Tag Archives: #politics

The Tariff Explosion

Posted on by

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 by

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 by

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

Adf

Hair All on Fire

Posted on by

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

 

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

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

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

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

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

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

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

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

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

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

Source: cnn.com

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

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

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

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

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

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

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

Source: tradingeconomics.com

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

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

Good luck (we all need it!)

Adf

Quite Miffed

Posted on by

By now, each of you is aware
More tariffs, the Prez did declare
Some nations will scream
While others will scheme
To Trump, though, in war all is fair
 
The market reaction was swift
With equities in a downshift
While Treasuries rallied
Pure gold, lower, sallied
And everyone worldwide’s quite miffed

 

Once again, President Trump did exactly what he told us he was going to do from the start.  He applied reciprocal tariffs on virtually every nation in the world, although at a rate claimed to be ~50% of their tariffs on the US, (as calculated by the White House and which included quotas and non-tariff barriers as well.)  In addition to Israel, which pledged to reduce tariffs to 0% on US goods if the US would do the same, it appears Canada has also agreed that deal.  I expect that we will hear different responses from nations all around the world, but remember, the one thing the president has made clear is that retaliation by other nations will be met with a significantly higher response from the US.  I expect that smaller nations may find themselves in very difficult straits, although larger ones have more potential to respond.  But, in the end, the US remains the consumer of last resort, and every nation on the list realizes that losing the US market will not help their economies.

The market response was immediate with US equity futures plummeting on the open of the evening session and sharp declines in Asian equities as well.  Treasury yields fell along with the dollar, while gold after an initial rally, reversed course and is now lower on the day as well.

Analysts around the world are out with early forecasts of the “likely” impacts of these tariffs although I would take them with a grain of salt.  Remember, analyst macro models have been pretty useless for a while, ever since the underlying conditions changed as I described earlier this week, so it is not clear to me that applying broken models to a new event is likely to offer accurate estimates of future activity.  However, there is a pretty clear consensus, which is that inflation is going to rise while economic activity is going to decline, probably into a recession.  Personally, I am confused by this analysis as every one of these analysts continues to believe that a recession drives prices lower and reduces inflation, but I’m just reporting on what I have seen.

If pressed, I expect that we will see several nations reduce their tariff structures in response to this, similar to Canada and Israel, and US tariffs will decline there as well.  Other nations will dig in their heels and trade activity between the US and those nations will decline.  But I will not even hazard a guess as to which nations will do what.  Political pain is a funny thing, and different leaders respond differently.

My sincere hope is that now that the tariffs have been imposed, we can move on with our lives and discuss other issues because frankly, I am really tired of this topic.

Masked by the tariff mania was news that the US Senate has moved forward on its budget resolution bill which if passed and combined with the House, will allow the process to start to legislate for fiscal year 2026.  Both versions maintain the 2017 tax cuts, both seek unspecified spending reductions and while each has a different price tag, my take is this process will be completed before too long.  It would truly be miraculous if Congress actually submitted department spending bills on a timely basis, rather than the omnibus bills that have been the norm for quite a while.  That would be true progress in how the government works.

Anyway, let’s see where things stand this morning.  The one thing we know is that despite President Trump’s constant discussion on tariffs, market participants were not prepared.  Ironically, yesterday saw modest gains in US equity indices but as of now (6:40) US futures are sharply lower (NASDAQ -3.8%, SPX -3.6%, DJIA -2.6%).  Of course, the damage has been significant everywhere with equities lower worldwide.

In Asia, Vietnam (-7.2%) was the worst hit index, actually the worst in the world, as tariffs there rose to 46%.  Given Vietnam has been a way station for exports from China to the US, I expect that we will see some swift action by the government there to address the situation.  But elsewhere in Asia, while the losses were universal, they were not as bad as might be expected.  Tokyo (-2.6%) led the way lower with Chinese shares (Hang Seng -1.5%, CSI 300 -0.6%) also falling, but not collapsing.  Korea (-0.8%) and India (-0.4%) fell but were also not devastated.

In Europe, though, the pain is more consistent and larger, net, than Asia as per the below snapshot from Bloomberg.  This will be the most interesting thing to watch as there has been a great deal of huffing and puffing about a response, but will European nations, who sell a great deal into the US, risk a worse outcome, or will they reduce their own tariffs?

