is what President Trump has been doing, disrupting things majorly. Whether or not he will ultimately be successful is hard to say, but the odds of a change are greater now than before he started. And almost everybody agreed that things were unsustainable.

One last thing you are sure to hear, especially now that the negotiations have begun is that the only reason is because President Trump “blinked” and couldn’t stand the pain of the market and the slings and arrows of the punditry. However, it remains very difficult for me to look at the data that has been released of late, with Chinese growth slowing rapidly and Chinese stimulus unable to solve the problem and believe that President Xi hasn’t felt enormous pressure to speed up the economy. It is clearly in both sides interest to come to a resolution, and that is what we should focus on going forward.

So, how did markets take the news? Well, it should be no surprise that Chinese (+1.2%) and Hong Kong (+3.0%) shares both rallied sharply given they are the direct beneficiaries of the story. Taiwan (+1.0%) and Korea (+1.2%) also fared well in the euphoria, but perhaps the biggest news in Asia was the ceasefire between India and Pakistan that was brokered by the US. That saw Indian shares (+3.8%) and Pakistani shares (+9.0%) both explode higher. It is certainly better that the explosions are in the relevant stock markets than on the ground! As to the rest of Asia, markets were generally higher but not nearly as ebullient. Meanwhile, in Europe, screens are green (Germany +0.9%, France +1.35%, UK +0.4%) but the gains pale compared to some of the Asian price action. US futures, though, are soaring at this hour (6:50) with gains between 2.4% (DJIA) and 4.0% (NASDAQ).

In the bond market, yields are soaring everywhere with Treasuries (+7bps) rising a similar amount to all European sovereigns (Bunds +7bps, OATs +6bps, Gilts +8bps) and JGBs (+8bps). It appears that with money flowing rapidly back into the equity markets now that the trade war has ended RISK IS ON baby!!! Either that or the only way to generate this new growth is by spending lots of government money which will require even more issuance. I’ll take the first for now.

But that risk on trade is clear in commodities with oil (+3.6%) soaring higher to its highest level in three weeks and despite the idea that OPEC+ is going to increase production. In fact, there are many things ongoing in the oil market that are far too detailed for this commentary, but in a nutshell, from what I understand, OPEC’s changes are simply catching up to the reality of what members have already been pumping and the market is now focusing on the renewed growth enthusiasm with the trade war on hold. As well, if risk is no longer a concern, you don’t need to hold gold, and the barbarous relic is under huge pressure this morning, tumbling -3.5% and taking silver (-2.1%) with it. Copper (+0.4%), however, is higher on the growth story.

Finally, the dollar is flying this morning. on the one hand, given risk is in such demand, that doesn’t make much sense as historically, risk on markets tend to see the dollar weaken. But my take is that all the stories about the end of American exceptionalism, with respect to US equity markets, got destroyed by the truce in the trade war, and now folks are buying dollars to buy US equities. So, the euro (-1.4%) is under major pressure along with the pound (-1.1%) and the yen (-2.0%) is in more dire straits, as is CHF (-1.8%). Other G10 currencies have also fallen, albeit not as far. In the Emerging markets, only two currencies are rallying this morning, both benefitting from truces; INR (+0.7%) which is obviously benefitting from the military ceasefire and CNY (+0.6%) which is benefitting from the trade ceasefire. As to the rest of the bloc, all currencies are lower between -0.6% and -1.6%.

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

Tuesday	CPI	0.3% (2.4% Y/Y)
	-ex food & energy	0.3% (2.8% Y/Y)
Thursday	Initial Claims	230K
	Continuing Claims	1890K
	Retail Sales	0.0%
	-ex autos	0.3%
	PPI	0.2% (2.5% Y/Y)
	-ex food & energy	0.3% (3.1% Y/Y)
	Empire State Manufacturing	-10.0
	Philly Fed Manufacturing	-12.5
	IP	0.2%
	Capacity Utilization	77.9%
Friday	Housing Starts	1.37M
	Building Permits	1.45M
	Michigan Sentiment	53.1

Source: tradingeconomics.com

As well as all the data, we hear from six Fed speakers, including Chairman Powell on Thursday morning. I cannot help but think that things are a bit overdone this morning but perhaps not. It is certainly positive that the US and China are speaking about trade, but it remains to be seen what can be agreed. In the end, while this week is starting off well, I suggest not getting too excited yet. As to the dollar, certainly this is positive news, but I have not changed my view that eventually it will slide.

Good luck

Adf

More Pain

Posted on May 6, 2025 by fxpoet

The data from China reflected
That tariffs have hurt, as expected
It’s likely more pain,
On China, will rain
As both nations are so connected

Meanwhile, in a German surprise
Herr Merz failed to get his allies
To name him to lead
Which seemed guaranteed
Could this presage his quick demise?

In the battle being waged between the US and China via tariffs, the first data indications have shown that the US is faring a bit better. Yesterday’s ISM Services data was stronger than expected, remaining well above the 50 level although arguably slightly below the recent average reading.

Source: tradingeconomics.com

Meanwhile, last night, the Chinese Caixin Services PMI fell to 50.7, missing expectations and continuing its drift lower over time.

Source: tradingeconmics.com

Are things really worse in China than the US, at least from the perspective of data releases? I think both nations will suffer during this period as the impacts of the tariffs and reduced trade bleed into the data over the next months, but so far, it seems the US is holding its own. One of the problems with analyzing the issue is that as the WSJ pointed out yesterday, when the data in China gets bad, they simply stop releasing it, so it may be difficult to see.

Now, last night, Chinese shares did manage a nice rally with the CSI 300 higher by 1.0% but that follows six consecutive down sessions, albeit of modest size.

