Tag Archives: #politics

Dine and Dash

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The president left in a flash
Completing a quick dine and dash
But so far, no word
On what, this move, spurred
Though I’ve no doubt he’ll make a splash
 
Then last night the BOJ passed
On hiking, though none was forecast
And Germany’s ZEW
Implied there’s a view
That growth there will soon be amassed

 

I have to admit that when I awoke this morning, I expected there to have been significantly more news regarding the Iran/Israel conflict based on President Trump’s early departure from the G-7 meeting.  But, from what I see so far, while markets have reversed some of yesterday’s hope that a ceasefire was coming soon, my read is we are back to overall uncertainty in the situation.  Of course, the concept of the fog of war is well known, and I expect that we will not find out very much until those in control of the information, whether the IDF or the US military, or Iranian sources, choose to publicize things.  The one thing we know is that everything we learn will be biased toward the informants’ view, so needs to be parsed carefully.  I do think that Trump’s comments to the press when he was leaving the G-7 about seeking “an end. A real end. Not a ceasefire, an end,” to the ongoing activities is telling.  It appears the Israelis planned on a 2-week campaign and that is what they are going to complete.

From a market perspective, as we have already seen in the price of oil, and generally all asset classes, absent a significant escalation, something like a tactical nuclear strike by the Israelis to destroy the Iranian nuclear bomb-making capabilities, I expect choppiness on headlines, but no trend changes.  At some point, the fighting will end, and markets will return their focus to economic and fiscal concerns and perhaps central banks will become relevant again.

So, let’s turn to that type of news which leads with the BOJ leaving policy rates on hold, although they did reduce the amount of QE to ¥200 billion per month, STARTING IN APRIL 2026!  You read that correctly.  The BOJ, which has been buying ¥400 billion per month of JGBs while they raised interest rates in their alleged policy tightening, has decided that ten months from now it will be appropriate to slow the pace of QE.  Yes, inflation has been running above their 2.0% target for more than three years (April 2022 to be exact) as you can see in the below chart, but despite a whole lot of talk, action has been slow to materialize.

Source: tradingeconomics.com

You may recall about a month ago when Japanese long-end yields, the 30-year and 40-year bonds, jumped substantially, to new all-time highs and there was much discussion about how there had been a sea change in the situation in Japan.  Expectations grew that we would start to see Japanese institutions reduce their holdings of Treasuries and bring their funds home to invest in JGBs, leading to a collapse in the dollar.  The carry trade was going to end, and this was another chink in the primacy of the dollar’s hegemony.  Well, if that is the case, it is going to take longer than the punditry anticipated, at the very least, assuming it happens at all.  As you can see from the charts below of both USDJPY and the 40-year JGB, all that angst has at the very least, been set aside for now.

Source: tradingeconomics.com

Elsewhere, the German ZEW data released this morning was substantially stronger than both last month and the forecasts for an improvement.  As you can see from the chart below, it is back at levels that are consistent with actual economic growth, something Germany has been lacking for several years.  It appears that a combination of the continued tariff truce, the promises of massive borrowing and spending by Germany to rearm itself and the ECB’s easy policy have German business quite a bit more optimistic that just a few months ago.

Source: tradingeconomics.com

Ok, while we await the next shoe to drop in Iran or Israel, let’s see how markets have behaved overnight. Yesterday’s nice rally in the US was followed by a mixed picture in Asia with the Nikkei (+0.6%) gaining after the BOJ showed that tighter policy is not coming that soon.  Elsewhere in the region, China, HK and India were all down at the margin, less than 0.4% while Korea and Taiwan managed some gains with Taiwan’s 0.7% rise the biggest mover overall.  In Europe, though, the excitement about a truce in Iran is gone with bourses across the continent lower (DAX -1.25%, CAC -1.05%, IBEX -1.5%, FTSE 100 -0.5%).  Apparently, there is fading hope of trade deals between the US and Europe and concerns are starting to grow as to how that will impact European activity.  I guess the ZEW data didn’t do that much to help.  US futures at this hour (7:00) are all pointing lower by about -0.5%, largely unwinding yesterday’s gains.