Something else that has declined sharply is bond yields around the world.  Treasury yields are lower by a further -6bps, and that is the basic decline seen across Europe as well.  Asia saw even greater drops in yields with JGB’s (-12bps) breaking the trendline that had been in place since the BOJ first started hiking rates last year and Governor Ueda made clear his intention to continue to do so.  

Source: tradingeconomics.com

It appears that investors are anticipating a global recession, at least based on the movements in government bond yields around the world.

In the commodity space, oil (-4.7%) has reversed much of its recent gains as the recession narrative has eclipsed the Iran war/sanctions narrative.  However, despite the sharp decline, oil remains nearly $3/bbl above the lows seen at the beginning of March, just one month ago.  In the metals market, gold, which initially traded to new highs on the tariff announcement reversed course about lunchtime in Asia and is now down by more than -2.0%.  My take is this is a short-term impact as investors sell liquid assets with gains to cover margin calls, rather than any negative feelings about gold in the wake of the news.  Instead, I suspect that the barbarous relic will regain its footing shortly as the ultimate haven asset in difficult times, and clearly many now see difficult times ahead.  Silver (-3.9%) and copper (-0.4%) are also softer, much more on the economic concerns than the risk concerns.

Finally, the dollar, shockingly, is broadly lower this morning.  While we have been consistently informed that a very clear response to the US imposing tariffs would be other currencies weakening vs. the dollar to offset the impact, apparently that model is also broken.  Versus it’s G10 counterparts, the dollar is under severe pressure today.  EUR (+1.75%), JPY (+1.7%), CHF (+2.1%), SEK (+2.1%) and even NOK (+1.1%) despite the collapse in oil prices, have all moved to within 1% of the dollar’s lows seen last September.  But to keep things in perspective, I don’t know that I would call the dollar “weak” here.  The below chart of DXY shows that even over the past 20 years, the dollar has been MUCH lower and only spent a relatively small amount of time above current levels.  

Source: Koyfin.com

Interestingly, other than the CE4, which track the euro closely, most EMG currencies have not seen the same boost vs. the dollar, although most are somewhat higher.  MXN (+0.6%), KRW (+0.6%) and INR (+0.5%) have all gained modestly.  ZAR (0.0%) and CNY (-0.2%) are the only currencies that have bucked the trend and followed the economic theory.  

Turning to the data, this morning brings the weekly Initial (exp 225K) and Continuing (1860K) Claims as well as the Trade Balance (-$123.5B) at 8:30.  Then at 10:00 we see ISM Services (53.0).  The thing about this data is it ought to have no impact whatsoever as last night’s tariff announcements completely changed the playing field.  So whatever things were, they are not representative of the future, at least the near future.  There are also a couple of Fed speakers, but again, there is no way they can determine how they will react until the real economic effects of these tariffs start to play out.

There have been many analysts who continue to believe that President Trump will not be able to tolerate a substantial decline in the equity market despite the fact that he has not discussed it at all, and he, along with Treasury Secretary Bessent have consistently said their goal is a lower yield on 10-year Treasuries.  Well, they are getting their wish right now, regardless of the reason.  

The president has done virtually everything he said he was going to do regarding the border, government efficiency and now tariffs.  There are many skeptics who believe that he is out to force economic change on the backs of the bottom 90% of earners to benefit himself and others in the top 1%.  But he has consistently said his goal is to help the middle class.  His view of reindustrialization and more self-sufficiency while reduced international adventures continues to be the driving force of his policies.  There is no reason to believe he is going to change that view.  Do not look for a reversal of what he has done simply because the S&P 500 declines.  I think the trend is going to be for the dollar to continue to decline along with interest rates, while commodities rally.  Equity markets are going to be a tale of two markets, likely with previous highflyers suffering and previously overlooked companies benefitting.  

The world is changing a lot, so the best thing you can do is maintain your hedges to mitigate the impact.

Good luck

Adf

Fast or Slow Death?

Posted on by

As markets all take a deep breath
Concerns are that, just like Macbeth
The President will
The ‘conomy kill
The question is, fast or slow death?

 

Personally, I am hopeful that we can stop discussing tariffs after today.  It’s not that they will decrease in importance, but they will no longer be the primary topic.  Instead, they will be a secondary explanation for anything that anybody decides is wrong with the economy, or the country or the world.  Recession? Tariffs are the cause.  Inflation? Tariffs are the cause.  War? Tariffs are the cause.  Duke loses in the semis?  Tariffs are the cause.  