Source: tradingeconomics.com

As to the renminbi, after a 1% gain last Friday, it has done little and remains very much in line with its levels of the past year. The thing about China is that nothing there moves quickly, so absent a policy announcement of some type, I expect this activity will continue to gradually adjust to the realities as they become clear to the market. If President Trump reduces tariffs, as he implied he would eventually, things could work better, but again, given the time lags of moving products across the Pacific, we have a lot of time between now and whatever the new normal turns out to be.

But the more interesting story to me overnight was that Friedrich Merz, the ostensible winner of the German elections last month failed to achieve the votes to be named Chancellor despite his coalition having a 12-seat majority in the Bundestag. As it was a secret ballot, nobody knows who didn’t support him, but this outcome certainly calls into question both his ability to lead Germany effectively, and correspondingly, Germany’s ability to lead Europe in the new world order.

Recall, Germany remains keen to support Ukraine in its ongoing war with Russia and even destroyed their once sacrosanct fiscal responsibility in order to be able to pay for that support. But if they do not have an effective leader, one who can command their parliament to enact his policies, it is not clear why other European nations would follow their lead on anything. It should not be surprising that the DAX (-1.3%) fell sharply when the news was released, and that has helped drag most European shares lower (CAC -0.7%, IBEX -0.3%, Poland -3.3%). As to the euro, you can see from the below chart that the response, when the news was announced, that it slipped about 0.5%, basically wiping out the gains it had achieved prior to the vote.

Source: tradingeconomics.com

Will this matter in the long run? I believe that a weakened Germany, which is likely the outcome of this situation, will simply undermine the euro’s value. As such, while I still believe the dollar has further to decline, the euro will probably not be a major winner. Look for other currencies to outperform the euro going forward.

Ok, I think those are the real stories as we head into today’s session with most market participants remaining tentative in the face of the ongoing confusion over policies, counter policies and macroeconomic data. Remember, too, we have the Fed tomorrow and the BOE on Thursday, so despite the fact that fiscal policy has been the driver, the Fed’s opinions still carry weight amongst the fixed income community, at the very least.

Looking at the price action overnight, the Nikkei (+1.0%) gained on some solid earnings data from Japanese companies as well as increased hopes that the US-Japan trade talks will be successfully completed by June. Apparently, there is also some faith that the US and China will begin talking soon on this subject. Hong Kong (+0.7%) also benefitted from these discussions, but the rest of the region showed very little movement overall, with gains or losses on the order of 0.3% or less. As we have already discussed Europe, a look at US futures shows they are pointing lower by about -0.5% at this hour (7:10).

Bond markets remain very dull these days with Treasury yields edging higher by 1bp this morning after climbing 3bps yesterday. European sovereign yields are also higher. By 1bp to 2bps although there is neither data nor a story that seems to have had much impact. The Services PMI data that was released this morning was very much in line with expectations and continues to hover around 50.0 for the continent as a whole. Meanwhile, JGB yields were unchanged last night and sit at 1.25%, well below the levels seen back in late March and having really gone nowhere for the past month. It strikes me that JGB yields will respond to any trade deals but are likely to be quiet in the interim.

Commodity prices are rallying this morning with oil (+2.2%) rebounding from its level yesterday which happen to come quite close to touching the lows from April 9^th. It should be no surprise that there are up days in this market, but if the Saudis and OPEC are going to continue increasing production, I expect that prices have further to fall. In the metals markets, gold (+1.4%) is having another blockbuster day, now having gained $150/oz in the past three sessions and bouncing off the correction lows. Demand for the barbarous relic continues to come from Asia mostly with all signs showing that US investors are not interested in this trade. As to silver (+1.7%) and copper (+0.6%), they are both still along for the ride.

It should be no surprise with the commodity markets showing strength that the dollar is under pressure this morning. while we’ve discussed the euro already, the pound (+0.5%) is looking quite solid as it continues its rally from the lows seen in mid-January. But the yen (+0.5%), SEK (+0.45%) and NOK (+0.35%) are all gaining today as well. Interestingly, the impact in emerging markets is far less noticeable with none of the major EMG currencies moving even 0.2% this morning.

On the data front, there is very little hard data this week although we do have the Fed on Wednesday and then a whole bunch of Fed speakers on Friday.

Today	Trade Balance	-$137.0B
Wednesday	FOMC Rate Decision	4.50% (unchanged)
	Consumer Credit	$9.5B
Thursday	BOE Rate Decision	4.25% (-0.25%)
	Initial Claims	230K
	Continuing Claims	1890K
	Nonfarm Productivity	-0.7%
	Unit Labor Costs	5.1%

Source: tradingeconomics.com

Today’s trade data is for March, prior to the tariff impositions, so will reflect significant tariff front-running. But really, it’s about the Fed this week, and since they have lost much of their cachet lately, I think the market is really going to continue to look to the White House for trade news and react to that. Net, I continue to believe that the dollar’s FX rate will be part of many trade discussions, like we saw with Taiwan (which by the way did reverse 3% of yesterday’s gain overnight) and that means further weakness is in our future.

Good luck

Adf

The Future As Fraught

Posted on May 5, 2025 by fxpoet

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 8^th. 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

Be Quite Scared

Posted on April 28, 2025 by fxpoet

The pundits have now all declared
That everyone should be quite scared
It will be a bummer
When shelves, come this summer
Are empty, so please be prepared

As well, a recession’s in view
Although, that seems like déjà vu
For three years at least
The pundits increased
The odds that this bill would come due

Apparently, the only thing you need to know this morning is that by summertime, shelves across the country will be barren as imports from China halt. The upshot, at least according to the sources that I have read, is that you should blame President Trump and join the media chorus in hating the man and his policies.

Now, I am no logistics expert, but the concern stems from the significant decline in shipping as evidenced by port activity in both China and the US. As you can see from the chart below, there has certainly been a significant decline in the number of ships leaving China on their way to the US.

