Balling Their Fists

Posted on March 3, 2025 by fxpoet

The world is no longer the same
Since Trump put Zelenskiy to shame
Now Europe insists
They’re balling their fists
And this time it isn’t a game

But markets just don’t seem to care
That, anymore, war’s in the air
Instead, what’s decisive
Is that the new price of
All cryptos has answered their prayer

Last Friday’s remarkable live TV meeting between Presidents Trump and Zelenskiy in the Oval Office has rocked the entire world, or certainly the entire Western World. The unwillingness of Zelenskiy to consider a ceasefire and Trump’s dismissal of him from the White House, even before lunch, has clearly changed a lot of views of how things are going to evolve from here.

The most noteworthy result is the sudden realization by the EU and NATO that the US is committed to ending the war and is not interested in spending much, if any, more money on the subject. The response by the EU, an emergency meeting in London yesterday where every nation committed to a strong defense of Ukraine, including boots on the ground, is remarkable. My fear is that if they proceed along these lines, and French or British soldiers are attacked/shot during the conflict, NATO will seek to invoke Article 5 and drag the US into the conflict. Certainly, that appears to be Zelenskiy’s goal, to get the US to fight Russia on their behalf. (Although, there are those who might say the Biden administration was using Ukraine to fight Russia on their behalf, so this is ~~justified~~ not surprising.). In the end, I believe this path is terrifying as that would result in two nuclear powers meeting on the battlefield, perhaps a cogent definition of WWIII.

However, there is little evidence that market participants are terribly concerned about this situation. Perhaps they are confident that this is all bluster and ultimately President Trump’s plan of increasing US economic interests in Ukraine will be enacted and a sufficient deterrent to prevent that outcome. Or perhaps this is a YOLO moment, where the belief is, if nuclear war destroys the world, I can’t stop it, so I better make as much money as possible now. I recognize geopolitical risk is tough to price, but I would have expected a lot more flight to safety than so far seen.

In fact, in markets, the true story of the weekend was the announcement of a cryptocurrency reserve to be created by the US although no specific size was revealed. While I don’t typically write on the topic, that is because the crypto space has not yet, in my view, become enough of an influence on the macro world to matter. However, this could change that.

Source: tradingeconomics.com

One cannot be surprised that crypto currency prices have rallied dramatically on the back of the announcement, which almost seemed timed to arrest what had been a very sharp decline in those prices recently. It is too early to really determine if this will draw cryptocurrencies closer to mainstream economic and financial discussion, but I would argue it is closer now than it has ever been before.

In Europe, the scoop on inflation
Does not seem ripe for celebration
While CPI slipped
Most forecasts, it pipped
So, slower but not near cessation

Eurozone CPI data was released this morning and the response to the outcome is quite interesting. The data showed that headline fell from 2.5% to 2.4%, while core fell from 2.7% to 2.6%. Obviously, that is a step in the right direction. Alas, analysts’ forecasts were looking for a 0.2% decline in both readings, so while the data was good, it was worse than expectations. In a perfect encapsulation of how narrative writing is so critical, both the WSJ and Bloomberg wrote articles explaining how the declines had set the table for the ECB to cut rates at their meeting this Thursday with neither one discussing market forecasts.

Now, a look at the market response shows that European sovereign yields have all risen between 6bps and 9bps, hardly the response one would expect in a lower inflation world. As well, with Treasury yields higher only by 5bps this morning, as they bounce from their recent declines, the euro (+0.7%) has rallied sharply on the day.

Much has been made of the European’s new commitments to increase defense spending, especially in the wake of yesterday’s meeting discussed above, and the requisite increases in defense spending that would accompany this new stance. However, increased European defense spending has been a story for the past many weeks as President Trump has been railing against European members of NATO for not holding up their end of the bargain. I guess the meeting added a greater sense of urgency, but remember, not an additional dime has been spent yet, nor even legislated. Talk is cheap!

But there you have it. Despite what appears to be a giant step closer to a major global conflagration, the market response has been a more classic risk-on result, with bond yields rising, the dollar falling and most equity indices doing fine. Some days, things don’t make much sense.

Time for a quick recap of overnight markets then. Friday’s strong US equity rally was followed by strength in Tokyo (+1.7%) and Australia (+0.9%) although both Hong Kong and China were little changed in the session. It appears Chinese traders are awaiting the news from Wednesday’s NPC meeting where the government will define their economic growth targets for the current year and how they might achieve them. In Europe, Spain (-0.1%) is the laggard with the rest of the continent doing well, led by Germany (+1.1%). It seems there are more defense companies there to benefit from all this mooted spending than elsewhere, hence the rally. Lastly, US futures are higher by 0.35% or so at this hour (7:00).

We have already discussed bonds, where yields are higher everywhere, including Japan (+4bps) as all the war talk has investors convinced there will be a lot more government borrowing everywhere in the world going forward.

In the commodity markets, oil (+0.25%) has been trading either side of unchanged in the overnight session but seems to be consolidating after last week’s declines. I continue to believe that if the Ukraine war does end (and I believe that will be the outcome regardless of Europe’s hawkish turn), oil prices are likely to slide further as one of the likely outcomes will be the end of sanctions against Russian oil and Russian oil transports. Meanwhile, gold (+0.6%) which had a rough week last week, is bouncing and dragging the entire metals complex higher with it. If war is truly in the air, gold and silver seem likely to rally further.

Finally, the dollar is under great pressure this morning across the board. Not only is the euro higher, but only JPY (-0.4%) is weaker vs. the dollar in the G10 as this seems a very risk-on initiative. SEK (+1.3%) is the leader, perhaps because it is on the front lines of the potential war? Seriously, I have no explanation there. But EMG currencies are also rallying with HUF (+2.1%) the big winner, although the entire CE4 is stronger. Again, this makes little sense to me if the politics is pushing toward war as all those nations are on the front lines. Meanwhile, MXN (+0.4%) is managing to rally despite the ongoing threat of tariffs to be imposed tonight at midnight. I continue to read numerous stories on the potential impacts of tariffs with dramatically different takes. In the end, it appears that at least some things will go up in price, although fears of widespread massive price rises seem a bit overdone.

On the data front, along with Thursday’s ECB meeting, Friday brings the payroll report and there is plenty of stuff between now and then.

Today	ISM Manufacturing	50.5
	ISM Prices Paid	56.2
Wednesday	ADP Employment	140K
	ISM Services	52.9
	Factory Orders	1.6%
	-ex Transport	0.3%
	Fed’s Beige Book
Thursday	ECB Rate Decision	2.75% (current 3.00%)
	Trade Balance	-$93.1B
	Initial Claims	340K
	Continuing Claims	1870K
	Nonfarm Productivity	1.2%
	Unit Labor Costs	3.0%
Friday	Nonfarm Payrolls	153K
	Private Payrolls	138K
	Manufacturing Payrolls	5K
	Unemployment Rate	4.0%
	Average Hourly Earnings	0.3% (4.1% Y/Y)
	Average Weekly Hours	34.2
	Participation Rate	62.6%
	Consumer Credit	$15.5B

Source: tradingeconomics.com

In addition to this, we hear from 7 more Fed speakers at 9 venues including Chairman Powell Friday afternoon at 12:30. Now, I have made a big deal about the fact that the Fed has lost much of its sway in the market to President Trump. I believe that Powell’s speech will tell us much about whether they are unhappy about this, or whether they will be quite comfortable sinking into the background. Given Powell’s previous antagonistic relationship with President Trump, I would think it would be the latter. But every central banker seems drawn to the limelight like moths to a flame, so I would not be surprised to see something more dramatic.

As things currently stand, I see the ongoing efforts to cut government spending as a critical piece of the US fiscal puzzle. The more success that DOGE and the administration has in this process, the better the potential outcomes for the US, tariffs or not. This could increase private sector activity and reduce the deficit, thus slowing the debt issuance, and perhaps, weighing on inflation. However, this is a longer-term process, not something that will happen in weeks, but over quarters. In the meantime, I cannot get past the Ukraine situation as the biggest potential risk factors around, and if escalation is in the cards, I would expect Treasury yields to decline amid growing demand while the dollar rallies along with the yen as a haven. Hopefully not but be prepared.