FWIW, which is probably not that much, my view is the market has absorbed this conversation and the correction we have seen over the past weeks in the equity market is the result of growing expectations of much slower growth or a recession.  Arguably, the biggest concern should be that US equity markets continue to trade at historically rich valuations and any negative catalyst can serve to both depress future expectations and compress multiples, and that’s how you get large equity market declines.

The thing about the tariff story is that while later today we will all find out the details, the actual impacts will take months, at least, to be determined.  For instance, the story that Israel has just decided to drop all tariffs on US made products, thus avoiding them on Israeli products is something I suspect we may see more frequently than now assumed.  Perhaps there would be no greater irony for all the naysayers than if this ‘end of free trade’ moment actually inspired a significant reduction in tariffs around the world as nations seek to retain access to the US.  I’m not saying this will be the case, but given the US is the consumer of last resort, running a nearly $1 trillion trade deficit, pretty much every other nation relies on the US as a market for some portion of their production.

Along these lines, I must ask, why is it that other nations, who apply tariffs and other non-tariff barriers like quotas or regulatory restrictions, to US products do so if tariffs are such a great evil?  Apparently when the French, for example, seek to protect their industries and farmers, it is healthy for the economy, but when the US does, it is world-ending.  Just sayin’

So, is the dip now to be bought?
Or are things still overly fraught?
The overnight session
Did naught for that question
As no one knows what Trump has wrought

Since there are literally no other stories to discuss regarding finance and markets right now, let’s turn to the overnight and see how markets are behaving in the runup to the Liberation Day announcement.  Yesterday’s mixed, but mildly positive, session in the US led to a mixed session in Asia with no real trend.  Even within a nation (Nikkei +0.3%, TOPIX -0.4%) there was no clarity.  Chinese shares were basically flat, Korea and Singapore fell while India and Malaysia rallied.  No movements approached even 1.0% so it is probably fair to say we didn’t learn anything.  However, European bourses are under pressure across the board this morning led by the DAX (-1.3%) and FTSE 100 (-0.9%).  Clearly, there is significant concern that the US tariffs, which are set to come into force immediately upon their announcement, will have a significant negative impact on European companies.  Certainly, German auto makers, who rely greatly on the US market, are likely to be negatively impacted, but as I said, it remains to be seen what actually occurs.  I guess considering that European shares have been performing well of late, with gains on the order of 10% or more YTD, some investors have decided to take their money and run.  

source: tradingeconomics.com

Meanwhile, US futures are pointing lower at this hour (7:10) down about -0.5% across the board.

In the bond market, while there is a lot of huffing and puffing that tariffs will be inflationary, yields are sliding this morning with Treasury yields (-2bps) declining to their lowest levels since last October, and a similar amount to most European sovereigns.  I suppose bond investors are more concerned over the mooted recession than the inflationary impact of tariffs.  Too, JGB yields slid -3bps, back to their lowest level in a month as questions remain about the BOJ’s future path as well as Japanese growth prospects in the new trade regime.

Turning to commodities, oil (-0.35%) has slipped a bit further but remains well up on the week as a story regarding the US moving more military assets toward the Middle East from Asia makes the rounds.  We cannot forget that President Trump has already initiated secondary sanctions on Venezuelan crude, and threatened to do so on Russian crude if Putin doesn’t agree to the ceasefire.  Meanwhile, Iran is always in Trump’s crosshairs while they remain a perceived threat to go nuclear.  As to the metals markets, gold (+0.1%) continues to edge higher with any pullbacks both short term and modest.  One look at the chart below shows how many more green days there have been than red ones over the past 6 months.  I see nothing to stop this trend.  As to the other metals, they are higher this morning and continue to trade well overall.  I believe the case can be made that going forward, commodity markets, and the shares of companies in the space, are set for some real outperformance in the new world order.

Source: tradingeconomics.com

Finally, the dollar is mixed as well, with some widely disparate movements seen.  For instance, NZD (+0.9%) is having a good day, perhaps because direct trade with the US is di minimus, or perhaps because it has been weakening so much for the past 6 months, down nearly 10% even after today’s rally, over that period, that it is a simple bounce.  At the same time, ZAR (-1.0%) is sliding despite the ongoing gold rally, although there are growing concerns over the outcome of the budget there and how it will be funded and impact the economy.  But in truth, as I look across the board, there are probably more currency gainers than losers this morning, which ironically is exactly the opposite of the forecast impact of tariffs by the US.  Just remember, as Yogi Berra allegedly explained, “in theory, there is no difference between theory and practice, in practice there is.” Detailed market outcomes based on economic theories rarely hold up.

