Tag Archives: #Powell

A Scold

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The market’s convinced that Chair Jay
Is going far out of his way
To keep rates on hold
‘Cause Trump’s been a scold
And strength’s what Jay wants to portray
 
But ask yourself why should rates fall?
With stocks at new highs, after all
And crypto’s exploded
Which clearly eroded
The storied liquidity fall

 

Yesterday’s market activity was benign with modest market movements in both equity and bond markets although the dollar did rally sharply, on the back of the EU trade deal.  Of course, economic theory predicts just that, when tariffs on a nation (or bloc of nations) are raised, that currency will decline in value to offset the tariffs.  Recall, this was the expectation in the beginning of 2025 when President Trump was just coming into office and calling himself ‘Tariff Man’ as he explained he would be imposing tariffs on virtually all US trading partners.  However, back then, the theory didn’t work out very well and the dollar declined throughout the first six months of the year as can be seen below.

Source: tradingeconomics.com

In fact, analysts quickly moved on and were virtually gleeful that the dollar’s decline of roughly 13% was the largest decline during the first six months of the year since the 1980’s.  Personally, I’m not sure why classifying the decline in terms of the time of year is relevant, but that was a key talking point in the narrative that described the end of American exceptionalism.  Other parts of that narrative were the end of the dollar as the global reserve currency (gold was going to take over) and the onset of other currencies as payment rails for trade.  

None of that ever made sense nor do current proclamations that the euro’s status has changed in any significant way.  There are still very significant long euro positions outstanding as the dollar decline theory has many adherents, but being long euros, aside from being expensive, just got a bit uglier after yesterday’s and this morning’s declines totaling about -1.5%.  

Remember, a key portion of the short dollar thesis is that the Fed is going to cut rates more than other central banks going forward.  And now that the FOMC’s meeting is starting this morning, let’s discuss that idea.  We all know that President Trump has been a vocal advocate for significant rate cuts immediately.  However, let’s look at some evidence.  On the one hand, equity markets are at historic highs in terms of prices as well as readings like the Buffett ratio (market cap/GDP) and P/E and P/S ratios as well.  Crypto currencies, arguably the most speculative of assets, have been flying, especially things like meme coins, which are literally a play on the greater fool paying someone more than they paid for a token with no intrinsic value whatsoever.  Credit spreads, especially for weak credits, are pushing historic lows as per the below chart.  All these things point to not merely ample liquidity and policy being appropriate, but excess liquidity and policy being easy.  

And yet the other side of that coin is a look at 2-year Treasury yields, which have a long history of accurately forecasting future Fed Funds levels.  Right now, as you can see in the below chart, they are trading at a 50 basis point discount to Fed Funds, an indication that the market is quite convinced the Fed is going to cut rates.  Ironically, I believe that Chairman Powell, a PE guy by background, is a strong believer in lower interest rates and I’m sure all his colleagues from his time at Carlyle Group are also pressing for lower interest rates, but he doesn’t want to seem cowed by Trump.

The market is pricing just a 3% probability of a cut tomorrow, but a 65% probability of a cut in September and then another cut in December.  It strikes me that we will need to see a major reversal in the economic situation in the US, with Unemployment rising and growth rapidly declining in order to bring about a situation where there is a real case to be made for a cut.  But we also know that politics plays an enormous role in this story, and while expectations are that we are going to see two dissents at tomorrow’s meeting, that will not change the outcome of no movement.

Adding this all up I conclude that the weak dollar thesis is largely predicated on the idea that the Fed is going to ease monetary policy going forward, catching down to what most other central banks have already done.  And I agree, if the Fed does cut rates, the dollar will fall.  But every day I watch market behavior and continue to see economic data that appears to be holding up pretty well despite a great deal of angst from the analyst community, and I find it harder and harder to come up with a reason to cut rates.  

Consider the story about the new effort by the Trump administration to remove 100,000 regulations by July 4th2026.  Estimates of the value that will unlock are upwards of $1.5 trillion and that assumes no policy changes.  That’s more than 5% of GDP.  I cannot help but believe that President Trump is going to be successful in completely changing the way the US economy works by changing the way (i.e. reducing) the government’s intrusions in the economy.  And if that is successful, it is not clear why interest rates need to decline.  Remember, too, there is an enormous amount of data compressed into this week, so by Friday afternoon, we will have much more information.

Ok, a quick turn round markets shows that after a mixed session in the US yesterday, Japan (-0.8%) slipped on concerns over the nature of the trade deal, while China (+0.4%) edged higher as trade talks continue in Stockholm between the US and China.  Elsewhere in the region both Korea and India rose a bit, spurred by hopes for trade deals there, and the rest of the area was mixed with no large movement.  In Europe, green is today’s color as investors have taken the avoidance of a trade war as a positive and added the euro’s weakness as a positive as well, helping European exporters.  So, gains are strong (DAX 1.3%, CAC 1.4%, FTSE 100 0.7%) and things are generally bright despite grumbling by some nations that the trade deal is going to hurt them.  And at this hour (7:30), US futures are higher by 0.3% or so.

In the bond market, yields are edging lower this morning (Treasuries -2bps, Gilts -1bp, Bunds unchanged) as investors remain either comfortable with the current situation or uncertain what to do to change things at current yields.  I vote for uncertainty.

In the commodity markets, neither oil nor metals markets are moving much at all this morning with daily fluctuations less than 0.2% in all of them.  This has all the feel of a consolidation ahead of tomorrow’s Fed and the rest of the week’s data including GDP, PCE and NFP.

Finally, the dollar is firmer again today vs. almost all its counterparts with gains on the order of 0.2% to 0.3% in most G10 and EMG currencies.  However, two CE4 currencies (PLN -0.6% and HUF -0.9%) are under pressure with the former complaining that the trade deal will cost them > €2 billion, while the latter is suffering from poor economic data heading into an election where President Orban is on shakier ground that normal.  But net, expect to hear about some more dollar strength in the wake of higher tariffs.

On the data front this morning, we see the Goods Trade Balance (exp -$98.4B), Case Shiller Home Prices (3.0%), JOLTS Job Openings (7.55M) and Consumer Confidence (95.8).  With so much focus on trade lately, I suspect that number could matter, but really the JOLTS number will be of more interest, especially for the bond market, as any weakness in the labor market will encourage the lower rates story.

And that’s really all for today.  Until we hear from Powell, it is hard to make a dollar call in the short-term, and the medium term is dependent on the Fed’s actions.

Good luck

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Filled With Gilding

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There once was a banker named Jay
Who yesterday, tried to allay
Fears that his building
Was too filled with gilding
But Trump seemed to have final say
 
The fact that this story’s what leads
The news, when one looks through the feeds
Is proof that there’s nought
Of note to be bought
Or sold, as price action recedes

 

According to Merriam-Webster, this is the definition of the word frequently bandied about these days, and rightly so.  

Market activity is just not very interesting.  While there is a new battle brewing on the Thai-Cambodian border, it is unlikely to have much impact on the rest of the world, and the Russia-Ukraine war continues apace, with very little new news.  Congress is in recess, sort of, which means new legislation is not imminent.  And while the Fed meets next week, just like the ECB and the BOE and the BOJ, no policy changes are imminent.  Doldrums indeed.

Which is why the story about President Trump visiting the construction site at the Marriner Eccles Building, the home of the Federal Reserve, has received so much press.  And frankly, a quick look at this clip is so descriptive of the current relationship between Trump and Powell it is remarkable.

But frankly, I just don’t see much else to discuss this morning.  equity markets in the US have generally been creeping higher, the DJIA excepted, the dollar is doing a slow-motion bounce and bond yields trade within a 5bps range.  Yesterday’s jobs data was solid, with both types of claims slipping, while the Flash PMIs showed net strength, although it was entirely Services driven.  And it’s Friday, so I won’t take up too much time.