I guess the question is just how much of what is on store shelves comes from China? Much will depend on what kind of store one considers. Certainly, toy stores seem likely to have less inventory, as will Best Buy with electronics potentially suffering, although as I recall President Trump exempted electronics initially. Arguably, clothing shelves and racks may be sparser as well. But based on official data, Chinese imports (~$463B) accounted for approximately 1.7% of the US’s $26.9T GDP in 2024. This may be an overreaction.

Potentially a bigger issue will be the impact on intermediate goods that are imported from China and elsewhere and incorporated into products finalized in the US. However, I cannot calculate that, nor have I seen any data of this issue, although I have read many stories about the end of this particular world as well.

One of the things to remember about the punditry is that they make their living describing the worst possible outcome because that gets them recognition. However, I’m confident we all remember that a recession was forecast for 2022, 2023 and 2024 by much of the punditry and yet one was never officially declared by the NBER. In fact, you may recall that in Q1 and Q2 of 2022, US Real GDP growth was -0.2% for both quarters, thus two consecutive quarters of negative growth. Historically, that has defined a recession. However, subsequent data revisions did remove that as you can see below with Q2 revised higher.

Source: tradingeconomics.com

The one thing I do know is that there is a group of analysts/economists who have been forecasting the next recession consistently for several years. They point to data like changes in the housing market, the JOLTs Quits rate shrinking and various other secondary and tertiary data points and sources, all of which have been pointing in that direction for several years. And I grant, reading that ~40% of GenZ is using BNPL to buy their groceries, and then run late on payments, is a frightening statistic (although perhaps one that highlights financial illiteracy more than economic reality).

In the end, what you need to know is you should be terrified because the punditry is almost certain that this time, they have it right. But our concern is how will this scenario impact markets.

Basically, despite all this huffing and puffing, it appears markets are whistling past this particular graveyard. Friday’s US equity rally was followed by general strength in Asia and strength this morning in Europe. Last night, Tokyo (+0.4%), Mumbai (+1.3%), Taiwan (+0.8%) and Australia (+0.4%) all had solid performances although neither Hong Kong (-0.1%) nor China (-0.15%) could find any real buying support. A less reported story is that China is exempting a number of US imports from its 125% tariffs on the US as clearly, this trading relationship is deep and complex.

As to Europe, all markets are ahead this morning, with the UK (+0.4%) the laggard and most of the continent higher by between 0.7% and 0.8%. There are headlines around as to how the ECB is preparing to cut rates further on the assumption that global economic activity is going to slow and thus hurt Europe, while the consistent message is that US tariffs will be deflationary in Europe, so less concerns about their inflation mandate. Finally, US futures are pointing slightly softer (-0.2%) at this hour (6:45).

In the bond market, 10-year Treasury yields have fallen 30bps in the past two and one-half weeks, sliding 5bps on Friday before bouncing 3bps overnight. However, the recent trend does seem lower.

Source: tradingeconomics.com

But yields are climbing in Europe as well today, higher by 5bps across the board on the continent, although UK Gilts have only edged higher by 2bps. It’s funny, despite all the doom and gloom regarding the economy because of US tariffs, as well as growing expectations of an ECB rate cut at the early June meeting, investors appear to be growing concerned about something. Perhaps they have pivoted back to the promised fiscal spending increases as their driver today.

In the commodity markets, oil (-0.35%) continues to trade in its recent $60 – $63/bbl range with limited signs that this will soon change. Peace in Ukraine does not seem at hand yet and reports are that the initial discussions between the US and Iran, while constructive, still have a ways to go before completion. Both of those seem likely to weigh on oil prices if completed. However, the more unusual thing to me is that with the rising chorus of recession calls, oil’s price has not fallen further. To date, markets have not yet agreed with the economists’ view that recession is imminent. In the metals markets, gold (-1.0%) is continuing its rough week, although remains nicely higher on the month. You may recall my view a week ago Friday that the move seemed parabolic and due for a correction. Recent price action is exactly that, corrective, as I believe the underlying thesis to own the barbarous relic remains intact. The other main metals are a touch softer this morning, but really nothing to discuss.

Finally, the dollar is mixed this morning with modest strength against the euro (-0.15%) but softness vs. the pound (+0.15%) and those size moves are representative of most of the price action across both G10 and EMG currencies this morning. The outlier is KRW (-0.4%), which seems to be suffering from comments that no trade deal will be completed before June’s election there.

Overall, despite ongoing doom and gloom by much of the punditry, it is not obvious to me that investors are anticipating major changes. Perhaps they are wrong, and the pundits are correct. But as yet, there is no evidence to support that conclusion.

Ok, let’s turn to the data this week, which starts slowly but ends on NFP.

Tuesday	Goods Trade Balance	-$146.0B
	Case-Shiller Home Prices	4.8%
	JOLTs Job Openings	7.5M
Wednesday	ADP Employment	108K
	Q1 GDP	0.4%
	Q1 Employment Cost Index	0.9%
	Chicago PMI	45.5
	Personal Income	0.4%
	Personal Spending	0.6%
	PCE	0.0% (2.2% Y/Y)
	Core PCE	0.1% (2.6% Y/Y)
Thursday	Initial Claims	225K
	Continuing Claims	1860K
	ISM Manufacturing	48.0
	ISM Prices Paid	70.2
Friday	Nonfarm Payrolls	135K
	Private Payrolls	127K
	Manufacturing Payrolls	-5K
	Unemployment Rate	4.2%
	Average Hourly Earnings	0.3% (3.9% Y/Y)
	Average Weekly Hours	34.2
	Participation Rate	62.5%
	Factory Orders	4.5%

Source: tradingeconomics.com

As well as NFP, we get the PCE data, which looks like it has changed to a 10:00am release from its traditional 8:30am time. The Fed is in its quiet period, but nobody has been listening to them anyway. Secretary Bessent, along with President Trump, has been the most important voice lately. Again, for now, the data has not indicated recession, although Q1 GDP is slated to be soft. Markets, too, have been unwilling to get behind the recession call completely.