On the data front, this morning brings ADP Employment (exp 105K) and Factory Orders (0.5%, 0.7% ex-Transport) as well as the EIA oil inventories.  Yesterday afternoon’s API inventories showed a large build, but expectations are for draws today.  We also hear from Adriana Kugler, Fed governor, but ironically, all the Fed talk is now about tariffs and not about monetary policy.

Today is a crapshoot, with no way to even guess how things will evolve.  Also, beware the initial reaction as it may not represent a new view, but rather the unwinding of current positions.  Until further notice, though, I still think the dollar has a slow decline in its future.

Good luck

Adf

Aren’t Just Rumors

Posted on by

Give plaudits to President Xi
Who’s trying to show it is he
That’s offering deals
To help grease the wheels
Of trade, which he claims will be free
 
The problem is Chinese consumers
Have not been in very good humors
And history shows
The Chinese impose
Restrictions that are aren’t just rumors

 

Market activity can well be described as lackluster, with equity indices generally slipping lower while bond markets wobble and the dollar retraces some of its recent losses.  In fact, the only markets really showing a trend right now are gold (+0.4%), silver (-0.1%) and copper (-0.2%), all of which have rallied sharply over the past month and year.  Obviously, the major discussion point is President Trump’s tariff policy and how that will impact economies around the world.  Recent focus has been on how other nations will respond with a variety of poses taken by different leaders, from conciliatory to combative.

So, it is with great interest that we see another impact of the Trump administration, the sight of China’s communist party leader, Xi Jinping, trying to convince foreign company CEO’s that investing in China is a good deal.  A lead article in Bloomberg this morning describes a large gathering in China where President Xi hosted CEO’s of numerous companies from around the world in an effort to portray China’s policies as investment friendly.

This makes sense given the trend in foreign direct investment toward China over the past years.  As can be seen in the chart below from the Bloomberg article, it has not been a pretty sight.  And remember, this all occurred before President Trump was elected.  Clearly, there were concerns prior to Mr Trump escalating the trade conflicts with the US.  

I find it somewhat ironic, though, that Xi is trying to promote Chinese policy as an island of stability in the world.  Consider how he has capriciously destroyed the private education market, or even the tech market until reversing course after the DeepSeek announcement, all while the housing market continues to implode.  Given the rest of the world has lost patience with China’s mercantilist policies and the flood of cheap goods they produce with government support, I am at a loss to understand the appeal of investing in China.  Using it as an export base is a nonstarter, and history has shown that nearly every foreign company that looked at China’s population as a great untapped market for their products has been hugely disappointed.  The exceptions are the luxury goods makers, where the global brand and cachet were too strong for domestic competitors to overcome.  But that is a small segment of the market.  

Instead, the usual outcome is forced technology transfer which results in a state-supported competitor for their products around the rest of the world.  I am confident there will be companies that choose to invest, if for no other reason than to curry favor with Xi and open the doors to further potential sales, but the trend of late is not promising.  Ultimately, property laws and their enforcement are the keystone for inward investment into any nation and China has no history of treating foreign companies fairly, or domestic ones for that matter.

But really, the flow of direct market news and economic data has been secondary with far more political news leading conversations.  The impact of tariffs on economic activity and inflation, as well as on market performance remains unclear with arguments being made on both sides as to potential benefits or detriments.  FWIW, which is probably not much, my take is the impacts will be very unevenly spread, and how that impacts broad based numbers is unknowable at this time.  I fear we will all need to be reactive for now, although for those with outstanding exposures, there is no better argument for maintaining robust hedge ratios given the overall uncertainty.

Ok, let’s take a look at the overnight action in markets.  After yesterday’s US declines, we saw much of Asia follow suit with Tokyo (-1.8%) particularly hard hit as PM Ishiba thought that he was making headway with President Trump but found out that Japanese auto manufacturers were going to be subject to those tariffs as well.  Adding to the pressure were the “Minutes” from the last BOJ meeting which implied further rate hikes are on the horizon. Both Hong Kong (-0.65%) and China (-0.45%) also slipped and, in fact, almost every major market in Asia (Korea, India, Taiwan, Malaysia, Singapore and Thailand) also fell, some quite sharply.  Apparently, Xi’s efforts at creating that stability haven’t yet been successful.  