Here’s the overnight review.  Asian markets followed the Dow, not the S&P or NASDAQ with Tokyo (-0.9%), Hong Kong (-1.1%) and China (-0.5%) all under pressure.  In Japan, there are starting to be more questions asked about whether PM Ishiba can hold on, and if he cannot (my guess is he will go) there is no obvious successor as no party there has any substantial strength.  Remember, the populist Sanseito party is a new phenomenon there and really is screwing up their electoral math.  As to the rest of the region, only Korea and New Zealand managed any gains, and they were di minimis.  Red was the color of the session.

Not surprisingly, that is the story in Europe as well, with most bourses lower on the day (DAX -0.6%, FTSE 100 -0.3%, IBEX -0.5%) although the CAC is essentially unchanged despite LVMH earnings being a little soft.  German Ifo data was slightly better than June, but lower than expected and UK Retail Sales were modestly weaker than forecast on every measure.  Again, it is hard to get excited here.  As to US futures, they are pointing higher by 0.2% at this hour (7:00).

In the bond market, Treasury yields have bounced 2bps from yesterday but are still right around 4.40% while European sovereign yields are higher by 3bps across the board.  Apparently, there is residual concern over European spending plans and absent a trade agreement with the US, investors there are not sure what to do.

In the commodity markets, oil (+0.4%) is bouncing for a second day, but remains within that recent trading range where we have seen choppy trading but no direction.  The gap lower earlier in the week was filled, but it is hard to get excited here about a new trend either.

Source: tradingeconmics.com

Meanwhile, metals markets remain under pressure as we head into the end of the month.  They have had a solid rally this month and it looks to me like some profit taking, but this morning gold (-0.7%), silver (-0.8%) and copper (-0.7%) are all under pressure.

Perhaps one of the reasons that the metals are soft is the dollar is stronger today.  I know we continue to hear about the death of the dollar, but as Mark Twain remarked, “the report of [its] death was an exaggeration.” Instead, what we see this morning is a pattern in the DXY that could easily be mistaken for described as a bottoming and we are simply waiting for confirmation.

Source: tradingeconomics.com

Looking at individual currencies, the dollar is firmer against every G10 currency with the euro (-0.25%) and pound (-0.4%) indicative of the magnitude of movement.  In the EMG bloc, KRW (-0.6%) and ZAR (-0.7%) are the worst performers, with the latter clearly following precious metals lower while the former is feeling a little heat from the fact that Japan struck a trade deal while South Korea has not yet done so.   Otherwise, things are just not that interesting here either.

On the data front, this morning brings Durable Goods (exp -10.8%, 0.1% ex Transports) which tells me that a lot of Boeing deliveries were made last month when Durables rose 16.4%.  But otherwise, nothing and no Fed speakers.  As I said before, it is a summer Friday, and I suspect that most trading desks will be skeleton staffed by 3:00pm if not earlier.

Good luck and good weekend

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Kvetched

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The story on everyone’s lips
A central bank apocalypse
If Trump fires Powell
The markets will howl
With yields rising numerous bips
 
However, said Trump, it’s farfetched
Despite plans that he’d clearly sketched
Thus, markets reversed
While bears, losses, nursed
And “right-thinking” people all kvetched

 

If you had Trump fires Powell on your White House Bingo card, congrats, it looked like a winner.  That was the story all morning yesterday, overshadowing PPI data that was quite benign, printing at 0.0% M/M for both headline and core, as the punditry postulated the problems with Trump doing that.  At this point, we are all familiar with the fact that the Fed Chair can only be fired for “cause” although exactly what “cause” represents is unclear.  Too, we know that in Trump’s efforts to reduce the size of the government, the Supreme Court gave him authority to remove the heads of many departments but explicitly carved out the Fed from that process.

In the end, though, despite rampant rumors that he had composed a letter for just such an occasion, at a press conference with Bahraini Crown Prince, Salman bin Hamad Al Khalifa, he said it was “highly unlikely” he was going to fire Powell, although he once again castigated him for not cutting rates. Most markets, after getting all excited about the prospects of this action, reverted to the previous solemnitude of doing nothing over the summer.  The below chart of the S&P 500 was replicated in virtually every market.

Source: finance.yahoo.com

It is also no surprise that the Fed Whisperer was out in the WSJ this morning defending his bread-and-butter relationship, but my take is this is just a feint on the president’s part to move the discussion away from issues he doesn’t like.  Given that Supreme Court protection and given that the Supreme Court has been very good for Mr Trump, I’m pretty confident that Powell will serve out his full term as Chair and be replaced next year.  I would, however, look for a candidate to be announced at the earliest possible time.

While that was the story that sucked up all the oxygen yesterday, life still goes on and this morning, arguably the biggest news is that UK Unemployment rose to 4.7% with earnings slipping and the Claimant count rising.  The punditry continues to harp on how the US is set to go into stagflation because of Trump’s tariffs which are driving inflation higher while weakening the economy (despite all evidence to the contrary) while ignoring the UK which saw inflation rise faster than expected yesterday, to 3.6% while Unemployment is rising.  That feels a lot closer to the stagflation story than in the US, and as we heard from BOE Governor Bailey yesterday, it’s all Trump’s fault because of the tariffs.  Talk about deflection.  However, a little sympathy for the Guv is in order as he really doesn’t know what to do.  After today’s data, there is more discussion of another rate cut by the BOE when they next meet on August 7th.  Certainly, the pound (-0.1%) is behaving as though a rate cut is coming as evidenced by the chart below.

Source: tradingeconomics.com

However, remember that the UK government of PM Starmer has proven its incompetence on virtually every issue it has addressed, both domestically and on an international basis, so the pound’s decline could well be a general exit from the UK by investors.  Speaking of currencies, the dollar is having quite a positive day across the board.  Aussie (-0.9%) is the laggard across both G10 and EMG blocs as its employment situation report showed a much weaker economy than expected, although the yen (-0.4%) is starting to feel real pressure as the Upper House Election approaches.  In fact, there is growing talk that USDJPY above 150 is likely if the PM Ishiba’s LDP loses their majority in the Upper House, or even if it wins given the amount of increased deficit spending they are promising.  Does anyone remember all the talk of the end of the yen carry trade and how the yen was going to rise dramatically?  There’s a theme that did not age well.  As to the rest of the currency market, the dollar is rising vs. everybody with a rough average gain of ~ 0.4%.  The dollar is not dead yet.

Heading back to equities, despite all the angst about Powell yesterday, US indices all managed a gain on the day.  In Asia, most markets performed well with Japan (+0.6%) and China (+0.7%) indicative of the movement.  Australia (+0.9%) responded to its jobs data with growing expectations of an RBA rate cut and there were many more regional exchange gainers than losers overnight.  In Europe, green is also today’s theme, with both the CAC (+0.9%) and DAX (+0.8%) having very nice sessions and most of the rest of the continent climbing around 0.5%.  The only data of note was the final CPI reading for the Eurozone, which was right on the button at 2.3% core.  However, at this hour (7:00) US futures are essentially unchanged.

Bonds were actually the biggest concern yesterday on the Powell news with a huge divergence between the 2-year and 30-year as the rumors flew, although most was forgiven after Mr Trump said he would not be firing Powell.  The Chart below shows that divergence and the retracement although 2-year notes did remain lower for the session.

Source: tradingeconomics.com

But that was yesterday.  This morning, 10-year Treasury yields have edged higher by 1bp, and European sovereigns have largely followed suit.  In Asia, though, it is noteworthy that Australian government bonds saw yields decline -5bps after the data, and JGB yields slid -2bps as election promises seem to imply more QE, not less.

