Tag Archives: #Powell

Leverage Thumbscrews

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The President said that today
He’d let us know who’ll replace Jay
The favorite is Warsh
But that could be harsh
For markets, or so people say
 
But really, this morning, the news
Is silver and gold have the blues
It turns out their prices
Were causing a crisis
For players with leverage thumbscrews

The big news this morning, is that President Trump is ostensibly going to announce former Fed governor Kevin Warsh as his selection for the next Fed Chair.  His history has been as someone who has disagreed with many Fed decisions, and he skews to the hawkish side of the spectrum, which seems odd for Trump who everyone expected would nominate a dove. He is clearly quite capable of doing the job and brings a significant amount of intellectual firepower to the role.  It remains to be seen, if he is nominated, how the confirmation process will proceed, as well as what Jay Powell will do when his Chairmanship is up (his term runs until 2028).

The interesting connection for me is the number of stories that have linked this rumor to major market moves overnight, especially in the precious metals space.  So, let’s jump in and look at a few charts to offer some perspective on things.  

As we all live in the moment, it is often difficult to consider history in its fullness.  Look at the three charts of gold (from tradingecomomics.com) that follow, each over a different timespan, 1week, 1year and 5 years.

1 week:

1 year:

5 years:

What do you notice:  there is no question that gold (-4.7% or $250/oz) has fallen sharply overnight.  that is evident in the first two charts.  However, a look at the first chart shows you that despite a decline of that magnitude, the barbarous relic is still higher THIS WEEK!  While gold has been exploding higher, it only crossed above $5000/oz for the first time on Sunday night in Asian trading.  Now, I expect the bulk of the discussion will center around the 1-year chart which shows the dramatic decline as that is the newsworthy story, the ‘collapse’ in the price.  But if we zoom out further, to the 5-year perspective, which has weekly candles, the last down week was in December.  Market technicians will point to the shape of the most recent weekly candle, which is typically referred to as a hammer candle, and explain it signals a reversal in trend.  And maybe it does.  But the fact is volumes on the way up were much higher than those overnight, which does not portend panic selling.  Trees don’t grow to the sky, and a reversal was always expected.  Here we are.

The price action in silver overnight was almost identical, albeit more violent as has been the case with the rally as well.  Platinum too.  A couple of other things to consider about this:

  • Today is month end, a time when positions are typically adjusted and rebalanced, so given the tremendous rally seen this month in the metals, selling is what rebalances things.
  • China has not changed its policy regarding gold purchases nor its policy on license restrictions for the export of silver, so to the extent that those were driving forces in the rally, they still exist
  • There is no evidence the world is a safer place this morning than it was yesterday morning.  There’s no peace in Ukraine; the Ayatollah has not relinquished power; Cuba and Venezuela remain in the status quo, and Europe continues to try to figure out how to power themselves without relying on the two largest energy exporters in the world, the US and Russia.

It beggar’s belief that this is entirely a reaction to the rumored naming of Kevin Warsh as the next Fed chair.  As I type early this morning, the prices of precious metals are already bouncing nicely off their lows.  I do not know what drove this move specifically, but I do not believe that the big picture story has changed.

This segues nicely into another key narrative this week, the dollar’s massive break lower.  Earlier this week I had written about how the DXY was approaching a double bottom on the charts and many in the market were convinced that if we traded below that level, and more importantly, closed below the level, which was 96.22, that it opened the door for a much more significant leg lower.  I addressed this, pointed out that the dollar was still in the broad middle of its long-term trading range, but acknowledged that a move lower was quite realistic.  Well, as of yet, we have not closed below the key level, and this move is shaping up as a potential bounce back into the range.  As you can see in the chart below, the baseline is still holding on.

Source: tradingeconomics.com

Now, the dollar is stronger across the board this morning (EUR -0.2%, GBP -0.2%, JPY -0.5%, CHF -0.4%, ZAR -1.1%, CLP -0.6%) although these declines are abating in a similar fashion to the precious metals price action this morning.   Here, too, portfolio rebalancing would indicate that traders would be buying dollars given its decline this month.  Has anything really changed in the FX markets overnight?  All the recent policy decisions were exactly as expected.  Data overnight showed that European GDP continues to muddle along at just 1.3%, hardly a rationale to invest aggressively on the continent.  Is this dollar rebound just a response to the Warsh story and his presumed hawkishness?  Or is it the normal ebb and flow of markets.  I am not yet willing to concede the dollar is breaking lower, I need more proof for that, but I certainly cannot rule out that outcome, regardless of who the new Fed chair is.  

How about other markets?  Equities in the US yesterday were hampered by Microsoft’s earnings release Wednesday, with its decline dragging down the NASDAQ, although the DJIA managed to recoup all its early losses and finish in the green (barely).  But Asian bourses had a more difficult time.  While Japan (-0.1%) was little changed, both China (-1.0%) and HK (-2.1%) fell sharply, and I don’t believe those markets were responding to the Warsh rumor.  It appears that HK, especially, was the victim of month end profit taking and rebalancing as it has had quite a good run this month.  The other key laggard in the region was Taiwan (-1.45%) while the rest of the markets in the time zone were +/-0.5% or so, or less.  

European shares, though, are all firmer this morning led by Spain (+1.6%) after GDP data there was a tick better than expected at 2.6%.  But gains are universal (DAX +0.85%, CAC +0.7%, FTSE 100 +0.4%) as earnings results were enough to offset the generally lackluster data.  Perhaps the idea of another ECB rate cut is entering the collective consciousness, although according to the ECB’s own forecast tool, there is a 10% probability of a 25bp rate HIKE.  I’ll believe that when I see it.  As to US futures, they are softer this morning as I type (7:10), with declines on the order of -0.3% across the board, which is also a rebound from levels earlier this morning.

Bonds:  nobody seems to care.  Yields have edged higher by 1bp virtually across the board this morning and still remain within the recent trading ranges.  It is quite interesting how little financial markets are focusing on this key source of information.  

And before I leave, oil (-0.5%) has backed off its recent top, although remains higher by 6.5% this week as concerns over a possible US action in Iran continue to haunt traders.

On the data front, this morning brings PPI (exp 0.2%, 2.7% Y/Y) for headline and (0.2%, 2.9% Y/Y) for core as well as Chicago PMI (44.0).  Too, we get the first Fed speaker, Governor Bowman, but the only Fed news that is going to matter today is the mooted announcement about the next Chair.

What have we learned this week?  Volatility is alive and well in the commodity space, and, although not quite to the same extent, in the equity space.  Bonds are boring and the dollar continues to refuse to stick to the narrative that its days in the sun are over.  Regarding the dollar, remember that despite all the talk of the dollar’s collapse, the only thing we have heard from ECB members is that if the euro rises too much (i.e. the dollar falls sharply) that is a problem and they will need to respond.  It’s been an eventful month in the markets.  I suspect that this may be a map for at least the first half of the year.

Good luck and good weekend

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Commodities Blazing

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According to Jay and the Fed
The ‘conomy’s moving ahead
So, rates are on hold
With rallies in gold
And stocks and the dollar instead
 
But really, the thing that’s amazing
Is nobody cares about phrasing
Or Dot plots or pressers
‘Cause now all the stressors
Are Trump and commodities blazing

Once upon a time, the FOMC meeting was THE story for markets during the week leading up to the meeting and through the Chair’s press conference explaining the many virtues of what they did and why they did it.  Of course, this has not always been the case.  If we head back to the pre-Alan Greenspan days, the FOMC was peopled by 18 anonymous members and the Fed Chair, at that time Paul Volcker, and nobody ever spoke to the press and only grudgingly to Congress, they simply managed the money supply to the best of their ability to achieve their mandates.  The biggest data point of every week was the Thursday afternoon M2 release, and there was an entire subculture of ‘Fed watchers’, similar to ‘Kremlin watchers’ whose job was to read the tea leaves based on market behavior and data in trying to determine how the Fed would behave going forward.

Almost the only time Chairman Volcker spoke in public was at the semiannual Humphrey-Hawkins testimony to Congress, but he basically never answered any questions and clearly didn’t care what either Senators or Congressmen asked.

But then we got the “Maestro”, Alan Greenspan, who after Black Monday in October 1987, created the first Fed put.  At that time, the rest of the FOMC was still largely anonymous, but Greenspan craved the limelight, if only to try to show how much smarter he was than everybody else.  Famously, he explained in Congressional testimony in 1996, “If you understood what I said I must have misspoken.”  Greenspan was more available to the press than Volcker, but the rest of the committee remained in the background.

However, that simply set the table for the ensuing Fed chairs, Bernanke, Yellen and now Powell, all of whom give press conferences and clearly encouraged their minions to get out there and deliver the message.  As so many struggling leaders explain, it’s not the substance, it’s the messaging that’s the problem.  This is what we have all been dealing with since Bernanke sat down in 2006, mandated press conferences and pushed the narrative as a critical part of policy.

Then, along came President Trump’s second term, and times, they are a-changing.  While Trump rails on Powell to cut rates and lambastes him regularly, it turns out, the combination of new fiscal and economic policy is driving monetary policy into the background, at least from the perspective of market participants.  The result is that while FOMC members still get out there and give interviews regularly, they are never newsworthy.  In fact, my suspicion is that the reason Chairman Powell made his little video announcing the Fed received subpoenas was as an effort to get back on the front page, a place he and his committee members have clearly grown to enjoy, and from which they are increasingly absent.