Ultimately, the one thing we know is that the nature of the global economy has changed since President Trump’s election. Globalization is in retreat and mercantilism is the new normal. It is not clear to me that existing econometric models will accurately portray how that works, so I need to see more data before recognizing the end of times. In the meantime, these myriad views are a sign that hedging for risk managers remains the only path forward.

Good luck

Adf

That Man is Our Bane

Posted on April 25, 2025 by fxpoet

Apparently, back in the day
Investors and CEOs say
The future was clear
But now they all fear
Uncertainty is in their way

So, they will now clearly explain
When earnings and profits do wane
That they’re not to blame
Instead, they now claim
It’s Trump’s fault, that man is our bane

I’m having some difficulty understanding a number of the concerns about which I read every day as more and more corporate executives and investment managers have suddenly found a new scapegoat, uncertainty. Apparently, I missed the time when the future was certain, as I have no recollection of that at all. Perhaps you remember. If so, could you remind me please?

For instance, I remember the certitude of the comments from the RBA back in April 2021 that interest rates would remain lower for longer, and that it would be at least three years before they would need to raise interest rates. I also remember, as the graph below demonstrates, that certainty was misplaced as less than two months after those comments, the RBA started raising interest rates despite the clear directive they would not need to do so for years.

Source: tradingeconomics.com

While this is just one example, in my experience, certainty is not part of the mix when running a business or a portfolio of assets or a position in any financial market. So imagine my surprise when reading Bloomberg this morning and finding that suddenly, the world is awash in uncertainty. Has it ever not been the case? Pretty much once you get beyond the laws of physics or mathematics, it strikes me that certainty in the future just doesn’t exist. (Even at 4Imprint). Nonetheless, uncertainty because of President Trump’s trade policies is the latest rationale for every problem at every company right now. In truth, I suspect that many executives are quite happy with this as the Covid excuse was wearing thin.

In the markets, too, uncertainty is the favored excuse for underperformance as how can anyone manage money with tape bombs constantly appearing. Powell is a loser one day to I’m not going to fire Powell the next. Tariffs are forever to a 90-day pause. And of course, there are many other political stories that have limited impact on markets but seem to change regularly. While this gets back to my view that President Trump is the avatar of volatility, I seem to recall long before President Trump that there were numerous presidential statements that had major market impacts. My point is, nothing has really changed folks, other than the media dislikes this president more than any other in my lifetime so amplifies anything they think makes him look bad.

However, the one thing about which we cannot be surprised is that trading activity is waning, at least compared to what we saw since Trump’s inauguration. Volumes of activity on the exchanges are sliding (see chart of S&P 500 volume below from ycharts.com) which makes perfect sense in a volatile and uncertain market.

Now, as per the above, I would contend that the future is always uncertain. Rather the real culprit here is volatility. My take is that the future is going to continue to be volatile which implies, to me at least, that trading activity is going to remain on the low side and with it, liquidity for those who have significant real flows to transact. It’s funny, volatility begets lower volumes, and lower volumes beget volatility due to reduced liquidity. I’m not sure what it will take to break us from this cycle, but I have a sense that it will be with us for a while.

With that in mind, let’s see what happened overnight. Yesterday’s strength in the US was followed by strength in Tokyo (+1.9%) although both China (+0.1%) and Hong Kong (+0.3%) didn’t really participate. Interestingly, this morning I read that China was exempting a number of imports from the US from tariffs as apparently, it was hurting their businesses so severely it could cause closures. Elsewhere in Asia, the picture was mixed although there were more gainers (Korea, Taiwan, Philippines, Thailand) than laggards (India, Singapore). I do believe the tariff story is impacting these markets more than any as they are directly in the line of fire.

Meanwhile, in Europe, most markets are firmer this morning (DAX +0.6%, CAC +0.4%, IBEX +0.9%) but the UK (-0.1%) is lagging despite much stronger than expected Retail Sales data there this morning. As to US futures, at this hour (7:00) they are pointing lower by about -0.35%.

In the bond market, Treasury yields continue to slide, down another -3bps this morning although Europe is moving in the opposite direction, with yields climbing between 2bps and 3bps in the session. It’s odd because I continue to hear about European growth forecasts being cut and the ECB preparing for more rate cuts while the talk around the markets is that the US is going to see inflation from the tariffs. Today’s bond moves don’t really speak to those narratives, but it is just one day. I need to mention JGB yields, which rose 3bps overnight after Tokyo CPI came in 2 ticks hotter than forecast at both headline and core levels.

In the commodity markets, oil (-1.2%) is slipping again and has consistently demonstrated it is unable to make any dent in the major price gap above the market. To close that gap, WTI will need to rally more than $8/bbl from current levels, something I just don’t see happening in the current environment. That would require a war in Iran I think. As to metals, yesterday’s gold rally has been reversed (-1.5%) and today it is impacting both silver (-0.75%) and copper (-2.1%) as is the stronger dollar it seems.

Speaking of the dollar, Monday’s narrative that the dollar was about to collapse will need at least another day to come to fruition as it is modestly higher again this morning. looking at the DXY as a proxy, it is trading just below 100, a level that many are watching closely. A quick look at the chart below shows this is the third time in the past two years it has traded to this level, although the first of those times it broke through. Of course, it was much lower just a couple years earlier.

Source: tradingeconomics.com

Today’s dollar strength is modest but broad-based with only CLP (+0.6%) higher this morning which makes absolutely no sense given copper’s slide today. The worst performer is SEK (-0.8%) but given it has been the best performer YTD amongst the G10, perhaps this is just corrective. Otherwise, we are looking at movements on the order of 0.25% to 0.45% across the board.