In Europe, red is also the dominant color with most continental bourses lower by around -0.6%, also on the tariff story.  The one exception here is the UK, which released a passel of data showing growth was modestly firmer than expected at 1.5% led by Retail Sales growing 1.0%, rather than declining by -0.3% as expected.  As to US futures, at this hour (7:15) they are pointing slightly lower, about -0.2%.

In the bond market, yields are backing off around the world with Treasuries (-3bps) lagging European price action where sovereigns have seen yields decline between -4bps and -6bps.  Even JGB yields have slipped -4bps.  In Europe, inflation data from France and Spain came in softer than expected which has encouraged the move there, and we even heard arch ECB hawk, Robert Holzmann, explain that funding defense spending via bond purchases (i.e. QE) was viable.

In the commodity markets, oil (-0.2%) which rallied yesterday to touch the elusive $70/bbl level is slipping back a bit, but the trend remains clearly higher as per the below.

Source: tradingeconomics.com

Finally, in the currency markets, the dollar is firmer once again with modest rallies vs. the euro (-0.3%) and pound (-0.2%) as well as strength against the Scandies (SEK -0.6%, NOK -0.3%).  However, the picture in the EMG bloc is more mixed with ZAR (+0.35%) showing strength alongside gold’s rally, and INR (+0.2%) bucking the trend after having agreed to reduce tariffs on US products.  Throughout the rest of the bloc, there has been generally little change.

Turning to the data this morning, there is plenty that will be keenly watched.  Personal Income (exp 0.4%), Personal Spending (0.5%) and the PCE data (headline 0.3%, 2.5% Y/Y and core 0.3%, 2.7% Y/Y) all get released at 8:30.  Then at 10:00 we see Michigan Sentiment (57.9) and you can be sure people will be talking about the Inflation Expectations piece (1yr 4.9%, 5yr 3.9%), especially if it syncs with their narrative.  There are two more Fed speakers, Governor Barr and Atlanta Fed president Bostic, but nothing any Fed speaker has uttered has mattered at all, maybe since Trump was inaugurated.

My read on overall sentiment is that investors are wary of the future, but not yet ready to abandon the stocks only go up narrative.  Regarding the dollar, the recent trend remains modestly lower, as per the below, but it is hard to get excited about large moves, at least for today.  Again, Trump clearly wants it lower and seems likely to get his way, at least to some extent.  The one thing I truly do like is commodities, which I believe will remain well bid overall.

Source: tradingeconomics.com

Good luck and good weekend

Adf

The Fools

Posted on by

In April, it starts with the Fools
But two days thereafter the rules
For importing cars
To where Stars and Bars
Fly will change with tariffs as tools
 
For Europe, the pain will be keen
At least that’s what most have foreseen
And poor crypto bros
Will find their Lambos
May soon cost a price quite obscene

 

While the political set continues to harp on the “Signal” story, markets really don’t care about political infighting between the parties.  Rather, their focus is keenly attuned to President Trump’s confirmation that starting on April 3rd, there will be a 25% tariff imposed on all imported autos from everywhere in the world.  This is particularly difficult for European auto manufacturers as they produce a far smaller proportion (VW 21%, BMW 36%, Mercedes 41%) of their vehicles in the US than do the Japanese (Honda 73%, Toyota 50%, Nissan 52%), although the Koreans will be impacted as well (Hyundai/Kia 33%).  Ironically, according to Grok, where I got all this information, GM only produces about 54% of their vehicles sold in the US, in the US, with the rest coming from Canada and Mexico.  As an aside, Tesla produces all their vehicles in the US.

Particularly hard hit are the specialty manufacturers like Porsche, Ferrari and Lamborghini, which produce none of their vehicles in the US.  Of course, given the price points of these vehicles, my sense is it may not really hurt their sales as if you are spending $250k on a car, you can likely afford to spend $312.5k as well.  In fact, in a funny way, these tariffs may enhance the Veblen effect where people will brag about paying the higher price as it puts it out of reach of more people.

Nonetheless, the action merely confirms that President Trump is very serious with respect to changing the world’s trading model.  I saw something interesting this morning in that Paul Krugman, who made his name, and won his Nobel Prize, based on work regarding international trade and was the prototypical free trader, has adjusted his views after recognizing that nations need to maintain some manufacturing capabilities for security reasons.  I assure you, if Krugman, who has been a vocal liberal critic of every Republican idea for the past twenty years, agrees with this policy, it will be very difficult for anyone to reject it.