Which brings us to the meeting yesterday where…nothing happened.  Policy rates remain unchanged, as universally expected, two voters wanted 25bp cuts (Miran and Waller), and they admitted that economic activity moved up from “moderate” to “solid”.  In the most stinging rebuke, the market virtually ignored the entire process.  In fact, the discussion about the next Fed chair is ebbing into the background.  My take is this is a better situation for all involved.  I only hope it stays this way.

So, what did happen?  Stocks were flat, bonds were flat, the dollar rebounded a bit, and commodities continue to rocket higher.  Let’s take a turn around markets overnight and start with commodities as that is where all the action is.

Copper (+6.1%) is the overnight star, soaring in Asia to record highs.  As with virtually all commodities right now, blame is laid at the feet of the weakening dollar (it didn’t move overnight) and with uncertainties about President Trump’s next actions and the potential risks attendant to those actions when they occur.  As we have seen with both gold (+1.9%, +27.1% in the past month) and silver (+1.3%, +54.6% in the past month), there is no doubt that fiat currencies are losing their status as a store of value, regardless of the interest rates they pay.  While copper’s movement has not been as extraordinary as that of either gold or silver, the trend, as you can see in the chart below, remains clearly higher.

Source: tradingeconomics.com

The underlying reality for all these metals is that the financialization of economies all around the world has resulted in far more market activity than was necessarily warranted by the physical markets.  And physical markets need ounces and pounds of stuff, which have very long lead times to get out of the ground.  As a trader, I look at these moves in precious metals and am very concerned they are overdone but as somebody with a basic understanding of physics, I see no reason to believe that the demand for these metals is going to slow down anytime soon.  The below chart shows just how extraordinary the silver move has been, and the table below it really tells the tale.

Source: tradingeconomics.com

As to oil (+2.6%), it is heading higher this morning on increasing fears that the President is going to initiate a military action to depose the Ayatollah in Iran.  Concerns are rising about Iran closing the Strait of Hormuz as well as its ability to respond via missile attacks.  Remember, though, a market that moves on a political issue will revert once that issue has either occurred, or clearly won’t occur, so do not mistake this move for the beginning of a new trend.  Consider what happened to oil after Russia invade Ukraine and after they invaded Crimea in 2014.

Source: finance.yahoo.com

Turning to the equity markets, yesterday’s US blahs were followed with a bit more price action in Asia as though Japan (-0.7%) slipped a bit, China (+0.8%), HK (+0.5%), Korea (+1.0%) and Taiwan (-0.8%) all so more significant movement, albeit not offering a larger theme given the relative gains and losses.  Elsewhere in the region, the smaller exchanges showed more red than green.  In Europe, Germany (-1.15%) is the dog, falling on idiosyncratic weakness in SAP and Deutsche Bank following weak earnings and forecasts, but the rest of the space is performing well (UK +0.4%, France +0.65%, Spain +0.4%) as earnings there have been relatively solid.  And, at this hour (7:10), US futures are pointing higher by about 0.25% or so as earnings numbers have been strong so far this week, highlighted by Meta last night.

In the bond market, activity is less frenetic with Treasury yields unchanged this morning, European sovereigns catching a bit of a bid as yields slip -2bps across the board and JGB yields (+2bps) rising after the latest poll showing PM Takaichi increasing her odds of getting an LDP majority in the Diet next week.  Something to watch closely going forward is the shape of the yield curve as there is growing concern that long-end rates may rise regardless of the Fed (yet another sign the Fed is losing its sway).  In fact, I suspect if that is the case, that we will see yet another bout of QE, although they will find an alternate name.

Finally, in the FX markets, despite all the pearl clutching about the end of the dollar, there is no movement of note in any currency today, with the entire screen showing gains or losses of 0.3% or less with one exception, CLP (+0.5%) following the remarkable jump in copper’s price.  The linked article is quite funny as they explain all the negatives of a weak dollar and then also explain that ECB members are concerned about a too strong euro.  I am frequently confused by whether a strong currency is good or bad for a nation, but I guess it depends on the narrative you are trying to push.

On the data front, weekly Initial (exp 205K) and Continuing (1860K) Claims come at 8:30 as does the Trade Balance (-$40.5B).  We also see final Nonfarm Productivity (4.9%) and Unit Labor Costs (-1.9%) which if those numbers are met indicate quite positive economic activity.  Then, at 10:00 we see Factory Orders from November (1.6%), but that is such old data I don’t think it matters.

Remember, it is Trump’s world (and Bessent) and we’re just living in it.  The White House is the source of all the news so let’s all be happy that the Fed is fading into the background.  With that in mind, based on President Trump’s goals, a weaker dollar is clearly his desire, at least in the short run, although I continue to see scope for longer term strength.

Good luck

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Step Five?

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It takes seven steps
Ere intervention arrives
Was last night step five?

 

The yen continues to be in the crosshairs of traders as further weakness is anticipated based on several things I believe.  First, there had long been an assumption that the Fed was going to cut rates further, especially with President Trump haranguing Chairman Powell constantly on the subject.  In addition to that, there continues to be an underlying thesis amongst many pundits that the US economy is weakening dramatically to drive that rate decision.  Yet recent data belies those facts, notably the Atlanta Fed’s remarkable GDPNow jump, but also relative stability in other data, including employment.  The upshot is the futures market is now pricing a mere 3% probability of a cut at the end of this month and not pricing the next rate cut until June, after Chairman Powell is gone.  One key leg of the yen strength argument is weakened.

Source: cmegroup.com

Second, there continues to be a belief that the BOJ will continue to hike interest rates, and perhaps they will, but it appears that the pace of those hikes will be far slower than previously anticipated.  Currently, the market is pricing just 50bps of hikes for all of 2026.  At the same time, Takaichi-san is set to “run it hot” in Japan just like in the US, pumping up fiscal stimulus and forcing the BOJ to come along for the ride.  The implication here, which is what we are seeing in the markets right now, is that a larger fiscal deficit will lead to strength in equities but a weaker currency.  The second leg of the yen strength argument is failing here as well.

Which brings us to last night’s commentary from Satsuki Katayama, Japan’s FinMin, who explained, [emphasis added] “We won’t rule out any means and will respond appropriately to moves that are excessive, including those that are speculative. We’ve mentioned this to the prime minister today as well.”  The kind of sudden moves we saw on Jan. 9 have nothing to do with fundamentals, and are deeply concerning,” she added. Her message was soon backed up by Atsushi Mimura, the ministry’s top official in charge of the yen, who reiterated that no options were being ruled out.

The bolded words are all part of the Japanese seven-step plan toward intervention.  At this point, I feel like we have reached number five.  The market responded predictably, with the yen strengthening vs. the dollar (and all its counterparts), albeit not all that much.  Last night saw the yen trade at 159.45, its highest since July 2024 (the last time the BOJ intervened), before the comments helped bring it back a bit.

Source: tradingeconomics.com

But one other area which the MOF/BOJ follow closely is not just the USDJPY exchange rate, but also the yen’s rate vs. other major currencies.  If, for instance, the yen is only weakening vs. the dollar, that is one thing.  However, a look at the chart below showing USDJPY, EURJPY and GBPJPY shows us that the yen is weakening against all those currencies pretty much in sync.  In fact, this argues that the yen’s current weakness is a yen specific fundamental, not a speculative move, which should argue against intervention, as that will only be a temporary sop.  However, my take is when we get to 160 or 162, which I believe is coming, we will see the BOJ selling aggressively.

Source: tradingeconomics.com

Ironically, the one currency against which the yen has been weakening steadily that I’m sure delights the BOJ/MOF is the Chinese yuan.  Since Liberation Day in the US, the yen has fallen more than 17% and continues to slide vs. the yuan as it has been doing for the past five years.  It is not hard to believe there are voices in the Japanese government that see that move and recognize how much it helps the Japanese export sector and caution against trying to arrest the yen’s weakness too aggressively.

Source: tradingeconomics.com

I look forward to much more dialog on this subject and expect that soon, we will be hearing about the end of the carry trade, yet again.  To my eyes, until Japanese fundamentals change, or at least appear to be moving in the right direction, the yen will struggle.  So, let me know when the fiscal deficit shrinks, or GDP jumps to 4% or inflation slides back to 1%.  Until then, they yen is damaged goods.

As to the rest of the market, precious metals continue to be the shining stars with the whole sector higher this morning (Au +1.0%, Ag +4.2%, Pt +2.0%) and that move taking copper (+0.4%) along for the ride.  Last night the CME raised its margining requirement and changed its nature by requiring a percentage of the value, rather than a numeric amount per contract.  My friend JJ, who writes the Market Vibes substack wrote a brilliant piece last night explaining how the flows are evolving in the silver market.  To sum it up, at this point, there appears no end in sight for the demand as short positions are covered by new shorts.  Metal for delivery remains scarce and despite the extraordinary shape of the move, it appears to have more steam to drive it forward.  Markets like this are extremely difficult to trade, and history shows that movements in the shape seen below reverse very sharply.  But as Keynes explained 100 years ago, markets can remain wrong longer than you can remain solvent.  I am happy I have been long silver for quite a while but am having a hard time figuring out what to do now!