Good luck

Adf

As It’s Been Wrote

Posted on February 26, 2025 by fxpoet

Though China would have you believe
Their goals, they are set to achieve
Their banks are in trouble
From their housing bubble
So capital, now, they’ll receive

Meanwhile, with Ukraine there’s a deal
For mineral wealth that’s a steal
This will help the peace
If war there does cease
And so, it has broader appeal

But really, the thing to denote
Is everything is anecdote
The data don’t matter
Unless it can flatter
The narrative as it’s been wrote

Confusion continues to be the watchword in financial markets as it is very difficult to keep up with the constant changes in the narrative and announcements on any number of subjects. And traders are at a loss to make sense of the situation. This is evidenced by the breakdown in previously strong correlations between different markets and ostensibly critical data for those markets.

For example, inflation expectations continue to rise, at least as per the University of Michigan surveys, with last week’s result coming in at 4.3% for one year and 3.5% for 5 years. And yet, Treasury yields continue to fall in the back end of the curve, with 10-year Treasury yields lower by nearly 15bps since that report was released on Friday. So, which is it? Is the data a better reflection of things? Or is market pricing foretelling the future?

Source: tradingeconomics.com

At the same time, the Fed funds futures market is now pricing in 55bps of cuts this year, up from just 29bps a few weeks ago. Is this reflective of concerns over economic growth? And how does this jibe with the rising inflation expectations?

Source: cmegroup.com

If risk is a concern, why is the price of gold declining?

Source: cnn.com

My point is right now, at least, many of the relationships that markets and investors have relied upon in the past seem to be broken. They could revert to form, or perhaps this is a new paradigm. In fact, that is the point, there is no clear pathway.

Sometimes a better way to view these things is to look at policy actions at the country level as they reflect a government’s major concerns. I couldn’t help but notice in Bloomberg this morning the story that the Chinese government is going to be injecting at least $55 billion of equity into their large banks. Now, government capital injections are hardly a sign of a strong industry, regardless of the spin. This highlights the fact that Chinese banks remain in difficult straits from the ongoing property market woes and so, are clearly not lending to industry in the manner that the government would like to see. I’m not sure how injecting capital into large banks that lend to SOE’s is helping the consumer in China, which allegedly has been one of their goals, but regardless, actions speak louder than words. Clearly the Chinese remain concerned over the health of their economy and are doing more things to support it. As it happens, this helped equity markets there last night with the Hang Seng (+3.3%) ripping higher with mainland shares (+0.9%) following along as well. Will it last? Great question.

Another interesting story that seems at odds with what the narrative, or at least quite a few headlines, proclaimed, is that the US and Ukraine have reached a deal for the US to have access to Ukrainian rare earth minerals once the fighting stops. The terms of this deal are unclear, but despite President Zelensky’s constant protests that he will not partake in peace talks, it appears that this is one of the steps necessary for the US to let him into the conversation. Now, is peace a benefit for the markets? Arguably, it is beneficial for lowering inflation as the one thing we know about war is it is inflationary. If peace is coming soon, how much will that help the Eurozone economy, which remains in the doldrums, and the euro? Will it lower energy prices as sanctions on Russian oil and gas disappear? Or will keeping the peace become a huge expense for Europe and not allow them to focus on their domestic issues?

Again, my point is that there are far more things happening that add little clarity to market narratives, and in some cases, result in price action that is not consistent with previous relationships. With this I return to my preaching that the only thing we can truly anticipate is increased volatility across markets.

With that in mind, let’s consider what happened overnight. First, US markets had another weak session, with the NASDAQ particularly under pressure. (I half expect the Fed to put forth an emergency rate cut to support the stock market.) As to Asian markets, that Chinese news was well received almost everywhere except Japan (Nikkei -0.25%) as most other markets gained on the idea that Chinese stimulus would help their economies. As such, we saw gains virtually across the board in Asia. Similarly, European bourses are all feeling terrific this morning with the UK (+0.6%) the laggard and virtually every continental exchange higher by more than 1%. Apparently, the Ukraine/US mineral rights deal has traders and investors bidding up shares for the peace dividend. Too, US futures are higher at this hour, about 0.5% or so across the board.

As to bond yields, after a sharp decline in Treasury yields over the past two sessions, this morning, the 10-year is higher by 1bp, consolidating that move. Meanwhile, European sovereign yields are all slipping between -2bps and -4bps as the peace dividend gets priced in there as well. While European governments may be miffed they have not been part of the peace talks, clearly investors are happy. Also, JGB yields, which didn’t move overnight, need to be noted as having fallen nearly 10bps in the past week as the narrative of ever tighter BOJ policy starts to slip a bit. While the yen has held its own, and USDJPY remains just below 150, it appears that for now, the market is taking a respite.

In the commodity markets, oil (-0.25% today, -2.0% yesterday) has convincingly broken below the $70/bbl level as this market clearly expects more Russian oil to freely be available. OPEC+ had discussed reducing their cuts in H2 this year, but if the price of oil continues to slide, I expect that will be changed as well. Certainly, declining oil prices will be a driver for lower inflation, arguably one of the reasons that Treasury yields are falling. So, some things still make some sense. As to the metals markets, gold (-0.2%) still has a hangover from yesterday’s sharp sell-off, although there have been myriad reasons put forth for that movement. Less global risk with Ukraine peace or falling inflation on the back of oil prices or suddenly less concern over the status of the gold in Ft Knox, pick your poison. Silver is little changed this morning but copper, which had been following gold closely, has jumped 2.7% this morning after President Trump turned his attention to the red metal for tariff treatment.

Finally, the dollar is firmer this morning, recouping most of yesterday’s losses. G10 currencies are lower by between -0.1% (GBP) and -0.5% (AUD) with the entire bloc under pressure. In the EMG space, only CLP (+0.45%) is managing any strength based on its tight correlation to the copper price. But otherwise, most of these currencies have slipped in the -0.1% to -0.3% range.

On the data front, New Home Sales (exp 680K) is the only hard data although we do see the EIA oil inventory numbers with a small build expected. Richmond Fed president Barkin speaks again, but as we have seen lately, the Fed’s comments have ceased to be market moving. President Trump’s policy announcements are clearly the primary market mover these days.

Quite frankly, it is very difficult to observe the ongoing situation and have a strong market view in either direction. There are too many variables or perhaps, as Donald Rumsfeld once explained, too many unknown unknowns. Who can say what Trump’s next target will be and how that will impact any particular market. In fact, this points back to my strong support for consistent hedging programs to help reduce volatility in one’s financial reporting.

Good luck

Adf

Confusion

Posted on February 25, 2025 by fxpoet

Confusion continues to reign
O’er markets though pundits will feign
That they understand
The movements at hand
Despite a quite rocky terrain

The speed with which Trump changes views
Can even, the algos, confuse
The pluses, I think
Are traders must shrink
Positions, elsewise pay high dues

For the longest time I believed that the algos were going to usurp all trading activity as their ability to respond to news was so much faster than any human. Certainly, this has been the key to success for major trading firms like Citadel and Virtu Financial. And they have been very successful. I think part of their success has been that we have been in an environment where both implied and actual volatility has declined in a secular manner, so not only could they respond quickly, but they could lever up their positions with impunity as the probability of a large reversal was relatively less.

However, I believe that the algos and their owners may have met their match in Donald Trump. Never before has someone been so powerful and yet so chaotic in his approach to very important things. Many pundits complain that even he doesn’t have a plan when he announces a new policy. But I think that’s his secret, keep everyone else off balance and then he has free reign. Chaos is the goal.

The market impact of this is that basically, for the past three months since shortly after his election, the major asset classes of stocks, bonds and the dollar, have chopped around a lot, but not moved anywhere at all. How can they as nobody seems willing to believe that the end game he has explained; reduced deficits, reduced trade balance, lower inflation and a strong military presence throughout the Western Hemisphere, is going to result from his actions. And in fairness, some of the actions do have a random quality to them. But if we have learned nothing from President Trump’s time in office, including his first term, it is that he is very willing to tell us what he is going to do. It just seems that most folks don’t believe he can do it so don’t take it seriously.

So, let’s look at how markets have behaved in the past three months. The noteworthy result is that the net movement over that period has been virtually nil. Look at the charts below from tradingeconomics.com:

S&P 500

10-Year Treasury

EUR/USD

While all these markets have moved higher and lower in the intervening period, they have not gone anywhere at all. The biggest mover over this time is the euro, which has rallied 0.54% with the other major markets showing far less movement than that.