In the bond market, Treasury yields, which backed up yesterday, are lower by -3bps this morning, essentially unwinding that move.  However, European sovereign yields have all edged higher between 1bp and 2bps with Italy’s BTPs the outlier at +3bps.  Quite frankly, it is hard to have an opinion as to why bond yields move such modest amounts, so I’m not going to try to explain things.

In the commodity space, fear is back in play as oil (+1.7%) is rallying as is gold (+0.4%) which is taking the rest of the metals complex (Ag +2.3%, Cu +0.3%, Pt +3.0%) with it.  These are the markets that are most directly responding to the ongoing ebbs and flows of the Iran/Israel situation, and I expect that will continue.  In the end, I continue to believe the long-term trend for oil is toward lower prices while for gold and metals it is toward higher prices, but on any given day, who knows.

Finally, the dollar doesn’t know which way to turn with modest gains and losses vs. different currencies in both G10 and EMG blocs.  The euro, pound and yen are all within 0.1% of yesterday’s closing levels while we have seen KRW (-0.4%) and INR (-0.3%) suffer and NOK (+0.4%) and SEK (+0.4%) both gain on the day.  However, those are the largest movers across the board, so it is difficult to make a case that anything of substance is ongoing.

On the data front, yesterday’s Empire State Manufacturing index was quite weak at -16, not a good look.  This morning, we see Retail Sales (exp -0.7%, +0.1% ex-autos), IP (0.1%), and Capacity Utilization (77.7%).  As well, the FOMC begins their meeting this morning with policy announcements and Powell’s press conference scheduled for tomorrow.  Helpfully, the Fed whisperer, Nick Timiraos, published an article this morning in the WSJ to explain why the Fed was going to do nothing as they consider inflation expectations despite the lack of empirical evidence that those have anything to do with future inflation.  But it is a really good sounding theory.

For now, the heat of the Iran/Israel situation will hold most trader’s attention, but I suspect that this will get tiresome sooner rather than later.  The biggest risk to markets, I think, is that the Iranian regime collapses and a secular regime arises, dramatically reducing risks in the Middle East and reducing the fear premium in oil substantially.  If that were to be the case, I expect the dollar would suffer as abundant, and cheap, oil would help other nations more than the US on a relative basis given the US already has its own supply.  But a major change of that nature would have many unpredictable outcomes.  In the meantime…

Good luck

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Mugwump

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The feud between Elon and Trump
Show’s Musk has become a mugwump
But though there’s much drama
It’s not clear there’s trauma
As markets continue to pump
 
So, turning our eyes toward today’s
Report about jobs, let’s appraise
The call for recession
That’s been an obsession
Of some for six months of Sundays

 

Clearly the big headlines are all about the escalating war of words between President Trump and Elon Musk.  I guess it was inevitable that two men with immense wealth and power would ultimately have to demonstrate that one of them was king.  But other than the initial impact on Tesla’s stock price, it is not clear to me what the market impacts are going to be here.  After all, President Trump has attacked others aggressively in the past when they didn’t toe his line, and it is not a general market problem, only potentially the company with which that person is associated.  As such, I don’t think this is the place to hash out the issue.

However, I think it is worth addressing one point that Musk raised regarding the Big Beautiful Bill.  The thing about reconciliation is it only addresses non-discretionary spending, meaning Social Security, Medicare, Medicaid and the interest on the debt.  All the other stuff that DOGE made headlines for, USAID etc., could never be part of this bill.  That requires recission packages where Congress specifically passes laws rescinding the previously enacted payments.  So, if this was a part of the blowup, it was senseless.  I will say, though, that the Trump administration did not communicate this fact effectively as I read all over how people are upset that Congress is not addressing these other things.  At any rate, this is not a political commentary, but I thought it was worth understanding because I only learned of this in the past weeks and I don’t believe it is widely understood.