Source: tradingeconomics.com

Meanwhile, oil (+1.4%) continues to rally on concerns that the Iran situation will lead to one of two outcomes, either a substantial decline in production as the regime collapses, or an effort by the regime to close the Strait of Hormuz which will impede shipping and reduce supply as they try to inflict pain on the US and the rest of the world who are rooting for the uprising.

Heading back to paper markets, yesterday’s weakness in the US was followed by a more mixed picture in Asia with Japan (+1.5%) rallying on continuing hope for more fiscal stimulus.  HK (+0.6%) benefitted from news that China’s trade surplus hit a new record high of $1.2 trillion (remember when they were going to grow domestic demand?) but Chinese shares suffered (-0.4%) after the regulators there raised margin requirements to 100%.  As to the rest of the region, it was far more green than red, although India continues to be a laggard overall.  In Europe, mixed is also the best description with the DAX (-0.35%) lagging while we have seen modest gains in the UK (+0.3%) and France (+0.2%).  Otherwise, it is hard to get excited about activity here today.  There continue to be existential questions about the EU and which nations will enact EU directives given that Poland, Hungary, Italy and the Czech Republic seem to be ignoring the latest issues like the Digital Asset Tax.  As to US futures, at this hour (7:00) they are softer by about -0.25% across the board.

Bond markets (except Japanese ones) remain completely uninteresting.  Treasury yields have slipped -3bps this morning and European sovereign yields are lower by -1bp.  Despite all the sound and fury about specific issues in markets, fixed income investors remain nonplussed by everything for now.  If/when that changes, we will need to watch things carefully.

Finally, aside from the yen (+0.3%) there is little to discuss overall. The DXY is still trading right around 99 and there has been very little movement of note.  Relationships that we would expect (ZAR and Au, NOK and oil) remain intact, but despite the metals dramatic movement, the rand is just gradually appreciating.

On the data front, yesterday’s CPI printed slightly softer than market expectations, but it is hard to get excited that inflation is heading back to target anytime soon.  @inflation_guy, Mike Ashton, had an excellent write-up here explaining what is going on and why much lower inflation is unlikely.  Ultimately, despite a lot of discussion regarding rental rates, those figures are not representative of the rental market as a whole and shelter costs continue to climb.  Absent a serious decline in goods inflation, it will be virtually impossible to get back to 2.0% on any sustainable basis.

As to today, it is a hodge podge of current and old data with Existing Home Sales (exp 4.21M) the only December number.  We see November Retail Sales (0.4%, 0.4% ex-autos) and PPI for both October and November which seem unlikely to impact markets greatly.  We also see EIA oil inventory data where a small draw is expected for crude but a build for gasoline.  Last week saw a massive build in products which likely helped weigh on the price last week.  But this week, things are different.  

We also hear from five more Fed speakers including Steven Miran, who will undoubtedly make his case for aggressive rate cuts again.  Then at 2:00 we get the Fed’s Beige Book.

Drinking from a firehose seems an apt metaphor for market analysts trying to make sense of the current situation.  Stepping back, I have never understood the market pricing for more rate cuts given the economy’s resilience.  The twin stories, in my estimation, are a growing level of fear regarding the debasement of fiat currencies, hence the move in metals, and the fact that the US remains the cleanest dirty shirt in the laundry, hence my preference for the dollar vs. other fiat currencies.  But on any given day, be careful!

Good luck

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Under Damocles’ Sword

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It turns out the market ignored
Chair Powell, though many abhorred
The idea the Fed
May soon need to shred
Its views under Damocles’ Sword
 
So, stocks rose and set more new highs
And bonds ignored all the shrill cries
But metals retained
The heights that they gained
How long ere the bears euthanize?


 
Yesterday, of course, the big news was the Powell video describing the subpoenas that he and the Fed received on Friday.  This continues to be seen as an attack on the Fed’s “independence” and the talking heads remain aghast.  I couldn’t help but chuckle at 12 current central bankers from around the world putting out a statement that this was a terrible precedent.  Consider that most people have no idea who any of the signees are, so they hold no reverence for their views, and the people who do know them, are already in the camp.  Of course, I cannot help but remember the statement by 51 former FBI/CIA security apparatus people explaining that Hunter Biden’s laptop had all the earmarks of Russian disinformation.  My point is this type of response is not necessarily the unvarnished truth.  I wasn’t at the Senate committee meeting and do not recall what he said, if I ever heard it, so am in no position to judge what went on.  I guess, that’s what a grand jury is all about, to determine if there are sufficient grounds to go forward with a charge.  Again, this is a Washington DC grand jury, who will be biased against anything President Trump’s administration is doing.  I put it at 50/50 that any charges are even brought.
 
Meanwhile, despite all the angst, equity markets rebounded all day to close higher, bond markets absorbed a 10-year auction with little concern and yields were within 1bp of the morning levels while the dollar, which had initially fallen about -0.4% to -0.5% on the news, clawed back a part of that loss, and is slightly firmer this morning.  The only real outlier here were the precious metals markets where both gold and silver had monster days trading to new highs.  Such was yesterday.
 
Takaichi-san
Like a hungry boa, wants
To tighten her grip

First, my error in yesterday’s note regarding the Japanese stock market on Monday, which was actually closed for Coming of Age Day, but overnight did jump 3.1% on the news that PM Takaichi, she of the 70+% approval rating, is going to call for snap elections to try to consolidate her power more effectively in the Lower House of the Diet.  While the announcement has not officially been made, it has been widely reported that on January 23rd, she will dissolve parliament and seek an election on either February 8th or 15th.

The market response here was quite clear.  Aside from the jump in equity prices based on more government support for her fiscal spending, the yen (-0.5%) fell to its lowest point in more than a year and now, trading near 159, is seen as entering the ‘intervention range’.  A look at the chart below shows that in July of last year, the last time the yen weakened to this level, we did see the BOJ enter the market and it was quite effective in the short run.  If I recall correctly, there was a great deal of discussion then about the end of the carry trade.  Of course, that didn’t happen, and even though the BOJ has increased rates to 0.75% in the interim, I assure you, the carry trade is still out there in very large size.

Source: tradingeconomics.com

I expect that this evening we will hear more from the FinMin and her deputies regarding concerns over ‘one-sided’ moves and the need for the yen to represent fundamentals, but I sincerely doubt that there will be any activity before 160 trades, and maybe even 165.

Perhaps of greater concern for Takaichi-san is that JGB yields rose sharply on the news with the 10yr (+7bps) rising to a new high for this move, while the super long 40-year traded to 3.80%, higher by 9bps and a new all-time high for the bond.  Japan has serious financing issues and has had them for quite some time.  However, two decades of ZIRP and NIRP hid the problems as financing costs were virtually nil.  As a net creditor nation, they also have inherent strengths with respect to international finance, although it remains to be seen if the population there will accept the idea that their savings need to be used to pay down government debt.

As we have seen across many markets, the old rules and relationships don’t seem to apply these days.  The fact that Japanese yields are climbing far more quickly than US yields, with the spread narrowing dramatically, in the past would have seen a much stronger yen.  As well, rising yields tend to undermine equity markets, and yet, they sit at record highs.  This is not the world in which many of us grew up.

Ok, as we await this morning’s CPI data, let’s see how other markets behaved overnight.  While yesterday’s US gains were modest across the board, they were gains after a terrible start.  Meanwhile, in addition to Tokyo’s rally, we saw HK (+0.9%), Korea (+1.5%), Taiwan (+0.5%) and Australia (+0.6%) all rally although both China (-0.6%) and India (-0.3%) lagged.  It appears the latter two suffered from some profit-taking (although Indian shares have not really performed that well) while the gainers all benefitted from the US rally and ongoing excitement over tech shares.  In Europe, though, every major market is softer this morning although only Paris (-0.6%) is showing any substance in the decline. Elsewhere, declines of -0.1% to -0.3% are the order of the day, hardly groundbreaking, and given most of these markets have had a good run, it seems there has been some profit-taking ahead of this morning’s CPI data.  As to US futures, at this hour (7:00) they are basically unchanged.

In the bond market, this morning yields are edging higher everywhere with Treasury yields (+2bps) now touching the top of its forever range at 4.20%.  European sovereign yields are uniformly higher by 2bps as well although there has been no data of note nor commentary to really offer a rationale.  Of course, 2bps is hardly earth shattering.  

In the commodity markets, while precious metals (Au -0.2%, Ag +0.75%, Pt -1.1%, Cu +0.5%) have been the headline story, the oil market has taken a back seat.  Quickly, on the metals side, it seems that the supply scarcity remains the main driver overall, and the fact that there is limited new exploration, let alone new mines coming online, ongoing, my take is these have further to climb.  