The only data this morning is Michigan Sentiment (exp 50.8). We continue to see a dichotomy between the ‘hard’ data, Claims, NFP, CPI, Factory Orders, and the ‘soft’ data, Michigan Sentiment, PMI, inflation expectations with the former holding in well while the latter weakens. Many analysts believe that recession is coming our way by summer, but these same analysts have been predicting the recession for the past 3 years. The one thing about the US economy is that it is extraordinarily resilient despite all the things governments try to do to disrupt it. I understand the concern, at least if you watch/read the news, but I have a sense that many people across the nation do not really do that. While I believe that equity valuations remain too high to be sustainable, it is not clear to me that the economy is heading into a recession at this time. As to the dollar, I wouldn’t write its obituary just yet, although I do think it will soften further over time.

Good luck and good weekend

Adf

The Tariff Explosion

Posted on April 16, 2025 by fxpoet

In China, Xi’s ‘conomy grew
Quite nicely, but now in Q2
The tariff explosion
Ought lead to erosion
Of growth, lest we see a breakthrough

Chinese economic data was released last night, and the numbers were far better than expected, well most of them were. The below table from tradingecoomics.com highlights the big numbers showing strength in GDP, IP and Retail Sales although Capacity Utilization was soft.

But this is Q1 data, and pretty early at that, just two weeks past the end of the quarter. As well it reflected activity prior to the tariffs imposed by President Trump, and subsequently the Chinese themselves. Just as we saw massive increases in the trade deficit here, as companies were front-running the tariff threat, I imagine we saw a lot more activity brought forward by the Chinese to both satisfy that front-running, as well as some front-running of their own. I guess the question to ask is, how much information does this data provide regarding potential future outcomes and I suspect the answer is, not much.

Already we are seeing global economists reducing their forecasts for Chinese annual GDP growth this year, with the lowest number I have seen at 3.5% (Goldman). That is far below the ‘about 5%’ that President Xi targeted back in February and clearly assumes tariffs will remain in place. And perhaps that is the biggest unknown. The current state of play between Trump and Xi is that Trump said, call me, maybe and we can talk while Xi has said, show some respect and we can talk.

At this point, it is all theater, with both men playing to their bases and trying to show strength. I do believe that Trump is seeking to isolate China, but the ultimate end game may well be to get them to alter their behavior. If history is any guide, I imagine that this won’t be settled quickly, but that by summer, both sides will be feeling the heat on the economy. Alas, that’s a long time from now and there is ample opportunity for significant market gyrations between now and then.

Like Fujiyama
Successful trade talks will be
A beautiful thing

On the other side of the tariff sheet is Japan, which is priority number one for the US. PM Ishiba has sent his chief trade negotiator, Ryosei Akazawa, to the US to sit down with Treasury Secretary Bessent who has been named the lead in these negotiations. While there is much discussion on autos, another very sticky subject is rice, on which Japan imposes a very high tariff. President Trump claims it is 700%, others say less, more like 400%, but whatever it is, clearly the Japanese are protecting their rice farmers. Ironically, Japan is in the middle of a rice shortage and has been pulling from strategic stockpiles to prevent prices there from rising too sharply. Meanwhile, the US has ample export capacity. It seems like a win-win opportunity, but politics is convoluted and from what I have read, the Japanese farmers don’t want to cede any market share to imports.

Nonetheless, I expect that this will be a successful outcome as it is too important to fail. While President Trump continues his bluster, he needs a win economically, and if Japanese talks are successful, we will see many more versions completed within the 90-day period in my view. Things won’t go back to the way they were before Liberation Day, but if trade questions are answered, all eyes will turn to the budget, which is going to be a different kind of messy. As I have written before, the greatest potential irony from this tariff war is that we could see lower tariffs around the world, something that all that WTO hobknobbing could never obtain.

One other mooted issue between the US and Japan is the exchange rate, which, while the yen has strengthened more than 10% since its low (dollar high) back just before the inauguration, remains far above levels seen before the Covid inspired inflation resulted in the Fed tightening policy aggressively. The chart below is quite clear in displaying just how weak, relative to the past 30 years of history, the yen remains. That last little dip is the move so far this year.

Of course, given the yen’s most recent bout of weakness dates from 2022, when US interest rates started to climb, if Treasury Secretary Bessent is successful in getting rates lower, that will be a natural driver of a weaker dollar, stronger yen. Especially if Ueda-san does tighten policy further.

We have much to anticipate as the year progresses. Ok, let’s turn to the overnight session and see what’s happening. Yesterday’s lackluster US equity performance was followed by a terrible earnings discussion for Nvidia and much more extended weakness in Asia. The Nikkei (-1.0%) and Hang Seng (-1.9%) fell sharply as did Korea (-1.2%) and Taiwan (-2.0%). China (+0.3%), however, bucked the trend likely on the support of the plunge protection team there buying to prevent a rout. Certainly, the positive data didn’t hurt, but I doubt that was enough. In Europe, screens are all red as well, with declines on the order of -0.3% (UK and Spain) to -0.6% (Germany and France). It is, however, universal with every market there declining. As to US futures, while the DJIA is unchanged, both the NASDAQ and SPX are down sharply on that Nvidia news.

In the bond market, yields have been edging lower despite (because of?) all the tariff anxiety. While Treasuries are unchanged this morning, they drifted off 3bps yesterday. European sovereign yields are all lower by -2bps to -3bps and the big news was JGB yields tumbling -10bps last night. There continues to be a great deal of discussion about China using its Treasury holdings as a weapon, but I find that highly unlikely. Unless they could literally find a bid for all of them at once, to prevent further losses, it would self-inflict too much damage. My take is they are essentially performing their own version of QT, allowing Treasuries to mature and slowly replacing them with other things, Bunds, gold, oil, copper. One of the biggest problems is there are precious few asset classes that are large enough to absorb all that money, so they will continue to hold Treasuries in some relatively large amount, probably forever.