Onward to the major market news today, the payroll report.  As of this morning, according to tradingeconomics.com, here are the forecast outcomes:

Nonfarm Payrolls130K
Private Payrolls120K
Manufacturing Payrolls-1K
Unemployment Rate4.2%
Average Hourly Earnings0.3% (3.7% Y/Y)
Average Weekly Hours34.3
Participation Rate62.6%

Of course, Wednesday’s ADP Employment number was MUCH lower than expected, so the whispers appear to be for a smaller outcome.  As well, the key wildcard in this data is the BLS Birth-Death model which is how the BLS estimates the number of jobs that have been created by small businesses which aren’t surveyed directly.  As with every model, especially post-Covid, what used to be is not necessarily what currently is.  The most accurate, after the fact, representation of employment is the Quarterly Census of Employment and Wages (QCEW) but that isn’t released until 6 months after the quarter it is addressing, so it is not much of a timing tool.  It is also the genesis of all the revisions.  

Here’s the thing, a look at the chart below shows that the BLS Birth-Death model appears to still be substantially overstating the payroll situation.  Given the datedness of its model, that cannot be a real surprise, but I assure you, if there is a major revision lower in that number, and NFP prints negative, it WILL be a surprise to markets.  I am not forecasting such an occurrence, merely highlighting the risk. 

If that were to be the case, I imagine the market reaction would be quite negative for stocks and the dollar, positive for bonds (lower yields) and likely continue to push precious metals higher, although oil would likely suffer.  I guess we will all have to wait and see at 8:30 how things go.

In the meantime, ahead of the weekend, let’s see how markets behaved overnight.  Yesterday’s modest sell-off in the US was followed by a mixed session in Asia (Nikkei +0.5%, Hang Seng -0.5%, CSI 300 -0.1%) but strength in Korea (+1.5%) and India (+0.9%).  Trade discussions still hang over the market and there are increasing bets that both India and Korea are going to be amongst the first to come to the table.  As well, the RBI cut rates by 50bps last night with the market only expecting 25bps, so that clearly supported the SENSEX.  In Europe, no major index has moved even 0.2% in either direction as positive European GDP data was unable to get people excited and there is now talk that the ECB will not cut rates again until September.  As to US futures, at this hour (6:50) they are pointing higher by about 0.3% across the board.  It appears that the Tesla fears are abating.

In the bond market, yields continue to slide with Treasuries falling -1bp and European sovereign yields down between -3bps and -5bps despite the stronger than expected Eurozone data which also included Retail Sales (+2.3%) growing more rapidly than expected.  But this is a global trend as recession discussions increase while we also saw JGB yields slip -2bps overnight.  It feels like the bond markets around the world are anticipating much slower economic activity.

In the commodity space, oil (0.0%) is unchanged this morning and continuing to hang around at its recent highs, but unable to break above that $63+ level.  It strikes me that if slower economic activity is on the horizon, that should push oil prices lower as there appears to be ample supply.  But I read that Spain has stopped importing Venezuelan crude as US secondary sanctions are about to come into effect there.  As to the metals markets, silver (+1.5%) and platinum (+2.6%) have been the leaders for the past few sessions although gold (+0.2%) continues to grind higher.  The loser here has been copper (-0.8%) which if the economic forecasts of slowing growth are correct, makes some sense.  Of course, there is a strong underlying narrative about insufficient copper supplies for the electrification of everything, but right now, payroll concerns are the story.

Finally, the dollar is a bit firmer this morning, but only just, with G10 currencies slipping between -0.2% and -0.3% while EMG currencies have shown even less movement.  INR (+0.25%) stands out for being the only currency strengthening vs. the dollar after the rate cut and positive growth story, but otherwise, this is a market waiting for its next cue.

In addition to the payroll report, we get Consumer Credit (exp $10.85B) a number which gets little attention but may grow in importance if economic activity does start to decline.  As well, I cannot ignore yesterday’s Trade data which saw the deficit fall much more than expected, to -$61.6B, its smallest outturn since September 2023.  While I didn’t see any White House comments on the subject, I expect that President Trump is happy about that number.