But oil is quite interesting.  You all know my view that the trend remains lower, but today, it is bucking that trend with WTI (+1.9%) up nicely and back above $60/bbl for the first time since mid-November.  A look at the chart below shows that using my, quite imperfect, crayon if I ignore the massive Operation Midnight Hammer spike, even after a few solid up days, oil remains well within its down trend.  I am no technician, so others will draw lines as they see fit, but I am looking at longer term views, not day-to-day or intraday.  

Source: tradingeconomics.com

My take is that the Venezuela story has evolved into increased production from there will take quite a long time, so ought not pressure prices lower.  Rather, I would lean toward the ongoing uprising in Iran as the proximate cause for today’s recent gains.  After all, if the regime falls, and the Mullahs exit for Moscow, it is unclear who will fill the power vacuum and what will come next.  As such, it is easy to anticipate a reduction in Iranian supply, which is currently about 3.2mm to 3.5mm barrels/day (according to Grok), and if that goes missing, or even is cut in half, would have a significant short-term impact on the price.  

Regarding this situation, obviously I have no special insight.  However, the most interesting thing I read, and why I believe this will indeed be the end of the theocracy, is that the protestors have burned down 350 mosques, a direct attack on the belief system of the Ayatollah.  This appears quite widespread, and it would not surprise me if the regime falls before the end of the month.  Good luck to the people of Iran.

Finally, the dollar is little changed this morning other than against the yen.  For the dollar bearish crowd, which is quite large as doom porn about the end of the dollar’s hegemony remains quite popular, yesterday’s decline was tiny.  In fact, if we use the DXY as our proxy, it is higher by 0.1% this morning and trading just below 99.00 as I type.  Once again, if we look at the chart below, it has been 9 months since the DXY has traded outside the 97/100 range in any substantive manner and we are basically right in the middle.  Nobody really cares right now.

Source: tradingeconomics.com

Turning to the data this morning, CPI (Exp 0.3%, 2.7% Y/Y) for both headline and core leads the list.  This is December data, so as up to date as we will get.  We also see stale New Home Sales data, but it is hard to get excited about that.  The NFIB Small Business Optimism Index already printed right at expectations of 99.5.

It’s funny, despite all the discussion of the Fed regarding the Powell subpoena, Fed speakers don’t seem to be getting much traction.  Yesterday, three speakers indicated that rates seemed to be in a good place, and, not surprisingly, all defended Chairman Powell.  My view at the beginning of the year was that the Fed was going to become less important to the market dialog and in truth, that remains my view.  Rate cut probabilities have fallen to 5% for this month with the next cut priced for June.  Obviously, that is a long time from now and much can happen, but if the data showing GDP is accurate, it seems hard to understand why there would be a cut at all.  Too, remember one of the key theses behind dollar weakness was Fed dovishness.  If the Fed is not so dovish, tell me again why the dollar should decline.

It’s a crazy world in which we live.  Hedgers, stay hedged.  The rest of you, play it close to the vest.

Good luck

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The Temperature’s Rising

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This morning the temperature’s rising
With Trump and his allies devising
An alternate way
For him to axe Jay
But this move is quite polarizing
 
The market response has been clear
It’s given the move a Bronx Cheer
Both stocks and the dollar
Are feeling a choler
But gold, everybody holds dear

 

The financial world is aghast this morning as last night, Chairman Powell revealed that the Fed has been served with grand jury subpoenas threatening criminal indictment regarding Chairman Powell’s testimony to the Senate Banking Committee last June.  The issue at hand is ostensibly the ongoing renovations at the Marriner Eccles Building, including their cost, and how that differs from Chairman Powell’s testimony.

Chairman Powell offered a video response last night explaining he will not be cowed into cutting rates because the President wants lower rates, but will continue their work of setting policy based on their assessments of the economy.  One cannot be surprised that this has raised an entirely new round of screaming about President Trump’s tactics, although what I did see this morning was that Florida House Representative Anna Paulina Luna took credit for referring the case to the DOJ.

While I have strong opinions on Chairman Powell’s effectiveness, or lack thereof, this is certainly a new level of pressure.  In fact, if you listen to the video above (it’s just 2 minutes) Powell explicitly claims that this is entirely about the Fed not cutting rates further.  But I am not going to discuss the legality, or tactics here, our focus is on the market’s response.

Starting with the dollar in the FX markets, it has fallen almost universally, and while it hasn’t collapsed, we are looking at a 0.3% to 0.5% decline pretty much everywhere.  Using the euro (+0.4%) as our proxy, you can see from the chart below that in the context of the past year’s price activity, this move is indistinguishable from any other move.

Source: tradingeconomics.com

This is not to imply that the Administration’s actions are insignificant, just that despite the rending of garments by the punditry, the market hasn’t determined it matters that much, at least not yet.  I have maintained my view that the dollar remains the best of a bad bunch of fiat currencies given the prospects for US economic activity compared to the rest of the world.  However, it is quite possible that foreign investors will view this action as far too detrimental to the structure of US financial markets and seek to exit, thus driving the dollar much lower.  I did not have this on my bingo card at the beginning of the year, so my views of dollar strength are somewhat tempered at this point.  It will certainly be interesting to see as we go forward.

One other thing to note is that CPI is released this week (exp 2.7% for both headline and core) and Truflation came out last week at 1.8%.  Now, I don’t put great stock in Truflation but there are many who do.  For that contingent, I assume they are aligned with President Trump in his views that Fed funds are too high.  After all, with Fed funds at 3.75%, that is nearly 200bps above the Truflation number.  I have always understood the “appropriate” relation to be closer to 75bps to 100bps above inflation, which if you believe Truflation, means you are looking for cuts.  (PS, this is not my personal view, I am simply highlighting part of the market thought process.)

At any rate, the dollar is under pressure this morning but remains well within its recent trading range.  Turning to commodities, though, that is where the real price action is, with precious metals exploding higher on this news.  We are looking at record highs for gold (+1.6%), silver (+4.6%) with platinum (+3.2%) also much richer, although not back to all-time highs.  If we look at a chart of both gold and silver below, we can see the parabolic nature of silver’s recent move, a situation which should make everyone uncomfortable as parabolic moves frequently signal the end of the line. 

Source: tradingeconomics.com

But perhaps what makes this more interesting is that there is a substantial amount of supply in both gold and silver due to enter the market as the BCOM index rebalancing began last Friday and continues through Thursday.  Given the dramatic rallies in both metals last year, there is a significant amount to be sold by those funds that track the index.  Estimates are for a total of nearly $7 billion of gold and silver to be sold for the rebalancing, and many expected the metals markets to decline under that pressure.  And perhaps they still will, but today’s moves are the clearest signal that there are many investors who are uncomfortable with the Fed situation.

Remarkably, Venezuela and oil markets have basically disappeared from the conversation at this point.  However, this morning WTI (-0.9%) is giving back some of last week’s gains, and remains well within its recent downtrend, but shows no signs of a sharp break in either direction.

Turning to the other risk spot, equity markets, while US futures are all lower by -0.5% to -0.6% at this hour (7:10), the Fed news has had a mixed impact elsewhere around the world.  For instance, Japan (+1.6%), HK (+1.4%) and China (+0.65%) all had solid sessions with that being the case throughout the region.  Even India (+0.4%) finally managed to go green last night.  And all of this occurred after the Fed news.  One possible explanation is that foreign investors are running home, hence bidding up local shares.  Of course, it is also possible that they don’t believe there is much there, there, and are simply ignoring the news.

In Europe, the situation is different with weakness the general trend as Spain (-0.4%), France (-0.3%) and Italy (-0.15%) all slipping although Germany (+0.3%) has managed to buck the trend absent any specific macro catalyst.  German defense stocks are modestly higher this morning and perhaps threats by President Trump to aid the fomenting Iranian revolution have investors looking for more gains there.  As I often say, markets can be quite perverse for no apparent reason at all.

Finally, bond markets are not really responding to the news in any substantial manner.  Treasury yields have backed up 3bps this morning, but at 4.19%, remain within that long-term trading range and are not signaling flight.  European sovereigns have seen yields edge lower by -1bp across the board, so while modestly better, hardly the sign of massive buying.  And JGB yields were unchanged overnight.  Bonds remain the least interesting space there is of all the markets.

Which takes us to the data this week.

TuesdayNFIB Small Biz Optimism99.5
 CPI0.3% (2.7% Y/Y)
 -ex food & energy0.3% (2.7% Y/Y)
 New Home Sales710K
WednesdayRetail Sales0.4%
 -ex Autos0.3%
 Existing Home Sales4.2M
 Fed’s Beige Book 
ThursdayInitial Claims219K
 Continuing Claims1918K
 Empire State Mfg1.0
 Philly Fed-2.0
FridayIP0.1%
 Capacity Utilization76.0%

Source: tradingeconomics.com

In addition, we get PPI data on Wednesday, but it is all old data, for October and November and, as such, I don’t think it will matter very much at all.  We also hear from 10 different Fed speakers, some several times, over the course of the week.  It will be very interesting to hear how they address the major news overnight regarding the subpoenas, or if they even touch on them.  I expect there will be oblique references to Fed independence at most.