In a perfect world (globo economicus?) free trade accrues benefits to all.  But we don’t live in that world and national priorities often supersede these issues.  The pandemic highlighted the weaknesses that the US had developed in its ability to manufacture key items necessary for its continued economic and defense survival. And remember this, for the world at large, their idea of free trade is they should be able to sell whatever they grow/manufacture into the US with no barriers, but US manufacturers need to be subject to barriers in order to protect other nations’ favored industries and companies.  That world is now history with new rules being written every day and most of them by Donald Trump.

So how have markets responded to this tariff confirmation?  Not terribly well.  Yesterday’s US equity selloff was pretty significant led by the NASDAQ’s -2.0% decline.  In Asia, the Nikkei (-0.6%) also sold off as did Korea (-1.4%), Taiwan (-1.4%) and Australia (-0.4%).  On the other hand, both China (+0.3%) and Hong Kong (+0.4%) managed a better session, seemingly as a rebound against declines in the previous session with the only news showing that Chinese industrial profits fell by -0.3% compared to a Y/Y decline of -3.3% in December.  However, a quick look at a chart of this data for the past five years tells me they need to seasonally adjust it in order to get something meaningful, so I don’t think it really impacted markets.

Source: tradingeconomics.com

As to European shares, it should be no surprise that the tariff announcements have negatively impacted shares there with declines of between -0.2% (Spain) and -0.7% (Germany).  US futures though, at this hour (7:00) are little changed on the session.

In the bond market, Treasury yields continue to creep higher, up another 3bps this morning and back to levels last seen a month ago.  This cannot be helping Secretary Bessent’s blood pressure, although he very clearly has a plan in mind.  There is much stagflation discussion in the markets by the punditry as they assume tariffs will slow growth and raise prices and bonds are not the favored investment in that scenario.  Meanwhile, European sovereign yields are all sliding this morning, largely down -2bps, amid growth concerns on the back of the tariff announcements.  The one exception here is UK Gilts (+7bps) as the UK Budget announcement indicated slightly more gilt issuance would be necessary to fund the government’s spending plans.  However, there is a growing concern over the financial management of the Starmer government overall.

In the commodity markets, oil (-0.35%) is slipping from yesterday’s closing levels and continues to flirt with the $70/bbl level but has not been able to breech it since late February.  Apparently, there are questions as to whether the auto tariffs will reduce demand.  Personally, I would think it is the opposite as more older, less fuel efficient cars will remain on the road here.  As to gold (+1.0%) after a several day pause, it appears that it is resuming its very strong trend higher.  You know what we haven’t heard about lately?  Ft Knox auditing.  I wonder if that is getting arranged or is now so old a story nobody cares.  Silver (+1.0%) is along for the ride although copper (-0.4%) is taking a breather after a breathtaking run to new all-time highs this year.  Look at the slope of the copper chart and you can see why it is pausing, at the very least.

Source: tradingeconomics.com’

Finally, the dollar is broadly softer this morning, with the euro, pound and Aussie all gaining on the order of 0.3%.  As well, NOK (+0.3%) is firmer after the Norgesbank surprised some and left rates on hold with a relatively hawkish message about the future.  But there is weakness vs. the greenback around with JPY (-0.3%), MXN (-0.3%) and INR (-0.2%) all leaning the other way.  Another tariff related story is that India is planning to cut its tariffs in half for the US, a very clear victory for President Trump. 

On the data front, this morning brings the weekly Initial (exp 225K) and Continuing (1890K) Claims data as well as the third and final look at Q4 GDP (2.3%).  Part of the GDP data is Real Final Sales (4.2%) which is a key indicator for what happens here given consumption represents ~70% of the economy.  We do hear from Richmond Fed president Barkin this afternoon, but right now, Fed speakers are speaking into the void.

International statecraft continues to be the underlying thesis of global relations and President Trump’s goals of reshoring significant amounts of manufacturing and jobs along with it is still the primary driver.  There has been far less talk of the Mar-a-Lago Accord as that seems to be losing its luster.  If countries adjust their trade policies, Trump will continue in this direction.  While that may include short-term economic weakness and some pain, for both the economy and the stock markets, there is no indication, yet, he is anywhere near blinking.  One thing to keep in mind is that an overvalued stock market can correct by prices falling sharply, but also by prices stagnating for a long time while earnings catch up and multiples compress.  We may very well be looking at the latter scenario, so no large gains nor losses, just choppy markets going forward.  As to the dollar, lower still seems the direction of travel overall from current levels, but probably in a very gradual manner.