Are we headed into a recession or not?  Will today’s data give us a stronger sense of that?  These are the questions that we hope to answer later this morning.  FWIW, which is probably not that much, my take is while economic activity has likely slowed a bit, I do not believe a recession is upon us, and as I do believe the reconciliation bill will be passed which extends the tax cuts, as well as adds a few like no tax on tips or Social Security, I expect that will turn any weakness around quickly.  What does that mean for the dollar?  Right now, it is piling up haters so a further decline is possible, but I cannot rule out a reversal if/when the tax legislation is finalized.

Good luck and good weekend

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Hard to Resolve

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

 

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

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

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

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

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

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

Y = C + I + G + (X – M)

Where:

Y = GDP

C = Consumption

I = Investment

G = Government Spending

X = Exports

M = Imports

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

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

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

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

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

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

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

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

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

Source: tradingeconomics.com

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

Good luck

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So Mind-Blowing

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On one hand, the chorus is growing
That US debt is so mind-blowing
The ‘conomy will
Slow down, then stand still
As ‘flation continues its slowing
 
But others remind us the data
Does not show a slowing growth rate-a
And their main concerns
Are Powell still yearns
For rate cuts to help market beta

 

As many of us enjoyed the long weekend, it appears it is time to put our noses back to the proverbial grindstone.  I know that as I age, I find the meaning of the Memorial Day holiday to grow in importance, although I have personally been very fortunate having never lost a loved one in service of the nation.  However, as the ructions in the nation are so evident each day, I remain quite thankful for all those that “…gave the(ir) last full measure of devotion” as President Lincoln so eloquently remarked all those years ago.

But on to less important, but more topical things.  A week ago, an X account I follow, The Kobeissi Letter, posted the following which I think is such an excellent description of why we are all so confused by the current market gyrations.  

Prior to President Trump’s second term, I would contend that the broad narrative had some internal consistency to it, so risk-on days saw equity markets rally along with commodities while bond prices would fall (yields rise) and the dollar would sink as well.  Similarly, risk-off days would see pretty much the opposite.  And it was not hard to understand the logic attached to the process.  

But here we are, some four plus months into President Trump’s term and pretty much every old narrative has broken into pieces.  I think part of that stems from the fact that the mainstream media, who were purveyors of that narrative, have been shown to be less than trustworthy in much of what they reported during the Biden Administration, and so there is a great deal of skepticism now regarding all that they say, whether political or financial.

However, I think a bigger part of the problem is that different markets have seen participants focusing on different idiosyncratic issues rather than on the bigger picture, and so there are many mini narratives that are frequently at odds.  Add to this the fact that there continues to be a significant dichotomy between the soft, survey data and the hard, calculated data, with the former pointing toward recession or stagflation while the latter seems to be pointing to stronger economic activity, and the fact that if you ask twenty market participants about the impact of President Trump’s tariff policies, you will receive twenty-five different explanations for why markets are behaving in a given manner and what those policies will mean for the economy going forward.

It is at times like these, when there are persuasive short-term arguments on both sides that I step back and try to look at bigger picture events.  In this category I place two things, energy and debt.  Energy is life.  Economic activity is simply energy transformed and the more energy a nation has and the cheaper it is, the better off that economy will be.  President Trump has made no bones about his desire to cement the US as the number one energy producer on the planet and to allow affordable energy to power the economy forward.  As that occurs, that is a medium- and long-term bullish backdrop.

On the other hand, we cannot forget the debt situation, which is an undeniable drag on economic activity.  Forgetting the numbers per se, the fact that the US debt/GDP ratio is at wartime levels during peacetime (well, US peacetime) with no obvious end to the spending is a key concern.  But it is not just the US with a growing debt/GDP ratio.  Here is a listing from tradingeconomics.com of the G20’s ratios.  (Russia is the bottom of the list but not relevant for this discussion.)

And remember what has been promised by Germany and the Eurozone with respect to defense spending? More than €1 trillion for Germany and it sounds, if my addition is correct, like upwards of €1.7 trillion across the continent.  And all of that will be borrowed, so that is another 22% in Germany alone.  The point is the global debt/GDP ratio remains above 300% for public and private debt.  As government debt grows above 100%, at some point, we are going to see central banks, in sync, clamp down on longer-term yields.  