And remember, none of this even considers the ongoing revolution in Iran, which appears to be gaining strength in its third week.  If the theocracy in Iran falls, that will have a very different impact on oil markets than the Venezuela situation.  First, they are currently producing far more oil.  Second, the removal of sanctions there would seemingly reduce the amount of ultra cheap oil that China can import, adding pressure to the Chinese economy, as well as help pressure oil prices lower in general, which would negatively impact Putin’s war chest.  (If Iranian oil is no longer black market, it raises China’s cost, but lower overall prices will reduce further Russia’s sanctioned sale prices).

As to the dollar on the FX markets, this move certainly gives me pause regarding my bullish view, but there seems to be a long way to go before anything really comes of it.  As well, grand jury testimony is secret, so we won’t know about anything that is said anytime soon.  Ultimately, nothing may come of this, no charges of any sort.  Remember, this is a Washington DC grand jury, and so many there disagree with everything that President Trump does, they may not indict for that reason alone.

I’m not willing to make a sweeping statement at this time, but caution in positioning seems like a sensible view.

Good luck

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Crazier Still

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There once was a time when the Fed
When meeting, and looking ahead
All seemed to agree
The future they’d see
And wrote banal statements, when read
 
But this time is different, it’s true
Though those words most folks should eschew
‘Cause nobody knows
Which way the wind blows
As true data’s hard to construe
 
So, rather than voting as one
Three members, the Chairman, did shun
But crazier still
The dot plot did kill
The idea much more can be done

 

I think it is appropriate to start this morning’s discussion with the dot plot, which as I, and many others, expected showed virtually no consensus as to what the future holds with respect to Federal Reserve monetary policy.  For 2026, the range of estimates by the 19 FOMC members is 175 basis points, the widest range I have ever seen.  Three members see a 25bp hike in 2026 and one member (likely Governor Miran) sees 150bps of cuts.  They can’t all be right!  But even if we look out to the longer run, the range of estimates is 125bps wide.

Personally, I am thrilled at this outcome as it indicates that instead of the Chairman browbeating everyone into agreeing with his/her view, which had been the history for the past 40 years, FOMC members have demonstrated they are willing to express a personal view.

Now, generally markets hate uncertainty of this nature, and one might have thought that equity markets, especially, would be negatively impacted by this outcome.  But, since the unwritten mandate of the Fed is to ensure that stock markets never decline, they were able to paper over the lack of consensus by explaining they will be buying $40 billion/month of T-bills to make sure that bank reserves are “ample”.  QT has ended, and while they will continue to go out of their way to explain this is not QE, and perhaps technically it is not, they are still promising to pump nearly $500 billion /year into the economy by expanding their balance sheet.  One cannot be surprised that initially, much of that money is going to head into financial markets, hence today’s rally.

However, if you want to see just how out of touch the Fed is with reality, a quick look at their economic projections helps disabuse you of the notion that there is really much independent thought in the Marriner Eccles Building.  As you can see below, they continue to believe that inflation will gradually head back to their target, that growth will slow, unemployment will slip and that Fed funds have room to decline from here.

I have frequently railed against the Fed and their models, highlighting time and again that their models are not fit for purpose.  It is abundantly clear that every member has a neo-Keynesian model that was calibrated in the wake of the Dot com bubble bursting when interest rates in the US first were pushed down to 0.0% while consumer inflation remained quiescent as all the funds went into financial assets.  One would think that the experience of 2022-23, when inflation soared forcing them to hike rates in the most aggressive manner in history, would have resulted in some second thoughts.  But I cannot look at the table above and draw that conclusion.  Perhaps this will help you understand the growth in the meme, end the fed.

To sum it all up, FOMC members have no consensus on how to behave going forward but they decided that expanding the balance sheet was the right thing to do.  Perhaps they do have an idea, but given inflation is showing no signs of heading back to their target, they decided that the esoterica of the balance sheet will hide their activities more effectively than interest rate announcements.

One of the key talking points this morning revolves around the dollar in the FX markets and how now that the Fed has cut rates again, while the ECB is set to leave them on hold, and the BOJ looks likely to raise them next week, that the greenback will fall further.  Much continues to be made of the fact that the dollar fell about 12% during the first 6 months of 2025, although a decline of that magnitude during a 6-month time span is hardly unique, it was the first such decline that happened during the first 6 months of the year, in 50 years or so.  In other words, much ado about nothing.  

The latest spin, though, is look for the dollar to decline sharply after the rate cut.  I have a hard time with this concept for a few reasons.  First, given the obvious uncertainty of future Fed activity, as per the dot plot, it is unclear the Fed is going to aggressively cut rates from this level anytime soon.  And second, a look at the history of the dollar in relation to Fed activity doesn’t really paint that picture.  The below chart of the euro over the past five years shows that the single currency fell during the initial stages of the Fed’s panic rate hikes in 2022 then rallied back sharply as they continued.  Meanwhile, during the latter half of 2024, the dollar rallied as the Fed cut rates and then declined as they remained on hold.   My point is, the recent history is ambiguous at best regarding the dollar’s response to a given Fed move.

Source: tradingeconomics.com

I have maintained that if the Fed cuts aggressively, it will undermine the dollar.  However, nothing about yesterday’s FOMC meeting tells me they are about to embark on an aggressive rate cutting binge.

The other noteworthy story this morning is the outcome from China’s Central Economic Work Conference (CEWC).  I have described several times that the President Xi’s government claims they are keen to help support domestic consumption and the housing market despite neither of those things having occurred during the past several years.  Well, Bloomberg was nice enough to create a table highlighting the CEWC’s statements this year and compare them to the past two years.  I have attached it below.

In a testament to the fact that bureaucrats speak the same language, no matter their native tongue, a look at the changes in Fiscal Policy or Top Priority Task, or even Real Estate shows that nothing has changed but the order of the words.  The very fact that they need to keep repeating themselves can readily be explained by the fact that the previous year’s efforts failed.  Why will this time be different?

Ok, a quick tour of markets.   Apparently, Asia was not enamored of the FOMC outcome with Tokyo (-0.9%) and China (-0.9%) both sliding although HK managed to stay put.  Elsewhere in the region, both Korea (-0.6%) and Taiwan (-1.3%) were also under pressure as most markets here were in the red.  The exceptions were India, Malaysia and the Philippines, all of which managed gains of 0.5% or so.  

In Europe, things are a little brighter with modest gains the order of the day led by Spain (+0.5%) and France (+0.4%) although both Germany and the UK are barely higher at this hour.  There was no data released in Europe this morning although the SNB did meet and leave rates on hold at 0.0% as universally expected.  There has been a little bit of ECB speak, with several members highlighting that ECB policy is independent of Fed policy but that if Fed cuts force the dollar lower, they may feel the need to respond as a higher euro would reduce inflation.  Alas for the stock market bulls in the US, futures this morning are pointing lower led by the NASDAQ (-0.7%) although that is on the back of weaker than expected Oracle earnings results last night.  Perhaps promising to spend $5 trillion on AI is beginning to be seen as unrealistic, although I doubt that is the case 🤔.

Turning to the bond market, Treasury yields have slipped -2bps overnight after falling -5bps yesterday.  Similar price action has been seen elsewhere with European sovereign yields slipping slightly and even JGB yields down -2bps overnight.  Personally, I am a bit confused by this as I have been assured that the Fed cutting rates in this economy would result in a steeper yield curve with long-dated rates rising even though the front end falls.  Perhaps I am reading the data wrong.

In the commodity markets, the one truth is that there are no sellers in the silver market.  It is higher by another 0.5% this morning and above $62/oz as whatever games had been played in the past to cap its price seem to have fallen apart.  Physical demand for the stuff outstrips new supply by about 120 million oz /year, and new mines are scarce on the ground.  This feels like there is further room to run.

Source: tradingeconomics.com

As to the rest of the space, gold (-0.2%) which had a nice day yesterday is consolidating, as is copper.  Turning to oil (-1.1%) it continues to drift lower, dragging gasoline along for the ride, something that must make the president quite happy.  You know my views here.

As to the dollar writ large, while it sold off a bit yesterday, as you can see from the below DXY (-0.3%) chart, it is hardly making new ground, rather it is back to the middle of its 6-month range.  

Source: tradingeconomics.com

This morning more currencies are a bit stronger but in the G10, CHF (+0.45%) is the leader with everything else far less impactful.  And on the flip side, INR (-0.7%) has traded to yet another historic low (USD high) as the new RBI governor has decided not to waste too much money on intervention.  Oh yeah, JPY (+0.2%) has gotten some tongues wagging as now that the Fed cut and the BOJ is ostensibly getting set to hike, there is more concern about the unwind of the carry trade.  My view is, don’t worry unless the BOJ hikes 50bps and promises a lot more on the way.  After all, if the Fed has finished cutting, something that cannot be ruled out, this entire thesis will be destroyed.

On the data front, Initial (exp 220K) and Continuing (1950K) Claims are coming as well as the Trade Balance (-$63.3B).  There are no Fed speakers on the docket, but I imagine we will hear from some anyway, as they cannot seem to shut up.  

It would not surprise me to see the dollar head toward the bottom of this trading range, but I think we need a much stronger catalyst than uncertainty from the Fed to break the range.

Good luck

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All But Assured

Posted on by

A cut has been all but assured
Though since last time we have endured
Some fears Jay’s a hawk
So, when he does talk
Will this cut, at last, be secured?
 