One interesting phenomenon of this price action is that despite significant uncertainty over policy actions by the President and the implications they may have on markets, and even though recent price action can best be described as choppy rather than trend like, the VIX Index remains in the lowest quartile of its long-term range. Certainly, it has risen slightly over the past few weeks, but to my eye, it looks like it is underpricing the chaos yet to come.

Source Bloomberg.com

While I have no clearer idea how things will unfold than anyone else, other than I have a certain amount of faith that the President will achieve many of his goals in one way or another, I am definitely of the belief that volatility is going to be the coin of the realm for quite a while going forward. We have spent the past many years with numerous strategies created to enhance returns via selling volatility, either shorting options or levering up, and that is the trend that seems likely to change going forward. The implication for hedgers is that maintaining hedge ratios while having a plan in place is going to be more important than any time in the past decade or more.

Ok, let’s take a look at how markets did move overnight. Yesterday’s net negative session in the US was followed by similar price action in Asia. Tokyo (-1.4%), Hong Kong (-1.35) and China (-1.1%) all suffered on stories about tariffs and extra efforts by the Trump administration to tighten up export controls on semiconductors. It should be no surprise that virtually every index in Asia followed suit with losses between -0.3% (Singapore) and -2.4% (Indonesia) and everywhere in between. Meanwhile, in Europe, the picture is not as dour as there are a few winners (Spain +0.9% and Italy +0.5%) although the rest of the continent is struggling to break even. The data point that is receiving the most press is Eurozone Negotiated Wage Growth (+4.12%) which rose less than in Q3 and has encouraged many to believe the ECB will be cutting rates next week. Interestingly, Joachim Nagel, Bundesbank president was on the tape telling the rest of the ECB to shut up about their expectations of future rate moves as there is still far too much uncertainty and decisions need to be made on a meeting-by-meeting basis. Apparently, oversharing is a general central bank affliction, not merely a Fed problem. As to US stocks, at this hour (6:50) they are little changed.

In the bond market, yields continue to slide, at least in the US, with Treasury yields down -6bps this morning and back to levels last seen in December. Apparently, some investors are beginning to believe Secretary Bessent regarding his goal to drive yields lower. As well, he has reconfirmed that there will be no major increase in the issuance of long-dated paper for now. European sovereigns, though, are little changed this morning with only UK gilts (-3bps) showing any movement after the CBI Trades report printed at -23, a bit less bad than expected.

In the commodity markets, oil (-0.15%) is little changed this morning after a very modest rally yesterday. But the reality here is that oil, like other markets, has been in a trading range rather than trending, although my take is that the longer-term view could be a bit lower. Gold (-0.35%), though lower this morning, is the one market that has shown a trend since Trump’s election, and truthfully since well before that as you can see in the chart below.

Source: tradingeconomics.com

Finally, the dollar is a touch softer this morning, with both the euro and pound rising 0.3% alongside the CHF (+0.3%) and JPY (+0.2%). Commodity currencies, though, are less robust with very minor losses seen in MXN, ZAR and CLP. Given the decline in 10-year yields, I am not that surprised at the dollar’s weakness although it is in opposition to the gut reaction that tariffs mean a higher dollar. This is of interest because yesterday President Trump confirmed that the 25% tariffs on Canada and Mexico were going into effect next week. As I explained above, it is very difficult to get a sense of short-term price action here although given the clear intent of the president to improve the competitiveness of US exporters, he would certainly like to see the dollar decline further.

It is very interesting to watch this president reduce the power of the Fed with words and not even have to attack the Chairman like he did in his first term. It will be very interesting to see how Chair Powell responds to the ongoing machinations.

On the data front, this morning brings only the Case-Shiller Home Price Index (exp +4.4%) and Consumer Confidence (102.5). We do hear from two Fed speakers, Barr and Barkin, but as I keep explaining, their words matter less each day. (It must be driving them crazy!)

It is hard to get excited about markets here. There is no directional bias right now and the lack of critical data adds to the lack of information. As well, given the mercurial nature of President Trump’s activities, we are always one tape bomb away from a complete reversal. While I don’t see the dollar collapsing, perhaps the next short-term wave is for further dollar weakness.

Good luck

Adf

Scapegoated

Posted on February 24, 2025 by fxpoet

The people of Germany voted
With Friedrich Merz, at last, promoted
The nation, to lead
Though sure to misread
The sitch, with the Right still scapegoated

The result of the German Federal elections was very much as expected, the CDU/CSU won 28.5% of the votes and the largest share while AfD garnered 20.8%, the SPD just 16.4% (it’s worst showing in modern times) and the Greens gaining 11.6%. A tail of other mostly very left-leaning parties made up the balance. However, one cannot look at a map of the distribution of votes without noticing that the part of the country that was East Germany prior to the fall of the Berlin Wall, still sees things very differently than the rest of the nation.

Source: Reuters.com

Regardless of the distribution, however, the outcome will result in some sort of coalition government, almost certainly to be a combination of the CDU and SPD. On the surface, it would seem this left-right coalition will be doomed to failure, and that could well be the case, but because the consensus amongst the ‘right-thinking’ people in politics is that AfD is the devil incarnate, or perhaps more accurately, Hitler incarnate, Herr Merz will not be able to rule with a sure majority of conservative voters.

As with virtually every election, the economy is a top priority of the voters, especially since GDP growth, as measured, has essentially been zero for the past three years as per the below chart, and is mooted to stay there on present policies.

Source: tradingeconomics.com

One of the key issues that is currently under discussion there is the constitutionally enshrined ‘debt-brake’ which prevents the German government from running deficits of greater than 0.35% of GDP in any fiscal year. In order to change the constitution, there needs to be a 2/3’s approval in the Bundestag, but AfD holds a blocking minority and one of their policy platforms has been fiscal prudence.

Arguably, this begs a larger question, what exactly constitutes economic growth? For instance, if government debt is rising more quickly than economic output, is that actually a growing economy? And is that process sustainable going forward? It is quite interesting to look at the government debt dynamics of different nations and ask that question, especially since Germany’s situation really stands out.

Perhaps, after looking at this group of charts, it is worth reevaluating exactly how much actual growth has been occurring and how much economic activity has simply been government borrowing recycled into the economy across all these nations. Of course, this process has not been restricted to G-7 nations, it is a global phenomenon, with China doing exactly the same thing as are virtually all nations. In fact, Germany is unique amongst large nations for bucking the trend.

The reason this issue matters is there is a limit to how far a government can increase its leverage ratio. At some point, investors will stop buying debt which will force the central bank to buy the debt. Of course, they will do so by printing more money and devaluing the currency. We know this because we have seen it happen before many times throughout history with Germany’s Weimar Republic in 1923, Argentina in the 1980’s and Zimbabwe in 2007-2008 as just the most recent examples. In fact, the reason the Germans have the debt brake is that there is a national memory of that hyperinflation from a century ago.

Circling back to the growth question, what is it that constitutes economic growth? If you remember your college macroeconomics classes, this is the equation that is used to calculate economic activity in an economy:

Y = C + I + G + NX

Where:

Y = GDP

C = Consumption

I = Investment

G = Government spending

NX = Net Exports

This equation is taken as gospel in the economics and political worlds. However, it is not often recalled that it was created in the 1930’s by John Maynard Keynes. It is not a law of nature, but merely was Keynes’ way of expressing something that had not been effectively measured previously. Nearly 100 years later, though, perhaps it is time to reevaluate the process. Remember, economies grew prior to Keynes creating this equation when government activity was a much smaller proportion of the economy. But as we can see by the dramatic rise in government debt, that is no longer the case. Perhaps Germany is a peek behind the GDP curtain that shows absent constantly increasing government borrowing, economic growth is stagnant. Neil Howe’s Fourth Turning could well be the conclusion of this period of government excess, where things will be extremely volatile during the change, but less government will be the norm on the other side, at least for a few generations!

Ok, sorry for the history and theoretical discussion, but that chart of German government debt vs. the rest of the world was really eye-opening. Let’s turn to markets from the overnight session.

After Friday’s sharp downward movement in the US, the picture in Asia was far more mixed. Japan (+0.25%) managed a small gain while Hong Kong (-0.6%) and China (-0.2%) both lagged. Elsewhere in the region, New Zealand (-1.8%) stood out for its weakness, although Korea, India and Taiwan were all softer in the session as well. Ironically, it seems that better than expected Retail Sales data in NZ hurt sentiment for further policy ease by the RBNZ and concerns over trade with China given US pronouncements is also hurting the situation there, at least for today.