Good luck

Adf

Another Broadside

Posted on by

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

 

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

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

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

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

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

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

Source: tradingeconomics.com

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

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

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

Source: tradingeconomics.com

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

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

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

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

Source: tradingeconomics.com

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

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

Good luck

Adf

Tripping Off Tongues

Posted on by

Recession is tripping off tongues
And pundits ain’t twiddling their thumbs
Political shades
Are driving tirades
And screams at the top of their lungs
 
But are we that likely to see
A minus in our ‘conomy?
We certainly could
And probably should
But life doesn’t always agree

 

The major discussion point over the weekend has been recession, and how likely we are to see one in the US in the coming months.  Of course, this matters to the punditry not because of any concern over the negative impacts a recession has on the population, but ‘more importantly’ because recessions tend to result in sharp declines in equity values.  And let’s face it, do you honestly believe that the editors of the New York Times or the Wall Street Journal are remotely interested in the condition of the majority of the population?  Me neither. 

However, if they can call out something that they believe can impede President Trump, or detract from his current high ratings, they will play that over and over and over.  Funnily enough, when I went to Google Trends, I looked up “recession” over the past 90 days with the result below:

That peak was on March 11 although there was no data of note that day compared to a reading of 9 today. Looking at the news of that day, even CNN had a hard time finding bad news with the four top stories being 1) the Continuing Resolution vote in the House being passed, 2) the Department of Education announcing a 50% RIF, 3) 25% tariffs on steel and aluminum being imposed and 4) Ukraine accepting terms for a 30-day ceasefire.  From an economic perspective, the tariffs clearly will have an impact, but it seems a leap that the average American can go from 25% tariffs on imported steel and aluminum to recession in one step.  And based on the positive responses that continue to be seen regarding President Trump’s efforts to reduce the size of government, I doubt the DOE cuts were seen as the beginning of the end of the economy.  

And yet, recession was the talk of the punditry this weekend.  To try to better understand why this is the case, I created the following table of several major economic indicators and their evolution since December, prior to President Trump’s inauguration.

Key indicatorsDecJanFeb
NFP323125151
Unemployment Rate4.10%4.00%4.10%
CPI2.90%3.00%2.80%
Core CPI3.20%3.30%3.10%
PCE2.60%2.50% 
Core PCE2.90%2.60% 
IP1.10%0.30%0.70%
Capacity Utilization77.60%77.70%78.10%
ISM Mfg49.250.950.3
ISM Services5452.853.5
Retail Sales0.70%-1.20%0.20%

Source: tradingeconomics.com

Once again, while I am certainly no PhD economist, this table doesn’t strike me as one demonstrating a clear trend in worsening data, certainly not on an across-the-board basis.  Rather, while you might say January was soft, the February data has largely rebounded.  My point is that despite ABC, NBC, Bloomberg, the BBC and CNN all publishing articles or interviews on the topic this weekend, I’m not yet convinced that is the obvious outcome.

My good friend the Inflation Guy™, Mike Ashton, made an excellent point in a recent podcast of his that is very well worth remembering.   The breadth of the US economy is extraordinarily wide and covers areas from manufacturing to agriculture to finance to energy and technology along with the necessary housing markets as well as the entire population consuming both goods and services.  Added to the private sector, the government sector is also huge, although President Trump and Elon Musk are trying hard to shrink it.  But the point is that it is not merely possible, but likely, that while some areas of the economy may go through weak patches, that doesn’t mean the entire economy is going to sink into the abyss.

If we think back to the last two recessions, the most recent was Covid inspired, which resulted from the government literally shutting down the economy for a period of several months, while giving out money.  Net, things weakened, but even then, there were stronger parts and weaker parts.  Go back to the GFC and the housing bubble popped and dragged banks along with it.  That was the problem because banking weakness inhibits the free flow of money and that will impact everyone.

The question to be asked now, I would suggest is, are we likely to see another catalyst that will have such widespread impacts?  Higher tariffs are not going to do the trick.  Shrinking government, although I believe it is critical for a better long-term trajectory for the economy, will have a short-term impact, but it is not clear to me that it will negatively impact the economy writ large.  Certainly, the Washington DC area, but will it impact the Rocky Mountain area?  Or Texas and Florida?  