However they couch it, and however they do it, whether actual yield curve control, through regulations requiring banks and insurance companies to hold more government bonds on their balance sheets with no capital charges, or through adjustments to tax driven accounts like IRA’s and 401K’s, requiring a certain amount of government debt in the portfolio to maintain the tax deferred status, I expect that is what we are going to see.  And even with oil prices declining, which I think remains the trend, inflation is going to be with us for a long time to come as debt will be monetized.  It is the only solution absent a depression.  And every central bank will be in on the joke.  Which takes us to this morning…

As yields were soaring
The BOJ kept quiet
Until yesterday

Apparently, the bond vigilantes have spent the past decades learning Japanese.  At least that is what I conclude from the price action, and more importantly, the BOJ’s recent response in the JGB market. As you can see in the chart below, there has been a significant reversal in 30-year JGB yields with similar price action in both the 20-year and 40-year varieties.

Source: tradingeconomics.com

You may recall that last week, the Japanese government issued 20-year bonds, and the auction went quite poorly, with yields rising sharply (that was the large green candle six sessions ago). Well, it seems that the BOJ (along with the Ministry of Finance) have figured out that the bond situation in Japan is reaching its limits. After all, in less than two months, 30-year JGB yields rose 100 basis points from a starting point of about 2.2%.  That is an enormous move.  Now, if we look at the table above, we are reminded that Japan’s debt/GDP ratio is the highest in the developed world at well over 200%.  In addition, the BOJ owns more than 53% of all JGBs outstanding.  Quite frankly, it is easy to make the case that the BOJ has been monetizing Japanese debt for years.  

As it happens, last week the BOJ held one of their periodic (actually, the 22nd) “Bond Market Group” meetings in which they discuss with various groups of market participants the situation in the JGB market regarding liquidity and trading capabilities and the general functioning of the market.  The two charts below, taken from the BOJ’s website (H/T Weston Nakamura) demonstrate that there is growing concern in the market as to its ability to continue along its current path.

The concern demonstrated by market participants is a clear signal, at least to me, that we are entering the end game.  For all the angst about the situation in the US, with excessive fiscal expenditures and too much debt, Japan has that on steroids.  And while Japan has the benefit of being a net creditor country, the US has the advantage of having both the strongest military in the world and issuing the world’s reserve currency.  As well, the US neighborhood is far less troublesome than Japan’s in East Asia with two potential protagonists, China and North Korea.  All I’m saying is that after decades of kicking the can down the road, it appears that the road may be ending for Japan and difficult policy decisions regarding spending, deficits and by extension JGB issuance are coming soon.

It’s funny, many economists have, in the past, described the US situation as Japanification, with rising debt and slowing growth.  But perhaps Japanification will really be the road map for how to respond to the first true limits on the issuance of government debt for a major economy.  Last night, JGB yields fell across the board, dragging global yields down with them.  The yen (-0.8%) weakened sharply, reversing its trend of the past two weeks, while the Nikkei (+0.5%) rallied.  Perhaps market participants are feeling comforted by the fact the Japanese government seems finally ready to recognize that things must change.  But this is the beginning of that process, not the end, and there will be many twists and turns along the way.  Stay tuned.

Ok, I really ran on, but I feel it is critical for us all to recognize the debt situation and that there are going to be changes coming.  As to other markets overnight, this is what we’ve seen.  Asia was mixed with gainers (Hong Kong, Australia, Singapore) and laggards (China, Korea, India, Taiwan) but nothing moving more than 0.5% in either direction.  Europe, on the other hand, has been the beneficiary of President Trump delaying the tariffs on the EU until July 9th, with all the major indices higher led by the DAX (+0.8%) which also rallied more than 1% yesterday.  Say what you will about President Trump, he has gotten trade discussions moving FAR faster than ever before in history.  US futures, at this hour (6:15) are also pointing nicely higher, more than 1.3% across the board.