In Europe, Germany’s DAX (+0.9%) is leading the way higher after IfO Expectation data was released a touch better than forecast at 85.4. However, it is important to remember that while this was a positive outcome, the average reading prior to Covid was between 95 and 103. As to the rest of Europe, there are more gainers than laggards but little of real note absent any other data. US futures at this hour (7:00) are pointing higher by at least 0.5% across the board.

In the bond market, Friday saw a very sharp decline in yields, -10bps in Treasuries, after weak readings in the Flash PMI data, especially services at 49.7, Existing Home Sales and Michigan sentiment. That helped bring global yields lower. This morning, Treasuries have bounced just 1bp and we are seeing similar rises in most of Europe. JGB yields are also unchanged and have continued to consolidate near recent highs.

In the commodity markets, after a sharp sell-off on Friday on the back of stories about increased supply from Kurdistan, oil (0.0%) is unchanged this morning. Meanwhile gold (+0.5%) is rebounding from its regular Friday sell-off, almost as though there were efforts by some to depress the price at the end of every week. It will be interesting to see what happens this Friday which is month end as well. As to silver and copper, they are little changed and dull this morning.

Finally, the dollar is asleep this morning, with very limited movement vs. almost any of its counterparts. USDJPY remains below 150, but the yen has actually fallen -0.3% on the session, while the biggest movers are in Eastern Europe (CZK +0.8%, HUF +0.4%, PLN +0.35%), perhaps on the back of the German election results offering hope for a more useful German government. We shall see about that. Otherwise, nobody is concerned over the dollar right now.

On the data front this week, it is a quiet one with PCE data the highlight on Friday.

Today	Chicago Fed Natl Activity	0.21
Tuesday	Case Shiller Home Prices	4.4%
	Consumer Confidence	103.0
Wednesday	New Home Sales	680K
Thursday	Initial Claims	220K
	Continuing Claims	1874K
	Q4 GDP (2^nd look)	2.3%
	Real Consumer Spending	4.2%
	Durable Goods	2.5%
	-ex Transport	0.3%
Friday	Personal Income	0.3%
	Personal Spending	0.2%
	PCE	0.3% (2.5% Y/Y)
	Core PCE	0.3% (2.6% Y/Y)
	Chicago PMI	41.5

Source: tradingeconomics.com

In addition to the data, we also hear from seven Fed speakers over 9 venues, but again, are they really going to change the cautious approach at this stage? And does it even matter? For now, financial markets are far more focused on President Trump and his cabinet’s activities than interest rate policy which seems set to remain in place for a while.

When it comes to the dollar, nothing has changed my perspective on relative interest rates in the front end, with US rates likely to be far stickier at current levels than others, but the back end has a potentially different outcome. Recall that Bessent and Trump are focused on the 10-year yield and getting that lower and seem far less concerned over the Fed for now. To achieve that they will need to demonstrate the ability to reduce spending and the deficit situation. While a promising start has been seen with DOGE, we are still a long way from a balanced budget. My take is the dollar, writ large, is going to take its cues from the 10-year yield for now, so bonds are the market to watch. If we see yields head back toward 4.0%, the dollar will decline and any significant move higher in yields will likely see the dollar climb as well.

Good luck

Adf

Having a Fit

Posted on February 14, 2025 by fxpoet

Seems Europe is having a fit
‘Cause Putin and Trump may submit
A plan for the peace
Where there’s an increase
In spending the Euros commit

Remarkably, though peace would seem
The basis of many a dream
Seems many despise
The fact that these guys
Don’t care Europe can’t stand this scheme

Here’s the thing about President Trump, you never know what he is going to do and how it is going to impact market behavior. A case in point is the growing momentum for further peace negotiations between the US and Russia, with Ukraine basically going to be told how things are going to wind up. On the one hand, you can understand Ukraine’s discomfort as they don’t feel like they are getting much say in the matter. On the other hand, it seemed increasingly clear that the end game, if there is no US intervention of this nature, would be for Russia to bleed Ukraine of its fighting age population while systematically destroying its infrastructure.

The thing I find most remarkable is the number of pundits who hate this outcome despite the end result of the cessation of the fighting and destruction. After three years of conflict, and with other nations willing to allow Ukrainians to die on the front lines while they preened about saving democracy, there was no serious push to find a solution. I have no strong opinion on the terms that have been floated thus far, and I don’t believe rewarding a nation for aggressive action is the best outcome, but Russia has proven throughout history that they are willing to sacrifice millions of their own citizens in warfare, and the case for a Ukrainian victory seemed remote at best. As experienced traders well understand, sometimes you have to cut your position so you can focus on something else. Seems like a good time to cut the positions here.

Speaking of positions, let us consider what peace in Europe may mean for financial markets. Yesterday I discussed how European NatGas prices have more than doubled since the war began. If they return to their pre-war levels, that dramatically enhances Europe’s economic prospects, despite their ongoing climate policies. Clearly, the FX market got that memo as the euro has rallied back to its highest level since December 2024 save for a one-day spike just after Trump’s inauguration. In fact, it is not hard to look at the chart below and see a bottom forming in the single currency. While the moving average I have included is only a short-term, 5-day version, you have to start somewhere. While the fundamentals still seem to point to further downside in the single currency, between the Fed’s pause and more hawkish stance opposite the ECB’s ongoing policy ease, the medium-term picture could be far better for the Europeans. If the war truly does end, it would likely see a significant uptick in investment and economic activity as they seek to rebuild Ukraine, and we could see substantial capital flows into the European economies.

Source: tradingeconomics.com

As well, oil prices, continue to trade near the bottom of their recent trading range as the working assumption seems to be that with a peace treaty, Russian oil would no longer be sanctioned, enhancing global supplies. A look at the trend line in the chart below seems to indicate that is the direction of the future.

Source: tradingeconomics.com

The other remarkable thing is the decline in yields, where yesterday, despite a very hot PPI number, which followed Wednesday’s hot CPI number, Treasury yields fell back 7bps. While there are likely some other aspects to this move, notably the ongoing story regarding DOGE and the attack on waste and fraud in the US, yesterday’s move was not indicative of fear, rather I read it as a positive sign that investors are betting on a chance that President Trump can be successful with respect to reducing the massive overspending by the government. Clearly, this is early days regarding President Trump’s ability to get a handle on spending, and it could all blow up as legislative compromises may significantly water down any benefits, but I contend the market is showing hope right now, not fear.

And that, I would contend, is the big underlying driver of markets right now. The prospects for peace and the potential impacts are the focus. While tariffs are still a big deal, and yesterday’s talk about reciprocal tariffs is simply the latest in a long line of these discussions and pronouncements, the market seems to be getting tired of that conversation. If we recap the current situation, central bank activities have lost their importance amid a huge uptick in governmental actions, both fiscal and geopolitical. In many ways, I think this is great, the less central bank, the better.

Ok, let’s see how markets continue to absorb these daily haymakers from President Trump and the responses from other governments. Clearly, the US equity market remains far more fixated on Trump’s actions than on higher inflation potentially forcing the Fed to raise rates. In fact, despite the hot PPI print, the futures market has actually increased its expectation for rate cuts this year to 35bps. That doesn’t make sense to me, but I’m just an FX poet.

If we turn to Asian markets, Hong Kong (+3.7%) was the big winner overnight as a combination of growing expectations for more Chinese government stimulus to be announced soon, along with the ongoing tech positivity in the wake of the DeepSeek announcement got investors excited. On the mainland, shares (CSI 300 +0.9%) were also higher, but not as frothy. Meanwhile, the weaker dollar hindered the Nikkei (-0.8%) as the yen has gained 1.3% since the CPI data on Wednesday. In Europe, the picture is mixed with the CAC (+0.4%) the best performer and the DAX (-0.4%) the worst performer. Eurozone GDP surprised on the upside in Q4, growing…0.1%!! Talk about an explosive economy. However, that was better than forecast and helped avoid a recession. The interesting thing about European equity markets, though, is that despite a dismal economic backdrop, most major markets are trading at or near all-time highs. Further proof that the market is not the economy. As to US futures, ahead of this morning’s Retail Sales data, they are flat.

After several days of substantial movement in the bond market, it seems that traders have taken a long weekend given the virtual absence of movement here. Treasury yields are unchanged on the day and European sovereign yields are higher by 1bp.