Lastly, commodity prices also got the whipsaw treatment on the Powell story, but this morning, with the dollar showing strength across the board, we see metals prices slipping (Au -0.6
%, Ag -0.25%, Cu -0.15%) although oil (+0.5%) is finding a bottom it seems as per the below chart from tradingeconomics.com.

On the data front, in addition to the weekly Initial (exp 235K) and Continuing (1970K) Claims data, we also get Retail Sales (0.1%, 0.3% ex autos) and Philly Fed (-1.0).  We hear from one Fed speaker, Governor Kugler, but if anything, after yesterday’s Powell drama, I expect everybody we hear from to rally round the Chair, so there will be no talk of rate cuts.  Aside from yesterday’s PPI data, the Fed’s Beige Book indicated modest economic growth, again, not a reason to cut interest rates.

Let me leave you with a thought experiment though.  Last night, the Senate passed the first (of many we hope) rescission bill to actually reduce spending.  Tariff income has grown as evidenced by last month’s budget surplus.  What if Trump and his team are correct, and through reduced regulations as well as tariff and increased inward investment, the private economy grows more strongly and the budget deficit declines far more than current estimates, perhaps achieving Secretary Bessent’s goal of 2%?  Will yields rise or fall?  Will the dollar rise or fall?  Will equities rise or fall?  On the White House Bingo card, I would suggest very few believe in this outcome and are not managing their portfolios to address this.  But I would also suggest it is a non-zero probability, although not my base case.  Just remember, stranger things have happened.

Good luck

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Trump’s Latest Ire

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The Minutes explained that in June
The Fed felt no need to impugn
Their previous view
Of nothing to do
Though two sang an alternate tune

 

Yesterday’s release of the FOMC Minutes from their June meeting confirmed what we have learned in the interim.  Governors Waller and Bowman have been clear that they see tariffs as a one-off impact on the rate of inflation, and not something on which to base policy.  If you think about it, tariffs are like food and energy, something that cannot be addressed effectively by monetary policy and which the Fed explicitly excludes from their decision-making process.  (For a really good read on the inflationary impact on tariffs, @inflation_guy published this yesterday).  To me, the salient comments from the Minutes are below:

“While a few participants noted that tariffs would lead to a one-time increase in prices and would not affect longer-term inflation expectations, most participants noted the risk that tariffs could have more persistent effects on inflation.”

“Participants agreed that although uncertainty about inflation and the economic outlook had decreased, it remained appropriate to take a careful approach in adjusting monetary policy.” 

In fact, it is not hard to conclude that the Fed’s intransigence on this issue is politically motivated as well since we have already established that the Fed is clearly political (and partisan).  I would estimate part of the reason they do not want to cut rates here is because they don’t want to be seen as caving into President Trump’s demands.  But whatever the reason, even the futures market is reducing the probability of a cut with the July probability having fallen from more than 20% two weeks ago to 6.7% as I type this morning.  We will need to see some seriously weak economic data to get the Fed to move, I believe, although I expect we will see Governors Waller and Bowman dissent at the July 30th meeting.

However, I would contend that the market has already sussed this out and there will be limited impact on any financial markets after the meeting absent a surprise cut.  So, let’s move on.

The target of Trump’s latest ire
Brazil, has now come under fire
The issue’s not trade
Instead, Trump was swayed
By lawfare ‘gainst one he admire(s)

The other news from yesterday (and there has been precious little overnight) was President Trump’s threat of 50% tariffs on all of Brazil’s exports to the US.  Now, the US runs a trade surplus with Brazil of about $10 billion, so clearly trade is not the issue here.  Rather, it seems that Mr Trump is seeking to help is friend, former Brazilian president Joao Bolsonaro, who is also a right-leaning populist and who is on trial for leading an insurrection after he lost the last election.  It is not hard to understand Mr Trump’s concern over the issue given the history in the US and the previous administration’s efforts to imprison Trump himself.  

However, this seems, at least to me, a bit over the top.  Brazil had been slated to get the minimum 10% tariff prior to yesterday’s outburst.  As well, the US is Brazil’s second largest trading partner, so this will have a significant impact on the country if these tariffs are imposed.  As such, it is no surprise that the market responded immediately.  

Source: tradingeconomics.com

As you can see from the chart above, the announcement at 1:30 yesterday afternoon had an immediate impact with the real falling -2.5% with minutes of the news.  Too, the IBOVESPA stock index fell more than -1.3% yesterday with Embraer, the airplane manufacturer down nearly 10%.  Right now, this is a threat, and the immediate Brazilian response was to say they would not be cowed by this action and will continue with their internal legal activities.  There is no way I will opine on how this will end, but if these tariffs are put in place, it will be a distinct negative for Brazil’s economy, and I would expect that the real could quickly head back toward 6.00 from its current levels.

Away from those two stories, though, issues impacting financial markets are sparse.  With that in mind, let’s see how markets behaved overnight.  Yesterday’s US equity rally was followed by a mixed picture in Asia with Japan (-0.4%) slipping a bit but gains in both China (+0.5%) and Hong Kong (+0.6%) after rumors came out that the Chinese government was getting set to add more support to the still-imploding Chinese property market.  Other regional bourses saw some gains (Korea, Taiwan, Australia) and some losses (India, Thailand, Philippines).  At this point, all eyes remain on the tariff story for most of these nations.  Meanwhile, in Europe, the FTSE 100 (+1.1%) is today’s leader on the strength of its mining sector which responded positively to President Trump’s mooted 50% tariffs on copper.  Elsewhere, though, things have been less robust with the CAC (+0.7%) having a nice day, the DAX (+0.2%) edging higher after inflation data was released as expected at 2.0% while the IBEX (-0.6%) is moving in the other direction absent a major catalyst.  However, remember it has been performing well, so this could just be some profit taking.  US futures are essentially unchanged at this hour (7:00).

In the bond market, yesterday’s 10-year auction went well with no tail and yields ultimately slipped 6bps during the session.  This morning, that yield has edged back higher by just 1bp.  As to European sovereigns, they are +/- 1bp this morning, showing no direction or new views on anything.  Readings from Europe this morning have confirmed that the rate of inflation is quiet and near the ECB’s target so there is little reason for investors to worry.  As well, the word is that a trade deal between the US and EU is getting close, which will almost certainly be seen as a benefit for markets on the continent.

In the commodity markets, oil (-0.6%) is softer this morning but continues to hug the $68/bbl level despite EIA inventory data showing a net large build of nearly 4 mm barrels.  It appears that there is both ample supply and production and there continues to be concern over slowing economic activity, yet oil is in demand.  As I often say, sometimes markets are simply perverse.  In the metals markets, gold (+0.5%) continues to trade either side of $3350/oz and has done so since mid-April.  I continue to read about central banks buying the relic and replacing US Treasuries with gold in their reserve portfolios, but there is obviously enough supply to prevent further price appreciation for now.  But gold is leading gains across the entire metals complex (although copper is getting a boost from the tariff talk.)

Finally, in the FX markets, there is no direction this morning.  both the euro and pound are slightly softer, but AUD (+0.4%) and NZD (+0.35%) are firmer with the yen and CAD little changed.  ZAR (+0.4%) is also having a good day, arguably on the strength in the precious metals markets but otherwise, it is hard to find anything exciting to note.

Turning to this morning’s data, we get the weekly Initial (exp 235K) and Continuing (1980K) Claims and that’s it.  We do hear from three Fed speakers, Musalem, Daly and Waller, but since we already know Waller’s views, it will be far more interesting to hear the other two.  I do find it interesting that Ms Daly, one of the most dovish FOMC members, is not in the rate cut camp, a situation I attribute entirely to her political views.