Now, a recession could well be on the way.  Running 7% budget deficits was capable of papering over many holes in the economy and pumping lots of liquidity into it as well.  If those deficits shrink, meaning spending shrinks, the pace of activity will slow.  But negative?  It seems a stretch to me, at least based on what we have seen so far.  One last thing here, is how might this potential weakening economic growth impact inflation? Now, we all ‘know’ that a recession causes inflation to decline, don’t we?  Hmmm. While that makes intuitive sense, and we hear it a lot, perhaps the Inflation Guy™ can help here as well.  Back in February he wrote a very good explanation about how that is not really the case at all, at least based on the macroeconomic data.  The truth is economic growth and inflation have very little correlation at all.

Of course, perhaps the most critical issue for the punditry is, will a recession drive stock prices lower?  Here the news is far less sanguine if you are a shareholder and believe there is going to be a recession.  As you can see from the below chart of the S&P 500, pretty much every recession for the last 100 years has resulted in a decline in stock market indices.

Source: macrotrends.net

This is a log chart so some of those dips don’t seem that large, but the average downturn during a recession is about 30%, although that number can vary widely.  To sum it up, while the data doesn’t scream recession to me, it cannot be ruled out.  As well, both President Trump and Secretary Bessent have indicated that weakness is likely going to be a result of their early actions, although the idea is to pave the way for a more stable economic performance ahead.  As I have written repeatedly, volatility is likely the only thing of which we can be certain as all these changes occur.  Hedge your exposures!

Ok, let’s look at the overnight activity.

The rumor is Trump may delay
His tariffs as he tries to weigh
How much he should charge
And how much, writ large,
These nations are going to pay

Equity futures in the US are higher this morning as the big story is that President Trump is considering narrowing the scope of nations who will have tariffs imposed on April 2nd.  Apparently, his administration has identified the “dirty fifteen” nations with the largest bilateral imbalances and they will be first addressed.  The telling comment in the WSJ article I read was when Trump said, “Once you give exemptions for one company, you have to do that for all. The word flexibility is an important word. Sometimes there’s flexibility, there’ll be flexibility.”  To my ear, the final plans are not in place, but my sense is he will impose then remove tariffs, rather than avoid them initially.  Interestingly, that story was written last night, yet Asian equity markets were not that ebullient.  Japan (-0.2%) saw no benefit although Chinese shares (HK +0.9%, CSI 300 +0.5%) fared better. Things elsewhere in the region were mixed with both gainers (India, Thailand) and laggards (Korea, Taiwan, Indonesia) with many bourses little changed overall.

In Europe, green is the predominant color this morning but movement is modest with Spain’s IBEX (+0.4%) the leader and lesser gains elsewhere.  While US futures are all higher by about 1% or more at this hour (6:45) apparently the Europeans aren’t as excited at the tariff delay process.

In the bond market, yields have backed up virtually across the board with Treasuries (+4bps) leading the way higher and most European sovereigns showing yields rising by 1bp or 2bps.  It’s interesting, while there has been much discussion regarding German yields having traded substantially higher in the wake of the effective end of the debt brake and anticipation of much further issuance, a look at the chart below tells me that after that gap higher on the news, concerns over German finances have not deteriorated at all.  And after all, the difference is about 25bps higher, hardly the end of the world.

Source: tradingeconomics.com

In the commodity markets, oil (+0.7%) is continuing its gradual rebound from the lows seen on, ironically, March 11th.  Arguably, what this tells us is that despite the weekend barrage of recession focused articles, the market doesn’t really see that outcome.  In the metals, strength is the word, again, with copper (+1.25%) making new all-time highs on the back of China’s stated goals of growing its strategic stockpile.  Not surprisingly, both gold (+0.2%) and silver (+0.6%) are also climbing this morning alongside copper as commodities remain in greater demand than a recession would indicate.

Finally, the dollar is a bit softer despite rising Treasury yields with both the euro (+0.3%) and pound (+0.4%) bouncing after last week’s modest declines.  And this is despite lackluster Flash PMI readings this morning out of Europe.  The biggest winner is NOK (+0.6%) which given the dollar’s broad weakness and oil’s rebound makes perfect sense.  Otherwise, while the dollar’s weakness is broad, it is no deeper than the aforementioned currencies.

Given the length of this note already (my apologies) and the dearth of data to be released, with only the Chicago Fed National Activity Index (exp +0.08), I will cover data tomorrow as we do end the week with GDP and PCE data.

Headline bingo remains the key concern for all market participants, but ultimately, my altered view of a softer dollar and higher commodities remains intact.

Good luck

Adf