In the commodity markets, on the day, oil prices are unchanged, although as per the above chart, it appears the trend is lower. US NatGas (+1.8%) is rallying on forecasts for another cold spell, but European NatGas (-4.85%) continues to fall as prospects for peace indicate new supplies, or perhaps, renewed supplies. In the metals markets, gold (+0.15%) is continuing its positive momentum but the big mover today is silver (+2.7%) which seems to be responding to some large option expirations in the SLV ETF (h/t Alyosha) which seem set to drive substantial demand for delivery.

Finally, the dollar remains under pressure overall, although the movement has generally not been that large today. The big outlier in the G10 is NZD (+0.9%) which has responded to the delay in the reciprocal tariff implementation until April. Elsewhere in this bloc, gains are universal, but modest with movement between just 0.1% and 0.2%. In the EMG bloc, the dollar is also under pressure with ZAR (+0.65%) a major gainer as precious metals continue to be in demand. CLP (+1.15%) is also continuing to benefit from copper’s ongoing rally. The exception to this movement has been Asia where most regional currencies are modestly softer this morning, KRW, TWD, INR, as the tariff talks still seem to be the driving force in these markets.

On the data front, we finish the week with Retail Sales (exp -0.1%, +0.3% ex autos), then IP (0.3%) and Capacity Utilization (77.7%). Yesterday’s PPI data was several ticks hotter than forecast and seems to put paid to the idea that inflation is heading back to the Fed’s target. This afternoon we hear from Dallas Fed president Lorrie Logan, but again, it is hard to make the case that the Fed is the driver of anything right now.

Fundamentals still point to dollar strength, I would argue, but the market is not paying attention. Rather peace and the peace dividend are now the driver in the FX markets and to me, that implies we are set to see the dollar give back some of its gains from the past 6 months.

Good luck and good weekend

Adf

Norms to Eschew

Posted on February 11, 2025 by fxpoet

For market practitioners, Trump
Is more than a modest speed bump
His willingness to
Most norms to eschew
Can force long-term views to go bump

Meanwhile, as the markets prepare
For Powell to sit in his chair
In front of the Senate
A popular tenet
Is more rate cuts he will foreswear

It is very difficult to keep up with the news these days as President Trump really does address so many disparate issues in such short order, it is hard to know which ones will potentially impact markets and which will simply be headline fodder. Obviously, the tariff discussions remain front and center, but even those plans seem to be evolving at a very fast pace, and while yesterday he did invoke 25% tariffs on steel and aluminum imports, that has literally become old news already. The next question is what will occur with the latest idea of reciprocal tariffs, where the US will charge the same tariff on imports from other nations as those nations charge on imports from the US.

Generally speaking, US tariffs are the lowest overall around the world, which arguably is exactly what Trump wants to address. I am not going to argue the merits or detractions of tariffs, that is pointless. The only thing to consider is if they are implemented, what are the potential impacts. One of the key things to remember about the effectiveness of tariffs is the price elasticity of the products being tariffed. If, for instance, a product has substantial competition and is easily replaced, the nation being tariffed is likely going to absorb the bulk of the pain. Consider Colombia and how quickly they caved regarding the deportations. While I am not a coffee drinker, and I am sure there are those who believe Colombian coffee is the best, coffee also comes from Brazil, Vietnam, Hawaii and Indonesia, and as none of those nations (and obviously Hawaii) were subject to tariffs, Colombia would have paid the freight had they been implemented.

But, for a product like solar panels, where there are few suppliers other than the Chinese, to the extent the demand remained in place, the purchaser would see higher prices. Turning to steel and aluminum, the below graphic shows the top 10 global steel producing nations and how much they produced in 2024. This graphic says all you need to know about why President Trump is unhappy with China and their trade policies. (well, this and the next one)

Source: worldsteel.org

And while this is not an exact apples-to-apples comparison, the below chart shows forecasts for steed demand in 2023 and 2024. The mismatches are clear as China, South Korea and Japan have a significant surplus to export while the US and India need imports.

Source: mrssteel.com.vn

The point is President Trump is seeking to address that imbalance and is of the mind that the US would be better off if we make our own steel. In fact, this is simply part of his entire philosophy to reshore US manufacturing capabilities.

Now, steel is a traded commodity, although in financial markets, not so much. But changes in the flows of imports and exports will have an impact on FX markets, while tariffs could well also impact investment flows. In fact, it is not hard to see why Nippon Steel wants to buy US Steel. if they own a steel manufacturer in the US, they can increase production with no concerns over tariffs.

Remember, too, this issue is merely a microcosm of the potential chaos that will be seen across industries and nations, both of which will impact financial markets. Once again, I harp on the idea that a robust hedging program is a necessity these days.

Turning to today’s activities, Chairman Powell will be testifying before the Senate Banking Committee this morning. On the one hand, I wonder if he is upset by the fact that virtually nobody is concerned about what he says these days as Trump continues to dominate every conversation. For someone who has become quite accustomed to being the center of attention with respect to markets, this may well be a blow to his vanity and ego. On the other hand, it is also quite possible that maintaining a low profile is precisely his strategy here, and if that is the case, I expect we will not learn anything new at all. The Fed mantra is currently that they will be cautious before implementing any further rate cuts. Remember, CPI is released tomorrow as well, so when he goes before the House, they will have that information in hand. But to Powell’s benefit, Treasury Secretary Bessent made clear he and President Trump are far more concerned about the 10-year yield than Fed funds. This may be the most amazing transformation of all, a Fed chair who becomes a wallflower!

Ok, after yesterday’s US equity rally, the story in Asia was far less positive. Japan and Australia were unchanged while the Hang Seng (-1.1%) and CSI 300 (-0.5%) both suffered, perhaps on the tariff impositions. Elsewhere in the region, Taiwan and South Korea both had solid sessions while weakness was evident in Indonesia, India and the Philippines. In fact, all three of those markets have been declining steadily since October, with declines between 15% and 20% as prospects in those economies seem concerning, especially with Trump’s tariff mania. In Europe, virtually every market is unchanged this morning as the EU quickly explained they would retaliate against any US tariffs. Of course, that is what makes Trump’s reciprocal tariff structure so interesting. How can Europe complain that other nations impose the same level of tariffs they do? Meanwhile, at this hour (7:05), US futures are pointing slightly lower, about -0.25%.

In the bond market, yields are climbing with Treasuries higher by 3bps, now 12bps above the lows seen early last week, while in Europe, yields are substantially higher, with France (+10bps) leading the way, but the rest of the continent showing rises of between 4bps and 6bps. Part of this move on the continent is driven by a catch up to yesterday afternoon’s US yield rally. As to the French, seemingly their Unemployment Report, which showed a much better than expected 7.3%, may have investors concerned about quickening growth and inflation. That feels like a lot, but there are no real explanations I have seen.

In the commodity markets, oil (+1.5%) is continuing to rebound off its recent lows, although still looks like it is in the middle of its trading range. Gold (-0.7%) and silver (-1.2%) are both finally retracing some of the extraordinary rally that we have been witnessing for the past two months. Copper (-2.7%), too, is under pressure this morning, unwinding some of its recent spectacular gains.

Finally, the dollar is very modestly softer, but not universally so. For instance, the euro (+0.2%) and yen (-0.2%) seem to offset each other while most other G10 currencies have moved even less. In the EMG bloc, though, INR (+0.9%) is the biggest gainer as the RBI has been intervening to address what had been an acceleration in the rupees decline in the past few weeks (see below).

Source: tradingeconomics.com

Elsewhere in the space, gains are less impressive, with moves on the order of +0.4% (PLN and HUF) or smaller.

On the data front, the NFIB Small Business Optimism Index was released at a softer than expected 102.8 as it seems the Trumpian chaos is having an effect for now. Otherwise, the only thing is Powell and three other Fed speakers, but again, given the relative lack of discussion regarding Powell, the other three will get even less press in my view.

It is difficult to claim nothing has changed lately, but perhaps more accurately, there is no clear directional change at this point. We need to start seeing some consistency in the policy impacts and that is likely to take months. Until then, volatility is the watchword across all markets.

Good luck

Adf

Rate Cuts Have Slowed

Posted on February 4, 2025 by fxpoet

The story that’s driving the news
Is one on which most have strong views
Both neighbors have claimed
Their borders are tamed
So, tariffs, the Prez, will not use

Meanwhile, data yesterday showed
That managers are in growth mode
The ISM rose
And Fed speakers chose
To validate rate cuts have slowed

The major economic story is, of course, the news that both Canada and Mexico have altered their behavior in order to prevent the imposition of 25% tariffs on their exports to the US. Both nations have now promised to police the border between themselves and the US more tightly, and it also seems that the US now has operational control, via military overflights, of the Mexican border. While there are many pundits who believe all this activity was merely theater and could have been accomplished without tariff threats, none of them are in a position of power. In the end, I think it is very difficult to conclude anything other than Trump got what he wanted and achieved it via his preferred means.