And now there’s a narrative view
Though rates will fall, what he will do
Is try to convey
Now it’s out the way
Another one may not come through

 

Good morning all and welcome to Fed Day.  The question, of course, is will this be a frabjous day?  As I write this morning, the Fed funds futures market continues to price a roughly 90% probability of a 25bp cut this afternoon, but the prospects for future rate cuts have greatly diminished as you can see in the table below from the CME.

It wasn’t long ago when the market was pricing 100bps more of rate cuts by the end of 2026, meaning a Fed funds rate of 2.50% – 2.75%.  However, the narrative has shifted over the past several weeks after very mixed signals from FOMC speakers and data releases that have indicated the economy is not cratering (e.g. yesterday’s JOLTS data printing at 7.658M, >400K higher than expected).  You may recall that shortly after the last FOMC meeting at the end of October, the probability of today’s rate cut had fallen to just 30%.

It appears that the new discussion point is this will be a hawkish cut, an idiom similar to jumbo shrimp.  At this point, the bulk of the discussion has been around how many dissents will be recorded with the subtext being, what will Chairman Powell have to promise potential dissenters in order to bring them along to his side of the ledger.  My take is if you thought the last press conference was hawkish, you ain’t seen nothin’ yet.  In fact, I would not be surprised to see a virtually categoric call to this being the end of the cutting cycle for the foreseeable future.

Remember, we also will see the new dot plots and SEP which will help us understand the broad picture of where FOMC members currently stand on the matter.  Personally, I expect to see a wide disparity between the ends of the distribution, and it wouldn’t surprise me to see some expectations of no rate changes for 2026 with other calls for 150bps of cuts and no consensus view at all. 

At this point, all we can do is wait.  However, the market discussion has centered on the fact that 10-year Treasury yields (+1bp) have been climbing lately, and that this morning they have touched 4.20% again while, at the same time, 2-year Treasury yields (no change) have been slipping as per the below chart I created from FRED data.

The steepening yield curve, which now appears to be turning into a bear steepener (when long dated yields rise more quickly than short-dated yields) is ringing alarm bells in some quarters.  The narrative is that there are growing concerns over both the quantity of debt outstanding and its rate of growth as well as the fact rate cuts will engender future inflation.

A key part of the discussion is the fact that what had been a synchronous system of global central bank policy easing is now starting to split up.  While we have known the BOJ is in a hiking cycle, albeit a slow one, today, the BOC is not only expected to leave rates on hold but explain they have bottomed.  We have heard that, as well, from the RBA earlier this week, and the commentary from the ECB may be coming along those lines.  So, is the US the outlier now?  And will that weaken the dollar?  Those are the key questions we will need to address going forward.

But before we move on, there is one market I must discuss, silver, which exploded to new historic highs yesterday, trading through $60/oz and is higher again this morning by 0.6% and trading at $61/oz.  someone made the point yesterday that for the second time in history, you need just 1 ounce of silver to buy one barrel of WTI.  The first time was back during the silver squeeze in January 1980, but that was quite short-lived (see chart below from macrotrends.com).  This one appears to have legs.  

I don’t know that I can find another indicator that better expresses my views of fiat currency debasement alongside an expanding availability of oil.  To my mind, both these trends remain quite strong, and this is the embodiment of them both combined.

Ok, so as we await the FOMC, let’s see if anybody is doing anything in financial markets of note.  As testament to the fact that virtually everybody is awaiting the Fed this afternoon, US equity markets barely moved yesterday, and Asian markets were similarly quiet, with only Taiwan (+0.8%) moving more than 0.4% in either direction.  The large markets were +/- 0.2% overall.  In Europe, the movement has been slightly larger, but still not impressive with Germany (-0.4%) the laggard of note while the UK (+0.3%) is the leader.  A smattering of data released from the continent doesn’t seem to be having any real impact, nor did comments by Madame Lagarde claiming the rates are in a good place and displaying some optimism on future GDP growth.  Of much greater concern is the headlong rush to a digital euro CBDC, where they are seeking to exert control over the citizenry.  If for no other reason, I would be leery of expecting great things from the Eurozone going forward.  Not surprisingly, at this hour (7:30) US futures are little changed ahead of the meeting.

In the bond market, yields are creeping higher all around the world with European sovereign yields higher between 2bps and 4bps this morning.  Perhaps investors are taking Madame Lagarde’s views to heart.  Or perhaps the fallout from the recently released US National Security Strategy, where the US basically dismisses Europe as strategic, has investors concerned that European governments are going to be spending that much more on defense without having the financial wherewithal to do so effectively, thus will be borrowing a lot and driving yields higher.  At this point, European sovereign yields have risen to levels not seen since the Eurozone bond crisis in 2011, but it feels like they have further to climb (see French 10-year OAT yields below from Marketwatch.com).

In the commodity market, oil (+0.5%) cannot get out of its own way.  While it is a touch higher this morning, it sits at $58.50/bbl, and that long-term trend remains lower.  We’ve already discussed silver and gold (-0.25%) continues to trade either side of $4200 these days, biding its time for its next move (higher I believe).  Copper (+1.4%) is looking good today, although it is hard to find economic news that is driving today’s price action.

Finally, the dollar is a touch softer this morning, about 0.1% in the DXY as well as virtually every major currency in the G10.  Interestingly, today’s outlier is SEK (+0.4%) which is rallying despite data showing GDP (-0.3%) slipping on the month while IP (-6.6%) fell sharply.  As to the EMG bloc, there is very little movement of note with the biggest news this evening’s Central Bank of Brazil meeting where they are expected to leave their overnight SELIC rate at 15.0% as inflation there, released this morning at a remarkably precise 4.46% continues to run at the top of their target range of 3.0% +/- 1.5%.

Ahead of the FOMC, we only see the Employment Cost Index (exp 0.9%), a number the Fed watches more closely than the market, and we hear from the BOC who are universally expected to leave Canadian rates on hold at 2.25%.

And that’s really it.  I wouldn’t look for much movement ahead of the 2pm statement release and then the fireworks at 2:30 when Powell speaks can drive things anywhere.  The most compelling story will be the number of dissents on the vote, as there will almost certainly be several.  According to Kalshi, 3 is the majority estimate.  With President Trump continuing to discuss the next Fed chair, I have a feeling there will be 4 and that will be a negative for bonds (higher yields) and a short-term negative for the dollar.  In fact, it is just another reason to hold precious metals.

Good luck

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The Whisperer’s Roar

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Most focus is still on the Fed
And what every Fed speaker said
But do not ignore
The Whisperer’s roar
That Jay’s got the votes, rates to shred
 
And this is why markets are soaring
While bond vigilantes are snoring
But, too, it’s why gold
Is bought and not sold
The question is, whose ox Jay’s goring?

 

One thing that is very clear right now, the demand for lower interest rates is extremely widespread, regardless of one’s political persuasion.  People may despise everything that President Trump has done or claims he will do, but those same folks are desperate for him to be able to force the Fed to cut rates further.  At least that’s my observation.  

But putting that aside, the narrative around next month’s FOMC meeting seems to be coming to a clearer point; a cut is in the cards, but a potentially long delay in the next move will follow.  While there were no Fed speakers on the calendar, at least the calendar I use, yesterday, we did hear from two more, the presidents of San Francisco and Boston, and though the former, renowned dove Mary Daly, was far more forthright in her views a cut was appropriate, the latter, centrist Susan Collins, clearly was amenable to the idea, though not forcefully so.  But we know that Chair Powell cares since the Fed Whisperer, Nick Timiraos, got top billing in this morning’s WSJ with the following article, “Fed Chair Powell’s Allies Provide Opening for December Rate Cut.”  

As this story was coming into view yesterday, we saw equity markets rise sharply in the US, or at least the tech portion (the DJIA managed only a 0.4% gain compared to the NASDAQ’s 2.7% jump).  We also have seen the Fed funds futures market up the pricing of a rate cut to 81% as of this morning, with the concerns last week about Powell’s hawkishness quickly forgotten.  One other thing of note was the strong rally in precious metals, with gold (0.0% this morning, +1.8% yesterday) and silver (-0.3% this morning, +2.6% yesterday) responding to the imminent further debasement of the dollar.  While both remain somewhat below their October highs, nothing indicates that their trends higher have ended.

Source: tradingeconomics.com

There continues to be a lot of discussion on two fronts, the state of the economy and the rationale for further equity market gains, and interestingly, they are completely independent discussions.  For the former, the dribs and drabs of data that have been released since the end of the government shutdown have been inconclusive as to what is going on, at least officially.  Yesterday brought nothing new, although this morning we are due to see September data on Retail Sales (exp 0.3%, 0.3% ex autos), PPI (2.7% for both headline and core) and House Prices (+1.4% Case Shiller) along with November Consumer Confidence (93.5, down slightly from last month).  It hardly seems this will change any views

But the market conversation is completely different.  Between talk of a Santa rally, the popping of the AI bubble (assuming there is such a thing) and growing certainty that a Fed cut will help goose the stock market, that economic uncertainty means nothing.  There remains a large swath of investors who are certain the Fed will not allow equity markets to fall in any meaningful fashion and who are prepared to continue to buy the dip.  