Turning to commodities, oil (+1.0%) continues to trade quietly and hang around just above $60/bbl. It feels to me like there is a lot more room on the downside than the upside, but that is just me. In the metals markets, gold (+1.5%) is glittering again, making yet another new all-time high this morning. Remember a week ago when the market was correcting and there was discussion about gold losing its luster? Me neither!

Source: tradingeconomics.com

This chart is a perfect example of the idea that nothing goes up in a straight line. But the trend here is strong. Silver (+1.6%) is following in gold’s footsteps today but copper (-0.4%) is lagging. No matter, I continue to think commodities have more strength ahead.

One of the reasons is that the dollar remains under pressure. Last night, further weakness was manifest with the euro trading back close to the highs touched on Friday at the 1.14 level. Prior to Friday, the last time the euro was here was in February 2022. But again, like the yen chart above, the euro’s strength is a very recent, short-term phenomenon. A look at the chart below demonstrates just how “weak” the dollar is vs. the single currency on a long-term basis. The answer is not very.

But overall, the dollar is weaker this morning across the board against both G10 and EMG currencies. I do agree with the idea that foreign investors have been liquidating their US equity holdings slowly and repatriating the funds home. If that continues, and it could, a continued decline in the dollar, especially if US yields slide, is likely.

On the data front, Retail Sales (exp 1.3%, 0.3% ex-autos) is the headliner at 8:30 then IP (-0.2%) and Capacity Utilization (78.0%) at 9:15. We also hear from the BOC, although they are expected to leave their base rate on hold at 2.75%. EIA oil inventory data is due later this morning with a decent sized draw of more than 5mm barrels across products expected. There are Fed speakers including Chair Powell at 1:30 this afternoon, but they have just not had much sway lately, and I think they are ok with that.

Putting it all together, at least in the FX framework, my take is the dollar has further to fall. There is no collapse coming, but steady weakness seems realistic. However, given the overall uncertainty at the current time, I would be maintaining hedges rather than anticipating that weak dollar.

Good luck

Adf

The Tariff Watusi

Posted on April 14, 2025 by fxpoet

Undoubtedly, most are confused
And many portfolios bruised
The problem I fear
Is throughout this year
Both bulls and bears will be contused

Right now, it’s the tariff Watusi
With rules that seem quite loosey-goosey
So, traders are scared
While pundits declared
The president’s just too obtuse-y

But will volatility reign
All year with the requisite pain?
Or will, as Trump said
When looking ahead
The outcome be growth once again?

(Before I start, “Ball of Confusion” is brilliant and timeless. But isn’t Billy Joel’s “We Didn’t Start the Fire” covered and updated by Fall Out Boy, really the same song for a different generation?) Now, back to our regular programming.

Tariffs are a tax. So, say seemingly all the most credentialed analysts and economists around.
Tariffs are inflationary. So, say many of these same analysts and economists.
Ergo, taxes are inflationary. So, say…well none of the credentialed analysts and economists. (H/T to Alyosha for highlighting this idea last week.)

But it is important to recognize this dichotomy as we listen to the many pundits and analysts who are now telling us that a recession is coming, if not already here, and the world is ending. It seems to me if you cannot recognize this connection then your views may be colored by something other than strict logic.

We are experiencing a complete regime change in both financial markets and economic outcomes around the world and as old as I am, the last time something like this occurred was long before I was born. I am very wary of any analyst who demonstrates any certitude in their views at this point. Frankly, I am more inclined to listen to historians than economists, as they have potentially studied previous regime changes. Alas, I have not so I am reliant on those who I read.

The current confusion remains over tariffs, their implementation and their impact. To me, the key point that is missing in most of the tariff discussions is the elasticity of demand for any given product. If something is highly inelastic and tariffs are added, then the price of that item is very likely to rise. However, if something has very elastic demand, then a tariff will do one of two things, either the producer will absorb the cost or the volume of sales will drop dramatically, but any price rise will be constrained.

I highlight this because the weekend’s ostensible pause in tariffs on electronic goods from China is the latest discussion point. It strikes me that under the thesis tariffs are inflationary, then inflation forecasts and expectations should now be declining. But I haven’t seen that yet. In the end, though, I don’t believe anybody really knows how things will evolve from here, although I believe the end goal is becoming clearer.

It appears that President Trump’s goal is seeking to isolate China from much of the developed world. He wants to create a situation where nations declare they are either with the US or against the US when it comes to economic relations. I read this morning that 75 nations are in negotiations with the US regarding tariff reductions. Given that, by themselves, the G10 represent nearly 50% of global GDP, even not knowing which nations are negotiating, the group almost certainly represents upwards of 70% or more of the global economy.

I would contend it is still very early days with respect to the results of President Trump’s actions. There is no question he has unleashed a certain amount of chaos in the government and in markets, but I don’t believe he is greatly concerned by that, and in fact he may welcome the process. Regime changes are always messy, and this one is no different. Be nimble.

Ok, let’s look at how things behaved overnight. Friday’s US equity rally was followed by strength throughout most of Asia (Japan +1.2%, Hong Kong +2.4%, China +0.2%, Korea +1.0%, India +1.8%) with Taiwan (-0.1%) the true laggard in the region. Clearly the tariff reprieve, even if temporary, was welcomed. In Europe, too, the gains are strong and widespread with the DAX (+2.3%) leading the way but the rest of the Continent and the UK all up at least 1.8%. And at this hour (6:30) US futures are higher by around 1.0% as well.

But let’s keep things in perspective. The below chart of the S&P 500 over the past 20 years can help you understand the magnitude (or lack thereof) of the recent decline. Yes, the index is lower by about 12% from the all-time highs set in February, and yes, uncertainty is rife. But if you ever wanted to understand what has happened since the Fed’s response to the GFC led to the financialization of the entire economy, the latest minor dip is being described as catastrophic by the punditry. It’s not!