The market response was very much what you might expect. The early sharp declines in the CAD and MXN were reversed and the day ended with both currencies at basically the same levels they closed on Friday. However, as you can see from the chart below, there was clearly some excitement and panic during the session, with back and forth 2% movements.

Source: tradingeconomics.com

Here’s the thing, I think you all need to be prepared for this type of activity on a regular basis for the next four years. Certainly, there is nothing to suggest that President Trump is going to change his style and as long as he is successful in achieving his aims in this manner, he will continue with these activities. Consider this as well, no national leader wants to appear weak, especially to their electorate, and so when President Trump turns his focus to a smaller nation, those leaders are very likely to try to stand up to the pressure, at least in public. But in the end, most nations are far more reliant on the US market to buy their stuff than the other way around. After all, the US is basically the consumer of last resort globally. As such, very few nations can truthfully withstand an onslaught of this magnitude.

Now, turning to the state of the US economy, President Trump got some very positive news from the ISM data which printed at 50.9, its highest level since September 2022 and far higher than forecasts. In fact, it is not hard to look at the recent trend in this data series and believe we are going to see positive economic growth going forward

Source: tradingeconomics.com

However, the downside here was that the Prices Paid portion of the index also rose, back to 54.9, implying that inflation pressures remain extant within the economy. Now, you and I both know that is the case as we all deal with these prices on a daily basis, but until the data starts to become more obvious, it appears the Fed is always the last to know.

Speaking of the Fed, while only one speaker was on the schedule, Atlanta Fed President Bostic, we heard from three of them anyway as it remains clear to me there is a strong belief in the Marriner Eccles building that a key part of their job is to ~~never shut up~~ constantly pitch their narrative to try to keep markets in line. So, as well as Bostic, we heard from Chicago’s Goolsbee and Boston’s Collins and they all basically said the same thing, perhaps best stated by Ms Collins, “There’s no urgency for making additional adjustments. The data is going to have to tell us. At some point I certainly would see additional normalization in terms of what the policy stance is.” The last part of her comment refers to the idea that she, and truthfully all three, believe that further rate cuts remain appropriate despite the ongoing growth and continued stickiness of prices. And to think, some people believe that Trump and the Fed are not on the same page. They all want lower rates!

Ok, let’s turn to markets and see how they have behaved overnight. Yesterday, after a pretty horrible opening on the basis of tariffs, tariffs everywhere, the news that they would be postponed saw US markets rebound, although still close lower on the session. In Asia, Japan (+0.7%) rallied as so far, Japan remains out of the tariff sightlines, and Hong Kong (+2.8%) traded much higher in its first post-holiday session although mainland Chinese share trading doesn’t reopen until tonight. Elsewhere in Asia, the screens were largely green, perhaps on the thesis that tariffs are just a negotiating tactic. In Europe, the picture is more mixed with the UK (-0.2%) lagging while Spain’s IBEX (+0.8%) is the leading gainer. The rest of the continent, though, is seeing gains on the order of just 0.2%, so not much love. And at this hour (7:10) US futures are little changed.

In the bond market, Treasury yields, after edging higher by a few bps yesterday, are up another 2bps this morning and pushing back to 4.60%. In Europe, sovereign yields are also firmer this morning, up between 2bps and 4bps across the board, although this is after sharply lower yields yesterday on still weak PMI data from the continent. As well, Mr Trump is hinting that he is going to turn his tariff sights on Europe soon, so there has to be some trepidation there. After all, Europe, which is already a basket case due to self-inflicted energy-based wounds, really cannot afford a trade fight with the US, especially since they have a net trade surplus on the order of $200 billion with the US. Finally, JGB yields rose 3bps and are now at their highest level since May 2010 and look for all the world like the trend remains strongly intact as per the below chart.

Source: tradingeconomics.com

In the commodity markets, confusion in energy reigns as yesterday’s initial rally on Canadian tariff news has been completely reversed with oil (-2.1%) and NatGas (-4.2%) both falling sharply today. But what is not falling is gold (+0.1%) which made yet another new all-time high yesterday and continues to defy gravity. This has helped the entire metals complex with both silver and copper higher by 0.5% this morning.

Finally, the dollar continues its general winning ways this morning. Yesterday saw early gains, also on the tariff story, which as evidenced by the chart at the beginning of the note, reversed. But in the other currencies, the euro and pound remain under modest pressure along with Aussie, as all three are softer by about -0.3% today, with the yen (-0.4%) along for the ride. In the EMG bloc, MXN (-0.6%), BRL (-1.2%) and ZAR (-0.3%) are also under pressure as though the immediate tariff threat seems to have abated, fear remains the driving force in the space. Add to the tariff fears the fact that the US economy continues to outperform its peers, and the Fed has basically put the kibosh on any rate cuts anytime soon and it is easy to understand why money is flowing this way.

On the data front, JOLTS Job Openings (exp 8.0M) and Factory Orders (-0.7%, +0.6% ex Transport) are today’s information, and we hear from more Fed speakers. It seems clear, so far, that the Fed mantra is wait and see as things evolve under President Trump. Unless one of these speakers (Bostic, Daly, Jefferson) offers a different view, which seems unlikely, then I suspect the dollar will continue to find more support than resistance for now.

Good luck

Adf

Run Amok

Posted on February 3, 2025 by fxpoet

The price level, sadly, will jump
According to President Trump
Will Canada shrink?
Will Mexico blink?
As tariffs cause things to go thump

The first thing that moved was the buck
While stock markets were thunderstruck
So, who will blink first?
And who will hurt worst?
No matter, things have run amok

Whatever you think of the man, you must admit that President Trump knows how to maintain the spotlight on himself and his policies to the exclusion of virtually everything else in the news. And so, in the wake of two terrible aviation disasters in short order, pretty much all eyes are now focused on the tariffs that Trump imposed this weekend on Canada, Mexico and China. While there had been a large school of thought that the tariff talk was a cudgel to be used during negotiations but would never actually be imposed as they would be too damaging, that thesis has been destroyed. It appears that President Trump believes his long-term goals of reshoring significant parts of US industry and leveling the playing field with trade partners is achievable via tariff policy and will more than offset any short-term pain that may come. We shall see if he is correct, but certainly, the short-term pain is beginning to arrive.

The early movement in equity markets was uniform around the world, and it was not pretty. The below snapshot of equity futures markets, taken at 6:00am this morning shows that the only two markets that have not fallen are China and Hong Kong, and that is only because they remain closed for the Chinese New Year holidays. But there is plenty of fear all around the world, especially considering that markets throughout Europe and Japan, as well as other nations that have not been named targets of tariffs, have also fallen sharply.

Source: tradingeconomics.com

Too, the FX markets have also responded dramatically, with the dollar exploding higher vs. virtually all its counterpart currencies this morning as 1% gains are the norm.

Source: tradingeconomics.com

A special shoutout to ZAR (-1.55%) which while not directly impacted by tariffs, caught Trump’s ire by their recently enacted legislation to confiscate property as they deem fit, oftentimes without compensation. While South African officials have claimed it is akin to eminent domain rules in the US, those require compensation at all times, a not insubstantial difference.

So, what’s a hedger to do? Well, this is why you maintain a hedge program in the first place. Lots of things happen in the world, most of which are beyond any individual or companies’ control, yet the impacts are real. Some of what I have read this morning highlights the idea that Canada and Europe and Mexico are going to stick together to fight these tariffs. However, at the end of the day, the US economy, and by extension its market, is the largest by far, and losing the US as an export destination will be a very difficult pill for those nations and their economies to swallow.

My sense is that Trump, especially if he continues to address the immigration and government waste issues, will have far more runway than most other nations, especially given the precarious situation of many ruling parties right now. But the other thing to consider is that there is no going back to the way things were in the past. Alliances and treaties are going to come under much greater scrutiny by all sides as governments everywhere re-evaluate what they are trying to achieve with various policies and how they can partner with other nations to work together. In fact, I suspect that the EU is going to continue to come under even greater pressure as it becomes more evident that while many countries believe in the trade benefits of the EU, the recent focus by Brussels on other issues like climate activism and immigration run counter to some members’ views. No matter what, the world is changing dramatically, and my take is the change is going to come faster than many will have anticipated.