Interestingly, the place where these two issues meet, earnings forecasts, shows that while fixed income investors may feel uncertain about the economy’s future, 2026 earnings estimates of 14% growth have equity investors in a very different place.  While I don’t know which side is correct, I suspect that the ‘run it hot’ philosophy which has been driving everything this administration does will favor equities over bonds.  While a correction is still likely in my mind, there is still nothing to stop this train!  

Ok, let’s turn to market performance overnight.  Japan (+0.1%) didn’t love the US tech story, which is somewhat surprising, although that may be because there continues to be growing concern regarding the JGB market and the spat with China.  China (+1.0%) and HK (+0.7%) however, both rallied on the US rate cut plus tech rally story.  Taiwan (+1.5%) and Thailand (+1.3%) also liked that story, but the rest of Asia was nonplussed, and more exchanges saw weakness than strength.  As to Europe, nobody there has a strong view this morning with every major bourse +/- 0.15% or less.  The only data was German GDP, which rose to…0.0% for Q3 and clocked in at +0.3% Y/Y! Look at the history of German economic activity over the past 3 years below and ask yourself if this is the powerhouse of Europe, why would anyone want to own any European assets?

Source: tradingeconomics.com

As well, the increased focus on a potential peace in Ukraine may be a negative for the continent.  While it has the potential to help them on the energy side, much of the rally seen across these nations was predicated on the military buildup that was coming.  However, if there is peace, I sense it will be difficult for a group of nations that are massively in debt to convince their populations to borrow more to defend themselves since the threat has abated.  After all, I’m willing to wager there isn’t a single person in the EU who if given the choice between defense spending for a potential future threat or an increased pension will opt for the former.  As to US futures, at this hour (7:25) they are unchanged.

In the bond market, Treasury yields are unchanged this morning after slipping another few basis points yesterday and are sitting at 4.03%.  Either the market is sanguine about the ongoing federal deficit spending or…everybody assumes the Fed is going to restart QE in some form or another if things start to deteriorate.  European sovereign yields are slipping this morning, down between -1bp and -3bps, with the UK on the larger end despite (because of?) tomorrow’s Budget announcement.  

While you may think the US has a fiscal problem, and it does, at least it has the global reserve currency and with it, the ability to live beyond its means for a long time.  The UK, however, simply has the first part, a fiscal problem, which they have exacerbated by adopting the most idiotic energy policies in the world (who would ever have thought that solar power made sense in the UK given the fact it rains, on average, 50% of the days in the year.)  It is unclear to me what the UK can do to right the ship with the current government and its stated priorities.  I suppose that we will see new regulations requiring UK financial institutions to hold more Gilts as otherwise nobody will buy them.  Before I leave this asset class, I cannot ignore the JGB market where back-end yields continue to climb.  As you can see from the below chart, the 10-, 30-, and 40-year yields are all at record highs and show no signs of stopping their multi-year rise.

Source: tradingeconomics.com

I had a long conversation with Charlie Garcia on Substack, someone you should all follow as he has very sharp ideas, on the causes, ramifications and potential outcomes of this unprecedented rise in yields there.  Needless to say, the end game will not be very good for anyone, but the timing remains in question.  As Keynes warned us all, markets can remain wrong longer than you can remain solvent.  But Japan has its own, unique fiscal problems along with every other nation in the world.

Turning to commodities, oil (-0.3%) continues to be the least interesting thing around, drifting slowly lower, but at an increasingly leisurely pace.  The glut narrative has calmed down, but I think there is more concern over the weakening economic story.  Hard for me to say from the outside, but lower is the direction of travel here.  The opposite is true for NatGas (-3.3%) which despite today’s decline is up 55% since October 16th!

Finally, the dollar is under modest pressure today with both the euro and pound stronger by 0.2%, a move that describes almost the entire G10.  One outlier here is NOK (-0.2%) which is clearly suffering on oil’s ongoing weakness.  In the EMG bloc, though, there has been more substantial movement with KRW (+0.7%) rising as traders position for the BOK to remain on hold while the Fed gets ready to cut, thus reversing some of the recent 7% decline in the won over the past quarter.  The CE3 have also rallied nicely, on the order of 0.5%, as they continue to demonstrate their excessive beta with the euro and even CNY (+0.3%) is moving this morning on the back of a potential thaw in relations between the US and China after Presidents Xi and Trump spoke by phone yesterday.  While my long-term perspective on the dollar remains positive, if the Fed does get aggressive, the greenback can certainly come under short-term pressure.

And that’s really all there is today.  With Thanksgiving coming, I expect that volumes will begin to decline so keep that in mind when trying to execute any trades.

Good luck

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Printing Up Gobs

Posted on by

The balance sheet, so said Chair Jay
Is really the very best way
For policy ease
And so, if you please,
QT is soon going away
 
Rate cuts are now back on the table
As we work quite hard to enable
Those folks lacking jobs
By printing up gobs
Of cash, just as fast as we’re able

 

Chairman Powell spoke yesterday morning in Philadelphia at the NABE meeting and the TL; DR is that QT, the process of shrinking the Fed’s balance sheet, is coming to an end.  Below is a chart showing the Fed’s balance sheet assets over the past 20+ years.  I have highlighted the first foray into QE, during the financial crisis, and you can see how that balance sheet has grown and evolved since then.

And the below chart is one I created from FRED data showing the Fed’s balance sheet as a percentage of the nation’s GDP.

Pretty similar looking, right?  The history shows that the GFC qualitatively changed the way the Fed managed monetary policy, and by extension their efforts at managing the economy.  As is frequently the case, QE was envisioned as an emergency policy to address the unfolding financial crisis in 2008, but as Milton Friedman warned us in 1984, “Nothing is so permanent as a temporary government program.”  QE is now one of the key tools in the Fed’s toolkit as they try to achieve their mandates.

There has been a great deal of discussion regarding the issue of the size of the Fed’s balance sheet, paying interest on reserves, something that started back in 2008 as well, and what the proper role for the Fed should be.  But I assure you, this is not the venue to determine those answers. 

However, of more importance than the speech, per se, was that during the Q&A that followed, Mr Powell explained that the Fed was soon reaching the point where they were going to end QT, and that they were going to seek to change the tenor of the balance sheet to own more short-term assets, T-bills, than the current allocation of holding more long-term assets including T-bonds and MBS.  And this was what the market wanted to hear.  While both the NASDAQ and S&P 500 both closed slightly lower on the day, as you can see from the chart below, the response to Powell’s speech was immediate and impressive.

Source: tradingeconomics.com

Too, other markets also responded to the news in a similar manner, with gold, as per the below chart accelerating its move higher.

Source: tradingeconomics.com

While the dollar, as per the DXY, responded in an equally forceful manner, falling sharply at the same time.

Source: tradingeconomics.com

Summing up, Chairman Powell basically just told us that inflation was no longer a fight they were willing to have and support of the economy and employment is Job #1.  Of course, this may not work out that well for long-term bond yields, which when if inflation rises are likely to rise as well, I think Powell knows that he will be gone by the time that becomes a problem, so maybe doesn’t care as much.

But here’s something to consider; there has been a great deal of talk about the animus between the Fed and the Treasury, or perhaps between Powell and Trump, but Treasury Secretary Bessent has already made clear they will be issuing more T-bills and less T-bonds going forward, which is a perfect fit for the Fed’s proposition to hold more T-bills and less T-bonds going forward.  This is not a coincidence.

Now, while that was the subject that got most tongues wagging in the market, the other story of note was the ongoing trade spat between the US and China.  It is hard to keep up with all the changes although it appears that soy oil imports from China are now on the menu of items to be tariffed, and the WSJ this morning explained that China is going to try to pressure President Trump by doing things to undermine the stock market as they see that as a vulnerability.  Funnily enough, I think Trump cares less about the stock market this time around than last time, as he is far more focused on issues like reindustrialization and jobs here and elevating labor relative to capital, which by its very nature implies stock market underperformance.

But that’s where things stand now. So, let’s take a turn around markets overnight.  Despite a mixed picture in the US, Asian equity markets had a fine time with Tokyo (+1.8%), China (+1.5%) and HK (+1.8%) all rallying sharply on the prospect of further Fed ease.  Regarding trade, given the meeting between Presidents Trump and Xi is still on the schedule, I think that many are watching the public back and forth and assuming it is posturing.  As well, Chinese inflation data was released showing deflation accelerating, -0.3% Y/Y, and that led to thoughts of further Chinese stimulus to support the economy there.  Of course, their stimulus so far has been underwhelming, at best.  Elsewhere in the region, green was also the theme with Korea (+2.7%), India (+0.7%), Taiwan (+1.8%) and Australia (+1.0%) all having strong sessions.  One other thing about India is the central bank there intervened aggressively in the FX market with the rupee (+0.9%) retracing to its strongest level in a month as the RBI starts to get more concerned over the inflationary impacts of a constantly weakening currency.