And that’s what we’ve got today.  Nothing has changed any trends, and it seems highly unlikely that today’s data will.  However, if we hear dovish signals from both Daly and Musalem, that may indicate a turn at the Fed and perhaps we will see that narrative change.  I am confident the one thing Chairman Powell does not want is to have a 5-4 vote to leave rates unchanged.  I would contend that is the most intriguing thing on the horizon right now.

Good luck

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The Perfect Riposte

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Attention right now’s being paid
To Congress on taxes and trade
The One BBB
Is seen as the key
To growth in the coming decade
 
Meanwhile, Sintra right now’s the host
To Powell, Lagarde and almost
All central bankers
Each one of whom hankers
To nurture the perfect riposte

 

The headlines this morning highlight that Congress put in an all-nighter last night as they try to get the BBB over the line and on the president’s desk by Friday.  My take is they were seeking sympathy for all the hard work they must do and trying to make it seem like they are slaving away on their constituents’ behalf.  Yet it appears that since the president’s inauguration on January 20, 161 days ago, Congress has been in session for somewhere between 40 and 50 days (according to Grok), about one-quarter of the time.  I have seen these estimates elsewhere as well, and quite frankly, it doesn’t speak well of Congressional leadership.  

In the end, though, I continue to expect the BBB to get passed by both houses and sent to the president.  I’m certain there are still a lot of things in the bill that many fiscal conservatives will not like, but I’m also confident that the fact that not a single Democratic representative or senator is going to vote for the bill is likely a sign that it does more good than harm.  I am completely aware of the debt and deficit issues and questions of their long-term sustainability, and I am not ignoring that.  But politics is the art of the possible, not the perfect, and my take is this is possible.  Consider for a moment the Orwellian-named Inflation Reduction Act from 2022, which passed the Senate on a tiebreaker vote by VP Harris.  That was a much more harmful piece of legislation from a fiscal perspective than this.  In fact, I would say this is the very definition of politics.

Through a market lens, if (when) this is passed, while there may be an initial ‘sell the news’ move, I suspect that the stimulus it entails will be a net benefit for risk assets overall.  And the only reason there would be a sell the news event is that the market is already pricing in a great future as evidenced by yesterday’s quarterly close at new all-time highs for the S&P 500, above 6200.

Turning to the other noteworthy news, the ECB is holding their faux Jackson Hole event this week in Sintra, Portugal where all the heads of major central banks are currently gathered along with academics and journalists who are there to spread the good word.  Chairman Powell speaks today, but this is the Powell story of the day.  Apparently, President Trump had this hand-written note delivered to the Fed Chair.  Are we not entertained?

But ignoring for a moment the president’s desires, let us consider the dollar and its potential future direction.  The predominant current thinking is that it has further to slide as the trend is clearly lower and the rising anticipation of a recession in the US forcing the Fed to cut rates further will undermine the greenback.  Let’s break that down for a moment.  There is no question the dollar is currently in a downtrend as evidenced by the chart below.  A look at the red line on the right shows the slope of the decline thus far this year, which totals about 11%.

Source: tradingeconomics.com

In fact, much has been made of the decline thus far this year as to its speed and how it is a harbinger of both a recession and the end of the dollar’s hegemony.  Yet, we don’t have to go very far back in time, late 2022-early 2023 to see a virtually identical decline in the dollar over a slightly shorter period, hence the steeper slope of the line in the center of the chart, and I cannot find a single descrying of the end of the dollar at that time. Too, I remember being certain a recession was on the way then, when it never arrived.  According to JPMorgan, it seems the recession probability for 2025 is now 40%.  I have seen estimates ranging from 25% to 80% over the past few months which mostly tells me nobody has any idea.

We also don’t have to go very far back in time to see when the dollar was substantially weaker than its current levels.  I’m not sure why this time the dollar’s recent trend means the world is ending when that was not the case back in 2023 or any of the myriad times we have seen movement like this in the past.

But one other thing to consider regarding the dollar is that the BBB is going to provide significant stimulus to the economy.  Combining this with President Trump’s trade policies which are designed to draw investment into the US, and seemingly are working, and I think that despite his desire for lower interest rates, the Fed will have little reason to cut amid stronger growth in the economy.  I do not believe you can rule out a turn in the dollar higher once the legislation is passed as it is going to matter a great deal.  While spending priorities are going to change, it appears that investment is going to rise and that will help the buck.  Be wary of the dollar is dying thesis.

Ok, yesterday’s market activity, while reaching record highs in the equity markets, was actually incredibly slow with volumes shrinking.  My sense is folks are on holiday this week and those who aren’t are waiting for Thursday’s NFP data, so they can then run out of the office and go for their long weekend.  But the rest of the world doesn’t have the holiday Friday and are all trying to solve their trade situation with the US.  That led the Nikkei (-1.25%) lower yesterday as there appears to be a timing mismatch from a political perspective.  Ishiba doesn’t want to agree to open Japan’s market to US rice ahead of the election on July 20th as that will be a major political problem, but July 9th is approaching quickly, and Trump has said that is the date.  But aside from Japan and Hong Kong (-0.9%) the rest of the region had a pretty solid session led by Thailand (+2.1%) and Taiwan (+1.3%).  In Europe, though, PMI data was less than stellar, and bourses are modestly softer (DAX -0.5%, CAC -0.4%, FTSE 100 -0.3%) although Spain’s IBEX (+0.2%) has managed a gain as they had the best PMI outcome of the lot.  

In the bond market, yields continue to slide everywhere with Treasuries (-4bps) actually lagging the Eurozone which has seen declines of -6bps virtually across the board.  Madame Lagarde, in her Sintra opening speech, explained that the ECB would be altering their communication strategy to try to take account of the uncertainty in their forecasts, so not promise as much, but I have a feeling the movement is more a result of the softer PMI data as well as the Eurozone inflation release at 2.0% which has ECB members explaining things are under control.  Japan is a bit more confusing as JGB yields (-4bps) slipped despite what I would consider a strong Tankan report and a rise in their PMI data.  However, the newest BOJ board member did explain there was no reason to raise rates anytime soon, so perhaps that is the driver.

In the commodity markets, oil (+0.8%) continues to creep higher, perhaps a harbinger of stronger future economic activity around the world, or perhaps more short covering.  Gold (+1.4%) has completely erased the dip at the end of last week and is back at its recent pivot point of $3350 or so.  This has brought silver (+1.1%) and copper (+0.7%) along for the ride.

Finally, the dollar is clearly softer this morning with JPY (+0.6%) the leader in the G10 while ZAR (+0.9%) is the leading gainer in the EMG bloc as it follows precious metals prices higher.  Net, I would suggest that the average move here is about 0.25% strength in currencies.

On the data front, we get ISM Manufacturing (exp 48.8) and Prices Paid (69.0) and we get the JOLTs Job openings (7.3M) this morning.  Too, at 9:30, Chairman Powell speaks so it will be interesting to see if there is any change in his tune.

I see no reason for the dollar to turn higher right now but watch for the BBB.  Its passage could well change the dollar’s direction.

Good luck

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He’s the Worst

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The talking points have been disbursed
With narrative writers well-versed
The dollar is falling
‘Cause Trump is now calling
For Powell to leave, “He’s the worst!”
 
The idea is Trump will soon name
The next Fed Chair, turning Jay lame
This shadow Fed Chair
Will have to beware
Since he’ll, for bad outcomes, get blame

 

The dollar is weaker this morning and if we use the Dollar Index as a proxy, it has fallen to its lowest level since February 2022.  