We’ve already discussed bond yields where 10yr Treasury yields have backed off by 5bps this morning although European sovereign yields have not benefitted quite the same way with declines of only 2bps on average.  But the trend in all cases is for lower yields right now.  Hope springs eternal, I guess.

In the commodity space, with the new view on tariffs, risk is abating and gold (-1.5%) is being sold off aggressively.  Not surprisingly, this has taken the whole metals complex with it.  As to oil (+0.1%) it continues to trade in its recent $60 – $65 range and while the trend remains lower, it is a very slow trend.

Source: tradingeconomics.com

Finally, the dollar is perking up this morning, not only against the yen, but across the board.  On the haven front, CHF (-0.6%) is sinking and the commodity currencies (AUD -0.6%, NZD -0.8%, SEK -0.6%) are also under pressure.  But the euro (-0.4%) is lower and taking the CE4 with it.  In fact, every major counterpart currency is lower vs. the dollar this morning.

On the data front, this morning brings Durable Goods (exp -7.8%, -0.1% ex-transport), Case Shiller Home Prices (4.5%), and Consumer Confidence (87.0). We also hear from NY Fed President Williams this evening.  Chairman Powell spoke at the Princeton graduation ceremony but said nothing about policy.  I will review the rest of the week’s data tomorrow.

Bonds are the thing to watch for now, especially if we are going to see more active policy adjustments to address what has long been considered an unsustainable path.  The question is, will there be fiscal adjustments that help?  Or will central banks simply soak up the bonds?  While I hope it is the former, I fear it is the latter.  Be prepared.

Good luck

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Everyone’s Bitching

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

 

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

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

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

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

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

Source: tradingeconomics.com

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

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

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

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

Source: tradingeconomics.com

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

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

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

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

Source: tradingeconomics.com

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

Good luck

Adf

Huge Fluctuations

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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:

TuesdayCPI0.3% (2.4% Y/Y)
 -ex food & energy0.3% (2.8% Y/Y)
ThursdayInitial Claims230K
 Continuing Claims1890K
 Retail Sales0.0%
 -ex autos0.3%
 PPI0.2% (2.5% Y/Y)
 -ex food & energy0.3% (3.1% Y/Y)
 Empire State Manufacturing-10.0
 Philly Fed Manufacturing-12.5
 IP0.2%
 Capacity Utilization77.9%
FridayHousing Starts1.37M
 Building Permits1.45M
 Michigan Sentiment53.1

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

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More Pain

Posted on by

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 9th.  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.

TodayTrade Balance-$137.0B
WednesdayFOMC Rate Decision4.50% (unchanged)
 Consumer Credit$9.5B
ThursdayBOE Rate Decision4.25% (-0.25%)
 Initial Claims230K
 Continuing Claims1890K
 Nonfarm Productivity-0.7%
 Unit Labor Costs5.1%

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

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The Future As Fraught

Posted on by

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

 

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

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

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

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

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

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

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

Source: tradingeconomics.com

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

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

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

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

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

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

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

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

Good luck

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Be Quite Scared

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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.

TuesdayGoods Trade Balance-$146.0B
 Case-Shiller Home Prices4.8%
 JOLTs Job Openings7.5M
WednesdayADP Employment108K
 Q1 GDP0.4%
 Q1 Employment Cost Index0.9%
 Chicago PMI45.5
 Personal Income0.4%
 Personal Spending0.6%
 PCE0.0% (2.2% Y/Y)
 Core PCE0.1% (2.6% Y/Y)
ThursdayInitial Claims225K
 Continuing Claims1860K
 ISM Manufacturing48.0
 ISM Prices Paid70.2
FridayNonfarm Payrolls135K
 Private Payrolls127K
 Manufacturing Payrolls-5K
 Unemployment Rate4.2%
 Average Hourly Earnings0.3% (3.9% Y/Y)
 Average Weekly Hours34.2
 Participation Rate62.5%
 Factory Orders4.5%

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

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That Man is Our Bane

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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

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