In Europe, the CAC (+2.4%) is leading the way higher after LVMH reported better than expected earnings (Isn’t it funny that the US market is dependent on NVDA while the French market is dependent on LVMH?  Talk about differences in the economy!), and while that has given a positive flavor to other markets, they have not seen the same type of movement with the DAX (+0.1%) and IBEX (+0.7%) holding up well while the FTSE 100 (-0.6%) continues to suffer from UK policies.  As to US futures, at this hour (7:40) they are all firmer by 0.5% to 0.9%.

In the bond market, yields continue to edge lower with Treasuries (-2bps) actually lagging the European sovereign market where yields have declined between -3bps and -4bps across the board.  In fact, UK gilts (-5bps) are doing best as investors are growing more comfortable with the idea the BOE is going to cut rates again after some dovish comments from Governor Bailey yesterday.

In the commodity space, oil (+0.2%) is consolidating after it fell again yesterday and is now lower by nearly -6% in the past week.  However, the story continues to be metals with gold (+1.3%), silver (+2.8%), copper (+0.5%) and platinum (+1.7%) all seeing continued demand as the theme of owning stuff that hurts if you drop it on your foot remains a driving force in the markets.  And as long as central banks are hinting that they are going to debase fiat currencies further, this trend will continue.

Finally, the dollar, as discussed above, is softer, down about -0.25% vs. most of its G10 counterparts this morning although NOK (+0.8%) is the leader in what appears to be some profit taking after an exaggerated decline on the back of oil’s decline.  In the EMG bloc, we have already discussed INR, and after that, quite frankly, it has not been all that impressive with the dollar broadly slipping about -0.2% against virtually the rest of the bloc.

On the data front, we see Empire State Manufacturing (exp -1.0) and get the Fed’s Beige Book at 2:00 this afternoon.  Four more Fed speakers are on the docket, with two, Miran and Waller, certainly on board for rate cuts, with the other two, Schmid and Bostic, likely to have a more moderated view.  Earlier this morning Eurozone IP (-1.2%) showed that Europe is hardly moving along that well.  Meanwhile, despite the excitement about Powell’s comments, the Fed funds futures market is essentially unchanged at 98% for an October cut and 95% for another in December.  I understand why the dollar slipped yesterday, but until those numbers start to move more aggressively, I suspect the dollar’s decline will be muted.

One other thing, rumor is that the BLS will be reporting the CPI data a week from Friday at 8:30am as they need it to calculate the COLA for Social Security for 2026.  If that is hot, and I understand that expectations are for 0.35% M/M, Chairman Powell and his crew may find they have a really tough choice to make the following week.

Good luck

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No Reprieve

Posted on by

The barbarous relic is soaring
As Stephen Miran is imploring
That Fed funds should be
At 2, don’t you see
An idea that Trump is adoring
 
But what else would happen if Steve
Is Fed Chair, when Powell does leave?
At first stocks would rally
Though bonds well could valley
And ‘flation? There’d be no reprieve

 

Arguably, the most interesting news in the past twenty-four hours has been the speech given by the newest FOMC member, Stephen Miran, where he explained his rationale for interest rates going forward.  There is no point going into the details of the argument here, but the upshot is he believes that 2.0% is the proper current setting for Fed funds based on his interpretation of the Taylor Rule.  That number is significantly lower than any other estimate I have seen from other economists, but then, the track record of most economists hasn’t been that stellar either.  Who am I to say he is right or wrong?

Well, actually, I guess that’s what I do, comment from the cheap seats, and FWIW, I suspect that number is far too low.  But forgetting economists’ views, perhaps the best arbiter of those views is the market, and in this case, the gold market.  With that in mind, I offer the following chart from tradingeconomics.com:

Those are weekly bars in the chart which shows us that the price of gold has risen for the past five weeks consecutively, during which time it has gained more than 14% on an already elevated price given the rally that began back in the beginning of 2024. Today’s 1% rise is just another step toward what appears to be much higher levels going forward.  

Why, you may ask, is gold rallying like this?  The thought process, which Miran defined for us all yesterday, is that he is in line to be the next Fed chair when Powell leaves, and so his effort will be to cut rates as quickly as possible to that 2% level.  Of course, the risk is inflation readings will continue to rise while the Fed is cutting.  If that occurs, and I suspect it is quite likely, then fears about a weaker dollar are well founded (that has been my view all along, aggressive rate cuts by the Fed will undermine the dollar in the short-run, longer term is different) and gold and other commodities will benefit greatly.  As to bonds…well here the picture is likely to be pretty ugly, with yields rising.  In fact, I wouldn’t be surprised to see 10-year Treasury yields head back toward 5.0% at which point the Treasury and the Fed, working hand in hand, will cap them via some combination of QE and YCC.

Of course, this is just one hypothesis based on what we know today and won’t happen until Q2 or Q3 next year.  Gold is merely sniffing out the probability of this outcome.  Remember, too, that the Trump administration has been quite unpredictable in its policy moves, and so none of this is a sure thing.

As an aside, given the inherent dovishness of the current make up of Fed governors, it would seem that a Miran chairmanship with a distinctly dovish bent will not have much problem getting the rest of the FOMC to go along, except perhaps for a few regional presidents.  And that doesn’t even assume that Governor Cook is forced out.  After all, she is a raging dove, just a political one that doesn’t want to give President Trump what he wants.

And before I start in on the overnight activity, here is another question I have.  Generally, economists are much more in favor of consumption taxes (that’s why they love a VAT) rather than income taxes and it makes sense, in that consumption taxes offer folks the choice to pay the tax by consuming or not.  If that is the case, why are these same economists’ hair all on fire about the tariffs, which they plainly argue is a consumption tax?  I read that the US is set to generate $400 billion in tariff revenue this year which would seem to go a long way to offsetting no tax on tips and other tax cuts from the OBBB.  I would expect that if starting from scratch, an honest economist, with no political bias (if such a person were to exist) would much rather see lower income tax rates and higher consumption tax rates.  Alas, that feels like a conversation we will never be able to have.

Anyway, on to markets where yesterday saw yet another set of new all-time highs in the US across all the major indices with futures this morning slightly higher yet again.  Japan was closed for Autumnal Equinox Day, while the rest of the region had a mixed performance.  China (-0.1%) and HK (-0.7%) suffered on continuing concerns over the Chinese economy with news that banks which are still dealing with property loan problems are now beginning to see consumer loan defaults as well.  Elsewhere Korea and Taiwan both rallied nicely, following the tech-led US while India suffered a bit on the H1-B visa story with the rupee falling to yet another historic low (dollar high) now pushing 89.00.  There were some other laggards as well (Thailand, Philippines) but most of the rest were modestly higher.  

In Europe, green is the theme with the CAC (+0.7%) leading the way while the DAX (+0.2%) and IBEX (+0.3%) are not as positive.  Ironically, Flash PMI data showed that French activity was lagging the most, with both manufacturing (48.1) and services (48.9) below the 50.0 breakeven level and much worse than expected.  It seems the fiscal issues in France are starting to feed into the private sector.  As to the UK, weaker Flash PMI data there has resulted in no change in the FTSE 100 as it appears caught between inflation worries and growth worries.

In the bond market, Treasury yields which rose 2bps yesterday have slipped by -1bp this morning while continental sovereigns are all essentially unchanged.  The one outlier here is the UK where gilts (-3bps) are rallying on hopes that the PMI data will lead to easier monetary policy.

Elsewhere in the commodity markets, oil (+1.1%) is bouncing from its recent lows but has not made much of a case to breech its recent $61.50/$65.50 trading range as per the below.

Source: tradingeconomics.com

The other precious metals are rocking alongside gold (Ag +0.7%, Pt +2.6%) with silver having outperformed gold since the beginning of the year by nearly 10 percentage points.  Oh, and platinum has risen even more, more than 63% YTD!

Finally, the dollar is basically unchanged this morning, with marginal movement against most of its counterparties.  There are only two outliers, SEK (+0.5%) which rallied despite (because of?) the Riksbank cutting their base rate by 25bps in a surprise move.  However, the commentary indicated they are done cutting for this cycle, so perhaps that is the support.  On the other side of the coin, INR (-0.5%) has been weakening steadily with the H1-B visa story just the latest chink in the armor there.  PM Modi is walking a very narrow tight rope to appease President Trump while not upsetting Presidents Putin and Xi.  His problem is that he needs both cheap oil and the US market for the economy to continue its growth, and there is a great deal of tension in his access to both simultaneously.  But away from those currencies, +/- 0.1% describes the session.

On the data front, today brings the Flash PMI data (exp 52.0 Manufacturing, 54.0 Services) and the Richmond Fed Manufacturing Index (-5.0).  remember, the Philly Fed Index registered a much higher than expected 23.2 last week, so the manufacturing story is clearly not dead yet.

Arguably, though, of far more importance than those numbers will be Chairman Powell’s speech at 12:35 this afternoon on the Economic Outlook in Providence, RI.  All eyes and ears will be on his current views regarding the employment situation and inflation, especially in light of Miran’s speech yesterday.

While the gold market is implying our future is inflationary and fiat currencies will weaken, the FX market has not yet taken that idea to extremes.  Any dovishness by Powell, which given the lack of data since we heard from him last week would be a surprise, will have an immediate impact.  However, I suspect he will maintain the relatively hawkish tone of the press conference and not impact markets much at all.

Good luck

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