Source: tradingeconomics.com

While certainly a part of this movement has been the fact that US yields continue to slide lately, it also seems there is a new narrative that has been distributed to journalists, the dollar is falling because President Trump is considering naming a new Fed Chair much earlier than usual in an effort to undermine Chairman Powell.  We have all heard about the rants the President has had regarding Powell’s unwillingness to cut rates even though inflation readings have been declining for the past two months, and are, on a Y/Y basis back to their lowest level since March 2021 whether measured as CPI (grey line) or Core PCE (blue line).

Source: tradingeconomics.com

But in an exclusive (!) article in the WSJ, which was repeated in Bloomberg, that is the story du jour.  While Bloomberg’s take cannot be a surprise given Mayor Mike’s intense hatred of Trump (after all Trump is the NY billionaire that became president, not Bloomberg), and editorial direction clearly comes from the top, it is more interesting that the Journal is pushing this theme.  Of course, given the Fed whisperer is the article’s writer, it is more than possible that he is simply airing Powell’s views and trying to explain how any move like this would result in chaos, so it’s not Powell’s fault if things go pear-shaped.

Nonetheless, that is today’s story.  In concert with this story, though is another, somewhat more interesting feature, where a really smart analyst, Marko Papic, has broken down the dollar’s movements across different time zones during 2025.  The chart below shows that the dollar selling has been emanating from Asia mostly with Europe having a lesser impact and no substantive change in the NY session.  The implication is that Asian holders of dollars, which tend to be sovereigns rather than other users like investors or corporates, are the ones bailing out.

This activity first became noticeable in early April, right around “Liberation Day” and does fit with the idea that higher US tariffs will result in a smaller US trade deficit.  But as I consider that concept, it strikes me that a smaller US trade deficit will result in fewer dollars around the rest of the world, a reduction in supply, and that would arguably increase the dollar’s value ceteris paribus.  Perhaps this reflects investors selling US assets and converting them to Europe, which has been another theme this year as European companies are set to benefit from a major increase in defense spending by NATO.  However, that doesn’t really sync with the fact that US equities continue to trade near all-time highs.  At this point, I think this is an interesting observation, but am not sure of its meaning.  I’m open to suggestions.

Ok, while that is the narrative this morning, let’s look at how markets are behaving.  Yesterday’s lackluster activity in the US, with the S&P 500 almost exactly unchanged and the other two main indices +/- 0.3% was followed by a burst higher in Tokyo (Nikkei +1.6%) but lagging activity in HK (-0.6%) and China (-0.4%).  The rest of the region couldn’t decide on much with a couple of solid performances (India, Indonesia) and one laggard of note (South Korea).  In Europe, Germany (+0.6%) is leading the way higher across the board, as NATO countries have promised to spend upward of 5% of GDP on total defense (including nonlethal investments), with as much as possible going to European based companies.  That is a lot of money, well over $1.5 trillion.  Meanwhile, US futures are all higher at this hour (7:15), up by about 0.4% or so.

In the bond market, Treasury yields (-2bps) continue to slip and are now back to their lowest level since early May.  Perhaps more interestingly, European sovereign yields are sliding today as well, led by Italian BTPs (-4bps) but lower across the board.  This is interesting given the promises of more borrowing based on the NATO announcement.  But net, bond yields have not really done very much lately at all.

In the commodity markets, oil (+0.5%) is continuing to slowly bounce from the initial lows in the wake of the Iran/Israel ceasefire.  This market still feels quite heavy to me and absent a major change on the ground in the Middle East, if war were to resume and oil facilities be attacked, I still think lower is the way.  In the metals markets, gold (+0.25%) which tried to sell off yesterday continues to find bids below the market, likely central bank support.  But silver (+0.9%) and copper (+2.3% and above $5.00/lb) are looking good although nowhere near as impressive as platinum (+3.4%) which has now risen above $!400/oz and is going parabolic here.  There is much talk here about a supply shortage (it is used for catalytic converters) and significant Chinese demand.

Source: tradingeconomics.com

Finally, the dollar, as mentioned, is under pressure across the board, although the magnitude of this morning’s movement has not been that large.  The largest movement has been in Asia with IDR (+0.6%), JPY (+0.4%) and KRW (+0.35%) while European and LATAM movements have been generally 0.2% or less.  So, the direction is clear, but it has not been impressive.

On the data front, there is plenty today starting with the weekly Initial (exp 245K) and Continuing (1950K) Claims, the Chicago Fed National Activity Index (-0.1), the last look at Q1 GDP (-0.2%), and Durable Goods (8.5%, 0.0% ex-Transports).  We also hear from four more Fed speakers, but Powell just repeated yesterday that they are happy where they are and unlikely to move soon unless something really changes rapidly.  However, despite Powell’s claims of nothing to come, the Fed funds futures market is pricing a 25% probability of a cut at the July 30 meeting.  There is a lot of time between now and then for that to change.

I keep trying to figure out what actually matters to markets anymore as responses to different potential catalysts seem confused.  People do seem to be coalescing around the dollar is falling theme, something I have believed for a while, and if the Fed does lean to a cut next month, I do believe there is further for it to fall.  One thing to remember, though, is with Mr Trump as president, things are still a tweet away from a dramatic change.  If I were in charge of hedging risk, I would adhere to guidelines closely.  There is too great an opportunity for a sudden major reversal in the current environment.

Good luck

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What He Will Mention

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Last night there was, briefly, a peace
This morning, though, that seemed to cease
But worries Iran
From Hormuz, would ban
Most ships, have now greatly decrease(d)
 
So, markets have turned their attention
To Powell and what he will mention
When he sits before
The Senate once more
Though most seated lack comprehension

 

Talk about yesterday’s news!  While I am pretty confident we have not heard the last of the Iran/Israel conflict, it has dropped off the radar in a NY minute.  Last night President Trump announced a cease fire between the two nations and while Israel alleged that Iran already broke the peace, the market has clearly moved on from the erstwhile WWIII concept to WWJS (What Will Jay Say).  In that vein, this morning’s WSJ had an articlefrom the Fed whisperer, Nick Timiraos, describing the trials and tribulations of poor Chairman Powell as he tries to fend off those mean words from President Trump.  

Powell sits down before the Senate Banking Committee this morning, and the House Financial Services Committee tomorrow, ostensibly to describe the state of the economy and the Fed’s current thinking.  I have begun to see discussions that two Trump appointed governors, Bowman and Waller, are now interested in potentially cutting the Fed funds rate in July and the futures market has raised the probability of a cut next month to 23%, back to the levels seen a month ago, pre-war and prior to a run of stronger than expected economic data.

Source: cmegroup.com

Frequently mentioned throughout the WSJ article was the idea of Fed independence and how critical that is for monetary policy to be effective.  As well, the fact that the comments on rate cuts are from governors Trump appointed, and that is being highlighted in a negative fashion, is further evidence that the Fed remains a highly political, and quite frankly, partisan organization.  One cannot look at the rate cuts last autumn ahead of the election, which were certainly not warranted by the data, as anything other than the Fed’s attempt to support VP Harris’s presidential campaign.  And when inflation was still quite high, although starting to decline, calls for cuts by Biden appointees Cook and Jefferson, were also likely politically motivated given the still high inflation rate.  

In fact, I wonder where Governor’s Cook and Jefferson are today with respect to rate cuts.  After all, both have demonstrated dovish biases throughout their tenure at the Fed, but suddenly they are strangely silent on the subject.  I’m sure that is not a political bias showing, but rather deeply considered economic analysis. 🙃

I do find it interesting that there is an underlying presumption that the Fed funds rate is always too high, at least for the narrative, although I guess that is because most narrative writers believe strongly in the idea if rates are low, stock prices will rise.