OK, there are a thousand stories on how the tariffs are going to impact the US, with initial calculations regarding the negative impact on GDP and how much they are going to raise inflation, so I’m not going to go there. Needless to say, the universal belief is things will get worse on those metrics. But here’s something else to consider. On Friday, the BLS will be revising the 2024 jobs data, including their population estimates and the birth/death model that describes the number of new businesses that are formed, net, each month. Early estimates show that the number of jobs created is going to fall by nearly 1 million while population, now taking into account more immigration, is going to rise. I have seen estimates that the Unemployment Rate may rise, or be revised, to 4.5% or 4.6%. If that is the case, it will certainly call into question exactly what the Fed has been doing. It will also, almost certainly, result in a Trumpian tirade about how the BLS is political and was cooking the books to burnish Biden’s economic record. I suspect it will not help equity markets if that is the case, but also probably hurt the dollar as the Fed will be right back onto their rate cutting discussions.

As I’ve already shown the equity and FX markets above, a look at bonds shows that Treasury yields are unchanged this morning, as they seem to be caught between concerns of slower growth and higher inflation due to the tariffs. Remember, too, that Wednesday, the Treasury will issue its Quarterly Borrowing Estimate with all eyes on the mix that new Treasury Secretary Bessent will be seeking as things go forward. Remember, he was quite vocal, before he took the job, as to the mistakes that Yellen made in not terming out more Treasury debt when rates were at extremely low levels. Meanwhile, European sovereign yields are all lower this morning, between -2bps (Italy) and -6bps (Germany) as PMI data released showed that though things were better than last month, they remain well below the key 50.0 level. However, on the inflation front, both Eurozone and Italian data printed higher than expected, clearly not what Madame Lagarde wants to see.

Finally, commodity markets have seen oil prices (+2.6%) rise sharply as the US will be imposing 10% tariffs on imports of Canadian oil products, while NatGas prices have jumped by 9.0% on concerns over supply disruptions from those tariffs. Like I said, the world is a different place today! In the metals markets, both gold and silver are little changed this morning although copper (-0.9%) prices are slipping, perhaps on the idea that these tariffs are going to slow economic activity. And that is one of the key belief sets amongst economists.

As to the data this week, it is reasonably busy, but all eyes will be on Friday’s NFP report, especially with the rumors of a major revision.

Today	ISM Manufacturing	49.8
	ISM Prices Paid	52.6
Tuesday	JOLTS Job Openings	8.0M
	Factory Orders	-0.8%
	-ex Transport	+0.6%
Wednesday	ADP Employment	150K
	Trade Balance	-$96.5B
	ISM Services	54.2
Thursday	Initial Claims	215K
	Continuing Claims	1855K
	Nonfarm Productivity	1.7%
	Unit Labor Costs	3.5%
Friday	Nonfarm Payrolls	170K
	Private Payrolls	140K
	Manufacturing Payrolls	-2K
	Unemployment Rate	4.1%
	Average Hourly Earnings	0.3%(3.8% Y/Y)
	Average Weekly Hours	34.3
	Participation Rate	62.5%
	Michigan Sentiment	70.9
	Consumer Credit	$10.5B

Source: tradingeconomics.com

In addition to all of this, we will hear from nine different Fed speakers, at least, over 13 different venues this week. Now, things could get quite interesting here given Chairman Powell did not speak to tariffs as they were not yet implemented when he delivered the FOMC news last week, but all of these speakers will have an opinion. I wonder if there will be a unified set of talking points or if each one will truly give their own views. Of course, given that each is a neo-Keynesian economist, I suspect their views will all be aligned anyway.

One other thing from last week that didn’t get much press is that the BOC, after cutting the base rate by 25bps as widely expected, has indicated they will be ending their QT program and, in fact, restarting their QE program over the next several months in order to grow their balance sheet in line with the economy. Do not be surprised if we see other major central banks go down this road as well, regardless of sticky inflation.

Summing it all up, the world is very different this morning compared to Friday morning. Trade and economic disruptions are going to become evident and there is still a great deal of vitriol to be vented at Trump by others, while Trump will continue to decry other nations efforts to weaken the US. As I have written in the past, volatility will be the main underlying thesis this year. Meanwhile, the beauty of a good hedge program is it helps through all market conditions. Do NOT slow things down waiting for a better entry point, be consistent, as that better entry point may not materialize for a long time. My strongest cue will be the bond market as if yields start to decline in anticipation of a significant economic slump, I expect the dollar will suffer, but if they hold up, then there is nothing to stop the dollar from testing and breaking its recent highs.

Good luck

Adf

Forked Tongue

Posted on January 31, 2025 by fxpoet

The major discussion today
Is tariffs and if they’re in play
While Trump thinks they’re great
Economists hate
Their impact and watch with dismay

Meanwhile it has not been a week
And questions are rife ‘bout DeepSeek
The most recent questions
Are making suggestions
That China, with forked tongue, did speak

President Trump has promised to impose 25% tariffs tomorrow on all Canadian and Mexican exports to the US if those nations do not agree to further efforts to tighten border security regarding the movement of both immigrants and drugs across the borders. Even within his administration, there are many who do not want to see them imposed given the potential disruption they would cause in supply chains throughout the nation. And of course, economists abhor tariffs as a pure deadweight loss to the economy. But Trump sees the world through very different eyes, that much is clear, and as evidenced by the very short-term row with Colombia last weekend, believes they can be useful tools to achieve strategic, non-economic outcomes.

This poet is not fool enough to try to anticipate what will actually happen as the mercurial nature of President Trump’s actions is far beyond my ability to forecast. However, if history is any guide, we will see both Mexico and Canada make some additional concessions and an announcement that because of that, the tariffs will be delayed until negotiations can be completed by some new deadline. (Well, maybe I am fool enough 🤣)

From our perspective observing market reactions, the only consistent view is that US tariffs will drive the dollar higher, or more accurately, other currencies lower, as the FX market adjusts to compensate for the tariffs. If we look back at Trump’s first term, the first tariffs were imposed on China in early 2018 on solar panels and washing machines and a few other things. A look at the chart below shows that the yuan (the green line) did, in fact, weaken substantially following those tariffs, with the dollar rising from 6.25 to 6.95 over the course of the ensuing six months. However, if we broaden our horizons beyond the renminbi to the dollar writ large, as seen by the Dollar Index (the blue line), which rose from 88 to 96 over the same period, the renminbi’s price action was directly in line with the dollar overall. There was only limited additional impact to CNY. Remember, too, that in 2018, the US equity market was performing quite well, and funds were flowing into the US, thus driving the dollar higher, not dissimilar to what we have seen over the past year. The point is that while the tariffs may have some impact, it is also likely that the dollar will move based on its traditional drivers of interest rate differentials and capital flows regardless.

Source: tradingeconomics.com

Away from the tariff talk, though, there is precious little other market related news, at least on a macro basis. Yesterday’s data showed that GDP grew a tick less than anticipated at 2.3% in Q4, but Real Consumer Spending, which is a critical part of the economic picture, rose at 4.2%, a very solid performance and an indication that things in the economy are still ticking along just fine. (The difference between that number and the GDP number is due to inventory adjustments, which are seen to wash out over time.). In fact, arguably, that solid growth was a key reason that the equity markets in the US had another strong session yesterday, with gains across the board.

Well, there is one other thing on many people’s minds, and that is the veracity of the claims about DeepSeek. You may recall I highlighted the question of all those Nvidia sales to Singapore earlier in the week as somewhat strange. Well, I was not the only one asking that question and this morning in Bloomberg, there is an exclusive story about a US government investigation into whether China actually got the most advanced H100 chips via Singapore after all. If that is the case, then perhaps the DeepSeek claims are not as impressive as they were initially made out. I suspect if this turns out to be the case, that worries over the need for AI to no longer utilize the most advanced chips will dissipate and the tech rally will regain momentum.

So, let’s look at markets now. China and Hong Kong remain closed for their New Year celebrations. Japan (+0.15%) had a modest gain and the truth is that only two Asian bourses had strong sessions, Singapore (+1.45%) and India (+1.0%) with the rest of the region mostly a touch firmer. In Europe, all markets are slightly stronger this morning, on the order of 0.3% or so, as the combination of yesterday’s ECB rate cut and hints at future cuts by Madame Lagarde, seem to be underpinning the markets. Certainly, today’s Eurozone data, showing German Unemployment climbing a tick to 6.2% while Retail Sales there fell -1.6% in December don’t seem like a rationale to buy equities. In the US futures market, though, we are seeing solid performance, 0.5% or more, as I believe many are jumping back on the AI bandwagon.