Source: multpl.com

Next, the Treasury bond market has been the focus of a great deal of angst lately. Once again, these same analysts and economists claim the world is ending because yields have risen over the past week. I grant the movement has been sharp, but my experience tells me that when a market as liquid as 10-year Treasuries moves this sharply, it is a position liquidation that is driving the move. In fact, both the 10-year and 30-year auctions last week seemed to have gone quite well, with strong demand. So, I am not of the opinion the bond market is about to collapse, nor do I believe that China is liquidating their Treasury holdings. Rather, hedge funds carrying significant leverage and being forced to unwind seems the most likely culprit here. Too, remember that 10-year yields are right in the middle of their range for the past six months at 4.43% (-6bps today).

Source: tradingeconomics.com

In fact, European sovereign yields are also retreating this morning led by Italy and Greece (-9bps) with German bunds (-4bps) the laggard of the session. With equity markets around the world rallying, it doesn’t appear this is safe haven buying. However, I do believe that there are many investors who are pushing at least some of their equity portfolios into fixed income amidst overall uncertainty.

Turning to commodities, oil (+1.25%) seems to have found a bottom, at least in the short-term, just below $60/bbl. While a recession doesn’t necessarily drive inflation lower, I am very comfortable with the idea that it reduces demand for energy and oil prices can slip. Is the recent move a harbinger of recession? I think there is too much noise to discern the signals the market is giving us right now, although a recession, which has been long awaited by many analysts, certainly seems possible.

As to the metals markets, while both gold (-0.7%) and silver (-0.3%) are a bit softer this morning, one need only look at their performance in the past week (both higher by more than 7%) to recognize that there is a great deal of growing demand for precious metals. Dr Copper (+0.9%), like oil today, is not indicating that a recession is coming as it, too, rose 7% last week and is higher by 15% YTD. Again, there is a lot of noise to get through to find the signal.

Finally, the dollar, is lower again today and is back at levels last seen…in September 2024. And before that in July 2023 and March 2022. In fact, if you look at the chart of the DXY below, I challenge you to show me that this decline was more dramatic than any of the three other major declines we have lived through in the past 3 years.

Source: tradingeconomics.com

Net the dollar has declined by about 10% since its recent peak in February, not insubstantial, but not unprecedented by any stretch. In fact, over the long-term, the dollar is within spitting distance of its long-term average, which as measured by the DXY is about 104. Looking at individual currencies, there is a strange grouping of currencies that have fallen vs. the greenback this morning, BRL (-0.85%), TRY (-0.5%), CHF (-0.5%) and CNY (-0.4%). Given the pause in tariffs on Chinese electronic goods, CNY is confusing, as is CHF, which might imply havens are out of favor (but then why is JPY stronger?). TRY is its own case and BRL is quite confusing. Commodity prices have held their own or risen lately, and BRL is nothing, if not a commodity currency. I need to search further here. Perhaps we are seeing some carry trades being unwound.

I apologize as once again my Monday missive has grown too long for comfort. I will highlight the data tomorrow with Retail Sales on Wednesday as the most important data release this week and the BOC and ECB meetings on Wednesday and Thursday respectively with the market looking for no change and a 25bp cut respectively.

The world is a messy place right now, with armed conflict now being joined by economic conflict. Opinions are hardening along political lines, and I don’t see how this changes in the short run. If you are managing risk, maintain your hedges, even if they seem expensive. There are too many opportunities for large movements that can be costly.

Good luck

Adf

Tariff’s Predations

Posted on April 8, 2025 by fxpoet

The White House said seventy nations
Are seeking to have conversations
With President Trump
Avoiding the thump
That comes amid tariff’s predations

But China is not on the list
As Xi claims that he’ll raise his fist
To “fight to the end”
And try to defend
His nation from being dismissed

Last week, risk was anathema to one and all. President Trump’s tariffs were upending the world economy, recession was coming to the US, and possibly the world. I couldn’t help but be reminded of this classic on the potential outcomes.

Leading up to the tariff announcements, nations around the world were puffing out their metaphorical chests and claiming all the things they would do to respond. But the reality is that as I have repeatedly said, the US is the consumer of last resort, and most nations cannot afford to lose access without significantly damaging their own economies. As such, it is not that surprising that such a long list of nations has reached out immediately, indicating a willingness to change their own policies in order to prevent these tariffs. Arguably, China is the one outlier here, with President Xi claiming they will “fight to the end” in this trade war.

Already, a number of nations have promised to reduce their tariffs on US goods to 0.0% if that is what is required, although thus far, the President has not accepted those deals. It is a fair question to ask what he is seeking, since apparently, it is not simply free access. Granted, there are also numerous non-tariff barriers that are in play, and perhaps he is focused on those as well. Or perhaps he really is looking at tariffs as a key revenue source and doesn’t want to give up that revenue opportunity. Or perhaps he is simply waiting for enough nations to bend the knee before one large announcement when all these deals are accepted. The latter idea would be in keeping with the idea that he is trying to isolate China.

These are just three possibilities of the many, and nobody other than President Trump himself knows how this will end up. I find it encouraging that Treasury Secretary Bessent is leading the discussions with Japan, a key ally and trade partner, as I have great faith in his understanding and abilities. However, in the end, it is the President’s decision so…who knows?

Of course, the end of last week brought mayhem to risk markets with equities around the world falling sharply in price. While there had been numerous voices explaining that equity valuations in the US were far too high and unsustainable, many of those same voices were screaming the loudest at the repricing. But, as I said yesterday, markets have a great deal of trouble trading in that manner for too long as traders and investors simply get tired and stop trading at all.