Regardless of the politics, Powell will very likely explain that there is still concern that tariffs could raise prices and while there is the beginning of concern over the labor market, it remains solid and does not warrant rate cuts at this time.  Of course, we will also be subject to the preening of all those senators (what is the probability that Senator Van Hollen brings up deportations?) with no useful discussion.  It seems unlikely that Chairman Powell will alter his message from the post meeting press conference which remains, patience is a virtue.

Ok, now that the war has ended, let’s see how markets have behaved.  I must start with oil (-3.0% today, -12.0% since yesterday morning) where traders have removed the entire Hormuz closing premium and are now dealing with the fact that there are more than ample supplies around.  Recall, OPEC+ continues to increase production, and the macroeconomic narrative remains one of slowing economic activity.  Happily, gasoline prices are following oil lower so look for less inflation concerns for next month.

Source: tradingeconomics.com

Meanwhile, with war off the table, gold (-1.3%) is no longer in such great demand although silver (unchanged) and copper (+0.7%) continue to find support.  Net, my longer-term views remain that oil prices have further to decline while metals prices should grind higher over time.

In the equity markets, you have to search long and hard to find a market that didn’t rally overnight or is in the process of doing so this morning.  After yesterday’s strong US closing (all three main indices up about 0.9%), Asia (Nikkei +1.1%, Hang Seng +2.1%, CSI 300 +1.2%) rallied sharply with Korea (+3.0%) really popping and only one negative, New Zealand (-0.5%) where local traders cannot seem to get on board with the better news.  In Europe, the gains are also substantial (DAX +1.8%, CAC +1.2%, IBEX +1.4%) although the UK (+0.3%) is lagging given the large weighting of energy in the index.  US futures are also pointing higher this morning, about 0.8%.

In the bond market, Treasury yields are unchanged this morning after slipping -3bps yesterday, but we are seeing yields rise in Europe (Bunds +5bps, OATs +3bps) after the Germans announced they would be borrowing 20% more this quarter than initially expected to help their rearmament program.  I guess investors had a mild bout of indigestion.

Finally, the dollar, which rallied nicely into yesterday’s NY opening has basically reversed all those gains since then and is back trading near 98 on the DXY. While there are various relative sizes of movement, it is all in the same direction and entirely driven by the Iran/Israel war story.  Perhaps we are starting to see some pricing of a Fed rate cut, and if they do act in July, I would expect the dollar to fall, but right now, it feels much more like unwinding the war footing.

On the data front, aside from Chairman Powell at 10:00 this morning, we see Case Shiller Home Prices (exp +4.0%) and Consumer Confidence (100.0).  However, I suspect that neither of those will matter very much.  The equity market has the bit in its mouth and is looking for reasons to go higher.  Any dovish hints by Powell will set that off, as well as undermine the dollar.  We shall see.

Good luck

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Rate Cutting Pretension

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The US and China have shaken
Their hands, as trade talks reawaken
And while it’s a start
It could fall apart
For granted, not much should be taken
 
So, markets have turned their attention
To ‘flation with some apprehension
This morning’s report
Might help, or might thwart
Chair Powell’s rate cutting pretension

 

Starting with the trade talks between China and the US, both sides have agreed that progress was made. Here is a quote from a report on China’s state broadcaster, CCTV, last night.  “China and the US held candid and in-depth talks and thoroughly exchanged views on economic and trade issues of mutual concern during their first meeting of the China-US economic and trade consultation mechanism in London on Monday and Tuesday. The two sides have agreed in principle the framework for implementing consensus between the two heads of state during their phone talks on June 5, as well as those reached at Geneva talks. The first meeting of such consultation mechanism led to new progress in addressing each other’s economic and trade concerns.”  I highlight this because it concurs with comments from Commerce Secretary Lutnick and tells me that things are back on track.

Clearly, this is a positive, although one I suspect that equity markets anticipated as they have been rallying for the past several sessions prior to the announcements.  Certainly, this is good news for all involved as if trade tensions between the US and China diminish, it should be a net global economic positive.  While anything can still happen, we must assume that a conclusion will be reached going forward that will stabilize the trade situation.  However, none of this precludes President Trump’s stated desire to reindustrialize the US, so that must be kept in mind.  And one of the features of that process, at least initially, is likely to be upward price pressures in the economy.

Which brings us to the other key story today, this morning’s CPI report.  Expectations for headline (0.2% M/M, 2.5% Y/Y) and core (0.3% M/M, 2.9% Y/Y) are indicating that the bottom of the move lower in inflation may have been seen last month.  However, these readings, while still higher than the Fed’s target (and I know the Fed uses Core PCE, but the rest of us live in a CPI world) remain well below the 2022 highs and inflation seems to be seen as less of a problem.  Yes, there are some fears that the newly imposed tariff regime is going to drive prices higher, and I have seen several analysts explain that we are about to see that particular process begin as of today’s data.  

Of course, from a markets perspective, the key issue with inflation is how it will impact interest rates.  In this case, I think the following chart from Nick Timiraos in the WSJ is an excellent description of how there is NO consensus view at all.

At the same time, Fed funds futures markets are pricing in the following probabilities as of this morning.

Source: cmegroup.com

The thing about the Fed is they have proven to be far more political than they claim.  First, it is unambiguous that there is no love lost between President Trump and Chairman Powell.  Interestingly, the Fed is strongly of the belief that when they cut rates, they are helping the federal government, and more importantly, the population’s impression of what the federal government is doing.  Hence, the 100bps of cuts last summer/fall never had an economic justification, they appeared to have been the Fed’s effort to sway the electorate to maintain the status quo.  With that in mind, absent a collapse in the labor market with a significantly higher Unemployment Rate, I fall into the camp of no Fed action this year at all.  And, if as I suspect, inflation readings start to pick up further, questions about hikes are going to be raised.

Consider if the BBB is passed and it juices economic activity so nominal GDP accelerates to 6% or 7%, the Fed will be quite concerned about inflation at that point and the market will need to completely reevaluate their interest rate stance.  My point is the fact that rate cuts are currently priced does not make them a given.  Market pricing changes all the time.

So, let’s take a look at how things behaved overnight.  After a modest US rally in equities yesterday, Asia had a solid session, especially China (+0.75%) and Hong Kong (+0.8%) as both responded to the trade news. Elsewhere in the region, things were green (Nikkei +0.5%), but without the same fanfare.  I have to highlight a comment from PM Ishiba overnight where he said “[Japan] should be cautious about any plans that would deteriorate already tattered state finances.  Issuing more deficit financing bonds is not an option.”  That sounds an awful lot like a monetary hawk, although that species was long thought to be extinct in Japan.  It will be interesting to see how well they adhere to this idea.

Meanwhile, in Europe, the only equity market that has moved is Spain (-0.6%) which is declining on idiosyncratic issues locally while the rest of the continent is essentially unchanged.  As to US futures, at this hour (7:30) they are pointing slightly lower, about -0.15% across the board.

In the bond market, the somnolence continues with yields backing up in the US (+2bps) and Europe, (virtually all sovereign yields are higher by 2bps) with only UK Gilts (+5bps) under any real pressure implying today’s 10-year auction was not as well received as some had hoped.  In Japan, yields slipped -1bp overnight and I thought, in the wake of the Ishiba comments above, I would highlight Japan 40-year bonds, where yields have collapsed over the past three weeks.  Recall, back in May there was a surge in commentary about how Japanese yields were breaking out and how Japanese investors would be bringing money home with the yen strengthening dramatically.  I guess this story will have to wait.

Source: tradingeconomics.com

Turning to commodities, oil (+1.5%), which reversed course during yesterday’s session, has regained its mojo and is very close to closing that first gap I showed on the chart yesterday.  Above $65, I understand most shale drilling is profitable so do not be surprised to hear that narrative pick up again.  In the metals markets, gold (+0.2%) now has the distinction of being the second largest reserve asset at central banks around the world, surpassing the euro, although trailing the dollar substantially.  I expect this process will continue.  Silver (-0.8%) and copper (-2.1%) are both under pressure this morning although I have not seen a catalyst which implies this is trading and position adjustments, notably profit taking after strong runs in both.