In the bond market, Treasury yields have edged higher by 1bp, and remain just north of 4.50% as the tension between solid growth and slowing inflation dreams keeps the market quiet. In Europe, though, yields are continuing their decline from yesterday, with sovereign yields down by between -3bps and -4bps as investors look for further easing from the ECB as the Eurozone sinks slowly toward recession. However, in Japan, JGB yields rose 3bps as data overnight showed inflation remains above target and expectations for another rate hike in the first half of the year rise.

In the commodity markets, oil (-0.35%) continues to chop around in the middle of its trading range with no strong directional impulse (see chart below).

Source: tradingeconomics.com

It is very difficult to know how to view this market in the short run given the potential for disruptions by tariffs and even more sanctions, but nothing has changed my long-term view that there is plenty of oil around and prices will remain here or decline. In the metals markets, both gold and silver are little changed on the morning although both have been in the midst of a strong rally with gold making new all-time highs in the cash market yesterday. Copper (-0.7%) is offered this morning but is still much higher than at the beginning of the month/year.

As to the dollar, it is modestly firmer this morning rallying against most of its G10 counterparts, but not by very much, 0.3% (JPY) at most. Versus its EMG counterparts, though, there is more strength with PLN (-0.6%) and ZAR (-0.4%) both under a bit of pressure. The latter is responding to ESKOM, the national electrical utility, announcing that they may need to impose rolling blackouts to help repair parts of the grid.

On the data front, this morning brings Personal Income (exp 0.4%) and Spending (0.5%) but of more importance it brings PCE (0.3%, 2.6% Y/Y) and core PCE (0.2%, 2.8% Y/Y) along with the Chicago PMI (40.0) release at 9:45. We also hear our first post-meeting Fed speaker, Governor Bowman, this morning but it would be shocking if she said anything other than they are going to be patient to watch inflation slowly move toward their target, almost as if by magic.

Once again, tape bombs are the biggest risk, as they will be for the next four years, but I imagine all eyes will be on Trump and the tariffs as the key driver. For now, nothing has dissuaded me from my view the dollar is more likely to rise than fall, but we need to see how things evolve.

Good luck and good weekend

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Cha-Ching

Posted on January 22, 2025 by fxpoet

It wasn’t all that long ago
When data would headline the show
As traders would wait
For each release date
And then recount trades blow-by-blow

But now there is only one thing
That matters, Trump’s latest cha-ching
He speaks off the cuff
Which makes it quite tough
To plan from Berlin to Beijing

As the morning of the third day of President Trump’s second term dawns, it is nigh on impossible to keep up with all the things he is doing and their actual and potential impacts on markets going forward. Arguably, the main FX market driver continues to be the tariff discussion and the question of if, and when, he may be imposing said tariffs. You will recall that on Monday, the mere absence of his reaffirmation that tariffs were coming resulted in a major dollar decline, which was subsequently reversed when he finally mentioned them in the evening.

Of course, those were aimed at Canada and Mexico with China, significantly, left out of the mix. Last night he remedied that situation declaring that China and Europe were also in his sights for tariffs, although he mooted a 10% initial level, far below the 60% he discussed during the election campaign. Once again, I would argue it is not possible at this point to make any serious market prognostications based on the lack of information as to the products to be impacted, the exact timing and what he is seeking in return for a reduction or elimination of those threats.

At the same time, I find the strait-laced approach that ‘tariffs are bad and a tax on Americans which will lead to inflation’ which continues to be promulgated by orthodox academic economists, typically from a left-leaning lens, to be almost comical at this point. We all should remember that during his first term, he imposed many tariffs, especially on China, and yet inflation was quiescent, with CPI averaging 1.9% during the entire term. This is not to say things will be identical in 2024 and beyond, just that in fairness, his record demonstrates that tariffs are not necessarily inflationary. Below is a chart of the monthly readings showing only 8 of the 48 months he was in office that headline CPI rose more than 0.3%, implying the rest of the time it was at or below that level. Those were the days.

Source: tradingeconomics.com

Beyond the tariff discussion, the bulk of his time currently seems to be focused on the size of the government workforce, which is certainly due to shrink, and the border and immigration. What will market impacts of these issues be like? For the former, I would suggest that less government employees will lead to less government interference in the workplace, and arguably, be beneficial for productivity if nothing else. As to the latter, it is a much more difficult problem to solve as there will likely be reductions in both labor supply but also demand for services like housing. It seems quite possible that there will be a reordering of the economy, although it is unclear if that will lead to a net positive or negative from an overall growth perspective, or at least an inflation perspective. Growth, of course, is the product of the size of the workforce * productivity, so a smaller workforce, if that is the outcome, will weigh on topline GDP, but not necessarily on per capita GDP. As I mentioned above, there are far more unknowns than knowns at this time, so forecasting the future is a mug’s game.

As we keep in mind that nobody knows anything about the future, let’s take a look at what happened overnight amid all the knee-jerk reactions to the latest Trump comments.

Yesterday saw US equity markets continue in their winning ways seemingly trying to achieve new highs. In Asia, the follow on was broad with Japan (+1.6%), Korea (+1.2%) and India (+0.75%) all nicely higher although Chinese shares suffered. This should be no surprise now that Trump has squarely put China on the tariff map again, but there are other things happening here as well. Perhaps the most confusing is the word that financial workers would be seeing pay cuts of up to 50% as President Xi no longer sees them as critical workers for the nation. I’m sure this will help rebalance the consumption-production equation…not! So, it should be no real surprise that both mainland (-0.9%) and Hong Kong (-1.6%) shares were under pressure.

Not so the case in Europe where the DAX (+1.2%) is leading the way higher although gains are universal, after comments from several ECB bankers that rate cuts were coming next week and likely will continue during the year. While inflation remains the sole ECB mandate, the weak economic situation plus the threat of tariffs certainly has Madame Lagarde under pressure to do something to support the economy there. Finally, it should be no surprise that US futures are nicely higher this morning with the NASDAQ (+0.9%) leading the way at this hour (7:15).

In the bond market, yields have stabilized after their recent 20bp decline in the past week and have edged higher by 1bp this morning. The same price action has been seen in Europe where sovereign yields are little changed to higher by 2bps across the continent. As to JGB yields, they, too, were unchanged on the session despite an increase in chatter that the BOJ is set to hike rates on Friday.

In the commodity space, gold continues to rally and is now within 1% of its all-time highs set back in late October. This has dragged silver along for the ride, and copper, in truth, although today copper is ceding -0.6%. however, a look at the price movement over the past month shows all three metals nicely higher (Au +5.3%, Ag +3.7%, Cu +6.2%). Oil (0.0%) is flat today as it consolidates its recent retracement. Recall, for the first two weeks of the year, it rallied sharply, up nearly $10/bbl, although it seems that may have been more of a short squeeze than a fundamental shift in thinking. Since then, it has given back about $4/bbl as market participants try to decide if the theorized Trumpian demand increase will offset the supply increase of drill, baby, drill.

Finally, the dollar is little changed this morning overall. That said, net over the past week, it has given back about 1.5% although that was from recent highs. This price movement feels far more like consolidation than a change in view especially given that the tariff story remains front and center. Now, it is possible that the market pushed the dollar higher ahead of the inauguration on a ‘buy the rumor’ idea and is now selling the news, but it remains difficult to see what has changed in the US economy relative to its counterparts that would encourage a change in rate expectations. As to today’s movement, there are more gainers than laggards vs. the dollar, but nothing of any real significance.

On the data front, the only US data is the Leading Indicators (exp 0.0%) so traders will continue to look at corporate earnings and listen to the president for the next pronouncement. I assure you; I have no idea what that will entail. Once again, I am a strong proponent of being hedged because the one thing we have learned lately is that markets can turn on a dime.

Good luck

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fxpoetry

Explaining the rhyme and rhythm of the FX markets each day

Tag Archives: #politics

Balling Their Fists

As It’s Been Wrote

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Scapegoated

Having a Fit

Norms to Eschew

Rate Cuts Have Slowed

Run Amok

Forked Tongue

Cha-Ching