But what was interesting was that US markets turned around after the incredibly weak opening in futures markets Sunday night, and closed mixed on the day, with the NASDAQ actually managing a tiny gain. I’m not sure exactly what to ascribe as the cause of that reversal, maybe bargain hunters, maybe short covering, or maybe much of the forced selling from margin calls had been completed. In the morning, there was a rumor that Trump would delay the imposition of tariffs by 90 days, but that was squelched very quickly. You can see that price action on the chart below.

Source: tradingeconomics.com

The bounce, though, is continuing and we saw substantial rebounds overnight throughout Asia as well as in Europe this morning and with US futures pointing higher as well. As much fear as was felt on Friday, it seems just the opposite today. Interestingly, the Fear & Greed Index is still sitting at its all-time lows of just 4 as of this morning. Perhaps that is the indicator driving the buying.

Source: cnn.com

To recap, many nations are offering to change their tariff policies with the US, although none of those offers have yet been accepted. Tariffs are due to be enacted starting tomorrow, and there is still a great deal of concern around, but equity markets worldwide are rebounding from their worst levels. For anyone who thought markets made sense, I dare you to put this puzzle together!

But let’s see how big the bounces were. Tokyo (+6.0%) exploded higher, recouping much of Friday’s losses, although still down net since this began. Surprisingly, China (+1.7%) and Hong Kong (+1.5%) showed much less bounce, although they didn’t fall as sharply either. However, I have to assume that President Xi cannot be very happy as the Chinese plunge protection team was active last night, buying more than $5.7 billion in ETF’s to support the market and there was verbal support as well from the government. Too, the yuan is sliding more aggressively but we will cover that below. As to the rest of Asia, the picture was mixed with Taiwan, Vietnam, Thailand and Singapore falling sharply while India, Australia and New Zealand all had nice bounces.

In Europe, there is a rebound as well, albeit not so dramatic with the FTSE 100 (+1.9%) leading the way and the DAX (+1.4%) and CAC (+1.3%) having solid sessions. One of the offers was from the EU, saying they will take the tariffs on manufactured goods to 0.0% if the US would reciprocate, although that offer was not accepted, at least not yet. US futures are all firmer this morning, up between 1.25% and 2.0% at this hour (7:15). I think the message here is that nobody really knows anything else yet, and short-term trading is the driver.

In the bond market, there was a massive reversal yesterday with Treasury yields spiking more than 30bps from bottom to top during the session and closing near the highs. (see below)

Source: tradingeconomics.com

We saw similar price action throughout European sovereigns as well, although the rise was not quite as dramatic, a bit more than 20bps in German bunds although 30bps in UK gilts. This morning, however, after all that price movement, yields are within 1bp of yesterday’s closing levels as traders and investors try to figure out what to do next. JGB yields did rally 16bps yesterday, which given their level, was commensurate with the Treasury movement. Arguably, looking at the chart above, what we have seen is a reset to pre-tariff levels.

In the commodity markets, oil (+0.25%) managed to close above $60/bbl, although the trend there remains lower in my eyes. I have had a bearish overall view on oil for more than a year as I explained back in January 2024 that there was plenty of oil around, and it was political decisions that was restricting its availability, not physical ones. As such, it is no surprise to me that the trend here is lower, especially with President Trump’s energy policy to drill, baby, drill, and OPEC increasing production as well. It is hard to get excited about major price rises here. Meanwhile, gold (+1.0%) and silver (+1.0%) are rebounding, with gold back above the $3000/oz level after its short profit taking foray below that key psychological level. Copper is still under pressure as the growth story remains uncertain, at best, for now.

Finally, the dollar is a bit softer this morning, but with some notable exceptions. While G7 currencies are all firmer, ranging from NZD (+1.1%) down to NOK (+0.1%) and everything in between, in the EMG bloc, CNY (-0.25%) is back to the weakest levels (dollar strength) since early January and prior to that since September 2023.

Source: tradingeconomics.com

Xi is now caught in a tough spot as given the US tariffs, which total to about 104% on Chinese imports, the natural response is to allow the yuan to depreciate. However, he has made a big deal about the yuan being a stable store of value, so if he lets it slide, that will undermine that argument. My money is on a weaker CNY going forward. Elsewhere in Asia, KRW (-0.6%) and INR (-0.4%) led the way lower.

On the data front, the NFIB Small Business Optimism Index was released at a softer than expected 97.4 this morning, but there is nothing else on the calendar other than an afternoon speech by SF Fed president Daly.

It cannot be a surprise that we had a rebound from last week’s dramatic declines. The question, of course, is have we now seen the bottom. My take is that is not the case, and while we may hold tight for a few sessions, further declines are still in the offing. At least absent a major change where Mr Trump announces that he has accepted the reduction in tariffs elsewhere around the world. Remember, even after the declines, US equities are still richly valued. As to the dollar, that is a much harder question, and I sense that there will be much more idiosyncratic movement rather than bloc dollar movement going forward.

Good luck

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Hair All on Fire

Posted on April 7, 2025 by fxpoet

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.

Today	Consumer Credit	$15.2B
Tuesday	NFIB Small Biz Optimism	101.3
Wednesday	FOMC Minutes
Thursday	Initial Claims	224K
	Continuing Claims	1915K
	CPI	0.2% (2.6% Y/Y)
	Ex food & energy	0.3% (3.0% Y/Y)
Friday	PPI	0.1% (3.3% Y/Y)
	Ex food & energy	0.3% (3.6% Y/Y)
	Michigan Confidence	54.7

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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fxpoetry

Explaining the rhyme and rhythm of the FX markets each day

Tag Archives: #politics

Everyone’s Bitching

Huge Fluctuations

More Pain

The Future As Fraught

Be Quite Scared

That Man is Our Bane

The Tariff Explosion

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Tariff’s Predations

Hair All on Fire