Finally, the dollar is slightly stronger this morning with the euro and pound essentially unchanged, AUD, NZD and JPY all having slipped -0.25%, and some smaller currencies (KRW -0.55%, ZAR -0.5%) having fallen a bit further.  However, for those who follow the DXY, it is unchanged on the day.  The thing about the dollar is despite a lot of discussion about a break much lower, it has proven more resilient than many expected and really hasn’t gone anywhere in the past two months.  If the Fed turns hawkish as inflation rebounds, I suspect the dollar bears are going to have a tougher time to make their case (present poets included.)

In addition to the CPI at 8:30, we see EIA oil inventory data with a modest build expected although yesterday’s API data showed a draw that surprised markets.  I must admit I fear inflation data is going to start to rebound again which should get tongues wagging about next week’s FOMC meeting.  However, for today, a hot print is likely to see a knee-jerk reaction lower in stocks and bonds and higher in the dollar.  But the end of the day is a long way away and could be very different, especially given the always present headline risk.

Good luck

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Much More Desirous

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The world that we knew ere the virus
Was different, and much more desirous
‘Cause we got to ease
Whenever we’d please
And ‘flation was rare as papyrus

 

A few disparate thoughts this morning as there doesn’t seem to be a real theme in markets.  

Starting with Chairman Powell’s comments yesterday regarding the Fed’s policy framework and how they were reviewing the current framework established in 2020, to see if it was still appropriate.  It was during that policy discussion that the Fed came up with the idea of average inflation targeting, rather than maintaining a stable rate.  However, Chairman Powell was candid yesterday when he explained, “The idea of an intentional, moderate overshoot proved irrelevant to our policy discussions and has remained so through today.”  Ya think?

Of course, being the consummate central banker, he made sure to explain that their future failures would not be their fault.  As explained in the WSJ by the Fed whisperer himself, Nick Timiraos, Powell explained that higher real interest rates might “reflect the possibility that inflation could be more volatile going forward than in the intercrisis period of the 2010s. We may be entering a period of more frequent, and potentially more persistent, supply shocks—a difficult challenge for the economy and for central banks.” 

However, unlike the pre-Trump era, it’s not clear the market paid much attention to Mr Powell.  Going forward, I do expect the Fed to have more market sway again, but it may be a little while before that is the case.  But I think it is worthwhile for us to understand how they are thinking.

While pundits expressed they were certain
The US is who would be hurtin’
From tariffs and Trump
It turns out the slump
Is elsewhere, as he’d been assertin’

One of the themes following President Trump’s “Liberation Day” tariff announcements amongst much of the punditry was that the US was shooting itself in the foot and the US economy would be the loser in the end.  My thesis had been that the US, as the consumer of last resort, was far more important to other nations’ economic growth than vice versa.  Now, we know that the first look at Q1 GDP in the US was a negative number, but we also know that was entirely the result of the uptick in imports that came ahead of the tariffs.  Meanwhile, private economic activity in the US grew and government activity shrank, both distinct economic positives.

Well, it turns out that the rest of the world is finding that when the US market is not as welcoming of their exports as previously seen, those economies find themselves under pressure.  Yesterday we saw weaker Eurozone GDP and last night Japanese GDP declined much more than expected, -0.2% in Q1 leading to a -0.7% Y/Y result.  The change in trade relations and weaker exports were the driver.  Now, this is just one quarter, and not necessarily a trend, especially if trade negotiations conclude on a timely basis.  But Japanese inflation remains sticky on the high side while growth is ebbing.  The BOJ is unlikely to change policy anytime soon as they, like most central banks, try to figure out the underlying trends. 

My take is this is going to be the scenario through the summer, and likely into the early autumn as trade deals get concluded but their impacts will take time to feel.  I suspect that central banks will be reluctant to be too aggressive in either direction given the propensity of President Trump to upset the applecart of policy decisions.  Ultimately, I see this as the backdrop that will result in more market volatility in both directions in response to the currently unknown policy announcements that are sure to come.  If you are a hedger, maintain those hedge ratios, even if they are a little pricey, the alternative could be far worse.  If you are a speculator, keep your positions smaller than you might think.  Wrong is only a Trump tweet away.

And finally, let’s talk of peace
Which most folks would like to increase
Could we really see
A Trump policy
That gets global fighting to cease?

I’m going to don my tinfoil hat for a paragraph or two here, but I think we must consider the possibilities that Mr Trump has far larger plans for a geopolitical realignment than most are aware.  I discussed the remarkable Iranian proposal to re-enter the brotherhood of nations yesterday.  The recent history of war shows that it is a) hugely profitable for a select number of companies and b) generally inflationary.  Mr Trump’s overtures throughout the Middle East this week, as he seems to be cementing relationships with the leadership there could well have a motive beyond lower oil prices.  I read a remarkable piece from Dr Pippa Malmgrenyesterday that pulled together many threads as to potential motivations for Trump’s activities and they were framed as the enemy is not necessarily Russia or China or Iran, but rather the deep-state in the US (I told you it was tinfoil hat territory).  There is a group in government who profits immensely from the ongoing war footing and who are not interested in seeing peace break out all over.  

I have no idea if Mr Trump can be successful in this endeavor, but if he is, the implications for markets will be significant.  Oil prices will be far lower, as will commodity prices generally given the result could easily see more access granted for mining/drilling/growing.  Inflation will remain under control which would reduce interest rates, and by extension remove some pressure from the US budget situation.  As well, reduced defense requirements would also help the budget.  The dollar would maintain its status as the global reserve currency and focus would return to economic growth rather than geopolitical mischief.  And this feels like a pretty good state for equities, at least those that are not defense focused.  Maybe crazy…but maybe not.

Ok, really quick around the world.  In equities, mixed is the best description of the US yesterday and Asia overnight with no real outstanding movers in either direction.  Europe is all green this morning, with gains on the order of 0.6%, but I think that is based on the idea the ECB is going to continue to cut rates going forward given inflation there remains low and growth is declining.  US futures, at this hour (7:15) are pointing slightly higher, 0.25%.

Bond markets rallied yesterday with Treasury yields sliding 10bps and falling another -3bps this morning.  European sovereign yields tracked Treasuries yesterday and are actually leading the way today with yield declines on the order of -4bps to -6bps across the entire continent and the UK.  Even JGB yields fell -2bps overnight.

In the commodity space, oil (+0.25%) bounced from its worst levels of the morning during the session yesterday but has created a new gap above the price to add to the really big gap from the beginning of April.

Source: tradingeconomics.com

My take is the market sees the possibility of lower oil prices going forward as supply is set to increase further.  There has been some discussion about how low oil prices will reduce capex in the space, and that is probably true, but what are oil companies going to do if they don’t drill for oil?  My view is they will still drill.  Meanwhile, gold is under pressure again as fear seems to be abating around the world.  This morning the barbarous relic is lower by -2.0% and that is taking both copper and silver along with similar declines.

Finally, the dollar is a bit softer this morning, with NZD (+0.5%) the biggest mover in either the G10 or EMG blocs.  JPY, EUR, MXN, ZAR are all just basis points different this morning than yesterday with a few gainers and a few laggards but no real trend to note here.  I think it is very clear Mr Trump would like to see the dollar’s value decline in the FX markets for competitiveness reasons, but right now, uncertainty is the driving force.

On the data front, yesterday’s big surprise in PPI (-0.5%) seemed to be the driving force behind the bond market rally.  But there was also a huge surprise in the Philly Fed New Orders sub-index, which jumped 41.7 points, a 4.3SD move and the largest in the history of the series.  Perhaps things aren’t as negative as some would have us believe.  As to this morning, we get Housing Starts (exp 1.37M) and Building Permits (1.45M) at 8:30 followed by Michigan Consumer Sentiment (53.4) at 10:00.  

It is very difficult to determine if the recent equity rally is just a bear market rally, or if things are going to be fine.  Given the still uncertain policy outcomes both domestically and globally, there are still many possible paths forward.  I wonder if gold, which had been a harbinger of concerns about the future is now telling us that the worst has passed.  Certainly, a movement toward peace in the Middle East is going to be a net positive for risk appetite, which when I translate that back to the dollar, implies my view of weakness going forward remains intact.

Good luck and good weekend

Adf

Heartburned

Posted on by

There’s no one surprised that the Fed
Did nothing, and here’s what Jay said
We’re not in a hurry
To cut, but don’t worry
If things change, we can cut ahead
 
The narrative now has returned
To Trump, which has many concerned
That in the short run
The things that he’s done
Will leave many traders heartburned

 

As universally expected, the Fed left policy unchanged yesterday.  Everything we had heard from FOMC members prior to the quiet period indicated they had to be patient to see how things played out regarding the impact of tariffs.  Apparently, Chairman Powell used the term “wait” or some version of that idea 22 times in the press conference.  Tomorrow, the Fed speakers hit the circuit again, but absent some change in data, which will take at least another month or two, I don’t see that the Fed is relevant again for a while.  

I will note that the market is currently pricing only about a 17% chance of a cut at the June 18 meeting though they are still pricing in 3 cuts for the year.  It appears that the idea of a H2 recession is gaining ground amongst both the punditry and the futures market.

However, contra to that message, the bigger news of the day is that President Trump will be announcing, at 10am, the first trade deal in the new era, this one with the UK.  It strikes me that this should be the easiest of trade deals to negotiate since both economies produce the same types of things.  Neither has a labor cost advantage, and there is great commonality between them with respect to the overall culture.  Arguably, the biggest advantage the US has is its energy sector has not been destroyed by the government, something PM Starmer is working hard to accomplish on his end.  Realistically, the trade deal here is going to be more about services than goods I suspect, given that’s what drives both economies.  I guess we will learn later today.

In a modest surprise, UK equities (FTSE 100 +0.4%) do not seem to see the benefits of such a deal, as they lag most of the rest of Europe.  Too, the BOE is expected to cut its base rate by 25bps this morning, which in isolation would ordinarily be seen as a positive for stock markets.  Perhaps, this is why the UK is the first to say yes, things there may be worse than meet the eye.  After all, the stock market there is higher by just 2% in the past year, hardly a breathtaking performance.  In fact, as you can see below, the FTSE 100 and S&P 500 have had very similar performances this year, tracking each other closely, although despite all the angst about recent volatility in US markets, the S&P is still 8% higher in the past year, decently outperforming the UK.

Source: tradingeconomics.com

Stepping back for a moment from individual markets, my take is the following: President Trump is keen to sign a number of key trade deals in this 90-day window.  If they agree deals with the UK, Japan, South Korea, Taiwan, Canada and Mexico, all of which seem quite possible, it will reduce the uncertainty and accompanying stress in markets.  If, as well, Congress can get the ‘big, beautiful budget bill’ passed, thoughts of recession will quickly dissipate.  Obviously, the China trade talks will still be outstanding, but both sides need to find a solution here.  While the punditry in the US will continue to harp on how those tariffs are going to kill the US economy, China has already shown they are having problems and need to come to an agreement.  It is quite possible that Mr Trump can be successful in his aims to reorder the nature of world trade such that the US reduces its deficits without destroying the world.  I think I am going to take the over on this question.

In the meantime, let’s see how markets have behaved overnight.  Yesterday saw US equity markets rally modestly after the Fed and that followed through in Asia, with modest gains being the best description.  The Nikkei (+0.4%), Hang Seng (+0.4%) and CSI 300 (+0.5%) all seemed to benefit from the US and hopes for a reduction in trade anxiety.  Of note in Asia was India (-0.5%) and perhaps more tellingly Pakistan (-6.0%) as the escalation in military conflict between those two nations has grown even hotter.  I expect that market impact will remain more isolated as neither market is a key destination of foreign capital, at least if the actual military conflict doesn’t spread into other areas.

Turning to Europe, both Germany (+1.1%) and France (+1.0%) are having very good days with both markets ostensibly responding to the news of the impending UK trade deal and perhaps some hopes there will be one with the EU.  As well, German IP data was released at a much better level than expected (3.0% vs. 0.8% expected), an indication that companies there are gearing up for all that mooted military spending.  As to US futures, at this hour (7:00) they are all higher by at least 1.0% with the NASDAQ higher by 1.6%.  

In the bond market, Treasury yields are higher by 4bps this morning, having recouped the declines yesterday.  But still, the 10-year hovers either side of 4.30% and has done for the past month as you can see in the chart below.  If anything, it appears that the trend remains toward modestly lower rates.

Source: tradingeconomics.com

In Europe, sovereign yields are also climbing slightly, higher by between 2bps and 3bps this morning and we saw similar movement in JGB markets overnight.  Frankly, bond markets have not been very exciting lately.

In the commodity markets, oil (+1.6%) is continuing its recent bounce from the lows seen Sunday night, but WTI remains below $60/bbl.  There is growing talk that at current prices, capex is going to decline and supply along with that, but you cannot look at what is happening in Guyana, for instance, as they seek to exploit the massive new oilfield discovered in their coastal waters last year and think that oil supply is going to shrink.  As well, OPEC+ looks set to produce all out.  I do not see a good case for higher oil prices in the near term.  Meanwhile, gold (-1.0%) is giving back some of its recent rebound gains, but nothing about the recent price action indicates to me that the bigger picture trend higher is over.  However, today, it is weighing on both silver (-0.2%) and copper (-0.8%).  

As aside about copper.  The red metal has been nicknamed Dr Copper given its importance in industrial activity.  Hence, when demand is strong, it foretells strong economic activity and vice-versa.  With that in mind, what does the below chart of copper tell you about economic activity?

Source: tradingeconomics.com

What it tells me is that this, too, is a former economic signal that had been reliable in the old world view but has lost its way as a signpost of future activity in the new world view.

Finally, the dollar is modestly stronger this morning, most notably vs. the yen (-0.6%) and INR (-0.8%). The latter is clearly suffering on the impacts of some negative military news, having lost several fighter jets and drones, while the former seems to be responding to the story that Mr Trump will not lower tariffs with China ahead of the first meetings that are upcoming this weekend, and that had been demanded requested by the Chinese to start talking.  Too, NZD (-0.6%) is softer but elsewhere, there is far less of interest overall with the euro unchanged and the pound edging higher by 0.25% after the BOE cut rates 25bps, as expected, but the vote was 7-2, with two MPC members voting for no change, a slightly more hawkish outcome than expected.

On the data front, this morning brings the weekly Initial (exp 230K) and Continuing (1890K) Claims data as well as Nonfarm Productivity (-0.7%) and Unit Labor Costs (5.1%).  Yesterday’s EIA oil inventory data showed modest draws, as expected and didn’t seem to matter much to the market.  It is difficult to get too excited about much these days as the landscape remains highly uncertain.  If, and it’s a big if, President Trump can come to agreement on trade deals with a number of countries, I suspect that we will see uncertainty wane and markets continue higher.  But the Fed won’t be cutting rates in that scenario.  Ultimately, though, I do believe that a lower dollar will be part of many of these deals, and for now, a lower dollar still seems the most likely outcome.

Good luck

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